CHAPTER 1: THE ACCOUNTANCY PROFESSION
DEFINITION OF ACCOUNTING
The Accounting Standards Council provides the following definition:
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Accounting is a service activity.
The accounting function is to provide quantitative information, primarily financial in
nature, about economic entities that is intended to be useful in making economic
decision.
The Committee on Accounting Terminology of the American Institute of Certified Public
Accountants defines accounting as follows:
- 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
ofa financial character and interpreting the results thereof.
The American Accounting Association in its Statement of Basic Accounting Theory
defines accounting as follows:
- Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the information.
Important points:
The following important points made in the definition of accounting should be noted:
One - Accounting is about quantitative information.
Two - The information is likely to be financial in nature.
Three - The information.should be useful in decision making.
The definition that has stood the test of time is the definition given by the American
Accounting Association. This definition states that the very purpose of accounting is to
provide quantitative information to be useful in making an economic decision.
The definition also states that accounting has a number of components, namely:
a. Identifying as the analytical component.
b.Measuring as the technical component.
c. Communicating as the formal component.
Identifying
- This accounting process is the recognition or nonrecognition of business activities as
“accountable” events.
- Not all business activities are accountable.
For example, the hiring of employees, the death of the entity president and the entering into a
contract are all business activities but such events are not accountable because they cannot be
quantified or expressed in terms of a unit of measure.
An event is accountable or quantifiable when it has an effect on assets, liabilities and equity.
In other words, the subject matter of accounting is economic activity or the measurement of
economic resources and economic obligations.
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Only economic activities are emphasized and recognized in accounting.
Sociological and psychological matters are beyond the province of accounting.
External and internal transactions
- Economic activities of an entity are referred to as transactions which may be classified
as external and internal.
- External transactions or exchange transactions are those economic events involving one
entity and another entity.
Examples of external transactions are:
A. Purchase of goods from a supplier
B. Borrowing money from a bank
C. Sale of goods to a customer
D. Payment of salaries to employees
E. Payment of taxes to the government
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Internal transactions are economic events involving the entity only.
Internal transactions are the economic activities that take place entirely within the entity.
Production and casualty loss are examples of internal transactions.
Production - is the process by which resources are transformed into products.
Casualty- is any sudden and unanticipated loss from fire, flood, earthquake and other
event ordinarily termed as an act of God.
Measuring
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This accounting process is the assigning of peso amounts to the accountable
economic transactions and events. If accounting information is to be useful, it must be
expressed in terms of a common financial denominator.
Financial statements without monetary amounts would be largely unintelligible or
incomprehensible.
The Philippine peso is the unit of measuring accountable economic transactions.
The measurement bases are historical cost and current value.
Historical cost - is the original acquisition cost and the most common measure of
financial transactions.
Current value- includes fair value, value in use, fulfillment value and current cost.
Communicating
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Communicating is the process of preparing and distributing accounting reports to
potential users of accounting information.
Identifying and measuring are pointless if the information contained in the accounting
records cannot be communicated in some form to potential users.
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Actually, the communicating process is the reason why accounting has been called the
universal language of business
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Implicit in the communication process are the recording, classifying and summarizing
aspects of accounting.
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Recording or journalizing is the process of systematically maintaining a record of all
economic business transactions after they have been identified and measured.
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Classifying - is the sorting or grouping of similar and interrelated economic transactions
into their respective classes.
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Classifying - is accomplished by posting to the ledger.
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The ledger - is a group of accounts which are systematically categorized into asset
accounts, liability accounts, equity accounts, revenue accounts and expense accounts.
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Summarizing - is the preparation of financial statements which include the statement of
financial. position, income statement, statement of comprehensive income, statement of
changes in equity and statement of cash flows.
Accounting as an information system
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Accounting is an information system that measures business activities, processes
information into reports and communicates the reports to decision makers.
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A key product of this information system is a set of financial statements - the documents
that report financial information about an entity to decision makers.
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Financial reports tell us how well an entity is performing in terms of profit and loss and
where it stands in financial terms.
Overall objective of accounting
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The overall objective of accounting is to provide quantitative financial information about a
business that is useful to statement users particularly owners and creditors in making
economic decisions.
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An accountant's primary task is to supply financial information so that the statement
users could make informed judgment and better decisions.
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The essence of accounting is decision-usefulness.
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Investors and other users are interested in financial accounting information necessary in
making important and significant economic decisions.
THE ACCOUNTANCY PROFESSION
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At present, Republic Act No. 9298 is the law regulating the practice of accountancy in
the Philippines.
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This law is known as the Philippine Accountancy Act of 2004.
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Accountancy has developed as a profession attaining a status equivalent to that of law
and medicine.
