DEFINITION OF ACCOUNTING

Accounting : a service activity (Accounting Standards Council)

Accounting function: to provide quantitative information, primarily financial in nature, about
economic entities, that is intended to be useful in making economic decision.

Accounting: 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 characters and
interpreting the results thereof. (Committee on Accounting Terminology of the American
Institute of Certified Public Accountants)

Accounting: process of identifying, measuring, and communicating economic information to
permit informed judgment and decision by users of the information. (American Accounting
Association in its Statement of Basic Accounting Theory)
ACCOUNTING
 about quantitative information
 financial in nature
 useful in decision making


Accounting has a number of components, namely:
Identifying as an analytical component
EXTERNAL AND INTERNAL TRANSACTIONS

External Transactions: those economic events involving one entity and another entity
- Examples:
a.
b.
c.
d.
e.
Purchase of goods from a supplier
Borrowing money from a bank
Sale of goods to a customer
Payment of salaries to employees
Payment of taxes to the government

Internal Transactions: economic events involving entity only
MEASURING: part of technical component
- measurement based on
 historical cost : past cost; most common measure of financial transactions
 current cost: present cost
 realizable value and present value : present cost
COMMUNICATING : formal component

Communicating : process of preparing and distribution

Accounting: an information system
- Accounting : measures business activities, processes information into reports and communicates the
reports to decision makers
- Key product : set of financial statements derived from financial information

Objective of Accounting: provide quantitative financial information about a business that is
useful to statement users particularly owners and creditors in making economic decisions.

PRC: Professional Regulation Committee

Republic Act No. 9298 : law regulating the practice of accountancy in the Philippines
- Noelle Cenenola : Board of Accountancy – body authorized by law to promulgate rules and regulations
affecting the practice of the accountancy profession In the Philippines
- Computer-based examination: twice a year, May and October in authorized testing centers
LIMITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY

Single practitioners and partnerships for the practice of public accountancy shall be registered
certified public accountants in the Philippines

Minimum of three years of experience in any of the areas of public practice including taxation.

CPA title: valid for 3 years
PUBLIC ACCOUNTING
1. Auditing: verifies / external verification
2. Taxation: preparation of annual income tax returns and determination of tax consequences
- 12% tax – business tax
3. Management advisory services: used generally to refer to services to clients on matters of
accounting, finance, business policies, org. procedures, product costs, distribution, and many
other phases of business conduct and operations
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 consolidation
8/23/21 – 2nd Discussion

Chairman of BOA : Noe Quinanola
PR BOA


Education : BS Accountancy
Examination
- CPALE-1 Auditing, MAS, RFBT, Taxation, FAR, AFAR

Supervision/Control : CPD (with exemptions)
- 120 units is needed to renew


RA 9298 : Phil. Accountancy Act of 2004
Areas of Accountancy
- Academe
- Public Practice : before entering public practice, enter to 3 yrs. meaningful experience
- Commerce and Industry
- Government

Limitation of practice Public Accountancy : 3 years meaningful experience
- not corporation
- until partnership ONLY

Financial Reporting Standards Council (FRSC) for PH
- replaced the ASC (Accounting Standards Council – dating council)
- establish and improve accounting standards that will be generally accepted in the Philippines
- 1 chaitman + 14 representatives with 3-year term renewable for another term

Philippine Interpretations Committee (PIC) for PH
- Formed by FRSC
- Formerly known as IC
- Role-to PREPARE INTERPRETATIONS of PFRS and provide guidance on issues not specifically addressed
in current PFRC

Status of the Conceptual Framework
- The Conceptual Framework is not a PFRS. If there is a conflict between Conceptual Framework and
PFRS, the PFRS will prevail
- If there is no standard, proceed to conceptual framework

Scope of the Conceptual Framework
- Conceptual Framework is concerned with general purpose financial reporting

General Purpose Financial Reports

Objective of general purpose financial reporting : provide financial information about the
reporting entity that is useful to primary users in making decisions

