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Definition of Accounting

The Accounting Standard 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.

The Committee on Accounting Terminology of American Institute of Certified Public Accountants defines
accounting as follows:

 Accounting is the 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.

The American Accounting Association in its Statement of Basic Accounting Theory defines accounting as follows:

 Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgement and decision by users of information.

Important points

The following important points made in the definition of accounting should be noted:

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.

The definition that has stood the test of time is the definition given by the American Accounting Association.

This definition states that the very purpose of accounting is to provide quantitative information to be useful in making an
economic decision.

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

a. Identifying as the analytical component

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

Identifying

 This accounting is the recognition or nonrecognition of business activities as “Accountable” events.

 Not all business activities are accountable. For example, the hiring of employees, the death of the entity
president and the entering into a contract are all business activities but such events are not accountable because
they cannot be quantified or expressed in terms of a unit of measure.
 An event is accountable or quantifiable 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 Transaction

 Economic activities of an entity are referred to as transactions which may be classified as 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 the bank
c. Sale of Goods to a customer
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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 a common financial denominator.
 Financial statements without monetary amounts would be largely unintelligible or comprehensible.
 The Philippine peso is the unit of measuring accountable economic transactions.
 The measurement bases are historical cost and current value.
 Historical cost is the most common measure of financial transactions.
 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 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
transaction after they have 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 a 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 which include the statement of financial position,
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, processes information into reports
and communicates the reports to decision makers.
 A key product of this information system 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.

Overall objective of accounting

 The overall objective of accounting is to 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 essence of accounting is decision-usefulness.
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 Investors and other user are interested in financial accounting information necessary in making important
and significant economic decisions.

The Accountancy Profession

 At present, Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines.
 This law is known as the “Philippines Accountancy Act of 2004”.
 Accountancy has developed as a profession attaining a status equivalent to that of law and medicine.
 In the Philippines, in order to qualify to practice the accountancy profession, a person must finish degree in
Bachelor Science in Accountancy and pass a very difficult government examination given by the Board of
Accountancy.
 The Board of Accountancy is the body authorized by law to promulgate rules and regulations affecting the
practice of accountancy profession in the Philippines.
 The Board of Accountancy is responsible for preparing and grading the Philippine CPA examination.
 This computer-based examination is offered twice a year, one in May and another one in October, in
authorized testing centers around the country.

Limitation of the practice of public accountancy

 Single practitioners and partnerships for the practice of public accountancy shall be issued to certified
public accountants in public practice only upon showing in accordance with rules and regulations promulgated
by the Board of Accountancy and approved by the Professional Regulation Commissions that such registrant has
acquired a minimum of three years of meaningful experience in any of the areas of public practice including
taxation.
 The Securities and Exchange Commission shall not register any corporation organized for the practice of
public accountancy.

Accreditation to practice public accountancy

 Certified public accountants, firms and partnerships of Certified public accountants, including partners and
staff members thereof, are required to register with the Board of Accountancy and Professional Regulation
Commission for the practice of public accountancy.
 The Professional Regulation Commission upon favorable recommendation of Board of Accountancy 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, namely:

a. Public accounting
b. Private accounting
c. Government accounting

Public Accounting

 The field 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.
 As a matter of fact, large multinational accounting firms have separate division for each these services.

Auditing

 Auditing has traditionally been the primary service offered by most public accounting practitioners.
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 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 statement are
prepared.
 Actually, external auditing is the attest function of independent CPAs.
 The Bureau of Internal Revenue requires audited financial statements to accompany the filing of annual
income tax return.
 Banks and other lending institutions frequently require an audit by an independent CPA before granting a
loan to the borrower.
 Creditors and prospective investors place considerable reliance on audited financial statements on making
economic decision.

Taxation

 Taxation services 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 tac investigations.
 To offer this service effectively and efficiency, the public accountant must be thoroughly familiar with the tax
laws and regulations and updated with changes in taxation law and court cases concerned with
interpreting taxation law.

Management advisory services

 Management advisory services have become increasingly important in recent years although audit and tax
services are undoubtedly the mainstay of public accountants.
 The term management advisory services has no precise coverage but is used generally to refer to services to
clients on matters of accounting, finance, business policies, organization procedures, product costs,
distribution and many other phase of business conduct and operations.

