CONCEPTUAL FRAMEWORK (identifying and measuring are pointless if accounting

information cannot be communicated)

DEFINITION OF ACCOUNTING
Communicating process is the reason why accounting has
1. Accounting Standards Council (ASC) -
been called the universal language of the business.
Accounting is a service activity. Its function is to
provide quantitative information, primarily Recording or journalizing is the process of systematically
financial in nature, about economic entities, that maintaining a record of all economic business
is intended to be useful in making economic transactions after they have been identified and
decisions. measured.
2. American Institute of Certified Public
Classifying is the sorting or grouping of similar and
Accountant (AICPA) Committee on Accounting
interrelated economic transactions into their respective
Terminology (CAT) - Accounting is the art of
classes. Accomplished by posting to the ledger (group of
recording, classifying, and summarizing in a
accounts which are systematically categorized into asset,
significant manner in terms of money,
liabilities, equities, revenues, and expense accounts).
transactions, and events which are in part at least
of a financial character and interpreting the Summarizing is the preparation of financial statements.
results thereof.
3. American Accounting Association (AAA) - Overall objective of accounting
Accounting is the process of identifying, The overall objective of accounting is to provide
measuring, and communicating economic quantitative financial information about a business that is
information to permit informed judgment and useful to statement users particularly owners and creditors
definition by users of the information. in making economic decisions.
COMPONENTS OF ACCOUNTING Accounting is an information system that measures
1. IDENTIFYING (analytical component) – this business activities, processes information into reports and
accounting process is the recognition or non- communicates the reports to decision-makers.
recognition of business activities as “accountable Primary task – supply financial information so that the
events” (when it has an effect of assets, liabilities, and statement users could make informed judgements and better
equity.) Not all business activities are accountable. decisions.

An event is accountable or quantifiable when it has an Financial reports tell us how well an entity is performing in
effect on assets, liabilities, and equity. terms of profit and loss and where it stands in financial terms.

