LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
Accounting and its Purpose
What is Accounting?
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According to ASC(Accounting Standards Council)
Accounting is a service activity.
The function is to provide quantitative information, primarily financial in nature,
about economic entities, that is intended to
be useful in making economic decisions.
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According to AAA(American Association of Accountants)
Accounting is “the process of identifying, measuring, and communicating
economic information to permit informed judgment and decisions by users of
information.”
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According to The Committee on Accounting terminology of AICPA
(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.
Three important activities
1. Identifying - the process of analyzing events and transactions to
determine whether or not they will be recognized. Only accountable
events are recognized.
2. Measuring - involves assigning numbers, normally in monetary terms, to
the economic transactions and events.
3. Communicating - the process of transforming economic data into useful
accounting information, such as financial statements and other
accounting reports, for dissemination to users.
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LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
Types of Events
1. External events – events that involve an external party.
a. Exchange (reciprocal transfer) – reciprocal giving and
receiving
b. Non-reciprocal transfer – “one way” transaction
c. External event other than transfer – an event that involves
changes in the economic resources or obligations of an entity
caused by an external party or external source but does not
involve transfers of resources or obligations.
2. Internal events – events that do not involve an external party.
a. Production – the process by which resources are transformed
into finished goods.
b. Casualty – an unanticipated loss from disasters or other similar
events.
Measurement
The several measurement bases used in accounting include, but not
limited to, the following:
1. Historical cost,
2. Fair value,
3. Present value,
4. Realizable value,
5. Current cost, and
6. Sometimes inflation-adjusted costs.
The most commonly used is historical cost. This is usually combined
with the other measurement bases. Accordingly, financial statements are said to
be prepared using a mixture of costs and values.
Valuation by fact or opinion
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When measurement is affected by estimates, the items measured are
said to be valued by opinion.
When measurement is unaffected by estimates, the items measured
are said to be valued by fact.
LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
Objective and purpose 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.
In a sense, accounting is to provide information about economic
activities intended to be useful in making economic decisions.
Types of accounting information classified as to users’ needs
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General purpose accounting information - designed to meet the
common needs of most statement users. This information is governed by
the Philippine Financial Reporting Standards (PFRSs).
Special purpose accounting information - designed to meet the specific
needs of particular statement users. This information is provided by
other types of accounting users, e.g. managerial accounting, tax basis
accounting, etc.
Accounting Concepts
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Double-entry system – each accountable event is recorded in two parts
– debit and credit.
Going concern - the entity is assumed to carry on its operations for an
indefinite period of time.
Separate entity – the entity is treated separately from its owners.
Stable monetary unit - amounts in the financial statements are stated in
terms of a common unit of measure; changes in purchasing power are
ignored.
Time Period – the life of the business is divided into a series of reporting
periods.
Materiality concept – information is material if its omission or
misstatement could influence economic decisions.
Cost-benefit – the cost of processing and communicating information
should not exceed the benefits to be derived from it.
LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
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Accrual Basis of accounting – effects of transactions are recognized
when they occur (and not as cash is received or paid) and they are
recognized in the accounting periods to which they relate.
Historical cost concept – the value of an asset is determined on the
basis of acquisition cost.
Concept of Articulation – all of the components of a complete set of
financial statements are interrelated.
Full disclosure principle – financial statements provide sufficient detail
to disclose matters that make a difference to users, yet sufficient
condensation to make the information understandable, keeping in mind
the costs of preparing and using it.
Consistency concept – financial statements are prepared on the basis
of accounting policies which are applied consistently from one period to
the next.
Matching – costs are recognized as expenses when the related revenue
is recognized.
Residual equity theory – this theory is applicable where there are two
classes of shares issued, ordinary and preferred. The equation is
“Assets – Liabilities – Preferred Shareholders’ Equity = Ordinary
Shareholders’ Equity.”
Branches of Accounting
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Financial accounting - focuses on general purpose financial
statements.
Management accounting – focuses on special purpose financial
reports for use by an entity’s management.
Cost accounting - the systematic recording and analysis of the costs of
materials, labor, and overhead incident to production.
Auditing - the process of evaluating the correspondence of certain
assertions with established criteria and expressing an opinion thereon.
