CFAS: CHAPTER 1


ACCOUNTING
- the means by which we measure and describe the
results of business activities
- LANGUAGE OF BUSINESS
- communicates important financial
information in a standardized way
- used a set of book consisting of CASH BOOK, a
STOCK BOOK, a WAGE BOOK, and a BOOK OF INCOME
AND OUTGO

HISTORY OF ACCOUNTING

BABYLONIAN
- taxes were levied and collected here

2300 B.C.
400 B. C.
- an IMPROVED METHOD OF RECORD KEEPING was
developed in Europe: PAPYRUS (PAPER) and CALAMUS
(PEN)

850 AD

1340
- development of DECIMAL SYSTEM by the Arabs
- earliest known use of the
BOOKKEEPING SYSTEM in Genova

15th CENTURY
- published a book “SUMMA DE
ARITHMETICA
,
GEOMETRICA,
PROPORTIONI ET PROPORTIONALITA”
(EVERYTHING
ABOUT
ARITHMETIC,
GEOMETRY, AND PROPORTION)
- published the first record book in
accounting

1543
 HUGH
- wrote TREATISE ON ACCOUNTING

1581

RENAISSANCE

INDUSTRIAL REVOLUTION & COMPLEXITIES
OF BUSINESS & FINANCE
- FIRST ACCOUNTING ASSOCIATION WAS FORMED in
Italy
- DOUBLE-ENTRY BOOKKEEPING STARTED in Italy
- TABLES OF CLAY were used for recording temple
receipts and disbursements

1494
 LUCA PACIOLI
- as it is the system that measures
business activities, processes that
information
into
reports,
and
communicates the results to decisionmakers
- presents the health of a business
a service activity.
- function is to provide quantitative information,
primarily financial in nature, about economic entities,
that are intended to be useful in making economic
decisions.
1341
 MEDICI FAMILY
DOUBLE-ENTRY
- accounting as exists today may have its beginnings in
Italy
- give birth to accounting in the British Islands as well
as in Europe

18th CENTURY

19th CENTURY

1880
 ENGLAND
- a directory of Edinburgh listed several accountants
- “CHARTERED ACCOUNTANTS” were recognized in
Scotland
- recognized the title “CHARTERED ACCOUNTANTS”

1882
- FIRST QUALIFYING EXAMINATION was given

NEW YORK

1896
 STATE LEGISLATURE OF NEW YORK
- first U.S. state to regulate public accounting
- provided for the granting of the title “CERTIFIED
PUBLIC ACCOUNTANT” upon passing an examination
administered by the New York University

MARCH 17, 1923
 PHILIPPINES
- the accountancy profession was given a FORMAL
RECOGNITION when the government enacted a law to
regulate the practice of accountancy in the Philippines

P.D. 692

PHILIPPINE ACCOUNTANCY ACT OF 2004
- known as the REVISED ACCOUNTANCY LAW
- law GOVERNING THE PRACTICE OF ACCOUNTANCY IN
THE PHILIPPINES
NATURE OF ACCOUNTING

ACCOUNTING (WEBSTER)
- the system of recording and summarizing business and
financial transactions and analyzing, verifying, and
reporting the results.

COMMITTEE ON TERMINOLOGY OF THE
AMERICAN INSTITUTE OF ACCOUNTANTS
- defines as an art of recording, classifying, summarizing,
in a significant manner and in terms of money,
transactions, and events which are part, at least, of a
financial character and interpreting the results thereof.

