Opening Prayer

Lord of light and wisdom, grant us bright intellect, a sound judgment and
retentive memory. Help us to study patiently, orderly and diligently to develop our
gifts and make good use of them according to Your will, as we commit ourselves
to Veritas et Fortitudo, Pro Deo et Patria. Amen.
 Learning Objectives
By the end of the discussion, student will be able to:
• Differentiate sole proprietorship, partnership and corporation;
• Identify the division of specialties within the accounting field;
• Recall the responsibilities of the Financial Accounting Standards Board;
• Identify the various discipline in the field of accounting; and
• Identify the Code of Ethics all accountants must adhere to.
The World of Accounting
Prepared and presented by:
Lex Daniel S. Quequegan, CPA
Instructor, Lyceum of the Philippines University
 Definitions of Accounting
• Accounting is a service activity. Its function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to be useful in
making economic decisions.
• Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the
information.
• 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 results thereof.
 History of Accounting
• Luca Pacioli – Father of Accounting, a Franciscan friar ad a celebrated
mathematician, is generally associated with the introduction of double-entry
bookkeeping.
• He published his book, Summa Arithmetica, Geometria, Proportioni et
Proportionalita
 Accountancy and Accounting
• Accountancy is a profession whose members are engaged in the collection of
financial data, the summary of that data, and then the presentation of
information in a form which helps recipients take effective decisions.
 Branches of Accounting
1. Auditing forms a most important branch of accountancy. Once accounts have been
prepared, they may have to be checked in order to ensure that they do not present a distorted
picture. The checking of accounts and the reporting on them is known as auditing. Businesses
have their accounts audited as a legal requirement.
Auditors are usually trained accountants who specialize in checking accounts rather than
preparing them.

Two kinds of Auditors:

1. External auditors
2. Internal auditors
 Branches of Accounting
2. Bookkeeping is a mechanical task involving the collection of basic financial
data. The data are first entered in special records known as books of account,
and then extracted and summarized in the form of a profit and loss account
and a balance sheet. This process normally takes place once a year, but it may
occur more frequently. A profit and loss account shows whether the business
has made a profit or loss during the year.
 Branches of Accounting
3. Cost Accounting is the process that involves the recording of cost data in
books of account. It is, therefore, similar to bookkeeping except that data are
recorded in very much greater detail. Cost accounting makes use of those data
once they have been extracted from the cost books in providing information
for managerial planning and control.
 Branches of Accounting
4. Financial Accounting is the more specific term applied to the preparation
and subsequent publication of highly summarized financial information. The
information supplied is usually for the benefit of the owners of an entity, but it
can also be used by management for planning and control purposes. It can also
be of interest to other parties, e.g. employees and creditors.
 Branches of Accounting
5. Financial Management is responsible for setting financial objectives, making plans
based on those objectives, obtaining the finance needed to achieve the plans, and
generally safeguarding all the financial resources of the entity.

6. Management Accounting incorporates cost accounting data and adapts them for
specific decisions which management may be called upon to make.

7. Taxation involves computing the amount of tax payable by both business entities
and individuals.
 Accountancy in the Philippines
• Republic Act 9298, known as the Philippine Accountancy Act of 2004, is the law governing the
practice of accountancy in the Philippines.
• The practice of accountancy shall include:
1. Practice of Public Accountancy
 Shall constitute in a person, be it his/her capacity, or a a partner or as a staff member in an accounting or
auditing firm, holding out himself/herself as one skilled in the knowledge, science and practice of accounting,
and as a qualified person to render professional services as a Certified Public Accountant (CPA); or offering
or rendering, or both, to more than one client on a fee basis or otherwise, services such as:
a. the audit verification of financial transaction and accounting records
b. the preparation, signing, or certification for clients of reports of audit, balance sheet, etc.
c. the design, installation, and revision of accounting system
d. the preparation of income tax returns when related to accounting procedures
e. when he/she represents clients before government agencies on tax or other matters related to accounting etc.
 Accountancy in the Philippines
2. Practice in Commerce and Industry
 Shall constitute in a person involved in decision making requiring professional knowledge in the science of
accounting, or when such employment or position requires that the holder thereof must be certified public
accountant.

