CONCEPTUAL FRAMEWORK AND ACCOU NTING STANDARDS – WEEK 1

OVERVIEW OF ACCOUNTING

Accounting is “the process of identifying, measuring, and communicating economic information

to permit informed judgment and decisions by users of information.” – (American Association of
Accountants)

Three important activities included in the definition of accounting.

1. Identifying - the process of analyzing events and transactions to determine whether or not they will be
recognized. Only accountable events are recognized.

Recognition refers to the process of including the effects of an accountable event in the statement of
financial position or the statement of comprehensive income through a journal entry.
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.

2. Measuring - involves assigning numbers, normally in monetary terms, to the economic transactions and
events.

3. Communicating - the process of transforming economic data into useful accounting information, such as
financial statements and other accounting reports, for dissemination to users.

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TYPES OF EVENTS OR TRANSACTIONS

1. External events – are events that involve an external party.

Types of External Events:

i. Exchange (reciprocal transfer) – an event wherein there is a reciprocal giving and receiving of
economic obligations between an entity and an external party. Examples: sale, purchase,
payment of liabilities, receipt of notes receivable in exchange for accounts receivable, and the
like.
ii. Non-reciprocal transfers – is a “one-way” transaction in that the party giving something does not
receive anything in return while the party receiving does not give anything in exchange.
Examples: donations, gifts or charitable contributions, payment of taxes, imposition of theft,
provision of capital by owners, distributions to owners, and the like.

iii. External event other than transfer – an event that involves changes in the economic resources
or obligations of an entity caused by an external party or external source but does not involve
transfers of resources or obligations.
Examples: changes in fair values and price levels, obsolescence, technological changes,
vandalism, and the like.

2. Internal events – are events that do not involve an external party.

Types of Internal Events:

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 i. Production – the process by which resources are transformed into finished goods.

Examples: conversion of raw materials into finished products, production of farm products, and
the like.

ii. Casualty – an unanticipated loss from disasters or other similar events.

Examples: loss from fire, flood, and other catastrophes.

MEASUREMENT BASES

The several measurement bases used in accounting include, but not limited to, the following:

1. Historical cost
2. Fair value
3. Present value
4. Realizable value
5. Current cost
6. 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.

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.

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 When measurement is affected by estimates, the items measured are said to be valued by opinion.

Examples:

a. Estimates of uncollectible amounts of receivables.

b. Depreciation and amortization
c. Estimated liabilities, such as provisions.
d. Retained earnings, which is affected by various estimates of income and expenses.

When measurement is unaffected by estimates, the items measured are said to be valued by fact.

Examples:

a. Ordinary share capital valued at par value.

b. Land stated at acquisition cost.
c. Cash measured at face amount.

BASIC PURPOSE OF ACCOUNTING

The basic purpose of accounting is to provide information that is useful in making economic
decisions.

Various sources of information are used when making economic decisions and the financial
statements are only one of those sources. Other sources may include current events, industry
publications, internet resources, professional advices, expert systems, etc.

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 Economic entities use accounting to record economic activities, process data, and disseminate
information intended to be useful in making economic decisions.

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; or

b. Business entity – one that operates primarily for profit.

Economic activities are activities that affect the economic resources (assets) and obligations
(liabilities), and consequently, the equity of an economic entity. Economic activities include:

1. Production – the process of converting economic resources into outputs of goods and services that
are intended to have greater utility than the required inputs.
2. Exchange – the process of trading resources or obligations for other resources or obligations.
3. Consumption – the process of using the final output of the production process.
4. Income distribution – the process of allocating rights to the use of output among individuals and
groups in society.
5. Savings – the process of setting aside rights to present consumption in exchange for rights to future
consumption.
6. Investment – the process of using current inputs to increase the stock resources available for output
as opposed to immediately consumable output.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING

1. Quantitative information – information expressed in numbers, quantities, or units.

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2. Qualitative information – information expressed in words or descriptive form. Qualitative information
is found in the notes to financial statements as well as on the face of the other financial statements.

3. Financial information – information expressed in money. Financial information is also quantitative

information because monetary amounts are normally expressed in numbers.

TYPES OF ACCOUNTING INFORMATION

1. General purpose accounting information – designed to meet the common needs of most statement
users. This information is provided under financial accounting. General purpose information is
governed by Generally Accepted Accounting Principles (GAAP) represented by the Philippine
Financial Reporting Standards (PFRSs).