FOUR DIFFERENT FUNCTIONS
1) RECORDING
- the setting down in WRITING ACCOUNTABLE
TRANSACTIONS AND EVENTS on the books or records
of the business on a SYSTEMATIC and
CHRONOLOGICAL ORDER
- WRITING THE EFFECTS OF THE TRANSACTIONS
2) CLASSIFYING
- means CATEGORIZING SIMILAR ITEMS INTO THE
SAME GROUP OR SAME NAME based on certain
characteristics or bases
- may be based on liquidity, permanent nature, or other
distinctions
- process of SORTING OR GROUPING OF SIMILAR
TRANSACTIONS AND EVENTS INTO SPECIFIC ACCOUNT
TITLES
3) SUMMARIZING
- means AGGREGATING AND CREATING A CONDENSED
VERSION OF THE RECORDED AND CLASSIFIED
INFORMATION
- usually done annually, semi-annually, quarterly,
monthly, or as required by the users of the information
- GROUPINGS THE VARIOUS ACCOUNTS referred to in
the classifying process
4) INTERPRETING
- means the EXPLANATION OF THE DATA recorded,
classified, and summarized
- involves the provision of assistance by the accountant
through
PREPARATION
OF
REPORTS
AND
EXPLANATIONS to aid understanding
- involves the COMPUTATION OF RELATIONSHIP OF
FIGURES
THE ACCOUNTING ENVIRONMENT
a) PROFIT-ORIENTED ENTERPRISES
- organized for the purpose of EARNING PROFIT
b) NON PROFIT ORIENTED ENTITIES
- are organized not for the purpose of earning but for
OTHER PURPOSES
FINANCIAL ACCOUNTING AND MANAGERIAL
ACCOUNTING
A. FINANCIAL ACCOUNTING
- primarily concerned with GENERATING GENERALPURPOSE REPORTS THAT SERVE PARTIES OUTSIDE THE
FIRM such as investors, creditors, government agencies
- for EXTERNAL USE
- a picture of how the business is doing
- report preparations are well-defined and restricted
B. MANAGERIAL ACCOUNTING
- produces information for INTERNAL USERS such as
managers and workers
- reports are prepared specifically for a particular user
for a particular decision
Targeted users
EXTERNAL
USERS
Restrictions on - well defined and
inputs
and restricted
processes
- only certain
kinds
of
economic events
qualify as inputs
and
processes
must
follow
generally
accepted
methods
Type
of - objective and
information
verifiable
financial
information
Time
orientation
- has a historical
orientation
- records and
reports
events
that have already
happened
Degree
of - overall firm
aggregation
performance,
providing a more
aggregated
viewpoint
Breadth
ACCOUNTABLE TRANSACTION OR EVENT
ACCOUNTING
FINANCIAL
MANAGERIAL
ACCOUNTING
ACCOUNTING
more
contained
self-
INTERNAL
USERS
- not subject to
standards

ACCOUNTABLE TRANSACTION OR EVENT
- means the EXCHANGE OF GOODS OR SERVICES FOR A
CERTAIN SUM OF MONEY
- for every transaction, there is VALUE RECEIVED and
an equal VALUE GIVEN or PARTED WITH
COMMON TYPES OF BUSINESS TRANSACTIONS
TRANSACTIONS
VALUE
VALUE PARTED
RECEIVED
WITH
- may be financial
or nonfinancial
and may be more
subjective
in
nature
- records and
reports
events
that have already
happened
emphasized
providing
information
about
future
events
- provides and
measures internal
reports used to
evaluate
the
performance of
entities, product
lines,
departments, and
managers
- very detailed
information
is
needed
and
provided
- much broader
- includes aspects
of
managerial
economics,
industrial
engineering, and
management
science, as well as
numerous other
areas
A. Collected cash
as payment for
services
rendered
B. Bought
computer
equipment for
company
use
paying cash
C. Bought
merchandise on
credit
D. Sale
of
merchandise on
credit
E. Sale
of
merchandise for
cash
F. Collection of
cash as payment
owing to the
business
G. Payment
of
debt owing to a
creditor
H. Payment
of
rental
I. Bought
merchandise for
cash
J. Payment
of
employees’
salaries
K. Rental
of
business
property
Cash
Service
Computer
equipment
Cash
Merchandise
Obligation to
pay
Right to collect
Merchandise
Cash
Merchandise
Cash
Release of the
right to collect
Cancellation of
the debt
Cash
Right to use the
property
Merchandise
Cash
Services
rendered by
employees
Right to collect
when due
Cash
Cash
Use of the
property
PRINCIPAL COMPONENT OF ACCOUNTING
PROCESS