PRIMARY USERS
- existing and potential investors
- lenders and other creditors

Only the COMMON NEEDS of primary users are met by the financial statements  General
Purpose Financial Reporting

Underlying Assumptions
- Conceptual Framework are only one assumption, the “Going Concern”
- However, implicit in accounting are the basic assumptions of
1. Accounting Entity: owner and business are separate entities
2. Time Period: calendar year or fiscal year
3. Monetary Unit: currency, the amount has absolute currency
QUALITATIVE CHARACTERISTICS

Fundamental qualitative characteristics
1. Relevance
 Predictive value: future
 Feedback value/Confirmatory value: past
- Materiality – entity-specific aspect of relevance
2. Faithful representation
 Completeness : complete
 Neutrality : objective, no bias
 Free from error
 Enhancing Qualitative characteristics - VCUT
1. Verifiability
2. Comparability
- Horizontal : within an entity, from period to period
- Vertical: line by line, per account
3. Timeliness: information is given when needed
4. Understandability : able to comprehend and easily to understand
FUNDAMENTAL VS. ENHANCING


Fundamental qualitative characteristics : make information useful to users
Enhancing qualitative characteristics: enhance the usefulness of information
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
RELEVANCE
 Information is relevant: can affect the decision of users
a. Predictive value – the information can be used in making predictions
b. Confirmatory value – the information can be used in confirming past predictions
 Materiality: an entity-specific aspect of relevance
- exercises professional judgment
FAITHFUL REPRESENTATION
Other important ideas
1. Conservatism / Prudence : exercise with care and caution especially at uncertainties
2. Substance over Form
- Ex. Lease
3. Cost Constraint : benefit over cost
FINANCIAL STATEMENTS and the Reporting Entity
8/25/21

Asset: present economic resource controlled by the entity
- economic resource: right that has the potential to produce economic benefits
3 ASPECTS in the definition of an asset
 Right : not necessarily to a physical object
- Ex. right to use, sell, lease, transfer, collect
 Potential to produce economic benefits
 Control – entity has the EXCLUSIVE RIGHT over the benefits and ability to prevent others to
access benefits
CLASSIFICATION OF ASSETS:
Current Assets: for normal course of business; usually less than 1 year or until current period
1.
2.
3.
4.
5.
Cash and Cash Equivalents
Financial assets at Fair value
Trade and other Receivables
Inventories
Prepaid Expenses
Noncurrent Assets: not on the normal course; more than 1 period
1.
2.
3.
4.
5.
Property, Plant, and Equipment
Long-term investments
Intangible assets
Deferred tax assets
Other noncurrent assets

Liability: a PRESENT obligation of the entity to transfer an economic resource as a result of past
events
3 Aspects of Liability
1. Obligation: DUTY OR RESPONSIBILITY that an entity has no practical ability to avoid
2. Transfer of an economic resource : has the potential to require the transfer of an economic
resource to another party
3. Present obligation AS A RESULT OF PAST EVENTS
- A present obligation as a result of past events if:
a. the entity has already obtained economic benefits
b. as a consequence, the entity needs to give something
CLASSIFICATION OF LIABILITIES:
Current Liabilities : within 12 months
1.
2.
3.
4.
Trade and other payables
Current provisions
Short-term borrowing
Current portion of long-term debt:
5. Current tax liability
Noncurrent liabilities: more than 12 months

Executory contracts :contract that is equally unperformed – neither party has fulfilled any of its
obligations, or both parties have partially fulfilled their obligations to an equal extent
- combined (2 parties) right and obligation
- Enforceable contract: when one has performed their obligation
 If an entity performs first, the entity’s combined right and obligation changes to an ASSET
 If the other performs first  LIABILITY

EQUITY: residual interest; A-L = E
INCOME AND EXPENSES

Income: increase in assets, or decrease in liabilities, that result increases in equity, EXCEPT
contributions from holders of equity claims

Expenses: decreases in assets, or increase in liabilities, that result in decreases in equity, EXCEPT
relating to distributions to holders of equity claims
RECOGNITION AND DERECOGNITION

