SHS

Fundamentals of Accountancy,
Business and Management 1
Module 1

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ABM - Fundamentals of Accountancy, Business and Management 1
Module 1
First Edition, 2021

Copyright © 2021
La Union Schools Division
Region I

All rights reserved. No part of this module may be reproduced in any form
without written permission from the copyright owners.

Development Team of the Module

Author: Kay Owen L. Boado, T-III

Editor: SDO La Union, Learning Resource Quality Assurance Team

Illustrator: Ernesto F. Ramos Jr., P II

Management Team:

Atty. Donato D. Balderas, Jr.

Schools Division Superintendent

Vivian Luz S. Pagatpatan, Ph.D

Assistant Schools Division Superintendent

German E. Flora, Ph.D, CID Chief

Virgilio C. Boado, Ph.D, EPS in Charge of LRMS

Lorna O. Gaspar, EPS in Charge of FABM

Michael Jason D. Morales, PDO II

Claire P. Toluyen, Librarian II
 Target

A Stairway to Accounting – GO, CPA!!

We begin our study of Accounting with the most commonly accepted definition of
Accounting:
“Accounting is the process of IDENTIFYING, RECORDING and
COOMUNICATING economic events of an organization to interested users.”
(Weygandt, J. et al)
The nature of accounting according to Accounting Theory:
“Accounting is a systematic recording of financial transactions and the
presentation of the related information to appropriate persons.”
The function of accounting in business is considered as the Language of Business.
Accounting is as old as civilization itself. It has evolved in response to various social
and economic needs of men. Accounting started as a simple recording of repetitive
exchanges. The history of accounting is often as indistinguishable from the history
of finance and business.

After going through this module you are expected to:

1. Define accounting. (ABM_FABM11-IIIa-1)
2. Describe the nature of accounting. (ABM_FABM11-IIIa-2)
3. Narrate the history/origin of accounting. (ABM_FABM11-IIIa-4)
4. Define external users and gives examples. (ABM_FABM11-IIIa-7)
5. Define internal users and gives examples. (ABM_FABM11-IIIa-8)

Jumpstart

Activity 1: Read me! Understand me!

Directions: Read about Accounting. Understand what you are reading.
“Accounting is the process of IDENTIFYING, RECORDING AND COMMUNICATING
economic events of an organization to interested users.” (Weygandt, J. et.al)
Identifying – this involves selecting economic events that are relevant to a
particular business transaction. The economic events of an organization are
referred to as transactions – In a bakery business: 1. Sales of bread and other
bakery products; 2. Purchases of flour that will be used for baking; 3. Purchase of
trucks needed to deliver the products.

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Recording – this involves keeping a chronological diary of events that are
measured in pesos. The diary referred to in the definition are the journal and
ledgers will be discussed in future learning materials.
Communicating – occurs through the preparation and distribution of financial and
other accounting reports.
The purpose of accounting is to help end-users see the true picture of the business
in financial terms. To achieve this purpose, the financial reports prepared by
accountants must be understandable, relevant, and for general-purpose. It must
contain information that is complete, neutral and free from error. It is achieved when
financial statements are made in conformity with prevailing accounting standards
called the “generally accepted accounting principles” (GAAP).
Accounting enables a business to maintain complete and orderly prepared records
of economic events by way of preparing books while facilitating the information for
various purposes.
The overall objective of financial reporting is to provide general-purpose financial
statements about the reporting entity that is useful to present potential user
groups, especially stockholders and creditors to assist them in making sound
economic decisions as capital providers.
To achieve this accounting objective, a business entity must prepare general-
purpose financial statements. General-purpose financial reporting help users
who lack the ability to demand all the financial information they need from an
entity and therefore, must rely, at least partly, on the information provided in the
financial statements.
Directions: Choose your answer from the given choices. Use separate paper.
Q1: What is the process of IDENTIFYING, RECORDING AND COMMUNICATING
economic events of an organization to interested users?
A. Accounting B. Management C. Organization D. Planning
Q2: Which of the following is/are an objective/s of accounting?
A. To ascertain the results of operations during the period.
B. To ascertain the financial position.
C. To maintain control over assets.
D. All of the above.
Q3: Which of the following is the purpose of accounting?
A. To aid management in planning and performance evaluation.
B. To provide information to government agencies and other legal purposes.
C. To help end-users see the true picture of the business in financial terms.
D. None of the above
Q4: What accounting function that is employed to ensure all the business
transactions are recorded in a systematic manner in property books of accounts?
A. Communicating B. Identifying C. Recording D. Summarizing

