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OVERVIEW OF ACCOUNTING

FRANCIS H.VILLAMIN
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OVERVIEW OF ACCOUNTING

Learning Objectives
• Define accounting and state its basic purpose.
• Explain the basic concepts applied in accounting.
• State the branches of accounting and the sectors in the
practice of accountancy.
• Explain the importance of a uniform set of financial reporting
standards.
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DEFINITION OF ACCOUNTING

• Accounting is “the process of identifying,

measuring, and communicating
economic information to permit informed
judgment and decisions by users of
information.”
4 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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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.
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TYPES OF EVENTS

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.
7 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.
8 VALUATION BY FACT OR
OPINION
• 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.
9 BASIC PURPOSE OF
ACCOUNTING

• The basic purpose of accounting is to

provide information about economic
activities intended to be useful in
making economic decisions.
 TYPES OF ACCOUNTING
10 INFORMATION CLASSIFIED AS TO
USERS’ NEEDS
• 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, e.g., managerial accounting, tax basis
accounting, etc.
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BASIC ACCOUNTING CONCEPTS
• 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 series
of reporting periods.
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BASIC ACCOUNTING CONCEPTS

• 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.
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BASIC ACCOUNTING CONCEPTS

• 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.
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BASIC ACCOUNTING CONCEPTS

• 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.
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BASIC ACCOUNTING CONCEPTS

• 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.
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BASIC ACCOUNTING CONCEPTS

• 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.”
• Fund theory – the accounting objective is the custody and
administration of funds.
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BASIC ACCOUNTING CONCEPTS

• Realization – the process of converting non-cash assets

into cash or claims for cash.
• Prudence (Conservatism) – the inclusion of a degree of
caution in the exercise of the judgments needed in
making the estimates required under conditions of
uncertainty , such that assets or income are not
overstated and liabilities or expenses are not
understated.
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COMMON BRANCHES OF ACCOUNTING

• 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.
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COMMON BRANCHES OF ACCOUNTING

• Tax accounting - the preparation of tax returns and

rendering of tax advice, such as the determination of tax
consequences of certain proposed business endeavors.
• 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.
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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.
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FOUR SECTORS IN THE PRACTICE OF
ACCOUNTANCY

3. 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.
4. 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.
22 LEGAL FRAMEWORK OF
ACCOUNTANCY PROFESSION
• RA 9298 (Philippine Accountancy Act of 2004
and its Implementing Rules and Regulations)
• RA 10912 (Continuing Professional
Development) – law mandating and strengthening
the continuing professional development program
for all registered professions, including the
accountancy profession.
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CPD UNITS
- 120 CPD units
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ETHICAL FRAMEWORK
• 2018 Revised Code of Ethics for Professional
Accountants in the Philippines
(patterned from 2016 IFAC Code of Ethics)
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FUNDAMENTAL ETHICAL
PRINCIPLES
• Professional Competence and Due Care
• Objectivity
• Professional Behavior
• Integrity
• Confidentiality
26 ACCOUNTING STANDARDS
IN THE PHILIPPINES
• 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
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THE NEED FOR REPORTING STANDARDS

• 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.
28 FINANCIAL REPORTING AND
STANDARD SETTING PROCESS

• Accounting standards that originated from the

works of IAS Committee or revised by the IASB
are known as International Accounting Standards.
• Accounting standards that originated from the
works of the IASB are called International Financial
Reporting Standards.
29 INTERNATIONAL FINANCIAL
REPORTING STANDARDS

• Specific International Financial Reporting

Standards
• Interpretations made by the International
Financial Reporting Interpretations Committee
(IFRIC), the body that interprets the works of the
IASC
30 INTERNATIONAL FINANCIAL
REPORTING STANDARDS

• International Accounting Standards

• Interpretations made by the Standing
Interpretations Committee (SIC), the body that
interpreted the works of the IAS Committee
31 STANDARD SETTING PROCESS
ADOPTED BY IASB
1. Setting the agenda
2. Planning the project
3. Developing and publishing the discussion paper
4. Developing and publishing the exposure draft
5. Developing and publishing the standard
6. Issuance of the standard
32 PHILIPPINE FINANCIAL REPORTING
STANDARDS

• Specific Philippine Financial Reporting Standards

• Philippine Accounting Standards (PAS), which are
adopted from the IASs
• Philippine Interpretations, which are adopted
from the interpretations of the IFRIC and the
SIC and the interpretations of the PIC.
33 PHILIPPINE FINANCIAL REPORTING
STANDARDS