ACCOUNTING PROCESS
- art of analyzing financial transactions and economic
events, recording them, classifying them into accounts,
summarizing them, reporting, and interpreting the
results.
- ACCUMULATION AND ANALYSIS OF RELEVANT
INFORMATION
and
the
eventual
REPORT
PREPARATION

PARTNERSHIP
- an association of two or more people as partners; it
refers to an arrangement in which the individuals share
the profits and liabilities of a business venture. (ARTICLE
1767 OF THE NEW CIVIL CODE OF THE PHILIPPINES)
- legal relationship among contracting parties
 TWO FORMS
1) GENERAL
COMPONENTS:
- equal decision making & unlimited liability
among partners.
a) IDENTIFYING
2) LIMITED
- RECOGNITION OR NON-RECOGNITION OF BUSINESS
ACTIVITIES AS ACCOUNTABLE EVENTS
- an event is accountable if it has an effect on the
economic resources and/or economic obligations of the
business
some non-active partners join as an
investment (and thus have limited liability-just
the investment, not the property). He is a “silent”
partner.
- ASSIGNING OF PESO AMOUNTS to the accountable
transactions and events
- expression of the economic impact of the event in
peso terms
c)





COMMUNICATING
- PREPARATION AND DISTRIBUTION OF ACCOUNTING
REPORTS to users of accounting information
- RECORDING, CLASSIFYING, SUMMARIZING
SOLE PROPRIETORSHIP
- one individual in business for himself.
- the simplest to form because of the small amount of
capital needed to start up.
 ADVANTAGES




Ease of start up
Ease of Management
You keep all profits
Ease of exit
 DISADVANTAGES




Unlimited Liability
Difficulty in raising financial capital
Limited managerial experience
Limited Life
Ease of establishment
Ease of Management:
Easier to raise financial capital
Larger than sole proprietorship
Easier to attract qualified workers
 DISADVANTAGES



FORMS OF BUSINESS ORGANIZATION

ADVANTAGES

b) MEASURING

Unlimited liability
Limited Life
Conflict between partners
CORPORATION
- an entity created by law that is separate and distinct
from its owners and its continued existence is
dependent upon the corporate statutes of the state in
which it is incorporated.
- 5 or more persons
 ADVANTAGES





Ease of raising financial capital
Ability to hire
Limited liability
Unlimited life
Ease of transferring ownership
 DISADVANTAGES


Start up expenses are high.
Profits are taxed

subject to more government regulations than
sole proprietors or partners
TYPES OF BUSINESS OPERATIONS

SERVICE BUSINESS
- provides intangible products (products with no
physical form). Service type firms offer professional
skills, expertise, advice, and other similar products.
- ex: salons, repair shops, schools, banks, accounting
firms, and law firms.

MERCHANDISING BUSINESS
- buys products at wholesale price and sells the same at
retail price. They are known as "buy and sell"
businesses. They make profit by selling the products at
prices higher than their purchase costs.
- sells a product without changing its form.
- ex: grocery stores, convenience stores, distributors,
and other resellers.

MANUFACTURING BUSINESS
- buys products with the intention of using them as
materials in making a new product. Thus, there is a
transformation of the products purchased.
- combines raw materials, labor, and factory
overhead in its production process. The manufactured
goods will then be sold to customers.

CERTIFIED PUBLIC ACCOUNTANT
- is a holder of a baccalaureate degree in
Bachelor of Science in Accountancy (BSA)
- passed the licensure examination for Certified Public
Accountants

BOARD OF ACCOUNTANCY
- employs strictness in the implementation of the
standards and regulations of the practice
- requires the registration of staff and partners of a CPA
firm
- we must comply with the accreditation requirements
with both the Professional Regulation Commission and
Board of Accountancy before we can be allowed
to practice public accountancy.
- responsible for preparing and grading the
Philippine CPA examination. The licensure examination
is offered twice a year, one in May and another one
in October, in authorized testing centers around the
country
FOUR MAIN AREAS OF PRACTICE FOR CPA
1) PRACTICE OF PUBLIC ACCOUNTANCY
- an accountant who engages in public accounting is not
an employee of a client company
a) EXTERNAL AUDITING
- centers on the critical examination of financial
statements by an independent CPA to express an
opinion regarding the fairness of the contents of
the financial statements
THE ACCOUNTANCY PROFESSION