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In the Philippines, in order to qualify to practice the accountancy profession, a person
must finish a degree in Bachelor of Science in Accountancy and pass a very difficult
government examination given by the Board of Accountancy.
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The Board of Accountancy is the body authorized by law to promulgate rules and
regulations affecting the practice of the accountancy profession in the Philippines.
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The Board of Accountancy is responsible for preparing and grading the Philippine CPA
examination. This computer-based examination is offered twice a year, one in May and
another one in October, in authorized testing centers around the country.
Limitation of the practice of public accountancy
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Single practitioners and partnerships for the practice of public accountancy shall be
registered certified public accountants in the Philippines.
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A certificate of accreditation shall be issued to certified public accountants in public
practice only upon showing in accordance with rules and regulations promulgated by the
Board of Accountancy and approved by the Professional Regulation Commission that
such registrant has acquired a minimum of three years of meaningful experience in any
of the areas of public practice including taxation.
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The Securities and Exchange Commission shall not register any corporation organized
for the pràctice of public accountancy.
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Accreditation to practice public accountancy Certified public accountants, firms and
partnerships of certified public accountants, including partners and staff members
thereof, are required to register with the Board of Accountancy and Professional
Regulation Commission for the practice of public accountancy.
The Professional Regulation Commission upon favorable recommendation of the Board
of Accountancy shall issue the Certificate of Registration to practice public accountancy
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which shall be valid for 3 years and renewable every years upon payment of required
fees.
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Certified Public Accountants generally practice their profession in three main areas,
namely:
a. Public accounting
b. Private accounting
c. Government accounting.
PUBLIC ACCOUNTING
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The field of public accounting or public accountancy is composed of individual
practitioners, small accounting firms and large multinational organizations that render
independent and expert financial services to the public.
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Public accountants usuạlly offer three kinds of services. namely auditing, taxation and
management advisory services.
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As a matter of fact, large multinational accounting firms have separate division for each
of these services.
Auditing
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Auditing has traditionally been the primary service offered by most public accounting
practitioners.
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Auditing or external auditing is the examination of financial statements by independent
certified public accountant for the purpose of expressing an opinion as to the fairness
with which the financial statements are prepared.
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Actually, external auditing is the attest function of independent CPAS.
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The Bureau of Internal Revenue requires audited financial statements to accompany the
filing of annual income tax return.
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Banks and other lending institutions frequently require an audit by an independent CPA
before granting a loan to the borrower.
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Creditors and prospective investors place considerable reliance on audited financial
statements on making economic decision.
Taxation
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Taxation service includes the preparation of annual income tax returns and
determination of tax consequences of certain proposed business endeavors.
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The CPA not infrequently represents the client in tax investigations.
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To offer this service effectively and efficiently, the public accountant must be thoroughly
familiar with the tax laws and regulations and updated with changes in taxation law and
court cases concerned with interpreting taxation law.
Management advisory services
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Management advisory services have become increasingly important in recent years
although audit and tax services are undoubtedly the mainstay of public accountants.
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The term management advisory services has no precise coverage but is used generally
to refer to services to clients on matters of accounting, finance, business policies,
organization procedures, product costs, distribution and many other phases of business
conduct and operations.
Specifically, management advisory services include:
a. Advice on installation of computer system
b. Quality control
c. Installation and modification of accounting system
d. Budgeting
e. Forward planning and forecasting
f. Design and modification of retirement plans
g. Advice on mergers and consolidations
PRIVATE ACCOUNTING
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Many Certified Public Accountants are employed in business entities in various capacity
as accounting staff, chief accountant, internal auditor and controller.
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The highest accounting officer in an entity is known as the controller.
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The major objective of the private accountant is to assist management in planning and
controlling the entity's operations.
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Private accounting includes maintaining the records. producing the financial reports,
preparing the budgets and controlling and allocating the resources of the entity.
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The private accountant has also the responsibility for the determination of the various
taxes the entity is obliged to pay.
GOVERNMENT ACCOUNTING
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Government accounting encompasses the process of analyzing, classifying,
summarizing and communicating all transactions involving the receipt and disposition of
government funds and property and interpreting the results thereof.
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The focus of government accounting is the custody and administration of public funds.
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Many Certified Public Accountants are employed in many branches of the government,
more particularly:
a. Bureau of Internal Revenue
b. Commission on Audit
c. Department of Budget and Management
d. Securities and Exchange Commission
e. Bangko Sentral ng Pilipinas
CONTINUING PROFESSIONAL DEVELOPMENT (CPD)
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Republic Act o. 10912 is the law mandating and strengthening the continuing
professional development program for all regulated professions, including the
Accountancy profession.
