Fundamentals of Accountancy Business and Management 1 ABM Grade 11

Course Information:
Course Title: Fundamentals of Accountancy, Business, and Management 1
Course Code: FABM 1
Subject Teacher: Ms. Mylene S. Candido
Contact Details: mscandidosmpcs@gmail.com 09559159782
Consultation Schedule: Thursday 3:00 – 5:00 pm / Friday 3:00 – 5:00 pm

LESSON 1 ( Quarter 3 Week 1 )

Definition, nature and history of Accounting Name: _______________________

External and Internal Users Section: ______________________

Content Standards: The learners demonstrate an understanding of the definition, nature, function, and
history of accounting, the external and internal users of financial information.
Performance Standards: The learners shall be able to
1. cite specific examples in which accounting is used in making business decisions.
2. solve exercises and problems on the identification of users of information, type of decisions to be made,
and type of information needed by the users
3. cite users of financial information and identify whether they are external or internal users.
Most Essential Learning Competency:
1. define Accounting
2. describe the nature of accounting
3. narrate the history / origin of accounting
4. define external users and give examples
5. define internal users and give examples
Unit 1: Introduction to Accounting
Week 1: The Definition, Nature, Function and History of Accounting

MY JOURNEY
Accounting is a subject founded on logic and sense. This lesson will guide you to understand the
logic of accounting. It will provide you the frameworks and tools to help you learn accounting from
conceptual perspective. You are challenged to learn beyond blindly memorizing formulas and to be able to
apply the concepts in real business transactions.
Fundamentals of Accountancy Business and Management 1 ABM Grade 11

TIME TO READ

I. Nature of Accounting
Accounting as the Language of Business
Accounting is the process of gathering financial information about a business and reporting this
information to its end users. Accounting is also called the language of business. (Cabrera, 2016)

The following are the three (3) widely-accepted definitions of accounting (Rabo, Tugas, &
Salendrez, 2016):
 According to American Accounting Association (AAA), accounting is the process of
identifying, measuring, and communicating economic information to permit informed judgment
and decisions by users of the information.
 American Institute of Certified Public Accountants (AICPA) defines accounting as 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 financial character, and interpreting the
results thereof.
 The Accounting Standards Council (ASC) see accounting as a service activity. Its function is
to provide quantitative information, primarily financial in nature, about economic entities,
intended to be useful in making economic decisions.

Nature
Based on the definitions above, there are unifying themes that describe the nature of accounting
(Rabo, Tugas, & Salendrez, 2016):
 Accounting is an art. The word ‘art’ refers to the design of how something can be performed. It
is a behavioral knowledge involving creativity and skill. By the very nature that accounting
activity is systematic, it has definite techniques and its proper application requires a particular
skill and expertise.
 Accounting deals with transactions that are financial in nature. The definition of ASC requires
that business transactions have to be measured in terms of money. All other transactions that
are non-monetary are not within the scope of accounting.
 It can also be assumed that accounting is a process. A ‘process’ is a systematic series of the
actions directed towards a particular outcome. As a process, accounting performs specific
actions such as identifying, measuring, and communicating financial information. It has to
follow logical steps in the accounting cycle like recording, classifying, and summarizing
financial transactions, and communicating the results after.
 In effect, accounting is also an ‘information system’. This is a set of interrelated components that
work together to achieve a common purpose. It also serves as a repository of collected financial
data, proposed financial information, and communicated financial statements.
 Moreover, accounting is a means and not an end. Although this has a tangible output in the form
of financial statements, it still underscores that users have the liberty to make economic decisions
based on the management assertions in the financial statements. Using this logic, accounting
indeed paves the way to an end and it is not the end itself.

Fundamentals of Accountancy Business and Management 1 ABM Grade 11

Function
An information system in itself, accounting performs the following tasks (Rabo, Tugas, & Salendrez,
2016):
 To fulfill the stewardship function of the management (or owners);
 To help interested users come up with informed decisions; and
 To support daily operations of the business.