3. Practice in Education/Academe
 Shall constitute a person in an educational institution which involve teaching of accounting, auditing,
management advisory services, finance, business law, taxation, and other technically related subjects.

4. Practice in Government
> Shall constitute in a person who holds, or is appointed to, a position in accounting professional group in
government or in a government-owned and/or –controlled corporation, including those performing proprietary
functions, where decision making requires professional knowledge in the science of accounting, or where a civil
service eligibility as certified public accountant.
 Code of Ethics for Philippine CPAs
• A distinguishing mark of the accountancy profession is its acceptance of the
responsibility to act in the public interest.
• A professional accountant is defined as “an individual who holds a valid
certificate issued by the Board of Accountancy (i.e., Certified Public
Accountant), whether he/she be in public practice, industry, commerce, the
public sector or education:.
 Code of Ethics for Philippine CPAs
• Integrity
 A professional accountant should be straightforward and honest in all professional business relationships.
Integrity also implies fair dealing and truthfulness.
• Objectivity
 A professional accountant has a continuing duty to maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent professional service based on current
developments in practice, legislation and techniques.
• Confidentiality
 A professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should no disclose any such information to third parties without
proper and specific authority unless there is a legal or professional right or duty to disclose.
• Professional Behavior
> A professional accountant should comply with relevant laws and regulations and should avoid any action that
discredits the profession.
 Accounting Standards in the Philippines
• Accounting standards are authoritative statements of how particular types
of transaction and other events should be reflected in financial statements.
• Compliance with accounting standards will normally be necessary for the fair
presentation of financial statements.
 Accounting Standards in the Philippines
• Accounting Standards Council (ASC) was created by the Philippine Institute of Certified
Public Accountants (PICPA) to establish and improve accounting standards that will be
generally accepted in the Philippines.
• Financial Reporting Standards Council (FRSC) was created per Section 9(A) of the
Rules and Regulation Implementing R.A. 9298 as the new accounting standard setting body,
thus, replacing the Accounting Standards Council (ASC).
• International Accounting Standards Board (IASB) assumed accounting standard setting
responsibilities from its predecessor body, the International Accounting Standards
Committee (IASC). Its objective is to achieve convergence in the accounting principles that
are used by businesses and other organizations for financial reporting around the world.
 Accounting Standards in the Philippines
• Statements of International Accounting Standards issued by the Board of
the International Accounting Standards Committee (1973-2001) are
designated “International Accounting Standards” (IAS).
• The International Accounting Standards Board announced in April 2001 that
its accounting standards would be designated “International Financial
Reporting Standards” (IFRS)
 Accounting Standards in the Philippines
• Accounting Standards Council (ASC) considered standards issued by other
standard-setting bodies such as the U.S. Financial Accounting Standards
Board (FASB) and the International Accounting Standards Committee
(IASC), now the IASB.
• In the past years, the ASC based most of the standards it issued on US
accounting standards. However, ASC issued accounting standards that were
based on International Accounting Standards (IAS).
Accounting Principles and
Reporting Standards
Prepared and presented by:
Lex Daniel S. Quequegan, CPA
Instructor, Lyceum of the Philippines University
 INTRODUCTION
• An entity is something that can be recognized as having its own separate
identity, such as an individual.
• The term economic entity usually refers to a business or organization
whose major purpose is to produce a profit for its owners.
 Fundamental Business Model
• For a business to be successful, it needs to develop a product or service that
customer will pay for and thus create a revenue stream.
• A business requires investments to enable it to pay for the infrastructure,
equipment and personnel. Only after a skillful combination of these
elements can a business generate a revenue stream.
 Fundamental Business Model
1. The investors provide the required capital for the business.
2. The cash in the business can be:
• converted into another type of asset that will be used in the business (e.g. equipment) or sold (e.g.
inventory); or
• spent on operating costs such as salaries, rental and utilities.
3. The combination of business provides the basis for producing the products or services.
4. The sale of product or service generates an asset called a receivable. This asset once
collected will produce a cash inflow for the business.
5. If there’s an existing debts from bank, the cash inflow from collections will be used to
provide the debt providers with interest on their loans to the company.
 Types of Business
1. Services – Hiring skilled staff and selling their time.
2. Trader – Buying a range of raw materials and manufactured goods and
consolidating them, making them available for sale in locations near to their
customers or online for delivery.
3. Manufacture – Buying blocks of land and using them to provide raw
materials.
 Types of Business
4. Infrastructure – Buying and selling operating assets (typically large assets); selling
occupancy often in combination with services.
5. Financial – Accepting cash from depositors and paying them interest; using the
money to provide loans to borrowers, charging them fees and a higher rate of
interest than the depositors receive.
6. Insurance – Collecting cash from many customers; investing the money to pay
the losses experienced by a few customers. By understanding the risk accepted and
the likelihood of a claim, more premium income can be earned than claims paid.
 Forms of Business Organizations
1. Sole Proprietorship – This business organization has a single owner called
the proprietor who generally is also the manager.
2. Partnership – is a business owned and operated by two or more persons
who bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves.
3. Corporation – is a business owned by its stockholders.
 Purpose and Phases of Accounting
• The accounting function is part of the broader business system, and does
not operate in isolation.
• It handles the financial operations of the business but also provides
information and advice to other departments.
• Business transactions are the economic activities of a business. Recording
these historical events is a significant function of accounting.
• Accounts are produced to aid management in planning, control and decision-
