MODULE 1A: THE ACCOUNTANCY PROFESSION  Mandatory for CPAs’ since it is a requirement for license
renewal* and accreditation to practice accountancy
It requires:
 Creative Thinking - involves the use of imagination and
insights to solve problems; important in identifying
alternative solutions
 Critical Thinking - involves the use of logic analysis of
issues; use of indicative or deductive reasoning to test new
relationships to determine their effectiveness; important in
evaluating alternative solutions
Principles upon which the process of accounting is based. Used
interchangeable with the following terms:
 Accounting Assumptions (Postulates) - fundamental
concepts or principles that provide the foundation of
accounting process
 Accounting Theory – logical reasoning in the form of a set
of broad principles; organized set of concepts and related
principles that guide the accountants’ actions in IMC
accounting information; comprises the Conceptual
Framework and the Phil. Financial Reporting Standards
(PFRS)
Accountancy - refers to the profession or practice of accounting
1. Public Practice – does not involve an employer
2. Private Practice – accountant is an employee
R.A. 9298 – law regulating the practice of Accountancy known as the
“Philippine Accountancy Act of 2004”; status equivalent to law or
medicine
QUALIFICATIONS TO PRACTICE ACCOUNTANCY
 Graduate of Bachelor of Science in Accountancy
 Passed the CPA Licensure Examination given by the
Board of Accountancy
BOARD OF ACCOUNTANCY - body authorized by Law to
promulgate rules and regulations affecting the practice of
Accountancy profession in the Philippines; responsible for preparing
and grading the CPA Licensure Examination which is a computerized
examination offered twice a year (May & Oct.) all over the country.
Registered CPAs’ in the Philippines - with a Certificate of
Accreditation from BOA and approved by PRC that the registrant has
a minimum gainful experience of 3 years in any area of public
practice including taxation; accreditation is valid for 3 years and
renewable every 3 years upon payment of required fees.
4 SECTORS IN THE PRACTICE OF ACCOUNTANCY
1. PUBLIC ACCOUNTANCY - rendering of audit, taxation,
accounting-related services to more than one (1) client for
a fee basis.
2. COMMERCE & INDUSTRY - employment in the private
sector requiring positions for CPAs in various capacities.
3. Education/Academe - employment in an educational
institution which involves teaching of accounting, auditing,
business law and other technically related subjects.
4. Government - employment in the government to a position
in an accounting professional group where eligibility as a
CPA is required.
CONTINUING PROFESSIONAL DEVELOPMENT (CPD)
R.A. 1012 – law mandating the CPD program for all regulated
professions; promulgated by the BOA, subject to the approval of
PRC and accredited organization for CPAs’ or educational
institutions; raises and enhances the technical skill of the CPA
CPD credit unit requirements (3 years)
 2018 - 100 units
 2019 - 120 units
(excluding CPAs’ 65 years old and up)
BRANCHES OF ACCOUNTING:
1. FINANCIAL ACCOUNTING - focus is on the preparation of
general-purpose financial statements that cater to the
needs of: external users” – users who have interest on the
company but do not have authority to demand reports
tailored to their needs; governed by PFRS
2. MANAGEMENT ACCOUNTING - focus is on the
preparation of financial reports that cater to the needs of
internal users or management; “Management Advisory
Services” - services to clients with regards to many other
phases of business conduct and operations.
3. COST ACCOUNTING - systematic recording and analysis
of the cost of materials, labor and overhead incident to
production.
4. AUDITING - process of evaluating the financial statements
based on established criteria and expressing an opinion
thereof.
5. TAX ACCOUNTING - preparation of tax returns and
rendering of tax advice and determination of tax
consequences.
6. GOVERNMENT ACCOUNTING - accounting for
government and its instrumentalities for the custody and
administration of public funds.
7. FIDUCIARY ACCOUNTING - handling of accounts
managed by a person entrusted with the custody and
management of property for the benefit of another.
8. ESTATE ACCOUNTING - handling of accounts for
fiduciaries wind up the affairs of a deceased person.
9. SOCIAL RESPONSIBILITY ACCOUNTING - process of
communicating the social and environmental effects of an
entity’s economic actions to the society.
