characterized as a storehouse of

information.
FINANCIAL ACCOUNTING
Identifying – The process of recognition or
AND REPORTING 1 nonrecognition of business activities as
Accounting Frameworks “accountable” events. An event is
accountable or quantifiable when it has an
effect on assets, liabilities and equity. Thus,
the subject matter of accounting is economic
activity or the measurement of economic
resources and economic obligations.

Measuring – The process of assigning peso

amounts to the accountable economic
transactions and events. The measurement
bases are;
● Historical Cost – the most common
measure of financial transactions, and
● Current Value – includes fair value,
value in use, fulfillment value and
I. Concepts and Principles Relating to current cost.
the Presentation of Financial
Statements Communicating – The process of preparing
and distributing accounting reports to
NATURE, SCOPE AND PRINCIPLES OF potential users of accounting information. This
ACCOUNTING process includes the recording, classifying and
summarizing aspects of accounting.
1. Accounting is a process. A process ● Recording or journalizing is the process
is a step by step performance of any of systematically maintaining a record of
specific job according to its all economic business transactions after
objectives. Accounting is identified as they have been identified and
a process as it performs a specific measured.
task of identifying, measuring, and ● Classifying is the sorting or grouping of
communicating financial information. similar and interrelated economic
2. Accounting is a service activity. Its transactions into their respective
function is to provide quantitative classes. It is accomplished by posting
information, primarily financial in to the ledger.
nature, about economic entities that is ● Summarizing is the preparation of
intended to be useful in making financial statements namely, statement
economic decisions. of financial position, income statement,
3. Accounting is an art. It is the art of statement of comprehensive income,
recording, classifying and statement of changes and equity and
summarizing financial data. statement of cash flows.
Accounting requires knowledge, skills,
and expertise to properly apply Accounting Theory
definite techniques in a systematic A set of assumptions, frameworks, and
manner. methodologies used in the study and
4. Accounting is an information application of financial reporting principles.
system. It measures business
activities, processes information into GENERALLY ACCEPTED ACCOUNTING
reports and communicates the reports PRINCIPLES (GAAP)
to decision makers. Thus,
 for the Preparation and Presentation
⮚ Represents the accounting rules, of Financial Statements
procedures, practices and standards
followed in the preparation and FINANCIAL REPORTING STANDARDS
presentation of financial statements. COUNCIL (FRSC)

FINANCIAL STATEMENTS The FRSC is the successor of the Accounting

Standards Council (ASC) which initially
⮚ Means by which the information formalized the development of generally
accumulated and processed in financial accepted accounting principles in the
accounting is periodically Philippines.
communicated to the users.
Creation: FRSC was established by the
Financial Position comprises the assets, Professional Regulation Commission (PRC)
liabilities and equity of an entity at a particular upon recommendation of the Board of
moment in time. It pertains to liquidity, Accountancy (BOA) to assist the Board in
solvency, and the need of the entity for carrying out its power and functions provided
additional financing. Information are pictures in under R.A. No. 9298.
the statement of financial position.
Function: FRSC’s main function is to establish
Financial performance comprises the and improve generally accepted accounting
revenue, expenses and net income or loss principles in the Philippines.
of an entity for a period of time. Also known as
results of operations and is portrayed in the Composition: The FRSC is composed of 15
income statement and statement of members with a Chairman, who had been or
comprehensive income. presently a senior accounting practitioner in
any scope of accounting practice, and 14
Cash flows are the cash receipts and cash representatives from the following:
payments arising from the operating, investing
and financing activities of the entity. The Board of Accountancy 1
information is presented in the statement of Securities and Exchange Commission 1
cash flow. Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
PHILIPPINE FINANCIAL REPORTING Commission on Audit 1
STANDARDS (PFRS)/PHILIPPINE Major organization of prepares & users
ACCOUNTING STANDARDS (PAS) of financial statements – Financial
1
Executives Institute of the Philippines
⮚ The PFRS/ PAS are the new set of (FINEX)
Generally Accepted Accounting Accredited national professional
Principles (GAAP) issued by the organizations of CPAs:
Accounting Standards Council (ASC) to
Public Practice 2
govern the preparation of financial
Commerce and Industry 2
statements.
Academe or Education 2
⮚ These standards are patterned after the
Government 2
revised International Financial Reporting
TOTAL 14
Standards (IFRS) and International
Accounting Standards (IAS) issued by
the International Accounting Standards All members of the FRSC including the
Board (IASB). chairman shall have a term of 3 years and is
renewable for another term.
II. Financial Reporting Standards
Council and Conceptual Preparation
 To provide information about an entity’s
assets, liabilities, equity, income and expenses
Philippine Interpretations Committee (PIC) useful to users in:
a. Assessing future cash flows to the
The FRSC formed the PIC in August 2006 and reporting entity.
has replaced the Interpretations Committee b. Assessing management stewardship of
(IC) formed by the Accounting Standards the entity’s economic resources.
Council (ASC) in May 2000.
Underlying Assumptions
Role: To prepare interpretations of PFRS for Going concern or continuity assumption
approval by the FRSC and to provide timely means that in the absence of evidence to the
guidance on financial reporting issues not contrary, the accounting entity is viewed as
specifically addressed in current PFRS. continuing in operation indefinitely.