Specifically, management advisory services include:

a. Advice on installation of computer system

b. Quality control
c. Installation and modification of accounting system
d. Budgeting
e. Forward Planning and forecasting
f. Design and modification of retirement plans
g. Advice on mergers and consolidations

Private Accounting

 Many Certified Public Accountants are employed in business entities in various capacity as accounting staff, chief
accountant, internal auditor and controller.
 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, 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
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 Government accounting encompasses the process of analyzing, classifying, summarizing and

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

Many Certified Public Accountants are employed in many branches of the government, more particularly:

a. Bureau of Internal Revenue

b. Commission on Audit
c. Department of Budget and Management
d. Securities and Exchange Commission
e. Bangko Sentral ng Pilipinas

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

 Republic Act No. 10912 is the law mandating and strengthening the continuing professional development
program for all regulated professions, including the accountancy profession.
 All certified public accountant shall abide by the requirements, rules and regulations on continuing
professional development to the approval of the Professional Regulation Commission, in Coordination with
the accredited national professional organization of certified public accountants or any duly accredited educational
institutions.
 Continuing professional development refers to the inculcation and acquisition of advanced knowledge, skill,
proficiency, ethnical, and moral values after the initial registration of the Certified Public Accountant for
assimilation into professional practice and lifelong learning.
 Continuing professional development raises and enhances the technical skill and competence of the
Certified Public Accountant

CPD Credit units

 The CPD credit units refer to the CPD credit hours required for the renewal of CPA license and accreditation
of a CPA to practice the accountancy profession every three years.
 Under the new BOA Resolution, all Certified Public Accountants regardless of area or sector of practice shall be
required to comply with 120 CPD credit units in a compliance period of three years.

However, the initial implementation of the 120 CPD credit units is gradual in the following period:

2017 80 credit units

2018 100 credit units

2019 120 credit units

 Excess credit units earned shall not be carried over to the next three-year period, except credit units earned
for masteral and doctoral degrees.
 It is to be emphasized that the Continuing Professional Development has become mandatory for CPA.
 The Continuing Professional Development is required for the renewal of CPA license and accreditation of
CPA to practice the accountancy profession.

Exemption from CPD

 A CPA shall be permanently exempted from a 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.

Accounting versus auditing

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 In a broad sense, accounting embrace auditing.

 Auditing is one of the areas of accounting specialization.
 In a limited sense, accounting is essentially constructive in nature. Accounting ceases when financial
statements are already prepared.
 On the other hand, auditing is analytical. The work of an auditor when the work of the accountant ends.
 After the financial statements are prepared, the auditor will begin to perform the task of auditing.
 The auditor examines the financial statements to ascertain whether they are in conformity with generally
accepted accounting principles.

Accounting versus bookkeeping

 Bookkeeping is procedural and largely concerned with development and maintenance of accounting
records.
 Bookkeeping is the “how” of accounting
 Accounting is conceptual and is concerned with the why, reason or justification for any action adopted.
 Bookkeeping is a procedural element of accounting as arithmetic is a procedural element of mathematics.

Accounting versus accountancy

 Broadly speaking, the two terms are synonymous because they both refer to the entire field of accounting
theory and practice.
 Technically speaking, however accountancy refers to the profession of accounting practice.
 Accounting is used in reference only to a particular field of accountancy such as public accounting, private
accounting and government accounting.

Financial accounting versus managerial accounting

 Financial accounting is primarily concerned with the recording business transactions and the eventual
preparation of financials statements.
 Financial accounting focuses on general purpose reports known as financial statements intended for
internal and external users.
 Financial accounting is the area of accounting that emphasizes reporting to creditors and investors.
 Managerial accounting is the accumulation and preparation of financial reports for internal users only.
 In other words, managerial accounting is the of accounting that emphasize developing accounting
information for use within an entity.