10. INSTITUTIONAL ACCOUNTING - accounting for non-profit
entities other than the government
11. ACCOUNTING SYSTEMS - installation of accounting
procedures for the accumulation of financial data and
designing of accounting forms to be used in data gathering.
12. ACCOUNTING RESEARCH - pertains to the careful
analysis of economic events and other variables to
understand their impact on decisions.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - represents
the accounting rules, procedures, practice and standards followed
in the preparation and presentation of financial statements.
PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS) -
standards and interpretations adopted by the Financial Reporting
Standards Council (FRSC); accompanied by a guidance which states
if a requirement is an “integral part” (mandatory). Comprised of:
 PFRS
 Philippine Accounting Standards (PAS)
 Interpretations
ACCOUNTING STANDARDS - identify proper accounting practices
for the preparation and presentation of financial statements regarding
measurement of assets and liabilities; to ensure comparability and
uniformity in the presentation of financial statements based on the
same financial information.
ACCOUNTING STANDARD-SETTING BODIES AND OTHER
RELEVANT ORGANIZATIONS:
1. FINANCIAL REPORTING STANDARDS COUNCIL -
official accounting standard-setting body in the Philippines
created under the Philippine Accountancy Act of 2004 or
 (RA 9298); replaced the Accounting Standards Council Financial Reporting Standards Foundation or IFRS
(ASC) Foundation. STANDARDS ISSUED BY THE IASB:
COMPOSITION OF FRSC:  International Financial Reporting Standards
Composed of 15 members with a Chairman and composed of:
Representatives from : (Total -14)  IFRS
 BOA - 1  IAS
 SEC - 1  Interpretations
 BSP- 1 11. PHIL. FINANCIAL REPORTING STANDARDS COUNCIL
 BIR – 1 (PFRSC) - the FRSC issues standards in a series of
 COA – 1 pronouncements called PFRS. The PFRS collectively
 FINEX (Fin. Exec. Inst. of the Phils.) - 1 includes the ff.:
 Accredited Professional Organization of CPAS’s:  PFRS which corresponds to the IFRS (numbered
 Public Practice – 2 the same)
 Commerce and Industry – 2  PAS which corresponds to the IAS (numbered
 Academe/ Education - 2 the same)
 Government - 2  Phil. Interpretations which corresponds to the
2. PHIL. INTERPRETATIONS COMMITTEE - committee interpretations of the IFRIC and the SIC
formed by the FRSC (replacing the Interpretations OTHER RELEVANT INTERNATIONAL ORGANIZATIONS:
Committee formed by the ASC); role is to review the 1. INTERNATIONAL FINANCIAL REPORTING
interpretations of the International Financial Interpretations INTERPRETATIONS COMMITTEE (IFRIC) - prepares
Committee (IFRIC) for approval and adoption by the FRSC interpretations of how specific issues should be accounted
3. Board of Accountancy (BOA) - professional regulatory for under the application of the IFRS
board created under RA 9298 to supervise the registration
and licensure; and practice of accountancy in the
Philippines; consists of a Chairperson and 6 members
appointed by the President of the Philippines; the Board
shall elect among its members a Vice-Chairman for a term
of 1 year.
4. PROFESSIONAL REGULATIONS COMMISSION (PRC) -
government body in charge of regulating and licensing the
practice of professions.
5. PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS (PICPA) - national professional
organization of CPAs’ in the Philippines
 NACPAE
 GACPA
 AIA
 ACPACI
6. SECURITIES AND EXCHANGE COMM. (SEC) -
government agency tasked in regulating corporations,
partnerships, capital and investment markets and the
investing public; SEC rulings affect the accounting
requirements of entities and the adoption and application of
accounting policies
7. BUREAU OF INTERNAL REVENUE (BIR) - administers
the provisions of the Internal Revenue Code; influence at
times the choice of accounting methods and procedures
8. BANGKO SENTRAL NG PILIPINAS (BSP) - influences the
selection and application of accounting policies by banks
and other entities performing banking functions
9. COOPERATIVE DEV. AUTHORITY (CDA) - influences the
selection and application of accounting policies by
Cooperatives
10. INTERNATIONAL ACCOUNTING STANDARDS BOARD
(IASB) - the standard-setting body of the IFRS Foundation
with the main objective of developing and promoting global
accounting standards; based in London; established in
04/01/01 as part of the International Accounting Standards
Committee (IASC) Foundation, which is an NPO based in
the USA, the parent of IASB. It was renamed International
 MODULE 2: FINANCIAL REPORTING & ASSUMPTIONS
HISTORY OF THE CONCEPTUAL FRAMEWORK
 Original CF was issued in 1989
 It was updated in Sept 2010
 Revised CF was issued on April 2018 now provides a more
complete, clearer and updated set of concepts; guidance
on: measurement, financial performance, derecognition,
and the reporting entity
CHAPTERS OF THE CF: (SPOQERMPCO)