making and to comply with regulations.
 Purpose and Phases of Accounting
• Before the effects of transactions can be recorded, they must be measured. In
order that accounting information will be useful, it must be expressed in terms of a
common financial denominator—money.
• To be useful in making decision making, the recorded data must be classified and
summarized.
• It is imperative that the result of the summarization phase be interpreted or
analyzed to evaluate the liquidity, profitability and solvency of the business
organization. Accounting provides the decision-makers with information to make
reasoned choices among alternative uses of scarce resources in the conduct of
business and economic activities.
 Users and Their Information Needs
• Investors need information to help them determine whether they should buy, hold
or sell.
• Employees are interested in information about the stability and profitability of
their employers. They are also interested in information which enables them to
assess the ability of the enterprise to provide remuneration, retirement benefits and
employment opportunities.
• Lenders are interested in information that enables them to determine whether their
loans and the related interest will be paid when due.
• Suppliers and other trade creditors are interested in information that enables
them to determine whether amounts owing to them will be paid when due.
 Users and Their Information Needs
• Customers have an interest in information about the continuance of an enterprise,
especially when they have a long-term involvement with, or are dependent on, the
enterprise.
• Government and their agencies are interested in the allocation of resources and,
therefore, the activities of the enterprises. They also require information in order to
regulate the activities of the enterprises, determine taxation policies and as the basis
for national income and similar statistics.
• Public. Financial statements may assist the public by providing information about
the trends and recent developments in the prosperity of the enterprise and the
range of its activities.
 Fundamental Concepts in Accounting
• Entity Concept – An accounting entity is an organization or a section of an
organization that stands apart from other organizations and individuals as a separate
economic entity. The transactions of different entities should not be accounted for
together. Each entity should be evaluated separately.
• Periodicity Concept – An entity’s life can be meaningfully subdivided into equal
time periods for reporting purposes.
• Stable Monetary Unit Concept – The Philippine peso is a reasonable unit of
measure and that its purchasing power is relatively stable. It allows accountants to
add and subtract peso amounts as though each peso has the same purchasing power
as any other peso at any time.
 Generally Accepted Accounting Principles
(GAAP)
• Generally Accepted Accounting Principles make financial statement
meaningful and useful, regardless of the type of business organization.
• Business and the environment in which they operate are constantly changing
(i.e. economy, technology, and laws). Therefore, financial information and the
methods of presenting that information must change to meet the needs of
the people who use the information.
• GAAPs are changed and refined as accountants respond to the changing
environment.
 Criteria for GAAP
• A principle has relevance to the extent that it results in information that is
meaningful and useful to those who need to know something about a certain
organization.
• A principle ha objectivity to the extent that the resulting information is not
influenced by the personal bias or judgment of those who furnish it.
• A principle has feasibility to the extent that it can be implemented without
undue complexity or cost.
 Basic Principles
• Objectivity Principle – Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as useful as possible.
• Historical Cost – The principle states that acquired assets should be recorded at
their actual cost and not at what management thinks they are worth as at reporting
date.
• Revenue Recognition Principle – Revenue is to be recognized in the accounting
period when goods are delivered or services are rendered or performed.
• Expense Recognition Principle – Expenses should be recognized in the
accounting period in which goods and services are used up to produce revenue and
not when the entity pays for the goods and services.
 Basic Principles
• Adequate Disclosure – Requires all relevant information that would affect the user’s
understanding and assessment of the accounting entity be disclosed in the financial
statements.
• Materiality – Financial reporting is only concerned with information that is
significant enough to affect evaluations and decisions.
• Consistency Principle – The firms should use the same accounting method from
period to period achieve comparability over time within a single enterprise.
However, changes are permitted if justifiable and disclosed in the financial
statements.
Accounting Principles and
Reporting Standards Part 2
Prepared and presented by:
Lex Daniel S. Quequegan, CPA
Instructor, Lyceum of the Philippines University
Conceptual Framework for Financial Reporting
(IFRS Framework)
• The IFRS Framework describes the basic concepts that underlie the
preparation and presentation of financial statements for external users.
• The framework deals with the objective of financial statements; the
qualitative characteristics that determine the usefulness to present and
potential investors, lenders and other creditors, who use that information to
make decisions about buying, selling or holding equity or debt instruments
and providing or settling loans or other forms of credit.
 Objective of General Purpose Financial
Reporting
• The objective of general purpose financial reporting is to provide financial information
about the reporting entity that is useful to present and potential investors, lenders
and other creditors, who use that information to make decisions about buying,
selling or holding equity or debt instruments and providing or settling loans or other
forms of credit.
• The primary users need information about the resources and claims against the
resources of the entity not only to assess an entity’s prospects for future net cash
inflows but also how effectively and efficiently management has discharged their
responsibilities to use the entity’s existing resources (i.e. stewardship).
 Economic Resources and Claims
• Information about the nature and amounts of a reporting entity’s economic
resources and claims assists user to assess the entity’s financial strengths and
weaknesses; to assess liquidity and solvency, and its need and ability to
obtain financing.
• Information about the claims and payment requirements assists user to predict how
future cash flows will be distributed among those with a claim on the reporting
entity.
• A reporting entity’s economic resources and claims are reported in the statement of
financial position.
 Changes in Economic Resources and Claims

