CHAPTER 1: THE ACCOUNTANCY b.

Measuring as the technical

PROFESSION component
DEFINITION of Accounting: c. Communicating as the formal
(ACCOUNTING STANDARDS component
COUNCIL)
IDENTIFYING
 Accounting is a service
activity  It is the recognition or non-
recognition of business
 Its function is to provide activities as accountable
quantitative information, events.
primarily financial in nature,
about economic entities, that
is intended to be useful in ■
making economic decisions
Accountable event or Quantifiable
(AMERICAN INSTITUTE OF event
CERTIFIED PUBLIC ACCOUNTANTS) –
it is an event that has an effect/s
 Accounting is the art of on assets, liabilities and equity.
recording, classifying and ■
summarizing in a significant
manner and in terms of Take note that
money, transactions and not
events which are in part at all business activities are
least of a financial character accountable
and interpreting the results
thereof ■

Subject matter of accounting:

(AMERICAN ACCOUNTING
ASSOCIATION)
 Accounting is the process of
identifying, measuring and
communicating economic
information to permit
informed judgment and
decision by users of the
information
Components of Accounting
(based on its definition)
a. Identifying as the analytical
component
Economic Activity/ies
CLASSIFICATION OF ECONOMIC
ACTIVITIES

EXTERNAL TRANSACTIONS
–
also known as
exchange transactions.
-
these are events that involves one
entity and another entity
 processes information into reports
and communicates the reports to
INTERNAL TRANSACTIONS decision makers
– ■
it involves the entity only.
MEASURING Its key product is a
■ set of financial statements

It is the process of Scribd

assigning peso amounts to
accountable economic transactions
and events.
■
Measurement bases are the
historical cost, current cost,
realizable value and present value
COMMUNICATING
 “The overall objective
It is the process of
preparing and distributing
accounting reports
to potential users of accounting
information

This process is the reason why
accounting is called the “Universal
Language of Business.”

