The Accountancy Profession

Accounting is a service activity that provides quantitative information, primarily financial in

nature, about economic entities, that is intended to be useful in making economic decisions.

The definition states that accounting has a number of components namely:

a. Identifying (analytical) to recognize or not to recognize. It means to say that some
transactions must be recognized while other transactions are not recognized.
Example of transactions to be recognize
- Collection from customers
- Payment of salaries

Example of transactions not to be recognize

- Supplier announce an increase in price
- A client inquires about the discount for bulk orders
b. Measuring (technical) assigning of peso amounts to the accountable transactions and
events. The amount must be determined reliably
- Historical cost. The cost assigned is the actual price in the original transaction.
Example: The land was bought for P100,000 in 1997. It now costs P20,000,000. The
historical cost is P100,000
- Current cost. The amount assigned is the current price regardless of the original
price.
Example: The land was bought for P100,000 in 1997. It now costs P20,000,000. The
current cost is P20,000,000
- Realizable value. The amount assigned to an item which is diminished by certain
conditions.
Example: A kilo of fish was bought to supplier for P100 per kilo. However, after
several hours, it was left unsold and not in saleable condition. The vendor now sells
it for P60 per kilo. The realizable value is P60.
- Present value. The amount assigned usually in a loan which reflects the present
value of the obligation even though it will be settled in a future time
Example: Mar obtained a loan of P10,000. He only received P9,200 after deducting
the interest in advance. The present value is P9,200.
c. Communicating (formal) preparing and distributing accounting reports to potential users
- Recording. In bookkeeping, it involves recording your transactions in a journal.
- Classifying. In bookkeeping, it involves posting journalized transactions into the
ledger.
- Summarizing. In bookkeeping, it involves preparation of trial balance leading to
preparation of financial statements

Accountancy Act of 2004 or Republic Act of 9298

Scope of practice
1. Public Accountancy. This sector refers to the CPAs whose involve in providing
assurance services to clients.
a. Auditing is the external examination of financial statements by independent CPAs for
the purpose of expressing opinions as to the fairness of the preparation of the
financial statement
 b. Taxation includes the preparation of tax returns and determination of tax
consequences of a client.
c. Management advisory services refer to the services to clients on matters of business
conducts and operations. It can be advice on installation of computer system; quality
control; accounting system; budgeting; forecasting; retirement plans and advices.
2. Commerce and Industry. This sector refers to the CPAs who work in private companies.
3. Education/Academe. This sector refers to the CPAs who are teaching accounting
subjects on tertiary level or graduate studies.
4. Government. This sector refers to the CPAs who are working in the government,
national agencies and other instrumentalities.

The Professional Regulatory Commission through Board of Accountancy shall issue Certificate
of Registration to practice public accountancy or teach accountancy which shall be valid for
three years. It is different from the CPA license which is also renewed every three years. An
accredited CPA is required to comply with 120 CPD units to be renewed but a CPA license will
be renewed for at least 15 CPD units

Financial accounting is primarily concerned with recording of business transactions and the
eventual preparation of financial statements. Managerial accounting is the accumulation and
preparation of financial reports for internal users only.

Generally Accepted Accounting Principles (GAAP)

It represents the rules, procedures, practice and standards followed in the preparation and
presentation of financial statements.

Purposes of Accounting Standards

The overall purpose of accounting standards is to identify proper accounting practices for the
preparation and presentation of financial statements.
1. Financial Reporting Standards Council (FRSC)
The main function is to establish and improve accounting standards that will be generally
accepted in the Philippines.
2. Philippine Interpretations Committee (PIC)
Its role is to provide interpretations of PFRS for approval of FRSC
3. International Accounting Standards Board (IASB)
Promote uniformity in the accounting principles which are used by businesses and other
organizations for financial reporting around the world.
4. Philippine Financial Reporting Standards (PFRS)
Standards issued by FRSC

Conceptual Framework – Financial Reporting and Assumptions

Conceptual framework is a summary of terms and concepts that underlie the preparation and
presentation of financial statements for external users. It provides the foundation for standards
that:
a. Contributes to the 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 investors to identify opportunities and risks
across the world.
Purposes of Conceptual Framework
- Assist IASB to develop IFRS standards based on consistent concepts
- Assists 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
- Assist preparers of financial statements to develop accounting policy when a
standard allows a choice of an accounting policy
- Assist all parties to understand and interpret the IFRS standards

Accounting standards prevails over Conceptual Framework

Users of Financial information

1. Primary users
a. Existing and potential investors
b. Lenders and other creditors
2. Other users
a. Employees
b. Customers
c. Government and their agencies
d. Public

Scope of Conceptual Framework

a. Objective of financial reporting
b. Qualitative characteristics of useful financial information
c. Financial statements and reporting entity

d. Elements of financial statements

e. Recognition and derecognition
f. Measurement
g. Presentation and disclosure
h. Concepts of capital and capital maintenance
Financial Reporting is the provision of financial information about an entity to external users that
is useful to them in making economic decisions and for assessing the effectiveness of the
entity’s management.
- Provide information useful in making decisions about providing resources to the
entity
- Provide information useful in assessing the cash flow prospects of the entity
- Provide information about entity resources, claims and changes in resources and
claims
a. Liquidity is the ability of the firm to pay its currently maturing obligations
b. Solvency is the ability of the firm to pay its obligations when comes due.

