Fundamentals of

Accountancy,
Business and
Management 1&2
Introduction to
Accounting
• meet the ever-increasing
needs for financial
information
• used in decision-making
purposes ACCOUNTING
• language of business
 Primitive

EVOLUTION OF ACCOUNTING
» Primitive Accounting
⋄ people have counted and kept records
throughout the history;
⋄ traced far back as 8500 B.C. (clay
tokens – cones, disks, spheres and
pellets – found in Mesopotamia
(modern Iraq);
⋄ represents sheep, jugs of oil, bread or
clothing;
⋄ often sealed in clay balls, called bullae,
which were broken on delivery so the
shipment could be checked against the
invoice (first bill of lading)
 Primitive

EVOLUTION OF ACCOUNTING
» Primitive Accounting
⋄ symbols impressed on wet clay tablets
replaced the tokens (experts consider this
stage of record keeping the beginning of
the art of writing)
⋄ During the 1st dynasty of Babylonia (2286-
2242 B.C.) its law which was based on
the Code of Hammurabi, requires
merchants trading goods to give buyers a
sealed memorandum containing the
agreed price before it can be considered
enforceable (recorded by the Scribe on a
small mound of clay with the parties
affixing their signatures on it
 Primitive

EVOLUTION OF ACCOUNTING
» Primitive Accounting
⋄ around 3600 B.C. in Babylonia, clay tablets also
recorded payments of wages (keep track of cost
of labor and materials used in building structures
as in the case of pharaohs of Egypt)
⋄ Factors attributed by the presence of
bookkeeping in the ancient world:
⋄ The invention of writing
⋄ Introduction of Arabic Numerals
⋄ The decimal system
⋄ The diffusion of knowledge in Algebra
⋄ The presence of inexpensive writing
materials
⋄ The rise of literacy
⋄ The existence of a standard medium of
exchange
 Primitive Middle Ages

EVOLUTION OF ACCOUNTING
» Middle Ages
⋄ As a result of Crusades (a medieval
military expedition, one of a series
made by Europeans to recover the
Holy Land from the Muslims in the
11th, 12th, and 13th centuries), literacy
has become widespread
⋄ Arabic numerals were also being
used as a result of trade (columns
added or subtracted)
⋄ Use of credit was prevalent and a
semblance of an international banking
system was also functioning
 Primitive Middle Ages

EVOLUTION OF ACCOUNTING
» Middle Ages
⋄ The Inca Empire, used knotted cords of
different lengths and colors called quipu
to keep accounting records
⋄ Development of more formal accounting-
keeping records is attributed to the
merchants and bankers of Florence,
Venice and Genoa during the 13th to 15th
centuries
⋄ Double-entry bookkeeping is not a
discovery of science; it is the outcome of
continued efforts to meet the changing
necessities of trade. (a decisive event in
European economic history)
 Primitive Middle Ages Florentine

EVOLUTION OF ACCOUNTING
» The Florentine Approach
⋄ Renaissance Florentine markets were a fascinating
combination of formalization, in the form of account
books and double-entry bookkeeping, and of informal
social networks, constructed out of the surrounding
rules of Florentine sociality. To them, doing business
and living life were extensions of each other.
⋄ The earliest evidence of business bookkeeping in
Florence, France was evidenced by the bank ledger
fragments of 1211 (transcribed in 1887 by Pietro
Santini) and with the development of accounting in
Tuscany, Italy during the 13th century, as evidenced
in the account-books or extracts.
 Primitive Middle Ages Florentine

EVOLUTION OF ACCOUNTING
» The Florentine Approach
⋄ The emergence of double entry itself, was
first witnessed in the "ledgers“ of Renieri
(or Rinieri) Fini & Brothers (1296-1305)
and Giovanni Farolfi & Company (1299-
1300).
» Giovanno Farolfi & Company
⋄ was a firm of Florentine merchants whose
head office was at Nimes in Languedoc,
in the kingdom of France
⋄ Financial records that he kept for the
firm's branch in Salon, Provence, survive
from 1299-1300.
 Primitive Middle Ages Florentine

EVOLUTION OF ACCOUNTING
» Amatino Manucci
⋄ Inventor of double-entry bookkeeping;
⋄ managed to construct a comprehensive
and fully-articulated set of double entry
records, with a regular balancing
procedure on closure of the general
ledger;
⋄ gave importance to the aspect of financial
control
 Primitive Middle Ages Florentine Venice

