FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

Introduction to Accounting, Branches of Accounting

OBJECTIVES
At the end of the session, the learners should be able to:
1. define accounting;
2. describe the nature of accounting;
3. explain the functions of accounting in business;
4. narrate the history/origin of accounting;
5. differentiate the branches of accounting; and
6. explain the kind/type of services rendered in each of these branches.

1. INTRODUCTION TO ACCOUNTING

Accounting has evolved in response to the social and economic needs of society. As business and society become more
complex, accounting develops new concepts and techniques to meet the ever-increasing needs for financial information.
Without such information, many complex economic developments and social programs may never have been
undertaken.
In a market economy, information helps decision-makers make informed choices regarding the allocation of scarce
resources under their control. When decision-makers can make well-informed decisions, resources are allocated in a
way that better meets the needs and goals of those within the market.

Accounting is relevant in all walks of life, and it is essential in the world of business. Accounting is the system that
measures business activities, processes that information into reports and communicates the results to decision-makers.
Accounting quantifies business communication. For this reason, accounting is called the language of business.

What is business?
A business is an organization or economic system where goods and services are exchanged for one another or for
money. Every business requires some form of investment and enough customers to whom its output can be sold on a
consistent basis in order to make a profit. http://www.businessdictionary.com/definition/business.html

A business is an organization or enterprising entity engaged in commercial, industrial or professional activities. A

company transacts business activities through the production of a good, offering of a service or retailing of already
manufactured products. A business can be a for-profit entity or a nonprofit organization that operates to fulfill a
charitable mission.
http://www.investopedia.com/terms/b/business.asp 8

A business (also known as an enterprise, a company, or a firm) is an organizational entity involved in the provision

of goods and services to consumers. Businesses serve as a form of economic activity, and are prevalent
in capitalist economies, where most of them are privately owned and provide goods and services allocated through
a market to consumers and customers in exchange for other goods, services, money, or other forms of exchange that
hold intrinsic economic value. Businesses may also be social non-profit enterprises or state-owned public enterprises
operated by governments with specific social and economic objectives. https://en.wikipedia.org/wiki/Business

No business could operate very long without knowing how much it was earning and how much it was spending.
Accounting provides the business with this information and more. So, accountants can be called the scorekeepers of
business. Without accounting, a business couldn’t function optimally; it wouldn’t know where it stands financially,
whether it's making a profit or not, and it wouldn’t know its financial situation. Also, a sound understanding of this
language will bring about a better management of the financial aspects of living. Personal financial planning, education
expenses, car amortization, business loans, income taxes and investments are based on the information system that we
call accounting.

Accounting is the process of gathering financial information about a business and reporting this information to users.
It is important to understand this language in order to work effectively in the business world. Accounting clerks,
bookkeepers, and accountants must understand accounting to perform their jobs. Accounting skills provide additional
job opportunities for sales clerks, customer service representatives and office workers. Small business owners need
accounting knowledge to run their business effectively.

Knowing the language of accounting helps one understand the impact of economic events on a specific company.
Whether one intends to work in accounting or in another area, it is important to have a clear understanding of this
language.

An understanding of the principles of accounting is of paramount importance to a modern business executive. Without
it, the executive lacks fundamental tool needed for problem-solving.

DEFINITIONS AND NATURE OF ACCOUNTING (objectives 1 & 2)

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 (Accounting Standards Council ASC).

Accounting is the process of identifying, measuring and communicating economic information to permit informed
judgments and decisions by users of the information (American Accounting Association AAA).

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 a financial character, and interpreting the results thereof
(American Institute of Certified Public Accountants AICPA).

FUNCTIONS AND PHASES OF ACCOUNTING (objective 3)

The accounting function is part of the broader business system, and does not operate in isolation. It handles the financial
operations of the business but also provides information and advice to other departments. Business transactions are the
economic activities of a business. Recording these historical events is a significant function of accounting. Accounts are
produced to aid management in planning, control and decision-making and to comply with regulations.
Before the effects of transactions can be recorded, they must be measured. In order that accounting information will be
useful, it must be expressed in terms of a common financial denominator – money. Money serves as both a medium of
exchange and a measure of value.

To measure a business transaction, the accountant must decide when the transaction occurred (recognition issue), what
value to place on the transaction (valuation issue) and how the components of the transaction should be classified
(classification issue).