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Q5: What is a measurement of rules used to develop the information in financial
statements?
A. General-purpose financial reporting.
B. Generally accepted accounting principles.
C. Philippine Standards in Accounting
D. Securities and Exchange Commission.

Discover

I. THE DEFINITIONS OF ACCOUNTING

The most commonly accepted definitions of Accounting are expressed by the
following authoritative bodies:
1. American Institute of Certified Public Accountants (AICPA): “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 financial character and
interpreting the results thereof.”
2. Accounting Standards Council (ASC): “A service activity. Its function is
provide quantitative information, primarily financial in nature, about
economic entities, that is intended to be useful in making economic
decisions.”

3. American Accounting Association (AAA): “The process of identifying, measuring

and communicating economic information to permit informed judgments and
decisions by users of the information.”

II. NATURE OF ACCOUNTING

The most common descriptions when accountants portray the nature of accounting
are as follows:
1. A Discipline. Accounting is a discipline that observes professional standards
and professional ethics as other fields of professions like medicine, law, engineering,
and others.
Ethics in accounting is of utmost importance. Certified Public Accountants (CPAs)
and other accounting professionals know that people who use their services,
especially decision makers using financial statements, expect them to be highly
competent, reliable, and objective. Those who work in the field of accounting must
not only be well qualified but must also possess a high degree of professional
integrity. A professional’s good reputation is one of accountant’s most important
possessions.
2. A Service activity. Accounting profession is not involved in the selling of goods.
Instead, it is involved in providing professional services particularly in performing

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tasks by making financial reports regarding the financial activities of economic
entities.
3. An art and Science. As an art, accounting is designed to perform its service
activity with utmost efficiency and in best possible manner without any wastage of
time and money. It encompasses a body of techniques that is commonly used in
certain profession. It demands thorough knowledge, good experience and deep
interest in the field of accountancy to achieve this goal.
Other believe that accounting it is not only an art but also a science as well
because it is regulated by accounting rules, principles, postulates and theories. It
follows a cause-and-effect relationship as shown by the double-entry system that in
every transaction it has a double-effect. If one account is debited, the other account
will be credited automatically.
On the other hand, some people dispute such an idea because accounting is not an
exact science. In fact, accounting constantly adjusts to new conceptual frameworks
to adopt in the rapidly changing business trends and situations globally.
4. The Language of Business. Accounting serves as a means of communication. It
communicates the results of business operations to various parties (owners,
lenders, investors, government, employees, and other agencies) who are directly or
indirectly interested on the economic affairs of the business. It informs them the
economic status of a business organization. It gives them insights regarding the
true financial standing of the business as accountants interpret and communicate
the through financial reports.
Accounting thus plays an essential role to businessmen. It helps them easily find
out needed information anytime to answer the following business operations:
a. How much is the increase in capital as a results of business operation?
(Profitability)
b. Are these available funds to finance the business operations? (Liquidity)
c. Can the business pay its long-term obligations to others? (Solvency)
d. Can the business sustain its long-term profitability and cash flow? (Stability)
e. How much borrowed capital and owner’s capital are invested in the business?
(Capital Structure)
f. Is there any excess cash available for investment opportunities and other
uncertainties? (Financial Flexibility)
5. The Eyes of the Business. Bookkeeping records, as the initial part of
accounting activities, enable the owner of a business to check on his financial
progress.
Adequate accounting records assist the owner to prepare plans for the future, avoid
material mistakes, analyze the causes of changes that are take place, and draw the
best choice among economic alternatives.
Accountants are economic detectives. Auditing, as an advanced part of the
accounting activity, verifies the truthfulness of the financial reports concerning the
business operation and financial condition.
III. FUNCTIONS OF ACCOUNTING
The primary function of accounting is “to provide financial reports to various end-
users for economic decision-making.” (PAS No. 1)
This is achieved through the use of the accounting functions as follows:

