Fundamentals of

Accounting
Course Material No. 1

Eugine John F. Blanco

Course Instructor
2 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA

Introduction to
Accounting 1
LEARNING OUTCOMES

At the end of this lesson, the learners shall be able to:

LESSON OUTLINE
• define accounting
Definition of
•
• describe the nature of accounting
Accounting
• Nature of • explain the functions of accounting in business
UnitAccounting
Outline
• narrate the history/origin of accounting
• Functions of
• differentiate and understand the branches of accounting
Accounting in
Business • identify the different users of accounting information
• History of
Accounting
• Branches of RESOURCES NEEDED
Accounting
• Users of For this lesson, you would need the following resources:
Accounting
Information
Accounting books and other references as uploaded in the files
section in MS Teams.
FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 3

TABLE OF CONTENTS

Word Search
Pretest 4
Before you start, try answering the following
questions. Definition of Accounting
5
1. Give at least 5 words you associate the word
“accounting”?
5 Nature of Accounting
_________________________________________
2. Why do you think accounting is important to
business and in daily life?
Functions of
________________________________________
6 Accounting in Business

History of Accounting
7

Branches of
9 Accounting

Users of Accounting
11 Information

Lesson Summary
13

Post Test
13

References
15
4 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA

Fundamentals
of Accounting

Key Point
This topic provides an
overview of accounting
fundamentals: the
definition, nature, function,
history, branches, and users
of accounting.

Find all 10 words relevant to our topic!

 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 5

Definition of Accounting

What is Accounting?
Accounting is the process of IDENTIFYING, RECORDING,
and COMMUNICATING economic events of an
organization to interested users.
• IDENTIFYING - this involves selecting
economic events that are relevant to a
particular business transaction. The economic events of an organization are referred to
as transactions.
• Examples of economic events or transactions, let’s say, in a bakery business:
o sales of bread and other bakery products
o purchases of flour that will be used for baking
o purchases of trucks needed to deliver the products
• RECORDING - this involves keeping a chronological diary of events that are measured in
pesos.
• COMMUNICATING - occurs through the preparation and distribution of financial and
other accounting reports.

Nature of Accounting

Based on the above definition, we can derive the following basic features of accounting:

• Accounting is a service activity. Accounting provides assistance to decision makers

by providing them financial reports that will guide them in coming up with sound
decisions.
• Accounting is a process. A process refers to the method of performing any specific
job step by step according to the objectives or targets. Accounting is identified as a
process, as it performs the specific task of collecting, processing and communicating
financial information. In doing so, it follows some definite steps like the collection,
recording, classification, summarization, finalization, and reporting of financial data.
• Accounting is both an art and a discipline. Accounting is the art of recording,
classifying, summarizing and finalizing financial data. The word ‘art’ refers to the
way something is performed. It is behavioral knowledge involving a certain creativity
and skill to help us attain some specific objectives. Accounting is a systematic
 6 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA

method consisting of definite techniques and its proper application requires skill and
expertise. So by nature, accounting is an art. And because it follows certain
standards and professional ethics, it is also a discipline.
• Accounting deals with financial information and transactions. Accounting records
financial transactions and data, classifies these and finalizes their results given for a
specified period of time, as needed by their users. At every stage, from start to
finish, accounting deals with financial information and financial information only. It
does not deal with non-monetary or non-financial aspects of such information.
• Accounting is an information system. Accounting is recognized and characterized as
a storehouse of information. As a service function, it collects processes and
communicates financial information of any
entity. This discipline of knowledge has evolved
to meet the need for financial information as
required by various interested groups.

Functions of Accounting in Business

• Accounting is considered as the language of business.

• Accounting is the means by which business
information is communicated to business owners and stakeholders.
• The role of accounting in business is to provide information for managers and owners to
use in operating the business. In addition, accounting information allows business owners
to assess the efficiency and effectiveness of their business operations.
• Prepared accounting reports can be compared with industry standards or to a leading
competitor to determine how the business is doing. Business owners may also use
historical financial accounting statements to create trends for analyzing and forecasting
future sales.
• Accounting helps the users of these financial reports to see the true picture of the
business in financial terms. In order for a business to survive, it is important that a business
owner or manager be well-informed.

