CONCEPTUAL FRAMEWORK MODULE

SCHOOL OF ACCOUNTANCY

MODULE 1
CONCEPTUAL FRAMEWORK

OVERVIEW:
This module will serve as an introduction to the accounting standards and the application of different
underlying assumptions, a review of the accountancy profession and financial statements.

KNOWLEDGE REQUIRED:
This module requires knowledge in the fundamentals of accounting and basic accounting concepts.

LEARNING OBJECTIVES:
After studying this module, you should be able to:
1. Familiarize yourself with the Accountancy profession
2. Know the underlying assumptions to be applied in accounting
3. Review different ideas regarding the financial statements

INTRODUCTION:
As you continue to study Accountancy you need to know different opportunities for you in the future. Not
only that. You also need to be familiar with the “foundations” of accounting, including underlying
assumptions. You need to inculcate these ideas from today until the rest of your life (of course, when you
continue to work as an accountant in the future).

LESSON 1: ACCOUNTANCY PROFESSION:

Being an accountant means different jobs. Some thought that accountants are needed only in big
businesses generating profit, but that is not the exact truth. Accountants may also teach accounting to
different courses. In fact, most colleges and universities even require their teachers to be Certified Public
Accountant or CPA.

Moreover, accountants may also be employed by the government, may it be accounting or auditing
departments. Some accountants are employed by a not-for-profit organizations like schools and
foundations.

Today, accountants are very much in demand in the field of technology, like business process outsourcing,
or even those that create new accounting systems. Given this fact, we are rest assured that accountants
will be part of every organization worldwide.

To better understand our profession, here is an excerpt from the Republic Act No. 9298:

[email protected]
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

Republic of the Philippines

Congress of the Philippines
Metro Manila
Twelfth Congress
Third Regular Session

Begun and held in Metro Manila, on Monday, the twenty-eight day of July, two thousand three.
Republic Act No. 9298 May 13, 2004
AN ACT REGULATING THE PRACTICE OF ACCOUNTANCY IN THE PHILIPPINES, REPEALING FOR THE
PURPOSE PRESIDENTIAL DECREE NO. 692, OTHERWISE KNOWN AS THE REVISED ACCOUNTANCY LAW,
APPROPRIATING FUNDS THEREFOR AND FOR OTHER PURPOSES
Be it enacted by the Senate and House of Representatives of the Philippine Congress Assembled:
Section 1. Shorts Title. - This act shall be known as the "Philippine Accountancy Act of 2004"
Section 2. Declaration of Policy. - The State recognizes the importance of accountants in nation building and
development. Hence, it shall develop and nurture competent, virtuous, productive and well rounded professional
accountants whose standard of practice and service shall be excellent, qualitative, world class and globally competitive
though inviolable, honest, effective, and credible licensure examinations and though regulatory measures, programs
and activities that foster their professional growth and development.
Section 3. Objectives. - This Act shall provide and govern:
The standardization and regulation of accounting education;
The examination of registration of certified public accountants; and
The supervision, control, and regulation of the practice of accountancy in the Philippines.
Section 4. Scope of Practice. - The practice of accountancy shall include, but not limited to, the following:
(a) Practice of Public Accountancy - shall constitute a person, be it his/her individual capacity, or as a staff
member in an accounting or auditing firm, holding out himself/herself as one skilled in the knowledge, science
and practice of accounting, and as a qualified person to render professional services as a certified public
accountant; or offering or rendering, or both or more than one client on a fee basis or otherwise, services as
such as the audit or verification of financial transaction and accounting records; or the preparation, signing, or
certification for clients of reports of audit, balance sheet, and other financial, accounting and related schedules,
exhibits, statement of reports which are to be used for publication or for credit purposes, or to be filed with a
court or government agency, or to be used for any other purposes; or to design, installation, and revision of
accounting system; or the preparation of income tax returns when related to accounting procedures; or when
he/she represent clients before government agencies on tax and other matters relating to accounting or render
professional assistance in matters relating to accounting procedures and the recording and presentation of
financial facts or data.
(b) Practice in Commerce and Industry - shall constitute in a person involved in decision making requiring
professional knowledge in the science of accounting, or when such employment or position requires that the
holder thereof must be a certified public accountant.
(c) Practice in Education/Academe - shall constitute in a person in an educational institution which involve
teaching of accounting, auditing, management advisory services, fiancé, business law, taxation and other
technically related subject: Provided, That members of the Integrated Bar of the Philippines may be allowed to
teach business law and taxation subjects.
(d) Practice in Government - shall constitute in a person who holds, or is appointed to, a position in an
accounting professional group in government or in an government-owned and/or controlled corporation,
including those performing proprietary functions, where decision making requires professional knowledge in the
science of accounting, or where a civil service eligibility as a certified public accountant is a prerequisite.