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1. Recording. This accounting function is employed to ensure that all business
transactions are recorded in a systematic manner in property books of accounts.
The recording is done in the “Journal Book” and subsidiary books such as cash
journal, purchase journal, and sales journal. Only transactions that are financial in
nature are recorded in the books of accounts.
2. Classifying. It is concerned with systematic analysis of recorded business
transactions and events, with a view to group those that are similar in nature as
one cluster in an accounting element called Assets, Liabilities, or Capital. The
classifying work of accounting is done in the “Ledger Book.”
3. Summarizing. This involves presenting the classified data in manner which is
understandable and useful to the end-users of accounting information. This
process leads to preparation of a (a) Trial Balance, (b) Statement of Comprehensive
Income and (c) Statement of Financial Position.
4. Analyzing and Interpreting. This is the final function of accounting. The
recorded financial data are analysed and interpreted in a manner that the end-
users can make a meaningful judgment about the financial condition and
profitability of the business operations. The data is also used for preparing the
future plan and framing of business policies.
5. Communication. After being meaningfully analysed and interpreted, the
accounting information has to be communicated to the intended end-user. This is
done thorough the distribution of accounting reports such as Statement of
Comprehensive Income and Statement of Financial Position including additional
information in the form of accounting ratios, graphs, diagrams, Statement of Cash
Flows, and Notes to Financial Statements.
The functions of accounting are comparable to the stages of accounting work and
purpose for which they may be ascribed.
The basic function of accounting is described as the process of identifying,
measuring, and communicating economic information to permit informed judgment
for an economic decision. – (American Accounting Association)
The advanced or critical function of accounting is its audit function – to test the
reliability of the financial reports, trace fraudulent transactions, and locate and
rectify accounting errors.
IV. HISTORY OF ACCOUNTING
Accounting, as a language of business, is an old as civilization. It has evolved in
response to economic and social needs of men. It started with a simple recording of
repetitive exchanges.

The Cradle of Civilization. Around 3600 BC, record-keeping was already

common from Mesopotamia, China and India to Central and South America. The
oldest evidence of this practice was the “clay tablet” of Mesopotamia, 90% of which
dealt with commercial transactions, accounts payable and receivable. 1 Tithes to
ruling theocratic class were faithfully recorded in many occasions as to both
quantity and value. (Rivkah Harris, “The Archives of the Sun Temple in Khafjah,”
Journal of Cuneiform Studies, Vol. 2 (1955): 91.)
Evolution of Double-Entry System. The early history of double-entry bookkeeping
cannot be traced with much accuracy. The earliest known examples of this
technique are the mercantile books of Ferris Bonis of Montauban, dated 1339.

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However the evolution of double-entry accounting system has an Italian influence
in the 13th to 15th century.
 In Genoa, the oldest double-entry books entitled “Massari (Treasury Officials)
Ledgers of Commerce of Genoa” were written in 1340. These were books
were known as a perfect double-entry form because separate pages were used
for debit and credit. Under the present system, this is simplified in to the T-
account and expanded into the Ledger.

Example of T-Account

Example of a Ledger
 In Florence, there were double-entry records wherein debits were written
over credits. It is also in Florence that manuscripts of “Partnership and
Association Contracts” reflecting how partners’ capital, division of profit and
losses, and dissolution of partnership were computed.

In present system, the Florentine Method is observed in the Journal Entries

with doubl-entry bookeeping.
Double-entry Bookkeeping. The double-entry bookkeeping system is based on the
dual aspect concept which says that in every business transaction, two effects of
recording are to be made – the value received (debit) and the value parted with
credit).
The basic principle of bookkeeping is the principle of balance. It is a principle that
distinguishes double-entry bokkeepimg form mere record keeping.
An example of double-entry bookkeeping is as follows:

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The transaction regarding the initial investment of the owner is recorded twice in
the general journal – one is Cash (debit side) which represents the value received
by the business, and the other is Capital (credit side), the corresponding reciprocal
value parted with or the obligation of the business to hold in trust the investment
of the owner.
 Venice of Northern Italy had key influence in the use of the double-entry
bookkeeping system in 1400s.