Illustrative Example:

Eren is a retired government employee who is good at baking. One day he decides to put up a
bakery shop in your barangay. He renovates a portion of his house to serve as the area for the
production of bread. He purchases baking equipment and raw materials to produce five different
types of bread. Eren also hires Mikasa to help him with the baking and, at the same time, to be
in-charge of sales. Eren pays Mikasa on a weekly basis. Every day, Eren’s wife deposits the daily
 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 7

cash sales in their bank account at Titan Savings Bank. With the help of accounting, what possible
decisions or questions of Eren can accounting provide an answer to?

Possible answers:

• Am I making or losing money from my business?

• How much daily or monthly sales do I need in order to recover my fixed cost?
• Do I need to hire additional workers to help me with my production?
• Should I put more money in my business or sell it and go into another business?
• How much am I worth?
• Can I afford to set up a new store in another place? Where do I get the funds?
• Can I afford to pay a bank loan?
• How much is owed to me, and how much do I owe?
• How can I change the way I operate to make more profit?

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. Following is the
evolution of accounting:

• The Cradle of Civilization

Around 3600 B.C., record-keeping was already common from Mesopotamia, China and India to
Central and South America. The oldest evidence of this practice was the “clay tablet” of
Mesopotamia which dealt with commercial transactions at the time such as listing of accounts
receivable and accounts payable.

• 14th Century - Double-Entry Bookkeeping

The most important event in accounting history is generally considered to be the dissemination
of double entry bookkeeping by Luca Pacioli (‘The Father of Accounting’) in 14th century Italy.
Pacioli was much revered in his day, and was a friend and contemporary of Leonardo da Vinci.
8 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA

The Italians of the 14th to 16th centuries are widely acknowledged as the fathers of modern
accounting and were the first to commonly use Arabic numerals, rather than Roman, for tracking
business accounts. Luca Pacioli wrote Summa de Arithmetica, the first book published that
contained a detailed chapter on double-entry bookkeeping.

• French Revolution (1700s)

The thorough study of accounting and development of accounting theory began during this
period. Social upheavals affecting government, finances, laws, customs and business had
greatly influenced the development of accounting.

• The Industrial Revolution (1760-1830)

Mass production and the great importance of fixed assets were given attention during this
period.

• 19th Century – The Beginnings of Modern Accounting in Europe and America

The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria
granted a Royal Charter to the Institute of Accountants in Glasgow, creating the profession of
the Chartered Accountant (CA). In the late 1800s, chartered accountants from Scotland and
Britain came to the U.S. to audit British investments. Some of these accountants stayed in the
U.S., setting up accounting practices and becoming the origins of several U.S. accounting firms.
The first national U.S. accounting society was set up in 1887. The American Association of Public
Accountants was the forerunner to the current American Institute of Certified Public
Accountants (AICPA). In this period rapid changes in accounting practice and reports were
made. Accounting standards to be observed by accounting professionals were promulgated.
Notable practices such as mergers, acquisitions and growth of multinational corporations were
developed. A merger is when one company takes over all the operations of another business
entity resulting in the dissolution of another business. Businesses expanded by acquiring other
companies. These types of transactions have challenged accounting professionals to develop
new standards that will address accounting issues related to these business combinations.
 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 9

• The Present - The Development of Modern Accounting Standards and Commerce

The accounting profession in the 20th century developed around state requirements for
financial statement audits. Beyond the industry's self-regulation, the government also sets
accounting standards, through laws and agencies such as the Securities and Exchange
Commission (SEC). As economies worldwide continued to globalize, accounting regulatory
bodies required accounting practitioners to observe International Accounting Standards. This
is to assure transparency and reliability, and to obtain greater confidence on accounting
information used by global investors. Nowadays, investors seek investment opportunities all
over the world. To remain competitive, businesses everywhere feel the need to operate
globally. The trend now for accounting professionals is to observe one single set of global
accounting standards in order to have greater transparency and comparability of financial
data across borders.

Branches of Accounting

Accounting is divided into several branches to better

serve the needs of different users with varying
information needs. These branches sometimes overlap,
and they are often closely intertwined.

Financial Accounting
Financial accounting is the broadest branch and is
focused on the needs of external users. Financial
accounting is primarily concerned with the recognition, measurement, and communication of
economic activities. This information is communicated in a complete set of financial statements.
It is assumed under this branch that the users have one common information need. Financial
accounting conforms with accounting standards developed by standard-setting bodies. In the
Philippines, there is a Council created to set these standards.