PROFESSIONAL REGULATORY BOARD OF
ACCOUNTANCY
b) TAX SERVICES
- is the body authorized by law to PROMULGATE RULES
AND REGULATIONS CONCERNING THE PRACTICE OF
ACCOUNTANCY PROFESSION IN THE PHILIPPINES

REPUBLIC ACT 9298 (Philippine Accountancy
Act of 2004)
- signed into law by President Gloria MacapagalArroyo on May 13, 2004
- This law regulates the practice of Accountancy in the
Philippines
- repealed Presidential Decree 692, the Revised
Accountancy Law, which was enacted May 5, 1975
- deals with the accountant’s preparation of the
client’s income tax returns, business and transfer
taxes
c)
MANAGEMENT ADVISORY SERVICES
- gives advice regarding accounting, finance,
budgeting, business policies, organizational
procedures, product cost, distribution and
many other phases of business conduct and
operation.
2) PRACTICE IN COMMERCE AND INDUSTRY
- accountants who are employed in a private enterprise
or in a non-profit organization
- HIGHEST POSITION THAT CAN BE OCCUPIED:
CONTROLLER
a) FINANCIAL ACCOUNTING
- primarily concerned with the RECORDING AND
CLASSIFYING OF ACCOUNTABLE BUSINESS ACTIVITIES
UNTIL THE PREPATION OF FINANCIAL STATEMENTS
EXPERIENCE. Meaningful experience in the four areas
encompasses the following
MEANINGFUL EXPERIENCE
Commerce and Industry
b) INTERNAL AUDITING
- deals with the DETERMINATION OF OPERATIONAL
EFFICIENCY OF THE COMPANY regarding the protection
of the company’s assets, accuracy and reliability of
accounting data, and adherence to the prescribed
managerial policies
c)
TAX ACCOUNTING
- includes the PREPARATION OF VARIOUS TAX
RETURNS AND THEIR TAX PLANNING necessary to
minimize the impact of taxes on the firm
Academe/ Industry
d) COST ACCOUNTING
- deals with the COLLECTION, ALLOCATION, AND
CONTROL OF COST in producing specific goods or
services
Government
e) BUDGETING
- this area covers the EFFICIENT MANAGEMENT OF
CASH by anticipating or predicting monetary objective
in the future periods
3) PRACTICE IN EDUCATION/ACADEME
- involves teaching accounting, auditing, management
advisory services, finance, business law, taxation and
some business subjects
Public practice
4) PRACTICE IN GOVERNMENT
- mainly focus on the proper custody of government
funds and their purposes
ACCREDITATION TO PRACTICE PUBLIC
ACCOUNTANCY
CPAs in public accountancy who want to practice under
individual capacity, firm (sole proprietorship) or
partnership, shall first REGISTER WITH THE BOARD OF
ACCOUNTANCY AND PROFESSIONAL REGULATIONS
COMMISSION
One of the requirements for accreditation is the
ATTAINMENT OF THREE YEARS OF MEANINGFUL
Significant involvement in
GENERAL ACCOUNTING,
BUDGETING,
TAX
ADMINISTRATION,
INTERNAL
AUDITING,
LIAISON WITH EXTERNAL
AUDITORS, REPRESENTING
HIS/HER
EMPLOYER
BEFORE GOV’T AGENCIES
ON TAX
and matters
related to accounting
functions; or
TEACHING ACCOUNTING
AND
ACCOUNTING
RELATED SUBJECTS. The
accumulated
teaching
experience
on
these
subjects shall NOT BE LESS
THAN THREE SCHOOL
YEARS; or
Significant involvement in
GENERAL ACCOUNTING,
BUDGETING,
TAX
ADMINISTRATION,
INTERNAL
AUDITING,
LIAISON WITH THE CoA or
any
other
related
functiond
At least ONE YEAR AS
AUDIT ASSISTANT AND AT
LEAST TWO YEARS AS
AUDITOR IN CHARGE OF
AUDIT
ENGAGEMENT
covering
full
audit
functions of significant
clients
Issuance of Certificate of Recognition , which shall be
VALID FOR THREE YEARS AND RENEWABLE EVERY
THREE YEARS
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