This process contains the
recording, classifying and
summarizing
aspects of accounting.
ACCOUNTING AS AN INFORMATION
SYSTEM
■ BOARD OF ACCOUNTANCY
Information System of Accounting
measures business activities,
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OVERALL OBJECTIVE OF
ACCOUNTING
of accounting is to provide
quantitative financial information
about a business that is useful to
statement users particularly
owners and creditors in
making economic decisions.”
The Accountancy Profession
■
Republic Act No. 9298
■
Known as the
“Philippine
Accountancy
Act of 2004”
■
–
a body authorized by law to
promulgate rules and regulations
affecting the practice of the
accountancy profession in the
Philippines.
- for a period of
it is also responsible for preparing
and grading the Philippine CPA
Examination
■
PRC shall issue the Certificate of
Registration to practice public
accountancy which shall be valid
for
3 years
and renewable
every 3 years upon payment of
required fees.
3 MAIN AREAS OF ACCOUNTANCY:
1.
Public Accounting 2.
Private Accounting 3.
Government Accounting
CONTINUING PROFESSIONAL
DEVELOPMENT (CPD)
■
Republic Act No. 10912
■ If a CPA has reached the age of
CPD refers to the inculcation and
acquisition of advanced knowledge,
skill, proficiency, and ethical and
moral values after the initial
registration of CPAs for the
assimilation into professional
practice and lifelong learning.
■ practice and standards followed in
Under the new BOA resolution, all
CPA (regardless of area or sector of
practice) shall be required to
comply with
120 CPD units
3 years.
■
Here is the initial implementation
of the 120 CPD credit units:
■
The
excess credit units
shall not be carried over for the
next three (3) year period, except of
masteral and doctoral degree CPD
units.
■
It has become
mandatory
for all Certified Public Accountants
and it is also required for the
renewal of CPA license and
accreditation of CPA to practice the
accountancy profession.
EXEMPTION FROM CPD:
■
65 years old.
(this only applies to the renewal of
the CPA license)
GENERAL ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
■
It represents the rules, procedures,
the preparation and presentation of
financial statements.
■
It is like laws that must be followed
in financial reporting.
PURPOSE OF ACCOUNTING
STANDARDS:
■ ■
To identify proper accounting
practices for the preparation and
presentation of financial
statements.
YEAR
CPD CREDIT UNITS
2017 80 credit units 2018 100
credit units 2019 120 credit units
■ It was formed by the FRSC in
These standards create a
common understanding
between preparers and users of
financial statements particularly
the measurement of assets and
liabilities.
FINANCIAL REPORTING
STANDARDS COUNCIL (FRSC)
■ specifically addressed in current
It is the accounting standard
setting body created by the PRC
upon recommendation of the BOA
to assist them in carrying out of its
powers and functions provided
under R.A. No. 9298.
■
Its main function is
to establish and improve
accounting standards that will be
generally accepted in the
Philippines.
■
The standard promulgated by FRSC
constitute the
highest hierarchy
of the GAAP in the Philippines.
FRSC approved standards are the
Philippine Accounting Standards
(PAS)
and
Philippine Financial Reporting
Standards (PFRS).
PHILIPPINE INTERPRETATION
COMMITTEE (PIC)
■
August 2006.
■
Its role is the preparation of
interpretations of PFRS for the
approval by the FRSC and to
provide timely guidance on
financial reporting issues not
PFRS.
INTERNATIONAL ACCOUNTING
STANDARDS COMMITTEE (IASC)
■
It was formed in
June 1973.
■
It is an independent private sector
body, with the objective of
achieving uniformity in the
accounting principles which are
used by business and other
organizations for financial reporting
around the world.
OBJECTIVES OF IASC:
1.
To
formulate and publish
in the public interest accounting
standards to be observed in the
presentation of financial
statements and to promote their
worldwide acceptance and
observance. 2.
To work generally for the
improvement and harmonization
of regulations, accounting
standards and procedures relating
to the presentation of financial
statements.
INTERNATIONAL ACCOUNTING
STANDARDS BOARD (IASB)
■ Standards.
It replaces the International
Accounting Standards Committee
(IASC)
■ International Accounting
It publishes the
International Financial Reporting
Standards (IFRS),
a standard in a series of
pronouncements.
■ Interpretations developed by the
the pronouncements of the IASC
continues to be designated as
“International Accounting
Standards” or
IAS.
■ It is a complete, comprehensive
It has adopted the body of
standards issued by the IASC.
■
The standard-setting process of the
IASB includes (in the correct order)
research, discussion paper,
exposure draft and accounting
standard.
PHILIPPINE FINANCIAL
REPORTING STANDARDS (PFRS)
■
It is a series of pronouncements
issued by the Financial Reporting
Standards Council.
■
It collectively include all of the
following: 1.
PFRS which corresponds to
International Financial Reporting
2.
PAS which corresponds to
Standards. 3.
Philippine Interpretations which
correspond to the Interpretations of
the IFRIC and Standing
Interpretations Committee, and
PIC.
CHAPTER 2: THE CONCEPTUAL
FRAMEWORK
Definition:
◦
and single document which is
promulgated by the International the information contained in the
Accounting Standards Board (IASB) financial statements.
◦ ◦

It is a summary of the terms and To assist auditors in

concepts that underlie the forming
preparation and presentation of an opinion as to whether financial
financial statements for external statements conform with Philippine
users. GAAP.
◦ ◦

It is intended to guide standard- To provide information to those

setters, preparers and users of interested in the work of the FRSC
financial information in the in the formulation of PFRS.
preparation and presentation of USERS OF FINANCIAL
statements. INFORMATION
PURPOSES OF CONCEPTUAL PRIMARY USERS
FRAMEWORK:
◦ 

To assist the FRSC in these are the parties to whom the

developing general purpose financial reports
accounting standards and are
reviewing existing standards. primarily directed.
◦

To assist preparers of financial
statements in It includes the existing and
applying potential investors, lenders and
accounting standards and in other creditors.
dealing with issues not yet covered OTHER USERS
by GAAP.
◦ 