INTERNATIONAL ACCOUNTING Accounting entity assumption means that

STANDARDS BOARD (IASB) the entity is separate from the owners,
managers, and employees who constitute the
⮚ IASB replaces the International entity.
Accounting Standards Committee
(IASC). Time period assumption requires that the
⮚ It publishes standards in a series of indefinite life of an entity is subdivided into
pronouncements called International accounting periods which are usually of
Financial Reporting Standards (IFRS). equal length for the purpose of preparing
⮚ The IASB standard-setting process financial reports on financial position,
includes in the correct order research, performance and cash flows.
discussion paper, exposure draft and
accounting standard. Monetary unit assumption has two aspects:
● Quantifiability – assets, liabilities,
CONCEPTUAL FRAMEWORK FOR THE equity, income and expenses should be
PREPARATION AND PRESENTATION OF stated in terms of a unit of measure
FINANCIAL STATEMENTS peso in the Philippines
● Stability of the peso – purchasing
Users of Financial Information: power of the peso is stable or constant
a. Primary Users – parties to whom
general purpose financial reports are Qualitative Characteristics
primarily directed, which includes ● Qualities or attributes that make
existing and potential investors, lenders financial accounting information useful
and other creditors to the users.
b. Other Users – parties that may find the
general purpose of financial reports 1. Relevance – capacity of the information
useful but the reports are not directed to influence a decision
to them primarily, which includes 2. Materiality – a sub quality of relevance
employees, customers, governments based on the nature or magnitude or
and their agencies, and the public both of the items to which the
information relates; factors include size
General Objective of Financial Statements: and nature of the item
To provide information about economic 3. Faithful representation – the actual
resources of the reporting entity, claims effects of the transactions shall be
against the entity and changes in the properly accounted for and reported in
economic resources and claims. the financial statements
 allocating them over the periods
benefited
Ingredients of Faithful Representation: ● Immediate recognition – cost incurred
a) Completeness – relevant is expensed outright because of
information should be presented in a uncertainty of future economic benefits
way that or difficulty of reliability associating
b) facilitates understanding and avoids certain costs with future revenue
erroneous implication
c) Neutrality – without bias in the Derecognition is the removal of all or part of a
preparation or presentation of recognized asset or liability from the statement
financial information of financial position.
d) Free from Error – there are no ● Asset is derecognized when the entity
errors or omissions the description loses control of all or part of the asset.
of the phenomenon or transaction ● Liability is derecognized when the
entity no longer has a present
4. Comparability – the ability to bring obligation for all or part of the liability.
together for the purpose of noting
points of likeness and difference Measurement is defined as quantifying in
5. Understandability – financial monetary terms the elements in the financial
information must be comprehensible or statements.
intelligible if it is to be most useful
6. Verifiability – different knowledgeable Historical Cost:
and independent observers could reach a. Historical cost of an asset is the cost
consensus, although not necessarily incurred in acquiring or creating the
complete agreement, that a particular asset comprising the consideration paid
depiction is a faithful representation plus transaction cost.
7. Timeliness – financial information must b. Historical cost of a liability is the
be available or communicated early consideration received to incur the
enough when a decision is to be made liability minus transaction cost.