THE GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
- refer to a common set of accounting principles,
standards, and procedures issued by the Financial
Accounting Standards Board (FASB).
- these principles are not laws, but are guidelines
determined primarily by the Financial Accounting
Standard Board (FASB) and its predecessor, the
Accounting Principles Board (APB).
- Provide the general framework for determining what
information is included in financial statements and how
this information is to be prepared and presented.
- FOR UNIFORMITY
- represent the RULES, PROCEDURES, PRACTICE AND
STANDARDS FOLLOWED IN THE PREPARATION AND
PRESENTATION OF FINANCIAL STATEMENTS
 AS APPLIED IN THE PHILIPPINES
 Philippine Financial Reporting Standards
(PFRS)
 Philippine Accounting Standards (PAS)
a) ACCOUNTING STANDARDS COUNCIL (ASC)
- approved statements were called STATEMENTS OF
FINANCIAL ACCOUNTING STANDARDS OR SFAS
b) PHILIPPINE
FINANCIAL
STANDARDS (PFRS)
1.
Charmain and members shall have a TERM OF 3 YEARS
RENEWABLE FOR ANOTHER TERM
INTERNATIONAL ACCOUNTING STANDARD
COMMITTEE
INTERNATIONAL ACCOUNTING STANDARD
COMMITTEE (IASC)
- an independent private sector body with the
OBJECTIVE OF ACHIEVING UNIFORMITY IN THE
 OBJECTIVE
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

MOVE TOWARD IAS
REPORTING
- replaced the ASC
- 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. NO. 9298
Board of Accountancy
1
Securities & Exchange Commission
1
Bangko Sentral ng Pilipinas
1
Bureau of Internal Revenue
1
Commission on Audit
1
Major Organization of Preparers and
1
Users of Financial Statements
Accredited National Professional
Organization of CPAs:
Public Practice
2
Commerce and Industry
2
Academe or Education
2
Government
2
8
Total
14

ACCOUNTING PRINCIPLES which are used by
businesses and other organizations for financial
reporting around the world
- FORMED IN JUNE 1973 through an agreement made
by professional accountancy bodies from Australia,
Canada, France, Germany, Japan, Mexico, Netherlands,
United Kingdom, Ireland, and the United States of
America
- headquarter: LONDON, UNITED KINGDOM
FACTORS CONSIDERED:
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 World Trade
Organization