- Set out the recognition, measurement,

presentation and disclosure requirements dealing
with transactions and events that are important
in general-purpose financial transactions.
- Set out such requirements for transactions and
events that arise mainly in specific industries.
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DUE PROCESS OF PFRS
1. Consideration of pronouncement of IASB
2. Formation of task force, when deemed
necessary, to give advice to FRSC.
3. Issuing for comment an exposure draft
approved by a majority of FRSC members;
comment period will be at least 60 days, unless
a shorter period (not less than 30 days)
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DUE PROCESS OF PFRS
4. Consideration of all comments received within
the comment period and when appropriate,
preparing a comment letter to the IASB.
5. Approval of a standard or an interpretation by a
majority of the FRSC members.
36 PHILIPPINE FINANCIAL REPORTING
STANDARDS
Philippine Financial Reporting Standards (PFRSs)
PFRS 1 First-time Adoption of Philippine Financial Reporting Standards
PFRS 2 Share-based Payment
PFRS 3 Business Combinations
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations
PFRS 6 Exploration for and Evaluation of Mineral Resources
PFRS 7 Financial instruments: Disclosures
PFRS 8 Operating Segments
PFRS 9 Financial Instruments
PFRS 10 Consolidated Financial Statements
PFRS 11 Joint Arrangements
PFRS 12 Disclosure of Interests in Other Entities
PFRS 13 Fair Value Measurement
PFRS 14 Regulatory Deferral Accounts
PFRS 15 Revenue From Contracts With Customers
PFRS 16 Leases
PFRS 17 Insurance Contracts
37 PHILIPPINE FINANCIAL
REPORTING STANDARDS
Philippine Accounting Standards (PASs)
PAS 1 Presentation of Financial Statements
PAS 2 Inventories
PAS 7 Statement of Cash Flows
PAS 8 Accounting Policies: Changes in Accounting Estimates and Errors
PAS 10 Events after the Balance Sheet Date
PAS 12 Income Taxes
PAS 16 Property, Plant and Equipment
PAS 19 Employee Benefits
PAS 20 Accounting for Government Grants and Disclosure of Government Assistance

PAS 21 The Effects of Changes in Foreign Exchange Rates

PAS 23 Borrowing Costs
PAS 24 Related Party Disclosures
PAS 26 Accounting and Reporting by Retirement Benefit Plans
PAS 27 Separate Financial Statements
PAS 28 Investments in Associates and Joint Ventures
PAS 29 Financial Reporting in Hyperinflationary Economies
PAS 32 Financial Instruments: Disclosure and Presentation
PAS 33 Earnings per Share
PAS 34 Interim Financial Reporting
PAS 36 Impairment of Assets
PAS 37 Provisions, Contingent Liabilities and Contingent Assets
PAS 38 Intangible Assets
PAS 40 Investment Property
PAS 41 Agriculture
38 FINANCIAL REPORTING FRAMEWORK
• On March 22, 2018, the Philippine SEC approved the adoption of the PFRS for
Small Entities.
• On March 26, 2018, the SEC issued SEC Memorandum Circular No. 5, Series of
2018, amending Part 1, Section 2 of SRC Rule 68, As Amended. Summarized
below are the framework applicable to each type of entity (quantitative criteria
are in millions):

Entities* Total assets Total liabilities Framework

Large >₱350 >₱250 PFRS
Medium-sized >₱100 - ₱350 >₱100 - ₱250 PFRS for SME
PFRS for
Small ₱3 - ₱100 ₱3 - ₱100
Small
Entities
Income tax basis or
Micro <₱3 <₱3 PFRS for Small
Entities
*Publicly-accountable entities have no quantitative criteria
39 SMALL ENTITIES
WHAT? What are small entities? (SRC Rule 68, As Amended)
 Small entities are those that meet all of the following criteria:
Quantitative characteristics
A Total assets ₱3 million - ₱100 million, or
Total liabilities ₱3 million - ₱100 million
If the entity is a parent company, the said amounts shall be based on the
B
consolidated figures.
Qualitative characteristics

C Not required to file financial statements under Part II of SRC Rule 68;

Not in the process of filing their financial statements for purpose of

D
issuing any class of instruments in public market; and

E Not holders of secondary licenses issued by regulatory agencies

40 OBJECTIVE OF FINANCIAL
REPORTING

• To communicate financial information that

achieves transparency, accountability and
efficiency to financial markets around the world.
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