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)
a. Identifying as the analytical
component
b. Measuring as the technical
component
c. Communicating as the formal
component
IDENTIFYING

It is the recognition or nonrecognition 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.
■
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
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.
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
Scribd
Trusted by over 1 million members
Try Scribd FREE for 30 days to access over
125 million titles without ads or
interruptions!
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:
1.
Public Accounting 2.
Private Accounting 3.
Start Free Trial
Cancel Anytime.
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.”
The Accountancy Profession
■
Republic Act No. 9298
■
Government Accounting
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.
■
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.
■
To identify proper accounting practices for
the preparation and presentation of financial
statements.
YEAR
CPD CREDIT UNITS
2017 80 credit units 2018 100 credit units
2019 120 credit units
Here is the initial implementation of the 120
CPD 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.
■
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 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:
■
If a CPA has reached the age of
65 years old.
(this only applies to the renewal of the CPA
license)
GENERAL ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
■
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:
■
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.
■
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.
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)
■
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 replaces the International Accounting
Standards Committee (IASC)
■
It is a complete, comprehensive and single
document which is promulgated by the
International Accounting Standards Board
(IASB)
◦
It publishes the
International Financial Reporting Standards
(IFRS),
a standard in a series of pronouncements.
It is a summary of the terms and concepts
that underlie the preparation and
presentation of financial statements for
external users.
◦
these are the parties to whom the general
purpose financial reports are
primarily directed.
It is intended to guide standard-setters,
preparers and users of financial information
in the preparation and presentation of
statements.
PURPOSES OF CONCEPTUAL
FRAMEWORK:
◦
It includes the existing and potential
investors, lenders and other creditors.
OTHER USERS
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 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.
in the periods in which those effects occur
even if the resulting cash receipts and
payments occur in a different period.
◦
To provide information useful in assessing
the cash flow prospects of the entity 3.
It is to recognize the effects of transactions
and other events when they occur and not
as cash is received or paid.
◦
To provide information about entity
resources, claims and changes in resources
and claims.
USEFULNESS OF FINANCIAL
PERFORMANCE
◦
“Income is recognized when earned
regardless of when cash is received and
expense is recognized when incurred
regardless
of when cash is paid.”
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
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.
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
OTHER BASIC ASSUMPTIONS
ACCOUNTING ENTITY
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.
It is the specific business organization
(proprietorship, partnership or corporation)
◦
enhancing qualitative characteristics
APPLICATION OF THESE
CHARACTERISTICS:
a.
“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
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.
◦
Two Aspects: 1.
Quantifiability Aspect
–
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
Scribd
Trusted by over 1 million members
Try Scribd FREE for 30 days to access over
125 million titles without ads or
interruptions!
Start Free Trial
Cancel Anytime.
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
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.
“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.
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.”
SUBSTANCE OVER FORM
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.
“Don’t count your chicks until the eggs
hatch.”
F.
PRUDENCE
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 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.
Indirect Verification
–
it is checking inputs to a model, formula or
other technique and recalculating the inputs
using the same methodology. 4.
HORIZONTAL COMPARABILITY
–
it is comparability within an entity.
TIMELINESS
INTERCOMPARABILITY OR
DIMENSIONAL COMPARABILITY
–
it is comparability across entities. 2.
CHAPTER 4:
CONCEPTUAL FRAMEWORK
(ELEMENTS OF FINANCIAL
STATEMENTS)
Elements of financial statements
Measurement of
financial position:
UNDERSTANDABILITY
Asset
It means that the information should be
presented in a form that is understandable
to the user.
The presentation of the information must be
clear and concise.
This characteristic is very essential because
a relevant and faithfully represented
information may prove useless if it is not
understood by users. 3.
Liability
Equity
Measurement of
financial performance:
Income
VERIFIABILITY
Expense
RECOGNITION OF ELEMENTS
1.
It implies consensus.
ASSET RECOGNITION PRINCIPLE Two
conditions to consider:
1.
A financial information is verifiable if it is
supported by evidence.
TYPES OF VERIFICATION:
1.
Direct Verification
–
verifying an amount through direct
observation 2.
It is
probable
that future economic benefits will flow to the
entity. 2.
The cost or value of the asset can be
measured
reliably.
COST PRINCIPLE
–
it requires that the assets be measured
initially at original cost or acquisition cost.
COMPARABILITY
CONSISTENCY
- Uniform application of accounting method
between and across entities in the same
industry. - Uniform application of accounting
method from period to period within an
entity. - It is the goal. - It helps to achieve
the goal.
Legal title to the goods passes to the buyer
at point of sale
•
It is usually the
point of delivery
(actual or constructive)
EXCEPTIONS TO THE POINT OF SALE:
1.
INSTALLMENT
METHOD
2.
LIABILITY RECOGNITION PRINCIPLE Two
conditions to consider:
1.
–
revenue is recognized at
point of collection.
2.
COST
It Is
probable
that an outflow of economic benefits will be
required for the settlement of a present
obligation 2.
RECOVERY
METHOD
OR
The amount of obligation can be measured
reliably.
SUNK
3.
COST
INCOME RECOGNITION PRINCIPLE
•
METHOD
Basic principle:
income shall be recognized when earned.
Two conditions to consider:
1.
–
revenue is recognized at
point of collection.
3.
PERCENTAGE
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.
OF
COMPLETION
METHOD
The economic benefits can be measured
reliably.
POINT OF SALE:
•
–
contract revenue and contract costs be
recognized as revenue and expenses based
on the stage of completion of the contract.
4.
matching of cost with revenue.
PRODUCTION
METHOD
–
revenue is recognized at the
point of production.
Example: cost of merchandise inventory,
doubtful accounts, warranty expense and
sales commissions
2.
SYSTEMATIC AND RATIONAL
ALLOCATION
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.
•
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,
allocation of prepaid rent, insurance and
other prepayments
3.
IMMEDIATE RECOGNITION
Expense is recognized immediately when:
1.
It requires that costs and expenses incurred
relating to a revenue shall be reported in the
same period.
Three applications of matching principle: 1.
An expenditure produces no future
economic benefit 2.
CAUSE AND EFFECT ASSOCIATION
Cost incurred does not qualify or ceases to
qualify for recognition as an asset
•
Expense is recognized when the revenue is
already recognized
It is commonly referred to as
Examples: salaries of officers,
administrative expenses, advertising and
selling expenses
MEASUREMENT OF ELEMENTS
1.
HISTORICAL COST
REALIZABLE VALUE
(past purchase exchange price)
2.
(current sale exchange price)
4.
CURRENT COST
PRESENT VALUE
(current purchase exchange price)
3.
(
future exchange price)