I – Basic Concepts

 Definition of Accounting
 Nature of Accounting
 Functions of Accounting
 Scope of Accounting
 Objectives and Purpose of Accounting
 History of Accounting
 Accounting variations among countries

DEFINITION of Accounting

Since accounting is already an established body of knowledge, it is better to define Accounting according to Authoritative bodies of the
Accounting Profession:

As defined by American Accounting Association (AAA)

“Accounting is the PROCESS of identifying, measuring, and communicating economic information to permit informed
judgements and decisions by users of information.”

As defined by American Institute of Certified Public Accountant (AICPA)

“Accounting is the ART or 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.”

As defined by Accounting Standard Council (ASC)*

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.”

 FRSC is the successor of ASC

References: American Institute of Certified Public Accountants (AICPA)

American Accounting Association (AAA)
Accounting Standard Council (ASC)*

NATURE of Accounting

By nature, Accounting is both an ART and a SCIENCE.

Art means imaginative skill of expression of objects by applying creativity to it.

We Apply the same creativity of thinking in accounting as artist do. Accountants use creative skills and
imaginative ways of gathering quantitative information and converting the financial data into presentable,
readable and understandable financial reports so that users whether accountants and non-accountants
alike can draw meanings from them and make judgments and decisions. Since some of the users of
financial reports are non-accountants, the accountants who prepared the report must be able to present
the repot in a format easily understood in layman’s terms. And, these require artful skills and creative
thinking. Thus, ACCOUNTING is an ART.

Applicably, accounting is also a SCIENCE. By definition science means a branch of knowledge requiring
systematic study and method. And, accounting is just so. Students of Accountancy shall apply systematic
study and method as they go along especially in higher accounting subjects. Accountants do the same in
their practice of accounting. They based what they do according to principles, conventions and standards
of Accounting. Hence, ACCOUNTING is a SCIENCE.

By nature, Accounting is a PROCESS and an ACTIVITY

Accounting operates on various step-by-step PROCESSES and ACTIVITIES inside the entity, to wit:

1. Identifying, recording and classifying transactions and events.

2. Measuring in terms of money the transactions and events which are in part at least of financial character.
3. Summarizing in a significant manner the transactions and events.
4. Communicating economic information to permit informed judgments and decisions by users of
information.
5. Interpreting the results thereof.

By nature, Accounting is a DISCIPLINE and SERVICE

Discipline means orderly and controlled behavior. It also means training which corrects, molds, or perfects the
mental facilities or behavior.

Consequently, Accounting has its own sets of standards and professional ethics to follow. In order to come up
with reliable and credible financial reports, those in the accounting practice are guided by rules, procedures,
principles, conventions, methods and standards. Those practicing accounting undergo years of training which
began in their college days and continuously being taught after graduation and updated by various authorities
thru seminars, workshop and lectures.
 Service is defined as act of serving or help given to others.

Accounting is a SERVICE. Accounting is a form of help to users of financial information and financial reports.
Accounting serves by providing assistance through financial reports about the financial affairs of the business.

By nature, Accounting is the REPORT CARD of the business.

In schools, the performance standing of students and the progress of the students are communicated and
reflected thru their report cards. Likewise, the progress or performance and financial standing of entities are
reflected in the Financial Statements and Financial Reports.

Financial Statements and Financial Reports help the owner of the entities and interested parties to understand
their financial standing of the business and how the business is performing and progressing.

FUNCTIONS of Accounting

By definition the word “function” means a role, a task, or a job.

The functions of Accounting and Accountants are implicit in the definitions provided by the Authoritative bodies.

So, let’s go back to the definitions of account and deduce what these roles, task or jobs are.

` ASC or FRSC, as stated in the Philippine Accounting Standards (PAS) No. 1, defined accounting as:

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.”

And, the AICPA’s definition:

“Accounting is the ART or 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.”

Also, the definition of AAA:

“Accounting is the PROCESS of identifying, measuring, and communicating economic information to permit informed
judgements and decisions by users of information.”

From the definitions provided, the FUNCTIONS of accounting and accountants may be inferred as follows:

 As a Role: To provide quantitative information

Meaning, the primary function of accountants is to prepare financial reports and provide
them to internal or external users.

 As Tasks or Jobs:

o Identifying
o Recording
o Measuring
o Classifying
o Summarizing
o Communicating
o Interpreting

In Accounting, financial affairs of entities undergo series of processes and activities such as identifying,
recording and measuring transactions and events then classifying and summarizing them thru account
devices and converting them thru report formats, then finally communicating and interpreting the reports to
the users. These basically are the functions of accounting

In summary, the role, or task or job or function of Accounting and Accountants then is about gathering of
quantitative and economic information, then processing these financial data thru series of activities, and
converting then into financial reports and give the reports to those who need the information for decision-making
study and judgments.

