HANDOUT 1 – OVERVIEW OF ACCOUNTING

By: REMAR ALLEN M. BAUTISTA, CPA

I. HISTORICAL BACKGROUND OF ACCOUNTING

Why study about history of accounting?

 It helps illuminate our past which led to where the accountancy profession is at the current time.
 It helps explain the phenomenal growth that the profession of accountancy has enjoyed worldwide.

These are some important historical events and findings:

 Ancient South Africa – (Blombos Cave) – found 760 markings that may have been used to count or store information that are
almost 76,000 years old.
 Ancient Iran (4th to 3rd millennium B.C.) – cylindrical tokens were found which were used for bookkeeping on clay scripts.
 Mesopotamia (3500B.C) – some of oldest known records of commerce 5,000 years before the birth of double-entry
 Ancient Egypt – extensive records were kept for government accounting; simple list-making only
 Ancient China – used accounting as a means of evaluating governmental programs
 Ancient Greece (5th Century B.C.) – legislation on financial matters included control of receipts and expenditure of public
monies through the oversight of 10 state or public accountants chosen by lot.
 Ancient Rome (25B.C.-20B.C.) – early Romans used the following financial records: rationarium or list of public revenues;
aerarium or list of amounts in cash in the provincial fisci (tax officials) and in the hands of publican (public contractors).
 Medieval Europe (13th century) – introduction of double-entry bookkeeping; birth of debit (from debere which means he owes)
and credit (from credere which means he trusts).
o Fra Luca Bartolomeo de Pacioli – Father of Modern Accounting;
 Books of Account by Pacioli
 Memorandum or memorial
 Journal
 Ledger
 Luca Pacioli’s accounting cycle ends with the preparation of Trial Balance
 England (19th century) – financial surge demanded for accountants
 1880 – Institute of Chartered Accountants in England and Wales brought together all accountancy organization in England
and Wales.
 1887 – first national accounting society was formed, the American Association of Public Accountants (AAPA) which is the
predecessor of American Institute of Certified Public Accountants (AICPA)
 March 17, 1973 - Act No. 3105 'An Act Regulating the Practice of Public Accounting’ was approved by the Sixth Legislature.
It created the Board of Accountancy to provide Examination and grant certificates of registration for Certified Public
Accountants. It also has the power to suspend and revoke registration.
 May 13, 2004 - Republic Act No. 9298 or Philippine Accountancy Act of 2004 was enacted for the standardization and
regulation of accounting education, examination of registration of certified public accountants and supervision, control, and
regulation of the practice of accountancy in the Philippines.

II. DEFINITION/NATURE/PURPOSE OF ACCOUNTING

1. Definition
“Accounting is 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 decision.” – Accounting Standards Council (ASC),
succeeded by Financial Reporting Standards Council (FRSC).

“Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least, of financial character, and interpreting the results thereof.” – American
Institute of Certified Public Accountants (AICPA)

2. Basic Purpose
“to provide information about economic entities intended to be useful in making economic decisions”
  Types of information provided by accounting
o Quantitative
o Qualitative
o Financial
 Economic Entity – is a separately identifiable combination of persons and property that uses or controls economic
or scarce resources to achieve certain goals or objectives.
3. Functions of Accounting
A. Identification – accounting process of recognition or non-recognition of business activities as “accountable
events” or whatever they have accounting relevance.
B. Measurement – the accounting process of assigning of peso amounts or numbers to the economic
transactions and events. The unit of measure of accounting is money, expressed in prices.
C. Communication – the accounting process of preparing and distributing accounting reports to potential users
of accounting information and interpreting the significance of this processed information. Three aspects of
communication process:
a. Recording – process of systematically committing to writing business transactions and events after they
have been identified and measured, in books of account in a systematic and chronological manner
according to rules and regulations.
b. Classifying – the grouping of similar and interrelated items into their respective classes.
c. Summarizing – putting together or expressing in condensed or brief form the recorded and classified
transactions
4. Branches of Accounting
A. Financial Accounting – recording and classifying business transactions, and preparing and presenting
financial statements to be used by internal and external users
B. Management Accounting - focuses on providing information for use by internal users, the management.
This branch deals with the needs of the management rather than strict compliance with generally accepted
accounting principles.
C. Auditing
1. External - External auditing refers to the examination of financial statements by an independent party
with the purpose of expressing an opinion as to fairness of presentation and compliance with GAAP.
2. Internal - focuses on evaluating the adequacy of a company's internal control structure by testing
segregation of duties, policies and procedures, degrees of authorization, and other controls implemented
by management.
D. Government Accounting – accounting for the national government and its instrumentalities, focusing
attention on the custody of public funds and the purpose or purposes to which such funds are committed.
E. Tax Accounting – involves the preparation of tax returns and rendering of tax advice, such as determination
of tax consequences of certain proposed business endeavors.
F. Fiduciary Accounting - handling accounts managed by a person entrusted with custody and management of
property for the benefit of another
G. Social Responsibility Accounting – reporting programs and projects that have to do with the upliftment of
the welfare of the people of a community
H. Environmental Accounting – focuses on programs, activities and projects that are focused on care for
Mother Earth
I. Price-Level Accounting – accounting that recognizes in the FS changes in purchasing power of money.
J. Forensic Accounting - involves court and litigation cases, fraud investigation, claims and dispute resolution, and
other areas that involve legal matters. This is one of the popular trends in accounting today.
Financial Accounting Management Accounting
 Concerned with income determination and asset  Concerned with decision-making
valuation
 In accordance with GAAP  In accordance with management needs
 General Purpose Financial Statements  Special Purpose Financial Statements
 Historical in nature  Future-oriented
 Emphasis on objectivity  Emphasis on relevance
 5. Areas of Professional Accounting Practice
A. Public Accounting – composed of individual practitioners, accounting firms and large multinational
organizations that render independent expert of financial services to the public on a professional fee basis. Public
Accountants usually offer three kinds of services: assurance and audit, taxation, and management advisory
services.
B. Private Accounting – composed of individuals employed in business enterprises on salary basis.
C. Government Accounting – composed of accountants employed in different branches of government.
D. Accounting Education (Academe) – composed of CPAs who are professors of accounting in various
colleges and universities.
III. ENVIRONMENT OF ACCOUNTING

Financial accounting is shaped to significant extent, by the environment, and in particular, all of the following:
 Economic activities in the society
 Means of measurement of economic activity
 Financial statement users and their information needs

1. Economic Activities in Society

A. Economic Activities and their Classification
1. Production 4. Consumption
2. Exchange 5. Investment
3. Income Distribution 6. Savings
Accountable Events – one that is quantifiable and has an effect on assets, liabilities and equity.
Criteria
a. must affect a financial element of accounting
b. result of past activity
c. can be measured reliably
Types
a. External – events where another party participates
i. Transfers
1. Exchange
2. Non-reciprocal transfers
ii. Other than transfers
b. Internal – those wherein only the entity participates
i. Production
ii. Casualties
B. Measurement of Accountable Events
1. Historical Cost
2. Current Cost
3. Realizable Value
4. Present Value
C. Users of Financial Statements
1. Investors
2. Employees
3. Lenders
4. Suppliers and Other Creditors
5. Customers
6. Government and its agencies
7. Public

References:
 Ledesma, E. F. (2015). Financial Accounting Theory (Booklet 1, May 2015). Manila, PH: CRC-ACE The Professional CPA
Review School.
 Investopedia.com