Primitive Accounting

Middle Ages
Industrial Revolution & Corporate Organization
Information Age
Primitive Accounting
Traced as far as 8500 BC in
Mesopotamia through the use of clay
like:
a. Record for paid wages
b. Record purposes, as general
Pyramids in Egypt, for the costs of
structures
Other places like China, Babylon,
and Greece
Middle Ages
More formal account-keeping methods were
developed by the merchants and banks.
Double-entry records first appeared in Genoa
in 1340 AD.
Summa de Arithmetica, Geometria,
Proportionis, et Proportionalita by Fr. Luca
Pacioli about double-entry bookkeeping.
Industrial Revolution & Corporate
Organization
Problem of costing for a large volume of products
Special field of accounting emerged to meet this need
for the analysis of the various costs.
Information Age
Clerical tasks that were done manually can be done
automatically with speed, consistency, precision, and
reliability.
Emergence of accounting applications to suit the
businesses’ various needs. (Quickbooks, Peachtree,
MYOB, JDE, Navision, SAP, etc.)

Limitation: professional judgment

Definitions:
“...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
a financial character, and interpreting the results
thereof.” - AICPA
“...process of identifying, measuring, and
communicating economic information to permit
informed judgments and decisions by the users of the
information.” - AAA
Phases of Accounting
Recording- also “journalizing”. It involves systematic
and chronological recording of business transactions
or events.
Classifying- similar items are grouped or sorted
under the same names.
Summarizing- periodical reporting of the status of
the business.
Interpreting- further explanation for the users
Current Definition of Accounting
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
decisions.
Difference of Accounting and
Bookkeeping
Accounting is much broader than
bookkeeping. It includes interpretation and
analysis of the financial reports, requiring a
higher degree of knowledge, reason and
judgement.
Bookkeeping is the procedural element of
accounting. It is the recording of business
activities and is just one part of the accounting
process.
Specialized Fields in Accounting
Financial Accounting and Management Accounting
(user-oriented)
Budgeting- setting sales and profit goals
Cost Accounting- measuring costs and controlling
expenses. Price setting
Information Systems Design- identifying internal and
external information needs. (flowcharts and manuals)
Internal Auditing- performed by company’s own
accountants. Operating efficiency and compliance.
Tax Accounting- tax laws compliance and minimizing the
tax through legal means
Users of Accounting Information
Broad sense:
Internal users: owners, managers, officers, employees

 External users: users of financial information to

facilitate decision making- investors, creditors,
suppliers, customers, and government agencies
Users of Accounting Information-
cont.
USERS DESCRIPTION AND INFORMATION NEEDS

INVESTOR/ One who puts his money in a business in the hope of receiving
OWNER a return on his investment. He considers the risks involved in
the investment and he wants to determine the economic
worth of the business. For these reasons, he wants to assess
the financial reports of the business.
MANAGER Responsible for planning, directing, and controlling the
operations of the business. He needs to make decisions when
given alternative courses of actions. Stewardship function
LENDER Concerned with the ability of the borrower to pay not only the
principal debt but also the interest. The information helps him
to decide whether to extend credit, how much credit to
extend, when to collect, and how much interest to charge.
Users of Accounting Information-
cont
USERS DESCRIPTION AND INFORMATION NEEDS

SUPPLIER One who offers his goods for cash or on credit terms. He
needs information to determine the paying ability of the
customer. Shortly speaking, the credit worth of the customer.

GOVERNMENT They are interested in the activities of the enterprise to

AND ITS regulate the activities for tax purposes, compiled information,
AGENCIES national statistics, and for the funding of government projects.

CUSTOMER Interested about the continuity of the enterprise. Some

customers are businesses that rely upon the enterprise for
their supply of goods or services.
Users of Accounting Information-
cont
USERS DESCRIPTION AND INFORMATION NEEDS