References :
Intermediate Accounting by Spiceland, Sepe, Nelson. McGrawhill, 2011
American Institute of Certified Public Accountants (AICPA)
American Accounting Association (AAA)
Accounting Standard Council (ASC)
WBBBB Accounting & Management Services
 SCOPE of Accounting

Looking at a dictionary, scope means the space to function or operate in; the range of a subject or activity.

Applying to accounting, scope of accounting covers and touches a lot of subjects.

Accounting affects economy. Accounting touches not just the economic activities of businesses but also those
of government and personal finances.

Forms of business organizations such as sole proprietorship, partnership and corporation, keep financial records
to obtain financial information about its business operations and in order to make economic decisions.

So do the government, for them to allocate funds to its instrumentalities, it needs accounting and financial records
to gauge how they perform and operate.

Individuals alike need to do financial record keeping and budgeting of their personal finances so they can know
if they are economically surviving and striving. In fact, learning and acquiring the knowledge of accounting
fundamentals, and the skill of bookkeeping are the gateway to financial freedom.

Thus, knowledge of accounting is essential to all whether in private businesses, in government, and individuals.

OBJECTIVES of Accounting

The objective of Accounting is to provide users with useful information for economic and decision-making
study and judgements.

Businesses are established for the purpose of earning profit. To determine whether the business earned profit or
suffered losses is thru the preparation of the so-called Income Statement in which the revenues, gains, costs to
operate and expenditures are shown. Income statement is usually prepared periodically.

Aside from determining the profit or losses, it is also important to financial users to know the financial standing of
the business. The so-called Statement of Financial Position (SFP) is prepared for this purpose. SFP formerly
known as Balance Sheet show the resources of the entity and the claims against these resources. Resources of
the entity are called Assets while the claims against the assets by creditors and owners are the so-called
Liabilities and Owner’s Equities (or Capital). SFP shows the financial condition of the entity on a particular day,
and usually, it is prepared at the end of the period.
The information provided helps the users evaluate the amounts, timing, and uncertainty of the entity’s future cash
receipts and disbursements. Cash-related activities of the entity are reflected in thru the so-called Statement of
Cash Flow. Future cash receipts and disbursements are planned thru the strategic planning activities made by
management and key people inside the organization and expressed thru the budgeting process.

Management, business owners and financial users also use various accounting data and financial reports in
carrying-out efficiently, effectively and properly the day-to-day operations and affairs of the organization
especially in managing, planning, organizing, monitoring and controlling its various transactions, economic
events, and activities.

PURPOSE of Accounting

Purpose means an intention, goal or intended, result of effort

The intention or purpose of accounting is to help various financial users to see the over-all and/or true picture of
businesses, organizations or entities in quantitative, economic and/or financial terms.

The process and activities involved in accounting help the business owners and users of financial information in surviving economically.

People inside the organization must have the right information in the right time to monitor and keep due control in managing the affairs of
the entity, and make decisions and implement strategies so to ensure that the entity continues to operate and remain in business year
after year and so on and on.

Thus, it is necessary that the financial information presented thru financial reports must be timely, understandable, relevant, reliable and
complete

QUICKBOOKS (Overview)

I – Principles of Accounting
 Purpose of accounting
 Common Financial Statements
 Note: Any discussion of how to use QuickBooks to better manage your business begins with the
discussion of accounting.

The purpose of accounting

- it is important to understand that accounting provides financial information to stakeholders.
Stakeholders are the people who do business with a firm: they include managers, employees,
investors, banks, vendors, customers, public and government authorities.

Common Financial Statements

 Income Statements
 Balance Sheet
 Statement of changes in Equity
 Statement of cash flows

Generating these reports however requires several steps and procedures such as recording,
classifying, summarizing, and reporting.

II – QuickBooks System
What accounting does
 Measures profits and losses
 Reports on the financial condition of a firm
 Provides detailed records of the assets, liabilities, and owner’s equity accounts
 Supplies financial information to stakeholders, especially to management
What accounting system do
 Produce financial statements
 Generate business forms
 Keep detailed records of key accounts, including cash, accounts receivable, accounts
payable, inventory items, fixed assets and many others.

