FDNACCT / AY2025-2026_Term 1 - UNIT 1: Introduction to Accounting

UNIT 1: Introduction to Accounting

Brief History of Accounting

  • Refer to the video posted in Canvas for a detailed history.

Introduction to Accounting

Definition, Nature, and Scope

  • Definition:

    • As per the American Institute of Certified Public Accountants (AICPA), accounting is "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."

    • It is commonly known as the "language of business."

  • Nature:

    • Accounting is considered an art.

    • It is primarily a service that provides financial information to interested users to aid in making economic decisions.

  • Scope:

    • Accounting exclusively deals with financial information and transactions.

  • Generally Accepted Accounting Principles (GAAP) - Monetary / Money Measurement / Monetary Unit:

    • This principle assumes that only transactions that can be expressed in monetary terms are recorded in the accounting system.

Areas and Branches of Accounting
Areas of Accounting

  • Public Accounting: Involves providing accounting services to various external companies.

    • Auditing: Focuses on reviewing financial statements to assess their fairness and adherence to accounting principles. In accounting, 'fair' means that a transaction is accounted for in accordance with accepted accounting rules.

    • Tax Accounting: Deals with two main aspects:

      • Tax Compliance: Involves the preparation and audit of tax returns.

      • Tax Planning: Provides advice to clients on how to structure their financial affairs strategically to reduce their tax liability.

    • Management Advisory Services: Involves assisting clients in improving their information systems and overall business performance.

  • Private Accounting: Involves working for a single business entity, typically within a specific industry.

  • Governmental Accounting: Pertains to keeping financial records and preparing financial reports for the national government, its various departments, and local government units.

Branches of Accounting

  • Financial Accounting: Provides general-purpose financial reports primarily for various external users, such as investors and creditors.

  • Auditing:

    • External Audit: Conducted by external auditors, who are independent third parties reviewing a company's financial statements to assess their fairness and adherence to accounting principles.

    • Internal Audit: Performed by internal auditors who evaluate the company's policies and procedures. Their goal is to identify weaknesses, mismanagement, waste, or fraud within the organization.

  • Cost Accounting: Concerned with accounting for and classifying costs and expenses to determine the total cost of producing a product or delivering a service.

  • Managerial Accounting: Provides internal financial reports, mainly to managers, to support their decision-making processes within the organization.

  • Government Accounting: Specializes in preparing financial reports for governmental bodies and their agencies.

  • Tax Accounting: Focuses on preparing tax returns and ensuring full compliance with tax laws and regulations.

  • Accounting Education: Encompasses teaching accounting principles and practices within the academe and engaging in accounting research.

  • Accounting Information System (AIS): A comprehensive system utilized by a business to collect, store, manage, process, retrieve, and report its financial data, which is then used by various internal stakeholders.

  • Forensic Accounting: A specialized branch that focuses on legal affairs, including inquiries into fraud, support for legal cases, and resolution of disputes and claims.

Users of Accounting Information

Primary Users (as per Conceptual Framework 1.5)

  • Investors (Individuals, Businesses, Banks, Insurance Companies):

    • Existing Investors: Monitor business performance to check the return on their current investments.

    • Potential Investors: Monitor business performance to assess the risk and reward of future investment opportunities.

  • Lenders and Other Creditors:

    • Lenders: Evaluate if the business is capable of repaying a loan and use this assessment to determine the terms of the loan.

    • Suppliers / Creditors: Assess the business's ability to pay its bills before extending credit and setting appropriate credit terms and credit limits.

Other Users

  • Internal Users:

    • Managers: Evaluate the results of the company's operations to plan and make strategic decisions for the future.

    • Employees: Ensure that the business has the financial capacity to pay salaries and other benefits.

  • External Users:

    • Tax Authorities: Responsible for collecting various taxes, such as employee tax, sales tax, property tax, and business tax.

    • Regulatory Agencies: Oversee the financial information provided by public companies. For example, The Securities and Exchange Commission (SEC) enforces security laws and protects against infractions like insider trading, accounting fraud, and companies providing misleading information about their financial condition.

    • Customers: Check the financial health of a business to ensure they can rely on continued service or supply of goods.

    • Employee Unions: Utilize financial information to negotiate salary increases, benefits, and profit-sharing agreements.