In 1494, Luca Pacioli(1447-1517), an Italian monk and mathematician,

wrote Summa de Arithmetica, the first book that was published containing a
detailed chapter of double-entry bookkeeping which enable others to study
and use it.

In this book, Pacioli introduced three important books of records, namely:

a. Memorandum Book – for all information on a transaction;

b. Journal Book – for the original entry; and
c. Ledger Book – for the final entry (posting, the center of accounting system)

Through the Venetian Method, the double-entry accounting became known

to the world and became the standard not only for the Italians but also
Dutch, German, and English authors of accounting books. The present
Ledger Posting is the modern adaption of the Venetian Method.
For this reason, Luca Pacioli is known as the “Father of Modern Accounting” even if
he was neither an accountant nor a merchant.
The Present – The Development of Modern Accounting Standards and
Commerce. The accounting profession in the 20th century developed around state
requirements for financial statement audits. Beyond the industry’s self-regulation,
the government also sets accounting standards, through laws and agencies such as
Securities and Exchange Commission (SEC).
As economies worldwide continued to globalize, accounting regulatory bodies
required accounting practitioners to observe International Accounting Standards.
This is to assure transparency and reliability, and to obtain greater confidence on
accounting information used by global investors.
Nowadays, investors seek investment opportunities all over the world. To remain
competitive, business everywhere feel the need to operate globally. The trend now
for accounting professionals is to observe one single set of global accounting
standards in order to have greater transparency and comparability of financial data
across borders.
V. Users of Accounting Information
The users of accounting information may be classified based on the extent of
their participation in the affairs of the business – that is, internal users comprising
the management group, and external users comprising the financing and public
groups.
The Management Group. Internal users are those who own and/or manage and
control the business entity.
To help them make relevant economic decisions in achieving the goal of the firm,
the management group needs more detailed accounting information.
Internal financial reports are usually prepared exclusively for the use of the internal
users for the efficient operation and control of the business activities.

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These reports are not governed by the generally accepted accounting principles. The
area of accounting that is concerned with internal reporting is referred to as
management accounting.
Examples of internal financial reports are variance analysis of cost of production,
differential cost report of capital budgeting, etc.
The Financing Group and Public Group. External users (the financing and public
groups) do not own and/or manage and control business entity.
They have no direct access to the management of the business, but they use
financial reports to satisfy some of their needs for financial information.
The external users and their respective needs as catered by the financial reports
include the following:
1. Investors. To assess the risk of investments portfolio, investors need
information to help them determine whether they should buy, hold, or sell their
investments. They need accounting information to assess their return on
investment.
2. Employees. Workers are interested in the financial statements to determine the
employer’s stability and profitability. Moreover, enterprise’s capability to provide
remuneration, retirement benefits, and employees’ opportunities may be evaluated
through financial reports.
3. Lenders. Financial statement are used by lenders to determine whether
borrowers can pay their loans and interest attached to them when due.
4. Suppliers and other trade creditors. Suppliers use the financial statements of
their customers and to determine the continuity of the latter’s business. They are
interested in the information that enables them to determine whether debts owed to
them will be paid when due. Trade creditors are likely to be interested in an
enterprise over a shorter period than lenders unless they are dependent upon the
continuation of the enterprise as a major customer.
5. Customers. Customers’ use the financial statements of their suppliers to assess
the latter’s continuity in business because some customers are dependent on the
existence of the suppliers to insure the availability of the supplies that will sustain
their business operation.
6. Government and its agencies. In allocation the national resources, the
government is interested in financial reports of an enterprise for statistics, income
taxes and other regulatory policies.
7. Public. Financial reports may assist the people by providing information about
the trends and recent developments in the prosperity of the enterprise and the
range of its activities.
External financial reports are usually prepared for those who have no direct access
to the management of the business. The preparation of these reports is governed by
the generally accepted accounting principles. The area of accounting that is
concerned with the preparation and presentation of the external reports is referred
to as financial accounting.