Tax accounting - the preparation of tax returns and rendering of tax
advice, such as the determination of tax consequences of certain
proposed business endeavors.
LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
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Government accounting - refers to the accounting for the government
and its instrumentalities, placing emphasis on the custody of public
funds, the purposes for which those funds are committed, and the
responsibility and accountability of the individuals entrusted with those
funds.
Four sectors in the practice of Accountancy
1. Practice of Public Accountancy - involves the rendering of audit or
accounting related services to more than one client on a fee basis.
2. Practice in Commerce and Industry - refers to employment in the
private sector in a position which involves decision making requiring
professional knowledge in the science of accounting and such position
requires that the holder thereof must be a CPA.
3. Practice in the Government - employment or appointment to a position
in an accounting professional group in the government or in a
government–owned and/or controlled corporation where decision making
requires professional knowledge in the science of accounting, or where
civil service eligibility as a CPA is a prerequisite.
4. Practice in Education/Academe - employment in an educational
institution which involves teaching of accounting, auditing, management
advisory services, finance, business law, taxation, and other technically
related subjects.
The Accountancy Profession
Republic Act No. 9298 (Philippine Accountancy Act of 2004) - is the
law regulating the practice of accountancy in the Philippines.
● Accountancy has developed as a profession attaining a status equivalent
to that of law and medicine.
● To qualify to practice the accountancy profession, a person must finish a
degree in BSA and pass a very difficult government examination given
by BOA (Board of Accountancy).
● The BOA is the body authorized by law to promulgate rules and
regulations offering the practice of accountancy profession in the
Philippines.
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LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
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The BOA is responsible for preparing and grading the Philippine CPA
exam.
How BOA grades the CPA Exam:
○ There are 6 subjects included in the CPA exam: MAS, FAR,
AFAR, Auditing, Law, Taxation
○ Where the general rules to pass the exam are: (1) must have a
general average of 75; (2) no subjects should have a grade lower
than 65; [FOR CONDITIONAL PASSERS] (3) average of majority
subjects, 4 subjects, is 75 and scores obtained in each of those
subjects is at least 75
Limitation of the Practice of Public Accounting
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Single practitioners and partnerships for the practice of public
accountancy shall be registered CPA in the Philippines
Certificate of accreditation shall be issued to CPAs in public practice only
once showing compliance with BOA and approved by PRC that such
registrant has acquired a minimum of three years of meaningful
experience in any of the areas of public practice including taxation.
SEC shall not register any corporation organized for the practice of
public accountancy.
Continuing Professional Development (CPD)
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Republic Act No. 10912 is the law mandating and strengthening the
CPD program for all regulated professions, including accountancy
profession.
CPD refers to the inculcation and acquisition of advanced knowledge,
skill, proficiency, and ethical and moral values after the initial registration
All CPAs regardless of area or sector of practice shall comply with 120
CPD units. Excess credit units shall not be carried over except those
earned for Masteral and Doctoral degrees.
Only 15 units are required for the renewal of CPA license. Exemption
applies only to those CPAs reaching the age of 65.
LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
Accounting Standards
The Generally Accepted Accounting Principles
● GAAP are rules and procedures by developed accountants in recording
transactions on the basis of experience, reason, custom, usage and
practical necessity.
● It represents rules, procedures, practice standards followed by
preparation and presentation of financial statements.
● These are like laws that must be followed in financial reporting.
● Establishing GAAP is a political process that incorporates political
actions of users, professional judgment and research.
Accounting Standards in the Philippines
Financial Reporting Standards Council (FRSC) replaces the ASC
(Accounting Standard Council)
● The accounting standard setting body created by PRC upon
recommendation of BOA to assist them in carrying out its powers and
functions as indicated in R.A. Act. No. 9298.
● Its main function is to establish and improve accounting standards that
will be generally accepted in the Philippines.
● Approved statements are known as PFRSs.