By simply measuring and recording transactions, the resulting information will be of limited use. To be useful in making
decisions, the recorded data must be classified and summarized. Classification reduces the effects of numerous
transactions into useful groups or categories. Summarization of financial data is achieved through the preparation of
financial statements. These summarize the effects of all business transactions that occurred during some period.

After going through the preceding phases, it is imperative that the result of the summarization phase be interpreted or
analyzed to evaluate the liquidity, profitability and solvency of the business organization. Accounting provides the
decision-makers with information to make reasoned choices among alternative uses of scarce resources in the conduct
of business and economic activities.

OUTPUT OF THE ACCOUNTING CYCLE

An accounting information system is used by a business to analyze transactions, handle routine bookkeeping tasks and
structure information so it can be used to evaluate the performance and health of the business. This system generates
output in the form of financial reports which can further be categorized into internal and external reports. Internal
reports are used by those directly involved in the managing and operating the business or collectively called the
“management.” External reports, like the financial statements, are used by individuals and organizations that have an
economic interest in the business but are not part of its management, or the external users.

HISTORY / EVOLUTION OF ACCOUNTING (objective 4)

Accounting history is important to accounting pedagogy, policy and practice. It makes it possible to better understand
our present and to forecast our future. Accounting history is the "study of the evolution in accounting thought, practices
and institutions in response to changes in the environment and societal needs. It also considers the effect that this
evolution has worked on the environment.”
The origin of accounting and its subsequent developments are best studied in the context of the history of commercial
transactions. Accounting is a function of the business environment in which it operates and it responded to the changing
nature of business transactions and the need to record them properly.

Primitive Accounting
 People have counted and kept records throughout history.
 The origin of keeping accounts has been traced as far back as B. C., the date archaeologists have established for
certain clay tokens – cones, disks, spheres and pellets found in Mesopotamia (Modern Iraq).
 Those tokens represented such commodities as sheep, jugs of oil, bread or clothing and were used in the Middle
East to keep records.
 The tokens were often sealed in clay balls, called bullae, which were broken on delivery so the shipment could
be checked against the invoice; bullae, in effect, were the first bills of lading.
 Later, symbols impressed on wet clay tablets replaced the tokens.
 Some experts consider this stage of record keeping the beginning of the art of writing, which spread rapidly
along the trade routes and took hold throughout the known civilized world.
 Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt.
 People in these civilizations maintained various types of records of business activities.
 During the 1st dynasty of Babylonia (2286-2242 B.C.), its law which was based on the Code of Hammurabi,
requires merchants trading goods to give buyers a sealed memorandum containing the agreed price before it
can be considered enforceable.
 The agreed-upon transaction was recorded by the Scribe (the predecessor of the modern accountant) on a small
mound of clay with the parties affixing “their signatures” on it.
 This clay was allowed to dry and served as the record of the transaction.
 For the more important ones, the record can be kiln-dried.
 At around 3600 B.C. in Babylonia, clay tablets also recorded payments of wages.
 The rulers of these civilizations used accounting to keep track of the costs of labor and materials used in building
structures as in the case of the pharaohs of Egypt in building their great pyramids.
 Accounting is one of our oldest skills.
 The earliest collections of understandable writing track how many bushels of grain came into the king’s
warehouse.
 Tablets recorded who brought in the grain and how much the king took as his share.
 Even in the early days, tax collecting is an activity closely linked to accounting.
 The presence of bookkeeping in the ancient world has been attributed to various factors including (i) the
invention of writing; (ii) the introduction of Arabic numerals; (iii) the decimal system; (iv) the diffusion of
knowledge of algebra; (v) the presence of inexpensive writing materials; (vi) the rise of literacy; and (vii) the
existence of a standard medium of exchange.

Middle Ages
 Because of the Crusades from the 11th to the 13th centuries, Northern Italy’s literacy has become widespread.
 Arabic numerals were also being used as a result of trade with the Near East allowing columns of numbers to be
added and subtracted.
 The use of credit was prevalent, and a semblance of an international banking system was also functioning.
 The Inca Empire, which spanned the west coast of South America throughout the 11th to 14th centuries, used
knotted cords of different lengths and colors called quipu to keep accounting records.
 Development of more formal account-keeping methods is attributed to the merchants and bankers of Florence,
Venice and Genoa during the 13th to 15th centuries.
 Double-entry bookkeeping is not a discovery of science; it is the outcome of continued efforts to meet the
changing necessities of trade.
 German philosopher Oswald Spengler wrote in The Decline of the West (1928) that the invention of double-
entry bookkeeping was the decisive event in European economic history.

