CHAPTER 1

THE ACCOUNTANCY PROFESSION

TECHNICAL KNOWLEDGE

 To understand the definition and concept of accounting.

 To know how accounting serves as an information system.
 To identify the overall objective of accounting.
 To describe the practice of the accountancy profession in the Philippines.
 To understand the Continuing Professional Development in the field of accounting.
 To know the meaning of generally accepted accounting principles.
 To explain the need for accounting standards.
 To identify the standard setting body in the Philippines.
 To describe the creation of the International Accounting Standards Board.
 To know the meaning of IFRS.

DEFINITION OF ACCOUNTING

The accounting Standards 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 the 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 result 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 the information’s.

Important Points ;

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

One : Accounting is about quantitative information.

Two : The information is likely to be financial in nature.
Three : 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.

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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 process 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 an psychological matters are beyond the province of accounting.

External and Internal transactions

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 pf external transactions :

a. Purchase of goods from a supplier.

b. Borrowing money from a bank.
c. Sale of goods to a customer.
d. Payment of salaries to employees.
e. Payment of taxes to the government.

Internal transaction are economic event involving the entity only.

 Internal transactions are the economic activities that take place entirely within the entity.
 Production and casually loss are examples of internal transactions.
 Production is the process by which resources are transformed in products.
 Casually is any sudden and unanticipated loss from fire, flood, earthquake, and other event
ordinarily termed as an act of God.

Measuring

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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 incomprehensible.

The Philippine peso is the unit of measuring accountable economic transactions.

The measurements bases are historical cost, current cost, realizable value and present value.

Historical cost is the most common measure of financial transactions.

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.

Actually, the communicating process is the reason why accounting has been called ”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 transactions after they have been identified and measured.
 Classifying is the sorting or grouping of similar and interrelated economic transactions into their
perspective 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 flow.

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.”

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 - An accountant’s primary task is to supply financial information so that the statement users could
make informed judgement and better decisions.

- The essence of accounting is decision-usefulness.

- Investors and other users 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 regulatimg the practice of accountancy in the
Philippines.
- This law is known as the “Philippine 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 of 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 the 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 another 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 registered
certified public accountants in the Philippines.
- A certificate of accreditation shall be issued to certified public accountants in public practice only
upon showing in accordance with rules and regulations promulgated by the Board of Commission
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 the Board of
Accountancy shall issue the Certificate of Registration to practice public accountancy will shall be
valid for 3 years and renewable every 3 years upon payment of required fees.

Certificate Public Accountants generally practice their profession in three main areas, namely ;

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

PUBLIC ACCOUNTING

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 - The field of public accounting or public accountantancy 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 of these
services.

AUDITING

- Auditing has traditionally been the primary service offered by most public accounting practitioners.
- 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 statements 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 service 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 tax investigations.
- To offer the service effectively and efficiently, 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 phases 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.

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 - 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 and 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

- Government accounting encompasses the process of analyzing, classifying, summarizing and

communicating all transactions involving the receipt and disposition of government funds and
property and interpreting the result.
- The focus of government accounting is the custody and administration 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 accountants shall abide by the requirements, rules and regulations on continuing
professional development to be promulgated by the Board of Accountancy, subject to the approval of
the professional Regulations Commission, in coordination with the accredit 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, and ethical 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 Accounting regardless of are 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

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 - 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
Certified Public Accountants.
- 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 CPD requirements upon reaching the age of 65 years.
- However, the examination applied only to the renewal of CPA license and not for the purpose of
accreditation to practice the accountancy profession.

ACCOUNTING vs AUDITING

- In a board sense, accounting embraces auditing. Auditing us one of the areas of accounting
specialization.
- In a limited sense, accounting is essentially constructive in nature. Accounting cease when financial
statements are already prepared.
- On the other hand, auditing Is analytical. The work of an auditor begins 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 vs. 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 vs. ACCOUNTANCY

- Broadly speaking the two terms are synonymous because they both refer to the entire field of
accounting theory and practices.
- 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 ang government accounting.

FINANCIAL ACCOUNTING vs. MANAGERIAL ACCOUNTING

- Financial accounting is primarily concerned with the recording of business transactions and the
eventual preparation of financial statements.
- Financial accounting focuses on general purposes 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.

