CHAPTER 1: THE ACCOUNTANCY ■

PROFESSION
DEFINITION of Accounting: Accountable event or Quantifiable event
(ACCOUNTING STANDARDS COUNCIL) –
it is an event that has an effect/s on assets,
 Accounting is a service activity liabilities and equity.
■
 Its function is to provide quantitative
information, primarily financial in Take note that
nature, about economic entities, that not
is intended to be useful in making all business activities are accountable
economic decisions
■
(AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS) Subject matter of accounting:
Economic Activity/ies
 Accounting is the art of recording,
classifying and summarizing in a CLASSIFICATION OF ECONOMIC
significant manner and in terms of ACTIVITIES
money, transactions and events
which are in part at least of a
financial character and interpreting
the results thereof EXTERNAL TRANSACTIONS
–
also known as
(AMERICAN ACCOUNTING exchange transactions.
ASSOCIATION)
-
 Accounting is the process of these are events that involves one entity
identifying, measuring and and another entity
communicating economic
information to permit informed
judgment and decision by users of INTERNAL TRANSACTIONS
the information –
it involves the entity only.
Components of Accounting MEASURING
(based on its definition) ■
a. Identifying as the analytical
component It is the process of
b. Measuring as the technical assigning peso amounts to accountable
component economic transactions and events.
c. Communicating as the formal
component ■

IDENTIFYING Measurement bases are the

historical cost, current cost, realizable value
 It is the recognition or non- and present value
recognition of business activities as
accountable events. COMMUNICATING
It is the process of
preparing and distributing accounting Known as the
reports “Philippine
to potential users of accounting information Accountancy
Act of 2004”

This process is the reason why ■

accounting is called the “Universal
Language of Business.” BOARD OF ACCOUNTANCY
–

a body authorized by law to promulgate

This process contains the rules and regulations affecting the practice
recording, classifying and summarizing of the accountancy profession in the
aspects of accounting. Philippines.
ACCOUNTING AS AN INFORMATION -
SYSTEM it is also responsible for preparing and
■ grading the Philippine CPA Examination
■
Information System of Accounting measures
business activities, processes information PRC shall issue the Certificate of
into reports and communicates the reports Registration to practice public accountancy
to decision makers which shall be valid for
■ 3 years
and renewable
Its key product is a every 3 years upon payment of required
set of financial statements fees.

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CONTINUING PROFESSIONAL
DEVELOPMENT (CPD)
OVERALL OBJECTIVE OF ACCOUNTING ■
“The overall objective
of accounting is to provide quantitative Republic Act No. 10912
financial information about a business that ■
is useful to statement users particularly
owners and creditors in CPD refers to the inculcation and
making economic decisions.” acquisition of advanced knowledge, skill,
proficiency, and ethical and moral values
The Accountancy Profession after the initial registration of CPAs for the
■ assimilation into professional practice and
lifelong learning.
Republic Act No. 9298 ■
■
Under the new BOA resolution, all CPA To identify proper accounting practices for
(regardless of area or sector of practice) the preparation and presentation of financial
shall be required to comply with statements.
120 CPD units YEAR
for a period of
3 years. CPD CREDIT UNITS
2017 80 credit units 2018 100 credit units
■ 2019 120 credit units

Here is the initial implementation of the 120

CPD credit units: ■
■
These standards create a
The common understanding
excess credit units between preparers and users of financial
shall not be carried over for the next three statements particularly the measurement of
(3) year period, except of masteral and assets and liabilities.
doctoral degree CPD units. FINANCIAL REPORTING STANDARDS
■ COUNCIL (FRSC)
■
It has become
mandatory It is the accounting standard setting body
for all Certified Public Accountants and it is created by the PRC upon recommendation
also required for the renewal of CPA license of the BOA to assist them in carrying out of
and accreditation of CPA to practice the its powers and functions provided under
accountancy profession. R.A. No. 9298.
EXEMPTION FROM CPD: ■

