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1. Identifying
2. Measuring
3. Communicating
Identifying is the process of analyzing events and transactions to determine whether or not they will be
recognized.
Only accountable events are recognized. An accountable event is one that affects the assets,
liabilities, equity, income or expenses of an entity (journalized).
Non-accountable events are not recognized but disclosed only in the notes if they have
accounting relevance (memorandum entry).
Measuring involves assigning numbers, normally in monetary terms to the economic transactions and
events.
Basis of measurement
Historical cost
Fair value
Present Value
Realizable value
Current cost
Inflation-adjusted costs
The basic purpose of accounting is to provide information that is useful in making economic decisions.
1. General purpose accounting information – designed to meet the common needs of most
statement users. (Philippine Financial Reporting Standards)
2. Special purpose accounting information – designed to meet the specific needs of particular
statement users. (Management accounting, tax basis accounting)
Information in the financial statements is not obtained exclusively from the entity’s accounting
records.
1. As social science, accounting is a body of knowledge which has been systematically gathered,
classified and organized.
2. As a practical art, accounting requires the use of creative skills and judgment.
The practice of accountancy requires the exercise of creative and critical thinking.
Creative thinking involves the use of imagination and insight to solve problems. It is most
important in identifying alternative solutions
Critical thinking involves the logical analysis of issues. It is most important in evaluating
alternative solutions
Accounting Concepts
Accounting concepts refer to the principles upon which the process of accounting is based. The term can
be used interchangeably with the following:
Accounting assumptions – fundamental concepts and principles that provide the foundation of the
accounting process
Accounting theory – is a logical reasoning in the form of a set of broad principles that:
Accounting theory comprises the Conceptual Framework and the Philippine Financial Reporting
Standards (PFRS).
Some of the concepts are implicit, meaning they are not expressly stated in the framework or PFRS but
are generally accepted because of their long-time use in the profession.
1. Double-entry system – each accountable event is recorded in 2 parts (debit and credit)
2. Going concern assumption – entity does not expect to end its operations in the foreseeable
future (measurement basis is the mixture of costs and values).
3. Separate entity – the entity is viewed separately from its owners.
4. Monetary unit assumptions – amount is stated in terms of a common unit (Php)
5. Time period – calendar or fiscal
6. Materiality concept – information is material if its omission or misstatement could influence
economic decisions
7. Cost-benefit – the cost of processing and communicating information should not exceed the
benefits to be derived from it.
8. Accrual basis of accounting – income is recognized when earned rather than when cash is
collected and expenses are recognized when incurred rather than when cash is paid.
9. Historical cost concept – the value of an asset is determined on the basis of acquisition cost. This
concept is not always maintained as some PFRS require different measurement.
a. Inventory measured at net realizable value
b. Financial instrument measured at fair value
10. Concept of Articulation – all of the components of a complete set of financial statements are
interrelated. FS, notes and cash flows should be interrelated.
11. Full disclosure principle – sufficient detail to disclose matters that make a difference to users
12. Consistency concept – basis of accounting principles are applied consistently from one period to
the next. Changes in accounting policy should be made when required by PFRS and additional
disclosure.
13. Matching – costs are recognized as expenses when related revenue is recognized
14. Entity Theory – assets = liabilities + capital
15. Proprietary theory – assets – liabilities = capital
16. Residual equity theory assets – liabilities – preferred shares = common shares (book value
determination)
17. Fund theory – cash inflow minus cash outflow equals fund
18. Realization – the process of converting non-cash assets into cash or claims for cash
19. Prudence (conservatism) – caution in making estimates wherein assets or income are not
overstated and liabilities or expenses are not understated.
Bookkeeping
Accounting Standards
The Philippine Financial Reporting Standards (PFRSs) represent the generally accepted accounting
principles (GAAP) in the Philippines
1. The standard has been established by an authoritative accounting rule-making body ex: PFRS
2. The principle has gained general acceptance due to practice over time and has been proven to
be the most usefule ex: double-entry recording and other implicit concepts
When selecting its accounting policies, an entity considers the following in descending order:
PFRS > Conceptual Framework > Pronouncements of other standard-setting bodies > accounting
literature and accepted industry practices
Selection of appropriate accounting policies is the responsibility of the entity’s management, the
proper application of accounting principles is most dependent upon the professional judgment
of the accountant.