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 Explore

Enrichment Activity 1: HERE WE GO A-COUNTING!

Directions: Choose your answer from the given choices. Use separate paper.
1. Which of the following is NOT an appropriate description of accounting?
A. Accounting is an information system.
B. Accounting is an exact science and an art.
C. Accounting is the language of business.
D. Accounting is a process that leads to understandable information.
2. Which of the following is NOT provided by the basic accounting reports?
A. Feasibility B. Liquidity C. Profitability D. Stability
3. Which of the following accounting processes comes first of the others?
A. Communicating B. Identifying C. Interpreting D. Measuring
4. Which of the following condition is NOT reported in the statement of financial
reports?
A. Financial Report B. Liquidity C. Profitability D. Solvency
5. Which of the following is NOT an external users of accounting information?
A. Creditors B. Government C. Employees D. Management

Assessment 1: MINDWORKS!
Directions: Use the same sheet of paper used in activity for your answer.
You just passed the CPA Licensure Exam and ranked as top 1. You don’t have any
experience in accounting practice. A client comes to you for management and tax
consultancy, and audit engagement purposes. Will you accept the engagement?
Why or why not?

Rubric for Essay Output

Criteria 1 2 3 4
Focus/Main The essay poorly The essay is focused The essay is The essay is
Point addresses the topic on topic and includes focused on the focused,
and includes irrelevant few loosely related topic and includes purposeful, and
ideas. ideas. relevant ideas. reflects clear
insights and ideas.
Support Provides little or no Supports main point Support main Persuasive
support for the main with some point with supports main
point. underdeveloped developed and/or point with well-
reasons and/or examples. developed reasons
examples. and/or examples.
Organization and Little or no Some organization of Organizes ideas to Effective organizes
Format organization of ideas to ideas to build an build an ideas to build a
build an argument. argument. argument. logical, coherent
argument.
Grammar, Style, Many errors in Contains frequent Uses correct Uses correct
conventions grammar, spelling, and errors in grammar, grammar, spelling, grammar, spelling,
punctuation, makes spelling, and and punctuation punctuation
reader’s punctuation. with few errors. throughout with
comprehension very few errors.
difficult.

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Enrichment Activity 2: IF YOU KNOW ME, ANSWER ME!
Directions: Copy and answer in a separate sheet of paper.

Across:
1. Father of Modern Accounting.
4. Own/manage or control the business.
5. They determine whether borrowers can pay their loans and interest attached to
them when due.
7. Answers the question, how much borrowed capital & owner’s capital are invested
in the business.
9. Value received.

Down:
Assessment 2: MINDWORKS, TWO!

2. Concerned with systematic analysis of recorded business and events.

3. Final entry.
6. A nature of accounting that is not involved with selling of goods.
8. Based on dual-aspect concept.
10. value-parted with.

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Assessment 2: MINDWORKS, TWO!
Directions: Find the 15 accounting terms that you encounter in this learning
material.

Great job! You have understood the lesson.

Are you now ready to summarize?

Deepen

At this point, you will make a collage showing the users of accounting information.
The scoring rubrics on the next page will be used in assessing your output.

What you need:

Old, magazines, scissors, pencil/pen/marker, crayon/pastel colors, long bond
paper, glue/paste.

What to do:
1. Cut the drawings on a magazine/s you have.
2. Paste on a piece of coupon bond.
3. Label each cut-outs.

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 Gauge

ANSWER ME, PLEASE?

