The Accountancy Profession

The Accoun ng Standards Council provides the following defini on:

Accoun ng is a service ac vity. The accoun ng func on is to provide quan ta ve informa on, primarily financial in nature, about economic
en es, that i intended to be useful in making economic decision.

The Committee on Accounting Terminology of the American Institute of Certified Public Accountants defines accoun ng as follows:

Accoun ng is the art of recording, classifying and summarizing in significant manner and in terms of money, transac ons and events a
which are in part at least of a financial character and interpre ng the results thereof.

The American Accoun ng Associa on in its Statement of Basic Accounting Theory defines accoun ng as follows:

Accoun ng is the process of iden fying, measuring and communica ng economic informa on to permit informed judgment and decision
by users of the informa on.

Important Points

The following important points made in the defini on of accoun ng should be noted:

One - Accoun ng is about quan ta ve informa on.

Two - The informa on is likely to be financial in nature.
Three - The informa on should be useful in decision making.

The defini on that has stood the test of me is the defini on given by the American Accoun ng Associa on This defini on states that the very purpose
of accoun ng is to provide quan ta ve informa on to be useful in making an economic decision. The defini on also states that accoun ng has a
number of components, namely:
a. Iden fying as the analy cal component.
b. Measuring as the technical component.
c. Communica ng as the formal component.

1. Iden fying
This accoun ng process is the recogni on or nonrecogni on of business ac vi es as "accountable" events.
Not all business ac vi es are accountable.
For example, the hiring of employees, the death of the en ty president and the entering into a contract are all business ac vi es but such events are
not accountable because they cannot be quan fied or expressed in terms of a unit of measure.
An event is accountable or quan fiable when it has an effect on assets, liabili es and equity. In other words, the subject ma er of accoun ng is
economic ac vity or the measurement of economic resources and economic obliga ons.

Only economic ac vi es are emphasized and recognized in accoun ng. Sociological and psychological ma ers are beyond the province of accoun ng.

External and Internal Transac ons - Economic ac vi es of an en ty are referred to as transac ons which may be classified as external and internal.

A. External transac ons or exchange transac ons are those economic events involving one en ty and another en ty.

Examples of external transac ons are:

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 transac ons are economic events involving the en ty only.

B. Internal transac ons are the economic ac vi es that take place en rely within the en ty. Produc on and casualty loss are examples
of internal transac ons.
 Produc on is the process by which resources are transformed into products.
 Casualty is any sudden and unan cipated loss from fire. flood, earthquake, and other event ordinarily termed as an act of God.

2. Measuring

This accoun ng process is the assigning of peso amounts to the accountable economic transac ons and events. If accoun ng informa on 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 transac ons.

The measurement bases are historical cost and current value. Historical cost is the original acquisi on cost and the most common measure of
financial transac ons. Current value includes fair value, value in use, fulfillment value and current cost.
 3. Communica ng

Communica ng is the process of preparing and distribu ng accoun ng reports to poten al users of accoun ng informa on. Iden fying and
measuring are pointless if the informa on contained in the accoun ng records cannot be communicated in some form to poten al users.
Actually, the communica ng process is the reason why accoun ng has been called the universal language of business".

Implicit in the communica on process are the recording, classifying and summarizing aspects of accoun ng.

Recording or journalizing is the process of systema cally maintaining a record of all economic business transac ons a er they have been
iden fied and measured.

Classifying is the sor ng or grouping of similar and interrelated economic transac ons into their respec ve classes. Classifying is accomplished
by pos ng to the ledger. The ledger is a group of accounts which are systema cally categorized into asset accounts, liability accounts, equity
accounts, revenue accounts and expense accounts.

Summarizing is the prepara on of financial statements which include the statement of financial posi on, income statement, statement of
comprehensive income, statement of changes in equity and statement of cash flows.

Accoun ng as an Informa on System

Accoun ng is an informa on system that measures business ac vi es, processes informa on into reports and communicates the reports
to decision makers. A key product of this informa on system is a set of financial statements - the documents that report financial informa on
about an en ty to decision makers. Financial reports tell us how well an en ty is performing in terms of profit and loss and where it stands in
financial terms.

Overall Objec ve of Accoun ng

The overall objec ve of accoun ng is to provide quan ta ve financial informa on about a business that is useful to statement users par cularly
owners and creditors in making economic decisions.

An accountant's primary task is to supply financial informa on so that the statement users could make informed judgment and be er decision.
The essence of accoun ng is decision-usefulness. Investors and other users are interested in financial accoun ng informa on necessary in
making important and significant economic decisions.

