LESSON I: ACCOUNTANCY PROFESSION & CONCEPTUAL FRAMEWORK

DEFINITION OF ACCOUNTING

Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgment and decision by users of the information. – American
Accounting Association

The very purpose of accounting is to provide quantitative information to be useful in

making economic decision.

Components:

1. Identifying – analytical component

2. Measuring – technical component
3. Communicating – formal component

Identifying. Recognition or non-recognition of business activities as “accountable” events.

Not all business activities are accountable.

An event is accountable or quantifiable when it has an effect on assets, liabilities and

equity.

The subject matter of accounting is economic activity. Economic activities are

transactions which may be classified as external and internal.

Measuring. Assigning of peso amounts to the accountable economic transactions and events.

The measurement bases are historical cost, current cost, realizable value and present value.
Historical cost is the most common measurement of financial transactions.

Communicating. Process of preparing and distributing accounting reports to potential users of

accounting information.

1. Recording or Journalizing. Process of systematically maintaining a record of all economic

business transactions after they have been identified and measured.

2. Classifying. Is the sorting or grouping of similar and interrelated economic transactions into
their respective classes.

3. Summarizing. Is the preparation of Financial Statements.

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 “Philippine Accountancy Act of 2004” is the law regulating the practice
of accountancy in the Philippines.

Board of Accountancy. Is the authorized by law to promulgate rules and regulations affecting
the practice of the accountancy profession in the Philippines.

Limitation of the practice of public accountancy

1. Accreditation from BOA and PRC

2. 3 years meaningful experience

3. SEC shall not register any corporation organized for the practice of public accountancy
LESSON I: ACCOUNTANCY PROFESSION & CONCEPTUAL FRAMEWORK

FOUR SECTORS OF THE ACCOUNTANCY PROFESSION

1. Public Accounting/Public Practice. Services offered Auditing. Taxation and Management

Advisory Services.

2. Private Accounting/Commerce and Industry. Objective is to assist management in planning

and controlling the entity’s operations.

3. Government Accounting. Its focus is the custody and administration of public funds.

4. Academe/Education.

Continuing Professional Development (CPD)

refers to the inculcation, assimilation and acquisition of knowledge, skill, proficiency,

and ethical and moral values after the initial registration of the Certified Public Accountant.

Exemptions from CPD

Permanently Exempted. CPA upon reaching the age of 65 years old.

Temporarily Exempted:

1. The CPA is working or practicing the profession or furthering studies abroad.

2. The exemption is for the duration of stay abroad.
3. The CPA has been out of the country for at least two years immediately prior
to the date of renewal of license and accreditation.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Represent the rules, procedures, practice and standards followed in the preparation
and presentation of financial statements. These are 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. It create a common understanding between preparers and users of FS particularly
the measurement of assets and liabilities. It is necessary to ensure comparability and
uniformity in financial statements based on the same financial information.

Composition of FRSC

Composed of 15 members with a Chairman who had been or is presently a senior

accounting practitioner 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
Major organization of preparers and users of FS
Financial Executives Institute of Phil. (FINEX) 1
Accredited national professional organization of CPSs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2
LESSON I: ACCOUNTANCY PROFESSION & CONCEPTUAL FRAMEWORK

The chairman and members of the FRSC shall have a term of 3 years and renewable for
another term. Any member of the ASC shall not be disqualified from being appointed to the
FRSC.
CONCEPTUAL FRAMEWORK

Financial Reporting and Assumptions

The Conceptual Framework for Financial Reporting is a complete, comprehensive and

single document promulgated by the IASB.
Is a summary of the terms and concepts that underlie the preparation and presentation
of financial statements for external users.
Is an attempt to provide an overall theoretical foundation for accounting which will
guide standard-setters, preparers and users of financial information in the preparation and
presentation of statements.
It is the underlying theory for the development of accounting standards and revision of
previously issued accounting standards.
It is concerned with general purpose financial statements, including consolidated
financial statements.

Purposes of Conceptual Framework

a. To assist the FRSC in developing accounting standards and reviewing existing
standards.
b. To assist preparers of financial statements in applying accounting standards and in
dealing with issues not yet covered by GAAp
c. To assist the FRSC in the review and adoption of IFRS
d. To assist users of financial statements in interpreting the information contained in
FS.
e. To assist auditors in forming an opinion as to whether financial statements conform
with Philippine GAAP.
f. To provide information to those interested in the work of FRSC in the formulation of
PFRS.

Authoritative status of Conceptual Framework

- Standards or Interpretation overrides the Conceptual Framework

- In the absence of Standard or interpretation, applicability of Conceptual Framework in
developing and applying accounting policy that results in information that is relevant
and reliable
- Conceptual Framework is not a Standard, It does not define standard
- Nothing in the Conceptual Framework overrides any specific standard.

Users of Financial Information

Primary Users
a. Existing and Potential Users
b. Lenders and Other Creditors
Other Users
a. Employees
b. Customers
c. Governments and other agencies
d. 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

A. Financial Reporting
Is the provision of financial information about an entity to external users that is useful
to them in making economic decisions and for assessing the effectiveness of the entity’s
management. It encompasses not only financial statements but also other information such as
financial highlights, summary of important financial figures, analysis of financial statements
LESSON I: ACCOUNTANCY PROFESSION & CONCEPTUAL FRAMEWORK

and significant ratios. It also include nonfinancial information such as description of major
products and a listing of corporate officers and directors.

Objective of Financial Reporting

- Forms the foundation of Conceptual Framework
- “Why”, purpose or goal of accounting
- Overall Objective 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.

Specific Objectives of Financial Reporting:

1. Provide information useful in decision making (Economic Decisions)
2. Assessing future cash flows
3. Economic resources and claims (Financial Position)
4. Changes in economic resources and claims (Financial Performance)

Accrual Accounting
Means that income is recognized when earned regardless of when received and expense
is recognized when incurred regardless of when 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. GPFR are not designated to show the value of an entity as a whole but it provide
information to help the primary user estimate the value of the entity
c. GPFR are intended to provide common information to users and cannot
accommodate every request for information.
d. GPFR are based on estimate and judgement rather than exact depiction.

UNDERLYING ASSUMPTIONS
Accounting assumptions/Postulates – basic notions or fundamental premises on which
the accounting process is based. It serve as the foundation or bedrock of accounting in order to
avoid misunderstanding but rather enhance the understanding and usefulness of the financial
statements.

Conceptual Framework for Financial Reporting mentions only One assumption – Going
Concern Assumption.

Basic assumptions: Accounting Entity, Time Period and Monetary Unit.

Going Concern Assumption

Means that in the absence of evidence to the contrary, the accounting entity is viewed
as continuing in operation indefinitely.
The very foundation of cost principle. Thus, assets are normally recorded at cost. As a
rule, market values are ignored.

Accounting Entity Assumption

The entity is separate from the owners, managers, and employees who constitute the
entity.

Time Period Assumption

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 Assumption

Has two aspects, namely quantifiability and stability of the peso.
Quantifiability – assets, liabilities, equity, income and expenses should be stated in
terms of a unit of measure (Philippine Peso)
Stability of Peso – Purchasing of the peso is stable or constant and that its instability is
insignificant and therefore may be ignored.