Overview
This lecture introduces the fundamentals of accounting, including its definition, nature, main functions, and a brief history of the discipline.
Definition of Accounting
- Accounting is a service activity that provides quantitative (mainly financial) information about economic entities.
- The goal of accounting is to aid decision-making and help choose among alternative courses of action.
- Accountants deliver professional accounting services for a fee, similar to how lawyers or doctors provide specialized services.
Nature of Accounting
- Accounting is an art, involving designed processes to produce financial information.
- It focuses on financial data—answering "how much" regarding business activities.
- Accounting is a step-by-step process leading to financial statements (e.g., income statement).
- It is also an information system, organizing and communicating financial records.
Functions of Accounting
- Maintains systematic records of financial transactions.
- Communicates financial results, such as net income or loss, to stakeholders.
- Serves as the "language of business" for effective organizational communication.
- Helps meet legal and statutory requirements (e.g., taxation, regulatory bodies).
- Protects business assets by tracking resources through proper record-keeping.
- Assists management by providing relevant operational information for decision-making.
Brief History of Accounting
- Accounting originated over 7,000 years ago in Mesopotamia, with evidence from ancient Egypt, Babylon, Assyria, Samaria, and other ancient civilizations.
- Record-keeping was essential for trade and commerce in all societies with economic activity.
- Roman Empire and Asian dynasties (e.g., Goryeo in Korea, dynasties in China) also practiced accounting.
- Luca Pacioli, an Italian mathematician, is known as the "Father of Accounting" for describing double-entry bookkeeping in 1494.
- The double-entry system records each business transaction in at least two accounts, ensuring balanced books.
Key Terms & Definitions
- Accounting — Service activity providing financial information for decision-making.
- Quantitative Information — Information expressed in numbers, especially financial amounts.
- Income Statement — Financial report showing revenues, expenses, and net income or loss.
- Double-entry Bookkeeping — System where every transaction affects at least two accounts, maintaining balance.
- Net Income/Net Loss — Result of revenues minus expenses; net income if positive, net loss if expenses exceed revenues.
Action Items / Next Steps
- Memorize the definition of accounting as provided by the Accounting Standards Council.
- Prepare for the next lesson: study the branches of accounting and their functions.