MODULE 1: Basic Theories of Accounting

• Accounting is a service activity.
• The language of business is accounting.
• The function of accounting is to provide quantitative information, primarily financial in nature, about the economic entities that is intended to be useful in making economic decisions.
• An information system that measures, processes, and communicates financial information about an economic entity is an accounting information system.
• Accounting is a system that measures business activities, processes information into reports, and communicates results to decision-makers.
• Accounting is a process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.
• Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events which are, of financial character, and interpreting the results thereof.
• EVOLUTION OF ACCOUNTING

  1. Primitive Accounting (8500 BCE)
  2. 1st Dynasty of Babylonia (2286-2242 BCE)
  3. 3600 BCE
  4. Middle Ages
  5. Florentine Approach
  6. The Method of Venice
• 8500 B.C. (Primitive Accounting)

  • Clay tokens - cones, disks, spheres, and pallets - found in Mesopotamia (Modern Iraq).
  • These tokens represented such commodities (sheep, jugs of oil, bread, or clothing).
  • Tokens were sealed in clay balls, called bullae, which were broken down on delivery so the shipment could be checked against the invoice.
• Bullae were the first bill of lading.
• 1st Dynasty of Babylonia (2286-2242 B.C.E)

  • Code of Hammurabi
  • Transactions are recorded by the Scribe (predecessor of the modern accountant) on a small mound of clay along with the parties signatures.
• Code of Hammurabi - merchants trading goods to give buyers sealed memorandum containing agreed price before it can be enforcable.
• 3600 BCE

  • In Babylonia, clay tablets were used to record payment of wages.
  • Accounting is used to keep track of the cost of labor and materials used in building structures.
• Middle Ages - 11th to the 13th Centuries

  • Arabic numbers were used allowing column of number to be added and subtracted.
  • The use of credit was prevalent and a semblance of a banking system was also functioning.
• Middle Ages - 11th to the 14th Centuries

  • Inca Empire (West Coast of South America), use knotted cords of different lengths and colors called quipu to keep accounting records.
• Middle Ages - 13th to the 15th Centuries

  • Merchants and bankers of Florence, Venice, and Genoa (Italy) developed a more formal account-keeping methods.
• Florentine Approach

  • Combination, in the form of account books and double-entry bookkeeping, and of informal social networks, constructed out of the surrounding rules of Florentine sociality.
• Amatino Manucci

  • Inventor of double-entry bookkeeping
  • He gave importance to the aspect of financial control
• The Method of Venice

  • This period involves with Luca Pacioli, father of double-entry accounting.
• Luca Pacioli

  • Franciscan friar and a mathematician, is associated with the introduction of double-entry bookkeeping.
  • Father of double-entry accounting.
• TYPES OF BUSINESSES:

  • Service
  • Trader
  • Manufacture
  • Raw Materials
  • Infrastructure
  • Financial
  • Insurance
• Service

  • Activity: selling people’s time
  • Structure: hiring skilled staff and selling their time
  • Examples: software development, accounting firms, and legal firms
• Trader

  • Activity: buying and selling products
  • Structure: buying raw materials and manufactured goods and making them available for sale
  • Examples: wholesaler and retailer
• Manufacture

  • Activity: designing products, aggregating components, and assembling finished products
  • Structure: buying raw materials and manufactured goods and making them available for sale
  • Examples: vehicle assembly & construction
• Raw Materials

  • Activity: growing or extracting raw materials
  • Structure: buying blocks of land and using them to provide raw materials
  • Examples: farming and mining oil and minerals
• Infrastructure

  • Activity: selling and utilizing structure
  • Structure: buying and selling assets; selling occupancy often in combination with services
  • Examples: airport, airlines, trains, hotels, telecoms, property management
• Financial

  • Activity: receiving deposits, lending, and investing money
  • Structure: accepting cash and paying interest, lending money charging them fees
  • Examples: banks and investment house
• Insurance

  • Activity: pooling premiums of many to meet the claims of few
  • Structure: collecting cash and investing money to pay losses experienced by few
  • Examples: car insurance and life insurance
• FORMS OF BUSINESS ORGANIZATION:

  • Sole Proprietorship
  • Partnership
  • Corporation
• Sole Proprietorship

  • Has a single owner called the proprietor who generally is the manager.
  • Tend to be small service-type business and retail environment.
  • Owner receives all profits, absorbs all the losses and is solely responsible for all the debts of the business.
  • Accounting records of the sole proprietorship does not include proprietor’s personal financial records.
• Partnership

  • Business owned and operated by two or more persons who binds themselves to contribute money, property, or industry to a common fund, with the intention of dividing profits among themselves.
• Corporation

  • Business owned by stockholders.
  • Artificial being created by law, having the rights of succession and the powers, attributes and properties
• FUNDAMENTAL CONCEPTS OF ACCOUNTING:

  • Entity Concept
  • Periodicity Concept
  • Stable Monetary Unit Concept
  • Going Concern
• Entity Concept

  • An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate unit.
  • Transactions of separate entities should be accounted for together.
• Periodicity Concept

  • Entity’s life can be subdivided into equal time periods for reporting purposes.
  • Allows users to obtain timely information to serve as a basis on making decisions about future activities.
• Stable Monetary Unit Concept

  • The Philippine peso is a reasonable unit of measurement and that its purchasing power is relatively stable.
  • Allows accountants to add and subtract peso amounts as though each peso has the same purchasing power as any other peso at any time.
• Going Concern

  • It is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading.
• BASIC PRINCIPLES OF ACCOUNTING:

  • Objectivity
  • Historical Cost
  • Revenue Recognition Principle
  • Expense Recognition Principle
  • Adequate Disclosure
  • Materiality
  • Consistency
• Objectivity

  • Reliable data are verifiable when they can be confirmed by independent observers.
  • Accounting records are based on information that flows from activities documented by objective evidence.
• Historical Cost

  • This principle states that acquired assets should be recorded at their actual cost and not at what managements thinks they are worth as at reporting date.