Directions: Read carefully each item. Use a separate sheet for your answers. Write
only the letter of the best answer for each test item.
1. It is involved in providing professional services particularly in performing tasks
by making financial reports regarding the financial activities of economic entities.
What nature of accounting is it?
A. An Art and a Science B. A Discipline
C. A Language of Business D. A Service Activity
2. What function of accounting is considered to be the basic function of accounting?
A. Identifying, Recording, and Communicating
B. Recording, Measuring, and Communicating
C. Measuring, Identifying and Communicating
D. Communicating, Identifying and Measuring

3. Luca Pacioli is the father of modern accounting and ____________________.

A. An Accountant B. A Merchant C. A Mathematician D. A Priest

4. Who introduced the use of three books in doing accounting – memorandum

where the transactions are noted; the journal where the debits and credits of
transactions are listed; and the ledger where posting are done.
A. Andrea Barbarigo C. Jacques Savary
B. Eugen Schmalenbach D. Luca Pacioli

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5. According to AICPA, 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 financial character and interpreting the
results thereof. In this definition, what is being centered on the long-
established bookkeeping functions of accountants?
A. To classify and summarize business transactions and events and afterward
to interpret their outcome.
B. To record and summarize business transactions and events and afterward to
interpret their outcome.
C. To record, classify, and summarize business transactions and events and
afterward to interpret their outcome.
D. To record and classify business transactions and events and afterward to
interpret their outcome.

6. External financial reports are usually prepared for those who have
_______________.
A. Direct access to the management of the business.
B. For the efficient operation and control of the business.
C. No direct access to the management of the business.
D. For the effective operation and control of the business.

7. They use the financial statement of their suppliers to assess the latter’s
continuity in business because some of them are dependent on the existence of
their supplier to insure the availability of supplies that will sustain their
business operations.
A. Employees B. Customers D. Investors D. Lenders

8. Statement 1: The T-account or Ledger of our present accounting system has

derived its accounting form from the “Massari Ledgers of commune Genoa.
Statement 2: The oldest evidence of records keeping was the clay tablet of
Mesopotamia, 60% of which dealt with commercial transactions, accounts
payable, and receivables.
A. Only statement 1 is correct. B. Only statement 2 is correct.
C. Both statements are correct. D. Both statements are incorrect.

9. Which of the following external users of accounting information is perceived to

be the most important user in a macro-user oriented accounting system?
A. Creditors B. Government and its agencies C. Investors D. Employees

10. The statement of financial condition reports the following, except

A. Financial Position B. Liquidity C. Profitability D. Solvency
11. These external users of financial reports primarily use accounting information
to assess their return on investment in the business.
A. Government B. Investors C. Creditors D. Management

12. It refers to the reciprocal value parted with regarding the obligation of the
business to hold in trust the investment of the owner.
A. Capital B. Credit C. Debit D. Liability.

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13. Statement 1: Accounting is useful in making economic decisions.
Statement 2: Accounting demands critical thinking and creative skills.
A. Only statement 1 is correct. B. Only statement 2 is correct.
C. Both statements are correct. D. Both statements are incorrect.

14. The following describe the double-entry bookkeeping, except_______________

A. based on principle of balance B. value received = value parted with
C. based on dual-aspect concept D. transactions are journalized in two
books

15. The following statements describe the nature of accounting, except

A. Accounting is a service activity.
B. Accounting is a process, an art, and a discipline.
C. Accounting is a language and the eyes of business.
D. Accounting is a perfect science of business.

Great job! You are almost done with this module.

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 Answer Key Gauge:
1. D. 6. C. 11. B
Jumpstart 2. A. 7. D 12. A.
3. B. 8. A. 13. C.
1. B.
4. D. 9. C. 14. D.
2. A. 5. C. 10. A. 15. D.
3. B.
4. A.
5. D

References
Printed Materials:
Department of Education. (2016). Fundamentals of Accountancy, Business
and Management 1, Teacher’s Guide for Senior High School. The Commission
on Higher Education in collaboration with the Philippine Normal University.
Pages 2-5. EC-TEC Commercial, Quezon City, Philippines.

Book(s):
Valencia, Edwin G; Roxas, Gregorio F. Basic Accounting Concepts,
Principles,Procedures and Applications 4th Edition 2014-2015 Pages 1-3, 29-34.
Baguio City, Philippines: Valencia Educational Supply.

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