[email protected]
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

LESSON 2: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

The FRSC Framework for the Preparation and Presentation of Financial Statements describes the basic
concepts by which financial statements are prepared. The Framework serves as a guide to the Board in
developing accounting standards and as a guide to resolving accounting issues that are not addressed
directly in Philippine Accounting Standards or Philippine Financial Reporting Standards or Interpretations.
The purpose of the framework as outlined is to:

a. Assist the Financial Reporting Standards Council (FRSC) in developing accounting standards that
represent generally accepted accounting principle;
b. Assist the FRSC in its review and adoption of existing International Accounting Standards;
c. Assist preparers of the financial statements in applying FRSC Statements of Financial Accounting
Standards and in dealing with topics that have yet to form the subject of an FRSC statement;
d. Assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP;
e. Assist users of financial statements in interpreting information contained in the financial statements
prepared in conformity with Philippine GAAP;
f. Provide those who are interested in the work of the FRSC with information about its approach to the
formulation of Statements of Financial Accounting Standards

Scope of the Framework:

• Defines the objective of financial statements;
• Identifies the qualitative characteristics that make information in financial statements useful; and
• Defines the basic elements of financial statements and the concepts for recognizing and measuring them
in financial statements.
• Concepts of capital and capital maintenance.

Framework is not a Standard. Meaning, when you encounter a transaction, you must not refer to the
framework only, but you must find the accounting standard related to the accounts in the transaction, in
order to follow strictly the financial reporting regulations. In case of contrary between framework and a
standard, the standard prevails.

2.1 The objective of general-purpose financial reporting:

The main objective of general-purpose financial reports is to provide the financial information
about the reporting entity that is useful to the following users:
a. existing and potential investors – interested in financial statements to help them make
decisions on what to do with their investments (shares of stock), i.e. hold, sell, or buy more.
b. lenders, and other creditors - interested in the company’s ability to pay liabilities upon maturity
c. Government - are interested in an entity's financial information for taxation and regulatory
purposes
d. Management – for business decisions, that require analysis of accounting information
e. Employees - interested in the company’s profitability and stability
f. Customers - interested in the company’s ability to continue its existence and maintain stability
of operations
g. General Public - anyone outside the company such as researchers, students, analysts and
others are interested in the financial statements of a company for some valid reason.

2.2 Qualitative characteristics of useful financial information

There are 2 types of characteristics for financial information to be useful:
2.2.1 Fundamental qualitative characteristics:

[email protected]
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

a. Relevance: capable of making a difference in the users’ decisions. The financial

information is relevant when it has predictive value, confirmatory value, or
both.
b. Materiality is closely related to relevance. Materiality depends on size or
nature of information.
c. Faithful representation: The information is faithfully represented when it is
complete, neutral and free from error.
2.2.2 Enhancing qualitative characteristics:
a. Comparability: Information should be comparable between different entities
or time periods;
b. Verifiability: Independent and knowledgeable observers are able to verify the
information;
c. Timeliness: Information is available in time to influence the decisions of users;
d. Understandability: Information shall be classified, presented clearly and
concisely.

2.3 Financial Statements

Financial statements are one of the outputs made by accountants. Financial statements) are formal
records of the financial activities and position of a business, person, or other entity. The financial
statements should provide the useful information about the reporting entity.
2.3.1 Statement of financial
position - A statement of financial
position a.k.a balance sheet. It
displays the assets of a company
and their sources of financing, debt
and equity. The elements of
financial position are:
a. Assets - a present
economic resource
controlled by the
entity as a result of
past events;
b. Liabilities - a present
obligation of the entity
to transfer an
economic resource as
a result of past events
c. Equity - the residual
interest in the assets
of the entity after
deducting all its liabilities

[email protected]
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

2.3.2 Statement of financial performance -

A statement showing the revenues,
expenses, and income (the difference
between revenues and expenses) of a
company over some period of time. Some call
this income statement. The elements of this
statement are:
a. Income - increases in assets or
decreases in liabilities resulting in
increases in equity, other than
contributions from equity
holders
b. Expenses - decreases in assets or
increases in liabilities resulting in
decreases in equity, other than
distributions to equity holders

2.3.3 Statement of changes in equity -

explains the changes in a company's Share Capital, accumulated reserves and retained
earnings over the reporting period. It breaks down changes in the owners' interest in the
organization, and in the application of retained profit or surplus from one accounting
period to the next. Line items typically include profits or losses from operations, dividends
paid, issue or redemption of shares, revaluation reserve and any other items charged or
credited to accumulated other comprehensive income.

2.3.4 Statement of cash flows - financial statement that summarizes the amount of cash
and cash equivalents entering and leaving a company. The cash flow statement measures
how well a company manages its cash position, meaning how well the company generates
cash to pay its debt obligations and fund its operating expenses.