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All certified public accountants shall abide by the requirements, rules and regulations on
continuing professional development to be promulgated by the Board of Accountancy,
subject to the approval of the Professional Regulation Commission, in coordination with
the accredited national professional organization of certified public accountants or any
duly accredited educational institutions.
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Continuing professional development refers to the inculcation and acquisition of
advanced knowledge, skill, proficiency, and ethical and moral values after the initial
registration of the Certified Public Accountant for assimilation into professional practice
and lifelong learning.
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Continuing professional development raises and enhances the technical skill and
competence of the Certified Public Accountant.
CPD credit units
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The CPD credit units refer to the CPD credit hours required for the renewal of CPA
license and accreditation of a CPA to practice the accountancy profession every three
years.
Under the new BOA Resolution, all Certified Public Accountants regardless of area or
sector of practice shall be required to comply with 120 CPD credit units.
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The Continuing Professional Development is required for the renewal of CPA license
and accreditation of CPA to practice the accountancy profession.
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As recently promulgated, only 15 CPD credit units are required for the renewal of CPA
license.
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However, 120 CPD credit units are required for accreditation of a CPA to practice the
accountancy profession.
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Excess credit units earned shall not be carried over to the next three-year period, except
credit units earned for masteral and doctoral degrees.
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It is to be emphasized that the Continuing Professional Development has become
mandatory for Certified Public Accountants.
Exemption from CPD
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A CPA shall be permanently exempted from CPD requirements upon reaching the age
of 65 years.
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However, this exemption applied only to the renewal of CPA license and not for the
purpose of accreditation to practice the Accountancy profession.
Accounting versus auditing
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In a broad sense, accounting embraces auditing.
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Auditing is one of the areas of accounting specialization. In a límited sense, accounting
is essentially constructive in nature.
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Accounting ceases when financial statements are already prepared.
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On the other hand, auditing is analytical. The work of an auditor begins when the work
of the accountant ends.
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After the financial statements are prepared, the auditor will begin to perform the task of
auditing.
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The auditor examines the financial statements to ascertain whether they are in
conformity with generally accepted accounting principles.
Accounting versus bookkeeping
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Bookkeeping is procedural and largely concerned with development and
maintenance of accounting records.
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Bookkeeping is the "how" of accounting.
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Accounting is conceptual and is concerned with the why, reason or justification for any
action adopted.
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Bookkeeping is a procedural element of accounting as Arithmetic is a procedural
element of mathematics.
Accounting versus accountancy
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Broadly speaking, the two terms are synonymous because they both refer to the entire
field of accounting theory and practice.
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Technically speaking, however, accountancy refers to the profession of accounting
practice.
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Accounting is used in reference only to a particular field of accountancy such as public
accounting, private accounting and government accounting.
Financial accounting versus managerial accounting
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Financial accounting is primarily concerned with the recording of business transactions
and the eventual preparation of financial statements.
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Financial accounting focuses on general purpose reports known as financial statements
intended for internal and external users.
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Financial accounting is the area of accounting that emphasizes reporting to creditors and
investors.
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Managerial accounting is the accumulation and preparation of financial reports for
internal users only.
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In other words, managerial accounting is the area of accounting that emphasizes
developing accounting information for use within an entity.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
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Accounting has evolved through time changing with the needs of society. As new types
of transactions occur in trade and commerce, accountants develop rules and procedures
for recording them.
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These accounting rules, procedures and practices came to be known as generally
accepted accounting principles or simply GAAP.
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The principles have developed on the basis of experience, reason, custom, usage and
practical necessity.
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Generally accepted accounting principles represent the rules, procedures, practice and
standards followed in the preparation and presentation of financial statements.
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Generally accepted accounting principles are like laws that must be followed in financial
reporting.
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The process of establishing GAAP is a political process which incorporates political
actions of various interested user groups as well as professional judgment, logic and
research.
Purpose of accounting standards
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The overall purpose of accounting standards is to identify. proper accounting practices
for the preparation and presentation of financial statements.
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Accounting standards create a common understanding between preparers and users of
financial statements particularly the measurement of assets and liabilities.
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A set of high-quality accounting standards is a necessity to ensure comparability and
uniformity in financial statements based on the same financial information.
FINANCIAL REPORTING STANDARDS COUNCIL
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In the Philippines, the development of generally accepted accounting principles is
formalized initially through the creation of the Accounting Standards Council or ASC.
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The Financial Reporting Standards Council or FRSC now replaces the Accounting
Standards Council.
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The FRSC is the accounting standard setting body created by the Professional
Regulation Commission upon recommendation of the Board of Accountancy to assist the
Board of Accountancy in carrying out its powers and functions provided under R.A. Act
No. 9298.
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The main function is to establish and improve accounting standards that will be generally
accepted in the Philippines.
