CHAPTER 1: THE ACCOUNTANCY
PROFESSION
DEFINITION of Accounting:
(ACCOUNTING STANDARDS COUNCIL)
■
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
(AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS)
■
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 ACCOUNTING ASSOCIATION)
■
Accounting is the process of identifying,
measuring and communicating
economic information to permit
informed judgment and decision by
users of the information
Components of Accounting
(based on its definition)
■
Take note that not all business activities
are accountable
■
Subject matter of accounting: Economic
Activity/ies
CLASSIFICATION OF ECONOMIC ACTIVITIES
 EXTERNAL TRANSACTIONS – also
known as exchange transactions.
- these are events that
involves one entity and another entity
 INTERNAL TRANSACTIONS – it involves
the entity only.
MEASURING
■
It is the process of assigning peso
amounts to accountable economic
transactions and events.
■
Measurement bases are the historical
cost, current cost, realizable value and
present value
COMMUNICATING



a. Identifying as the analytical component
b. Measuring as the technical component
c. Communicating as the formal
component
ACCOUNTING AS AN INFORMATION SYSTEM
■
Information System of Accounting
measures business activities, processes
information into reports and
communicates the reports to decision
makers
■
Its key product is a set of financial
statements
IDENTIFYING
■
■
It is the recognition or non-recognition
of business activities as accountable
events.
Accountable event or Quantifiable
event – it is an event that has an
effect/s on assets, liabilities and equity.
It is the process of preparing and
distributing accounting reports to
potential users of accounting
information
This process is the reason why
accounting is called the “Universal
Language of Business.”
This process contains the recording,
classifying and summarizing aspects of
accounting.
OVERALL OBJECTIVE OF ACCOUNTING
“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.”
■
Under the new BOA resolution, all CPA
(regardless of area or sector of practice)
shall be required to comply with 120
CPD units for a period of 3 years.
■
Here is the initial implementation of the
120 CPD credit units:
The Accountancy Profession
■
Republic Act No. 9298
■
Known as the “Philippine Accountancy
Act of 2004”
■
BOARD OF ACCOUNTANCY – a body
authorized by law to promulgate rules
and regulations affecting the practice of
the accountancy profession in the
Philippines.
- it is also responsible for
preparing and grading the Philippine CPA
Examination
■
PRC shall issue the Certificate of
Registration to practice public
accountancy which shall be valid for 3
years and renewable every 3 years
upon payment of required fees.
3 MAIN AREAS OF ACCOUNTANCY:
YEAR
CPD CREDIT
UNITS
2017
80 credit units
2018
100 credit units
2019
120 credit units
■
The excess credit units shall not be
carried over for the next three (3) year
period, except of masteral and doctoral
degree CPD units.
■
It has become mandatory for all
Certified Public Accountants and it is
also required for the renewal of CPA
license and accreditation of CPA to
practice the accountancy profession.
EXEMPTION FROM CPD:
■
1. Public Accounting
2. Private Accounting
If a CPA has reached the age of 65 years
old. (this only applies to the renewal of
the CPA license)
3. Government Accounting
GENERAL ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
CONTINUING PROFESSIONAL DEVELOPMENT
(CPD)
■
Republic Act No. 10912
■
CPD refers to the inculcation and
acquisition of advanced knowledge,
skill, proficiency, and ethical and moral
values after the initial registration of
CPAs for the assimilation into
professional practice and lifelong
learning.
■
It represents the rules, procedures,
practice and standards followed in the
preparation and presentation of
financial statements.
■
It is like laws that must be followed in
financial reporting.
PURPOSE OF ACCOUNTING STANDARDS:
■
To identify proper accounting practices
for the preparation and presentation of
financial statements.
■
These standards create a common
understanding between preparers and
users of financial statements
particularly the measurement of assets
and liabilities.
FINANCIAL REPORTING STANDARDS COUNCIL
(FRSC)
■
It is the accounting standard setting
body created by the PRC upon
recommendation of the BOA to assist
them in carrying out of its powers and
functions provided under R.A. No. 9298.
■
Its main function is to establish and
improve accounting standards that will
be generally accepted in the Philippines.
■
The standard promulgated by FRSC
constitute the highest hierarchy of the
GAAP in the Philippines.
■
FRSC approved standards are the
Philippine Accounting Standards (PAS)
and Philippine Financial Reporting
Standards (PFRS).
PHILIPPINE INTERPRETATION COMMITTEE
(PIC)
■
It was formed by the FRSC in August
2006.
■
Its role is the preparation of
interpretations of PFRS for the approval
by the FRSC and to provide timely
guidance on financial reporting issues
not specifically addressed in current
PFRS.
INTERNATIONAL ACCOUNTING STANDARDS
COMMITTEE (IASC)
■
It was formed in June 1973.
■
It is an independent private sector
body, with the objective of achieving
uniformity in the accounting principles
which are used by business and other
organizations for financial reporting
around the world.
OBJECTIVES OF IASC:
1. To formulate and publish in the public
interest accounting standards to be
observed in the presentation of
financial statements and to promote
their worldwide acceptance and
observance.
2. 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 (IASB)
■
It replaces the International Accounting
Standards Committee (IASC)
■
It publishes the International Financial
Reporting Standards (IFRS), a standard
in a series of pronouncements.
■
the pronouncements of the IASC
continues to be designated as
“International Accounting Standards” or
IAS.
■
It has adopted the body of standards
issued by the IASC.
■
The standard-setting process of the
IASB includes (in the correct order)
research, discussion paper, exposure
draft and accounting standard.
PHILIPPINE FINANCIAL REPORTING
STANDARDS (PFRS)
■
It is a series of pronouncements issued
by the Financial Reporting Standards
Council.
■
It collectively include all of the
following:
1.
PFRS which corresponds to
International Financial Reporting
Standards.
2. PAS which corresponds to International
Accounting Standards.
3. Philippine Interpretations which
correspond to the Interpretations of the
IFRIC and Standing Interpretations
Committee, and Interpretations
developed by the PIC.
CHAPTER 2: THE CONCEPTUAL
FRAMEWORK
Definition:
◦
◦
◦
It is a complete, comprehensive and
single document which is promulgated
by the International Accounting
Standards Board (IASB)
It is a summary of the terms and
concepts that underlie the preparation
and presentation of financial
statements for external users.
It is intended to guide standard-setters,
preparers and users of financial
information in the preparation and
presentation of statements.
PURPOSES OF CONCEPTUAL FRAMEWORK:
◦
To assist the FRSC in developing
accounting standards and reviewing
existing standards.
◦
To assist preparers of financial
statements in applying accounting
standards and in dealing with issues not
yet covered by GAAP.
◦
To assist the FRSC in the review and
adoption of International Financial
Reporting Standards.
◦
To assist users of financial statements in
interpreting the information contained
in the financial statements.
◦
To assist auditors in forming an opinion
as to whether financial statements
conform with Philippine GAAP.
◦
To provide information to those
interested in the work of the FRSC in
the formulation of PFRS.
USERS OF FINANCIAL INFORMATION
PRIMARY USERS

