FABM 1.1-1.2

Lesson 1.1 - The Nature of Accounting

Definition of Accounting

  • Accounting is a systematic process of measuring and reporting relevant financial information about the activities of an economic organization or unit. Its purpose is to provide financial information. It is capable of being expressed in monetary terms.

  • The American Institute of Certified Public Accountants (AICPA) defined accounting as the art of recording, classifying, and summarizing in a significant manner and in terms of money, transaction, and events, which are in part at least of a financial character and interpreting the result thereof.

  • The Philippine Institute of Certified Public Accountants (PICPA) defined accounting as 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.

The nature of accounting is in its definition as follows:

  • Systematic Process: Measuring and reporting financial information about economic activities.

  • Art: Requires skill and knowledge through experience and study.

  • Service Activity: Provides financial information for decision-making.

Four Aspects of Accounting

  1. Recording: Chronological documentation of transactions.

  2. Classifying: Sorting transactions into categories (assets, liabilities, equity).

  3. Summarizing: Preparing financial statements for user needs.

  4. Interpreting: Making financial data comprehensible for decision-making.

    Accounting primarily serves the function of generating relevant and timely financial information for various stakeholders, including investors, government agencies, creditors, and management. This financial data enables these parties to make informed decisions by providing a clear understanding of an organization's financial position at a specific time and its operational results over a defined period. The qualitative and quantitative nature of this information positions accounting as the essential language of business, facilitating effective decision-making related to specific business activities.

Lesson 1.2 - History of Accounting

Ancient Accounting in Egypt, Mesopotamia, Greece, and Rome

  • Ancient Origins:

    • The history of accounting dates back to ancient civilizations.

    • The abacus, developed by the Sumerians around 5,000 BCE, served as an early calculator.

    • The papyrus, created by the Egyptians around 4,000 BCE, enabled the recording of commercial transactions and transcription of various texts.

  • Early Records:

    • Archaeologist Dr. Gunter Dreyer discovered clay tablets in Egypt, among the oldest written tax accounting records.

    • In the tomb of King Scorpion I (circa 3,000 BCE), stone labels were found detailing taxes in oil and linens.

  • Mesopotamia:

    • Used clay tokens and tablets to document loans, herds, crops, and trade systems.

    • Scribes acted as early accountants, ensuring compliance with commercial transaction codes.

  • Greek Contributions:

    • By 600 BCE, the Greeks introduced coins and adopted the Phoenician Writing System for record-keeping.

    • Greek bankers facilitated credit and fund transfers, evidenced by their accounting records.

  • Roman Innovations:

    • Romans established a finance and legal system reliant on accounting.

    • They introduced an annual budget to manage revenues and expenditures, and households maintained cash books for expenses.

  • England's Accounting History:

    • Following the invasion by William the Conqueror, the Domesday Book (1086) recorded real estate and taxes.

The pipe roll, the oldest surviving accounting record in English, documented rents, fines, and taxes from 1130-1830.

14th Century – The Birth of Double-Entry Bookkeeping

In the 14th century, Luca Pacioli, an Italian mathematician and contemporary of Leonardo da Vinci, authored Summa de Arithmetica, Geometria, Proportioni et Proportionalita, which is foundational in accounting. A key section, De Computis et Scripturis, consists of 36 chapters detailing bookkeeping practices, including the accounting cycle, balanced sheets, and the use of journals and ledgers. Pacioli's work outlines essential accounting concepts such as assets, liabilities, owner’s equity, revenue, expenses, year-end closing entries, and trial balances.

Pacioli acknowledged Benedetto Cotrugli for the original concept of double-entry bookkeeping, which was briefly described in Cotrugli's unpublished manuscript, Della Mercatura et del Mercante Perfetto. The Italians, particularly Venetian merchants in the late 15th century, are recognized for their significant contributions to accounting and commerce, utilizing the double-entry system to track earnings and profits.

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

The latter part of the nineteenth century saw the rise of accounting as a formal profession, particularly influenced by the Industrial Revolution in England, which transitioned from hand tools to machine-based production. This shift necessitated the expertise of accountants for effective corporate management.

In Scotland, the profession was formalized when Queen Victoria granted a royal charter to the Institute of Accountants in Glasgow in 1854, establishing the role of chartered accountant (CA). As British capital flowed into American industries, many Scottish and British chartered accountants were sent to the U.S. to audit these investments. Some chose to remain in America, founding various accounting firms.

In 1887, the first national accounting society in the U.S., the American Association of Public Accountants, was established, laying the groundwork for the current American Institute of Certified Public Accountants (AICPA) by introducing a formal certification process for accountants.

20th Century – The Evolution of Modern Accounting Standards

The American Institute of Certified Public Accountants (AICPA) was established as the first national professional association for Certified Public Accountants (CPAs) in the United States. In response to the economic depression, the Securities and Exchange Commission (SEC) was created, requiring publicly traded companies to file periodic reports certified by CPAs before selling securities. The AICPA was responsible for setting accounting and auditing standards for these reports until the Financial Accounting Standards Board (FASB) was formed in 1973, driven by demands for more reliable financial reporting from Congress and the SEC. Currently, the FASB and the Governmental Accounting Standards Board (GASB) are key authorities in establishing Generally Accepted Accounting Principles (GAAP) in the U.S. Additionally, large accounting firms have expanded their services to include consultancy alongside auditing.

The Information Age

The Information Age, also referred to as the Computer Age, Digital Age, or New Media Age, has transformed the accounting profession significantly.

  • Reduction of Manual Tasks: Traditional, labor-intensive accounting tasks have been replaced by faster and more accurate computer methods.

  • Online Transactions: The internet enables transactions to be completed online, streamlining processes.

  • Software Development: Various accounting software applications have been created to enhance efficiency and meet the diverse needs of businesses.

21st Century – Accounting in the Modern Times

The 21st century began with the formation of the International Accounting Standards Board (IASB) in January 2001, replacing the International Accounting Standards Committee (IASC).

  • Enron Scandal: This scandal led to the downfall of Arthur Andersen, a major audit firm, and resulted in the Sarbanes-Oxley Act of 2002, which imposed stricter regulations on accountants to protect investors, particularly concerning consultancy services.

  • 2008 Economic Recession: This recession prompted the introduction of the Dodd-Frank Act in 2010, which brought extensive reforms in financial stability, hedge fund regulation, and consumer protection.

As technology evolves and businesses become more globalized, accountants are faced with increasingly complex responsibilities. Many countries, including the Philippines, have adopted International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) to improve the comparability and clarity of financial statements globally.

Modern technology has enhanced record-keeping, minimized errors, and improved data processing, requiring accountants to stay informed about ongoing innovations in their field.