Conceptual Framework and Accounting Standards  Process of preparing and distributing accounting reports to potential o After the FS are

ng reports to potential o After the FS are prepared, the auditor will begin to perform the
users of accounting information. task of auditing.
Accounting Standards Council
o The auditor examines the financial statements to ascertain
Accounting is a service activity.
o Accounting has been called the “universal language of whether they are in conformity with generally accepted
Committee on Accounting Terminology of the American Institute of Certified business” accounting principles.
Public Accountants o Recording or Journaling: process of systematically maintaining a  Accounting: constructive
Accounting is the art of recording, classifying and summarizing in a record of all economic business transactions after they have o Accounting is essentially constructive in nature. Accounting
significant manner and in terms of money, transactions and events which are in been identified and measured. Ceases when financial statements are already prepared.
part of at least of a financial character and interpreting the results thereof.  Auditing: analytical
o Classifying: sorting and grouping of similar and interrelated o Auditing is analytical. The work of an auditor begins when the
American Accounting Association economic transactions work of the accountant ends.
Accounting is the process of identifying, measuring and communicating o Summarizing: preparation of financial statements  Accounting vs. Bookkeeping
economic information to permit informed judgement and decision by users of
o Accounting: conceptual
the information.
 Accounting is conceptual and is concerned with the
Purpose of Accounting The Accountancy Profession why, reason or justification for any action adopted.
o Bookkeeping: procedural
The very purpose of accounting is to provide quantitative information to  Republic Act No. 9298
 Bookkeeping is procedural and largely concerned with
be useful in making an economic decision. o Philippine Accountancy Act of 2004
development and maintenance of accounting records.
QUANTITATIVE INFORMATION > FINANCIAL IN NATURE > o Law regulating the practice of accountancy in the Philippines
 Bookkeeping is the “how” of accounting.
USEFUL IN DECISION MAKING  In the Philippines
o Degree in BS Accountancy
Components of the Accounting  Accounting vs. Accountancy
o Board examination given by the Board of Accountancy
o Accountancy refers to the profession of accounting practice
 Identifying = Analytical  Board of Accountancy
o Accounting is used in reference only to a particular field of
 Measuring = Technical o The body authorized by law to promulgate rules and regulations
accountancy such as public accounting, private accounting and
 Communicating = Formal affecting the practice of accountancy profession in the
government accounting.
Philippines.
Identifying  Accountancy: profession
o BOA is responsible for preparing and grading the Philippine CPA
 Financial Accounting vs. Managerial Accounting
 Recognition or noncognition examination.
o Financial accounting is primarily concerned with the recording
 Business activities as “accountable” events.
Certified Public Accountants 3 main areas of practice of business transactions and the eventual preparation of
financial statements.
o Event is accountable or quantifiable when it has an effect on  Public Accounting
 Financial Accounting: Internal and External Users
Assets, Liabilities and Equity. - Render independent and expert financial services to the
o Financial accounting focuses on general purpose reports known
o Economic activities- External or internal transactions public.
as financial statements intended for internal and external users.
- Auditing, Taxation, and Management Advisory Services
Measuring o Financial accounting is the area of accounting that emphasizes
 Private Accounting
reporting to creditors and inventors.
 Assigning peso amounts to the accountable economic transactions and - Employment in business entities as accounting staff, chief
 Managerial Accounting: Internal Users only
events. accountant, internal auditor and controller
o Managerial Accounting is the accumulation and preparation of
 Government Accounting
financial reports for internal users only.
 PHP = Philippine Peso -Involves receipt and disposition of government funds and
o Managerial accounting is the area of accounting that
property
emphasizes developing accounting information for use within
 Measurement bases are historical cost and current value -The focus is on the custody and administration of public funds.
an entity
o Historical cost: the original acquisition cost - BIR, COA, DBM, SEC, BSP
o Current value: fair value, value in use, fulfillment value and Generally Accepted Accounting Principles (GAAP)
current cost.