1. Financial Reporting Standards Council (FRSC) – official accounting standard setting body in the
Philippines created under the Philippine Accountancy Act of 2004.
2. Philippine Interpretations Committee (PIC) – predecessor of FRSC with the role of reviewing the
interpretations of the International Financial Reporting Interpretations Committee (IFRIC)
3. Board of Accountancy – professional regulatory board to supervise the registration, licensure
and practice of accountancy in the Philippines.
4. Securities and Exchange Commission (SEC) – is the government agency tasked in regulating
corporations and partnerships, capital and investment market and the investing public.
5. Bureau of Internal Revenue – administers the provisions of the National Internal Revenue Code.
These provisions do not always reflect the goals of financial reporting. However, they do at
times influence the choice of accounting methods.
6. Bangko Sentral ng Pilipinas (BSP) – influences the selection and application of accounting
policies by banks and other entities performing banking functions
7. Cooperative Development Authority (CDA) – influences the selection and application of
accounting policies by cooperatives.
International Accounting Standards Board (IASB) is the standard-setting body of the IFRS Foundation
with the main objectives of developing and promoting global accounting standards.
The accounting standards used in the Philippines are the PFRS, which are based on the IFRSs. The PFRSs
are comprised of the following:
1. PFRSs
2. PASs
3. Interpretations
Conceptual Framework
Sets out the concepts that underlie the preparation and presentation of financial statements for
external users.
The Conceptual Framework is not a PFRS and therefore does not prescribe any measurement or
disclosure requirement. If there is a conflict between a PFRS and the Conceptual Framework, the
requirements of the PFRS will prevail.
a. PFRSs
b. Judgment
SCOPE
“The objective of general purpose financial reporting 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.”
a. Financial position – information on economic resources (assets) and claims against the reporting
entity (liabilities and equity).
b. Changes in economic resources and claims – information on financial performance and other
transactions and events that lead to changes in financial position.
Information on economic resources and claims help users assess the entity’s:
Liquidity > ability to pay short-term; solvency > ability to meet long term obligations
Helps users assess the entity’s ability to produce return from its economic resources.
o Return provides an indication on how well management has efficiently and effectively
used the entity’s resources.
Variability of the return helps users in assessing the uncertainty of future cash flows.
o For example, significant fluctuations in reported profits may indicate financial instability
and uncertainty on the entity’s ability to generate cash flows from its operations.
Qualitative Characteristics
The qualitative characteristics of useful financial information identify the types of information that are
likely to be most useful to the primary users in making decisions using an entity’s financial report.
The Conceptual Framework classifies the qualitative characteristics into the following:
1. Fundamental qualitative characteristics – these are the characteristics that make information
useful to users. They are consist of the following:
a. Relevance
i. Materiality concept
b. Faithful Representation
i. Completeness
ii. Neutrality
iii. Free from error
2. Enhancing qualitative characteristics – these are the characteristics that enhance the usefulness
of information. They consist of the following:
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability
Relevance
Information is relevant if it is capable of making difference in the decisions made by the users.
Materiality
The Conceptual Framework states that materiality is an ‘entity-specific’ aspect of relevance, meaning
materiality depends on the facts and circumstances surrounding a specific entity. Accordingly, the
Conceptual Framework and the Standards do not specify a uniform quantitative threshold for
materiality. Materiality is a matter of judgment.
Faithful Representation
The information provides a true, correct and complete depiction of what it purports to represent.