1. Status and Purpose
2. Objective of Gen. Purpose Fin. Reporting
3. Qualitative Characteristics of useful Fin. Info.
4. Elements of the Financial Statement
5. Recognition and Derecognition
6. Measurement
7. Presentation and Disclosure
8. Concepts of capital and capital maintenance
CONCEPTUAL FRAMEWORK - summary of the terms and concepts
that underlie the preparation and presentation of financial statements
for external users; promulgated by the IASB; theoretical foundation
for accounting; concerned with general purpose financial statements
(excluding special financial reports)
PURPOSES OF CONCEPTUAL FRAMEWORK
1. assist FRSC in developing accounting standards and
reviewing existing accounting standards
2. assists preparers of FS in applying accounting standards
and dealing with issues not yet covered by GAAP
3. assist FRSC in the review and adoption of IFRS
4. assist users of FS in interpreting the info in the FS
5. assist auditors in forming an opinion as to whether FS
conforms with GAAP
6. provide information to those interested in the work of FRSC
in the formulation of the PFRS
AUTHORITATIVE STATUS OF THE CONCEPTUAL FRAMEWORK
 not a PFRS
 does not define any standard for any particular
measurement or disclosure issue.
 If there is a conflict between the CF and the PFRS, the
PFRS will prevail
 In the absence of a PFRS, management shall consider the
application of the CF
USERS OF FINANCIAL INFORMATION
1. Primary Users – existing and potential investors (risk and
return; determine whether they should buy, hold, or sell
their shares; assess the ability of the entity to pay
dividends), lenders and other creditors (loans, interests,
and other amounts owing to them will be paid when due)
2. Other users – employees (remuneration, retirement
benefits, and employment opportunities); customers
(interested on the continuity wherein they have loyalty and
dependence); government agencies (regulation, taxation,
and national income and similar statistics); public (jobs and
local supplier patronage; trend and range of their activities)
LIMITATIONS OF FINANCIAL REPORTING
Gen. Purpose Financial reports
 cannot provide all the information needed by its primary
users
 not designed to show the true value of the entity (only
estimated value)
 provides common information to users (cannot
accommodate request for information)
 based on estimate and judgement rather exact depiction
UNDERLYING ASSUMPTIONS:
1. Accounting Assumptions (postulates) - basic notions or
fundamental premises where the accounting process is
based (foundation)
2. Going Concern Assumption
 that the entity will continue in operation
indefinitely
 assets are normally recorded at cost (as a rule:
market values are ignored)
 to be abandoned if the entity has to be
terminated due to large and pertinent loses.
 only assumption explicitly mentioned in the
Conceptual Framework
3. Accounting Entity Assumption - that the entity is separate
from its owners
4. Time-period Assumption - the entity is subdivided into
accounting periods which are usually equal in length for the
purpose of preparing financial reports on financial position,
performance and cash flow
 Accounting period or fiscal period – period of 12
months
 Calendar year – ends in Dec. 31
 Natural business year – ends at any month when
the business is at its lowest or slack season
5. Monetary Unit Assumption
2 ASPECTS
 Quantifiability - assets, liabilities, equity and
income should be stated in terms of a unit of
measure (Peso)
 Stability of the peso - purchasing power of the
peso is stable or constant (instability is
insignificant and maybe ignored) but if there is
significant gap between historical and current
replacement cost. Entity may choose the
revaluation model as an accounting policy.
