Chapter 1

The Accountancy Profession

Definition of Accounting

Accounting Standards Council

 Accounting is a service activity.

 The accounting function is to provide quantitative information, primarily financial in nature,
about economic entities, that is intended to be useful in making economic decision.

Committee on Accounting Terminology of the American Institute of Certified Public

Accountants
 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 judgement and decision by users of the information.

Important Points

1. Accounting is about quantitative information.

2. The information is likely to be financial in nature.
3. The information should be useful in decision making.

a. Identifying as the analytical component.

b. Measuring as the technical component.
c. Communicating as the formal component.

Identifying

 This accounting process is the recognition or nonrecognition 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.
 Sociological and psychological matters are beyond the province of accounting.

External and Internal Transactions

Examples of External transactions:

a. Purchase of goods from a supplier

b. Borrowing money from a bank
c. Sale of goods to a customer
d. Payment of salaries to employees
 e. Payment of taxes to the government

Internal Transactions

 Economic activities that take place entirely within the entity.

 Production is the process by which resources are transformed into products.
 Casualty is any sudden and unanticipated loss from fire, flood, earthquake and other event
ordinarily termed as an act of God.

Measuring

 This accounting process is the assigning of peso amounts to the accountable economic
transactions and events.
 If the accounting information is to be useful, it must be expressed in terms of a common
financial denominator.
 Financial statements without monetary amounts would be largely unintelligible or
incomprehensible.
 The measurement bases are historical cost, current cost, realizable value, and present value.
 Historical cost is the most common measure of financial transactions.

Communicating

 It is the process of preparing and distributing accounting reports to potential users of

accounting information.
 Implicit in the communication process are the recording, classifying and summarizing aspects of
accounting.
 Recording or journalizing is the process of systematically maintaining a record of all economic
business transactions after they have been identified and measured.
 Classifying is the sorting or grouping of similar and interrelated economic transactions into their
respective classes. Classifying is accomplished by posting to the ledger.
 The ledger is group of accounts which are systematically categorized into asset accounts, liability
accounts, equity accounts, revenue accounts and expense accounts.
 Summarizing is the preparation of financial statements.

Accounting as an information system

 Accounting is an information system that measures business activities, processes information

into reports and communicates the reports to decision makers.
 The key product of this information system is a set of financial statements.

Overall objective of accounting

 Provide quantitative financial information about a business that is useful to statement users
particularly owners and creditors, in making economic decisions.
 An accountant’s primary task is to supply financial information so that the statement users could
make informed judgement and better decision.

The Accountancy Profession

  Republic No. 9298, it is the law regulating the practice of accountancy in the Philippines. It is
also known as the “Philippine Accountancy Act of 2004”.
 The Board of Accountancy is the body authorized by law to promulgate rules and regulations
affecting the practice of the accountancy profession in the Philippines. The BOA is responsible
for preparing and grading the Philippine CPA examination.

Limitation of the Practice of Public Accountancy

 A certificate of accreditation shall be issued to CPA in public practice only upon showing in
accordance with rules and regulations promulgated by the BOA and approved by the PRC that
such registrant has acquired a minimum of 3 years of meaningful experience in any of the areas
of public practice including taxation.
 The SEC shall not register any corporation organized for the practice of public accountancy.

Accreditation to Practice Public Accountancy

 The Professional Regulation Commission upon favorable recommendation of BOA 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.
 Certified Public Accountants generally practice their profession in three main areas:
1. Public accounting
2. Private accounting
3. Government accounting

Public Accounting

 The field of public accounting or public accountancy is composed of individual practitioners,

small accounting firms and large multinational organizations that render independent and
expert financial services to the public.
 Public accountants usually offer three kinds of services, namely auditing, taxation and
management advisory services.

Auditing

 Primary service offered by most public accounting practitioners.

 External auditing is the attest function of independent CPAs. Attest means a CPA's review of a
company's financial statement.

Taxation

 Taxation service includes the preparation of annual income tax returns and determination of tax
consequences of certain proposed business endeavors.
 The CPA not infrequently represents the client in tax investigation.

Management Advisory Services

Private Accounting

 The highest accounting officer in an entity is known as the controller.

 The major objective of the private accountant is to assist management in planning and
controlling the entity’s operations.
 Private accounting includes maintaining the records, producing the financial reports, preparing
the budgets and controlling and allocating the resources of the entity.
 The private accountant has also the responsibility for the determination of the various taxes the
entity is obliged to pay.

Government Accounting

 Government accounting encompasses the process of analyzing, classifying, summarizing and

communicating all transactions involving the receipt and disposition of government funds and
property and interpreting the results thereof.
 The focus of government accounting is the custody and administration of public funds.

Continuing Professional Development

 Republic Act No. 10912 is the law mandating and strengthening the continuing professional
development program for all regulated professions, including the accountancy profession.
 Under the new BOA resolution, all CPA shall be required to comply with 120 CPD credit units in
compliance period of 3 years.
 Excess credit units earned shall not be carried over to the next three-year period, except credit
units earned for masteral or doctoral degrees.

Exception from CPD

 A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65
years.
 However, this exemption applied only to the renewal of CPA license and not for the purpose of
accreditation to practice the accountancy profession.

Financial Accounting vs Managerial Accounting

 Financial accounting is concerned with the recording of business transactions and the eventual
preparation of FS.
 Financial accounting focuses on general purpose reports known as FS intended for internal and
external users. It is the are of accounting that emphasizes reporting to creditors and investors.
 Managerial accounting is the accumulation and preparation of financial reports for internal
users only.

Generally Accepted Accounting Principles

 Generally Accepted Accounting Principles represents the rules, procedures, practice and
standards followed in the preparation and presentation of FS.
 GAAP are like laws that must be followed on financial reporting.

Purpose of Accounting Standards

 Accounting standards create a common understanding between preparers and users of FS

particularly the measurement of assets and liabilities.
 A set of high-quality accounting standards is a necessity to ensure comparability and uniformity
in FS based on the same financial information.

Financial Reporting Standards Council

 In the Philippines, the development of generally accepted accounting principles is formalized

initially through the creation of the Accounting Standards Council or ASC.
 The Financial Reporting Standards Council or FRSC now replaces the ASC. It is a standard setting
body created by the Professional Regulation Commission upon recommendation of BOA in
carrying out its powers and functions provided under RA Act No. 9298.
 The main function is to establish and improve accounting standards that will be generally
accepted in the Philippines.
 The accounting standards promulgated by the Financial Reporting Standards Council constitute
the highest hierarchy of generally accepted accounting principles in the Philippines.
 The approved statements of the FRSC are known as Philippine Accounting Standards or PAS and
Philippine Financial Reporting Standards or PFRS.

Composition of FRSC

 The FRSC is composed of 15 members with a Chairman who had been or is presently a senior
accounting practitioner and 14 representatives.

Philippine Interpretations Committee

 The role of Philippine Interpretations Committee is to prepare interpretations of PFRS for

approval by the FRSC and to provide timely guidance on financial reporting issues not specifically
addressed in current PFRS.

International Accounting Standards Committee

 The International Accounting Standards Committee or IASC 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.

International Accounting Standards Board

 International Accounting Standards Board now replaced IASC.

 The IASB publishes standards in a series of pronouncements called “International Financial
Reporting Standards” or IFRS.
 The IFRS is a global phenomenon intended to bring about greater transparency and a higher
degree of comparability in financial reporting.