To assist the FRSC in the these are the users of financial

review and adoption information other than the existing
of International Financial Reporting and potential investors, lenders and
Standards. other creditors.
◦ 

To assist users of financial it includes the employees,

statements in customers, governments and their
interpreting agencies, and the public.
SCOPE OF CONCEPTUAL
FRAMEWORK
a.
Objective of financial reporting b.
Qualitative characteristics of
useful financial information c.
Definition, recognition and
measurement of the elements from
which financial statements are
constructed d.
Concepts of capital and capital
maintenance
OBJECTIVE OF FINANCIAL
REPORTING
◦ management has discharged its
“It is 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.”
◦ future returns
It is the
“why”
, purpose or goal of accounting
SPECIFIC OBJECTIVES OF
FINANCIAL REPORTING
1.
To provide information useful in
making decisions about providing
resources to the entity. 2.
To provide information useful in
assessing the cash flow prospects
of the entity 3.
To provide information about entity
resources, claims and changes in
resources and claims.
USEFULNESS OF FINANCIAL
PERFORMANCE
◦
It helps users to understand the
return
that the entity has produced on the
economic resources.
◦
The
return of the entity
provides an indication of how well
responsibilities to make efficient
and effective use of the
entity’s economic resources.
◦
The
past financial performance
information
is helpful in predicting the
on the economic resources of the
entity.
◦
Also, the information about
financial performance during a
period is useful in
assessing the entity’s
ability to generate future cash
inflows from operations.
ACCRUAL ACCOUNTING
◦
It depicts the effects of
transactions and other events and
circumstances on an
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.
◦
It is to recognize the effects of
transactions and other events
when they occur and not as cash is
received or paid.
◦ It is also known as
“Income is recognized when earned
regardless of when cash is
received and expense is recognized
when incurred regardless
of when cash is paid.”
LIMITATIONS OF FINANCIAL
REPORTING
a.
General purpose financial reports
do NOT and cannot provide all of
the information that existing and
potential investors, lenders and
other creditors need. b.
General purpose financial reports
are not designed to show the value
of an entity but the reports
provide information to help the
primary users estimate the value of
the entity.
c.
General purpose financial reports
are intended to provide
common information
to users and cannot accommodate
every request for information. d.
To a large extent, general purpose
financial reports are based on
estimate and judgment rather than
exact depiction.
UNDERLYING ASSUMPTIONS
◦
These are the fundamental
premises, which is the basis of the
accounting process.
◦
postulates.
◦
These serves as the foundation or
bedrock of accounting.
◦
Only ONE assumption is stated in
the Conceptual Framework for
Financial Reporting, which is
going concern.
◦
Other BASIC ASSUMPTIONS:
accounting entity, time period and
monetary unit.
OTHER BASIC ASSUMPTIONS
ACCOUNTING ENTITY
◦
It is the specific business
organization (proprietorship,
partnership or corporation)
◦
“The entity is separate from the
owners,
managers, employees who
constitute fundamental qualitative
the entity.” characteristics 2.

TIME PERIOD enhancing qualitative

◦ APPLICATION OF THESE
“it
requires that the indefinite life of
an entity is subdivided into
accounting periods which are
usually of equal length for the
purpose of preparing financial
reports on financial position,
performance and cash flows.”
MONETARY UNIT
characteristics
CHARACTERISTICS:
a.
Identify an economic phenomenon
that has the potential to be useful.
b.
Identify the type of information
about the phenomenon that would
be most relevant and can be
faithfully represented. c.

◦ Determine whether the information

is available.
Two Aspects: 1. A.

Quantifiability Aspect RELEVANCE

– 
the assets, liabilities, equity,
income and expenses be measured It is the capacity of the information
in Philippine peso. 2. to influence a decision.