What QuickBooks does

 QuickBooks does the things that accounting system do.
 It gives users and businesses a lot of flexibility

QuickBooks comes in several flavors: QB Simple Start, QB Pro, QB Premier, and QB Enterprise.
 QuickBooks Pro doesn’t supply a good way to handle the manufacturing of inventory.
 QuickBooks Premier and QuickBooks Enterprise Solutions do support simple
manufacturing accounting.
 QB Enterprise Solutions provides some additional inventory management capability. It
also handles the situation of storing inventory in multiple locations.
Some features are common to all software programs using Windows. For Example in the upper right
corner is the minimize button, Double Window button, and the Close button. The title bar,
window border, and mouse pointer are also common to windows programs. Other features are specific
to QB: Icon Bar, menu bar, and Home page selections. The contents of these menus differ depending on
the application.

1. Title Bar: contains the company name and the software version.

2. Icon Bar. The Icon Bar contains shortcuts to the tasks and reports you use most. You can place
the Icon Bar to the left of the QB desktop, above it, or hide it.

3. Menu Bar. Contains the menus for File, Edit, View, Lists, Favorites, Accountant, Company,
Customers, Vendors, Employees, Banking, Reports, Window and Help. You can click with your
left-mouse button on the menu bar headings to see the selections.

How QuickBooks help:

1. Record Keeping
It makes most of the journal entries upon preparation of documents:
a. Create Sales receipts – QuickBooks (1) debit cash (undeposited funds) and credit sales or service
revenue (2) debit cost of sales and credit inventory.
b. Create invoices – QuickBooks (1) debit accounts receivable and credit sales or service revenue (2)
debit cost of sales and credit inventory. It automatically updates the customers ledger.
c. Receive payments – QB debit cash (undeposited funds) and credit accounts receivable. It
automatically deducts the amount collected from customer’s ledger.
d. Write checks/pay bills – QB debit accounts payable or expenses and credit cash in bank. It also
updates payable to supplier.
e. Enter Bills – QB debit expenses and credit accounts payable. It automatically updates payable to
supplier. This is where the bills or invoices received from suppliers are recorded.
f. Purchase order – (non-posting documents)
g. Record deposits - QB also shows record of when was the collections deposited.
2. Reporting
a. It generates aging of accounts receivable and payable.
b. It provide details of each and every account in the financial statement.
c. It provides detailed record of inventory or items that you are selling.
d. Bank reconciliation statement
e. Trial Balance and Financial Statements are generated at the end of the period

Setting Up a Business Accounting System

2 ways of setting up the company
1. EasyStep interview process
2. Set up the company yourself.

EasyStep interview process provides a step-by-step guided series of questions that you can
answer to help you choose various QuickBooks features.

Company Preferences:

Preferences provides a way for turning certain features on or off. Preferences is found in
the Edit Menu.

Accounting – preferences for use of account numbers and the Set Date/Password features
are being set-up.
Checking – where the default accounts to use in Write Checks, Paybills, and Make
Deposits.
Items & Inventory – where the Purchase Orders and Inventory, and Unit of Measure
features are being set-up.

Company Items:

Item – is anything that a company buys, sells or resells in the course of business, such as
products, shipping and handling charges, discounts, and sales tax (if applicable).

To set up an Item there is a need to identify the item Type such us

Service – use for services you charge for or purchase, like specialized labor, consulting
hours, or professional fees.
Inventory Part – use for goods you purchase, track as inventory, and resell
Other charge – use for miscellaneous labor, material, or part charges, such as delivery
charges, setup fees, and service charges.

Items & Inventory can be set up through Home Page click Lists in the Menu and select Item Lists.

Customers:

To set up customers, click Customer section of the home page or click Customers in the Menu
and select Customers Center.

Vendor:

To set up vendors, click Vendor section of the home page or click Vendors in the Menu and select
Vendor Center

Business Events or Transactions:

3 Fundamental Business Activities

1. Financing
2. Investing
3. Operating

Financing activities are initiated when money or other resources are obtained from short-term
nontrade creditors, long-term creditors, and/or owners. It is completed when amounts
owed are repaid to or otherwise settled with the same creditors and/or owners.
 Ex. Investment from the owner (sole proprietorship, partnership)
Sale of shares to investors (corporation)
Borrow money from banks or financing institutions

Investing activities are initiated when the money obtained from financial activities is applied to
non-operating uses, such as buying investment securities and/or productive assets like
equipment, buildings, land, or furniture and fixtures. It is completed when the investment
securities and/or productive assets are sold.

Ex. Investment in money market

Purchase of new equipment
Sale of fixed assets
Sale of investment

Operating activities occur when the money obtained from financing activities and productive
assets obtained from investing activities are applied to either purchase or produce goods
and service for sale. It is substantially completed when goods are delivered or when
services are performed.

Ex. Collection of accounts receivable

Cash sales
Purchase of merchandise inventory
Payment of expenses