The Florentine Approach

 The earliest evidence of business bookkeeping in Florence, France was evidenced by the bank ledger fragments
 of 1211 (transcribed in 1887 by Pietro Santini) and with the development of accounting in Tuscany, Italy during
the 13th century, as evidenced in the account-books or extracts.
 But, these were within the framework of the “narrative” or “paragraph” type of accounting record (a sezioni
sovrapposte), perhaps derived from the “charge and discharge" format used in public accounts.
 The system was primitive; accounts were not related in any special way (in terms of equality for entries), and
balancing of the accounts was lacking.
 The emergence of double entry itself, was first witnessed in the “ledgers” of Renieri Fini & Brothers (1296-1305)
and Giovanni Farolfi & Company (1299-1300).
 Giovanni Farolfi & Company, as appears from the "ledger”, was a firm of Florentine merchants whose head
office was at Nimes in Languedoc, in the kingdom of France.
 The ledger, however, relates exclusively to the branch at Salon, a town in the independent county of Provence.
 Amatino Manucci was a partner in Giovanni Farolfi & Company, a merchant partnership based in Florence.
 Financial records that he kept for the firm’s branch in Salon, Provence, survive from l299-1300.
 Although these records are incomplete, they show enough detail to be identified as double-entry bookkeeping.
 These details include the use of debits and credits and duality of entries. They are the oldest known existing
examples of the double-entry system.
 Amatino Manucci was the inventor of double-entry bookkeeping.
 He managed to construct a comprehensive and fully-articulated set of double-entry records, with a regular
balancing procedure on closure of the General Ledger.
 He used five books – general ledger, two merchandise ledgers, expenses ledger, and cash book (with the white
ledger as a sixth) – constituted what looks very like a true double-entry system.
 In addition, there were at least two subsidiary books.
 He gave importance to the aspect of financial control.
 The books were logically subdivided, with segregation “of cash and goods accounts from the main ledger, a
perpetual inventory of each line of agricultural produce and each grade of cloth or yarn dealt in, and full records
of debtors and creditors, expenses, profits, interest and, partners’ drawings, as well as the state of account with
the head office at Nimes, and an estimate (15% per annum) of the expected rate of return on capital employed.

The Method of Venice

 Luca Pacioli, a Franciscan friar and a celebrated mathematician, is generally associated with the introduction of
double-entry bookkeeping.
 In 1494 he published his book, Summa de Arithmetica, Geometric, Proportioni et Proportionalita or “Everything
about Arithmetic, Geometry, Proportions and Proportionality,” which includes, Particularis de Computis et
Scripturis or “Details of Calculation and Recording," describing double–entry bookkeeping.
 His treatise reflected the practices of Venice at the time, which became known as the Method of Venice or the
Italian method. Therefore, he did not invent double-entry bookkeeping, but rather described what were
prevalent accounting practices of the day.
 Although Pacioli made no claim to developing the art of bookkeeping, he has been regarded as the father of
double-entry accounting.
 He stated that the purpose of bookkeeping was "to give the trader without delay information as to his assets
and liabilities."
 Pacioli also advised the computation of a periodic profit and the closing of the books. He said, “It is always good
to close the books each year, especially if you are in a partnership with others. Frequent accounting makes for
long friendship.”
 This Italian bookkeeping prospered with the development of the commercial republics of Italy and the use of the
double-entry method in the fourteenth century.
 Goethe, the famous German poet and dramatist, referred to double-entry bookkeeping as ”one of the finest
discoveries of human intellect.’
 Werner Sombart, an eminent economist-sociologist, believed that “double-entry bookkeeping is born of the
same spirit as the system of Galileo and Newton."

