CHAPTER 1 Important Points

THE ACCOUNTING PROFESSION The following important points made in the

DEFINITION OF ACCOUNTING
The Accounting Standards Council provides the
following definition:
- 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.
definition of accounting should be noted:
One - Accounting is about quantitative
information.
Two - The information is likely to be financial in
nature.
Three - The information should be useful in
decision making.
The definition that has stood the test of time is
the definition given by the American Accounting
Association.

The Committee on Accounting Terminology of This definition that the very purpose of
the American Institute of Certified Public accounting is to provide quantitative
Accountants defines accounting as follows: information

- Accounting is the art of recording, The definition also states that accounting has a
classifying and summarizing in a number of components, namely:
significant manner and in terms of
money, transactions and events which a. Identifying as the analytical
are in part at least of a financial component.
character and interpreting the results b. Measuring as the technical component.
thereof. c. Communicating as the formal
component.
The American Accounting Association in its
Statement of Basic Accounting Theory defines Identifying
accounting as follows: - This accounting process is the
recognition or nonrecognition of
- Accounting is the process of identifying, business as “accountable” events.
measuring and communicating - Not all business activities are
economic information to permit accountable.
informed judgment and decision by user - An event is accountable or quantifiable
of the information. when it has an effect on assets,
liabilities and equity.
- In other words, the subject matter of
accounting is economic activity or the
measurement of economic resources
and economic obligations.
- Only economic activities are
emphasized and recognized in
accounting.
- Sociological and psychological matters
are beyond the province of accounting.
External and Internal Transactions
Economic activities of an entity are referred to
as transactions which may be classified as an
external and internal.
External transactions or exchange transactions
are those economic events involving one entity
and another entity.
Examples of external transactions are:
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 are economic events
involving the entity only.
Internal transactions are the economic activities
that take place entirely within the entity.
Production and casualty loss are examples of
internal transactions.
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 accounting information is to be
useful, it must be expressed in terms of
common financial denominator.
- Financial statements without monetary
amounts would be largely unintelligible
or incomprehensible.
- The Philippine peso is the unit of
measuring accountable economic
transactions.
- The measurement basses are historical
cost and current value.
- Historical cost is the original acquisition
cost and the most common measure of
financial transaction
- Current value includes fair value, value
in use, fulfillment value and current
cost.
Communicating
- Communicating is the process of
preparing and distributing accounting
reports to potential users of accounting
information.
- Identifying and measuring are pointless
if the information contained in the
accounting records cannot be
communicated in some form to
potential users.
- Actually, the communicating process is
the reason why accounting has been
called the “universal language of
business”.
- Implicit in the accounting
communicating 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
transaction into their respective classes.
- Classifying is a accomplished by posting
to the ledger.
- The ledger is a group of accounts which
are systematically categorized into asset
accounts, liability accounts, equity
accounts, revenue accounts and
expense accounts.
- Summarizing is the presentation of
financial statements which include the
statement of financial positive, income
statement, statement of comprehensive
income, statement of changes in equity
and statement of cash flows.
Accounting as an Information System
 - Accounting is an information system
that measures business activities,
process information into reports and
communicate the reports to decision
makers.
- A key product of this information
systems is a set of financial statements -
the documents that report financial
information about an entity to decision
makers.
- Financial reports tell us how well an
entity is performing in terms of profit
and loss and where it stands in financial
terms.
The Accountancy Profession
- Republic Act No. 9298 is the law
regulating the practice of accountancy
in the Philippines.
- Known as the Philippine Accountancy
Act of 2004.
- Board of Accountancy is responsible for
preparing and grading the Philippine
CPA examination.
- This computer-based examination is
offered twice a year, May and October.
Public Accounting
- composed of individual practitioners,
small accounting firms and large