EMPLOYEE They are employed by the enterprise. They demand

high wages, better benefits, good working conditions.
They are interested in the financial information to
determine whether the enterprise has the ability to
grant their demands
PUBLIC Assesses the trends and recent developments in the
prosperity of the enterprise and the range of its
activities.
Accounting and Business
Business is a economic unit engaged in providing
goods and/or services with the intention of obtaining
a profit
The need to keep records: “What is my financial
status? Have I already earned enough?”
Accounting is the language of business because it is a
system that measures business activities, processes
these information into reports, and communicates the
results to users.
Forms of Business Organizations
Forms Definition
Sole Proprietorship -most basic form
-the owner is the manager
-examples: retailers, sari-sari stores, individual businesses
Partnership -formed by two persons, who agree to contribute money,
property or industry to a common fund w/ the purpose of
dividing the profits among themselves
-owners are called partners
-ADVANTAGES:
a. Greater availability of capital
b. Combined skills of partners, better management
c. Treated as separate entity
Corporation -most complex; created by law- separate from the stockholders
-a business whose capital is divided into shares of stocks
-ADVANTAGES:
a. Limited liability of stockholders
b. Greater source of liability
c. Long period of existence
Types of Business Operations
TYPE DEFINITION

Service -simplest form

-renders services to clients or customers for a fee
-examples: schools, clinics, agencies, salons, and professional
services
Merchandising -one which buys goods from suppliers with the aim of selling
these goods at a higher price
-sari-sari stores, hardware stores, supermarkets
Manufacturing -sells goods a higher price than cost
-produces the goods that it sells to customers
Components of AIS
AIS involves an orderly way of accumulating and
reporting business transactions through a process of
analyzing, measuring, recording, classifying, and
summarizing, and from which reports are generated for
proper communication to decision makers.
Steps:
1. Data gathering- business documents e.i. OR, SI, vouchers
2. Analysis, Measuring, and Recording- journals
3. Classifying and Storing- ledgers
4. Summarizing, Reporting, Interpreting- FS, FSA
5. Decision making
Financial Reports
Accounting information are prepared at least
manually and are directed toward the common needs
of practically all of the users/stakeholders.
Four Basic Financial Statements
1. Balance Sheet
2. Income Statement
3. Statement of Changes in Owner’s Equity
4. Cash Flow Statement
These are called General Purpose Financial
Statements
Balance Sheet
Gives information about the financial position of the
business by showing a list of its assets (cash and
properties), liabilities (debts or obligations to pay) and
from which the net worth of the business representing
equity or share of the owner could be determined. Net
worth represents the net assets belonging to the owner
Solvency- ability of the business to pay for its liabilities
Liquidity- ability of the enterprise to meet its currently
maturing obligations
Income Statement
Supports the balance sheet

It describes how the business operated over a period

of time.
“Is the business profitable or not?”
Net Income? Or Net Loss? Or Break-even?
Statement of Changes in Owner’s
Equity
Explains the activities for a period of time that
changed the owner’s share over the net assets of the
business.
Major activities:
1. Investment
2. Withdrawal
3. Profit
4. Loss
Cash Flow Statement
Presents information about cash flows
“How well a company can generate cash?”
Three Categories:
1. Operating-from/ within the operations of the
business
2. Investing- acquisition or disposal of properties.
3. Financing- obtaining resources from
owners/creditors
Qualitative Characteristics
Understandability- use of terminologies that are simple
and easily understood by the users. It also involves the
way of presentation.
Relevance- quality of information that will make a
difference and influence a statement user to make
decisions. (Materiality- if its omission will adversely affect
the decision then it is material)
Reliability- degree of confidence users have on financial
statements. Neutrality- free from bias.
Comparability- financial information between two
periods or between two business entities can be compared.
Consistency- uniformity of accounting treatment of like
items from one period to another.
Generally Accepted Accounting
Principles
1. Business Entity Concept- business is separate and
distinct from the owners. Only business properties
are reported.
2. Exchange Price or Cost Principle- assets should be
recorded based on cash which is the amount
exchanged at the time of purchase or equal to cash
basis (cash equivalent) if no amount was exchanged
(paid) at the time of the acquisition.
3. Going Concern Concepts- assumes that business has
indefinite existence
Generally Accepted Accounting
Principles
4. Objectivity- financial data must be verifiable and
substantiated by documents. Record the asset for the
amount equivalent to the amount paid.
5. Disclosure- information important enough to
influence the decision-making of a user should be
disclosed either in body or in a supplementary note.
6. Reporting Period- Business life is divided into specific
time intervals
7. Monetary Principle- All business transactions are
recorded and measured using only one unit of
measurement (money)