Savary and Napoleonic Commercial Code

 The earliest systematized form of accounting regulation developed in continental Europe, starting in France in
1673.
 The government introduced the submission of an annual fair value statement of financial position to protect the
 economy from bankruptcies.
 This legal requirement for businesses to keep accounting records was first introduced in the Ordonnonce de
Commerce of 1673 which was put through by Jean-Baptiste Colbert during the reign of Louis XIV. and the
Napoleonic Commercial Code of 1807, that influenced the bookkeeping provisions of commercial law
throughout Continental Europe, Francophone Africa and beyond.
 The Napoleonic Code or Code Napoleon is the French civil code, established under Napoleon Bonaparte on Mar.
21, 1804.
 The Commercial Code was adopted in 1807.
 Jacques Savary, the elder (1622-1690) in an early accounting text stated, "If this merchandise is starting to
deteriorate or go out of style, or is that which one judges he could find at the factory or wholesalers at 5% less, it
must be reduced to this price."
 Inventory valuation at the lower-of-cost-or-market was required by the Code of Commerce in France in 1673, in
Prussia in 1794, and in the German Commercial Code of 1884.
 As Savary was the principal author, the French Commercial Code of 1673 was also called the Code Savary.
 In the 17th century, Nicolas Petri was the first person to group similar transactions in a separate record and
enter the monthly totals in the journal, rather than recording all transactions seriatim, that is, in a series.
 In 1769, Benjamin Workman published The American Accountant, the earliest-known American accounting
textbook.

Industrial Revolution, Corporate Organization, Railroads, United States Steel

 Accounting practice really dates from antiquity, but the formation of an accounting profession was closely tied
to the rise of a modern industrial society in Britain during the late 18th century.
 The need for accounting services emerged slowly, but by the early decades of the 19th century a flurry of
textbooks and handbooks on accounting had appeared, reflecting the Impact of the Industrial Revolution.
 This revolution, which occurred In England from the mid-18th to the mid-19th century, changed the method of
producing commercial goods from the handicraft method to the factory system.
 With this change came the problem of costing for a large volume of products.
 The specialized field of cost accounting emerged to meet this need for the analysis of various costs.
 The expanded business operations initiated by the Industrial Revolution required increasingly large amount of
funds to build factories and purchase machinery.
 This need resulted to the development of the corporate form of organization.
 The growth of corporations spurred the development of accounting.
 Corporate owners, the shareholders, were no longer the managers of their business.
 Managers had to create accounting systems to report to the owners the results of their stewardship of the
business.
 This situation created a need for an independent report to provide assurance that management‘s financial
representations are reliable.
 Accountancy was still an indeterminate calling in Britain as late as the 1830s.
 Men then engaged in accounting not only made simple accounts but also found it financially necessary to act as
auctioneers, appraisers, agents and debt collectors.
 The profession was shaped by legislation.
 Accountancy reached the shores of the United States of America as a natural result of the investments being
made by British businessmen into the land of opportunities.
 Railroads, heavy users of debt financing in the late 1800s, were the first American firms to issue balance sheets
to absentee creditors.
 By 1880, the US railroad system had accumulated $4.6 billion of investments which was roughly equivalent to
40% of the American economy's annual output.
 Depreciation was formally considered given that the railroad companies used higher value and longer-lived
equipment-- locomotives, rail cars and track - than previous established enterprises.
 With the hauling of freight, the equipment gradually lost productive capacity and needed to be replaced.
 This loss presented a financial reporting problem since it was never clear when the wear and tear took place.
 Also, there’s the problem of matching of revenues and expenses.
 The concept of depreciation was largely ignored until the 1909 US corporate income tax law permitted a
deduction for depreciation charges in the calculation of taxable income.
 At the beginning of the 20th century, some managers began to use depreciation to smooth reported earnings.
  A 1912 Journal of Accountancy editorial complained that that depreciation had become a tool used by
management to counter fluctuations in profits.
 In good years, heavy depreciation charges were made. Bad years saw no provision or an inadequate charge.
 On Mar. 12, 1903, United States Steel published consolidated financial statements as of Dec. 31, 1902, together
with Price Warehouse a Company's (PW) assurance that they were audited and found correct.
 US Steel resulted from the amalgamation of various steel producers at that time. It’s the first billion-dollar
corporation. It controlled 75% of the US steel business.
 US Steel‘s consolidated financial statements rapidly became a landmark in accounting history.

Schmalenbach and The Model Chart of Accounts

 Eugen Schmalenbach (1873-1955) was a German academic and economist.
 In the early 1920s, Professor Schmalenbach was frustrated repeatedly with his failure to compare meaningfully
the financial data made available by different companies.
 This led to a research on the problem and the publication of his book, The Model Chart of Accounts.
 With this book, he laid the foundation for all subsequent developments in uniform accounting in Germany.
 It also became the basis for corresponding efforts in other European countries.
 Schmalenbach claimed that important information could be gained from a firm‘s accounts.
 The results of one's firm should show through-flows more usefully than balances.
 What he termed "Dynamic Balances" were to be promptly and regularly prepared and presented, so that
external changes and internal efficiencies could be gauged.
 Inter-firm comparisons were also to be facilitated.