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The accounting standards promulgated by the Financial Reporting Standards Council
constitute the "highest hierarchy" of generally accepted accounting principles in the
Philippines.
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The approved statements of the FRSC are known as Philippine Accounting Standards or
PAS and Philippine Financial Reporting Standards or PFRS.
Composition of FRSC
The FRSC is composed of 15 members with a Chairman who had been or is presently a
senior accounting practitioner and 14 representatives from the following:
Board of Accountancy
1
Securities and Exchange Commission
1
Bangko Sentral ng Pilipinas
1
Bureau of Internal Revenue
1
Commission on Audit
1
Major organization of preparers and users of
financial statements- Financial Executives Institute
of the Philippines or FINEX
Accredited national professional organization of CPAs:
Public Practice
Commerce and Industry
Academe or Education
Government
Total
1
2
2
2
2
14
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The Chairman and members of the FRSC shall have a term of 3 years renewable for
another term. Any member of the ASC shall not be disqualified from being appointed to
the FRSC.
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Philippine Interpretations Committee The Philippine Interpretations Committee or PIC
was formed by the FRSC in August 2006 and has replaced the Interpretations
Committee or IC formed by the Accounting Standards Council in May 2000.
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The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and
to provide timely guidance on financial reporting issues not specifically addressed in
current PFRS.
In other words, interpretations are intended to give authoritative guidance on issues that
are likely to receive divergent or unacceptable treatment because the standards do not
provide specific and clear cut rules and guidelines.
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The counterpart of the PIC in the United Kingdom is the International Financial Reporting
Interpretations Committee or IFRIC which has already replaced the Standing
Interpretations Committee or SIC.
INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE
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The International Accounting Standards Committee or IASC is an independent private
sector body, with the objective of achieving uníformity in the accounting principles which
are used by business and other organizations for financial reporting around the world.
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It was formed in June 1973 through an agreement made by professional accountancy
bodíes from Australía, Canada, France, Germany, Japan, Mexico, the Netherlands, the
United Kingdom and Ireland, and the United States of America. The IASC is
headquartered in London, Uníted Kingdom.
Objectives of IASC
a. To formulate and publish in the public ínterest accounting standards to be observed in
the presentation of financial statements and to promote their worldwide acceptance and
observance.
b. To work generally for the improvement and harmonization of regulations, accounting
standards and procedures relating to the presentation of financial statements.
INTERNATIONAL ACCOUNTING STANDARDS BOARD
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The International Accounting Standards Board or IASB now replaces the International
Accounting Standards Committee or IASC,
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The IASB publishes standards in a series of pronouncements called International
Financial Reporting Standards or IFRS.
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However, the IASB has adopted the body of standards issued by the IASC.
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The pronouncements of the IASC continue to be designated as "International Accounting
Standards" or IAS.
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The IASB standard-setting process includes in the correct order research, discussion
paper, exposure draft and accounting standard.
Move toward IFRS
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In developing accounting standards that will be generally accepted in the Philippines,
standards issued by other standard setting bodies such as the USA Financial
Accounting Standards Board (FASB) and the IASB are considered.
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In the past years, most of the Philippine standards issued are based on American
accounting standards. At present, the FRSC has adopted in their entirety all International
Accounting Standards and International Financial Reporting Standards.
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The move toward IFRS is essential to achieve the goal of one uniform and globally
accepted financial reporting standards.
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The Philippines is fully compliant with IFRS effective January 2005, a process which was
started back in 1997 in moving from USA GAAP to IFRS.
The following factors are considered in deciding to move totally to international
accounting standards:
a. Support of international accounting standards by Philippine organizations, such as the
Philippine SEC, Board of Accountancy and PICPA.
b. Increasing internalization of business which has heightened interest in a common
language for financial reporting.
c. Improvement of international accounting standards or removal of free choices of
accounting treatments.
d. Increasing recognition of international accounting standards by the World Bank, Asian
Development Bank and the World Trade Organization.
Philippine Financial Reporting Standards
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The Financial Reporting Standards Council issues standards in a series of
pronouncements called "Philippine Financial Reporting Standards" or PFRS.
The Philippine Financial Reporting Standards collectively include all of the following:
a. Philippine Financial Reporting Standards which correspond to International Financial
Reporting Standards. The Philippine Financial Reporting Standards are numbered the
same as their counterpart in International Financial Reporting Standards.
b. Philippine Accounting Standards which correspond to International Accounting
Standards. The Philippine Accounting Standards are numbered the same as their
counterpart in International Accounting Standards.
c. Philippine Interpretations which correspond to Interpretations of the IFRIC and the
Standing Interpretations Committee, and Interpretations developed by the Philippine
Interpretations Committee.