Examples of these financial reports include:

• the balance sheet (statement of financial condition)
• income statement (the profit and loss statement, or P&L)
• statement of cash flows

Financial accounting is primarily concerned with processing historical data. Although financial
accounting generally meets the needs of external users, internal users of accounting information
also use this information for their decision-making needs.
10 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA

Managerial Accounting
Management accounting emphasizes the preparation and analysis of accounting information
within the organization. The objective of managerial accounting is to provide timely and relevant
information for those internal users of accounting information, such as the managers and
employees in their decision-making needs. Oftentimes, these are sensitive information and is not
distributed to those outside the business - for example, prices, plans to open up branches,
customer list, etc. Managerial accounting involves financial analysis, budgeting and forecasting,
cost analysis, evaluation of business decisions, and similar areas.

Government Accounting
Government accounting is the process of recording, analyzing, classifying, summarizing,
communicating, and interpreting financial information about the government in aggregate and
in detail reflecting transactions and other economic events involving the receipt, spending,
transfer, usability and disposition of assets and liabilities. This branch of accounting deals with
how the funds of the government are recorded and reported. Government accounting deals with
these transactions, the recording of inflow and outflow of funds of the government.

Auditing
There are two types of auditing: external and internal auditing. External auditing refers to the
examination of financial statements by an independent CPA (Certified Public Accountant) with
the purpose of expressing an opinion as to fairness of presentation and compliance with the
generally accepted accounting principles (GAAP). The audit does not cover 100% of the
accounting records but the CPA reviews a selected sample of these records and issues an audit
report.

Internal auditing deals with determining the operational efficiency of the company regarding the
protection of the company’s assets, accuracy and reliability of the accounting data, and
adherence to certain management policies. It focuses on evaluating the adequacy of a company’s
internal control structure by testing segregation of duties, policies and procedures, degrees of
authorization, and other controls implemented by management.

Tax Accounting
Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and
preparation of tax returns. It also involves determination of income tax and other taxes, tax
advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax
decisions, and other tax-related matters. The Bureau of Internal Revenue is a government agency
whose role is the administration and implementation of our tax laws.
 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 11

Cost Accounting
Sometimes considered as a subset of management accounting, cost accounting refers to the
recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in
manufacturing businesses since they have the most complicated costing process. Cost
accountants also analyze actual and standard costs to help managers determine future courses
of action regarding the company's operations. Cost accounting will also help the owner set the
selling price of his products. For example, if the cost accounting records shows that the total cost
to produce one can of sardines is PHP50, then the owner can set the selling price at PHP60.

Accounting Education
This branch of accounting deals with developing future accountants by creating relevant
accounting curriculum. Accounting professionals can become faculty members of educational
institutions. Accounting educators contribute to the development of the profession through their
effective teaching, publications of their research and influencing students to pursue careers in
accounting. Accounting teachers share their knowledge on accounting so that students are
informed of the importance of accounting and its use in our daily lives.

Accounting Research
Accounting research focuses on the search for new knowledge on the effects of economic events
on the process of summarizing, analyzing, verifying, and reporting standardized financial
information, and on the effects of reported information on economic events. Researchers
typically choose a subject area and a methodology on which to focus their efforts. The subject
matter of accounting research may include information systems, auditing and assurance,
corporate governance, financials, managerial, and tax. Accounting research plays an essential
part in creating new knowledge. Academic accounting research "addresses all aspects of the
accounting profession" using a scientific method. Practicing accountants also conduct accounting
research that focuses on solving problems for a client or group of clients. The Accounting research
helps standard-setting bodies around the world to develop new standards that will address recent
issues or trend in global business.

Users of Accounting Information

There are two broad categories of users of financial information: internal and external 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.
12 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA

• Owners. Owners need accounting information to assess how well their business is
performing. Financial statements provide information to owners about
the profitability of the business.
• Managers. Managers need accounting information to plan, monitor and make business
decisions.
• Employees. Employees are interested in knowing how well a company is performing as it
could have implications for their job security and income.

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.
• Creditors – They need accounting information in determining 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) – They need accounting information in determining the credibility
of the tax returns filed on behalf of a company.
• Investors – They need accounting information for analyzing 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 – They need accounting information for assessing 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, DOLE, etc.) – They need accounting information for
ensuring that a company's disclosure of accounting 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.