multinational organizations that render
independent and expert financial
service to the public.
- usually offer three kinds of services,
namely auditing, taxation, and
management advisory services.
Auditing
- has traditionally been the primary
service offered by most public
accounting practitioners.
- Auditing or external auditing is the
examination of financial statements by
independent certified public accountant
for the purpose of expressing an
opinion as to the fairness with which
the financial statements prepared.
Taxation
- includes the preparation of annual
income tax returns and determination
of tax consequences of certain purpose
business endeavors.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
- the accounting rules, procedures and
practices.
- these principles have developed on the
basis of experience , reason, custom,
usage and practical necessity.
- The process of establishing GAAP is a
political process which incorporates
political actions of various interested
user groups as well as professional
judgement, logic and research.
Purpose of Accounting Standard
- is to identify proper accounting
practices for preparation and
presentation of financial statements.
- Accounting standards create a common
understanding between preparers and
users of financial statements
particularly the measurement of assets
and liabilities.
- A set of high-quality accounting
standards is a necessity to ensure
comparability and uniformity is the
financial statements based on the same
financial information.
FINANCIAL REPORTING STANDARDS COUNCIL
- The Financial Reporting Standards
Council or FRSC now replaces the
Accounting Standards Council.
- The FRSC is the accounting standard
setting body 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 Act
No. 9298.
 - The main function is to establish and financial reporting issues not specifically
improve accounting standards that will addressed in current PFRS.
be generally accepted in the Philippines. - in other words, interpretations are
- The accounting standards promulgated intended to give authoritative guidance
by the Financial Reporting Standards on issues that are likely to receive
Council constitute to the “highest divergent or unacceptable treatment
hierarchy” of generally accepted because the standards do not provide
accounting principles in the Philippines. specific and clearcut rules and
- The approved statements of the FRSC guidelines.
are known as philippine Accounting
Standards or PAS and Philippine International Accounting Standards Committee
Financial Reporting Standards or PFRS. (IASC)
- independent private sector body, with
Composition of FRSC the objectives of achieving uniformity in
The FRSC is composed of 15 members with a the accounting principles which are
Chairman who had been or is presently a senior used by business and other
accounting practitioner and 14 representatives organizations for financial reporting
from the following: around the world.
- was formed in June 1973
- Board of Accountancy 1 Objectives of IASC
-Securities and Exchange Commission 1 a. To formulate and publish in the public
-Bangko Sentral ng Pilipinas 1 interest accounting standards to be
-Bureau of Internal Revenue 1 observed in the presentation of
-Commission on Audit 1 financial statements and to promote
-Major organization of preparers and users of their worldwide acceptance and
financial statements - Financial Executives observance.
Institute of the Philippines or FINEX 1 b. To work generally for the improvement
-Accredited national professional organizations and harmonization of regulations,
of CPAs: accounting standards and procedures
Public Practice 2 relating to the presentation of financial
Commerce and Industry 2 statements.
Academe or Education 2
Government 2 International Accounting Standards Board
Total 14 (IASB)
- The IASB now replaces the IASC.
The Chairman and members of the FRSC shall - The IASB publishes standards in a series
have term of 3 years renewable for another of pronouncements called International
term. Any member of the ASC shall not be Financial Reporting Standards or IFRS.
disqualified from being appointed to the FRSC. - However, the IASB has adopted the
Philippine Interpretations Committee body of standards issued by th IASC.
- The Philippine Interpretations - The pronouncements of the IASC
Committee or PIC was formed by the continue to be designated as
FRSC in August 2006 and has replaced “International Accounting Standards” or
the Interpretations Committee or IC IAS.
formed by the Accounting Standards - The IASB standard-setting process
Council in May 2000. includes in the correct order research,
- The role of the PIC was formed by the discussion paper, exposure draft and
FRSC and to provide timely guidance on accounting standard.
Move toward IFRS IFRS and the Standing Interpretations
The following factors are considered in deciding Committee, and Interpretations
to move totally to international accounting developed by the Philipine
standards: Interpretations Committee.
a. Support 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
and World Trade Organization.

