CONCEPTUAL FRAMEWORK & ACCOUNTING Types of Events prepared using a mixture of costs and
STANDARDS values.
1. -External events – events that involve an
Overview of Accounting
external party. Valuation by fact or opinion
Learning Objectives a. Exchange (reciprocal transfer) – reciprocal • When measurement is affected by
giving and receiving estimates, the items measured are said
• Define accounting and state its basic b. Non-reciprocal transfer – “one way” to be valued by opinion.
purpose. transaction • When measurement is unaffected by
• Explain the basic concepts applied in c. External event other than transfer – an estimates, the items measured are said
accounting. event that involves changes in the to be valued by fact.
• State the branches of accounting and economic resources or obligations of an
the sectors in the practice of entity caused by an external party or Basic purpose of accounting
accountancy. external source but does not involve • The basic purpose of accounting is to
• Explain the importance of a uniform set transfers of resources or obligations. provide information about economic
of financial reporting standards. 2. Internal events – events that do not involve activities intended to be useful in
an external party. making economic decisions.
Definition of Accounting a. Production – the process by which
• Accounting is “the process of resources are transformed into finished Types of accounting information classified as
identifying, measuring, and goods. to users’ needs
communicating economic information b. Casualty – an unanticipated loss from • General purpose accounting
to permit informed judgment and disasters or other similar events. information - designed to meet the
decisions by users of information.” common needs of most statement
(American Association of Accountants) Measurement users. This information is governed by
• The several measurement bases used in the Philippine Financial Reporting
Three important activities accounting include, but not limited to, Standards (PFRSs).
1. Identifying - the process of analyzing events the following: • Special purpose accounting information
and transactions to determine whether or not 1. historical cost, - designed to meet the specific needs of
they will be recognized. Only accountable 2. fair value, particular statement users. This
events are recognized. 3. present value, information is provided by other types
2. Measuring - involves assigning numbers, 4. realizable value, of accounting, e.g., managerial
normally in monetary terms, to the economic 5. current cost, and accounting, tax basis accounting, etc.
transactions and events. 6. sometimes inflation-adjusted
3. Communicating - the process of transforming costs. Basic Accounting Concepts
economic data into useful accounting • The most commonly used is historical • Double-entry system – each
information, such as financial statements and cost. This is usually combined with the accountable event is recorded in two
other accounting reports, for dissemination to other measurement bases. Accordingly, parts – debit and credit.
users. financial statements are said to be
• Going concern - the entity is assumed to policies which are applied consistently from • Tax accounting - the preparation of tax
carry on its operations for an indefinite one period to the next. returns and rendering of tax advice, such as
period of time. • Matching – costs are recognized as the determination of tax consequences of
• Separate entity – the entity is treated expenses when the related revenue is certain proposed business endeavors.
separately from its owners. recognized. • Government accounting - refers to the
• Stable monetary unit - amounts in the • Residual equity theory – this theory is accounting for the government and its
financial statements are stated in terms of a applicable where there are two classes of instrumentalities, placing emphasis on the
common unit of measure; changes in shares issued, ordinary and preferred. The custody of public funds, the purposes for
purchasing power are ignored. equation is “Assets – Liabilities – Preferred which those funds are committed, and the
• Time Period – the life of the business is Shareholders’ Equity = Ordinary responsibility and accountability of the
divided into series of reporting periods. Shareholders’ Equity.” individuals entrusted with those funds.
• Materiality concept – information is • Fund theory – the accounting objective is
material if its omission or misstatement the custody and administration of funds. Four sectors in the practice of accountancy
could influence economic decisions. • Realization – the process of converting non- 1. Practice of Public Accountancy - involves
• Cost-benefit – the cost of processing and cash assets into cash or claims for cash. the rendering of audit or accounting
communicating information should not • Prudence (Conservatism) – the inclusion of related services to more than one client
exceed the benefits to be derived from it. a degree of caution in the exercise of the on a fee basis.
• Accrual Basis of accounting – effects of judgments needed in making the estimates 2. Practice in Commerce and Industry -
transactions are recognized when they required under conditions of uncertainty , refers to employment in the private
occur (and not as cash is received or paid) such that assets or income are not sector in a position which involves
and they are recognized in the accounting overstated and liabilities or expenses are decision making requiring professional
periods to which they relate. not understated. knowledge in the science of accounting
• Historical cost concept – the value of an and such position requires that the holder
asset is determined on the basis of Common branches of accounting thereof must be a CPA.
acquisition cost. • Financial accounting - focuses on general 3. Practice in Education/Academe –
• Concept of Articulation – all of the purpose financial statements. employment in an educational institution
components of a complete set of financial • Management accounting – focuses on which involves teaching of accounting,
statements are interrelated. special purpose financial reports for use by auditing, management advisory services,
• Full disclosure principle – financial an entity’s management. finance, business law, taxation, and other
statements provide sufficient detail to • Cost accounting - the systematic recording technically related subjects.
disclose matters that make a difference to and analysis of the costs of materials, labor, 4. Practice in the Government –
users, yet sufficient condensation to make and overhead incident to production. employment or appointment to a
the information understandable, keeping in • Auditing - the process of evaluating the position in an accounting professional
mind the costs of preparing and using it. correspondence of certain assertions with group in the government or in a
• Consistency concept – financial statements established criteria and expressing an government–owned and/or controlled
are prepared on the basis of accounting opinion thereon. corporation where decision making
requires professional knowledge in the
science of accounting, or where civil accountants must agree with a standard
service eligibility as a CPA is a before it becomes implemented.
prerequisite.
Accounting standards in the Philippines
• Philippine Financial Reporting
Standards (PFRSs) are Standards and
Interpretations adopted by the Financial
Reporting Standards Council (FRSC).
They comprise:
1. Philippine Financial Reporting
Standards (PFRSs);
2. Philippine Accounting
Standards (PASs); and
3. Interpretations
The need for reporting standards
• Entities should follow a uniform set of
generally acceptable reporting
standards when preparing and
presenting financial statements;
otherwise, financial statements would
be misleading.
• The term “generally acceptable” means
that either:
a. the standard has been
established by an authoritative
accounting rule-making body;
or
b. the principle has gained general
acceptance due to practice over
time and has been proven to be
most useful.
• The process of establishing financial
accounting standards is a democratic
process in that a majority of practicing