SCOPE OF CONCEPTUAL FRAMEWORK (OQDRMC)
 Objective of Financial Reporting
 Qualitative Characteristics
 Definition, Recognition and Measurement of the elements
 Concepts of capital and capital maintenance
OVERALL OBJECTIVE OF FINANCIAL REPORTING:
 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 OBJECTIVE OF FINANCIAL REPORTING:
 To provide information that is useful in making economic
decisions about providing resources to the entity (buy, sell
or hold investments; provide or settle loans); useful in
assessing the cash flow prospects of the entity (returns;
principal and interest payments); about entity economic
resources, claims and changes in resources and claims
(financial position).
FINANCIAL POSITION OF THE ENTITY (represented in the Balance
Sheet) - economic resources – assets; and claims – liabilities and
equity
It shows information about the liquidity, solvency and need for
additional financing.
 Liquidity – availability of cash to cover currently maturing
obligations
 Solvency – availability of cash to meet long term
obligations when they fall due
FINANCIAL PERFORMANCE (represented in the Statement of
Financial Performance/Income Statement, or in the Statement of
Comprehensive Income) - changes in resources and claims
composed of: Revenues, Expenses, Net Income or Loss, Level of
income earned by the entity through the efficient and effective use of
its resources also known as the results of its operation
Usefulness of Financial Performance
 Past financial performance - helps in predicting future
returns on the entity’s economic resources
 Financial Performance for the period - helps to assess the
ability of the entity to generate future cash inflow from
operations.
ACCRUAL ACCOUNTING: INCOME recognized when earned (not
when received) and EXPENSES recognized when incurred (not
when paid)
MODULE 3: QUALITATIVE CHARACTERISTICS
Qualitative Characteristics - are the qualities or attributes that make
financial accounting information useful to users; objective is to
ensure that the information is useful to the users in making economic
decisions
2 CLASSIFICATIONS OF QUALITATIVE CHARACTERISTICS
1. FUNDAMENTAL QUALITATIVE CHARACTERISTICS –
relates to the content or substance of financial information
a. RELEVANCE - capacity of the information to influence
a user to make a meaningful decision.
It must reflect:
 Confirmatory value (feedback value) -
confirms or corrects previous predictions
(shows past performance of the business)
 Predictive value – forecast outcome of
events (what might happen in the future)
Materiality - “Doctrine of Convenience”; information is
material if its omission or misstatement could
influence the economic decision of the user.
Materiality is a matter of professional judgement
based on the following factors:
 size or amount of the item (threshold)
 nature of the item
 structure of the business
b. FAITHFUL REPRESENTATION - financial reports
must depict what really happened during the year.
Characteristics:
 Completeness- all information must have
been taken into account so as not to be
misleading; may warrant an adequate
disclosure or full disclosure in the notes to
financial statements.
 Neutrality – “Principle of fairness”
 Free from error
 Substance over Form - substance
or economic reality should always
prevail over legal form.
 Prudence/Conservatism –
accountant should exercise
caution when using estimates or
information marked with
uncertainty; no overstatement of
assets /revenues; no
understatement of
liabilities/expenses
2. ENHANCING QUALITATIVE CHARACTERISTICS -
relates to the presentation or form of the financial
information; Intended to increase the usefulness of the
financial information that is relevant and faithfully
represented.
a. COMPARABILITY - enables users to understand
similarities between one information to another
information.
 Intra-comparability (horizontal) - comparability
within an entity from one accounting period to
another, determines the change or trend of its
performance or position
  Inter-comparability (dimensional) - comparability
between 2 or more entities from accounting
period to another; determines the
competitiveness of the entity.
b. UNDERSTANDABILITY - financial information must
be comprehensible to be useful, terminologies must
be clear, presentation of the reports must be orderly,
users must have reasonable knowledge of business
and economic activities to come up with a good
judgement.
c. VERIFIABILITY (CONSENSUS) - the financial
information is supported by evidence such as invoices
or receipts to show that the transaction really
transpired.
Types of verification:
 Direct – direct observation
 Indirect – check inputs /recalculate formulas
d. TIMELINESS - information is available within the
period of time that it is needed to form judgement or
decisions so as not to lose its usefulness.
Cost Constraint - the benefit derived from the information should
exceed the cost incurred in obtaining the information.