Limita on of the Prac ce of Public Accountancy

Single prac oners and partnerships for the prac ce of public accountancy shall be registered cer fied public accountants in the Philippines.

A cer ficate of accredita on shall be issued to cer fied public accountants in public prac ce only upon showing in accordance with rules and
regula ons promulgated by the Board of Accountancy and approved by the Professional Regula on Commission that such registrant has acquired
a minimum of three years of meaningful experience in any of the areas of public prac ce including taxa on.

The Securi es and Exchange Commission shall not register any corpora on organized for the prac ce of public accountancy.

Accredita on to Prac ce Public Accountancy.

Cer fied Public Accountants, firms and partnerships of cer fied public accountants, including partners and staff members thereof, are required
to register with the Board of Accountancy and Professional Regula on Commission for the prac ce of public accountancy.

CPA generally prac ce their profession in 3 main areas:

 Public Accoun ng
-composed of individual prac oners, small accoun ng firms and large mul na onal organiza ons that render independent and
expert financial service to the public. Usually offer 3 kinds of services:
* Audi ng – tradi onally been the primary service offered
- or external audi ng is the examina on of financial statements by independent CPA for the purpose of expressing an opinion as to the fairness with
which the financial statements are prepared. It is the a est func on of independent CPAs.
* Taxa on – a service includes the prepara on of annual income tax returns and determina on of tax consequence of certain
proposed business endeavors.
*Management Advisory Services – refer to service to clients on ma ers of accoun ng, finance, business policies, organiza on
procedures, product costs, distribu on and many other phases of business and opera ons.
 Private Accoun ng – CPAs that are employed in business en es in various capacity as accoun ng staff, chief accountant, internal
auditor, and controller.
- The major objec ve is to assist management in planning and controlling the en ty’s opera ons.
- Includes maintaining the records, producing the financial reports, preparing the budgets and controlling and alloca ng the
resources of the en ty.
- CPA has also the responsibility for the determina on of the various taxes the en ty is obliged to pay.
  Government Accoun ng – encompasses the process of analyzing, classifying, summarizing and communica ng all transac ons
involving the receipt and disposi on of government funds and property and interpre ng the results thereof. Focus on the custody
and administra on of public funds.

Con nuing Professional Development (CPD)

 Refers to the inculca on and acquisi on of advanced knowledge, skill, proficiency and ethical and moral values a er the ini al
registra on of the CPA for assimila on into professional prac ce and lifelong learning.
 Raises and enhances the technical skill and competence of the CPA
 Required for the renewal of CPA license and accredita on of CPA to prac ce the accountancy profession.
 15 cpd units are required for the renewal of CPA license.
 120 cpd units are required for accredita on of a CPA to prac ce the accountancy profession.
 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 has become mandatory for CPA
 A CPA is permanently exempted from CPD requirements upon reaching the age of 65 years. This was applied only for renewal of
license and not for the purpose of accredita on to prac ce the accountancy profession.

Purpose of accoun ng standards

- The overall purpose is to iden fy the proper accoun ng prac ces for the prepara on and presenta on of financial
statements.
- A set of high-quality standards is a necessity to ensure comparability and uniformity in financial statements based on the
same financial informa on.

Financial Repor ng Standards Council (FRSC) replaces the Accoun ng Standard Council
It is the accoun ng standard se ng body created by the PRC upon recommenda on of the Board of accountancy to assist the BOA in
carrying out its powers and func ons provided under R.A. Act No. 9298.
The main func on is to establish and improve accoun ng standards that will be generally accepted in the Philippines.
The accoun ng standards promulgated by FRSC cons tute the “highest hierarchy” of generally accepted accoun ng principles in the
Philippines.
The approved statements as Philippine accoun ng standards or PAS and Philippine Repor ng Standards or PFRS.
Composi on of FRSC
BOA -1 Major organiza on of preparers and users of FS –
SEC -1 Financial Execu ves Ins tute of the Phil (FINEX) -1
BSP -1 Accredited na onal profession organiza on of CPAs:
BIR -1 Public Prac ce -2
COA -1 Commerce and Industry -2
Academe or Educa on -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.

Interna onal Accoun ng Standards Commi ee (IASC)

Is an independent private sector body, with the objec ve of achieving uniformity in the accoun ng principles which are used by the business
and other organiza ons for financial repor ng around the world.
Formed in June 1973 through the agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan,
Mexico, The Netherlands, The united Kingdon and Ireland and the USA. The IASC is headquartered in London, United Kingdom.

Objec ves of IASC

a. To formulate and publish in the public interest accoun ng standards to be observed in the presenta on of financial statements and to
promote their worldwide acceptance and observance.
b. To work generally for the improvement and harmoniza on of regula ons, accoun ng standards and procedures rela ng to the presenta on
of financial statements.