these are the parties to whom
the general purpose financial reports
are primarily directed.
 It includes the existing and potential
investors, lenders and other creditors.
OTHER USERS

these are the users of financial
information other than the existing and
potential investors, lenders and other
creditors.

it includes the employees, customers,
governments and their agencies, and
the public.
SCOPE OF CONCEPTUAL FRAMEWORK
a. Objective of financial reporting
b. Qualitative characteristics of useful
financial information
c. Definition, recognition and
measurement of the elements from
which financial statements are
constructed
d. Concepts of capital and capital
maintenance
OBJECTIVE OF FINANCIAL REPORTING
◦
“It is to provide financial information
about the reporting entity that is useful
to existing and potential investors,
lenders and other creditors in making
decisions about providing resources to
the entity.”
◦
It is the “why” , purpose or goal of
accounting
SPECIFIC OBJECTIVES OF FINANCIAL
REPORTING
1. To provide information useful in making
decisions about providing resources to
the entity.
2. To provide information useful in
assessing the cash flow prospects of the
entity
3. To provide information about entity
resources, claims and changes in
resources and claims.
USEFULNESS OF FINANCIAL PERFORMANCE
◦
◦
◦
◦
It helps users to understand the return
that the entity has produced on the
economic resources.
The return of the entity provides an
indication of how well management has
discharged its responsibilities to make
efficient and effective use of the
entity’s economic resources.
The past financial performance
information is helpful in predicting the
future returns on the economic
resources of the entity.
Also, the information about financial
performance during a period is useful in
assessing the entity’s ability to
generate future cash inflows from
operations.
ACCRUAL ACCOUNTING
◦
◦
It depicts the effects of transactions and
other events and circumstances on an
entity’s economic resources and claims
in the periods in which those effects
occur even if the resulting cash receipts
and payments occur in a different
period.
It is to recognize the effects of
transactions and other events when
they occur and not as cash is received
or paid.
◦
“Income is recognized when earned
regardless of when cash is received and
expense is recognized when incurred
regardless of when cash is paid.”
LIMITATIONS OF FINANCIAL REPORTING
a. General purpose financial reports do
NOT and cannot provide all of the
information that existing and potential
investors, lenders and other creditors
need.
b. General purpose financial reports are
not designed to show the value of an
entity but the reports provide
information to help the primary users
estimate the value of the entity.
c. General purpose financial reports are
intended to provide common
information to users and cannot
accommodate every request for
information.
d. To a large extent, general purpose
financial reports are based on estimate
and judgment rather than exact
depiction.
UNDERLYING ASSUMPTIONS
◦
These are the fundamental premises,
which is the basis of the accounting
process.
◦
It is also known as postulates.
◦
These serves as the foundation or
bedrock of accounting.
◦
Only ONE assumption is stated in the
Conceptual Framework for Financial
Reporting, which is going concern.
◦
Other BASIC ASSUMPTIONS:
accounting entity, time period and
monetary unit.
OTHER BASIC ASSUMPTIONS
ACCOUNTING ENTITY
◦
◦
It is the specific business organization
(proprietorship, partnership or
corporation)
“The entity is separate from the owners,
managers, employees who constitute
the entity.”
TIME PERIOD
◦
“it requires that the indefinite life of an
entity is subdivided into accounting
periods which are usually of equal
length for the purpose of preparing
financial reports on financial position,
performance and cash flows.”
MONETARY UNIT
◦
Two Aspects:
1. Quantifiability Aspect – the assets,
liabilities, equity, income and expenses
be measured in Philippine peso.
2. Stability of the Peso – the purchasing
power of peso is constant or stable.