■ Its main function is

to establish and improve accounting
If a CPA has reached the age of standards that will be generally accepted in
65 years old. the Philippines.
(this only applies to the renewal of the CPA
license) ■
GENERAL ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) The standard promulgated by FRSC
■ constitute the
highest hierarchy
It represents the rules, procedures, practice of the GAAP in the Philippines.
and standards followed in the preparation ■
and presentation of financial statements.
■ FRSC approved standards are the
Philippine Accounting Standards (PAS)
It is like laws that must be followed in and
financial reporting. Philippine Financial Reporting Standards
PURPOSE OF ACCOUNTING (PFRS).
STANDARDS:
PHILIPPINE INTERPRETATION
■ COMMITTEE (PIC)
■
It was formed by the FRSC in
August 2006.
■ to be designated as
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 specifically addressed
in current PFRS.
INTERNATIONAL ACCOUNTING
STANDARDS COMMITTEE (IASC)
■ The standard-setting process of the IASB
It was formed in
June 1973.
■ STANDARDS (PFRS)
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.
■
the pronouncements of the IASC continues
“International Accounting Standards” or
IAS.
■
It has adopted the body of standards issued
by the IASC.
■
includes (in the correct order)
research, discussion paper, exposure draft
and accounting standard.
PHILIPPINE FINANCIAL REPORTING
■
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 Standards.
2.
PAS which corresponds to International
Accounting Standards. 3.

To work generally for the Philippine Interpretations which correspond

improvement and harmonization to the Interpretations of the IFRIC and
of regulations, accounting standards and Standing Interpretations Committee, and
procedures relating to the presentation of Interpretations developed by the PIC.
financial statements. CHAPTER 2: THE CONCEPTUAL
INTERNATIONAL ACCOUNTING FRAMEWORK
STANDARDS BOARD (IASB) Definition:
■ ◦

It replaces the International Accounting It is a complete, comprehensive and single

Standards Committee (IASC) document which is promulgated by the
■ International Accounting Standards Board
(IASB)
It publishes the ◦
International Financial Reporting Standards
(IFRS), It is a summary of the terms and concepts
a standard in a series of pronouncements. that underlie the preparation and
presentation of financial statements for these are the parties to whom the general
external users. purpose financial reports are
◦ primarily directed.

It is intended to guide standard-setters,

preparers and users of financial information
in the preparation and presentation of It includes the existing and potential
statements. investors, lenders and other creditors.
PURPOSES OF CONCEPTUAL OTHER USERS
FRAMEWORK:
◦

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

developing other than the existing and potential
accounting standards and reviewing existing investors, lenders and other creditors.
standards.
◦
it includes the employees, customers,
To assist preparers of financial statements governments and their agencies, and the
in public.
applying SCOPE OF CONCEPTUAL FRAMEWORK
accounting standards and in dealing with a.
issues not yet covered by GAAP.
◦ Objective of financial reporting b.

To assist the FRSC in the Qualitative characteristics of useful financial

review and adoption information c.
of International Financial Reporting
Standards. Definition, recognition and measurement of
◦ the elements from which financial
statements are constructed d.
To assist users of financial statements in
interpreting Concepts of capital and capital maintenance
the information contained in the financial OBJECTIVE OF FINANCIAL REPORTING
statements. ◦
◦
“It is to provide financial information
To assist auditors in about the reporting entity that is useful to
forming existing and potential investors, lenders and
an opinion as to whether financial other creditors in making decisions about
statements conform with Philippine GAAP. providing resources to
◦ the entity.”

To provide information to those interested in ◦

the work of the FRSC in the formulation of
PFRS. It is the
USERS OF FINANCIAL INFORMATION “why”
PRIMARY USERS , 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
◦ of when cash is paid.”
It helps users to understand the
return
that the entity has produced on the
economic resources.
◦ General purpose financial reports do NOT
The
return of the entity
provides an indication of how well
management has discharged its
responsibilities to make efficient and
effective use of the
entity’s economic resources.
◦ c.
The
past financial performance information
is helpful in predicting the
future returns
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.
◦
“Income is recognized when earned
regardless of when cash is received and
expense is recognized when incurred
regardless
LIMITATIONS OF FINANCIAL
REPORTING
a.
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.
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.
It is also known as
postulates.
◦ the assets, liabilities, equity, income and
expenses be measured in Philippine peso.
These serves as the foundation or bedrock 2.
of accounting.
◦ Stability of the Peso
–
Only ONE assumption is stated in the the purchasing power of peso is constant or
Conceptual Framework for Financial stable.
Reporting, which is CHAPTER 3: CONCEPTUAL
going concern. FRAMEWORK (QUALITATIVE
CHARACTERISTICS)
◦ QUALITATIVE CHARACTERISTICS

Other BASIC ASSUMPTIONS:

accounting entity, time period and monetary Definition:
unit. these are the qualities or attributes that
make financial accounting information
useful to the users. It is
OTHER BASIC ASSUMPTIONS classified into two
ACCOUNTING ENTITY : 1.

