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Understanding Accounting Fundamentals

Accounting is the systematic process of recording, classifying, and summarizing financial transactions and interpreting the results. It involves four key aspects: recording transactions, classifying them, summarizing financial statements, and interpreting the information. The basic function of accounting is to provide timely and relevant financial information to assist decision making. It has many branches including financial, management, government, auditing, tax, and cost accounting. Luca Pacioli is considered the father of accounting for documenting double-entry bookkeeping.

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Emmanuel James Sevilla
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323 views3 pages

Understanding Accounting Fundamentals

Accounting is the systematic process of recording, classifying, and summarizing financial transactions and interpreting the results. It involves four key aspects: recording transactions, classifying them, summarizing financial statements, and interpreting the information. The basic function of accounting is to provide timely and relevant financial information to assist decision making. It has many branches including financial, management, government, auditing, tax, and cost accounting. Luca Pacioli is considered the father of accounting for documenting double-entry bookkeeping.

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Emmanuel James Sevilla
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  • What is Accounting?
  • Four Aspects of Accounting
  • Types of Business Organization
  • Branches of Accounting
  • Three Types of Business Activity
  • Fundamental Concepts

What is Accounting?

It is the systematic process of measuring and reporting relevant financial information about the
activities of an economic organization or unit.
As per AICPA
It is the art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions, and events, which are in part at least of a financial character, and
interpreting the result thereof.
As per PICPA
It is a service activity whose function is to provide quantitative information, primarily financial
in nature, about economic entities, that is intended to be useful in making economic decisions.
NATURE OF ACCOUNTING
Accounting is a systematic process – a series of actions that produce something or that lead to a
particular result.
Accounting is an art – skill required by experience, study or observation. An occupation
requiring knowledge or skill.
Accounting is a service activity – a work of occupation for serving a particular purpose.

FOUR ASPECTS OF ACCOUNTING


Recording – writing down of business transactions chronologically in the books of account as
they transpire.
Classifying – sorting similar and related business transactions into the three categories of assets,
liabilities, and owner’s equity.
Summarizing – preparing the financial statements from the transactions recorded in the books of
account that are designed to meet the information needs of its users.
Interpreting – representing the qualitative and quantitative financial information about the
business transactions in a language comprehensible to the users of financial statements.
**Basic function of accounting in business is the generation of relevant and timely financial
information for interested parties. The data provided by accountants can assists investors,
government agencies, creditors and management in making sound decision.
Father of Accounting – Luca Pacioli – wrote the book Summa de Arithmetica, Geometria,
Proportioni et Proportionalita (Everything about arithmetic, geometry and proportion). Discuss
bookkeeping, accounting cycle, use of journals and ledgers.
BRANCHES OF ACCOUNTING
1) Financial Accounting – covers accounting principles and concepts relative to measurement
and valuation as applied to assets, liabilities, stockholder’s equity, retained earnings, revenue and
expense accounts in relation to the preparation and presentation of financial statement.
2) Management Accounting – involves partnering in management decision making, devising
planning and performance management systems to assist management in the formulation and
implementation of an organization’s strategy.
3) Government Accounting – Section 109 of Presidential Decree (PD) No. 1445 states that
accounting encompasses the process of analyzing, classifying, summarizing and communicating
all transactions involving the receipt and disposition of government funds and property.
4) Auditing – examination and review of accounting reports in order to ascertain their fairness,
propriety and reliability.
5) Tax accounting – tax services provided by accountants
6) Cost accounting – collection, determination, allocation assessment and control of cost data.
Particularly the cost of production in a manufacturing concern.
7) Accounting education – planned grading and formal teaching in an educational institution.
8) Accounting Research – conducting careful and diligent study aimed at discovering and
interpreting facts, revising accepted theories in the light of new facts.
USERS OF FINANCIAL INFORMATION
Internal Users – 1) Investors/Owners/Stockholders 2) Management 3) Employees
External Users – 1) Financial Institutions/Creditors 2) Government 3) Potential
Investors/Creditors