EVOLUTION OF ACCOUNTING
» The Method of Venice
⋄ Luca Pacioli, a Franciscan friar and a
celebrated mathematician, is generally
associated with the introduction of
double-entry bookkeeping;
⋄ In 1494 he published his book, Summa
de Arithmetico, Geometria, Proportioni et
Proportionolito or "Everything about
Arithmetic, Geometry, Proportions and
Proportionality, " which includes,
Particularis de Computis et Scripturis or
"Details of Calculation and Recording, "
describing double-entry bookkeeping.
 Primitive Middle Ages Florentine Venice

EVOLUTION OF ACCOUNTING
» The Method of Venice
⋄ Although Pacioli made no claim to
developing the art of bookkeeping, he has
been regarded as the father of double-
entry accounting. He stated that the
purpose of bookkeeping was "to give the
trader without delay information as to his
assets and liabilities.”
⋄ Pacioli also advised the computation of a
periodic profit and the closing of the
books. He said, "It is always good to close
the books each year, especially if you are
in a partnership with others. Frequent
accounting makes for long friendship. "
 Primitive Middle Ages Florentine Venice

EVOLUTION OF ACCOUNTING
» Savary and Napoleonic Commercial Code
⋄ The earliest systematized form of accounting regulation
developed in continental Europe, starting in France in
1673. The government introduced the submission of an
annual fair value statement of financial position to protect
the economy from bankruptcies.
⋄ The Napoleonic code or code Napoleon is the French civil
code, established under Napoleon Bonaparte on March
21, 1804. The commercial Code was adopted in 1807.
⋄ The concept of lower of cost or net realizable value by
Jacques Savary (If this merchandise is starting to
deteriorate, or go out of style, or is that which one judges
he could find at the factory or wholesalers at 5% less, it
must be reduced to this price)
 Primitive Middle Ages Florentine Venice

EVOLUTION OF ACCOUNTING
» Savary and Napoleonic Commercial Code
⋄ In the 17th century, Nicolas Petri was the
first person to group similar transactions
in a separate record and enter the
monthly totals in the journal, rather than
recording all transactions seriatim, that is,
in a series.
⋄ In 1769, Benjamin Workman published
The American Accountant, the earliest-
known American accounting textbook.
 Primitive Middle Ages Florentine Venice Industrial

EVOLUTION OF ACCOUNTING
» Industrial Revolution, Corporate Organization,
Railroads, United States Steel
⋄ This revolution, which occurred in England from the
mid-18th to the mid-19th century, changed the
method of producing commercial goods from the
handicraft method to the factory system. With this
change came the problem of costing for a large
volume of products.
⋄ The expanded business operations initiated by the
Industrial Revolution required increasingly large
amount of funds to build factories and purchase
machinery. This need resulted to the development
of the corporate form of organization. (managers
report to corporate owners)
 Primitive Middle Ages Florentine Venice Industrial

EVOLUTION OF ACCOUNTING
» Industrial Revolution, Corporate Organization, Railroads,
United States Steel
⋄ Railroads, heavy users of debt financing in the late
1800s, were the first American firms to issue balance
sheets to absentee creditors. By 1880, the US railroad
system had accumulated $4. 6 billion of investments
which was roughly equivalent to 40% of the American
economy’s annual output. (depreciation)
⋄ A 1912 Journal of Accountancy editorial complained
that that depreciation had become a tool used by
management to counter fluctuations in profits. In good
years, heavy depreciation charges were made. Bad
years saw no provision or an inadequate charge.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Schmalenbach and The Model Chart of
Accounts
⋄ Eugen Schmalenbach, German academic
and economist, contributor to German
language journals on the subjects of
economics, business management and
financial accounting;
⋄ publisher of The Model Chart of Accounts;
⋄ Important information could be gained
from a firm’s accounts
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Imposition of Income Tax and Conflicts with Financial
Accounting
⋄ In the year 10 CE, Xin Dynasty's Emperor Wang
Mang instituted an unprecedented tax – the
income tax – at the “rate of 10% of profits, for
professionals and skilled labor.”
⋄ To pay for weapons and equipment in
preparation for the Napoleonic wars) William Pitt
the Younger of Britain levied an income tax in his
budget of December 1798.
⋄ The 1862 Union Government established the
Bureau of Internal Revenue to assess personal
and corporate income taxes to help finance the
Civil War.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Imposition of Income Tax and Conflicts with
Financial Accounting
⋄ In 1943, the US Congress passed income tax
withholding as the only way to collect on high
tax rates to fund World War ll.
⋄ The Philippines‘ Bureau of Internal Revenue
(BIR) was created through the passage of
Reorganization Act No. 1189 dated July 2,
1904.
⋄ 0n August 1, 1904, the BIR was formally
organized and made operational under the
Secretary of Finance.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Imposition of Income Tax and Conflicts with
Financial Accounting
⋄ Financial accounting is conservative and it's
about matching efforts and results. Tax
accounting, in turn, is about improving the
amount and timing of collections.
⋄ Note that "taxes are the lifeblood of the
government and their prompt and certain
availability are an imperious need
(Commissioner vs. Pineda, 21 SCRA 105).“
This difference in perspective produces
conflicts.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Information Age
⋄ Dan Brinklin and Bob Frankston wrote
VisiCalc for the Apple II, the first electronic
spreadsheet, the most important business
application for the personal computer.
⋄ Tremendous advances in information
technology have further revolutionized
accounting in recent years. Tasks those are
time-consuming when done manually can
now be done with speed, consistency,
precision and reliability by computers.
 Primitive Middle Ages Florentine Venice Industrial Schmalenbac
h

