INTENSIVE BASIC ACCOUNTING

Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

MODULE 1
Introduction,
Overview of Accounting,
Accounting Principles and Reporting Standards

Module Author:
Accountancy Department

Accountancy Department
College of Business Administration and Accountancy
De La Salle University – Dasmariñas
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

To all aspiring accountants, this module will set your heart on as it opens the door of
accounting for you. It is interesting to know how accounting relates to your personal
life. It will make you realize the important role that accountants play on business
organizations and global economy. By the end of this module, you will be acquainted
with the principles that this profession must observe as you carry on your oath as a
certified public accountant.

Course Learning Outcome

• Recognize the role that accounting plays in business and society, and the professional
environment of accountants.

Gospel Reflection

S: “But seek first the kingdom of God and his righteousness, and all
these things will be added to you.” – Matthew 6:33 ESV
O:

A:

P:
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

TOPIC LEARNING OUTCOME (TLO) #1

⇒ Explain the relevance and role of accounting in organizations and business.

ACCOUNTING IS PART OF YOUR DAILY LIFE

Before we dig deeper into the vital role that accounting does
in business, let us first discuss how accounting becomes part
of our daily life. Yes! Without being aware of, we often use
the concept of accounting in making personal life decisions
that involve money. For instance, you might have overheard
your parents talking about how they handle your family
finances. Your father might ask your mother, “where my
salary have gone?” Then your mother will reply, “I have used
it to pay off the tuition fee, house rent, electricity, water and
food!” Class, that is accounting! Or as a student, at the end
of the day, you may have asked yourself, “it seems that I
have lost my money?” You’ll start to figure out where you
have spent it and tie it up to your cash on hand. These
scenarios may result to decisions such as finding a way to lessen expenses, or the need to earn
additional income, or safeguard and keep track of your cash. By deciding on how much the family could
save in a month leads to more significant decisions such as acquiring properties, investing and planning
out family vacations.
As much as accounting is helpful in managing our personal finances, its importance is more felt in
business. But let us first look back on how accounting have started.

HISTORY OF ACCOUNTING
For as long as civilizations have been engaging in trade or organized systems of government, methods of
record keeping, accounting, and accounting tools have been in use.

Some of the earliest known writings discovered by archaeologists are accounts of ancient tax records on
clay tablets from Egypt and Mesopotamia dating back as early as 3300 to 2000 BCE. Historians
hypothesize that the primary reason for the development of writing systems came out of a need to
record trade and business transactions.

Accounting Revolution
When medieval Europe moved toward a monetary economy in the 13th century, merchants depended
on bookkeeping to oversee multiple simultaneous transactions financed by bank loans.

In 1458 Benedetto Cotrugli invented the double-entry accounting system, which revolutionized
accounting. Double-entry accounting is defined as any bookkeeping system that involves a debit and/or
credit entry for transactions. Italian mathematician and Franciscan monk Luca Bartolomes Pacioli, who
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

invented a system of record keeping that used a memorandum, journal, and ledger, wrote many books
on accounting.

Father of Accounting
Born in 1445 in Tuscany, Pacioli is known today as the father of accounting and bookkeeping. He
wrote Summa de Arithmetica, Geometria, Proportioni et Proportionalita ("The Collected Knowledge of
Arithmetic, Geometry, Proportion, and Proportionality") in 1494, which included a 27-page treatise on
bookkeeping. His book was one of the first published using the historical Gutenberg press, and the
included treatise was the first known published work on the topic of double-entry bookkeeping.

One chapter of his book, "Particularis de Computis et Scripturis" ("Details of Calculation and Recording"),
on the topic of record keeping and double-entry accounting, became the reference text and teaching
tool on those subjects for the next several hundred years. The chapter educated readers about the use
of journals and ledgers; accounting for assets, receivables, inventories, liabilities, capital, income and
expenses; and keeping a balance sheet and an income statement.

After Luca Pacioli wrote his book, he was invited to teach mathematics at the Court of Duke Lodovico
Maria Sforza in Milan. Artist and inventor Leonardo da Vinci were one of Pacioli's students. Pacioli and
da Vinci became close friends. Da Vinci illustrated Pacioli's manuscript De Divina Proportione ("Of Divine
Proportion"), and Pacioli taught da Vinci the mathematics of perspective and proportionality.

In the Philippines, bookkeeping was introduced by the Spaniards and the bookkeeper was called
Tenedor de Libro. But even before the Spaniards came, trade was already flourishing between the
Philippines and the other Asian countries and records of goods being bartered were kept by the traders.

BUSINESS, ITS MOTIVE AND ROLE IN SOCIETY

First, let us define what business is. I know most of you have been in ABM program and you are very
well aware of what the business does. Or if you just try to observe around, especially now, that we are
under global pandemic and most of the people tend to turn into doing business.

