Introduction to Accounting, Bookkeeping, and the Accounting Profession

Objectives of Lesson I

• Define core terminology:
  • Accounting, bookkeeping, journalizing, posting, etc.
• Explain why accounting & bookkeeping are vital in every economic activity.
• Identify professional attributes of accountants and enumerate available career paths.
• List different classes of business activities and organizational forms by ownership.
• Recognize all user-groups interested in an entity’s operations and financial position.

Fundamental Concepts Behind Doing Business

• Individuals/organizations go into business primarily to earn profit and secure livelihood.
• Typical decision scenarios for a proprietor:
  • Buy goods at cost and resell at a higher price; margin = selling price – cost.
  • Render services for a fee.
  • Invest money/equipment so that another party pays periodic rentals for its use.
• Regardless of size, every entity must know its profits or losses “from time to time.”
  • Requires executing the accounting cycle and maintaining complete, systematic records.
  • Records must follow standard principles (GAAP / PFRS) so that reports are reliable.
• Accounting’s ultimate role: furnish the owner with financial data in report form for decision-making.

Definition of Accounting

• Official definition (AICPA-oriented): “Accounting is a service activity that provides quantitative information, primarily financial in nature, about business organizations; such information is necessary for making decisions.”
• Expanded classic definition: “Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money transactions and events, at least in part of a financial character, and interpreting the results thereof.”
  • Emphasis on both art (judgement) and service (information utility).

Four Technical Functions Embedded in the Definition

• Recording (Journalizing)
  • Chronological writing of transactions/events.
  • Can be manual (journal book) or electronic (diskette, server, cloud DB).
• Classifying (Posting)
  • Grouping similar transactions under specific account titles (e.g., Rent Expense, Service Income, Accounts Payable).
  • Manual tool: General Ledger; electronic: digital ledgers.
• Summarizing
  • Preparing periodic financial statements (monthly, quarterly, semi-annual, annual).
  • Provides consolidated view suitable for both management and external parties.
• Interpreting
  • Analyzing statements to answer questions on profitability, liquidity, solvency, and stability.
  • Supplies the narrative & ratios that turn raw numbers into actionable insight.

Bookkeeping Defined & Its Scope

• Bookkeeping = process of recording + classifying using prescribed procedures.
• Literally “keeping the books” (Journal + Ledger).
• Provides the foundational database on which accounting analysis is built.

Accounting vs. Bookkeeping

• Scope:
  • Bookkeeping: clerical work focused on recording & classifying.
  • Accounting: includes bookkeeping plus summarizing & interpreting.
• Personnel:
  • Bookkeeper: maintains records; clerical nature.
  • Accountant/CPA: reviews bookkeeping, prepares & interprets FS; requires higher analytical skill & professional license.

Path to Becoming a CPA (Philippines Context)

• Complete a bachelor’s degree in accounting (or equivalent) from a recognized institution.
• Pass the Certified Public Accountant Licensure Examination administered by the Professional Regulation Commission (PRC).
  • Notoriously rigorous; characterized by high mortality (failure) rate.

Career Opportunities for CPAs

• Public Accounting Practice
  • Core: Auditing; expanding into tax consultancy & management advisory services.
  • Many PH firms now serve international clientele.
• Government Service
  • Roles in improving public finance; work in BIR, COA, DBM, LGUs, etc.
• Accounting Education
  • Train future professionals; curriculum design; research.
• Commerce & Industry (Private Accounting)
  • Planners/controllers enhancing corporate performance & contributing to national economy.

Why Every Transaction Must Be Recorded

1. Future reference – historical archive.
2. Basis for sound decision-making.
3. Compliance – law (BIR, SEC) requires maintained books & documented evidence.

Primary Users of Accounting Information

• Owners/Stockholders – track profit, assets, liabilities, and residual equity.
• Management – planning, operating, controlling, forecasting.
• Creditors & Suppliers – lending/credit-grant decisions; banks request FS before loans.
• Prospective Investors – evaluate potential returns & risks.
• Employees – assess employer’s financial stability & job security.
• Labor Unions – gauge capacity for improved compensation/benefits.
• Government Authorities –
  • BIR: taxation.
  • SEC: regulatory oversight.
  • NEDA: macro-economic statistics & policy.

Forms of Business Organization (By Ownership)

• Sole Proprietorship
  • Single owner (proprietor) controls operations & enjoys all profits.
  • Typical examples: retail kiosks, barber shops, pawnshops.
• Partnership
  • Two or more partners contribute $money$, property, or industry; share profits.
  • Favored for professional practices (physicians, lawyers, accountants).
• Corporation
  • Artificial legal person created by law; ownership via shares; owners = stockholders.
  • Most complex structure (separate juridical entity).

Classes of Business Activities (By Nature of Operations)

• Service – Provide service for a fee.
  • Examples: repair shops, beauty parlors, hotels, schools, transport, utilities (PLDT, Meralco, MWSS).
• Merchandising / Trading – Buy finished goods, resell higher.
  • Inventory consists solely of finished goods.
  • Examples: boutiques, appliance dealers, bookstores.
• Manufacturing – Acquire raw materials, convert to finished goods via labor & overhead.
  • Inventories: Raw Materials, Work-in-Process, Finished Goods.
  • Examples: shoe factories, furniture, garments, pharmaceuticals.
• Other Specialized Activities – mining, financing, agriculture, investment, etc.

(Note: The textbook will focus primarily on recording for service and merchandising entities.)

Stewardship Function of Accounting

• Acts as guardian of resources entrusted by owners & creditors.
• Ensures treatments & reports are fact-based due to diverse interested groups.

Books of Accounts & Business Papers

• Business Papers / Source Documents: sales invoices, official receipts, purchase orders, etc. – concrete evidence of transactions.
• Books of Accounts: journals & ledgers (simplified or computerised) where transactions are documented.
• Sound financial reporting demands verifiable records supported by these documents.

Primary Financial Statements & Key Equations

1. Income Statement (Statement of Profit or Loss)
   • Shows revenues, expenses, and resulting net income or loss.
   • Fundamental formula: $\text{Revenue} - \text{Expenses} = \text{Net\ Income}$ (If negative, net loss).
2. Balance Sheet (Statement of Financial Position)
   • Presents assets, liabilities, and owner’s equity at a point in time.
   • Basic Accounting Equation: $\text{Assets} = \text{Liabilities} + \text{Owner's\ Equity}$
3. Cash Flow Statement
   • Details cash sources and uses across operating, investing, and financing activities.

Ethical, Practical, & Real-World Implications

• Reliability and transparency of accounting information underpin investor confidence, credit markets, and economic policy.
• CPAs, by adhering to stewardship and ethical standards, contribute to national development (capital markets, taxation fairness, governance).
• Misstated or fraudulent reports can lead to poor decisions, legal penalties, and economic instability.

Connection to Future Lessons

• Subsequent chapters will deep-dive into the accounting cycle, journalizing/posting rules (debits & credits), adjusting entries, and full financial-statement preparation for service and merchandising entities.
• Foundational principles established here—users, forms of business, basic equations—serve as reference points when analyzing actual transactions later.