Recognition: process of INCLUDING A,L,E,I, Expense
- Recognition criteria:
 qualified for elements of fs
 recognizing it must be relevant and faithfully represented
*Relevance: an asset could be not a relevant information if: (thus must not be recognized)
a. it is uncertain whether asset or liability exists (there is an existence)
b. an asset of liability exists, but the PROBABILITY of an inflow or outflow of economic benefits is
LOW
^ However, the presence of one or both of the foregoing does not automatically lead to the nonrecognition of an item. Other factors should also be considered.
*Faithful representation
 Completeness
 Neutrality
 Free from error
*Measurement uncertainty  needs to be estimated
- the estimate SHOULD PROVIDE RELEVANT INFORMATION and is clearly and accurately described and
explained
- however, measurement uncertainty can lead to the non-recognition of asset if the estimate is:
 Exceptionally difficult
 Exceptionally subjective

Derecognition: REMOVAL of “previously” recognized asset or liability from the entity’s
statement of FS
- when item “ceases” or no right anymore to meet the definition of an asset or liability
MEASUREMENT BASES
1. Historical cost: past cost
- commonly used
 HC of an asset – the consideration paid to acquire the asset plus transaction costs
 HC of liability – the consideration received to incur the liability minus transaction costs
- HC is updated over time to depict the following:
 Depreciation (for physical asset), amortization (if not a physical asset), or impairment (bumaba
ang value dahil may nangyari like abnormal loss)
 Collections or payments that extinguish part or all of the asset or liability
 Unwinding of discount or premium when the asset or liability is measured at amortized cost

FAIR VALUE
- the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date


Value in use : present value of all “cash flows or benefits” that an entity expects to derive
Fulfillment value: : present value of cash or other economic resources that an entity expects to
be obliged to transfer as it fulfills a liability
2. Current value: present cost
- The current cost of:
a. an asset – the cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date
b. Liabilit
ENTRY VALUES VS. EXIT VALUES


Entry values: current cost and historical cost (pag magkakaroon)
Exit values: fair value in use and fulfillment value (pag finufulfill)
CONSIDERATIONS when SELECTING A MEASUREMENT BASIS
a. The NATURE OF INFORMATION provided by a particular measurement bases
- Historical Cost: depreciation or impairment, all became expense
- Current Cost: fair value chances
b. The qualitative characteristics, the cost-contraint, and other factors : a particular measurement
basis may be more verifiable or more costly to apply than the other measurement bases
MEASUREMENT OF EQUITY
- EQUITY: not measured directly; thus, bases on the E= A-L
- Total equity cannot be expected to be equal to the entity’s market value nor the amount that can be
raised from either selling or liquidating the entity
- Generally positive (+) , although some components can be negative
- Yet, Total equity can be negative when “total liabilities exceed total assets”
PRESENTATION AND DISCLOSURE


a.
b.
c.
Information is communicated through presentation and disclosure in the financial statements.
Effective communication makes information more useful. Effective communication requires:
Focusing on presentation and disclosure objectives and principles rather than on rules
Classifying information by grouping similar items and separating dissimilar items
Aggregating information in a manner that it is not obscured either by excessive detail or by
excessive summarization
P AND D OBJECTIVES AND PRINCIPLES


a.
b.
Objectives are specified in the Standards.
The principles include:
the use of entity-specific information is more useful that standardized descriptions, and
duplication of information is usually unnecessary
CLASSIFICATION


Classifying : combining similar items and separating dissimilar items
Offsetting of A and L is NOT GENERALLY APPROPRIATE.
Classification of income and expenses
 Income and expenses are classified as recognized either in:
a. profit or loss; or
b. other comprehensive income

Aggregation : adding together of assets, liabilities, equity, income or expenses that have shared
characteristics
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

Financial concept of capital – capital  invested money or invested purchasing power
- synonymous with equity, net assets, and net worth

Physical concept of capital – capital  entity’s productive capacity, e.g. units of output per day