Imposition of Income Tax and Conflicts with Financial Accounting

 In the year 10 CE, Xin Dynasty’s Emperor Wang Mang instituted an unprecedented tax-the income tax - at the
“rate of 10% of profits, for professionals and skilled labor”.
 To pay for weapons and equipment in preparation for the Napoleonic wars, William Pitt the Younger of Britain
levied an income tax in his budget of December 1798.
 The 1862 Union Government established the Bureau of Internal Revenue to assess personal and corporate
income taxes to help finance the Civil War.
 In 1943, the US Congress passed income tax withholding as the only way to collect on high tax rates to fund
World War II.
 The Philippines‘ Bureau of Internal Revenue (BIR) was created through the passage of Reorganization Act 1189
dated July 2, 1904.
 On Aug. 1, 1904, the Bill was formally organized and made operational under the Secretary of Finance.
 Financial accounting is conservative and it’s about matching efforts and results.
 Tax accounting, in turn, is about improving the amount and timing of collections.
 Note that "taxes are the lifeblood of the government and their prompt and certain availability are an imperious
need (Commissioner vs. Pineda, 21 SCRA 105).”
 This difference in perspective produces conflicts.
 Note that all returns required to be filed by the Tax Coda shall he prepared always in conformity with the
provisions of the Tax Code.
 In case of conflicts with generally accepted accounting principles (GAAP), in the final reckoning, the Tax Code will
prevail.

Information Age
 Dan Brinklin and Bob Frankston wrote VisiCaIc for the Apple ll, the first electronic spreadsheet, the most
important business application for the personal computer.
 Tremendous advances in information technology have further revolutionized accounting in recent years.
 Tasks that are time-consuming when done manually can now be done with speed, consistency, precision and
reliability by computers.
 There is an abundance of accounting applications and modules to suite the businesses’ various needs.
 With the proliferation of netbooks and smartphones along with its mind-boggling array of applications, surely,
doing business will change.
 This will necessarily bring changes to the field of accounting.
The growth of multinational corporations fostered new internal and external reporting consolidated accounts and
control system. As the world’s capital markets globalized there was dramatic increase in foreign investment and world
trade.
Prior to 1981, the Philippines had adopted the generally accepted accounting principle (GAAP) which were principally
US-GAAP based.

Nowadays, investors seek investment opportunities all over the world. However, investors and creditors became
increasingly frustrated when trying to compare the financial statements of companies in different countries. In 1973, the
International Accounting Standards Council was formed to develop a body of accounting standards suitable to use
around the world.

Currently, the Philippines is one the countries worldwide that has fully adopted the International Financial Reporting
Standards (IFRSs).

2. BRANCHES OF ACCOUNTING (objectives 5&6)

The work that accountants undertake ranges far beyond that of simply summarizing information to calculate how much
profit a business has made, how much it owes, and how much is owed to it. Although this work is still very important,
accountants are involved in other types of work.

The branches of accounting and their brief descriptions are discussed as follows:

1) Financial Accounting
Financial accounting is focused on the recording of business transactions and the periodic preparation of reports on
results of operations, changes in equity, financial position and cash flows. Financial accountants accord importance to
generally accepted accounting principles (GAAP). Financial accounting is the more specific term applied to the
preparation and subsequent publication of general-purpose financial statements.

2) Management Accounting
Management accounting is a profession that involves partnering in management decision-making, devising planning and
performance management systems, and providing expertise in financial reporting and control to assist management in
the formulation and implementation of an organization’s strategy.

Management accounting is the process of identification, measurement, accumulation, analysis, preparation,

interpretation and communication of information used by management to plan, evaluate and control within an entity
and to assure appropriate use of and accountability for its resources.

Management accounting is an integral part of the management process. It provides information primarily to internal
management. It measures, analyzes and reports financial and non-financial information which is then used by
management for planning, control and decision-making. Examples of non-financial information are as follows:
percentage of defects, number of customer complaints, warranty claims, budgeted hours, employee satisfaction,
customer satisfaction, product or service quality and reputation.