INTERNATIONAL ACCOUNTING STANDARDS
BOARD
- replaces the IASC
- publishes it standards in a series of pronouncements
called “INTERNATIONAL FINANCIAL REPORTING
STANDARD” IFRS
- objective is to RAISE THE QUALITY AND CONSISTENCY
OF FINANCIAL REPORTING and to have a platform of
high quality and improved standards
USERS AND THEIR INFORMATION NEEDS
b) SUPPLIERS AND CRADE EDITORS
- ABILITY TO PAY SUPPLIERS ON TIME
- Granting of Credit Purchases
c)
- HOW THE BUSINESS PRICE ITS PRODUCTS
-Buying the Products
1) INTERNAL USERS
- Individuals inside the organization who plan, organize,
and run the business.
- accounting information is usually in the form of
management accounts, budgets, forecasts, and
financial statements
- include the board of directors, chief executive officers,
chief financial officers, vice presidents, internal auditors,
business unit managers, plant managers and the
supervisors
a) MANAGEMENT
- BUDGET VS. ACTUAL OPERATING EXPENSE
- Decision to improve or change operational
activities
b)
EMPLOYEES
- JOB SECURITY
- Increase in Salary and Benefits
c)
OWNERS
- FINANCIAL PROGRESS AND STATUS OF THE
BUSINESS
- Additional Investment, Expansion and
Borrowing Funds
2) EXTERNAL USERS
- Individuals or organizations outside the company who
are not involved in operating the business.
- individuals and others that have current or potential
financial interest in the reporting entity but are not
involved in the daily operations of the entity
- only the primary or general-purpose information are
provided
- include owners, stockholders creditors, customers,
suppliers, government agencies, potential investors,
brokers, trade associations, and the public
a) GOVERNMENT AGENCIES
- SALES AND NET INCOME
- Collection of the Right Taxes
CUSTOMERS
d) LENDERS(BANKS AND FINANCIAL INSTI.)
- CREDIT WORTHINESS
- Granting of Business Loans
e) INVESTORS
- RETURN ON INVESTMENT
- Decision to Invest
f)
PUBLIC
- financial statements may assist the public by
providing information about the trends and recent
developments in the prosperity of the enterprise and
the range of its activities.
QUALITATIVE CHARACTERISTICS OF
INFORMATION IN FINANCIAL STATEMENTS
1) FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
a) RELEVANCE
- information provided must be relevant to the
decision-making needs of users
- capable of influencing the economic decisions of users
- INFORMATIONS MUST HAVE A DIRECT BEARING ON
A DECISION
i.
ii.
PREDICTIVE VALUE
- it HELPS DECISION-MAKERS
CERTAIN OUTCOME
PREDICT
CONFIRMATIVE VALUE
- it CONFIRMS OR CHANGES PREVIOUS
EVALUATIONS
iii. MATERIALITY
- if its OMISSION OR MISSTATEMENT COULD
INFLUENCE THE ECONOMIC DECISIONS OF
USERS made on the basis of the financial
statements
- related to BOTH THE NATURE OF AN ITEM
AND ITS SIZE OR MISSTATEMENT
- determined by RELATING ITS PESO VALUE
TO AN ELEMENT OF THE FINANCIAL
STATEMENTS
b)FAITHFUL REPRESENTATION
- TRUTHFUL EXPRESSIO OF WHAT REALLY HAPPENED
OR EXISTED
i.
ii.
COMPLETENESS
- PROVIDES ALL INFORMATION NECESSARY FOR
A RELIABLE DECISION
- must be complete within the bounds of
materiality and cost
KNOWLEDGE BUSINESS AND ECONOMIC ACTIVITIES
AND ACCOUNTING AND A WILLINGNESS TO STUDY
THE INFORMATION WITH REASONABLE DILIGENCE
- does not allow relevant information to be omitted on
the grounds that it may be too difficult for some users
to understand
3) ACCOUNTING CONVENTIONS
- accountants MUST PREPARE FINANCIAL STATEMENTS
IN ACCORDANCE WITH ACCEPTED PRACTICES
i.
NEUTRALITY
- FREE FROM BIAS intended to achieve a certain
result or to bring about a particular behavior
iii. FREE FROM MATERIAL ERROR
- INFORMATION MEETS A MINIMUM LEVEL OF
ACCURACY so it does not distort what is being
reported
2) ENHANCING QUALITATIVE CHARACTERISTICS
- refers to the FORM OR PRESENTATION OF THE
FINANCIAL INFORMATION
a) COMPARABILITY
- users must be able to COMPARE THE FS OF AN
ENTITY THROUGH TIME TO IDENTIFY TRENDS IN
ITS FINANCIAL POSITION AND PERFORMANCE, AS
WELL AS TO EVALUATE THEIR RELATIVE
FINANCIAL POSITION, PERFORMANCE, AND CASH
FLOWS
b)VERIFIABILITY
is
the
QUALITY
THAT
DIFFERENT
KNOWLEDGEABLE AND INDEPENDENT OBSERVERS
COULD REACH CONCENSUS, although not
necessarily mean complete agreement, that a
particular depiction is a faithful representation
c) TIMELINESS
-involves PROVIDING THE INFORMATION WITHIN THE
DECISION TIME FRAME
d) UNDERSTANDABILITY
- the information provided in the financial statements
should be presented in a way that MAKES IT
COMPREHENSIBLE BY USERS WHO HAVE REASONABLE
ii.
CONSISTENCY
- requires that ONCE A COMPANY HAS ADOPTED
AN ACCOUNTING PROCEDURE, IT MUST BE USE
FORM ONE PERIOD TO THE NEXT unless a note
to the financial statements informs users of
change
FULL DISCLOSURE (TRANSPARENCY)
- requires that
FINANCIAL STATEMENTS
PRESENT ALL THE INFORMATION RELEVANT TO
THE USERS’ UNDERSTANDING OF THE
STATEMENTS
iii. CONSERVATISM OR PRUDENCE
- INCLUSION OF A DEGREE OF CAUTION IN THE
EXERCISE OF THE JUDGMENTS NEEDED IN
MAKING THE ESTIMATES REQUIRED UNDER
CONDITIONS OF UNCERTAINTY
- does not allow the deliberate understatement
of assets or income, or the deliberate
overstatement of liabilities or expenses
- DOES NOT PERMIT BIAS
OTHER CONCEPTS INVOLVING FINANCIAL
INFORMATION
1) SUBSTANCE OVER FORM
- transactions and other events and conditions should
be ACCOUNTED FOR AND PRESENTED IN ACCORDANCE
WITH THEIR SUBSTANCE AND NOT MERELY THEIR
LEGAL FORM
- entails the USE OF JUDGMENT ON THE PART OF THE
PREPARERS of the financial statements in order for
them to derive the business sense from the
transactions and events and to present them in a
manner that best reflect their true essence
- legal aspects of transactions may have to be
disregarded at times
2) COST-BENEFIT ANALYSIS
- THE BENEFITS DERIVED FROM INFORMATION
SHOULD EXCEED THE COST OF PROVIDING IT

