CONCEPTUAL FRAMEWORK

&
ACCOUNTING STANDARDS
Lecture Aid
2020 Edition

By: Zeus Vernon B. Millan

Conceptual Framework & Acctg.

1
Standards (by: Zeus Vernon B. Millan)
 Overview of Accounting

Learning Objectives
• Define accounting and state its basic purpose.
• Explain the basic concepts applied in accounting.
• State the branches of accounting and the sectors in the
practice of accountancy.
• Explain the importance of a uniform set of financial
reporting standards.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 2

 Definition 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)

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 3

 Three important activities

1. Identifying - the process of analyzing events and 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.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 4

 Types of Events
1. External events – events that involve an external party.
a. Exchange (reciprocal transfer) – reciprocal giving and
receiving
b. Non-reciprocal transfer – “one way” transaction
c. 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.

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

d. Production – the process by which resources are transformed
into finished goods.  
e. Casualty – an unanticipated loss from disasters or other
similar events.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 5

 Measurement
• 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, and
6. sometimes 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.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 6

 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.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 7

 Basic purpose of accounting

• The basic purpose of accounting is to provide

information about economic activities intended to be
useful in making economic decisions.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 8

 Types of accounting information classified as to users’ needs

• General purpose accounting information - designed to

meet the common needs of most statement users. This
information is governed by the Philippine Financial
Reporting Standards (PFRSs).

• 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.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 9

 Basic Accounting Concepts
• Double-entry system – each accountable event is recorded in two parts –
debit and credit.
• Going concern - the 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 - amounts in the financial statements are stated in
terms of a common unit of measure; changes in purchasing power are ignored.
• Time Period – the life of the business is divided into series of reporting periods.
• Materiality concept – information 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. 

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 10

 Basic Accounting Concepts - Continuation
• 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.
•  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 are 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.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 11

 Basic Accounting Concepts - Continuation
• 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 shares 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.
• 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 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.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 12

 Common branches of accounting

• Financial accounting - focuses on general purpose financial

statements.
• Management accounting – focuses on special purpose financial
reports for use by an entity’s management.
• Cost accounting - the systematic recording and analysis of the costs of
materials, labor, and overhead incident to production.
• Auditing - the process of evaluating the correspondence of certain
assertions with established criteria and expressing an opinion thereon.
• Tax accounting - the preparation of tax returns and rendering of 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.
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 13
 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, 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.
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 14
 Accounting standards in the Philippines

• Philippine Financial Reporting Standards (PFRSs) are

Standards and Interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 15

 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 that a majority of practicing accountants must agree with a
standard before it becomes implemented.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 16

 APPLICATION OF CONCEPTS
 

PROBLEM 4: FOR CLASSROOM DISCUSSION

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 17

 1. Entity A buys bananas and
converts them into banana chips,
The conversion of bananas into
banana chips is a (an)
a. non-accountable event.
b. external event.
c. non-reciprocal transfer.
d. internal event.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 18

 1. Entity A buys bananas and
converts them into banana chips,
The conversion of bananas into
banana chips is a (an)
a. non-accountable event.
b. external event.
c. non-reciprocal transfer.
d. internal event.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 19

 2. Which of the following is
considered valued by fact rather
than by opinion?
a. Depreciation
b. Cost of goods sold
c. Discount on share capital
d. Retained earnings

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 20

 2. Which of the following is
considered valued by fact rather
than by opinion?
a. Depreciation
b. Cost of goods sold
c. Discount on share capital
d. Retained earnings

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 21

 3. Which of the following is not one
of the several measurement bases
used in accounting?
a. historical cost
b. fair value
c. present value
d. all of these are used

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 22

 3. Which of the following is not one
of the several measurement bases
used in accounting?
a. historical cost
b. fair value
c. present value
d. all of these are used

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 23

 4. Entity A is owned by Mr. X and Ms. Y.
Which of the following transactions does not
violate the separate entity concept and
therefore is appropriately recorded in the
accounting records of Entity A?
a. Mr. X purchases groceries for his home consumption.
b. Mr. X gives Ms. Y chocolate and flowers on Valentine's
Day.
c. Ms. Y provides capital to Entity A.
d. Ms. Y provides capital to Entity B, another business entity.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 24