    • Trade Associations: Provide summary reports to assess the performance of a business and the industry it operates in.

    • Financial Intermediaries:

      • Financial Analysts: Provide summary reports to assess businesses and industries for investment purposes.

      • Stock Brokers: Evaluate the potential returns of current and future stock investments.

      • Mutual Fund Companies: Monitor business performance to assess the risk and reward associated with current and future investments.

      • Credit-Rating Agencies: Provide summary reports that assess the credit-worthiness of public companies, specifically their ability to make timely payments of principal and interests.

Forms of Business Organization

As to Activity

  • Service: A business whose primary activity is providing services to customers.

  • Merchandising / Trading: A business that primarily engages in buying and selling goods.

  • Manufacturing: A business that converts raw materials into finished goods.

As to Ownership
Sole Proprietorship

  • Definition: A business entity owned by an individual who trades alone, either in their own name or under a recognized business name. The owner solely takes all business profits and assumes all business losses.

  • Number of Owners: One.

  • Business Life: Ends when the owner passes away, becomes unable to carry on business operations, or decides to close the business.

  • Responsibility for Business Debts: The owner is solely liable for all business debts, extending to the full extent of their personal assets (unlimited liability).

Partnership

  • Definition: A business entity owned by two or more individuals, known as partners, who enter into a contract called the partnership agreement. They bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves (Article 1767, Civil Code of the Philippines). This also applies to practicing a profession.

  • Number of Owners: Two or more.

  • Business Life: A partnership can end by:

    • The termination of the definite term or particular undertaking specified in the partnership agreement.

    • The express will of any partner, acting in good faith.

    • The death, insolvency, or civil interdiction of any partner.

    • A decree of court (Article 1830, Civil Code of the Philippines).

  • Responsibility for Business Debts: Partners are responsible individually and jointly for the business debts.

  • Partnership Agreement Provisions: A partnership agreement typically covers:

    • Capital invested by each partner.

    • Profit and loss sharing ratios.

    • Interest on capital: an agreed rate of interest given to a partner for their capital invested.

    • Interest on drawings: an agreed rate of interest charged to a partner for withdrawals made.

    • Salary and bonus for partners actively working in the partnership.

    • Interest given to a partner who extends a loan to the partnership.

    • Responsibilities of the partners in managing the business.

  • Note on Regulated Professions: Regulated professions (e.g., Accountants, Architects, Doctors, Engineers, Lawyers) cannot be established as corporations. This is due to public policy, which aims to prevent practicing professionals from avoiding personal liability for their professional actions.

Corporation

  • Definition: An artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence (Section 2, Revised Corporation Code of the Philippines). It is considered a separate legal entity meaning:

    • The business can sue and be sued in its own name.

    • The business can carry out transactions in the business name.

    • The business needs to pay company tax (corporate tax).

  • Number of Owners: One or more.

  • Business Life: A corporation can continue indefinitely and ends only when the business goes bankrupt or when the stockholders vote to liquidate it. A corporation is designed to have perpetual existence unless its articles of incorporation provide otherwise (Section 11, Revised Corporation Code of the Philippines).

  • Responsibility for Business Debts: Stockholders are not responsible for the business debts; their liability is limited to the amount of their individual investment (limited liability).

  • Owners: Owners are called stockholders (or shareholders) because ownership is divided into a number of stocks (or shares) and is evidenced by holding a stock (or share) certificate.

Generally Accepted Accounting Principles (GAAP)

  • Entity / Business Entity / Economic Entity / Separate Entity Principle:

    • Assumes that a business unit is separate and distinct from its owner(s).

    • Requires that the business's accounting records should always be kept separate from the owner's personal accounting records to maintain clear financial boundaries.

  • Definition of GAAP:

    • Refers to a common set of rules, procedures, practices, and standards.

    • These principles are followed in the preparation and presentation of financial statements.

    • GAAP are issued by the Financial Accounting Standards Board (FASB).

    • They serve as the fundamental rules that accountants adhere to when recording business transactions and preparing financial statements, ensuring consistency and comparability.

References

  • The detailed references for this unit's content include various editions of accounting textbooks and electronic sources such as Republic Act No. 386 (Civil Code of the Philippines) and Republic Act No. 11232 (Revised Corporation Code of the Philippines).