Measurement of economic activity, economic resources, THE ACCOUNTANCY PROFESSION

and economic obligations.
At present, Republic Act No. 9298 is the law regulating
ECONOMIC ACTIVITY the practice of accountancy in the Philippines. Law is
known as Philippine Accountancy Act of 2004.
- External Transactions: OR EXCHANGE
TRANSACTIONS are those economic events Accountancy has developed as a profession attaining a
involving one entity and another entity. status equivalent to that of law and medicine.
(purchase of goods from suppliers, borrowing
money from bank, SOGS to customers, salaries to The Board of Accountancy (BOA) is the body
employees, taxes to the government.) authorized by law to promulgate laws and regulations
- Internal Transactions are economic events affecting the practice of accountancy profession in the
involving the entity only. (ex. production process, Philippines. BOA is responsible for preparing and grading
casualty loss such as flood, earthquake, fire) the Philippine CPA Examination (CPALE / LECPA). This
examination is offered twice a year, one in May, and
2. MEASURING (technical component) - This another one in October.
accounting process is the assigning of peso amounts Limitation of the practice of public accountancy
to the accountable economic transactions and events.
It must be expressed in terms of common financial - Certificate of accreditation must be approved by
denominator. the Professional Regulation Commission
(PRC).
The Philippine peso is the unit of measuring accountable - Minimum of three years of meaningful
economic transactions. experience in any of the fields of public practice
Historical cost is the original acquisition cost and the including taxation.
most common measure of financial transaction. - Securities of Exchange Commission (SEC) shall
not register any corporation or recognized for
Current Value includes fair value, value in use, public practice of accountancy.
fulfillment value and current cost.
Accreditation to practice public accountancy
3. COMMUNICATING (formal component) – is the
process of preparing and distributing accounting
reports to potential users of accounting information.
 - Certificate of accreditation is valid for 3 years and CONTINUING PROFESSIONAL DEVELOPMENT
renewable every 3 years upon payment of (CPD)
required fees.
- Certificate public accounting firms and Republic Act No. 10912 is the law mandating and
partnerships of certified public accountants, strengthening the continuing professional development
including partners and staff members are required program for all regulated professions, including the
accountancy profession.
to register with the BOA and PRC for the practice
of public accountancy. All certified public accountants shall abide by the
Three Main Areas: requirements, rules and regulations on continuing
professional development to be promulgated by the Board
1. PUBLIC ACCOUNTING - composed of individual of Accountancy (BOA), subject to the approval of the
practitioners, small accounting firms, and large Professional Regulation Commission (PRC)
multinational organizations that render independent
and expert financial services to the public. Continuing professional development is the acquisition of
a. Auditing – traditionally been the primary advanced knowledge, skill and proficiency.
service offered by most public accounting
Continuing professional development raises and
practitioners.
enhances the technical skill and competence of the
i. Auditing or external auditing –
Certified Public Accountant.
examination of financial statements by
independent certified public accountants CPD (Continuing Professional Development) credit
for the purpose of expressing an opinion. units
External auditing is the attest function of
independent CPA. The CPD credit units refer to the CPD credit hours
ii. Bureau of Internal Revenue – requires required for the renewal of CPA license and accreditation
audited financial statements to accompany a CPA to practice the accountancy profression every three
the filing of annual income tax return. years.
iii. Banks and other lending institutions –
frequently require an audit by an Under the new BOA Resolution, all Certified Public
independent CPA before granting a loan to Accountants regardless of area or sector of practice shall
the borrower. be required to comply with 120 CPD credit units.