Business is an entity that produce or sell goods and services for a profit. As being said, the major
concern of a business is to earn profit. However, there are other business established for other reasons.
These are called non-for-profit organization and they operate to fulfill a charitable mission or further a
social cause. Common examples are Red Cross which is known for its blood donation activities and
provides immediate relief and assistance during disasters. Another one is Gawad Kalinga with its mission
of ending the poverty of Filipino families.

There are other roles that business plays in our society: a service provider; product provider; job
provider and revenue source for the economy. The taxes that these businesses pay to the government
are being used to construct public schools, hospitals, roads and bridges which improves the lives of its
citizen while creating more job opportunities. If the business system will stop, it will greatly harm the
economy like what we are experiencing right now due to the effect of COVID 19 where most of non-
essential operations were forced to close.
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

Now, how accounting is related to business? As a business student, you might have thought of a
particular business that you want to put up to someday. You will need to answer questions such as:
1) Do I have sufficient knowledge, skills and interest on the product or service I want to offer?
2) Do I have enough capital or money to start a business? If not, how do I raise enough funds?
3) What other resources, aside from cash, does this business need to operate well?
4) How much are the operating costs that I need to pay? Operating costs are the expenses you
incur in doing business such as supplies, electricity, salary, water, gas, etc.
5) Where should I locate the business?
6) What will be a reasonable price to offer for my products or services?
7) Should I always follow the price of the competitor?

You need business knowledge and accounting knowledge to be able to prepare a good business plan.

A year or so after you have started operation, you need answers again to the following questions to
determine the progress of the business. If plans are working well, you have to decide on what to do to
make it more profitable. Or if performance falls out of expectation, changes have to be made. The six
important questions are:
1) Was the business doing well, earning profit and an adequate return on investment? When you
say adequate return on investment, if you have invested cash of P10,000 for instance, is P500
return (profit) every month good enough for you?
2) Is the business liquid, and able to pay obligations promptly on the due date? Liquidity means
you have enough cash in your hand to pay off salaries, electricity, water, supplies because if
there’s none, it might force you to close down your operation.
3) Is the business solvent and able to withstand financial pressure? Do you have more assets
(resources) than your liabilities (obligations)? Let say that you have 5,000 cash but you owe
someone P10,000, then you are not considered solvent.
4) How much money has come in and gone out?
5) Are the creditors (bank or supplier) paid on time?
6) Did I get a good return (profit) on the money and other properties I invested?

It is very crucial to keep track of all business transactions at the very onset to aid you in answering these
questions and making important business decisions. It is critical for anyone who would like to put up his
own business to understand even the basic concepts of accounting.
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

FORMS OF BUSINESS ORGANIZATION

These are the basic forms of business ownership:
1. Sole Proprietorship
A sole proprietorship is a business owned by only one person. It is
easy to set-up and is the least costly among all forms of
ownership. The owner faces unlimited liability; meaning, the
creditors of the business may go after the personal assets of
the owner if the business cannot pay them. The sole
proprietorship form is usually adopted by small business entities.

2. Partnership

A partnership is a business owned by two or more persons who

contribute resources into the entity. The partners divide the
profits of the business among themselves.

In general partnerships, all partners have unlimited liability.

In limited partnerships, creditors cannot go after the personal
assets of the limited partners.

3. Corporation
A corporation is a business organization that has a separate legal personality from its owners.
Ownership in a stock corporation is represented by shares of stock.
The owners (stockholders) enjoy limited liability but have limited involvement in the company's
operations. The board of directors, an elected group from the stockholders, controls the activities of the
corporation.

In addition to those basic forms of business ownership, these are some other types of organizations that
are common today:

Limited Liability Company

Limited liability companies (LLCs) in the USA, are hybrid forms of

business that have characteristics of both a corporation and a
partnership. An LLC is not incorporated; hence, it is not considered a
corporation. But, the owners enjoy limited liability like in a corporation.
An LLC may elect to be taxed as a sole proprietorship, a partnership, or a
corporation.
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

Cooperative
A cooperative is a business organization owned by a group of individuals and is operated for their
mutual benefit. The persons making up the group are called members. Cooperatives may be
incorporated or unincorporated.

Some examples of cooperatives are: water and electricity (utility) cooperatives, cooperative banking,
credit unions, and housing cooperatives.

SUMMARY OF COMPARISON

TYPES OF BUSINESS OPERATION

A business earns profit depending on its type of operation. There are at least three general lines of
operation:

1. Service Business
A service type of business provides intangible products (products with no physical form). Service type
firms offer professional skills, expertise, advice, and other similar products.

Examples of service businesses are: salons, repair shops, schools, banks, accounting firms, and law firms.
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

2. Merchandising Business

This type of business buys products at wholesale price and sells the same at retail price. They are known
as "buy and sell" businesses. They make profit by selling the products at prices higher than their
purchase costs.

A merchandising business sells a product without changing its form. Examples are: grocery stores,
convenience stores, distributors, and other resellers.

3. Manufacturing Business

Unlike a merchandising business, a manufacturing business buys products with the intention of using
them as materials in making a new product. Thus, there is a transformation of the products purchased.