History of Accounting

Accounting is as old as civilization itself. It has

evolved in response to various social and economic
needs of men. Accounting started as a simple recording
of repetitive exchanges. The history of accounting is
often seen as indistinguishable from the history of
finance and business.

Branches of Accounting
The main areas of accounting are:
 Financial Accounting – The gathering, classifying,
analyzing, recording of financial data in the books of
accounts, and preparation of reports to management
on the financial data. It involves bookkeeping – the
procedural aspect of recording financial data and
preparing of reports (Reyes, 2016).

 Management Accounting – The gathering and

reporting to management of data necessary for
management decisions (e.g. controlling cost,
planning for future operations, discontinuing losing
operations, and distribution of income to
stockholders) (Reyes, 2016).

 Auditing
 Internal Auditing – Reviews the business operations
to check if they comply with management policies.
It also evaluates the efficiency of business
operations. Normally, an internal auditor is a hired
employee of a company (Rabo, Tugas, & Salendrez,
2016).
 External Auditing – The work of Certified Public
Accountants (CPA) outside the business
organization, in ascertaining the correctness of data
in the financial statements, for the statements’
acceptability to the public and to government
regulatory agencies (Reyes, 2016).
Fundamentals of Accountancy Business and Management 1 ABM Grade 11

• Tax Accounting – Deals with the preparation of various tax returns and doing tax planning for the business.
The data prepared is to be reported to the revenue collection agencies of the government (e.g. Bureau of
Internal Revenue) (Rabo, Tugas, & Salendrez, 2016).
• Government Accounting – Used by all branches of the government and by those who receive government
funds to oversee the complicated business of providing government services or to report to the government
on the use of government funding in compliance with the imposed regulations (Cabrera, 2016).
• Cost Accounting – Analyzes the costs incurred by the business to help managers control expenses. Good
cost accounting records guide managers in pricing their products and services to achieve greater profits.
Also, cost accounting information shows management when a product is not profitable and should be
dropped (Cabrera, 2016).
• Accounting Education – Responsible for training future accountants. It engages in teaching accounting,
financial management, taxation, and other related business course. Per CHED Memorandum Order (CMO)
No. 3, Series 2007, a CPA in accounting education should possess the educational qualifications,
professional experience, classroom teaching ability, computer literacy, scholarly research productivity, and
other attributes that are essential for the successful conduct of a professional accounting program. CPAs are
encouraged to be part of the academe and become an integral force in inspiring students to pursue a career
in accounting. Accounting educators could be professors, deans, or researchers (Rabo, Tugas, & Salendrez,
2016).
• Accounting Research - Plays an essential part in creating new knowledge. The hard sciences have
produced models of research and testing that can be used and applied over many disciplines including
accounting research. Using these models along with evidence such as financial statements, stock prices,
surveys, experiments, computer simulations, and mathematical proofs, we can gain a scientific perspective
and basis for: (1) deciding and implementing new accounting or auditing standards; (2) presenting unusual
economic transactions in the financial statements; (3) learning how new tax laws impact clients and
employers; and (4) discerning how the accounting profession affects the capital markets through academic
accounting research (Brigham Young University, 2015).

Task 1: Answer the following questions as concise as possible. Write your answers on the space
provided after each number. Please refer to rubrics for scoring.
1. Define Accounting according to AAA, AICPA, & ASC.
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2. Explain briefly why accounting is an art and a process.
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Fundamentals of Accountancy Business and Management 1 ABM Grade 11

_____________________________________________________________________________________
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3. Narrate how accounting started.
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Rubrics for Scoring:

EXCELLENT OUTSTANDING VERY SATISFACTORY NEEDS
CRITERIA /
Weight
SATISFACTORY IMPROVEMENT
5 4 3 2 1
Presents
Present ideas/concept in Present
ideas/concept in Ideas/concept are too Ideas/concept are unclear
Ideas/Concept an original and ideas/concept in a
slightly relevant general or not substantial
substantial manner consistent manner
manner
Writing shows a Writing shows Writing shows
Writing shows depth and Writing shows little or no
Understanding clear & sound moderate adequate
clear understanding understanding
understanding understanding understanding
Have several Word choice is
Word choice and usage Word choice makes Word choice is simple
Word Usage mistakes in word inadequate or
are professional piece interesting but acceptable
choice and usage inappropriate.
 Fundamentals of Accountancy Business and Management 1 ABM Grade 11