Stability of the Peso
– For a financial information to be
the purchasing power of peso is relevant, it must be capable of
constant or stable. making a difference in the
CHAPTER 3: CONCEPTUAL decisions made by users.
FRAMEWORK (QUALITATIVE 
CHARACTERISTICS)
QUALITATIVE CHARACTERISTICS To be relevant, it requires that the
 financial information should be
related or pertinent to the
Definition: economic decision, but if it does
these are the qualities or attributes not bear an economic decision, the
that make financial accounting information is deemed useless.
information useful to the users. It is INGREDIENTS OF RELEVANCE:
classified into two 1.
: 1.
Predictive value
– an item is material if knowledge of
can be used as an input to
processes employed by users to
predict future outcome. 2.
Confirmatory value
B.
MATERIALITY
 could influence the economic
It is a practical rule which dictates
that strict observance of the GAAP
is not necessary when the items
are NOT significant enough to
affect the evaluation, decision and
fairness of the financial
statements.
 –
This concept is also known as the
Doctrine of Convenience
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 It means that financial reports
It is a “subquality” of relevance
based
on the nature or magnitude or both
of the items to which the
information relates.
WHEN IS AN ITEM MATERIAL?

it would affect or influence the
decision of the informed users of
the financial statements.

Information is
material
if its omission or misstatement
decision that the users make on
the basis of the financial
information about an entity
FACTORS OF MATERIALITY
1.
RELATIVE SIZE
it is in relation to the total of the
group to which the item belongs is
taken into account. 2.
NATURE OF AN ITEM
–
it may be inherently material
because by its very nature it
affects economic decision.
C.
FAITHFUL REPRESENTATION

represent economic phenomena or
transactions in words and numbers.

The descriptions and figures must
match what really happened or
existed.

The actual effects of a transaction
or event must be accounted
properly and reported in the
financial statements.
INGREDIENTS OF FAITHFUL
REPRESENTATION: 1.
to represent, it is necessary that
the transactions and events are
accounted in accordance with their
substance and reality and not
merely their legal form.


COMPLETENESS 2. It is not considered a separate

component of faithful
NEUTRALITY representation because it would be
 redundant.

A neutral depiction is without bias
in the preparation or presentation Faithful representation
of financial information. –
it represents the substance of an
 economic phenomenon or
transaction rather than merely
To be neutral, the information in the representing the legal form.
financial statements must be free E.
from bias.
 CONSERVATISM

“to be neutral is to be fair.”
It means that when alternatives
3. exist, the one chosen should be the
one which has the least effect on
FREE FROM ERROR equity.
 

It means that there are no errors or “In case of doubt, record any loss
omissions in the description of the and do not record any gain.”
phenomenon or transaction.
 Contingent Loss
–
The concept of free from error does it is recognized as a
not necessarily mean perfectly “provision” if the loss is
accurate in all respects. probable
D. and the amount can be
reliably measured.
SUBSTANCE OVER FORM
 Contingent Gain
–
If the transactions events faithfully it is not recognized but disclosed.
represents information it purports Expressions of Conservatism
 it is comparability across entities.
2.
“
Anticipate no profit and provide for UNDERSTANDABILITY
probable and measurable loss.”


 It means that the information

should be presented in a form that
“Don’t count your chicks until the is understandable to the user.
eggs hatch.” 

F. The presentation of the information

must be
PRUDENCE clear and concise.
 

It is the desire to exercise care and This characteristic is very

caution when dealing with the essential because a relevant and
uncertainties faithfully represented information
in the measurement process. may prove useless if it is not
ENHANCING QUALITATIVE understood by users. 3.
CHARACTERISTICS
1. VERIFIABILITY

COMPARABILITY 

 It implies consensus.

It is one of the enhancing
qualitative characteristics that A financial information is verifiable
enables users identify and if it is supported by evidence.
understand the similarities and TYPES OF VERIFICATION:
dissimilarities among items. 1.

Direct Verification
HORIZONTAL COMPARABILITY –
– verifying an amount through direct
it is comparability within an entity. observation 2.