CHAPTER 3: CONCEPTUAL
FRAMEWORK (QUALITATIVE
CHARACTERISTICS)
QUALITATIVE CHARACTERISTICS
 Definition: these are the qualities or
attributes that make financial
accounting information useful to the
users.
It is classified into two:
1. fundamental qualitative characteristics
2. enhancing qualitative characteristics
APPLICATION OF THESE CHARACTERISTICS:
a. Identify an economic phenomenon that
has the potential to be useful.
b. Identify the type of information about
the phenomenon that would be most
relevant and can be faithfully
represented.
c. Determine whether the information is
available.
A. RELEVANCE
 It is the capacity of the information to
influence a decision.
 For a financial information to be
relevant, it must be capable of making a
difference in the decisions made by
users.
 To be relevant, it requires that the
financial information should be related
or pertinent to the economic decision,
but if it does not bear an economic
decision, the information is deemed
useless.
INGREDIENTS OF RELEVANCE:
1. Predictive value – can be used as an
input to processes employed by users
to predict future outcome.
2. Confirmatory value
B. MATERIALITY
 It is a practical rule which dictates that
strict observance of the GAAP is not
necessary when the items are NOT
significant enough to affect the
evaluation, decision and fairness of the
financial statements.
 This concept is also known as the
Doctrine of Convenience
 It is a “subquality” of relevance based
on the nature or magnitude or both of
the items to which the information
relates.
WHEN IS AN ITEM MATERIAL?
 an item is material if knowledge of it
would affect or influence the decision
of the informed users of the financial
statements.
 Information is material if its omission or
misstatement could influence the
economic decision that the users make
on the basis of the financial information
about an entity

“to be neutral is to be fair.”
3. FREE FROM ERROR

It means that there are no errors or
omissions in the description of the
phenomenon or transaction.

The concept of free from error does not
necessarily mean perfectly accurate in
all respects.
D. SUBSTANCE OVER FORM

FACTORS OF MATERIALITY
1. RELATIVE SIZE – it is in relation to the
total of the group to which the item
belongs is taken into account.

2. NATURE OF AN ITEM – it may be
inherently material because by its very
nature it affects economic decision.

C. FAITHFUL REPRESENTATION
 It means that financial reports
represent economic phenomena or
transactions in words and numbers.
 The descriptions and figures must
match what really happened or existed.
 The actual effects of a transaction or
event must be accounted properly and
reported in the financial statements.
INGREDIENTS OF FAITHFUL REPRESENTATION:
1. COMPLETENESS
2. NEUTRALITY


A neutral depiction is without bias in the
preparation or presentation of financial
information.
To be neutral, the information in the
financial statements must be free from
bias.
If the transactions events faithfully
represents information it purports
to represent, it is necessary that the
transactions and events are
accounted in accordance with their
substance and reality and not
merely their legal form.
It is not considered a separate
component of faithful
representation because it would be
redundant.
Faithful representation – it
represents the substance of an
economic phenomenon or
transaction rather than merely
representing the legal form.
E. CONSERVATISM

It means that when alternatives exist,
the one chosen should be the one
which has the least effect on equity.

“In case of doubt, record any loss and
do not record any gain.”
Contingent Loss – it is recognized as a
“provision” if the loss is probable and the
amount can be reliably measured.
Contingent Gain – it is not recognized but
disclosed.
Expressions of Conservatism
 “Anticipate no profit and provide for
probable and measurable loss.”
 “Don’t count your chicks until the eggs
hatch.”
F. PRUDENCE
2. Indirect Verification – it is checking
inputs to a model, formula or other
technique and recalculating the inputs
using the same methodology.