Users of Accounting Information

The progress and reputation of any business firm is built upon the sound financial footing. There
are number of parties who are interested in the accounting information relating to the business. Accounting
is the language employed to communicate financial information of a concern to such parties.

Who uses accounting data or information? There are two broad categories of users of financial
information: internal and external users.

Internal Users
Internal users of accounting information are those individuals inside a company who plan, organize,
and run the business. These users are directly involved in managing and operating the business. These
include marketing managers, production supervisors, finance directors, company officers and owners.

Management Employees Owners

Income/earnings for the Profit for the period, Profit or income for the
Accounting period, sales, available salaries paid to employees period, resources or assets
Information cash, production cost of the business, liabilities
Needed
of the business

Decision Analyze the organization's Job security, consider Considerations regarding

Supported performance and position staying in the employ of additional investment,
and take appropriate the company or look for expanding the business,
measures to improve the other employment borrowing funds to
company results. opportunities support any expansion
sufficiency of cash to pay plans.
dividends to stockholders;
pricing decisions
Fundamentals of Accountancy Business and Management 1 ABM Grade 11

External Users
External users are individuals and organizations outside a company who want financial information
about the company. These users are not directly involved in managing and operating the business. The two
most common types of external users are potential investors and creditors. Potential Investors use
accounting information to make decisions to buy shares of a company. Creditors (such as suppliers and
bankers) use accounting information to evaluate the risks of granting credit or lending money. Also included
as external users are government regulatory agencies such as Securities and Exchange Commission (SEC),
Bureau of Internal Revenue (BIR), Department of Labor and Employment (DOLE), Social Security System
(SSS), and Local Government Units (LGUs).

External users (secondary users) of accounting information include the following:

Secondary Users Accounting Information Needed

Creditors Determines the credit worthiness of an organization. Terms
of credit are set by creditors according to the assessment of
their customers' financial health. Creditors include suppliers
as well as lenders of finance such as banks.

Tax Authorities (BIR) Determines the credibility of the tax returns filed on behalf
of a company

Investors Analyze the feasibility of investing in a company. Investors

want to make sure they can earn a reasonable return on their
investment before they commit any financial resources to a
company.
Customers Assess the financial position of its suppliers which is
necessary for them to maintain a stable source of supply in
the long term.
Regulatory Authorities (SEC, Ensure that a company's disclosure of accounting
DOLE) information is in accordance with the rules and regulations
set in order to protect the interests of the stakeholders who
rely on such information in forming their decisions.

Task 1: Answer the question as concise as possible. Write your answers on the space provided.
Discuss your answer in no more than 10 sentences. Please refer to rubrics for scoring.

Who are the users of accounting information? Distinguish the type of information needed by each group of
users.
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Fundamentals of Accountancy Business and Management 1 ABM Grade 11

_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________

Rubrics for scoring:

EXCELLENT OUTSTANDING VERY SATISFACTORY NEEDS
CRITERIA / SATISFACTORY IMRPOVEMENT
Weight
10 1
20 15 5

Present ideas/concept in Present Presents ideas/concept

Ideas/concept are too Ideas/concept are unclear
Ideas/Concept an original and ideas/concept in a in slightly relevant
general or not substantial
substantial manner consistent manner manner

Writing shows a Writing shows Writing shows

Writing shows depth and Writing shows little or no
Understanding clear & sound moderate adequate
clear understanding understanding
understanding understanding understanding

Have sevral mistakes

Word Choice and usage Word choice makes Word choice is simple Word choice is inadequate
Word Usage in word choice and
are professional piece interesting but acceptable or inappropriate.
usage