CONCEPTUAL FRAMEWORK AND
UNDERLYING ASSUMPTIONS
- is a SUMMARY OF THE TERMS AND CONCEPTS that
underlie the preparation and presentation of financial
statements for EXTERNAL USERS
- an attempt to PROVIDE AN OVERALL THEORETICAL
FOUNDATION FOR ACCOUNTING

ACCOUNTING ASSUMPTIONS
- are the BASIC NOTIONS OR FUNDAMENTAL
PREMISES ON WHICH THE ACCOUNTING PROCESS IS
BASED
- FOUNDATION OF ACCOUNTING to avoid
misunderstanding
1) ACCOUNTING ENTITY CONCEPT
- assumes that a business enterprise is separate and
distinct from its owner or investor
- business transaction is recorded; personal transaction
is not recorded
2) GOING CONCERN
- it is expected that the business will continue to exist
indefinitely thus financial statements should be
prepared on a going concern basis.
- Business entity is assumed to remain in existence for
an indefinite period of time
3) TIME PERIOD
- the enterprise need to prepare periodic financial
statements.
- giving periodic reports


Calendar year – jan 1 - Dec.
31
Fiscal year –starting year + 12
consecutive months
4) ACCRUAL ASSUMPTION
- requires that financial statements be prepared under
accrual basis.
- Recognize as they occur, and not when cash or cash
equivalent is paid
5) MONETARY UNIT
- all business transactions are measured and recorded
using only one unit of measurement
- consistency in the currency
- If not express monetary – don’t record
- Non-financial – don’t record
ACCOUNTING PRINCIPLES
1) COST PRINCIPLE
- assets, liabilities, revenues and expenses should be
recorded based on cost.
refers to the amount spent when an item was
originally obtained, whether that purchase
happened last year or ten years ago
- cash transaction: cost = cash payment
- non cash transaction: cost = fair market value
2) MATCHING PRINCIPLE
- when revenue is reported, all costs and expenses
incurred to earn that revenue should also be reported
in THE SAME PERIOD
3) REVENUE RECOGNITION PRINCIPLE
- revenue should be recognized when earned
- POINT OF A SALE = POINT OF REVENUE RECOGNITION
-TWO CONDITIONS:
1. It is probable that future economic benefits will flow
to the enterprise
2. The economic benefit can be measured reliably