4. TIMELINESS
It is the desire to exercise care and
caution when dealing with the
uncertainties in the measurement
process.
ENHANCING QUALITATIVE
CHARACTERISTICS
1. COMPARABILITY

It is one of the enhancing qualitative
characteristics that enables users
identify and understand the similarities
and dissimilarities among items.

HORIZONTAL COMPARABILITY – it is
comparability within an entity.

INTERCOMPARABILITY OR
DIMENSIONAL COMPARABILITY – it is
comparability across entities.
2. UNDERSTANDABILITY
CHAPTER 4: CONCEPTUAL
FRAMEWORK (ELEMENTS OF
FINANCIAL STATEMENTS)
Elements of financial statements
Measurement of financial position:
 Asset
 Liability
 Equity
Measurement of financial performance:
 Income
 Expense
COMPARABILITY
CONSISTENCY
- Uniform application
of accounting method
from period to period
within an entity.
- It helps to achieve the
goal.

It means that the information should be
presented in a form that is
understandable to the user.
- Uniform application
of accounting method
between and across
entities in the same
industry.

The presentation of the information
must be clear and concise.
- It is the goal.

This characteristic is very essential
because a relevant and faithfully
represented information may prove
useless if it is not understood by users.
3. VERIFIABILITY
RECOGNITION OF ELEMENTS
1. ASSET RECOGNITION PRINCIPLE
Two conditions to consider:
 It implies consensus.
1. It is probable that future economic
benefits will flow to the entity.
 A financial information is verifiable if it
is supported by evidence.
2. The cost or value of the asset can be
measured reliably.
TYPES OF VERIFICATION:
1. Direct Verification – verifying an
amount through direct observation
COST PRINCIPLE – it requires that the assets be
measured initially at original cost or acquisition
cost.
2. LIABILITY RECOGNITION PRINCIPLE
Two conditions to consider:
1. It Is probable that an outflow of
economic benefits will be required for
the settlement of a present obligation
2. The amount of obligation can be
measured reliably.
3. INCOME RECOGNITION PRINCIPLE
•
Basic principle: income shall be
recognized when earned.
Two conditions to consider:
1. It is probable that future economic
benefits will flow to the entity as a
result of an increase in an asset or a
decrease in a liability.
2. The economic benefits can be
measured reliably.
POINT OF SALE:
4. EXPENSE RECOGNITION PRINCIPLE
•
Basic principle: expenses are recognized
when incurred.
TWO conditions to consider:
1. It is probable that a decrease in future
economic benefits has occurred as a
result of a decrease in an asset or an
increase in a liability.
2. The decrease in economic benefits can
be measured reliably.
MATCHING PRINCIPLE
•
It is applied in expense recognition
principle.
•
It requires that costs and expenses
incurred relating to a revenue shall be
reported in the same period.
Three applications of matching principle:
1. CAUSE AND EFFECT ASSOCIATION
•
Legal title to the goods passes to the
buyer at point of sale

Expense is recognized when the
revenue is already recognized
•
It is usually the point of delivery (actual
or constructive)

It is commonly referred to as matching
of cost with revenue.

Example: cost of merchandise
inventory, doubtful accounts, warranty
expense and sales commissions
EXCEPTIONS TO THE POINT OF SALE:
1. INSTALLMENT METHOD – revenue is
recognized at point of collection.
2. COST RECOVERY METHOD OR SUNK
COST METHOD – revenue is recognized
at point of collection.
3. PERCENTAGE OF COMPLETION
METHOD – contract revenue and
contract costs be recognized as revenue
and expenses based on the stage of
completion of the contract.
2. SYSTEMATIC AND RATIONAL
ALLOCATION

Costs are expensed by simply allocating
them over the periods benefited.

“when economic benefits are expected
to arise over several accounting periods
and the association with income can
only be broadly or indirectly
determined, expenses are recognized
on the basis of systematic and
allocation procedures.”

Examples: depreciation of ppe,
amortization of intangible assets,
4. PRODUCTION METHOD – revenue is
recognized at the point of production.
allocation of prepaid rent, insurance
and other prepayments
3. IMMEDIATE RECOGNITION
Expense is recognized immediately when:
1. An expenditure produces no future
economic benefit
2. Cost incurred does not qualify or ceases
to qualify for recognition as an asset
•
Examples: salaries of officers,
administrative expenses, advertising
and selling expenses
MEASUREMENT OF ELEMENTS
1. HISTORICAL COST (past purchase
exchange price)
2. CURRENT COST (current purchase
exchange price)
3. REALIZABLE VALUE (current sale
exchange price)
4. PRESENT VALUE (future exchange price)