◦ fundamental qualitative characteristics 2.

It is the specific business organization enhancing qualitative characteristics

(proprietorship, partnership or corporation) APPLICATION OF THESE
◦ CHARACTERISTICS:
a.
“The entity is separate from the owners,
managers, employees who constitute Identify an economic phenomenon that has
the entity.” the potential to be useful. b.

TIME PERIOD Identify the type of information about the

phenomenon that would be most relevant
◦ and can be faithfully represented. c.

“it Determine whether the information is

requires that the indefinite life of an entity is available.
subdivided into accounting periods which A.
are usually of equal length for the purpose
of preparing financial reports on financial RELEVANCE
position,
performance and cash flows.”
It is the capacity of the information to
MONETARY UNIT influence a decision.

◦
For a financial information to be relevant, it
Two Aspects: 1. must be capable of making a difference in
the decisions made by users.
Quantifiability Aspect
–
To be relevant, it requires that the financial
information should be related or pertinent to
the economic decision, but if it does not
bear an economic decision, the information
is deemed useless.
INGREDIENTS OF RELEVANCE:
1.
Predictive value
– users make on the basis of the financial
can be used as an input to processes
employed by users to predict future
outcome. 2.
an item is material if knowledge of it would
affect or influence the decision of the
informed users of the financial statements.
Information is
material
if its omission or misstatement could
influence the economic decision that the
information about an entity
FACTORS OF MATERIALITY
1.

Confirmatory value RELATIVE SIZE

B.
–
MATERIALITY it is in relation to the total of the group to
which the item belongs is taken into
account. 2.
It is a practical rule which dictates that strict
observance of the GAAP is not necessary NATURE OF AN ITEM
when the items are NOT significant enough
to affect the evaluation, decision and –
fairness of the financial statements. it may be inherently material because by its
very nature it affects economic decision.
C.
This concept is also known as the
Doctrine of Convenience FAITHFUL REPRESENTATION

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The actual effects of a transaction or event

must be accounted properly and reported in
the financial statements.
It is a “subquality” of relevance based INGREDIENTS OF FAITHFUL
on the nature or magnitude or both of the REPRESENTATION: 1.
items to which the information relates.
WHEN IS AN ITEM MATERIAL? COMPLETENESS 2.

NEUTRALITY
 A neutral depiction is without bias in the
preparation or presentation of financial
information.
It means that when alternatives exist, the
one chosen should be the one which has
the least effect on equity.

To be neutral, the information in the

financial statements must be free from bias. “In case of doubt, record any loss and do
not record any gain.”

“to be neutral is to be fair.” Contingent Loss

–
3. it is recognized as a
“provision” if the loss is
FREE FROM ERROR probable
and the amount can be
reliably measured.
It means that there are no errors or
omissions in the description of the Contingent Gain
phenomenon or transaction. –
it is not recognized but disclosed.
Expressions of Conservatism
The concept of free from error does not
necessarily mean perfectly accurate in all
respects. “
D. Anticipate no profit and provide for
probable and measurable loss.”
SUBSTANCE OVER FORM

If the transactions events faithfully

represents information it purports to “Don’t count your chicks until the eggs
represent, it is necessary that the hatch.”
transactions and events are accounted in
accordance with their substance and reality F.
and not merely their legal form.
PRUDENCE

It is not considered a separate component

of faithful representation because it would It is the desire to exercise care and caution
be redundant. when dealing with the
uncertainties
in the measurement process.
Faithful representation ENHANCING QUALITATIVE
– CHARACTERISTICS
it represents the substance of an economic 1.
phenomenon or transaction rather than
merely representing the legal form. COMPARABILITY
E.

CONSERVATISM
It is one of the enhancing qualitative
characteristics that enables users identify
and understand the similarities and
dissimilarities among items.
Indirect Verification
–
it is checking inputs to a model, formula or
other technique and recalculating the inputs
using the same methodology. 4.

