CFAS
user’s needs.
Definition of Accounting
Accounting is "the process of identifying,
measuring, and communicating economic
information to permit informed judgment and decisions
by users of information."
Three Important Activities
1. Identifying – the process of analyzing events,
transactions to determine whether or not they
will be recognized. Only accountable events are
recognized.
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.
Types of Events:
I. External events – involve and external party
a. Exchange – reciprocal giving and receiving.
b. Non-reciprocal transfer – “one way”
transaction.
c. External event other than transfer – event that
involves changes in economic resources or
obligations of an entity caused by external party
or external source but does not involve transfers
of resources or obligations.
2. Internal events – events that do not involve an
external party.
a. Production – the process by which resources
are transformed into finished goods.
b. Casualty – an unanticipated loss from
disasters or other similar events.
The several measurement bases used in accounting
include but not limited to the following:
 Historical cost
 Fair value
 Present value
 Realizable value
 Current cost
 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
When measurement is affected by estimates, the
items measured are said to be valued by opinion.
When measurement is unaffected by estimates,
the items measured are said to be valued by fact.
Types of accounting information classified as to
 General Purpose accounting information –
designed to meet the common needs of most
statement users. This information is governed by the
PFRS.
 Special Purpose accounting information –
designed to meet the specific needs of particular
statement users. This information is provided by
other types of accounting, e.g., managerial
accounting, tax basis accounting, etc.
Basic accounting concepts
 Double-entry system – recorded into two parts
 Going concern – entity is assumed to carry on its
operations for an indefinite period of time
 Separate entity – the entity is treated separately from
its owners
 Stable monetary unit – common unit measure
 Time period – life of the business is divided into
series of reporting periods.
 Materiality concept – info is material if its omission
or misstatement could influence economic decisions.
 Cost-benefit – the cost of processing and
communicating information should not exceed the
benefits to be derived from it.
 Accrual basis of accounting – effects of transactions
are recognized when they occur regardless of when
cash is received.
 Historical cost concept – the value of an asset is
determined on the basis of acquisition cost.
 Concept of articulation – all of the components of a
complete set of financial statements interrelated.
 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.
 Consistency concept – financial statements are
prepared on the basis of accounting policies which
are applied consistently from one period to the next.
 Matching – costs are recognized as expenses when
the related revenue is recognized.
 Residual equity theory – this theory is applicable
where there are two classes of share issued. Ordinary
and preferred. The equation is “Assets – Liabilities –
Preferred shareholders’ equity = Ordinary
shareholders equity.”
 Fund theory – the accounting objective is the
custody and administration of funds. Found in
government accounting.
 Realization – the process of converting non-cash
assets into cash or claims for cash.
 Prudence (conservatism) – the inclusion of a degree
of caution in the exercise of the judgements 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.
Common Branches of Accounting
 Financial accounting – gen purpose financial
statements, for external parties.
 Management accounting – internal parties sya
mostly concerned.
 Cost accounting – the systematic recording and
analysis of the costs.
 Auditing – the process of evaluating the
correspondence of certain assertions with established
criteria and expressing an opinion thereon.
 Tax accounting – the prep of tax returns and
rendering tax advice, such as the determination of
tax consequences of certain proposed business
endeavors.
 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.
Continuing Professional Development
Inculcation and acquisition of advanced knowledge,
skill, proficiency, and ethical and moral values after
the initial registration of the CPA for assimilation
into professional practice and lifelong learner.
Generally Accepted Accounting Principles (GAAP)
 Rules and procedures developed for recording
transactions in trade or commerce
 Followed in the preparation and presentation of FS
 Developed on the basis of experience, reason,
custom, usage and practical necessity.
Financial Reporting Standards Council
 FRSC replaced Accounting Standards Council
 Accounting standard setting body created by the
PRC upon recommendation of the BOA to assist the
latter in carrying out its powers and functions under
RA 9298
 Main function: Establish and ipprove accounting
standards that will be generally accepted in the
Philippines
Four sectors in the practice of accountancy
1. Practice of Public Accountancy – 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, basta teaching.
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 in the Philippines
PFRS – are standards and interpretations adopted by the
Financial Reporting Standards Council (FRSC). They
comprise:
1. PFRS
2. PAS
3. Interpretations – authoritative guidance
The need for reporting standards
 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 chat a majority
of practicing accountants must agree with a standard
before it becomes implemented
Hierarchy of reporting standards – if ever there’s a
conflict between the standards and the conceptual
framework, the standard will win/prevail.
CONCEPTUAL FRAMEWORK
 Promulgated by the International Accounting
Standards Board
 Summary of the terms and concepts that underlie the
preparation and presentation of financial statements
for external users (concepts on general purpose
financial reporting)
 GR: Apply CF
 XPN: Standard or interpretation that specifically
applies to a transaction
 CF is not an International Financial Reporting
Standard
 IFRS > CF
Users of Financial Information
 Primary users — to whom general purpose financial
reports are primarily directed
 Investors
 Lenders
 Other creditors
 Other users
 Employees
 Customers
 Government and their agencies
 Public
Objectives of Financial Reporting
Overall
 To provide financial information about the reporting
entity that is useful to existing and potential
investors, lenders and other creditors in making
decisions about providing resources to the entity
 Specific
Provide information that is useful for decision
making
 Making decisions about providing resources to the
entity
 Assessing the cash flow prospects
 Resources, claims and changes in resources and
claims
— Financial position (i.e., liquidity, solvency)
— Financial performance (i.e., revenue, expense, net
income)

Limitations of Financial Reporting

 Do not and cannot provide all the information
 Only aid in the estimation of value of the entity
 Common information
 Based on estimates and judgment

Qualitative Characteristics
 Make financial reporting useful to users
 Fundamental:
Relevance - capacity of the information to
influence a decision (ex. Interim FS).
Predictive value - can predict future outcome
Confirmatory value - provides feedback about
previous evaluations
Faithful representation