MODULE 1

Introduction Accounting

Overview ● Accounting is the art of recording, classifying, and

summarizing in a significant manner and in terms of money,
This module discusses definition of Accounting, its purpose transactions and events which are in part at least of a financial
and phases, users of financial information, the types of business character and interpreting the results thereof. (AICPA)
organization and nature of business operations.
Phases of Accounting
Module Objectives
1. Recording – is the process of recording business
At the end of this module, the student is expected to be able to: transaction in the book of original entry which we called the
Journal. This process is what we call journalization. A
1. Define accounting and explain its role in business. complete journal entry is one with a debit, credit entries and
2. Explain the need for non-accountants to study accounting accompanied with a simple explanation. The date of the
3. Distinguished the different types and the nature of activities transaction must also be recorded.
of business organization
Business Transaction is an event or transaction wherein
Course Materials there are:

Definition of Accounting a. Two parties involved. It can be 2 individuals (buyer &

seller), an individual and a business (the owner and the
● Accounting is a service activity. Its function is to provide business) or 2 businesses (the company & a bank)
quantitative information primarily financial in nature, about b. Exchange of rights or things or obligations. Example,
economic entities that is intended to be useful in making when A buys a T-shirt from Z Boutique for P500.00.
economic decision. (SFAS 1) The two parties involved are A and Z Boutique
A receives T-shirt from Z and Z Boutique received the
● Accounting is an Information System – that measures, payment of P500.
processes and communicates financial information about an c. It can be measured in terms of Peso Values. Meaning
economic entity. (SFAS1) what one party receives must be quantified in terms of
how much? In the example given in letter b. how much is
● Accounting is a process of identifying, measuring and the T-shirt? P500. How much money did Z Boutique
communicating economic information to permit informed receives? P500.
judgement and decisions by users of the information (AAA).

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Leonila J. Generales, CPA, MBA
 2. Classifying – The phase of Accounting that involves
grouping of similar items. Here, we classify and group b. Balance Sheet – the statement that will give information on
together the accounts used in journalization into three broad the financial condition of the business. How stable or how
categories: Assets, Liabilities and Equity. This is done liquid is the business. Its contents are Assets, Liabilities
through Posting. Posting is the process of transferring what and Owner’s Equity.
we have recorded in the Journal into another book of
accounts which we called the Ledger or the book of final Assets – refers to rights and things of value owned by
entry. the business.
Example: Cash, Computer, Building, Accounts
3. Summarizing – is the process of preparing Financial Receivable
Statements. After preparing journal entries, it will be posted
in the ledger and from there a financial statements can be Liabilities – refers to amounts owed to others, or
prepared. obligations to pay or to render services.
Example: Accounts Payable, Salaries Payable
Set of Financial Statement
Owner’s Equity – the financial interest of the owner
a. Income Statement – the statement that will shows the over the assets of the business. This includes the
result of business operation for a given period of time. This investment made by the owner, share in income less
will show how profitable is the business. Its contents are: withdrawals. Or the excess of Assets over its Liabilities.
revenues or income and cost and expenses In equation form this is express as

Results of Operation Owner’s Equity = Assets - Liabilities

Net Income if the revenues or income exceeds cost and 4. Interpreting – financial statement are useless if it is not
expenses. accompanied by analysis or interpretation. To make the
Revenue > Cost and expenses financial statement useful to the different users it must be
analyzed and interpreted using ratios and percentages.
Net Loss if cost and expenses exceeds revenues or
income. Accounting as a Language of Business
Revenue < cost and expenses
Accounting is often described as the language of business
Break even a point when the business earned no income because it is the medium of communication between the
and incurred no loss. business and the various parties interested in its financial
Revenue = cost and expenses activities.

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Leonila J. Generales, CPA, MBA
 1. Sole or Single Proprietorship – a business owned by only
Accounting transmit financial information by means of periodic one person called the proprietor and usually the manager.
reports or financial statement. This is the reason why the This is suitable for small businesses engaged in providing
subject Basic Accounting is required in any course. The services or retail business. The owner receives all profits,
success of anyone who is engaged in the field of business absorb all losses and solely responsible for all business
depends to a great extent on his ability to understand, interpret obligations.
and use the messages contains in the financial information.
2. Partnership – a business owned and operated by two or
Reasons why Non-BSA students should study Accounting more persons who bind themselves to contribute money,
property or industry to a common fund, with the intention of
1. To make sure that you follow legal requirements. Once you dividing profits among themselves. The owners are called
become a senior officer or manager of the company, you will Partners.
be required by law to disclosed publicly some information
regarding the business activities. These information are 3. Corporation – an artificial being created by operation of law,
usually written using technical language and presented in having the rights of succession and the powers, and
highly prescribed format. The responsibility of complying with attributes expressly authorized by law or incident to its
the law rest on the senior officer of the company. While the existence. The owners are called stockholders or
accountants can help in the preparation of the financial reports shareholders.
but the total responsibility cannot be delegated to them. It is
Type Activity Structure Example
the senior manager who has the full responsibility and
therefore they must know something about the accounting Service Selling Hiring skilled staff/ Software
process. people’s workers and selling Development
time their time Accounting
2. To help you do a better job. Large companies or organization Legal
almost certainly have some form of internal information supply. Manpower services
You might be involve either or both receiving or supplying the Trader/ Buying and Buying a range of Wholesaler
information. Its purpose is to help you and other managers do Merchandising selling of manufactured goods Retailer
your job more efficiently and effectively. It can help you plan goods or consolidating them Hardware
and monitor your department’s activities and budget. It will commoditie and making them Grocery store
also be a great help in making decisions. s available near their
intended customer
Types of Business Organization or online
Manufacturing Designing Buying raw All the factories
products, materials, and inside the AFAB.
and converting them into
producing a finished product
ACCO 05BC – Fundamentals of Accounting 1 finished
3 with the help of labor
Leonila J. Generales, CPA, MBA products and equipment
 ● Customers – are interested to know if the business can
supply the needed demand and to continue to provide
Nature/Types of Business Operation similar services in the future or whether the company is
true to their commitment to fulfill warranty obligations.
Users of Accounting Information: ● Government Agencies – like BIR (Bureau of Internal
Revenue) to determine if the company is paying the right
A. Internal Users – those who make decisions directly affecting amount of taxes, the SEC (Securities and Exchange
the internal operations of the business. Commission requiring all business to submit financial
report for monitoring purposes.
● Managers - they need accounting data in order to ● Public in General – businesses provide substantial
measure the effectiveness and efficiency of their assistance to the general public in the form of employment
performance. and contribute in the enhancement of the local economy.
● Employees – they need accounting information in order
to assess whether they are receiving the right
compensation and to check if they can bargain for more
benefits and for security of their job.
● Officers – they are interested to know if the company are
doing well so they can plan for possible expansion or to
cost cut.
● Business Owners – they need to know whether they are
receiving a fair return of what they have invested, to add
or to withdraw their investment.

B. External Users - are those that have financial interest in the

business but they are not involved in the day to day activities
of the business.

● Suppliers – they need to know the credibility of the

business before they transact with them and the terms of
their transaction.
● Creditors – they are interested in the financial data of the
borrower in order to decide whether to grant or not to
grant loan and how much.

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Leonila J. Generales, CPA, MBA