Generally Accepted Accounting Principles (GAAP)

 Accounting has evolved through time changing with the needs of society. As new type of transactions occur in
trade and commerce, accountants develops rules and procedures for recording them.
 These accounting rules, procedures and practices came to be known as generally accepted accounting principles
or simply GAAP.
 The principles have developed on the basis of experience, reason, custom, usage and practical necessity.
 GAAP represent the rules, procedures, practice and standards followed in the preparation and presentation
of financial statements.
 Generally accepted accounting principles are like laws that must be followed in financial reporting.
 The process of establishing GAAP is a political process which incorporates political actions of various
interested user groups as well as professional judgment, logic and research.

Purpose of accounting standards

 The overall purpose of accounting standards is to identify proper accounting practices for the preparation
and presentation of financials statements.
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 Accounting standards create a common understanding between preparers and users of financial statement
particularly the measurement of assets and liabilities.
 A set of high-quality accounting standards is necessity to ensure comparability and uniformity in financial
statements based on the same financial information.

Financial Reporting Standards Council (FRSC)

 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 Accounting Standards Council.
 The FRSC is the accounting standard setting body created by the Professional Regulation Commission
upon recommendation of the Board of Accountancy (BOA) to assist the BOA in carrying out its powers
and functions provided under R.A. 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 constitutes 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.

Compositions 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 from the following:

Board of Accountancy 1
Securities and Exchange Commission 1
Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
Commission on Audit 1
Major organization of preparers and users of
financial statements – Financial Executive Institute
of the Philippines or FINEX 1
Accredited national professional organization of CPAs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2_
Total 14

The Chairman and members of FRSC shall have a term of 3 years renewable for another term. Any member of the
ASC shall not be disqualified from appointed to the FRSC.

Philippine Interpretations Committee (PIC)

 The Philippine Interpretations Committee or PIC was formed by the FRSC in August 2006 and has replaced
the Interpretations Committee or IC formed by the Accounting Standards Council in May 2000.
 The role of the PIC 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.
 In other words, interpretations are intended to give authoritative guidance on issues that are likely to
receive divergent or unacceptable treatment because the standards do not provide specific and clear-cut rules
and guidelines.
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 The counterpart of the PIC in the United Kingdom is the International Financial Reporting Interpretations
Committee or IFRIC which has already replaced the Standing Interpretations Committee or SIC.

International Accounting Standards Committee (IASC)

 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.
 It was formed in June 1973 through an agreement made by professional accountancy bodies from
Australia, Canada, France, Germany, Japan, Mexico, the United States of America. The IASC is headquartered
in London, United Kingdom

Objectives of IASC

 To formulate and publish in the public interest accounting standards to be observed in the presentation of
financial statements and to promote their worldwide acceptance and observance.
 To work generally for the improvement and harmonization of regulations, accounting standards and
procedures relating to the presentation of financial statements.

International Accounting Standards Board (IASB)

 The International Accounting Standards Board or IASB now replaces IASC.

 The IASB publishes standards in a series of pronouncements called International Financial Reporting
Standards or IFRS.
 However, the IASB has adopted the body of standards issued by the IASC.
 The pronouncements of the IASC continued to be designated as “International Accounting Standards” or
IAS.
 The IASB standard -setting process includes in the correct order research, discussion paper, exposure
draft and accounting standard

Move toward IFRS

 In developing accounting standards that will be generally accepted in the Philippines, standards issued by other
standards setting bodies such as the USA Financial Accounting Standards Board (FASB) and the IASB are
considered.
 In the past years, most of the Philippine standards issued are based on American accounting standards.
 At present, the FRSC has adopted in their entirety all International Accounting Standards and International
Financial Reporting Standards.
 The move toward IFRS is essential to achieve the goal of one uniform and globally accepted financial
reporting standards.
 The Philippines is fully compliant with IFRS effective January 2005, a process which was started back in
1997 in moving from USA GAAP to IFRS.

The following factors are considered in deciding to move totally to international accounting standards:

a. Support of 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 choice of accounting treatments.
d. Increasing recognition of international accounting standards by the World Bank, Asian Development Bank
and World Trade Organization.
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Philippine Financial Reporting Standards

 The Financial Reporting Standard Council issues standards in a series of pronouncements called the
“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.
b. Philippine Accounting Standard which corresponds to International Accounting Standards.
c. Philippine Interpretations which correspond to Interpretations of the International Financial Reporting
Interpretations Committee (IFRIC) and the Standing Interpretations Committee, and Interpretations
developed by the PIC.