Recognition and Measurement Current Value:

Recognition is the process of capturing for a. Fair value of an asset is the price that
inclusion in the financial statements on an item would be received to sell an asset in an
that meets the definition of asset, liability, orderly transaction between market
equity, income or expense. participants at the measurement date.
Fair value of a liability is the price that
Income recognition: Income is recognized would be paid to transfer a liability in an
when earned. The point of sale is the point orderly transaction between market
of income recognition with respect to sale of participants at the measurement date.
goods in the ordinary course of business. b. Value in use is the present value of the
Expense recognition: Expenses are recognized cash flows that an entity expects to
when incurred. derive from the use of an asset and
from the ultimate disposal.
Matching Principle requires that those costs c. Fulfillment value is the present value of
and expenses incurred in earning a revenue cash that an entity expects to transfer in
shall be reported in the same period. It has paying or settling a liability.
three applications: d. Current cost of an asset is the cost of
● Cause and effect association – an equivalent asset at the measurement
expenses recognized when the revenue date comprising the consideration paid
is already recognized and transaction cost.
● Systematic and rational allocation – Current cost of a liability is the
some costs are expensed by simply consideration that would be received
 not arise in ordinary regular
activities.
less any transaction cost at
measurement date. 2. Expense – defined as decreases in
assets or increases in liabilities that
Elements of Financial Statements result in the decreases in equity, other
● Refer to the quantitative information than those relating to distributions to
reported in the statement of financial equity holders
position and income statement. ● Expenses arise in the course of
ordinary regular activities including
Elements directly related in the measurement cost of goods sold, wages and
of financial position: depreciation.
1. Asset – defined as a present ● Losses do not arise in the course
economic resource controlled by the of ordinary regular activities and
entity as a result of past events include losses resulting from
Essential Characteristics: disasters.
● The asset is a present economic
resource.
● The economic resource is a right that
has potential to produce economic III. Introduction to Financial Instruments
benefits.
● The economic resource is controlled by FINANCIAL INSTRUMENTS
the entity as a result of past events.
PAS 32, paragraph 11, defines a financial
2. Liability – defined as present instrument as any contract that gives rise to
obligation of an entity to transfer an both a financial asset of one entity and a
economic resource as a result of past financial liability or equity instrument of
events another entity.
Essential Characteristics:
● The entity has an obligation. Financial asset is any asset that is:
● The obligation is to transfer an ✔ cash or currency
economic resource. ✔ an equity instrument of another entity
● The obligation is a present obligation ✔ a contractual right to receive cash in
that exists as a result of past events. the future;
a) Trade accounts receivable
3. Equity – residual interest in the b) Notes receivable
assets of the entity after deducting all c) Loans receivable
of the liabilities d) Bonds receivable
✔ a contractual right to exchange financial
Elements directly related in the measurement instruments with another entity under
of financial performance: conditions that are potentially favorable
1. Income – defined as increases in to the entity
assets or decreases in liabilities as
that result in increases in equity, other Financial liability is any liability that is a
than those relating to contributions contractual obligation:
from equity holders ✔ to deliver cash or another financial
● Revenue arises in the course of asset to another entity
ordinary business and is referred to ✔ to exchange financial assets or financial
by a variety of different names liabilities with another entity under
including sales, fees, interest, conditions that are potentially
dividends, royalties and rent. unfavorable to the entity
● Gains represent other items that
meet the definition of income and do
 ✔ Trade accounts payable
✔ Notes payable
✔ Loans payable
✔ Bonds payable

Equity instrument is any contract that

evidences a residual interest in the assets of
an entity after deducting all of its liabilities.
✔ Ordinary share capital
✔ Preference share capital
✔ Warrants or options

Classification as Liability or Equity

PAS 32, paragraph 15, provides that a financial
instrument should be classified as either a
financial liability or an equity instrument
according to the substance of the contract and
the definitions of financial liability and equity
instrument.

Paragraph 16 further provides that a financial

instrument is an equity instrument only if the
instrument includes no contractual obligation
to deliver cash or another financial asset to
another entity.

Compound Financial Instrument

PAS 32, paragraph 28, defines a compound
financial instrument as “a financial instrument
that contains both a liability and an equity
element from the perspective of the issuer.”
✔ Bonds payable issued with share
warrants
✔ Convertible bonds payable