• Changes in a reporting entity’s economic resources and claims result from

the entity’s performance and from other events or transactions such as
issuing debt and equity instruments.
• Users need to be able to distinguish between both of these changes.
 Changes in Economic Resources and Claims

Financial Performance Reflected by Accrual Accounting

• Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources and claims in the
periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period.
 Changes in Economic Resources and Claims

Financial Performance Reflected By Past Cash Flows

• Information about a reporting entity’s cash flows during the reporting period
also assists users to assess the entity’s ability to generate future net cash
inflows.
• This information indicates how the entity obtains and spend cash, including
information about its borrowing and repayment of debt, cash dividends to
shareholders, etc. The changes in the entity’s cash flows are presented in the
statement of cash flows.
 Changes in Economic Resources and Claims

Changes in Economic Resources And Claims Not Resulting From

Financial Performance
• Information about changes in an entity’s economic resources and claims
resulting from events and transactions other than financial performance, such
as the issue of equity instruments or distributions of cash or other assets to
shareholders is necessary and claims.
• The changes in an entity’s economic resources and claims not resulting from
financial performance is presented in the statement of changes in equity.
Qualitative Characteristics of Useful
Financial Information
 Fundamental Qualitative Characteristics
• Relevance and faithful representation are the fundamental qualitative
characteristics of useful financial information.
• Information must be both relevant and faithfully represented if it is to be
useful.
• Neither a faithful representation of an irrelevant phenomenon nor an
unfaithful representation of a relevant phenomenon help users make good
decisions.
 Fundamental Qualitative Characteristics
Relevance
• Relevant financial information is capable of making a difference in the decisions made by
users.
• Relevant information influences the economic decisions of users by helping them evaluate
past, present, or future events, or confirming, or correcting, their past evaluations.
• Financial information has a confirmatory role when it is used to confirm or correct the
decision-maker’s earlier expectations.
• Financial information has a predictive role when it is used to make predictions of, for
instance, future cash flows or income.
 Fundamental Qualitative Characteristics
Faithful Representation
• General purpose financial reports represent economic phenomena in words
and numbers.
• To be useful, financial information must not only be relevant, it must also
represent faithfully the phenomena it purports to represent.
• This fundamental characteristic seeks to maximize the underlying
characteristics of completeness, neutrality and freedom from error.
 Fundamental Qualitative Characteristics
Completeness
• A complete depiction includes all information necessary for a user to understand
the phenomenon being predicted, including all necessary descriptions and
explanations.

