INTRODUCTION TO AE111
LECTURE - AE111
ACCOUNTING
Accounting is the language of business.
It is the system that includes recording,
summarizing, and analyzing an economic entity’s
financial transactions and effectively
communicating this information.
Many users including internal users, banks,
investors, government agencies, financial and
economic analysts rely on the financial
information provided by accounting in making
sound financial decisions.
Financial information is presented to common
users through financial statements.
OTHER DEFINITIONS
American Accounting Association (AAA)
- Accounting is the process of identifying,
measuring, and communicating economic
information to permit informed judgment and
decision by users of the information.
American Institute of Certified Public
Accountants (AICPA)
- 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 results thereof.
Accounting Standards Council (ACS)
- Accounting is a service. Its function is to provide
quantitative information, primarily financial in
nature, about economic entities that are intended
to be used in making economic decisions.
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FUNCTIONS OF ACCOUNTING
1. Identifying
- the process of recognising business
activities whether accountable or not.
● Only events that are accountable should
be recognized.
● An accountable event is one that is
quantifiable and has an effect on assets,
liabilities, and equity.
Requisites:
a. It affects a financial element of accounting.
It either increases or decreases the asset,
liability, equity, income and/or expense
(probability criterion)
b. It is a result of a past activity (historical
nature)
c. It can be measured reliably (measurability
criterion)
Types of Accountable Events:
External Events
- Events wherein another party participates
- It may be through transfers of
non-transfers
● Exchanges
- Involves two-way movement of
giving and receiving
● Non-reciprocal
- One-way movement; it is either
giving or receiving
Interval Events
- Events wherein only the entity participates
- Examples are production and casualities
2. Measuring
- the process where accountable events are
assigned peso amounts that are assumed
to have stable purchasing power.
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● The unit of measure of accounting is
money, expressed in prices.
3. Communicating
- the process of preparing and distributing
reports to potential users of accounting
information and interpreting the
significance of this processed information.
SPECIALIZED FIELDS AND BRANCHES OF
ACCOUNTING
Public Accounting
Accountants who are in public accounting offer
professional services for a fee like other
professionals do. They do not keep an
employer-employee relationship.
They are professionals providing services to
which may be external auditing, tax services, or
management advisory services.
Private Accounting
Government Accounting
PHILIPPINE REGULATORY AGENCY
Republic Act. 9298
- also known as the Philippine Accountancy
Act of 2004
- the law that regulates the practice of
accountancy in the Philippines
RA 9298 provides and governs:
a. The standardization and regulation of the
accountancy profession;
b. The examination of registration of certified
public accountants; and
c. The supervision, control, and regulation of
the practice of accountancy in the
Philippines.
Professional Regulatory Board of Accountancy
- the body authorized by the act to
promulgate rules and regulations affecting
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the practice of accountancy in the
Philippines.
The Philippine Regulatory Act specified that:
- only Filipino citizen;
- who finished the degree of Bachelor of
Science in Accountancy; and
- has passed the CPA board examination
can practice the accountancy profession.
Special Notes on Public Practice:
● A certificate of accreditation shall be
issued to CPAs in public practice only
upon showing in accordance with rules
and regulations promulgated by the
PRBOA and approved by the Professional
Regulation Commission (PRC) that such
registrant has acquired a minimum
three-year meaningful experience in any
areas of public practice.
● Single practitioners and partnerships for
the practice of public accountancy shall be
registered CPAs in the Philippines.
● The Securities and Exchange Commission
(SEC) shall not register any corporation
organized for the practice of public
accountancy.
CONTINUING PROFESSIONAL
DEVELOPMENT
Republic Act. 10912
- the law mandating and strenghtening the
CPD program for all regulated
professions, including the accountancy
profession.
CPD is defined as the inculcation and acquisition
of advanced knowledge, skill, proficiency, and
ethical moral values after the initial registration of
the CPA. It raises awareness and enhances the
technical skill and competence of the CPA.
CPD credit units refer to the required units for the
renewal of CPA license and accreditation of a
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CPA to practice the accountancy profession every
three years.
- 120 credit units for all CPAs regardless of
sector of practice
- 15 credit units for renewal of CPA license
- CPAs who are 65 years old and above are
not required to comply with the
requirements.
ACCOUNTING STANDARD-BODY SETTING
International Accounting Standards Board (IASB)
- Replaced the International Accounting
Standards Committee
- Publishes the International Financial
Reporting Standards
- Adopted the standards of the IASC which
are the International Accounting
Standards
The goal of IASB is to create one uniform and
globally accepted financial reporting standard.
Financial Reporting Standards Council (FRSC)
- The accounting standard setting body in
the Philippines that establishes and
improves accounting standards that will be
generally accepted accounting principles
in the country.
The FRSC superseded the Accounting Standards
Council when the R.A 9298 was adopted.