MODULE 4: ELEMENTS OF THE FINANCIALSTATEMENTS
FINANCIAL STATEMENTS - portray the financial effects of
transactions and other events by grouping them into broad classes
according to their economic characteristics referred to as the
Elements of FS.
Elements of the FS - refer to the quantitative information reported in
Statement of Financial Position and Statement Financial
Performance; building blocks from which FS are constructed
CLASSIFICATIONS OF THE ELEMENTS (as to measurement)
Financial Position: Asset, Liability, Equity
Financial Performance: Income, Expense
[Note: There are no elements unique to the Statement of Changes in
Equity, because its elements can also be found in the Statement of
Financial Position and Performance.]
Equity – residual interest of Assets-Liabilities
RECOGNITION OF THE ELEMENTS - reporting of an asset, liability,
income and expenses on the face of the Financial Statements of an
entity
CF MAIN RECOGNITION PRINCIPLES:
1. ASSET RECOGNITION PRINCIPLE
Asset – defined as a resource controlled by the entity;
result of a past event; from which future economic benefits
are expected to flow (refers to the potential to contribute
directly or indirectly to the flow of cash and cash
equivalents)
2 Conditions for recognition:
 Probable flow of future economic benefits (more
likely to happen than not)
 cost or value can be measured reliably.
Cash or Cash Equivalent may flow to the entity in a number
of ways thru:
 Production of goods or services to be sold by the
entity
 Exchange of other assets
 Used to settle a liability
 Distribute to the owners of the entity
COST PRINCIPLE (inherent to asset recognition) – assets
should be recorded initially at original cost.
a) Carried w/o change
b) Changed by depreciation, amortization or write-
off
c) Shifted to other categories (raw Materials to
finished goods)
DETERMINING THE COST OF THE ASSET
a) Cash transaction – cash payment
b) Exchange transaction –
 Fair value of asset given
 Fair value of the asset received
 Carrying amount of the asset given (in
the absence of a fair value)
2. LIABILITY RECOGNITION PRINCIPLE

Liability- defined as a present obligation arising from a past
event; the settlement of which is expected to result in an
outflow of resources; embodying economic benefits from
the entity
2 Conditions for recognition
 Probability of an outflow for the settlement
 Amount of obligation can be measured reliably
Entity has a present obligation which may be:
a. Legal obligation – legally enforceable as a
consequence of a binding contract.
b. Constructive obligation – arise from normal
business practice, custom or desire to maintain
good business relations or act in an equitable
manner (restoration of mining sites, warranties,
clean-up of waste materials)
Ways to settle liability:
a.Payment of cash
b.Transfer of Non-Cash Assets
c.Provision of services
d.Replacement of the obligation with another
obligation
e. Conversion of an obligation into equity
3. INCOME RECOGNITION PRINCIPLE
Income - defined as an increase in economic benefit during
the accounting period in the form of:
 an inflow or increase in asset or
 decrease in liability - results in an increase in
equity, other than contributions from equity
participants
Definition of Income (encompasses both Revenues and
Gains)
 Revenues - arises in the course of ordinary
regular business activities/ operations (sales,
professional fees, interest, dividends)
 Gains - other items that meet the definition of
income but do not arise in the regular ordinary
course of business (from disposal of assets,
trading of securities, expropriation)
Income Recognition Principle - income shall be recognized
when earned
2 Conditions for Recognition:
a. probable that future economic benefits will flow to
the entity as a result of:
 an increase in an asset or
 a decrease in liability
b. benefits can be measured reliably
Point of Sale - the point of income recognition; where legal
title of goods passes from the seller to the buyer (risk and
rewards); the point of delivery (point of transfer of
ownership)
METHODS IN RECOGNIZING INCOME:
 Installment Method - revenue recognized at the
point of collection; Formula: Collections x Gross
Profit rate
 Cost Recovery Method (sunk cost) - revenue
recognized at the point of collection; all
collections are applied to the cost of merchandise
sold
 Percentage of Completion method (stage of
completion) - revenue from contracts; contract
cost (recognized as expenses)
 Production Method - recognized at the point of
production (agricultural, forest and mineral
products)
Other Income Recognition
 Interest Revenue - recognized based on a - Time
proportion basis; Effective yield of the assets
 Royalties – recognized in an accrual basis based
on the substance or regular agreement
 Dividends - recognized upon declaration of the
dividend at the Stockholders’ Meeting.