A manufacturing business combines raw materials, labor, and overhead costs in its production process.
The manufactured goods will then be sold to customers.

But how are you going to classify a fast food chain such as Jollibee or Mc Donald’s? Since they transform
a dressed chicken legs into delicious chicken joy and potatoes to BFF fries, they are into manufacturing
type of operation. But how about a cold glass of soft drinks from Coca Cola Company and the way they
greet you as they fill your orders and bring your food to the table? Yes, there are businesses that fall into
these three categories and they are called hybrid type of business.
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

DEFINITION OF ACCOUNTING
Let us now define accounting, accounting comes from the word “account” which is synonymous to a
record, narration, or journal. The Merriam Webster dictionary define the word account as a description
of facts, conditions, or events; and to furnish a justifying analysis or explanation.

You could relate it to a typical job of an accountant who records the transactions of an entity and
prepares its financial reports. But of course, the responsibilities of an accountant are beyond the record-
keeping task, there are enormous value-added function an accountant could offer.

The American Institute of Certified Public Accountants (AICPA) provided the following definition for
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, in making
reasoned choices among alternative courses of action.”

Let us breakdown the definition of accounting:

“Accounting is a service activity…” Similar to other professions, accountants use its technical expertise to
serve its clients. The accountant could act as a bookkeeper who records all the transactions of the
company. He may also serve as an auditor who examines the company’s financial records. He could also
act as a consultant who assist the owners in coming up with important management decisions.

“Its function is to provide quantitative information, primarily financial in nature about economic
entities…” The financial reports contain information about economic entities or business in terms of
money. It shows the net worth of the company by detailing out the amount of its resources (e.g. cash,
inventories, building, equipment, etc.) and obligations (e.g. salaries payable, utilities payable, loans
payable, etc.) at any given point of time and how much did the company earned by summarizing the
income and expenditures for a specified period.

“that is useful in making economic decisions, in making reasoned choices among alternative courses of
action.” Business owners and/or managers from time to time would need to make a decision about their
business. Should they open up another branch? Is it the right time to increase the selling price? Should
they add more employees? These questions shouldn’t be answered through a wild guess. A decision
must be based on a complete and relevant data. That is when financial reports will be very useful.

Accounting is also defined as “the art of recording, classifying, and summarizing in a significant manner
and in terms of money, transactions and events which are, in part of least financial character, and
interpreting the results thereof.”

As financial information is a means to communicate the financial condition and performance of an entity
to its users in making sound decisions, accounting is referred to as “the language of business”.
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

Complete set of Financial Statements:

1. Statement of Financial Position (balance sheet) is a
progress report showing a list of assets, liabilities and
owner’s net worth.
2. Statement of Comprehensive Income (Income
Statement) is a performance report of revenues
against costs and expenses. It shows the net income
or profit that the owner has generated during a
period.
3. Statement of Cash Flows is a cash report showing
where we got and where we used the money. Was it
used in operation, investing or financing activities?
4. Statement of Changes in Owner’s Equity (Net
Worth). This is a progress report that shows how the
capital/ owner’s investment had increased or
decreased for a given period as a result of additional
investments, profit and any withdrawals the owner
have made.
5. Notes to the Financial Statements are explanatory
notes supplemental to the four basic statements that
provides additional information so that the users can
understand what information it is trying to convey.

USERS OF FINANCIAL INFORMATION

Internal users
Managers: Managers use accounting information for decision making, and to assess the performance of
the business.

External Users
1. Investors: Use financial information to decide whether or not to buy, hold, or sell an investment in
a business. They are particularly interested in the return they make on their investment and the
dividends paid by the business.

2. Lenders: Use business financial information to decide whether or not to lend and will play close
attention to the ability of the business to make loan and interest repayments.
3. Vendors and Suppliers: Are users of accounting information as they need to decide whether to
trade with the business, and in particular whether or not to provide credit terms. They are
concerned with the ability of a business to make payment of invoices on the due dates

4. Customers: Use the accounting information to assess the financial stability of the business when
deciding whether it will be a reliable supplier to place orders with.
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

5. Employees: Employees are stakeholders in the business and want to

know their employer or potential employer is financially stable, and is able
to continue to provide remuneration, employment opportunities, and
retirement benefits

6. Tax authorities: Use the financial statements of the business to

calculate any tax due.

7. Competitors: Competitors will make use of publicly available

accounting information in order to assess the level of competition they
face.

8. Government: Governments are users of accounting information as they collect data to provide
statistics on a variety of factors such as import and export data.

9. Public: The public use corporate financial information, particularly the annual financial statements,
to gather information about a business and its activities during the year.
 INTENSIVE BASIC ACCOUNTING
Module 1
Introduction, Overview of Accounting, Accounting Principles and Reporting Standards
__________________________________________________________________________

References:
https://www.thoughtco.com/history-of-accounting-1991228
https://www.accountingverse.com/accounting-basics/types-of-businesses.html
https://www.double-entry-bookkeeping.com/bookkeeping-basics/users-of-accounting-
information/