Interna onal Accoun ng standards Board (IASB)

Replaces the Interna onal accoun ng Standards Commi ee or IASC
Publishes standards in a series of pronouncements called Interna onal Financial Repor ng Standards of IFRS
However, IASB has adopted the body of standards issued by the IASC.
The pronouncements of the IASC con nue to be designated as Interna onal Accoun ng Standards of IAS.
The IASB standard se ng process includes in the correct order research, discussion paper, exposure dra and accoun ng standard.

Move toward IFRS

Is essen al to achieve the goal of one uniform and globally accepted financial repor ng standards.
The Philippines is fully compliant with IFRS effec ve January 2005, a process which was started back in 1997 in moving from USA GAAP to
IFRS.
 Philippine Financial Repor ng Standards (PFRS)
- Standards issued in a series of pronouncements by FRSC
- Collec vely include the ff:
 PFRS which corresponds to IFRS
 PAS which corresponds to IAS
 Philippine Interpreta ons which correspond to Interpreta ons of the IFRIC and the Standing Interpreta ons Commi ee and
Interpreta ons developed by the Philippine Interpreta ons Commi ee.

Conceptual Framework

The Conceptual Framework for Financial Repor ng is a complete, comprehensive, and single document promulgated by the Interna onal Accoun ng
Standards Board.

The Conceptual Framework is a summary of the terms and concepts that underlie the prepara on and presenta on of financial statements for external
users.
In other words, the Conceptual Framework describes the concepts for general purpose financial repor ng.

The Conceptual Framework is an a empt to provide an overall theore cal founda on for accoun ng.

The Conceptual Framework is intended to guide standard se ers, preparers, and users of financial informa on in the prepara on and presenta on of
statements. It is the underlying theory for the development of accoun ng standards and revision of previously issued accoun ng standards. The
Conceptual Framework will be used in future standard ge ng decision, but no changes will be made to the current IFRS.

The Conceptual Framework provides the founda on for Standards that:

a. Contribute to transparency by enhancing interna onal comparability and quality of financial informa on.
b. Strengthen accountability by reducing informa on gap between the providers of capital and the people to whom they have entrusted their money.
c. Contribute to economic efficiency by helping investors to iden fy opportuni es and risks across the world.

Purposes of Revised Conceptual Framework

a. To assist the Interna onal Accoun ng Standards Board to develop IFRS Standards based on consistent concepts.
b. To assist preparers of financial statements to develop consistent accoun ng policy when no Standard applies to a par cular transac on or
other event or where an issue is not yet addressed by an IFRS.
c. To assist preparers of financial statements to develop accoun ng policy when a Standard allows a choice of an accoun ng policy.
d. To assist all par es to understand and interpret the IFRS Standards.

Authorita ve status of Conceptual Framework

* If there is a standard or an interpreta on that specifically applies to a transac on, the standard or interpreta on overrides the Conceptual
Framework.
* In the absence of a standard or an interpreta on that specifically applies to a transac on, management shall consider the applicability of the
Conceptual Framework in developing and applying an accoun ng policy that results in informa on that is relevant and reliable. However, it is to be
stated that the Conceptual Framework is not an Interna onal Financial Repor ng Standard.
* Nothing in the Conceptual Framework overrides any specific Interna onal Financial Repor ng Standard.
In case where there is a conflict, the requirements of the Interna onal Financial Repor ng Standards shall prevail over the Conceptual Framework.

Users of financial informa on

a. Primary users
The primary users include the exis ng and poten al. investors, lenders and other creditors. The other users include the employees, customers,
governments and their agencies, and the public.
- are the par es to whom general purpose financial reports are primarily directed.
*Exis ng and poten al investors
- are concerned with the risk inherent in and return provided by their investments.
*Investors need informa on to help them determine whether they should buy, hold or sell. Shareholders are also interested in informa on
which enables them to assess the ability of the en ty to pay dividends.
*Lenders and other creditors Exis ng and poten al lenders and other creditors are interested in informa on which enables them to
determine whether their loans, interest thereon and other amounts owing to them will be paid when due.
b. Other users
- users of financial informa on other than primary users.
- they are par es that may find the general purpose financial reports useful but the reports are not directed to them primarily.

