Intermediate Accounting, Part 1

Chapter 1: The Development of the Accounting Profession

The Nature of Accounting and the Users of Accounting Information

The primary purpose of accounting is to provide quantitative information, about economic entities,
that is to be used as basis for the formulation of economic decisions.
Stakeholders – owners, management, employees, regulatory agencies, creditors and lenders,
suppliers, customers, taxing authorities, labor unions, financial analysts and advisers, and the
public.

Branches of Accounting
Financial Accounting – focuses on the needs of external users. It is concerned with the recognition,
measurement, and communication of economic resources, economic obligations, and changes in
economic resources and economic obligations.
Management Accounting – serves the information needs of the internal users. The managers and
active owners use accounting information in making and implementing short-term and long-range
plans for the enterprise.
Cost Accounting – is concerned with the measurement of and recognition of cost of services
provided or products manufactured.
Tax Accounting – is concerned with the computation of taxes and preparation of tax returns
submitted to a taxing authority.
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.
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Bookkeeping – refers only to one phase of accounting, the recording phase. Other phases of
accounting include classifying, summarizing, and communicating information and interpreting the
results thereof.
Auditing – refers to an independent examination of the financial statements conducted by a
certified public accountant for the purpose of rendering an opinion as to the fairness of the
presentation of the financial statements.

The Development of the Accounting Profession and the Standard-Setting Process

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Around the world, differing national traditions, legal systems, capital markets and business
practices led to the development of different financial reporting practices. Each country
communicates financial reports based on the accounting principles in the particular country.
However, the evolution of multinational companies led to the conduct of international business
operations across national borders.
Business transactions became complicated, and goods, services and capital investments were
transferred worldwide. Thus, there was a need to bring into common basis the system of
measurement and communication of economic activities. This need was recognized and acted upon
by the accounting profession through the creation of the International Accounting Standards
Committee (IASC) in 1973.
From 1973 up to 2001, the IASC developed a set of uniform global accounting standards, called
International Accounting Standards (IAS).
The IASC was reconstituted in 2001 as the International Accounting Standards Board (IASB). The
IASB took the initiative to undertake an improvement project. The objective of this project was to
reduce or eliminate alternatives, redundancies, and conflicts within the IAS, to deal with some
convergence issues, and to make other improvements.
The accounting standards that originated from the works of IASC, even if improved or revised by
the IASB, are known as IAS. The standards that originated from the works of IASB are called
International Financial Reporting Standards (IFRS).
Collectively, the IFRS include the following:
1. IFRS
2. Interpretations made by International Financial Reporting Interpretations Committee
(IFRIC)
3. IAS
4. Interpretations made by the Standing Interpretations Committee (SIC)

The Standard Setting Process in the Philippines

Before 1981, the Philippines did not have a formal process for the development of accounting
practices. It was only in late 1981, when the PICPA organized the Accounting Standards Council
(ASC) that formalized the standard setting process in the Philippines.
The ASC was formed on November 18, 1981 to establish and improve generally accepted
accounting principles (GAAS) in the Philippines. The standards developed by the ASC were known
as the Statements of Financial Accounting Standards (SFAS).
The ASC was composed of eight members, representing the following organizations: PICPA, SEC,
BSP, BOA, and Financial Executives of the Philippines.
The ASC was succeeded by the Financial Reporting Standards Council (FRSC), which was
established in 2006 by the BOA. The BOA is the body that regulates the practice of accountancy
profession in the Philippines. The FRSC shall be composed of a chairperson and 14 members

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representing the following organizations: BOA, SEC, BSP, BIR, Financial Executives of the
Philippines, COA, and PICPA.
The FRSC formed the Philippine Interpretations Committee (PIC) in November 2006. The PIC issues
implementation guidelines on PFRS.
Similar to IFRSs, the PFRSs consist of:
1. PFRS
2. PAS
3. Philippine Interpretations adopted from IFRIC, SIC, PIC

Recognition Principles
The Conceptual Framework identifies two general criteria for the recognition of financial statement
elements.
1. It is probable that there is an inflow or outflow of economic benefits; AND
2. The element has a cost or value that could be reliably measured.

The Concept of Capital and Capital Maintenance

1. Financial Capital Concept – capital is synonymous with net assets of the enterprise.
Financial Capital Maintenance Concept – measures profit as the excess of the financial
amount of net assets at the end of the period over the financial amount of net assets at the
beginning of the period, after deducting contributions from owners and adding back
distributions to owners.
2. Physical Capital Concept – defines capital as the operating capacity of the enterprise and
requires the use of current cost as measurement basis for an enterprise’s assets and
liabilities.
Physical Capital Maintenance Concept – measures profit as the excess of the productive
capacity of the enterprise at the end of the period over the productive capacity at the
beginning of the period, measured in terms of current cost, after excluding the effects of
transactions with owners.