FUNDAMENTALS OF
ACCOUNTING
ACCOUNTING is the process of recording financial
transactions pertaining to a business. The accounting
process includes summarizing, analyzing, and
reporting these transactions to oversight agencies,
regulators, and tax collection entities. Moreover,
accounting is a significant manner and terms of money,
transactions and events in which are in part atleast of
financial character and interpreting the result thereof. It
is also a language of business. When we say
BUSINESS, it is regulatory, profit-oriented, and coming
together with common sense. Business also define as
economic activity of buying and selling in order to
obtain profit.
(Profit is obtained when the amount you receive if
more than the amount you paid for goods and services
you sold)
(All business need a financial information before
making decision)
HISTORY OF ACCOUNTING
14th – 17th century (renaissance period)
Fra Luca Pacioli – Father of Accounting
Italy, Europe (debere-debit, credere-credit)
OBJECTIVES OF ACCOUNTING
Providing information to the usersfor rational
decision-making.
Systematic recording of transaction.
Ascertainment of results of above transaction.
Ascertain the financial position of the business.
To know the balance sheet.
WAYS OF OBTAINING PROFIT
In service business – money is received for
the cost of service rendered.
In merchandising business – money is
received for the cost of merchandise given
In manufacturing business – money is
received for the cost of the product given.
TYPES OF BUSINESS ACTIVITIES
FINANCING ACTIVITIES -- owner “finances”
the business with a capital in cash and other
resources.
INVESTING ACTIVITIES -- involve the
acquisition of properties such as land,
furniture, machineries and equipment.
OPERATING ACTIVITIES -- day to day
activities related to earning of income when
goods or services are sold and the incurring of
expenses when wages, rent, utilities,
transportation are paid.
USERS OF ACCOUNTING INFORMATION
1. Internal Users – those who make decisions
that affect the internal operations of the
company.
2. External Users – those who make their
decisions based on the company’s financial
information.
THREE PRIMARY INFORMATION NEEDED BY THE
USERS
1. Financial Performance ( Income Statement)
also called Profit or Loss.
Statement or Statement of Earnings -
report which describes how business operated or
produced wealth over a given period of time.
2. Financial Position ( formerly called the
balance sheet ) - show how healthy or robust
the enterprise when it shows a listing of
accumulated resources (cash and properties)
Statement of Changes in Owner’s
Equity is another report prepared by the
accountant which explain the activities for a
period of time that caused the owner ’s equity
to change.
3. Cash Flow Statement of the business is a
financial statement which explains why the
amount of cash changed over a period of time.
The report makes a listing of the cash inflow
activities (cash receipts) and the cash outflow
(cash payments) of the business.
ACCOUNTING AREAS (BRANCHES OF
ACCOUNTING)
Basic Accounting or Bookkeeping – routine
activity of recording, classifying, and
summarizing business transactions in a
systematic manner. It is the procedural aspect
of accounting.
Financial Accounting – involves in the
preparation and interpretation of financial
statements primarily intend for external users.
Financial Statements are primarily concerned
with historical financial information regarding
performance(profit and loss), position (liquid,
solvent), structure (loan, equity) and a
compliance with legal and regulatory
requirements.
Cost Accounting – deals with recording,
classifying and summarizing the details of
material, labor and overhead necessary to
produce and sell a product of service.
Management Accounting – deals with
financial and non-financial information
primarily for managers and other internal users
to assist them in planning, directing and
controlling the affairs of business.