The Philippine Regulation Commission created
FRSC upon recommendation of the Board of
Accountancy.
The FRSC is composed of 15 members.
➢ A chairman who has been or is presently a
senior accounting practitioner.
➢ 14 representatives from:
- The Board of Accountancy;
- Securities and Exchange
Commission;
- Banko Sentral ng Pilipinas;
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- Bureau of Internal Revenue;
- Commission on Audit;
- Major organizations of preparers
and users of financial statements;
and
- Two representatives per accredited
professional organization of CPAs
from the public practice; commerce
and industry; academe and
government.
INTERPRETATIONS COMMITTEE
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-out
rules and guidelines.
Philippine Interpretation Committee (PIC)
- Formed by the FRSC in August 2016.
- Its role is to prepare interpretations of
PFRS for approval by the FRSC and to
provide timely guidance on financial
reporting issues not specifically addressed
in the current PFRS.
- It is the counterpart of the International
Financial Reporting Interpretations
Committee (IFRIC) which is based in the
United Kingdom.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
Generally Accepted Accounting Principles refer to
the standard framework of guidelines for use in
any given jurisdiction; generally known as
accounting standards
The standard-setting process IASB normally goes
through include:
a. The conduct of a research;
b. Preparation of a discussion paper;
c. Floating of the exposure draft; and
d. The distribution of the financial accounting
standard.
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CONCEPTUAL FRAMEWORK
Conceptual Framework is defined as a “coherent
system of interrelated objectives and
fundamentals that should lead to consistent
standards that prescribe the nature, function, and
limits of financial accounting and financial
statements.” (AT Foulks Lynch)
It is a set of guiding principles used to plan and
decide financial accounting standards.
STATUS AND PURPOSE
Purpose
- Assist the International Accounting
Standards Board (IASB) to develop
International Financial Reporting
Standards (IFRS)
- Assist preparers to develop consistent
account policies
- Assist all parties to understand and
interpret standards
Status
- Conceptual Framework is not a standard
- Standards may depart from the
Conceptual Framework
- Conceptual Framework may change with
no automatic changes to the standards
- Conceptual Framework contributes to the
mission (Transparency, Accountability,
Efficiency) of the IFRS Foundation
CHAPTER 1 : OBJECTIVES OF FINANCIAL
REPORTING
Objective
- To provide financial information about the
reporting entity that is useful to existing
and potential investors, lenders, and other
creditors (primary users) in making
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decisions relating to providing resources
to the entity.
Usefulness and Limitations
- Many users may only rely on General
Purpose Financial Reports
- Cannot provide all information, such as
economic conditions
- Not designed to show the value of the
entity, but help users to estimate its value
- Internal users need not rely on General
Purpose Financial Reports
- Other users may find it useful
- Based on estimates, judgments, and
models (to a large extent)
Information about resources, claims, and changes
thereto
a. Economic resources and claims
● Identify strengths and weaknesses
● Assess liquidity, solvency, and
flexibility
● Assess management stewardship
b. Changes in resources and claims provide
information about:
● Financial Performance help users
to understand returns and predict
future returns
● Other changes give complete
understanding
CHAPTER II : QUALITATIVE
CHARACTERISTICS
Fundamental Characteristics
- contents of Financial Reports
a. Relevance
● Information is relevant if it affects the
decision of users
● Financial information is capable of making
a difference in decisions if it has predictive
value or confirmatory value.
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Materiality
- Entity-specific relevance
-
b. Faithful Representation
● Information must faithfully represent the
legal and substance form of what it
purports to represent.
● It is affected by the level of measurement
uncertainty.
● It must be complete, neutral, and free from
error.
Enhancing Characteristics
- Presentation of Financial Reports
a. Verifiability
- Knowledgeable and independent
observers reach a consensus
b. Comparability
- Identify and understand similarities
and dissimilarities; assisted by
Consistency
c. Understandability
- Clear and concise with users with
reasonably knowledge of business
and economic activities
d. Timeliness
- Available in time to be capable of
influencing decisions
Cost Constraint
- The benefit of providing the information
needs to justify the cost of providing and
using the information.
CHAPTER III : FINANCIAL STATEMENT AND
REPORTING ENTITY
Objective of Financial Statements
- To provide information about the reporting
entity’s assets, liabilities, equity, income,
and expenses that are useful to users of
financial statements in assessing the
prospects for future net cash inflows to the
reporting entity assessing management’s
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stewardship to the entity’s economic
resource.
Reporting Entity
- An entity that is required, or chooses, to
prepare financial statements
- Not necessarily a legal entity - could be a
portion of an entity or compromise more
than one entity.
Financial Statements
- A particular form of financial reports that
provide information about the reporting
entity’s assets, liabilities, and equity.
Reporting Period
- Specified period of time the FS are
prepared for
Perspective
- POV of the reporting entity
Consolidated Financial Statements
- Provide information about assets,
liabilities, equity, income, and expenses of