iv. Creditors and prospective investors –
The Continuing Professional Development is required for
place considerable reliance on audited
the renewal of CPA license and accreditation of CPA to
financial statements on making economic practice the accountancy profession.
decisions.
b. Taxation – Taxation Service includes the Continuing Professional Development has become
preparation of annual income tax returns and mandatory for Certified Public Accountants.
determination of tax consequences of certain
proposed business endeavors. The CPA not As recently promulgated, only 15 CPD credit units are
infrequently represents the client investigations. required for the renewal of CPA license.
c. Management Advisory Services – has no
precise coverage but is used generally to refer to However, 120 CPD credit units are required for
services to clients on the following matters: accreditation of a CPA to practice the accountancy
i. Advice on installation of computer system profession.
ii. Quality control
Excess credit units earned shall not be carried over to the
iii. Installation and and modification of next three-year period, except credit units earned for
accounting system masteral and doctoral degrees.
iv. Budgeting
v. Forward planning and forecasting Exemption from CPD

2. PRIVATE ACCOUNTING – includes maintaining A CPA shall be permanently exempted from CPD
the records, producing the financial reports, preparing requirements upon reaching the age of 65 years.
the budgets, and controlling and allocating the
resources of the entity. The major objective of a However, this exemption applied only to the renewal of
private accountant is to assist management in CPA license and not for the purpose of accreditation to
planning and controlling. The highest accounting practice the accountancy profession.
officer in an entity is known as the controller.
Accounting versus auditing
3. GOVERNMENT ACCOUNTING – encompasses
the process of analyzing, classifying, summarizing, In a broad sense, accounting embraces auditing.
and communicating all transactions involving the Auditing is one of the areas of accounting specialization.
receipt and disposition of government funds and
property. The focus of government accounting is the
custody and administration of public funds.
In a limited sense, accounting is essentially constructive The principles have developed on the basis of experience,
in nature. Accounting ceases when financial statements reason, custom, usage and practical necessity.
are already prepared.
Generally accepted accounting principles represent the
On the other hand, auditing is analytical. The work of an rules, procedures, practice and standards followed in
auditor begins when the work of the accountant ends. the preparation and presentation of financial statements.
After the financial statements are prepared, the auditor Generally accepted accounting principles are like laws
will begin to perform the task of auditing. that must be followed in financial reporting.
The auditor examines the financial statements to ascertain The process of establishing GAAP is a political process
whether they are in conformity with generally accepted which incorporates political actions of various interested
accounting principles. user groups as well as professional judgment, logic, and
research.
Accounting versus bookkeeping
Purpose of accounting standards
Bookkeeping is procedural and largely concerned with
the development and maintenance of accounting records. The overall purpose of accounting standards is to identify
proper accounting practices for the preparation and
Bookkeeping is the "how" of accounting.
presentation of financial statements.
Accounting is conceptual and is concerned with the why,
Accounting standards create a common understanding
reason or justification for any action adopted.
between preparers and users of financial statements,
Bookkeeping is a procedural element of accounting as particularly the measurement of assets and liabilities.
arithmetic is a procedural element of mathematics.
A set of high-quality accounting standards is a necessity
Accounting versus accountancy ensure comparability and uniformity in financial
statement. based on the same financial information.
Broadly speaking, the two terms are synonymous because
they both refer to the entire field of accounting theory and FINANCIAL REPORTING STANDARDS
practice. COUNCIL