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 - In other words, managerial accounting is the area od accounting that emphasize developing
accounting information for use within an entity.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

- Accounting has evolved through time changing with the needs of society. As new types of
transactions occur in trade and commerce, accountants develop 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
necessily.
- Generally accepted accounting principles 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 social process which incorporates political actions of various
interested user groups as well as professional judgement, logic and research.

PURPOSE OF ACCOUNTING STANDARDS

- The overall purpose of accounting standards is to identify proper accounting practice for the
preparation and presentation of financial statements.
- Accounting standards create a common understanding between preparers and users of financial
statements particularly the measurements 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

- In the Philippines, the development of generally accepted accounting principles is formalized

initially through creation of the Accounting Standards Council or ASC.
- Th 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 to assist the Board of Accountancy
in carrying out its powers and functions provided under R.A. Act 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 Constitute
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.

COMPOSITION OF FRSC

The PFRSC 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 International Revenue 1
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 Commission on Audit 1
Major Organization of preparers and users of 1
financial statements - Financial Executive Institute
of the Philippines or FINEX

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

PHILIPPINE INTERPRETATIONS COMMITTEE

- The Philippine Interpretations Committee or PIC was formed by the FRSC in August 2016 and has
replaced the Interpretations Committee or IC formed by the Accounting Standards Council in May
2000.
- The role of the PIC is to prepare interpretations of PFRSC 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
clearcut rules and guidelines.
- 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

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 Netherlands, the United Kingdom and Ireland,
and the United State of America. The IASC is headquartered in London, United Kingdom.

OBJECTIVES OF IASC
a. 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.
b. 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

- The international Accounting Standards Board or IASB now replaces the International Accounting
Standards Committee or 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.
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 - The pronouncements of the IASC continue to be designated as “International Accounting
Standards” or IAS.
- The IFRS is a global phenomenon intended to bring about greater transparency and a higher degree
of comparability in financial reporting.

MOVE TOWARD IFRS

- In developing accounting standards that will be generally accepted in the Philippines, standards
issued by other standard 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.
- However, at present the FRSC has adopted in their entirely all International Accounting Standards
and International Financial Reporting Standards.
- The move toward IFRS is essential to achieve the global of one uniform and globally accepted
financial reporting standards.
- The Philippines is fully compliant with IFRS effective January 2005, a process which was standard
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 the 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 choices of accounting
treatments.
d. Increasing recognition of international accounting standards by the World Bank, Asian Development
Bank and World Trade Organization.

PHILIPPINE FINANCIAL REPORTING STANDARDS.

The Financial Reporting Standards Council issues standards in a series pronouncements called ”Philippine
Financial Reporting Standards” of PFRS.

The Philippine Financial Reporting Standards collectively include all of the following :

a. Philippine Financial Reporting Standards which correspond to International Financial Reporting

Standards.

The Philippine Financial Reporting Standards are numbered the same as their counterpart in
International Financial Reporting Standards.
b. Philippine Accounting Standards which correspond to International Accounting Standards.

The Philippine Accounting Standards are numbered the same as their counterpart in International
Accounting Standards.
c. Philippine Interpretations which correspond to Interpretations of the IFRIC and the standing
Interpretations Committee, and Interpretations developed by the Philippine Interpretations
Committee.

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QUESTIONS :

1. Define accounting.

2. What are the important points made in the definition of accounting?

3. Explain “identifying” as a component of accounting.

4. What are transactions?

5. Distinguish external transactions and internal transactions.

6. When is a transaction accountable or qualifiable?

7. Explain “measuring” as a component of accounting?

8. What are the measurement bases used in accounting?

9. Explain “communicating” as component of accounting?

10. Explain recording, classifying and summarizing in relation to the communicating component of
accounting.

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 11. Explain why accounting has been called the “universal language of business”.

12. Explain accounting as an information system.

13. What is the overall objective of accounting?

14. Describe the accountancy profession.

15. What is R.A. No. 9238?

16. What do you understand by the Board of Accountancy?

17. Explain the limitation of the practice of public accountancy.

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