both the parent and its subsidiaries as a
single reporting entity.
Unconsolidated Financial Statements
- Provide information about assets,
liabilities, equity, income, and expenses of
the parent entity only.
Combined Financial Statements
- Provide information about assets,
liabilities, equity, income, and expenses of
two or more entities that are not all linked
by a parent-subsidiary relationship.
UNDERLYING ASSUMPTIONS
Underlying assumptions are the foundations of
accounting principles. It is where the
accounting principles are derived.
Going Concern Assumption
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● The financial statements are normally
prepared on the assumption that an
enterprise is a going concern and will
continue in operation in the foreseeable
future.
● It allows the readers of financial
statements to assume that the company
will continue long enough to carry out its
objectives and commitments.
Accounting Entity Assumption
● The economic entity or accounting entity
assumption presumes that economic
events and transactions can be identified
with an economic entity.
● The organization is separate and distinct
from the owners.
Monetary Unit Assumption
● It states that elements of the financial
statements must be measured in terms of
the Philippine Peso currency.
Time Period or Periodicity Assumption
● Time period assumption divides the life of
the business into shorter periods like
annually, semi-annually, quarterly or
monthly.
● Interim reports may also be prepared
during a year. These are periods shorter
than a year.
Calendar Year
- a twelve-month period that ends on
December 31
Fiscal Year
- a twelve-month period that ends when the
activities of the business are at the lowest
point in its annual cycle.
Accrual Basis
● The effects of transactions and other
events are recognized when they occur
(and not when cash or its equivalent is
received or paid) and they are recorded in
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the accounting records and reported in the
financial statements of the periods to
which they relate.
CHAPTER IV : ELEMENTS OF FINANCIAL
STATEMENT
Related to Financial Position
Asset
- A present economic resource controlled
by the entity as a result of past events
Economic Resource
- A right that has the potential to produce
economic benefits
Liability
- A present obligation of the entity to
transfer an economic resource as a result
of past events
Obligation
- A duty or responsibility that the entity has
no practical ability to avoid
Related to Financial Performance
Income
- Increases in assets, or decreases in
liabilities, that results in increases in
equity, other than those relating to
contributions from holders of equity claims
Expenses
- Decreases in assets, or increases in
liabilities, that result in decreases in equity,
other than those relating to distributions to
holders of equity claims
Unit of Account
- the right(s) or obligation(s), or group of
rights and obligations, to which recognition
criteria and measurement are applied
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CHAPTER V : RECOGNITION AND
DERECOGNITION
Recognition
- the process of capturing for inclusion in
the financial statements
Recognition Criteria
a. Relevance
● Existence uncertainty
● Low probability of a flow of
economic benefits
b. Faithful Representation
● Measurement Uncertainty
● Recognition Inconsistency
(Accounting Mismatch)
● Presentation and Disclosure
Derecognition
- the removal of all or part of a recognized
asset or liability from an entity’s statement
of financial position
Derecognition normally occurs:
a. When the entity loses control of all or part
of the recognized asset
b. When the entity has no longer a present
obligation for all or part of the recognized
liability
Derecognition aims to faithfully represent:
- Any asset and liabilities retained after the
transaction that led to the derecognition
- Change in the equity’s assets and
liabilities as a result of that transaction
CHAPTER VI : MEASUREMENT
Historical Cost Measurement Bases
Historical Cost
- Provides information
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Current Value Measurement Bases
Current Value
- Provides information updated to reflect
conditions at the measurement date
a. Fair Value
- Reflect market participants’ current
expectations about the amount,
timing, and uncertainty of future
cash flows
b. Value in Use and Fulfillment Value
- Reflects entity-specific current
assumptions about the amount,
timing, and uncertainty of future
cash flows
c. Current Cost
- Reflects the current amount that
would be paid to acquire an
equivalent asset and received to
take on an equivalent liability
Selecting Measurement Basis
a. Relevance
- Characteristics of the asset or
liability
- Contribution to future cash flows
b. Faithful Representation
- Measurement inconsistency
- Measurement uncertainty
● Cost constrains the selection of
measurement basis, just as it constrains
other financial reporting decisions.
CHAPTER VII : PRESENTATION AND
DISCLOSURE
CHAPTER VIII : CAPITAL AND CAPITAL
MAINTENANCE
Capital
a. Financial Concept
- Pertains to the invested money
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- It is adopted by most entities’

preparation of financial statements
b. Physical Concept
- Pertains to the opening capability
or productive capability of the
entity

Capital Maintenance
- Profit determination

Financial Capital Maintenance

- nominal monetary amount
- constant peso amount

a. Using Nominal Amount

● Profit includes all pre level
changes but are not recognized
until disposed of in an exchange
transaction
b. Using Constant Amount
● Profit includes only the price level
changes exceeding the general
level price changes.
● General level price changes are
accounted for as capital
maintenance adjustments equity.

Physical Capital Maintenance

- current cost basis

● All price changes are acquitted as capital

maintenance adjustments.