2.3.4 Notes to financial statements - also referred to as footnotes. These provide additional
information pertaining to a company's operations and financial position and are
considered to be an integral part of the financial statements. The notes are required by the
full disclosure principle. These give detailed explanation of the different accounts seen in
the other financial statements.

2.4 Fundamental accounting concepts and assumptions:

Underlying Assumptions (Postulates)
• Accrual Basis. The effects of transactions and other events are recognized when they occur, rather
than when cash or its equivalent is received or paid, and they are reported in the financial
statements of the periods to which they relate.
• Going Concern. The financial statements presume that an enterprise will continue in operation
indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are
required.

The FRSC conceptual framework mentions two assumptions only. However, it is widely believed
that an inherent trait of the financial statements are the basic assumptions of:

[email protected]
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

• Accounting Entity. The business is separate from the owners, managers, and employees who
constitute the business. Therefore transactions of the said individuals should not be included as
transactions of the business.
• Time Period. Financial reports are to be prepared for one year or a period of twelve months.
• Monetary unit. There are two aspects under this assumption. First is the quantifiability of the
peso, meaning that the elements of the financial statements should be stated under one unit of
measure which is the Philippine Peso. Second is the stability of the peso, means that there is still
an assumption that the purchasing power of the peso is stable or constant and that instability is
insignificant and therefore ignored.

Other concepts and principles:

• Matching principle - directs a company to report an expense on its income statement in the period
in which the related revenues are earned.
• Prudence / Conservatism - if there are two acceptable accounting procedures choose the one gives
the less optimistic view of profitability and asset values.
• Consistency - similar items should be accorded similar accounting treatments.
• Separate Valuation - each asset or liability must be valued separately.
• Materiality - only items material in amount or in their nature will affect the true and fair view given
by a set of accounts.
• Historical Cost -transactions are recorded at the cost when they occurred.
• Full disclosure principle - requires a company to provide the necessary information so that people
who are accustomed to reading financial information are able to make informed decisions
regarding the company.

2.5 Concepts of Capital Maintenance

Financial capital maintenance – Under this concept, a profit is earned only if the financial (or
money) amount of the net assets at the end of the of the period exceeds the financial (or
money) amount of the net assets at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period.

Physical capital maintenance – Under this concept, a profit is earned only if the physical
productive capacity (or operating capability) of the enterprise (or the resources need to
achieve that capacity) at the end of the period exceeds the physical productive capacity at
the beginning of the period, after excluding any distributions to, and contributions from,
owners during the period.

REFERENCES:
R.A. 9298
https://www.ifrsbox.com/
https://Investopedia.com
https://courses.lumenlearning.com/
Financial Accounting 1, Volume 1 Part 1, Christian Valix et al.

ADDITIONAL READINGS:
Financial Accounting 1, Volume 1 Part 1, by Christian Valix, Jose Peralta, and Chrsitian Valix, Chapters 1-6.

[email protected]
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

NAME: ________________________________
ID NUMBER: _________________

ACTIVITY SECTION

ACTIVITY 1: REFLECTION
Why do you want to become a CPA? As of today, in which sector of accountancy do you prefer to work?
State your reason.

Academe/Public Practice/Government/Commerce and Industry

ACTIVITY 2:
Identify which assumption or principle may be applied to each situation. Give brief explanation:

1. Princess Company does not report bankruptcy yet because they think they can still continue
operations amidst COVID19 pandemic.

2. Assume Apple Company is currently suing Ample company for copyright violation over its software
package. Since this software package is the only operation the small tech company does, losing this
lawsuit would be detrimental. There is a 95 percent expectation that Apple will win the lawsuit.

3. Your business bought a new building for P10,000,000. You recorded the building account on the
same amount.

4. Thor Company has a receivable from a customer named Loki. Loki recently had problems with his
finances and told Thor that he may not be able to pay his debt. From that day, Thor Company did
not recognize the debt anymore. He recorded that as an expense/loss.

5. Bong No, together with his friends has created a business registered as NoNoNo Company last
2018. Bong No needed a large amount of money last June 2020 because he was hospitalized due

[email protected]
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

to COVID. He borrowed from his relatives, and when the due date came, they told Bong No to just
give them the company as payment. Bong No and other owners refused.

6. Instead of preparing daily financial statements, you prepared financial statements for the period
January 1 to December 31, 2019, your first year of operations. Aside from this annual report, you
also prepared quarterly and semi-annual reports.

7. The standard requires you to give detailed information of your cash balance such as its composition
and restrictions, if there are any. You showed these details in the notes to financial statements.

EVALUATION

Which part of the discussion did you Which part of the discussion did you
find most enjoyable to learn? find most difficult?

Do you have question(s) in mind? Write it here

[email protected]