 Employees are interested in informa on about the stability and profitability of the en ty. The employees are interested in
informa on which enables them to assess the ability of the en ty to provide remunera on, re rement benefits and employment
opportuni es.
 Customers have an interest in informa on about the con nuance of an en ty especially when they have a long-term involvement
with or are dependent on the en ty.
  Governments and their agencies are interested in the alloca on of resources and therefore the ac vi es of the en ty. These
users require informa on to regulate the ac vi es of the en ty, determine taxa on policies and as a basis for na onal income
and similar sta s cs.
 Public En es affect members of the public in a variety of ways. For example, en es make substan al contribu on to the local
economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements
may assist the public by providing informa on about the trend and the range of its ac vi es.

Overall Objec ve of Financial Repor ng

- Forms the founda on of Conceptual framework
- To provide financial informa on about the repor ng en ty that is useful to exis ng and poten al investor, lenders and other
creditors in making decisions about providing resources to the en ty.

Specific objec ves of Financial repor ng

To provide informa on:
1. useful for decisions making about providing resources to the en ty.
2. In assessing the cash flow prospects of the en ty.
3. About en ty resources, claims and changes in resources and claims.

Liquidity – is the availability of cash in the near future to cover currently maturing obliga ons.

Solvency - availability of cash over a long term to meet financial commitments when they fall due.

Financial posi on – informa on about the en ty’s economic resources and the claims against the repor ng en ty.
Financial performance – comprises revenue, expenses and the net income or loss for a period of me.
- Level of income earned by the en ty through the efficient and effec ve use of its resources.
- Results of opera ons – portrayed in the income statement and comprehensive income statement.
Accrual Accoun ng
- Depicts the effects of transac ons and other events and circumstances on the en ty’s economic resources and claims in the
periods in which those effects occur even if the resul ng cash receipts and payments occur in a different period.
- Income is recognized when earned regardless when received and expenses is recognized when incurred regardless when
paid.
Limita ons of Financial repor ng
a. General purpose financial reports do not and cannot provide all of the informa on that the primary users need.
b. Not design to show the value of an en ty but the reports provide informa on to help the primary users es mate the value of the en ty.
c. Intended to provide common informa on to users and cannot accommodate every request for informa on.
d. Based on es mate and judgement rather than exact depic on.

QUALITATIVE CHARACTERISTICS

Qualita ve characteris cs are the quali es or a ributes that make financial accoun ng informa on useful to the users.
The objec ve is to ensure that the informa on is useful to the users in making economic decisions.

Classifica on
A. Fundamental qualita ve characteris cs – relate to the content or substance of financial informa on.
Applica on:
1. Iden fy an economic phenomenon that has the poten al to be useful.
2. Iden fy the type of informa on about the phenomenon that would be most relevant and can be faithfully represented.
3. Determine whether the informa on is available.

Relevance – Capacity of the informa on to influence a decision. It requires that the financial informa on should be related to the economic decision.

Ingredients of Relevance
1. Predic ve value – financial informa on can be used as an input to processes employed by users to predict future outcomes.
2. Confirmatory value – financial informa on can provide feedback about previous evalua ons. Also, when it enables users confirm or correct
earlier expecta ons.
Subquality of Relevance
 Materiality – is a prac cal rule in accoun ng which dictates that strict adherence to GAAP is not required when the items are not
significant enough to affect the evalua on, decision and fairness of the financial statements.
- Known as “doctrine of convenience”.
- The materiality of item depends on rela ve size rather than absolute size.
- What is material for one en ty maybe immaterial to another.
 - IASB means Materiality when an informa on is material if omi ng, missta ng or obscuring it could reasonably be expected
to influence the economic decision of the primary users of general purpose financial statements make on the basis of those
statements which provide financial informa on about a specific repor ng en ty.
Factors of Materiality
 Size of the item
 Nature of the Item

Faithful Representa on - means that financial reports represent economic phenomena or transac ons in words and numbers. It must be properly
accounted for and reported in the financial statements.

Ingredients of Faithful Representa on

1. Completeness – relevant informa on should be presented in a way that facilitates understanding and avoid erroneous implica ons.
- A result of the standard of adequate disclosure or the principle of full disclosure.
- Standard of Adequate disclosure – all significant or relevant informa on leading to the prepara on of financial statements
shall be clearly reported. It is a disclosure of any financial facts significant enough to influence the judgement of informed
users.
- Notes to financial statements – provide narra ve descrip on or disaggrega on of the items presented in the financial
statements and informa on about items that do not qualify for recogni on.

