Definition of Accounting Nature of Accounting

A systematic process of identifying, Accounting is a Science

classifying, measuring, recording, summarizing,
verifying, analyzing, interpreting, and  A body of knowledge which has been
communicating financial information of an systematically gathered, classified, and
organization to enable users to make decisions. organized.
Accounting is an Art
Recording
Identifying  It requires knowledge, interest and
Classifying experience, techniques and proper
Business Financial
Measuring
Transaction Verifying
Information application, skills and expertise to maintain
Analyzing the books of accounts in a systematic
Interpreting
Communicating manner.
Accounting is an Information System
Identifying  Used to identify and measure economic
activities, process the information into
• Recognition of non-recognition of business
financial reports and communicate these
activities as accountable events
reports to different users of accounting
Recording information.

• Business related transactions are recorded Accounting is a Profession

in an orderly manner (journalizing)
Classifying
• Grouping together similar types of business
transactions in one place
 Career that involves acquiring a specialized
formal education before rendering any
service.
Accounting is a Language

• posted in ledgers (posting)  Referred to as the “language of business”

Summarizing
• Classified information is presented in a form
that is understandable and useful to users
• Preparation of Balance Sheet and Income
Statement
Analyzing
• Establishes the relationship between the
items in the statement of financial position
and statement of comprehensive income
Interpreting
• Explaining the meaning and significance of
the relationship established by the analysis
Communicating
• The results obtained from the summarized,
analyzed and interpreted information are
communicated to the interested parties
because it helps users understand what is
happening inside of the business.
Objectives of Accounting
1. To maintain full and systematic records of
business transactions.
2. To calculate the result of operations whether the
business earned a profit or incurred a loss.
3. To ascertain the financial position of the
business.
4. To facilitate rational decision making and
communicate the financial information to users.
Functions of Bookkeeping
1. Record Keeping
Accounting is important in the sense that it
enables a business to maintain a complete and
orderly prepared records of business events.
2. Protecting of Properties
Accounting provides the business owner a
record relating to what the entity owns in the form
of assets and what it owes in the form of liabilities
3. Communication of Results
Accounting communications financial
information to relevant users like owners,
managers, investors, employees, government
sectors, etc.
4. Meeting Legal Requirements
Accounting develops and designs a system of
record keeping and reporting the results.
History of Accounting
• 700 years - accounting records have been found
in Mesopotamia which shows lists of
expenditures and goods received and traded
• 5000 BC - Ancient Mesopotamia, Babylon,
Assyria and Sumeria left evidence of early
accounting and bookkeeping records on clay
tablets
– Clay Tablets - use to record transaction
– Cylinder Seal - administrative tools much
like signature
• usually about 1 inch long inscribed
with figures and cuneiform writing
• 1000-3000 BC - used the account to record the
safekeeping of gold and the valuables in
treasures
eye and ear of the king - the accountant
• Babylonia - City of Commerce, to uncover
losses due to fraud and to uncover losses due to
inefficiency
• Greece - to apportion the revenue received
maintaining total receipts/payments and balance
of government financial transaction
• 700BC - 400 AD
• Romans - used memorandum or day book
(adversaria) to record receipts and payments
and posted to ledgers or cash books (codex
acepti et expensi) on monthly basis
• India - Chadragupta Minister Kautilya wrote
a book “Arthashastra” - how account records
can be maintained
• 1122-256 BC
• China - used sophisticated government
accounts during the Chao Dynasty
• 622 AD
• Arabian Peninsula - developed the Islamic
accounting system
• 642 AD
• Zakat encourage accounting for the
calculation and payment
• 1494 Fra Luca Bartolomeo de Pacioli
• an Italian Mathematician
• Father of Accounting
• introduced Double Entry System
• trial balance (summa summarium) is the
end of Pacioli's accounting cycle
• oldest discovered record of a complete
double-entry system is Messari (Italian:
Treasurer's) accounts of the Republic of
Genoa in 1801
• Industrial Revolution
• 18th Century
• double-entry system was used instead of
the single entry
• Colonial America
• relied on the single-entry method or narrative
accounts of transactions
• Industrialized world resulted
• Chartered accountancy was developed
and formed
• Certified Public Accountants - licensure
exams are necessary
• Computerized Accounting
• began in 1955
• 20th Century
• Securities and Exchange Commission were
created in 1933 to 1934
• 21st Century
• sets government standards
BRANCHES OF ACCOUNTING
FINANCIAL ACCOUNTING
• Deals with the basic accounting processes of
recording, classifying, and summarizing
transactions in the books of accounts in such
a way that operating result of a particular
period and financial position on a particular
date can be known
• Five basic financial statements - statement of
financial position, statement of
comprehensive income, statement of cash
flows, statement of changes in equity, and
notes to financial statements
MANAGEMENT ACCOUNTING
• Relates to the use of accounting data
collected with the help of financial accounting
and cost accounting for the purpose of policy
formulation, planning, control and decision-
making by the management
GOVERNMENT ACCOUNTING
• Deals with the transactions of the national
government and its different agencies
• Focuses on the safekeeping of public funds,
budget allocations and utilization
AUDITING
• Deals with the inspection and verification of
the financial statements, which were
prepared in the financial accounting, for
accuracy and consistency
2 Types of Auditing
Internal Auditing
• 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
External Auditing
• examination of financial statements
by an independent party with the
purpose of expressing an opinion as
to the fairness of presentation and
compliance with GAAP
TAX ACCOUNTING
• Deals with taxation matters
• Includes preparation and filing of various tax
returns, helps clients follow rules set by tax
authorities, rendering of tax advice to clients,
such as determination and verification of tax
consequences, the effect of taxes on the
business operations, tax minimization
through legal means and other tax related
matters
COST ACCOUNTING
• Deals with the recording, classification,
allocation and reporting of current and
prospective costs
• In manufacturing business, it is necessary to
keep the records of daily stocks in hand, their
issues and receipts, payment of wages,
overhead charges, fixing the sale-price of the
products
ACCOUNTING EDUCATION
• Deals with teaching students to gain
knowledge and develop skills to achieve a
recognized profession in Accounting
ACCOUNTING RESEARCH
• Deals with research on the fundamentals
issues of accounting affecting the business
and regulatory authorities