Neutrality
• Free from bias. A neutral depiction is not slanted, weighted, emphasized, de-
emphasized or otherwise manipulated to increase the probability that financial
information will be received favorably or unfavorably by users.
 Fundamental Qualitative Characteristics
Freedom from Error
• No errors or omissions in the description of the phenomenon, and the
process used to produce the reported information has been selected and
applied with no errors in the process.
• Free from error does not mean perfectly accurate in all respects.
 Enhancing Qualitative Characteristics
Comparability
• Information about a reporting entity is more useful if it can be compared
with similar information about other entities and with similar information
about the same entity for another period or another date.
• Comparability enables users to identify and understand similarities in, and
differences among, items.
 Enhancing Qualitative Characteristics
Verifiability
• Verifiability helps to assure users that information represents faithfully the
economic phenomena it purports to represent.
• Verifiability means that different knowledgeable and independent observers
could reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation.
 Enhancing Qualitative Characteristics
Timeliness
• Timeliness means that the information is available to decision makers in time
to be capable of influencing their decisions.

Understandability
• Classifying, characterizing and presenting information clearly and concisely
makes it understandable.
 Enhancing Qualitative Characteristics
Applying the Enhancing Qualitative Characteristics
• Enhancing qualitative characteristics should be maximized to the extent
necessary.
• However, enhancing qualitative characteristics cannot render information
useful if that information is irrelevant or not represented faithfully.
 Underlying Assumptions
Going Concern
• The financial statements are normally prepared on the assumption that an
enterprise is a going concern and will continue in operation for the
foreseeable future.
• It is assumed that the enterprise has neither the intention nor the need to
liquidate or curtail materially the scale of its operations.
 Elements of Financial Statements
• Balance sheet
• Assets
• Liabilities
• Equity
• Income Statement
• Income
• Expense
 Recognition of the Elements of Financial
Statements
An item that meets the definition of an element should be recognized if:
• it is probable that any future economic benefit associated with the item will flow to or
from the enterprise; and
• the item has a cost or value that can be measured with reliability.
 Measurement of the Elements of Financial
Statements
Measurement is the process of determining the monetary amounts of which the
elements of the financial statements are to be recognized and carried in the balance
sheet and income statement.
• Historical Cost – Assets are recorded at the amount of cash or cash equivalents
paid or the fair value pf the considerations given to acquire at the time of their
acquisition.
• Current Cost – Assets are carried at the amount of cash or cash equivalents that
would have to be paid if the same or an equivalent asset was acquired currently.
• Present Value - Assets are carried at the present discounted value of the future net
cash inflows that the item is expected to generate in the normal course of business.
 Measurement of the Elements of Financial
Statements
• Realizable (Settlement) Value
• Realizable Value – Assets are carried at the amount of cash or cash equivalents that
could currently be obtained by selling an asset in an orderly disposal.
• Settlement Value – Liabilities are carried at the undiscounted amounts of cash or cash
equivalents expected to be paid to satisfy the liabilities in the normal course of business.
 Concepts of Capital and Capital Maintenance

• Financial concept of capital, such as invested money or invested

purchasing power, capital is synonymous with the net assets or equity of the
enterprise.
• Physical concept of capital, such as operating capability, capital is regarded
as the productive capacity of the enterprise based on, for example, units of
output per day.
 Closing Prayer
Lord, thank You for giving us the opportunity to learn and the capacity to
understand. Let our knowledge be of service not only for the attainment of
our goals but also for the benefit of others. Amen.