TYPES OF BUSINESS ORGANIZATION


1) Sole / Single Proprietorship – business owned and managed by only one person
2) Partnership – business organization owned and managed by two or more people who agree
to contribute money, property or industry to a common fund for the purpose of earning a profit.
3) Corporation – form of business organization managed by an elected board of directors.
Investors are called stockholders and the unit of ownership is called share of stock.
4) Cooperatives – association of small producers and consumers who come together voluntarily
to form a business which they own, manage and patronize.
THREE TYPES OF BUSINESS ACTIVITY
1) Service – business operation engaged in the rendering of services
2) Trading / Merchandising – engaged in buying and selling of goods. Included process of
managing and marketing the products sold to its customers.
3) Manufacturing – engaged in the production of items to be sold. Involved purchasing and
converting of raw materials to finished goods.
ACCOUNTING SYSTEM – comprises the methods used by business to keep records of the
financial activities and to summarize these accounts in periodic accounting reports.
Transaction – completed action which can be expressed in monetary terms
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) – these are broad,
general statements or rules and procedures that serve as guides in the practice of accounting.
These are standards, assumptions, and concepts with general acceptability. These are
measurement techiniques and standards used in the presentation and preparation of financial
statements.
FUNDAMENTAL CONCEPTS
1) Entity Concept – regards the business enterprise as separate and distinct from the owners and
from other business enterprise
2) Periodicity – concept behind providing financial accounting information about the economic
activities of an enterprise for specified time period.
3) Going concern – assumes that the business enterprise will continue to operate indefinitely.
BASIC ACCOUNTING PRINCIPLES
1) Objectivity Principle – states that all business transactions that will be entered in the
accounting records must be duly supported by verifiable evidence.
2) Historical Cost – all properties and services acquired by the business must be recorded at
their original acquisition cost.
3) Accrual Principle – income should be recognized at the time it is earned such as when goods
are delivered or when services have been rendered. Likewise, expenses should be recognized at
the time they are incurred.
4) Adequate Disclosure – states that all material facts that will significantly affect the financial
statements must be indicated.
5) Materiality – means that financial reporting is only concerned with information significant
enough to affect decisions. Refers to the relative importance of an item or event.
6) Consistency – approaches used in reporting must be uniformly employed from period to
period allow comparison of results between time periods.

Common questions

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Consistency ensures that once an accounting method is adopted, it is uniformly applied over time, allowing for meaningful comparisons of financial data across different periods. This stability in accounting practices aids stakeholders in understanding trends and changes in a business's financial position and performance with greater confidence, enhancing comparability and aiding effective economic decision-making .

Luca Pacioli, regarded as the Father of Accounting, authored 'Summa de Arithmetica,' which detailed bookkeeping, the accounting cycle, and the use of journals and ledgers, laying the groundwork for modern accounting practices. Pacioli's documentation of double-entry bookkeeping provided the first systematic guide that balanced debits and credits, influencing the development of accounting standards and practices crucial for transparent and structured financial reporting .

The periodicity concept allows enterprises to divide their continuous economic activities into discrete time periods for reporting purposes. This ensures stakeholders receive regular updates about the business's financial performance, enabling timely decision-making. However, activities occurring near the boundaries of these periods might be subject to judgment regarding timing of recognition, which could affect perceived performance .

According to the AICPA, accounting functions as the art of recording, classifying, and summarizing financial transactions and interpreting the results. It involves a systematic process applied in terms of money and events of a financial character . PICPA describes accounting as a service activity providing quantitative, primarily financial, information about economic entities, assisting in economic decision-making. These definitions highlight accounting as a systematic process, a skill-based art, and a service activity, essential for generating relevant and timely financial information for stakeholders like investors, government agencies, and management .

Adequate disclosure mandates that all significant information affecting financial statements must be shared, ensuring transparency and thoroughness in financial reporting. It is closely tied to the materiality principle, which focuses on the significance of information necessary for informed decision-making. Materiality dictates that only items affecting economic decisions require disclosure, aligning with adequate disclosure to provide a complete and relevant picture while avoiding information overload .

Government accounting focuses on analyzing, classifying, summarizing, and communicating transactions involving government funds and property, ensuring accountability and transparency in the use of public resources . Unlike other branches such as financial accounting which target external stakeholders, government accounting is geared towards ensuring that public funds are utilized efficiently per regulatory frameworks, prioritizing compliance over profitability or performance metrics .

Both financial and management accounting aim to provide decision-useful information, yet they differ in focus. Financial accounting focuses on preparing financial statements for external users, adhering to principles like GAAP for consistency and comparability . Management accounting, however, is internally focused, assisting management in decision-making and strategy formulation via planning and performance management systems, often tailored to specific organizational needs rather than standardized reporting formats .

The entity concept treats the business enterprise as distinct from its owners and other enterprises, ensuring that the financial statements reflect only the business's financial activities. This separation is crucial for accurately assessing the financial performance and position of the business without personal financial interference from the owners, thereby maintaining the integrity and objectivity of financial reports .

Recording involves chronologically documenting business transactions as they occur, ensuring detailed and accessible records. Summarizing then transforms these detailed records into broader financial statements, condensing the data into reports that meet the information needs of users, including investors and management. Together, these aspects ensure accurate, timely, and relevant financial information is available for decision-making, fulfilling the fundamental purpose of accounting .

The historical cost principle ensures transactions and events are recorded at their original purchase price. This provides reliability and verifiability in financial reporting, as historical costs are objective and easily verified. However, in times of inflation or significant asset appreciation, historical cost may not reflect current market values, potentially leading to underestimations of asset worth and affecting economic decision-making .

What is Accounting? It is the systematic process of measuring and reporting relevant financial information about the activi
BRANCHES OF ACCOUNTING 1) Financial Accounting – covers accounting principles and concepts relative to measurement and valu
THREE TYPES OF BUSINESS ACTIVITY 1) Service – business operation engaged in the rendering of services 2) Trading / Merchand

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