Philippine Financial Reporting Standards

The Financial Reporting Standards Council
issues standards in a series of pronouncements
called “Philippine Financial Reporting
Standards” or PFRS.

The Philippine Financial Reporting Standards

collectively include all of the following:

a. Philippine Financial Reporting Standards

which correspond to International
Financial Reporting Standards.

The Philippine Financial Reporting

Standards are numbered the same as
their counterpart in International
Financial Reporting Standards.

b. Philippine Accounting Standards which

correspond to International Accounting
Standards.

The Philippine Accounting Standards are

numbered the same as their
counterpart in International Accounting
Standards.

c. Philippine International which

correspond to Interpretations of the
CHAPTER 2
CONCEPTUAL FRAMEWORK
Conceptual Framework
- The Conceptual Framework for Financial
Reporting is a complete comprehensive
and single document promulgated by
the International Accounting Standards
Board.
- The Conceptual Framework is a
summary of the terms and concepts
that underlie the preparation and
presentation of financial statements for
external users.
- describes the concepts for general
purpose financial reporting.
- is an attempt to provided an overall
theoretical foundation for accounting.
The Conceptual Framework provides the
foundation for Standards that:
a. Contribute to transparency by
enhancing international comparability
and quality of financial information.
b. Strengthen accountability by reducing
information gap between the providers
of capital and the people to whom they
have entrusted their money.
c. Contribute to economic efficiency by
helping by helping investors to identify
opportunities and risks across the
world.
Purpose of Revised Conceptual Framework
a. To assist the international Accounting
Standards Board to develop IFRS
Standards based on consistent
concepts.
b. To assist preparers of financial
statements to develop consistent
accounting policy when no Standard
applies to a particular transaction or
other event or where an issue is not yet
addressed by an IFRS.
c. To assist preparers of financial
statements to develop accounting policy
when a Standard allows a choice of an
accounting policy.
d. To assist all parties to understand and
interpret the IFRS Standards.
Authoritative status of Conceptual Framework
- in absence of a standard or an
interpretation that specifically applies
to a transaction, management shall
consider the applicability of the
Conceptual Framework in developing
and applying an accounting policy that
results in information that is relevant
and reliability.
- Conceptual Framework is not an
International Financial Reporting
Standard.
- Nothing in the Conceptual Framework
overrides any specific International
Financial Reporting Standard.
- in case where there is a conflict, the
requirements of the International
Financial Reporting Standards shall
prevail over the conceptual Framework.
Users of Financial Information
- a. Primary Users
- b. Other Users
- Primary Users include the existing and
potential investors, lenders and other
creditors.
- Other users include the employees,
customers, governments and their
agencies, and the public.
Objectives of Financial Reporting
- the overall objective of financial
reporting is to provide financial
reporting 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 Assessing Cash Flows Prospects
resources to the entity. -
- the objective of financial reporting is -
the “why”, purpose or goal of -
accounting.
Economic Resources and Claims
Target Users -
- Financial reporting is directed primarily -
to the existing and potential investors, -
lenders and other creditors which
compose the primary user group. Changes in Economic Resources and Claims
-
Specific Objectives of Financial Reporting -
- The overall objective of financial -
reporting is to provide information that
is useful for decision making. Usefulness of Financial Performance
- Conceptual Framework places more -
emphasis on the importance of -
providing information of providing -
information needed to assess the
management stewardship of the entity’s Accrual Accounting
economic resources. -
- Specific Objectives of financial -
reporting: -
a. To provide information useful in
making decisions about Limitations of Financial Reporting
providing resources to the -
entity. -
b. To provide information useful in -
assessing the cash flow,
prospects of the entity. Management Stewardship
c. To provide information about -
entity resources, claims and -
changes in resources and -
claims.

Economic Decisions
- existing and potential investors need
general purpose financial reports in
order to enable them in making
decisions whether to buy, sell or hold
equity investments.
CHAPTER 3
CONCEPTUAL FRAMEWORK
Qualitative Characteristics
Qualitative Characteristics
- are the qualities or attributes that make
financial accounting information useful
to the users.
Fundamental Qualitative Characteristics
- fundamental qualitative characteristics
are relevance and faithful
representation.
Application of Qualitative Characteristics
- First, identify an economic
phenomenon that has the potential to
be useful.
- Second, identify the type of information
about the phenomenon that would be
most relevant and can be faithfully
represented.
- Third, determine whether the
information is available.
Relevance
- is the capacity of the information to
influence a decision.
- Must be capable of making difference in
the decisions made by users.
Ingredients of Relevance
- Predictive Value and Confirmatory Value
- Financial information has predictive
value if it can be used as an input to
process employed by users to predict
future outcome.
- In other words, financial information
has predictive value when it can help
users increase the likehood of correctly
or accurately predicting or forecasting
outcomes of events.
- Financial information has a
confirmatory value if it provides
feedback about previous evaluations.
- In other words, financial information
has a confirmatory value when it
enables users confirm or correct earlier
expectations.
Materiality
- known as the doctrine of convenience.
- a practical rule in accounting which
dictates that strict adherence to GAAP is
not required when the items are not
significant enough to affect evaluation,
decision and fairness of the financial
statements.
Faithful Representation
- means that financial reports represent
economic phenomena or transactions in
words and numbers.
Ingredients of Faithful Representation
a. Completeness
b. Neutrality
c. Free from error
Completeness
- requires that relevant information
should be presented in a way that
facilitates understand and avoids
erroneous implication.
Neutrality
- a neutral depiction is without bias in the
preparation or presentation of financial
information.
Free from Error
- means there are no errors or omissions
in the description of the phenomenon
or transaction.
Enhancing Qualitative Characteristics Timeliness
- intended to increase the usefulness of - means that financial information must
the financial information that is relevant be available or communicated early
and faithfully represented. enough when a decision is to be made.
-
Comparability
- means the ability to bring together for
the purpose of nothing points of
likeness and difference.
- Comparability within an entity is the
qualitative information that allows
comparisons within a single entity
through time or from one accounting
period to next.
- Comparability between and across
entities is the quality of information
that allows comparisons between two
or more entities engaged in the same
industry.

Understandability
- requires that financial information must
be comprehend or intelligible if it is to
be most useful.
- Classifying, characterizing and
presenting information “clearly and
concise” makes it understandable.

Verifiability
- means that different knowledgeable
and independent observers could reach
consensus, although not necessarily
complete agreement, that a particular
depiction is a faithful representation.
- Direct verification means verifying an
amount or other representation
through direct observation, for
example, by counting cash.
- Indirect verification means checking the
inputs to a model, formula or other
technique and recalculating the inputs
using the same methodology.