 Represent the rules, procedures, practice and standards followed in the
Accounting vs. … preparation and presentation of financial statements.
Communicating  Like laws that must be followed in financial reporting.
 Accounting vs. Auditing
o Accounting embraces auditing Accounting Standards
o Auditing is one of the areas of accounting specialization
  The overall purpose of accounting standards is to identify proper Objective of Financial Reporting ❑ Philippine Institute of Certified Public
accounting practices for the preparation and presentation of financial
 The overall objective of financial reporting is to provide financial Accountants (PICPA)
statements.
 ACCOUNTING STANDARDS CREATE A COMMON UNDERSTANDING information about the reporting entity that is useful to existing and “A system that measures business
BETWEEN PREPARERS AND USERS OF FINANCIAL STATEMENTS.
potential investors, lenders and other creditors in making decisions activities, processes given information into
Financial Reporting Standards Council (FRSC)
about providing resources to the entity. reports, and communicates those findings to
 The accounting standard setting body created by the Professional
Regulation Commission (PRC) upon the recommendation of the BOA.  To provide information that is useful for decision making decision-makers.”
o Investment decisions
 The main function is to establish and improve accounting standards that Nature of Accounting
will be generally accepted in the Philippines. o Assessing the cash flow prospects of the entity
 Accounting Standards promulgated by the FRSC = Highest Hierarchy o Resources, claims and changes in resources and claims.  A service activity
 Philippine Accounting Standards (PAS) and Philippine Financial  A process, an art and a discipline
Fundamentals of Accountancy,
Reporting Standards (PFRS)  The language of business
o Approved statements of the FRSC Business and Management A. Profitability f. Financial Flexibility
 At present, the FRSC has adopted in their ENTIRETY all International B. Liquidity
• Accounting for Service Business
Accounting Standards (IAS) and International Financial Reporting C. Solvency
Standards (IFRS). • Accounting for Merchandising Business D. Stability
o To achieve uniformity in the global setting E. Capital Structure
Definition of Accounting :
Conceptual Framework Bookkeeping and Accounting
❑ Financial Reporting Standards Council
 The conceptual framework for financial reporting is a complete,  Bookkeeping – deals primarily with the systematic method of recording
“A service activity, its function is to and classifying financial transaction of business. It is considered the
comprehensive and single document promulgated by the IASB. procedural element of accounting.
provide quantitative information, primarily
 Summary of the terms and concepts that underlie the preparation of FS financial in nature, about economic entities, Objectives of Accounting
for external users
 Theoretical foundation for accounting that is intended to be useful in making 1. To ascertain the result of the business operations.
2. To ascertain the financial position of the business.
 Provides foundation for Standards that:
economic decision.” 3. To assist financial users in predicting the enterprise’s financial capacity
o Contribute to transparency
regarding future cash flows, financial conditions and results of
o Strengthen accountability ❑ American Institute of Certified Public
operations.
o Contribute to economic efficiency
Accountants (AICPA)
Authoritative status of Conceptual Framework
“The art of recording, classifying and
Fields of Accounting
 In the absence of a standard or an interpretation that specifically applies
summarizing in a significant manner
to a transaction, consider the applicability of the Conceptual Framework • Financial accounting
in developing and applying an accounting policy that results in and in terms of money, transactions • Management accounting
information that is relevant and reliable. • Cost accounting
and events which are in part at least of
• Tax accounting
Users of Financial Information
financial character and interpreting the • Government accounting
 Primary Users
results thereof.” Sectors of Accounting
o Investors, Lenders, Other Creditors
o Parties to whom general purpose financial reports are primarily ❑ American Accounting Association  Practice
directed. • Public Practice
 Other Users “The process of identifying, measuring and • Commerce and Industry
o Employees, customers, governments, public communicating economic information to • Education and Academe
o Residual definition • Government
o May use the general purpose financial reports that are not permit informed judgments and decisions by
directed to them primarily users of the information.”
Users of Accounting Information • Lack of continuity • Taxes