LESSON SUMMARY

In this lesson, you were introduced to the concept of accounting including its definition, nature,
functions, history, branches, and its users. This lesson would provide you a strong foundation as
we go along future topics on this course.
FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 13

LESSON SUMMARY

Accounting Communicating Double Entry Bookkeeping

Identifying Branches of Accounting Business
Measuring Users of Accounting Transaction

POST TEST

Part 1. Multiple Choice: Fill in the blank with the letter corresponding to your answer.

_______ 1. This aspect of accounting involves selecting economic events related to a

transaction.
a. Identifying
b. Communicating
c. Measuring
d. Recording

_______ 2. Which of the following is not a nature of accounting?

a. Accounting is a process.
b. Accounting deals with non-financial information only.
c. Accounting is an information system.
d. Accounting is an art.

_______ 3. Which of the following questions could not be answered by accounting?

a. Am I making profit from my business?
b. Can I afford to pay my loans?
c. Do I need to hire additional workers?
d. How can I promote tourist spots in the Philippines?

_______ 4. Who is the Father of Accounting?

a. Leonardo Da Vinci
b. Luca Pacioli
c. Michelangelo
d. King James II

_______ 5. These are the users of financial information who plan, organize, and run the
business.
a. Internal users
b. External users
c. Government
d. Employees
14 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA

_______ 6. This field of accounting focuses on the preparation of financial reports.

a. Financial accounting
b. Managerial accounting
c. Tax accounting
d. Government accounting

_______ 7. Accounting professionals can become faculty members of educational institutions.

a. True
b. False
c. Maybe
d. Never

_______ 8. This government agency administers and implements tax laws.

a. Commission on Audit
b. Department of Tourism
c. Bureau of Internal Revenue
d. Bureau of Customs

_______ 9. This was used by ancient civilizations in Mesopotamia to record commercial

transactions.
a. Android tablet
b. Clay tablet
c. Paper
d. Rock

_______ 10. These users include customers, creditors, regulatory authorities, etc.
a. Internal users
b. External users
c. Government
d. Management

_______ 11. This occurs through the preparation and distribution of financial reports.
a. Identifying
b. Communicating
c. Measuring
d. Recording

_______ 12. Which of the following is false about accounting?

a. Accounting is the language of business.
b. Accounting was only discovered in the 20th century.
c. Accounting dates back to the earliest civilizations.
d. Accounting is governed by global standards.

_______ 13. Economic events are also called these.

a. Records
 FUNDAMENTALS OF ACCOUNTING • NU LAGUNA 15

b. Transactions
c. Incidents
d. Agreements

Part 2. Matching Type: Match the Column A with Column B.

(Items #14 - #22: Branches of Accounting; Items #23 - #30: Users of Accounting Information)

Column A Column B
______14. This deals with how the government funds are recorded and reported. A. Financial accounting
______15. This refers to the examination of financial statements by an independent CPA. B. Managerial accounting
______16. It includes tax planning and preparation of tax returns. C. Tax accounting
______17. This refers to the recording, presentation, and analysis of manufacturing costs. D. Government accounting
______18. This involves budgeting and forecasting and evaluation of business decisions. E. External auditing
______19. This involves producing financial reports like balance sheet. F. Internal auditing
______20. This deals with determining the operational efficiency of the company. G. Cost accounting
______21. This branch of accounting deals with developing future accountants. H. Accounting education
______22. This focuses on the search for new knowledge on the effects of economic events. I. Accounting research
______23. They need accounting information in determining the credibility of the tax returns. J. Owners
______24. They need accounting information for assessing the financial position of its suppliers. K. Managers
______25. They need accounting information for ensuring that accounting information is in
L. Employees
accordance with the rules and regulations.
______26. They need accounting information to plan, monitor and make business decisions. M. Regulatory authorities
______27. They are interested in knowing how well a company is performing to ensure job security
N. Creditors
and income.
______28. They need accounting information to assess how well their business is performing. O. Tax authorities
______29. These include suppliers as well as lenders of finance such as banks. P. Investors
______30. They want to make sure they can earn a reasonable return on their investment. Q. Customers

Please refer to MS Forms link in the Assignments bin.

REFERENCES

Ballada, W. et al (2021). Basic Financial Accounting and Reporting Made Easy (23rd edition).
Manila: DomDane Publishers & Made Easy Books
Label, W. (2016). Accounting for Non-Accountants (3rd ed.). Naperville: Sourcebooks.