Indirect Verification
INTERCOMPARABILITY OR –
DIMENSIONAL COMPARABILITY it is checking inputs to a model,
– formula or other technique and
recalculating the inputs using the The cost or value of the asset can
same methodology. 4. be measured
reliably.
TIMELINESS COST PRINCIPLE

CHAPTER 4: –
CONCEPTUAL FRAMEWORK it requires that the assets be
(ELEMENTS OF FINANCIAL measured initially at original cost
STATEMENTS) or acquisition cost.
COMPARABILITY
Elements of financial statements
Measurement of CONSISTENCY
financial position: - Uniform application of accounting
method between and across
 entities in the same industry. -
Uniform application of accounting
Asset method from period to period
 within an entity. - It is the goal. - It
helps to achieve the goal.
Liability

2.
Equity
Measurement of LIABILITY RECOGNITION
financial performance: PRINCIPLE Two conditions to
consider:
 1.

Income It Is
 probable
that an outflow of economic
Expense benefits will be required for the
RECOGNITION OF ELEMENTS settlement of a present obligation
1. 2.

ASSET RECOGNITION PRINCIPLE The amount of obligation can be

Two conditions to consider: measured
1. reliably.

It is 3.
probable
that future economic benefits will INCOME RECOGNITION PRINCIPLE
flow to the entity. 2. •

Basic principle:
income shall be recognized when OR
earned.
Two conditions to consider: SUNK
1.
COST
It is
probable METHOD
that future economic benefits will
flow to the entity as a result of an –
increase in an asset or a decrease revenue is recognized at
in a liability. 2. point of collection.
3.
The economic benefits can be
measured PERCENTAGE
reliably.
OF
POINT OF SALE:
• COMPLETION

Legal title to the goods passes to METHOD

the buyer at point of sale
–
•
contract revenue and contract
It is usually the costs be recognized as revenue and
point of delivery expenses based on the stage of
(actual or constructive) completion of the contract. 4.
EXCEPTIONS TO THE POINT OF
PRODUCTION
SALE:
1.
METHOD
INSTALLMENT
–
revenue is recognized at the
METHOD
point of production.
–
4.
revenue is recognized at
point of collection.
EXPENSE RECOGNITION
2.
PRINCIPLE
•
COST

Basic principle:
RECOVERY
expenses are recognized when
METHOD incurred.
TWO conditions to consider:
1.
It is
probable
that a decrease in future economic
benefits has occurred as a result of
a decrease in an asset or an
increase in a liability. 2.
The decrease in economic benefits
can be measured
reliably.
MATCHING PRINCIPLE
• recognized on the basis of
It is applied in expense recognition
principle.
• 
It requires that costs and expenses
incurred relating to a revenue shall
be reported in the same period.
Three applications of matching
principle: 1.
CAUSE AND EFFECT ASSOCIATION

Expense is recognized when the
revenue is already recognized

It is commonly referred to as
matching of cost with revenue.
 ceases to qualify for recognition as
Example: cost of merchandise
inventory, doubtful accounts,
warranty expense and sales
commissions
2.
SYSTEMATIC AND RATIONAL
ALLOCATION

Costs are expensed by simply
allocating them over the periods
benefited.

“when economic benefits are
expected
to arise over several accounting
periods and the association with
income can only be broadly or
indirectly determined, expenses are
systematic and
allocation procedures.”
Examples: depreciation of ppe,
amortization of intangible assets,
allocation of prepaid rent,
insurance and other prepayments
3.
IMMEDIATE RECOGNITION
Expense is recognized immediately
when: 1.
An expenditure produces no future
economic benefit 2.
Cost incurred does not qualify or
an asset
•
Examples: salaries of officers,
administrative expenses,
advertising and selling expenses
MEASUREMENT OF ELEMENTS
1.
REALIZABLE VALUE
HISTORICAL COST
(current sale exchange price)
(past purchase exchange price) 4.
2.
PRESENT VALUE
CURRENT COST
(
(current purchase exchange price) future exchange price)
3.