Accrual accounting means that income is recognized when earned and regardless of when
received and expense is recognized when incurred regardless of when paid.

Limitations of Financial Reporting

a. FS do not and cannot provide all of the information that existing users need
b. FS are not designed to show the value of an entity.
c. FS provide common information to users
d. FS are based on estimate and judgment

Qualitative Characteristics
These are the qualities that make financial accounting information useful to all users.

Fundamental Qualitative Characteristics

1. Relevance, capacity of the information to influence a decision.
Example: the figures for August 2019 is relevant for decision making for next month but
data from August 2009 may not be useful.
a. Predictive value. It can be used to predicts future figures
Example: Based on the trend, sales are expected to increase by P1,000,000
b. Confirmatory value. It confirms previous predictions
Example: After a year sales increased by P1,000,000
Materiality. Information when omitted, misstated and obscured could affect the decisions of
primary users. It can be material based on nature and size of the item
Example: Losing P1,000 in the business firm like SM is not a big deal but to a sari-sari store, it
means a lot.
But even big companies can fire its employees if they are caught stealing item worth P 100,
because it is the nature of the transaction that makes it material

2. Faithful representation, represents economic phenomenon in words and numbers

a. Completeness, result of the adequate disclosure standard
Example: An item was sold for half of its price. It must disclose that the reason for
low price is because the item is near expiry date.
Standard of adequate disclosure means that all significant and relevant information
leading to the preparation of financial statements shall be clearly reported.
 b. Neutrality, without bias in the preparation and presentation of financial statements
Example: The accountant is questioning the liquidation documents of his girlfriend
marketing manager. Personal relationships should not interfere with the works of an
accountant

Prudence is the exercise of care and caution when dealing with the uncertainties in
the measurement process such that assets or income are not overstated and
liabilities or expenses are not understated
Conservatism is choosing a process that has the least effect on the equity
c. Free from error, no errors or omissions in the description of the transaction
Substance over form emphasised in substance over legal form.
Example: A business rents a space renewable indefinitely. In this case, the business
can record the space as their asset even if they are not the legal owners.

Enhancing Qualitative Characteristics

These are intended to increase the usefulness of the financial information that is relevant and
faithfully represented.
1. Comparability, ability to bring together for the purpose of noting points of likeness and
difference
Intracomparability. Comparing financial data from the same business.
Example: Comparing income from 2016 – 2019 of CSTC Inc.
Intercomparability/ Dimensional comparability. Comparing financial data of different businesses
on the same industry.
Example: Comparing the number of students of CSTC and CSCB
Consistency refers to the use of same method for the same item from period to period.
Example: A company measures its inventory using FIFO method perpetual system
2. Understandability, requires that financial information must be intelligible.
3. Verifiability. Different observers come to consensus regarding an item.
a. Direct. Amount of an item is easily verified. Example: cash count
b. Indirect. Amount of an item is checks through inputs to a model, formula or technique.
Example: physical count of inventory while the store is open.
4. Timeliness, must be available early enough when a decision is to be made
Cost constraint. The benefit derived from getting information should not exceed costs related to
it.

Financial Statements and Reporting Entity

Financial statement is the provision of financial information about an entity to external users that
is useful to them in making economic decisions and for assessing the effectiveness of the
entity’s management. It aims to:
a. Assessing the future cash flows to the reporting entity
b. Assessing management stewardship of the entity’s resources
Types of Financial Statements
1. Consolidated. These are financial statements prepared when the reporting entity
comprises both the parent and its subsidiaries.
Example: CSTC Financial statements comprises of its three campuses: Atimonan,
Lucena and Sariaya
2. Unconsolidated. These are financial statements prepared when the reporting entity is the
parent alone.
Example: Financial statements of Elrey Computer Shop
3. Combined. These are financial statements when the reporting entity comprises two or
more entities that are not linked by a parent and subsidiary relationship.

A reporting entity is an entity that is required or chooses to prepare a financial statement. The
reporting period is the period when the financial statements are prepared for general purpose
reporting.

Underlying Assumptions
These are the basic notions on which the accounting process is based. It is known as
postulates.
1. Going concern, it means that the accounting entity will operate indefinitely.
2. Accounting entity. This concept requires that the financial and business transactions of
the entity are separate from its owner.
Example: The owner of carinderia must pay when he/she eats his/her products.
The personal bills of the owner must not be shoulder by the business.
3. Time period. It suggests that business should follow certain frequency of reporting
- Calendar year. The business usually closes its books on December 31.
- Fiscal year. The business closes its books on other dates, not near December 31.
- Natural year. The business follows the natural cycle of the business.
Example: Poultry usually have 45 days cycle in raising chickens.
A farmer takes three months before he/she harvests his/her crops
4. Monetary unit. It must use one common unit of measure which is in the Philippines, the
Philippine peso. The amount must be quantifiable and the currency should withstand
inflation and/or deflation.