Fundamentals of Accountancy, Business, and Management (FABM11)
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Class notes Fundamentals of Accountancy, Business, and Management (FABM11)
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Fundamentals of Accountancy, Business, and Management (FABM11)
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Bulacan State University
Class notes for the subject Fundamentals of Accountancy, Business, and Management (FABM11) from Lesson 1 to 6. It started with the introduction of accounting. Followed by discussing the different branches of accounting. The users of financial information also tackle in lesson 4. Followed by the dif...
Fundamentals of Accountancy, Business, and Management (FABM11)
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Page 1 of 20
Fundamentals of Accountancy, Business and Management
Lesson 1: Introduction to Accounting
Study Materials – July 2018
______________________________________________________________________________
Nature of accounting
Definition of Accounting: “Accounting is the process of IDENTIFYING, RECORDING, and
COMMUNICATING economic events of an organization to interested users.” (Weygandt, J. et.
al) wherein;
IDENTIFYING – this involves selecting economic events that are relevant to a particular business
transaction
RECORDING – this involves keeping a chronological diary of events that are measured in pesos.
The diary referred to in the definition are the journals and ledgers which will be discussed in
future chapters.
COMMUNICATING – occurs through the preparation and distribution of financial and other
accounting reports.
The economic events of an organization are referred to as transactions.
Examples of economic events or transactions - In a bakery business:
• sales of bread and other bakery products
• purchases of flour that will be used for baking
• purchases of trucks needed to deliver the products
According to Accounting Theory “Accounting is a systematic recording of financial transactions
and the presentation of the related information to appropriate persons.” Based on this
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
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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 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 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.
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
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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. 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
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