EVOLUTION OF ACCOUNTING
» Information Age
⋄ There is an abundance of accounting
applications, and modules to suite the
businesses‘ various needs. With the
proliferation of netbooks and smartphones
along with its mind-boggling array of
applications, surely, doing business will
change. This will necessarily bring
changes to the field of accounting. As
they say information technology is it, you
either breathe it or perish.
 ROLE OF ETHICS IN BUSINESS

Ethics – concerned with right or wrong and

how conduct should be judged to be good or
bad

Ethical dilemma – situation in which there is

no obvious right or wrong decision but rather a
right or a right answer
EXAMPLES: :EXAMPLES
White collar crime Fiduciary responsibilities
Whistle-blowing Sexual harassment
Conflicts of interest Discrimination
 TYPES OF BUSINESS

Manufactur Raw
Services Trader
e materials
designing
buying and growing or
selling people’s products,
selling extracting raw
time aggregating
products materials
components

Infrastructur
Financial Insurance
e receiving
pooling
selling the deposits,
premiums of
utilization of lending and
many to meet
infrastructure investing
claims of a few
money
 FORMS OF BUSINESS ORGANIZATION

• has a single • owned and • owned by

Corporation
Partnership
Sole Proprietorship

owner called the operated by two stockholders

proprietor or more persons • an artificial
• small service- who bind being created
type businesses themselves to by operation of
and retail contribute law, having the
establishment money, rights of
property, or succession and
industry to a the powers,
common fund, attributes and
with the properties
intention of expressly
diving profits authorized by
among law or incident
themselves to its existence
 ACTIVITIES IN BUSINESS
ORGANIZATION

Financing
Operating • used to obtain
• use of resources and manage
to design, financial
produce, resources
distribute and
market goods
and services

Investing
• acquire other
resources used in the
transform-ation
process
 DEFINITIONS OF ACCOUNTING

Accounting is a service activity. Its function is

to provide quantitative information, primarily
financial in nature, about economic entities
that is intended to be useful in making
economic decisions. (Statement of Financial
Accounting Standards No. 1, “Basic Concepts
and Accounting Principles Underlying
Financial Statements of Business Enterprises”
(Manila: Accounting Standards Council, 1983)
par. 1)
 DEFINITIONS OF ACCOUNTING

Accounting is an information system

that measures, processes and
communicates financial information
about economic entity. (Statement of
Financial Accounting Concepts No. 1
“Objectives of Financial Reporting by
Business Enterprises” (Norwalk,
Conn.: Financial Accounting Standards
Board, 1978), par. 9)
 DEFINITIONS OF ACCOUNTING

Accounting is the process of identifying,

measuring and communicating
economic information to permit
informed judgements and decision
users of the information (American
Accounting Association, “A Statement of
Basic Accounting Theory” (Evanson, III.:
American Accounting Association, 1966)
par. 1)
 DEFINITIONS OF ACCOUNTING
Accounting is an 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 results thereof
(American Institute of Certified Public
Accountants, “Review and Resume”,
Accounting Terminology Bulletin No.
1 (New York: AICPA 1953), par 9)
 FUNDAMENTAL CONCEPTS
OF ACCOUNTING PROCESS
Stable
Periodicity
Entity Concept Monetary Unit
Concept
Concept
• accounting • entity’s life is • the Philippine
entity is subdivided peso is a
separate from into equal reasonable
other periods for unit of
organizations reporting measure and
and purposes that its
individuals purchasing
power is
relatively
stable.
 BASIC PRINCIPLES
• records and statements are based on the most
Objectivity Principle reliable data available