 Subscription – recognized on a straight-line basis
over the subscription period.
 Admission fees - recognized when the event
takes place.
 Tuition fees - recognized over the period in which
tuition is provided.
4. EXPENSE RECOGNITION PRINCIPLE
Expense - defined as decrease in economic benefit during
the accounting period; in the form of:
 outflow or decrease in asset
 increase in liability - results in a decrease in
equity, other than distributions to equity
participants
Definition of Expense (encompasses Losses and Expenses
for ordinary regular activities)
 Expenses - arises in the course of ordinary
regular business activities (business operations)
 Losses - arise from disasters (fire, flood, storm
surge, tsunami and hurricane); disposal of non-
current assets
2 Conditions for the recognition of expense:
a. probable that a decrease of future economic benefits
has occurred as a result of:
 decrease in an asset or
 increase in liability
b. decrease in economic benefits can be measured
reliably
 Matching Principle (inherent in Expense Recognition
Principle) - requires that cost and expenses incurred in
earning a revenue shall be posted in the same period
because generation of revenue is not without cost.
3 Applications of the Matching Principle
a. Cause-and-Effect Association - expense is
recognized when the revenue is already
recognized. This is the “strict matching concept”;
process called” matching the cost with revenue”
or the simultaneous or combined recognition of
revenue and expenses
Examples:
 merchandise sold (Cost of Goods Sold)
 doubtful accounts, warranty expense,
sales commissions
b. Systematic and Rational Allocation - some costs
are expensed by allocation over the periods
benefited. Reason: Cost incurred will benefit
future periods or several accounting periods
Examples:
 depreciation of PPE
 amortization of Intangibles
 allocation of prepaid rent, insurance
and other payments
c. Immediate Recognition - cost incurred is
expensed outright because of: uncertainty of
future economic benefits, or difficulty of
associating cost with future revenue (no asset
recognition)
Examples:
 salaries, administrative, advertising,
selling, expenses
 settlement of lawsuits or
 worthless intangibles
 losses from disposal of PPE or
Investment
 casualty losses (fire, flood etc.)
MEASUREMENT OF THE ELEMENTS - process of determining the
monetary amounts at which elements are to be recognized and
carried in the statement of Financial Position and Income Statement
Measurement Bases:
1. Historical cost
 Amount of cash or cash equivalent paid
 Fair value of the consideration given at the
time of acquisition
 Known as “past purchase exchange price”
 Most commonly adopted in the FS
2. Current Cost (replacement/repurchase cost)
 Amount of cash or cash equivalent to be
paid if the same or equivalent asset was
acquired currently
 known as “current purchase exchange price”
3. Realizable value (settlement value)
 Amount of cash or cash equivalent that
could be currently obtained by selling the
asset in an orderly disposal. (net selling
price)
 Undiscounted amount of cash expected to
be paid to satisfy the liabilities
 Known as “current sale exchange price”
4. Present value (amortized cost)
 Discounted value of the future net cash
inflow expected to be derived from the asset
 Discounted value of the future net cash
outflow expected to be paid to settle a
liability
 Known as “future exchange price”
CONCEPTS OF CAPITAL
1. Financial Concept – capital is regarded as: Equity or net
assets (A - L = E); Invested money
2. Physical concept - capital is regarded as: Entity’s operating
capability (output/day); measurement base- current cost;
[Choice of the concept is based on the users need and it will affect
the determination of profit.]
CONCEPTS OF CAPITAL MAINTENANCE - net worth method of
measuring profit
1. Financial Capital Maintenance - profit is earned if: Net
asset end > Net Asset Beg. excluding any -distribution to,
or contribution from owners during the period. Profit is
measured either thru:
 Nominal monetary units
 Units of constant purchasing power
2. Physical Capital Maintenance - profit is earned if:
Productive capacity, End is > the Productive capacity, Beg.
excluding any -distribution to, or contribution from owner
during the period; Measurement base – current cost