HORIZONTAL COMPARABILITY TIMELINESS

–
it is comparability within an entity. CHAPTER 4:
CONCEPTUAL FRAMEWORK
(ELEMENTS OF FINANCIAL
INTERCOMPARABILITY OR STATEMENTS)
DIMENSIONAL COMPARABILITY
– Elements of financial statements
it is comparability across entities. 2. Measurement of
financial position:
UNDERSTANDABILITY

Asset
It means that the information should be
presented in a form that is understandable
to the user. Liability

The presentation of the information must be Equity

clear and concise. Measurement of
financial performance:

This characteristic is very essential because

a relevant and faithfully represented
information may prove useless if it is not Income
understood by users. 3.

VERIFIABILITY Expense
RECOGNITION OF ELEMENTS
1.

It implies consensus. ASSET RECOGNITION PRINCIPLE Two

conditions to consider:
1.
A financial information is verifiable if it is
supported by evidence. It is
TYPES OF VERIFICATION: probable
1. that future economic benefits will flow to the
entity. 2.
Direct Verification
– The cost or value of the asset can be
verifying an amount through direct measured
observation 2. reliably.
COST PRINCIPLE
 – Legal title to the goods passes to the buyer
it requires that the assets be measured at point of sale
initially at original cost or acquisition cost. •
COMPARABILITY
It is usually the
CONSISTENCY point of delivery
- Uniform application of accounting method (actual or constructive)
between and across entities in the same EXCEPTIONS TO THE POINT OF SALE:
industry. - Uniform application of accounting 1.
method from period to period within an
entity. - It is the goal. - It helps to achieve INSTALLMENT
the goal.
METHOD

2. –
revenue is recognized at
LIABILITY RECOGNITION PRINCIPLE Two point of collection.
conditions to consider: 2.
1.
COST
It Is
probable RECOVERY
that an outflow of economic benefits will be
required for the settlement of a present METHOD
obligation 2.
OR
The amount of obligation can be measured
reliably. SUNK

3. COST

INCOME RECOGNITION PRINCIPLE METHOD

•
–
Basic principle: revenue is recognized at
income shall be recognized when earned. point of collection.
Two conditions to consider: 3.
1.
PERCENTAGE
It is
probable OF
that future economic benefits will flow to the
entity as a result of an increase in an asset COMPLETION
or a decrease in a liability. 2.
METHOD
The economic benefits can be measured
reliably. –
contract revenue and contract costs be
POINT OF SALE: recognized as revenue and expenses based
•
on the stage of completion of the contract. matching of cost with revenue.
4.

PRODUCTION
Example: cost of merchandise inventory,
METHOD doubtful accounts, warranty expense and
sales commissions
– 2.
revenue is recognized at the
point of production. SYSTEMATIC AND RATIONAL
ALLOCATION
4.

EXPENSE RECOGNITION PRINCIPLE Costs are expensed by simply allocating

• them over the periods benefited.

Basic principle:
expenses are recognized when incurred. “when economic benefits are expected
to arise over several accounting periods and
TWO conditions to consider: the association with income can only be
1. broadly or indirectly determined, expenses
are recognized on the basis of systematic
It is and
probable allocation procedures.”
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.
Examples: depreciation of ppe, amortization
The decrease in economic benefits can be of intangible assets,
measured
reliably.
allocation of prepaid rent, insurance and
MATCHING PRINCIPLE other prepayments
• 3.

It is applied in expense recognition principle. IMMEDIATE RECOGNITION

• Expense is recognized immediately when:
1.
It requires that costs and expenses incurred
relating to a revenue shall be reported in the An expenditure produces no future
same period. economic benefit 2.
Three applications of matching principle: 1.
Cost incurred does not qualify or ceases to
CAUSE AND EFFECT ASSOCIATION qualify for recognition as an asset
•

Expense is recognized when the revenue is Examples: salaries of officers,

already recognized administrative expenses, advertising and
selling expenses
MEASUREMENT OF ELEMENTS
It is commonly referred to as 1.
HISTORICAL COST REALIZABLE VALUE

(past purchase exchange price) (current sale exchange price)

2. 4.

CURRENT COST PRESENT VALUE

(current purchase exchange price) (

3. future exchange price)