Technically speaking, however, accountancy refers to the In the Philippines, the development of generally accepted
profession of accounting practice. accounting principles is formalized initially through the
creation of the Accounting Standards. Council or
Accounting is used only in reference to a particular field ASC.
of accountancy such as public accounting, private
accounting and government accounting. The Financial Reporting Standards Council or FRSC
now replaces the Accounting Standards Council
Financial accounting versus managerial accounting
The FRSC is the accounting standard setting body
Financial accounting is primarily concerned with the created by the Professional Regulation Commission upon
recording of business transactions and the eventual recommendation of the Board of Accountancy to assist
preparation of financial statements. the Board of Accountancy in carrying out its powers and
Financial accounting focuses on general purpose reports functions provided under R.A. Act No. 9298.
known as financial statements intended for internal and The main function is to establish and improve accounting
external users. standards that will be generally accepted in the
Financial accounting is the area of accounting that Philippines.
emphasizes reporting to creditors and investors. The accounting standards promulgated by the Financial
Managerial accounting is the accumulation and Reporting Standards Council constitute the highest
preparation of financial reports for internal users hierarchy of generally accepted accounting principles
only. in the Philippines.

In other words, managerial accounting is the area of The approved statements of the FRSC are known as
accounting that emphasizes developing accounting Philippine Accounting Standards or PAS and
information for use within an entity. Philippine Financial Reporting Standards or PFRS.

GENERALLY ACCEPTED ACCOUNTING Composition of FRSC

PRINCIPLES The FRSC is composed of 15 members with a Chairman
Accounting has evolved through time changing with the who had been or is presently a senior accounting
needs of society. As new types of transactions occur in practitioner and 14 representatives from the following:
trade and commerce, accountants develop rules and Board of Accountancy 1
procedures for recording them. Securities and Exchange Commission 1
These accounting rules, procedures and practices came to Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
be known as generally accepted accounting principles
Commission on Audit 1
or simply GAAP.
 Major organizations of preparers and users of INTERNATIONAL ACCOUNTING STANDARDS
financial statements – Financial Executives 1 BOARD
Institute of the Philippines or FINEX
Accredited national professional organizations The International Accounting Standards Board or IASB
of CPAs: now replaces the International Accounting Standards
Public Practice 2 Committee or IASC.
Commerce and Industry 2
The IASB publishes standards in a series of
Academe or Education 2
pronouncements called International Financial
Government 2
Reporting Standards or IFRS.
Total 14
However, the IASB has adopted the body of standards
The Chairman and members of the FRSC shall have a issued by the IASC.
term of 3 years renewable for another term. The pronouncements of the IASC continue to be
Philippine Interpretations Committee designated as International Accounting Standards or IAS.

The Philippine Interpretations Committee or PIC was The IASB standard-setting process includes in the correct
formed by the FRSC in August 2006 and has replaced the accounting order research, discussion paper, exposure
Interpretations Committee or IC formed by the draft and accounting standard.
Accounting Standards Council in May 2000. The IASB declared that the merits of proposed standards
The role of the PIC is to prepare interpretations of are assessed from a position of neutrality.
PFRS for approval by the FRSC and to provide timely A due process system is employed to enable interested
guidance on financial reporting issues not specifically parties to express their views on issues under
addressed in current PFRS. consideration.
In other words, interpretations are intended to give Move toward IFS
authoritative guidance on issues that are likely to
receive divergent or unacceptable treatment because the In developing accounting standards that will be generally
standards do not provide specific and clear cut rules and accepted in the Philippines, standards issued by other
guidelines. standard setting bodies such as the USA Financial
Accounting Standards Board (FASB) and the IASB are
The counterpart of the PIC in the International considered.
Accounting Standards Board is the International
Financial Reporting Interpretations Committee or In the past years, most of the Philippine standards are
IFRIC. based on American accounting standards.