Managerial accounting and financial accounting are contrasted as follows:

Managerial Accounting Financial Accounting

Output Internal reports Financial Statements
Primary users Internal users (like managers) External users (ie stockholders, creditors
and government agencies)
3) Restrictions No mandatory rules for preparing reports Must follow GAAP when preparing
financial statements
Type of Financial and nonfinancial information; Financial information; objective
information subjective information possible information
Time orientation Emphasis on the future (planning and Historical orientation; past;
decision-making); retrospective
Degree of Based on very detailed information; Information about the overall firm
Aggregation parts/segmented performance; more aggregated
Timing of reports As required Monthly, quarterly, annually
 Cost Accounting
Cost accounting is the collection, allocation, and control or the costs to produce or supply a product or service. This
accumulation and explanation of actual and prospective cost data is important to control current operations (i.e. to
lower costs and thus, increase profits) and to plan for the future.

Cost accounting can be viewed as the intersection between managerial and financial accounting. Both managerial and
financial accounting use the ”production cost“ data accumulated using the cost accounting system of the entity. For
example, the determination of the product or service cost is essential for pricing decision because management needs to
ascertain that the revenue of the product or service can cover its costs and make a profit for the entity. The same
production cost data is used to value inventory on the balance sheet (financial accounting concern).

4) Government Accounting
According to Sec. 109 of Presidential Decree 1445, government accounting encompasses the processes of analyzing,
recording, classifying, summarizing and communicating all transactions involving the receipt and disposition of
government funds and property, and interpreting the results thereof. Government accounting shall aim to:
1. produce information concerning past operations and present conditions;
2. provide a basis for guidance for future operations:
3. provide for control of the acts of public bodies and officers in the receipt, disposition and utilization of funds and
property; and
4. report on the financial position and the results of operations of government agencies for the information of all
persons concerned.

There are three types of governmental organizational units in our country, namely: national government, local
government and government corporations. They maintain their own accounting systems.
New Government Accounting System (NGAS) is a simplified set of accounting concepts, guidelines and procedures
designed to ensure correct, complete and timely recording of government financial transactions, and production of
accurate end relevant financial reports.

Accounting responsibility emanates from the Constitution, laws, policies, rules end regulations. The offices charged with
the responsibility are the Commission of Audit (COA), the Department of Budget and Management (DBM), the Bureau of
Treasury (BTr) and the government agencies discharging the functions of the government to enable it to attain its
commitment to the Filipino people.

The Commission of Audit (COA) is an independent constitutional commission that keeps the general accounts of the
government, promulgates accounting rules and regulations, and submits to the President and Congress an annual report
of the government.

The Department of Budget and Management (DBM) shall be responsible for the formulation and implementation of the
National Budget with the goal of attaining our national socio-economic plans and objectives. The Department shall be
responsible for the efficient and sound utilization of the government funds and revenues to effectively service the
country‘s development objectives.

The Bureau of Treasury (BTr) is the principal custodian of all national government funds. The BTr receive and keep
government funds, manage and control the disbursements. Also, it maintains accounts of financial transactions of all
national government agencies and instrumentalities.

The national budget is the government’s estimate of its income and expenditure. It is what the government plans to
spend for its program and projects and where the funds will be sourced, whether from revenues or borrowings. The
major phases in budgeting process are as follows: preparation, authorization or legislation, execution and accountability.

General Appropriations Act (GAA) is the approved national budget for the year. This is consonance with Section 29 (1),
Article VI of the 1987 Constitution, “No money shall be paid out of the Treasury except is pursuance of an appropriation
by law.”
5) Auditing
Auditing is systematic process of objectively obtaining and evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of correspondence between those assertions and established criteria and
communicating the results to interested users.

Auditing is the accountancy profession’s most significant service to the public. An external audit is the independent
examination that ensures the fairness and completeness of the financial statements that management submits to users
outside the business entity. The result of the examination is embodied in the independent auditor’s report. Note that the
required financial statements have been prepared by management so they be evaluated to ensure that they do not
present a distorted picture.

External auditors are appointed from outside the entity. The external auditor’s job is to protect the interests of the users
of the financial statements. On the other hand, the main functions of an internal auditor are to review the operating and
accounting control procedures adopted by management and to see that accurate and timely information is provided.

6) Tax Accounting
Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need. Taxation is
the process or means by which the sovereign, through its lawmaking body, raises income to defray the necessary
expenses of the government. Taxation, as a power of the State, is inherent in sovereignty. This inherent power gives the
government the right to tax citizens and properties within its jurisdiction.

