CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

CHAPTER 1
OVERVIEW OF ACCOUNTING

What is accounting?
Accounting is the process of IDENTIFYING, MEASURING and COMMUNICATING economic information
to permit informed judgement and decisions by the users of the information. (AAA)

IDENTIFYING
It is the process of ANALYZING the events and transactions to determine whether or not they will be
recognized.
( RECOGNITION - refers to the process of including the effects of an accountable events in the statement of
financial position or the statement of comprehensive income through JOURNAL ENTRY)
*ONLY ACCOUNTABLE EVENTS ARE RECOGNIZED
(ACCOUNTABLE EVENTS - it is the one that affects the ASSET, LIABLITIES, EQUITY, INCOME OR EXPENSES of
an entity. It is also known as ECONOMIC ACTIVITIES, which is the subject matter of accounting.)

TYPES OF EVENTS OT TRANSACTIONS

1. EXTERNAL EVENTS - are events that involves an entity and another external party.

TYPES OF EXTERNAL EVENTS

i. EXCHANGE (reciprocal transfer) - an event wherein there is a reciprocal giving and receiving of
economic resources or discharging of economic obligations between an entity and an external party.
Examples:
 Sale
 Purchase
 Payment of liabilities
 Etc.

ii.Non-reciprocal Transfer - is a one-way transaction in that the party giving something does not receive
anything in return.
Examples:
 Donations
 Gifts
 Charitable contributions
 Theft
 Provision of capital by owners
 Distribution to owner

iii. External event other than transfer - an event that involves changes in the economic resources and
obligation of an entity caused by external party and external source but does not involve transfers of
resources and obligations
Examples:
 Changes in fair values and price levels
 Obsolescence
 Technological changes
 Vandalism, etc.
2. INTERNAL EVENTS - an events that do not involve an external party.

TYPES OF INTERNAL EVENTS

I. PRODUCTION - the process by which the resources are transformed into finished goods.
Examples:
 Conversion of raw materials into finished goods
 Production of farm products, etc.

II. CASUALTY - an unanticipated loss from disasters or other similar events.

Examples:
 Loss from fire
 Flood, etc

MEASURING

ECONOMIC ENTITY TYPES

Not for profit
- carries out some socially desirable needs of the community or its members
- activities are not directed towards making profit
Business Entity
- one that operates primarily for profit

ECONOMIC RESOURCES (asset)

OBLIGATIONS (liabilities)

ECONOMIC ACTIVITIES
1. PRODUCTION - converting economic resources into finished goods and services
2. EXCHANGE - trading resources and obligations to other resources and obligation
3. CONSUMPTION - using the final output of the production process
4. INCOME DISTRIBUTION - allocation of rights
5. SAVINGS - setting aside rights in todays consumption for future use.
6. INVESTMENT - the process of using current inputs to increase the stock of resources available for
output as opposed to immediately consumable output