INTERNATIONAL ACCOUNTING STANDARDS At present, the FRSC has adopted in their entirety all
COMMITTEE International Accounting Standards and International
Financial Reporting Standards.
The International Accounting Standard Committee or
IASC is an independent private sector body with its The move toward IFS is essential to achieve the goal of
objectives of achieving unformity in the accounting one uniform and globally accepted financial reporting
principles which are used by business and other standards.
organizations for financial reporting around the world. Philippine Financial Reporting Standards
It was formed in June 1978 through an agreement made The Financial Reporting Standards Council issues
by professional accountancy bodies from Australia, standards in a series of pronouncements called Philippine
Canada, France, Germany, Japan, Mexico, the Financial Reporting Standards or PERS.
Netherlands, the United Kingdom and Ireland, and the
United States of America. The IASC is headquartered in The Philippine Financial Reporting Standards
London, United Kingdom. collectively include all of the following:

Objectives of IASC a. Philippine Financial Reporting Standards which

correspond to International Financial Reporting
a. To formulate and publish in the public interest Standards.
accounting standards to be observed in the
presentation of financial statements and to The Philippine Financial Reporting Standards are
promote their worldwide acceptance and numbered the same as their counterpart in
observance. International Financial Reporting Standards.

b. To work generally for the improvement and b. Philippine Accounting Standards which
harmonization of regulations, accounting correspond to International Accounting
standards and procedures relating to the Standards.
presentation of financial statements.
 The Philippine Accounting Standards are c. To assist preparers of financial statements to
numbered the same as their counterpart in develop accounting policy when a Standard
International Accounting Standards. allows a choice of an accounting policy.

c. Philippine Interpretations which correspond to d. To assist all parties to understand and interpret
Interpretations of the IFRIC and Interpretations the IFRS Standards.
developed by the Philippine Interpretations
Authoritative status of Conceptual Framework
Committee.
If there is a standard or an interpretation that specifically
CONCEPTUAL FRAMEWORK - IASB
applies to a transaction, the standard or interpretation
The Conceptual Framework for Financial Reporting is a overrides the Conceptual Framework.
complete, comprehensive, and single document
In the absence of a standard or an interpretation that
promulgated by the International Accounting Standards
specifically applies to a transaction, management shall
Board.
consider the applicability of the Conceptual
The Conceptual Framework is a summary of the terms Framework in developing and applying an accounting
and concepts that underlie the preparation and policy that results in information that is relevant and
presentation of financial statements for external users. reliable.
In other words, the Conceptual Framework describes the * CF is not, IFS
concepts for general purpose financial reporting.
However, it is to be stated that the Conceptual
The Conceptual Framework is an attempt to provide an Framework is not an International Financial
overall theoretical foundation for accounting. Reporting Standard.
The Conceptual Framework is intended to guide standard Nothing in the Conceptual Framework overrides any
setters, preparers and users of financial information in the specific International Financial Reporting Standard.
preparation and presentation of statements.
In case where there is a conflict, the requirements of the
The Conceptual Framework is the underlying theory for International Financial Reporting Standards shall prevail
the development of accounting standards and revision of over the Conceptual Framework.
previously issued accounting standards.
Users of financial information
The Conceptual Framework will be used in future
Under the Conceptual Framework for Financial Reporting
standard setting decision, but no changes are made to the
the users of financial information may be classified ibnto
current IFRS.
two namely:
The Conceptual Framework provides the foundation
a. Primary Users
for Standards that: - CSC
b. Other Users
a. Contribute to transparency by enhancing
The primary users include the existing and potential
international comparability and quality of
investors, lenders and other creditors.
financial information.
The other users include the employees, customers,
b. Strengthen accountability by reducing the governments and their agencies, and the public.
information gap between the providers of capital
and the people to whom they have entrusted their Primary users
money. The primary users of financial information are the parties
to whom general purpose financial reports are primarily
c. Contribute to economic efficiency by helping directed. (provider)
investors to identify opportunities and risks
across the world. Such primary users cannot require reporting entities to
provide information directly to them and therefore must
rely on general purpose financial reports for how much
Purposes of Revised Conceptual Framework tandaan ( of the financial information is needed.
Kasama sa quiz)
i. Existing and potential investors
a. To assist the International Accounting Standards
Board to develop IFRS Standards based on Existing and potential investors are concerned with the
consistent concepts. risk inherent in and return provided by their
investments.
b. To assist preparers of financial statements to
The investors need information to help them determine
develop a consistent accounting policy when no
whether they should buy, hold or sell.
Standard applies to a particular transaction or
other event or where an issue is not yet addressed Shareholders are also interested in information which
by an IFRS. enables them to assess the ability of the entity to pay
dividends.
 ii. Lenders and other creditors The overall objective of financial reporting is to provide
financial information about the reporting entity that is
Existing and potential lenders and other creditors are
useful to existing and potential investors, lenders and
interested in information which enables them to
other creditors in making decisions about providing
determine whether their loans, interest thereon and
resources to the entity.
other amounts owing to them will be paid when due.
The objective of financial reporting is the "why", purpose
Other users
or goal of accounting.
By residual definition, other users are users of financial
Financial reporting is the provision of financial
information other than the existing and potential
information about an entity to external users that is useful
investors, lenders, and other creditors.
to them in making economic decisions and for assessing
Other users are so called because they are parties that may the effectiveness of the entity's management.
find the general-purpose financial reports useful, but the
The principal way of providing financial information
reports are not directed to them primarily.
to external users is through the annual financial
i. Employees statements.