2. Specific purpose accounting information – designed to meet the specific needs of particular
statement users. This information is provided by other types of accounting other than financial
accounting, e.g., managerial accounting, tax basis accounting.

ACCOUNTING CONCEPT

Accounting concepts refer to the principles upon which the process of accounting is based. The term
“accounting concepts” is used interchangeably with the following terms:

Accounting assumptions (accounting postulates) – are the fundamental concepts or principles and
basic notions that provide the foundation of the accounting process.

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 Accounting theory – is logical reasoning in the form of a set of broad principles. It comprises of
Conceptual Framework and PFRSs.

Examples of accounting concepts:

1. Double-entry system – each accountable event is recorded in two parts – debit and credit.
2. Going concern assumption - the entity is assumed to carry on its operations for an indefinite period of
time.
3. Separate entity (Accounting entity / Business entity concept / Entity concept) – the entity is viewed
separately from its owners.
4. Stable monetary unit – amounts in the financial statements are stated in terms of a common unit of
measure; changes in purchasing power are ignored.
5. Time period (Periodicity / Accounting period) – the life of the business is divided into series of
reporting periods.
6. Materiality concept – information is material if its omission or misstatement could influence economic
decisions.
7. Cost-benefit (Cost constraint / Reasonable assurance) – the cost of processing and communicating
information should not exceed the benefits to be derived from it.
8. Accrual basis of accounting – effects of transactions are recognized when they occur (and not as cash
is received or paid) and they are recognized in the accounting periods to which they relate.
9. Historical cost concept (Cost principle) – the value of an asset is determined on the basis of
acquisition cost.
10. Concept of Articulation – all of the components of a complete set of financial statements are
interrelated.
11. Full disclosure principle – financial statements provide sufficient detail to disclose matters that make a
difference to users, yet sufficient condensation to make the information understandable, keeping in
mind the costs of preparing and using it.
12. Consistency concept – the financial statements are prepared on the basis of accounting policies which
are applied consistently from one period to the next.

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13. Matching (Association of cause and effect) – costs are recognized as expenses when the related
revenue is recognized.
14. Entity theory – the accounting objective is geared towards proper income determination. This theory
emphasizes the income statement.(A = L + C)
15. Proprietary theory – the accounting objective is geared towards the proper valuation of assets. This
theory emphasizes the balance sheet statement. (A - L = C)
16. Residual equity theory - this theory is applicable where there are two classes of shares
issued,ordinary and preferred. The equation is “Assets – Liabilities –
Preferred Shareholders’ Equity =Ordinary Shareholders’ Equity.”
17. Fund theory – the accounting objective is the custody and administration of funds.
18. Realization – the process of converting non-cash assets into cash or claims for cash.
19. Prudence (Conservatism) – the inclusion of a degree of caution in the exercise of the judgments
needed in making the estimates required under conditions of uncertainty, such that assets or income
are not overstated, and liabilities or expenses are not understated.
20. Matching concept (Direct association of costs and revenues) – costs that are directly related to the
earning of revenue are recognized as expenses int eh same period the related revenue is recognized.
21. Systematic and rational allocation – costs that are not directly related to the earning of revenue are
initially recognized as assets and recognized as expenses over the periods their economic benefits
are consumed, using some method of allocation.
22. Immediate recognition – costs that do not meet the definition of an asset, or ceases to meet the
definition of an asset, are expensed immediately.

COMMON BRANCHES OF ACCOUNTING

1. Financial accounting – is the branch of accounting that focuses on general purpose financial
statements. Financial accounting is governed by the Philippine Financial Reporting Standards
(PFRSs).

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 Financial Reporting is the provision of financial information about an entity that is useful to external
users, primarily the investors, lenders and other creditors, in making investment and credit decisions.

Primary objective of financial To provide information about an entity’s economic

reporting resources, claims to those resources, and
changes in those resources.
Secondary objective of To provide information useful in assessing the
financial reporting entity’s management stewardship.