Tax accounting includes the preparation of the relevant tax returns and the consideration of the tax consequences of
proposed business transactions or alternative courses of action. As typically known, accountants involved in tax work are
responsible for computing the amount of tax payable by both business entities and individuals but their work is more
complex. Accountant with this specialization aim to comply with existing tax statues but are also in constant legal search
for ways to minimize tax payments. It is not necessary for either companies or individuals to pay more tax than is
lawfully due. If tax experts attempt to reduce their clients’ tax liabilities strictly in accordance with the law, this is known
as ‘tax avoidance’. Tax avoidance is a perfectly legitimate exercise, but tax evasion (the non-declaration of sources of
income on which tax might be due) is a very serious offense.

7) Accounting Education
The primary goal of accounting education is “to produce competent professional accountants capable at making a
positive contribution over their lifetimes to the profession and society in which they work."

Accounting education guarantees the continued development of the profession by endeavoring to clarify and address
emerging issues through research and sharing the results obtained with their colleagues. Considered as ”unheralded"
heroes, they make others understand the body of accounting knowledge. In addition, they painstakingly prepare
candidates for the tough CPA Board Exams. With the advent of information technology, this sector is being challenged to
focus accounting education from the 'transfer of knowledge' approach to the more effective “learning to learn”
approach. Other CPAs from the other sectors are encouraged to do part-time teaching to be able to impart their
workplace experiences.

8) Accounting Research
Accountancy research is the systematic process of collecting and analyzing information to increase one’s understanding
of the functions of a professional accountant and contribute to the solution of problems besetting the practice of the
profession.

Accountancy research can be classified into functional classification and sectoral classification. The mainstream
accountancy research is primarily concerned with the functioning of accountancy. Thus, the most rationale classification
of accountancy research is based on the functional areas of the profession namely: financial accounting, management
accounting, auditing and assurance, tax, and other functional areas (such as fraud prevention and investigation,
corporate governance, internal auditing, risk management, sustainability reporting, and the like). The sectoral
classification is based on the sectors of professional accountancy practice which are: education or academe, commerce
and industry, public practice, and government. Accountancy research can also be classified as basic and applied.

Not-for-profit Accounting
Not-for-profit Accounting is used by nonprofit organizations (such as NGO‘s, civic and charitable insti0tutions) to
measure the success of their activities and to ensure strict compliance with all requirements imposed by law, by donors,
or by the entity’s purposes.

Bookkeeping vs Accounting
Some people normally interchange the term bookkeeping with accounting. Technically, they serve two different
functions in the financial reporting process.

Bookkeeping is procedural and largely concerned with development and maintenance of accounting records.
Bookkeeping is the “how” of accounting.

Accounting is conceptual and is concerned with the why, reason or justification for any action adopted.
Bookkeeping is a procedural element of accounting as arithmetic is a procedural element of mathematics.
Bookkeeping is a mechanical task involving the collection of basic financial data. The data are first entered in the
accounting records or the books of accounts, and then extracted, classified and summarized in the form of income
statement, balance sheet and cash flows statement. The bookkeeping procedures usually and when the basic data have
been entered in the books of accounts and the accuracy of each entry has been tested. At that stage, the accounting
function takes over. Accounting tends to be used as a generic term covering almost anything to do with the collection
and use at basic financial data. It should, however, be more properly applied to the use to which the data are put once
they have been extracted from the books of accounts.

Bookkeeping is a routine operation, while accounting requires the ability to examine a problem using both financial and
non-financial data.

Accounting is used to ...

Point of view of owner/s
 Determine how much sales the company generated in a period (month or year)
 Determine the costs of making such sale and expenses in operating the business
 Determine whether the company earned profit or incurred a loss
 Decide on whether to expand its operations (add stores, branches) or not
 Decide on whether to eliminate a branch / product line or not
 Decide on ways to improve profits
 Decide on whether to increase salaries of employees / hire additional manpower or not
 Decide on whether to pay in cash or incur debt
 Decide on whether to construct its own building or rent a commercial space.
Point of view of suppliers of goods/materials/services
 Decide on whether to grant a business establishment a credit or not
Point of view of banks
 Decide on whether to approve or disapprove the loan application of a business enterprise
 Decide on the amount of loan and terms of loan to be granted
Point of view of investors
 Decide on whether to make additional investments or to withdraw investments (for current investors)
 Decide on whether to invest in a particular company or not (for prospective investor)