FRSC is composed of 15 members with a chairman 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
Financial Executives Institute of the Philippines
1
CPAs in:
Public Practice
2
Commerce and Industry
2
Government
2
Education/Academe
2
Total
14
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LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
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Philippine Financial Reporting Standards (PFRSs) are Standards and
Interpretations adopted by the Financial Reporting Standards Council
(FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations
International Organizations
International Accounting Standards Committee (IASC) is an
independent private sector body, with the objective of achieving uniformity in the
accounting principles which are used by the business and other organizations
for financial reporting around the world. It was formed in June 1973 with the
following
objectives:
a. To formulate and publish in the public interest accounting standards to
be observed in the presentation of FS and to promote worldwide
acceptance and observance.
b. To work generally for the improvement and harmonization of
regulations, accounting standards and procedures relating to the
presentation of FS
International Accounting Standards Board (IASB) replaces
International Accounting Standards Committee (IASC)
● It publishes standards in a series of pronouncements called International
Financial Reporting Standards (IFRS) and continued to be designated
as International Accounting Standards (IAS)
● It has adopted the body of standards issued by the IASC.
● Its standard setting-process includes in the correct order research,
discussion paper, exposure draft and accounting standard.
Moving Towards IFRS
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In developing accounting standards that will be generally accepted in
the Philippine standards issued by other standard setting bodies such as
USA Financial Accounting Standard Board (FASB) and IASB are
considered.
LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
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At present, the FRSC has adopted in its entirety all International
Accounting Standards and International Financial Reporting
Standards.
The move toward IFRS is essential to achieve the goal of one uniform
and globally accepted financial reporting standards. The Philippines
is fully compliant with IFRS effective January 2005, a process started
back in 1997.
Factors to consider to move totally to International Accounting
Standards
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Support of international accounting standards by Philippine
organizations.
Increasing internalization of business which has heightened interest in a
common language for financial reporting.
Improvement of international accounting standards or removal of free
choices of accounting treatments.
Increasing recognition of International accounting standards by the
World Bank, Asian Development Bank and World Trade Organization.
International Financial Interpretations Committee(IFRIC) is a
committee that prepares interpretations of how specific issues should be
accounted under the application of IFRS where:
a. The standards do not include specific authoritative guidance; and
b. There is a risk of divergent and unacceptable accounting practices
— is composed mostly of technical partners in audit firms but also includes
prepares and users. In 2002, It replaced the former Standing Interpretations
Committee (SIC) which had been created by the IASC.
*Philippine Interpretations Committee (PIC) was formed by the FRSC
in August 2006 replacing Interpretations Committee (IC), formed by the
Accounting Standard Council.
● Its role is to prepare interpretations of PFRS for approval by the FRSC
and to provide timely guidance of financial reporting issues not
specifically addressed in current PFRS.
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LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
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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.
IFRs Advisory Council (previously as Standards Advisory Council SAC) is a group of organizations and individuals with
interest in international financial reporting.
— Its role includes advertising on priorities within IASB’s work program and is
required to consult the Advisory Council in advance of any board decisions on
major projects that wish to add to its agenda.
International Federation of Accountants (IFAC) is a non-profit,
non-governmental, non-political organization of the accountancy bodies that
represents the worldwide accountancy profession.
— Its mission is to develop and enhance the profession to provide services
consistently high quality in public interest.
International Organization of Securities Commissions (IOSCO) is an
international body of security commissions. The Philippine SEC is a member of
IOSCO.
Uniform Standards
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Entities should follow a uniform set of generally acceptable reporting
standards when preparing and presenting financial statements;
otherwise, financial statements would be misleading.
The term “generally acceptable” means that either:
a. the standard has been established by an authoritative accounting
rule-making body; or
b. the principle has gained general acceptance due to practice over
time and has been proven to be most useful.
The process of establishing financial accounting standards is a
democratic process in that a majority of practicing accountants must
agree with a standard before it becomes implemented.
LESSON 1: INTRODUCTION TO ACCOUNTANCY
Conceptual Framework in Accounting Standards
BS Accountancy | 1st Semester, 2022
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The overall purpose of accounting standards is to identify proper
accounting practices for preparation and presentation of financial
statements.
It creates a common understanding between preparers and users of
FS especially measuring assets and liabilities.
A set of high quality standards is a necessity to ensure comparability
and uniformity on FS base on same financial information