FINANCIAL STATEMENTS vs FINANCIAL REPORT

Financial statements Financial report

1. Statement of financial position
2. Statement of profit or loss and other
comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
6. Additional statement of financial
position
1. Statement of financial position
2. Statement of profit or loss and other
comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
6. Additional statement of financial
position
7. Other information

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2. Management accounting - focuses on special purpose financial reports for use by an entity’s
management. (Management Advisory Services)
3. Cost accounting – is the systematic recording and analysis of the costs of materials, labor, and
overhead incident of production.
4. Auditing – is the process of evaluation the correspondence of certain assertions with established
criteria and expressing an opinion thereon.
5. Tax accounting – the preparation of tax returns and rendering of tax advice, such as the determination
of the tax consequences of certain proposed business endeavors.
6. Government accounting – refers to the accounting for the government and its instrumentalities, placing
emphasis on the custody of public funds, the purposes for which those funds are committed, and the
responsibility and accountability of the individuals entrusted with those funds.
7. Fiduciary accounting – refers to the handling of accounts managed by a person entrusted with the
custody and management of property for the benefit of another.
8. Estate accounting – refers to the handling of accounts for fiduciaries who wind up the affairs of a
deceased person.
9. Social accounting (social and environmental accounting or social responsibility reporting) – the
process of communicating the social and environmental effects of an entity’s economic actions to the
society.
10. Institutional accounting – the accounting for non-profit entities other than the government.
11. Accounting systems – the installation of accounting procedures for the accumulation of financial data
and designing of accounting forms to be used in data gathering.
12. Accounting research – pertains to the careful analysis of economic events and other variables to
understand their impact on decisions.

FOUR SECTORS IN THE PRACTICE OF ACCOUNTANCY

Under R.A. 9298 also known as the “Philippine Accountancy Act of 2004,” the practice of accounting
is sub-classified into the following:

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1. Practice of Public Accounting – involves the rendering of audit or accounting related services to more
than one client on a fee basis.

2. Practice in Commerce and Industry – refers to employment in the private sector in a position which
involves decision making requiring professional knowledge in the science of accounting and such
position requires that the holder thereof must be a CPA.

3. Practice in Education/Academe – employment in an educational institution which involves teaching of

accounting, auditing, management advisory services, finance, business law, taxation,and other
technically related subjects.

4. Practice in the Government – employment or appointment to a position in an accounting professional

group in the government or in a government–owned and/or controlled corporation where decision
making requires professional knowledge in the science of accounting, or where civil service eligibility
as a CPA is a prerequisite.

ACCOUNTING STANDARDS

The Philippine Financial Reporting Standards (PFRSs) represent the Generally Accepted
Accounting Principles (GAAP) in the Philippines.

The PFRSs are Standards and Interpretations adopted by the Financial Reporting Standards Council
(FRSC). They comprise:

a. Philippine Financial Reporting Standards (PFRSs);

b. Philippine Accounting Standards (PASs); and
c. Interpretation

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 Entities should follow a uniform set of generally acceptable reporting standards when preparing and
presenting financial statements; otherwise, financial statements would be misleading.

The term “generally acceptable” means that either:

a. The standard has been established by an authoritative accounting rule-making body; or

b. The principle has gained general acceptance due to practice over time and has been proven to be
most useful.

The process of establishing financial accounting standards is a democratic process in that a majority
of practicing accountants must agree with a standard before it becomes implemented.

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ACCOUNTING STANDARD SETTING BODIES AND OTHER RELEVANT ORGANIZATIONS

1. Financial Reporting Standards Council (FRSC) – is the official accounting standard setting body in
the Philippines created under the Philippine Accountancy Act of 2004 (R.A. No. 9298). The FRSC is
composed of fifteen (15) individuals.

2. Philippine Interpretation Committee (PIC) – is a committee formed by the Accounting Standard

Council (ASC), the predecessor of FRSC, with the role of reviewing the interpretations of the
International Financial Reporting Interpretations Committee (IFRIC) for approval and adoption by the
FRSC.

3. Board of Accountancy (BOA) – is the professional regulatory board created under R.A. No. 9298 to
supervise the registration, licensure and practice of accountancy in the Philippines. The BOA
consists of a chairperson and six members.

4. Securities and Exchange Commission (SEC) – is the government agency tasked in regulating
corporations and partnerships, capital and investment markets, and the investing public.

5. Bureau of Internal Revenue (BIR) – administers the provisions of the National Internal Revenue
Code.

6. Bangko Sentral ng Pilipinas (BSP) – influences the selection and application of accounting policies
by banks and other entities performing banking functions.

7. Cooperative Development Authority (CDA) – influences the selection and application of accounting
policies by cooperatives.

Accounting policies prescribed by a regulatory body (e.g., BSP, CDA) are sometimes referred to as
Regulatory Accounting Principles.
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 -END-

References:

1. Conceptual Framework and Accounting Standards, 2021, Zeus Vernon B. Millan

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