Faithfully represented information has the following characteristics:
a. Completeness – all information necessary for users to understand the phenomenon being
depicted are provided. These include:
o Description of the nature of the item
o Numerical depiction (monetary amount)
o Description of the numerical depiction (historical cost or fair value)
o Explanations of significant facts surrounding the item
b. Neutrality – information is selected or presented without bias
c. Free from error – this does not mean that the information is perfectly accurate in all aspects. It
means there are no errors in the description and in the process by which the information is
selected and applied.
o If the information is an estimate, that fact should be described clearly, including an
explanation of the process used in making that estimate.
Comparability
Information is comparable if it helps users identify similarities and differences between one information
and another information that is either provided by the same entity but in another period (intra-
comparability) or by other entities (inter-comparability).
Although related, consistency and comparability are not the same. Consistency refers to the use
of the same methods for the same items. Comparability is the goal while consistency is the
means of achieving that goal.
Verifiability
Information is verifiable if different users could reach an agreement as to what the information purports
to represent.
Timeliness
Understandability
Understandability does not mean that complex matters should be excluded because this would
make information incomplete and potentially misleading. Accordingly, financial reports are
intended for users:
o Who have reasonable knowledge of business activities and
o Who are willing to analyze the information diligently
Underlying Assumption
The underlying assumption in financial reporting is going concern. It is assumed that the entity has
neither the intention nor the need to end its operations in the foreseeable future.
Financial statement portray the effects of transactions and events by grouping them into broad
classes.
Financial Position
the elements directly related to the measurement of financial position are assets, liabilities and
equity
Asset
“An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity”.
a. Control – means the entity has the exclusive right over the benefits of an asset or the ability to
prevent others from accessing those benefits
o Substance over form concept
i. Ownership or possession is not always necessary for control to exist (ex. Asset
acquire through bank financing)
ii. Physical form is not necessary for an asset to exist. (ex. Receivables and
intangibles)
iii. The presence or absence of expenditure is not necessary in determining the
existence of an asset. (ex. Donations)
b. Past Events
o Resources for which control is yet to be obtained in the future do not qualify as assets in
the past event. (ex. Mere intention to acquire vehicles)
c. Future Economic Benefits
o ‘Future” means the resource is expected to provide economic benefit over more than
one accounting period. Expense for current period only.
o “Economic benefits” means the potential of the resource to provide the entity, directly,
indirectly with cash and cash equivalents.
Liability
“A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits”
a. Present obligation arising from past events – means that at the reporting date, the entity has
the responsibility to perform some act because of an obligating event that has already
transcribed.
i. Legal obligation – an obligation that results from a contract, legislation or other
operation of law
ii. Constructive obligation – an obligation that results from an entity’s actions that create a
valid expectation from others that the entity will accept and discharge certain
responsibilities.
o Intention to purchase inventory (no obligation)
o Irrevocable contract to purchase an inventory (creates liability)
o Assumed acceptable of repairs in the future (constructive)
b. Outflow of economic benefits – settling an obligation normally requires the entity to:
o Pay cash
o Transfer non-cash assets
o Render a service
o Replace the obligation with another obligation
o Convert the obligation to equity
Equity
“Equity is the residual interest in the assets of the entity after deducting all its liabilities”
Performance
The elements directly related to the measurement of performance are income and expenses.
Income
“Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants”.
a. “Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety
of different names including sales, fees, interest, dividends, royalties and rent”
b. “Gains represent other items that meet the definition of income and may, or may not, arise in
the course of the ordinary activities of an entity”.
Revenues and gains are normally presented separately in the financial statements as knowledge
of them is useful in making economic decisions.
Expenses
“Expenses are decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decrease in equity, other than those
relating to distributions to equity participants”.
Capitalizable costs – recognized as assets
Period costs or revenue expenditures – expensed immediately in the period they are incurred
Measurement
“Measurement is the process of determining the monetary amounts at which the elements of the
financial statements are to be recognized and carried in the balance sheet and income statement”.
Basis of measurements
a. Financial Concept of Capital – capital is regarded as the invested money or invested purchasing
power. Capital is synonymous with equity or net assets.
b. Physical concept of capital – capital is regarded as the entity’s productive capacity ex. Units of
output per day.