Conceptual Framework &

Accounting Standard

2020 EDITION, MILLAN

Overview of Accounting
Definition of Accounting
Accounting is “the process of
identifying, measuring, and
communicating economic information to
permit informed judgements and
decisions by users of the information.”
(American Association of
Three important activities included in
the definition of accounting
1. Identifying
2. Measuring
3. Communicating
Identifying
Identifying is the process of
analyzing events and transactions to
determine whether or not they will be
recognized.
Only accountable events are
recognized (i.e., journalized). An
accountable event is one that affects the
assets, liabilities, equity, income or
expenses of an entity. It is also known as
economic activity, which is the subject
matter of accounting. Only economic
activities are emphasized and recognized
in accounting. Sociological and
psychological matters are not recognized.
Non-accountable events are not
recognized but disclosed only in the
notes, if they have accounting relevance.
Disclosure only in the notes is not an
application of the recognition process. A
non-accountable event that has an
accounting relevance may be recorded

Recognition refers to the process

of including the effects of an accountable
event in the statement of financial
TYPES
position or the OF EVENTS OR TRANSACTION
statement of
comprehensive income through a journal
1. External Events- are events that involve an entity and another external party.
 Types of External Events
i. Exchange (reciprocal transfer)-
an event wherein there is a Examples: sale, purchase, payment of
reciprocal giving and receiving of liabilities, receipt of notes receivable in
economic resources or discharging exchange for accounts receivable, and the
of economic obligations between like.
an entity and external party.
ii. Non-reciprocal transfer- is a “one Examples: donations, gifts or charitable
way” transaction in that the party contributions, payment of taxes,
giving something does not receive imposition of fines, theft, provision of
anything in return while the party capital owners, distributions to owners
receiving does not give anything in and the like.
exchange.
iii. External event other than Examples: changes in fair values and
transfer- an event that involves price levels, obsolescence, technological
changes in the economic resources changes, vandalism, and the like.
or obligations of an entity caused
by an external source but does not
involve transfers or obligations.
2. Internal Events- are events that do not involve an external party.
Types of Internal Events
i. Production- the process by which Examples: conversion of raw materials
resources are transformed into into finished products, production of
finished goods. farm products, and the like.
ii. Casualty- an unanticipated loss Examples: loss from fire, flood, and
from disasters or other similar other catastrophes.
events.
Measuring
Measuring involves assigning numbers, normally in monetary terms, to the economic
transactions and events.
Several measurement bases are used in accounting which include, but not limited to,
historical cost, fair value, present value, realizable value, current cost, and sometimes inflation
adjusted costs. The most commonly used is historical cost. This is usually combined with the other
measurement bases. Accordingly, financial statements are said to be prepared using a mixture of
costs and values. Costs include historical cost and current cost while values include the other
measurement bases.
Valuation by fact or opinion
The use of estimates is essential in providing relevant information. Thus, financial statements are
said to be a mixture of fact and opinion.
 An economic entity is a separately identifiable combination of persons and property that uses
or controls economic resources to achieve certain goals or objectives. An economic entity may either
be a:
a. Not-for-profit entity- one that carries out some socially desirable needs of the community or
its members and whose activities are not directed towards making profit
b. Business entity- one that operates primarily for profit.