2. Neutrality – without bias in the prepara on of financial statements

- To be neutral is to be fair.
- Supported by the exercise of Prudence.
Prudence – is the exercise of care and cau on when dealing with the uncertain es in the measurement process such that assets
or income are not overstated and liabili es or expenses are not understated.
Conserva sm – synonymous to Prudence
- Means when alterna ves exist, the alterna ves which has the least effect on equity should be chosen.
- In case of doubt, record any loss and do not record any gain

3. Free from Error – there are no error or omissions in the descrip on of the transac ons.
Measurement Uncertainty arises when monetary amounts in financial reports cannot be observed directly and must instead be
es mated. The use of reasonable es mate is an essen al part of providing financial informa on and does not undermine the
usefulness of the financial informa on.
Substance over form – this represents faithful representa on inherently of an economic phenomenon or transac on rather than
merely represen ng the legal form.

Enhancing Qualita ve Characteris cs

- Relate to the presenta on or form of the financial statements.
1. Comparability – the ability to bring together for the purpose of no ng points of likeliness and difference.
- Enables users to iden fy and understand similari es and dissimilari es among others.
- Is the uniform applica on of accoun ng method between and across en es in the same industry.

Intracomparability or horizontal - comparability within en ty (comparisons within single en ty through me or period)

Intercomparability or dimensional – comparability across en es (2 or more en es engaged in the same industry)

Consistency – implicit in the qualita ve characteris cs of comparability.

- Refers to the use of the same method for the same item, either from period to period within an en ty or in a single period
across en es.
- Is the uniform applica on of accoun ng method from period to period within an en ty.

2. Understandability – requires that financial informa on must be comprehensible or intelligible if it is to be most useful.
3. Verifiability – means that different knowledgeable and independent observers could reach consensus, although not necessarily complete
agreement that a par cular depic on is a faithful representa on. It implies consensus.
- It must be supported by evidence.
Types of Verifica on
a. Direct Verifica on – Verifying an amount or other representa on through direct observa on, i.e., by coun ng cash.
b. Indirect verifica on – checking the inputs to a model formula or other technique and recalcula ng the inputs using the same methodology.

4. Timeliness – financial informa on must be available or communicated early enough when a decision is to be made.
- The older the informa on, the less useful.

Cost Constraint – is a considera on of the cost incurred in genera ng financial informa on against the benefit to be obtained from having the
informa on.
- The benefit derived from the informa on should exceed the cost incurred in obtaining the informa on.
General Objec ve of Financial Statements

- provide informa on about economic resources of the repor ng en ty, claims against the en ty and changes in the economic
resources and claims.
- Provide informa on about an en ty’s assets, liabili es, equity, income and expenses useful to users of financial statements
in assessing:
a. The en ty’s ability to generate future net cash inflows.
b. Management’s stewardship over economic resources.

Types of Financial Statements

1. Consolidated FS – prepared when the repor ng en ty comprises both the parent and its subsidiaries.
- Provide informa on about the assets, liabili es, equity, income and expenses of both as a single repor ng en ty.
- Useful for exis ng and poten al investors, lenders and other creditors of the parent company in their assessment of future
net cash inflows to the parent company.
2. Unconsolidated FS – prepared when the repor ng en ty is the parent alone.
- Provide informa on about the assets, liabili es, equity, income and expenses and not about those of the subsidiaries.
3. Combined FS – Provide informa on about the assets, liabili es, equity, income and expenses of two or more en es not linked by a parent
and subsidiary rela onship.

A repor ng en ty is one that is required, or chooses, to prepare financial statements.

a. Individual corpora on, partnership or sole
b. The parent alone
c. The parent and its subsidiaries as single repor ng en ty
d. Two or more en es without parent and subsidiary rela onship as a single repor ng en ty.
e. A reportable business segment of an en ty

Repor ng period – is the period when financial statements are prepared for general purpose financial repor ng.

Underlying Assump ons

Accoun ng assump ons are the basic no ons or fundamental premises on which the accoun ng process is based.
- Serve as the founda on or bedrock of accoun ng in order to avoid misunderstanding but rather enhance the understanding
and usefulness of fs.
1. Accoun ng en ty – is the specific business organiza on which may be a proprietorship, partnership or corpora on.
- The en ty is separate from the owners, managers and employees who cons tute the en ty.
2. Time period – requires that the indefinite life of an en ty is subdivided into accoun ng periods which are usually of equal length for the
purpose of preparing financial reports on financial posi on, performance, and cash flows.
3. Monetary unit – has 2 aspects:
a. Quan fiability – means the assets, liabili es, equity, income and expenses should be stated in terms of measure which is the peso in
the PH.
b. Stability of the peso – the purchasing power of the peso is stable or constant and that its instability is insignificant and therefore may
be ignored.
Going Concern or con nuity assump ons – that in the absence of evidence to the contrary, the accoun ng en ty is viewed as con nuing in opera on
indefinitely.