Chapter 1

INTRODUCTION TO
ACCOUNTING

What is Accounting?
Accounting is an information system that measures
business activities, processes data into reports, and
communicates results to decision makers.
(Harrison & Hongren, 2004)
Accounting is the process of identifying, measuring, and
communicating economic information to permit
informed judgment and decisions by users of the
information.
(Anthony, Hawkins & Merchant, 1999)
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A brief history of Accounting

Accounting is a system that uses the principle of Double

Entry which was invented by the merchants of the city
states of northern Italy in the late 13th century.

The founder of the double entry principle was a man

named Luca Pacioli (1445 1517).

He introduces the 3 sets of accounting books:

i.

Memorandum (records in detail all transactions as they take

place)
ii. Journal (records summary of transaction in the form of debit
and credit)
iii. Ledger (records transactions in the account by using the
principle of double entry).

The development of accounting

The Accounting System evolves in 3 stages:
1.

Stage 1 a record-keeper selects those economic events

relevant to his or her objectives and records them in
writing on a writing medium using calculations involving
numerals which express physical quantities.

2.

Stage 2 money is employed as a unit of account,

enabling diverse physical quantities to be added together.

3.

Stage 3 individual accounts are integrated into one

comprehensive system.

Functions, objectives and uses of financial accounting

Accounting serves the function of providing valuable
information to users of accounting information.
The main objective of financial accounting is to assist users of
accounting information to make decision.
Financial accounting ease the job of a decision maker since it
provides detailed and valuable information about the financial
position of a business.

Main user groups of financial statement

Individuals
Businesses
Investors and creditors
Government regulatory agencies
Tax authorities
NGOs

Individuals
People use accounting to manage their bank
accounts and to decide whether to rent an
apartment or to buy a house. Accounting helps
them decide which automobile they can afford and
how to pay for it.

Businesses
Business manager use accounting information to
set goals, evaluate progress and to take corrective
action.

Investors and creditors

Investors and creditors use accounting information
to evaluate the creditworthiness of a prospect
loaner.

Government regulatory agencies

Government regulatory agencies require
businesses to furnish their financial reports.

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Tax authorities
Tax authorities (Inland Revenue Department)
collect taxes from individuals and businesses and
most taxes are based on accounting data.

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Types and various form of business

Soleproprietorship

Partnership

Corporation

owner

One owner

Two to twenty

Two to fifty

Life of entity

Limited by
Limited by
indefinite
owners choice or owners choice
death
or death

Personal liability Proprietor is

of owner for
personally liable
business debts

Accounting
status

Partners are
personally
liable

Accounting entity Accounting

is separate from entity is
proprietor
separate from
partners

Stockholders
are not liable

Accounting
entity is
separate
from 12
stockholders

Differences between
Bookkeeping and Accounting
Bookkeeping is the process of recording
business
transactions accurately and systematically in accordance
with certain principle or rules.
Accounting covers not only the process of recording but
also other processes such as identifying, measuring, and
communicating economic information to the users of
accounting information.

recording
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The role of accounting profession in the business

The accounting profession plays vital role in the business
since it provides financial data to assist management in the
decision making.
It also provide audit service that is to verify the financial
report prepared by the organization.

14

Employment opportunities

CEO
Auditor (internal/external)
Accountant
Financial Executive
Bookkeeper
Tax executive
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Accounting and Information

Technology
Written Assignment
1. How do Information technology affect the
accounting profession?
2. In your own opinion, discuss whether IT
could replace the work of an accountant?

SUBMISSION DATE: NEXT CLASS

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