• acquired assets should be recorded at their actual

Historical Cost cost

Revenue Recognition • recognized when goods are delivered or services

Principle are rendered or performed

Expense Recognition • recognized when expenses are incurred in

Principle producing goods and services

• all relevant information that would affect the user’s

Adequate Disclosure understanding and assessment be disclosed in FS

• concerned with information that is significant

Materiality enough to affect evaluations and decisions

• use of accounting method from period to period to

Consistency Principle achieve comparability over time within a single
enterprise
 ACCOUNTANCY ACT OF 2004

Republic Act No. 9298, signed into

law by President Gloria Macapagal-
Arroyo
on May 13, 2004
 ACCOUNTANCY ACT OF 2004
Practice of
Public
Accountanc
y

Scope Practice in
Practice in
Government of Commerce
and Industry
Practice

Practice in
Education/
Academe
 ACCOUNTANCY ACT OF 2004
The Professional Regulatory Board of
Accountancy is the body regulating
the practice of Accountancy in the
Philippines. Hon. Noe G.
BOA CHAIRMAN:
Quiñanola
BOA VICE CHAIRMAN: Hon. Marko Romeo
L. Fuentes
BOA MEMBERS: Hon. Gloria T. Baysa
Hon. Samuel B. Padilla
Hon. Thelma S. Ciudadano
Hon. Arlyn S. Villanueva
Hon. Gervacio I. Piator
 ACCOUNTANCY ACT OF 2004
Financial
Accounting
and
Reporting
Advanced
Financial
Auditing Accounting
and
Reporting

Scope of
Examination

Management
Advisory Taxation
Services

Regulatory
Framework
for Business
Transactions
 CODE OF ETHICS FOR PROFESSIONAL
ACCOUNTANTS
complying
not allowing with relevant
maintaining
bias, conflict respecting the laws and
should be professional
of interest or confidentiality regulations;
straightforwar knowledge
undue of information avoiding any
d and honest and skill at the
influence of acquired action that
level required
others discredits the
profession

Professional
Competenc Confidentiali Professional
Integrity Objectivity
e and Due ty Behavior
Care

Code of Ethics
 PROFESSIONAL ORGANIZATION

The Philippine Institute of Certified Public

Accountants (PICPA) is the integrated national
professional organization of CPAs in the
Philippines accredited by the BOA and the PRC.
 BRANCHES OF ACCOUNTING
Cost
Bookkeeping,
Auditing Bookkeeping
Costing, and
Cost Accounting

Financial Financial Management

Accounting Management Accounting

Government
Taxation
Accounting
 CLASSICAL NOTION OF STEWARDSHIP

Stewardship means custodianship or being

a keeper.
 CLASSICAL NOTION OF STEWARDSHIP
Valuation Stewardship

• how • accounting
accounting is an
measures information
the value -provider or
of the firm data
provider
 USERS OF ACCOUNTING INFORMATION

Internal External
Users users
 QUALITATIVE CHARACTERISTICS
OF USEFUL FINANCIAL INFORMATION
• Predictive
Relevance
value
• Confirmatory
value
Fundamental
Qualitative
Characteristics

Faithful
• Completeness
Representati
on
• Neutrality
• Free from error
 QUALITATIVE CHARACTERISTICS
OF USEFUL FINANCIAL INFORMATION
• information • comparable with
represents other entities
faithfully the with similar
economic information
phenomena it about the same
purports to entity
represents
Verifiability Comparability

Fundamental Qualitative CharacteristicsEnhancing

Qualitative
Characteristics
Understand-
Timeliness
ability

• information is • should contain

available to information that
decision-makers is complete and
in time not potentially
misleading
 UNDERLYING ASSUMPTION

GOING CONCERN
an entity will continue in operation
indefinitely
 ELEMENTS OF FINANCIAL
STATEMENTS
• Assets
Financial
• Liabilities
Position
• Equity
Financial • Revenue
Performan
ce • Expenses

MEASUREMENT:
Historical Cost Realizable Value

Current Cost Present Value

 ACCOUNTS

account - basic summary device of

accounting
Account title

Left side Right side

or Debit side or Credit side

ACCOUNTING EQUATION:
Assets = Liabilities + Owner’s Equity
 DOUBLE-ENTRY SYSTEM

accounting is based on a double-entry

system which means that the dual effects of
a business transaction is recorded

» a debit side entry must have a corresponding credit side

entry
» there must be one or more accounts debited and one or
more accounts credited
» each transaction affects at least two accounts
» the total of debits for a transaction must always equal the
total credits
 NORMAL BALANCE OF AN ACCOUNT

INCREASE SIDE OF AN ACCOUNT

Assets Liabilities
Drawings Owner’s equity
Expenses Income