• Internal users – those who are directly Partnership Forms of Business Organization

involved in the business enterprise • Based on operations or activity

a. Owners • Legal arrangement in which two or more a. Service concern

b. Management
persons agree to contribute capital or b. Merchandising or trading concern
c. Employees
services to the business and divide the c. Manufacturing concern

profits or losses that may be derived 1. Service – performs an activity for a fee
• External users – those who are not directly
therefrom. 2. Merchandising – involved in selling of
involved in the business enterprise
Advantages of Partnership finished goods produced by other
a. Potential investors
b. Creditors (which includes money lenders,suppliers and other • Ease of formation businesses.
trade creditors)
c. Customers • Additional sources of capital 3. Manufacturing – involved in the conversion
d. Taxing authorities • Management base of raw materials into some tangible,
e. Government regulation agencies
f. Non profit organizations • Tax implication physical product.
g. Other users Disadvantages of Partnership Basic Accounting Concepts

• Unlimited liability These are the ground rules that govern

Forms of Business Organization • Lack of continuity how the accountants measure, process
• Based on ownership • Difficulty in transferring ownership and communicate financial information.
a. Sole or single proprietorship
b. Partnership • Limitations in raising capital Purpose of basic accounting
c. Corporation
Corporation concepts
Proprietorship
• An artificial being created by law and a
• Business owned by a single person who has
legal entity separate from its owners. 1.They help increase the confidence of
complete control over business decisions.
The legal entity may own assets, borrow financial statement users that the
This individual owns all the firm’s assets
money and engage in other businesses financial statements are
and is responsible for all its liabilities.
without directly involving the owners. representationally faithful.
Advantages of Sole Proprietorship
Advantages of Corporation 2. They provide companies and
• Ease of entry and exit
• Limited liability accountants who prepare the financial
• Full ownership and control
• Unlimited life statements with guidance on how to
• Tax savings
• Ease in transforming ownership account for and report economic
• Few government regulations
• Ability to raise capital activities.
Disadvantages of Sole Proprietorship
Disadvantages of Corporation 3. They provide independent auditors of
• Unlimited liability
• Time and cost formation financial statements with basis for
• Limitations in raising capital
• Regulation evaluating the fairness and
completeness of those statements. condition and progress of the business. buyers and a seller at the fair value

Entity Concept Revenue Realization Concept prevailing at the time of transaction).

• The business is regarded as having a • It provides that income is recognized when Going Concern Concept

separate and distinct personality from that earned regardless whether cash is received. • It assumes that the business is to continue

of the owner/s – generating its own a. Income is considered earned when its operations indefinitely.

revenue, incurring its own expenses, owning services are fully rendered. • The business will stay in operation for a

its own assets and owing its own liabilities. b. Income is considered earned when period of time sufficient to carry out

• Personal transactions of owners must not goods or merchandise are fully delivered. contemplated operations, contracts and

be combined with transactions of the Accrual Concept commitments.

business. • It requires that income be recorded Conservatism Concept

when earned regardless of whether • It assumes that when uncertainty

Monetary Concept cash is received and expense be exists, the users of financial

• Money is used as the unit of measure recognized when incurred regardless statements are better served by

in preparing the various financial whether payment is made. understatement than overstatement

reports of the company. Matching Concept of net income and assets.

Time Period Concept or Periodicity • This concept states that all expenses Disclosure Concept

• It divides the life of the business into incurred to generate revenues must be • All relevant and material events

regular intervals (usually one year) at the recorded in the same period that the affecting the financial

end of which financial statements are income are recorded to properly condition/position of a business and

prepared. determine net income or net loss of the results of its operations must be

The economic activities undertaken during the period. communicated to users of financial

the life of an accounting entity are Objectivity or Reliability Concept statements.

assumed to be divisible into various • This principle requires that all Materiality Concept

artificial time periods for financial transactions must be evidenced by • An item/event is considered material

reporting purposes. business documents free from if knowledge of it would influence the

• Calendar Year – A twelve-month period personal biases and independent decision of prudent users of financial

beginning January 1 and ending experts can verify reports. statements.

December 31. Consistency Concept

• Fiscal Year – The length of the fiscal Cost Concept • It states that once a method is

period is determined by the nature of • It assumes that the assets are acquired in adopted, it must not be changed from

the business and the frequency of the business transactions conducted at arm’s year to year to allow comparability of

need of data regarding the financial length transactions (transactions between a financial statements between years
and between businesses. Qualitative Characteristics ○ adequate disclosure/full

Fundamental Qualitative Characteristics disclosure

Organizations that affect ● Relevance ● Neutrality

accounting profession ● Faithful Representation ○ free from bias

• Philippine Institute of Certified Public Relevance ○ Prudence

Accountants ● Capacity of the information to ● Free from error

• Financial Reporting Standards Council influence a decision ○ no errors or omissions

• Auditing and Assurance Standards Council ● Ingredients of relevance ○ Substance over form

• Professional Regulations Commission ○ Predictive value

• Board of Accountancy ○ Confirmatory value ● Transactions and events are

• Securities and Exchange Commission Materiality accounted in accordance with their

• Bureau of Internal Revenue ● Subquality of relevance substance and reality and not

• Bangko Sentral ng Pilipinas ● based on the nature or magnitude merely their legal form.

• Commission on Audit or both of the items to which the

information relates ENHANCING QUALITATIVE CHARACTERISTICS

Basic professional values and business ethics ● “threshold” ● (VCUT)

• Ethical values provide the foundation ● relative ● Comparability

on which a civilized society exists. ● Information is material if the ○ consistency

• The purpose of ethics is to direct omission, misstatement and ● Understandability

businessmen and women to abide by obscuring of the information could ● Verifiability

the code of conduct that facilitates, reasonably affect the economic ● Timeliness

if not encourages, public confidence decision of primary users.

in their products and services. Faithful Representation Elements of Financial

● Means that financial reports

Fundamental Ethical Principles represent economic phenomena or ● (VCUT)

• Professional behavior transactions in words and numbers. ● Comparability

• Professional competence and due care ● ‘must match what really existed or ○ consistency

• Objectivity happened’ ● Understandability

• Integrity ● ‘properly accounted for’ ● Verifiability

• Confidentiality ● Timeliness

• Independence Ingredients of faithful representation

● Completeness