 4. Entity A is owned by Mr. X and Ms. Y.
Which of the following transactions does not
violate the separate entity concept and
therefore is appropriately recorded in the
accounting records of Entity A?
a. Mr. X purchases groceries for his home consumption.
b. Mr. X gives Ms. Y chocolate and flowers on Valentine's
Day.
c. Ms. Y provides capital to Entity A.
d. Ms. Y provides capital to Entity B, another business entity.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 25

5. Mr. A is assessing, the ability of Entity A to
generate future cash and cash equivalents.
In making the assessment, Mr. A use not
only the statement of cash flows but also the
other components of a complete set of
financial statements. This is because of
which of the following concepts?
a. Going concern
b. Time period
c. Intercalation
d. Articulation

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 26

5. Mr. A is assessing, the ability of Entity A to
generate future cash and cash equivalents.
In making the assessment, Mr. A use not
only the statement of cash flows but also the
other components of a complete set of
financial statements. This is because of
which of the following concepts?
a. Going concern
b. Time period
c. Intercalation
d. Articulation

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 27

6. Entity A acquires a stapler. Instead of
recognizing the cost of the stapler as an asset
to be subsequently depreciated, Entity A
immediately charges it as expense. This is an
application of which of the following
concepts?
a. Prudence
b. Materiality
c. Cost-benefit
d. b and c

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 28

6. Entity A acquires a stapler. Instead of
recognizing the cost of the stapler as an asset
to be subsequently depreciated, Entity A
immediately charges it as expense. This is an
application of which of the following
concepts?
a. Prudence
b. Materiality
c. Cost-benefit
d. b and c

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 29

 7. What type of users' needs is
catered by general purpose
financial statements?
a. common needs
b. specific needs
c. a and b
d. neither a nor b

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 30

 7. What type of users' needs is
catered by general purpose
financial statements?
a. common needs
b. specific needs
c. a and b
d. neither a nor b

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 31

8. Which of the following is not among
the Four Sectors in the practice of
accountancy as enumerated in R.A.
9298 also known as the "Philippine
Accountancy Act of 2004"?
a. Practice in Commerce and Industry
b. Practice in the Government
c. Practice in Education/Academe
d. Practice of Private Accountancy

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 32

8. Which of the following is not among
the Four Sectors in the practice of
accountancy as enumerated in R.A.
9298 also known as the "Philippine
Accountancy Act of 2004"?
a. Practice in Commerce and Industry
b. Practice in the Government
c. Practice in Education/Academe
d. Practice of Private Accountancy

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 33

9. The Philippine Financial Reporting
Standards (PFRSs) comprise:
I. Philippine Financial Reporting Standards
II. Philippine Accounting Standards
III.Interpretations
IV.Accounting Practice Statements and
Implementation Guidelines
a. I, II and III
b. I, II, III and IV
c. I and II
d. I and III

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 34

9. The Philippine Financial Reporting
Standards (PFRSs) comprise:
I. Philippine Financial Reporting Standards
II. Philippine Accounting Standards
III.Interpretations
IV.Accounting Practice Statements and
Implementation Guidelines
a. I, II and III
b. I, II, III and IV
c. I and II
d. I and III

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 35

10. Which of the following
statements is incorrect regarding
the PFRSs?
a. The PFRSs are based on the IFRSs.
b. The financial reporting standards used in the Philippines
are the same as those used globally.
c. The PFRSs have higher authority than the PASs and
Interpretations.
d. The PFRSs are accompanied by guidance. The use of such
guidance is sometimes mandatory and sometimes optional.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 36

10. Which of the following
statements is incorrect regarding
the PFRSs?
a. The PFRSs are based on the IFRSs.
b. The financial reporting standards used in the Philippines
are the same as those used globally.
c. The PFRSs have higher authority than the PASs and
Interpretations.
d. The PFRSs are accompanied by guidance. The use of such
guidance is sometimes mandatory and sometimes optional.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 37

 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 38

 END
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 39