Employees are interested in information about the However, financial reporting encompasses not only
stability and profitability of the entity. financial statements but also other information such as
financial highlights, summary of important financial
The employees are interested in information which figures, analysis of financial statements and significant
enables them to assess the ability of the entity to provide ratios.
remuneration, retirement benefits and employment
opportunities. Financial reports also include nonfinancial information
such as description of major products and a listing of
ii. Customers corporate officers and directors.
Customers have an interest in information about the Target users ( primary users )
continuance of an entity especially when they have a long-
term involvement with or are dependent on the entity. Financial reporting is directed primarily to the existing
and potential investors, lenders and other creditors which
iii. Governments and their agencies compose the primary user group.
Governments and their agencies are interested in the The reason is that existing and potential investors, lenders
allocation of resources and therefore the activities of the and other creditors have the most critical and immediate
entity. (BIR, DOLE) need for information in financial reports.
These users require information to regulate the activities As a matter of fact, the primary users of financial
of the entity, determine taxation policies and as a basis for information are the parties that provide resources to the
national income and similar statistics. entity.
iv. Public Moreover, information that meets the needs of the
Entities affect members of the public in a variety of ways. specified primary users is likely to meet the needs of other
users such as employees, customers, governments and
For example, entities make substantial contributions to their agencies.
the local economy in many ways including the number of
people they employ and their patronage of local suppliers. The management of a reporting entity is also interested in
financial information about the entity.
Financial statements may assist the public by providing
information about the trend and the range of its activities. However, management need not rely on general purpose
financial reports because it is able to obtain or access
Scope of Revised Conceptual Framework additional financial information internally.
1. Objective of financial reporting Specific objectives of financial reporting
2. Qualitative characteristics of useful financial
information The overall objective of financial reporting is to provide
3. Financial statements and reporting entity information useful for decision making.
4. Elements of financial statements The Conceptual Framework places more emphasis on the
5. Recognition and derecognition importance of providing information needed to assess the
6. Measurement management stewardship of the entity's economic
7. Presentation and disclosure resources.
8. Concepts of capital and capital maintenance
Accordingly, the specific objectives of financial reporting
OBJECTIVE OF FINANCIAL REPORTING are:
The objective of financial reporting forms the a. To provide information useful in making
foundation of the Conceptual Framework. decisions about providing resources to the
entity.
 b. To provide information useful in assessing the Changes in economic resources and claims
cash flow prospects of the entity.
General purpose financial reports also provide
information about the effects of transactions and other
c. To provide information about entity resources,
events that change the economic resources and claims.
claims and changes in resources and claims.
Changes in, economic resources and claims result from
Economic decisions
financial performance and from other events or
Existing and potential investors need several purpose transactions, such as issuing debt or equity instruments.
financial reports in order to enable them in making
The financial performance of an entity comprises
decisions, whether to buy, sell or hold equity investments.
revenue, expenses and net income or loss for a period of
Existing and potential lenders and other creditors need time.
general purpose financial reports in order to enable them
In other words, financial performance is the level of
in making decisions whether to provide or settle loans and
income earned by the entity through the efficient and
other forms of credit.
effective use of its resources.
Assessing cash flow prospects
The financial performance of an entity is also known as
Decisions by existing and potential investors about results of operations and is portrayed in the income
buying, selling or holding equity instruments depend on statement and statement of comprehensive income.
the returns that they expect from an investment, for
Usefulness of financial performance
example, dividends.
Information about financial performance helps users to
Similarly, decisions by existing and potential lenders and
understand the return that the entity has produced on the
other creditors about providing or settling loans and other
economic resources.
forms of credit depend on the principal and interest
payments or other returns that they expect. Information about the return the entity has produce
provides an indication of how well management has
Consequently, financial reporting should provide
discharged its responsibilities to make efficient and
information useful in assessing the amount, timing, and
effective use of the entity's economic resources.
uncertainty of prospects for future net cash inflows to the
entity. Information about past financial performance is usually
helpful in predicting the future returns on the entity’s
Economic resources (Assets) and claims (Liabilities
economic resources.
and Equity)
Information about financial performance during a period
General purpose financial reports provide information
is useful is assessing the entity's ability to generate future
about the financial position of a reporting entity.
cash inflows from operations.
Financial position is information about the entitv's
Accrual accounting
economic resources, and the claims against the reporting
entity. The financial performance of the entity must be measured
using the accrual basis of accounting.
The economic resources are the assets and the claims are
the liabilities and equity of the entity. Accrual accounting depicts the effects of transactions
and other events and circumstances on an entity's
In other words, the financial position comprises the assets,
economic resources and claims in the periods in which
liabilities and equity of an entity at a particular moment in
those effects occur even if the resulting cash receipts and
time.
payments occur in a different period.
Information about the nature and amounts of an entity's
In other words, under the accrual basis, the effects of
economic resources and claims can help users identify
transactions and other events are recognized when
the entity's financial strength and weakness.
they occur and not as cash is received or paid.
Otherwise stated, information about financial position can
Simply stated, accrual accounting means that income is
help users to assess the entity's liquidity, solvency, and
recognized when earned regardless of when received and
the need for additional financing.
expense is recognized when incurred regardless of when
Liquidity is the availability of cash in the near future to paid.
cover currently maturing obligations.
Information about financial performance measured in
Solvency is the availability of cash over a long term to accordance with accrual accounting provides a better
meet financial commitments when they fall due. basis for assessing past and future performance than
information solely about cash receipts and payments
Information about priorities and payment requirements of
during a period.
existing claims can help users to predict how future cash
flows will be distributed among those with a claim
against the reporting entity.
Limitations of financial reporting
a. General purpose financial reports do not and
cannot provide all of the information that
existing and potential investors, lenders and other
creditors need.

Primary users need to consider pertinent

information from other sources, for example,
general economic conditions, political events and
industry outlook.

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.

c. 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.
Management stewardship
Information about how efficiently and effectively
management has discharged its responsibility to use the
entity's economic resources helps users to assess
management stewardship of those resources.
Such information is also useful for predicting how
management will use the entity's economic resources in
future periods.
Hence, the information can be useful for assessing the
entity's prospects for future net cash flows.
For example, management can decide not to dispose or
sell investments when prices are declining in order to
avoid realized, losses.