Chapter 2:

THE ACCOUNTING
PROFESSION

Chapter Outline

1) Definition of Accounting 9) Classical Notion of Accounting

2) Nature of Accounting Stewardship
3) Functions of Accounting 10) Fields or Branches of Accounting
4) Purposes of Accounting 11) Accounting Profession
5) Objective of Accounting 12) Professional Values and Ethics
6) Scope of Accounting 13) Career Opportunities in
7) Users of Accounting Information Accounting Profession
8) Bookkeeping, Accounting, 14) Business Organization Served
and Auditing by Accountants

Definitions of Accounting
The most commonly accepted definitions of Accounting are expressed by the following
authoritative bodies:
1. American Institute of Certified Public Accountants (AICPA): The art of recording,
classifying and summarizing in a significant manner and in terms of money,
transactions and events which are in part at least of financial character and
interpreting the results thereof

The definition of Accounting is centered

on the long-established bookkeeping
Good performance I the
functions of accountants to record,
CPA Exam is an offshoot of
classify and summarize business transactions
good learning and good
and events and afterward to interpret their outcome.
teaching.
As an art, accountants apply practical knowledge,
Dean Gabino Garoy
experience and skills guided by accounting
principles and rules in the efficient preparation of
financial reports.
Accounting demands critical thinking and creative skills. Accountants gather relevant data of
business and convert them into organized financial reports then drew certain economic
meanings from them. Accounting gives due importance to the measurement of the business
activities that have monetary value. Business activities that do not involve monetary value are
not recorded in the books of accounts.

2. Accounting Standard Council (ASC): A service activity. Its function is to provide

quantitative information, primarily financial nature, about economic entities, that is
intended to be useful in making economic decisions.

ASC conveys that economic decision-making is the main reason why accounting records
and financial reports are prepared.

Accounting connects the economic activities to the economic decision-makers. As a

service accounting intends to supply financial reports to be used by economic decision-
makers.

Accountants choose an acceptable accounting method, the amounts and type of

information to disclose, and the format in which to present.

Financial reports derived from accounting are not and end in itself. As accountan ts
choose which alternative reporting method provides the most useful information for
decision-making purposes, the financial information also allows the decision-makers
make reasoned choices among alternative uses of scarce resources in the conduct of
economic activities.

3. American Accounting Association (AAA): The process of identifying, measuring, and

communicating economic information to permit informed judgements and decisions
by users of the information.

As a process, accounting goes through an accounting cycle to summarize the voluminous

and repetitive business transactions into organized and understandable financial
reports.

Accounting measures and records the data of business activities. These data are
processed into financial reports that are stored for current and future use. They are used
to guide decision-makers make sound economic decisions.

Therefore, accounting is an information system for business decisions. It ascertains the

value of business transactions and events converts them into financial reports and
imparts the meaning of these financial reports to the interested parties.

Accounting information systems vary widely from one business to another. Various
factors shape these systems: the nature of business,
Chapter 2: The Accounting Profession

The business transactions involved, the size of the firm, the volume of data to be
handled and the information that the management and others require.

ACCOUNTING
PROCESS
COMMUNICATED DECISION MAKERS
TO
FINANCIAL INFORMATION External:
Internal:
Assets = Investors
Management
(Liabilities + Owners Equity) Creditors
Customers
Profit or Loss =
Government
(Revennue - Expenses

Nature of Accounting

The most common descriptions when accountants portray the nature of accounting are as
follows:

1. A Discipline. Accounting is a discipline that observes professional standards and

professional ethics as other fields of professions like medicine, law, engineering and
others.

Accounting practice is guided by distinctive accounting standards, rules, methods and

procedures to come up with reliable general-purpose financial reports.

Ethics in accounting is of utmost importance. Certified Public Accountants (CPAs) and

other accounting professionals know that people who use their services, especially
decision makers using financial statements, expect them to be highly competent, reliable,
and objective. Those who work on the field of accounting must not only be well
qualified but must also possess a high degree of professional integrity. A professionals
good reputation is one of accountants most important possessions.

2. A Service Activity. Accounting profession is not involved in the selling of goods.

Instead in providing professional services particularly in performing tasks by making
financial reports regarding the financial activities of economic entities.
 These financial reports help users to understand the true condition of the business and
guide them in drawing sound economic decisions.

The service activity of an accountant begins when he accumulates the voluminous

business transactions and transforms them into organized and meaningful financial
reports.

Before making economic decisions, these financial reports are communicated and
explained first to the economic decision-makers.

3. An Art and Science. As an art, accounting is designed to perform its service activity
with utmost efficiency and in the best possible manner without any wastage of time and
money. It encompasses a body of techniques that commonly used in a certain profession.
It demands thorough knowledge, good experience and deep interest in the field of
accountancy to achieve this goal.

Others believe that accounting, it is not only an art but also a science as well because it is
regulated by accounting rules, principles, postulates and theories. It follows a cause-and
-effect relationship as shown by the double entry system that in every transaction it has
a double effect. If one account is debited, the other account will be credited
automatically.

On the other hand, some people dispute such an idea because accounting is not an exact
science. In fact, accounting, constantly adjust to new conceptual frameworks to adopt in
the rapidly changing business trends and situations globally.

4. The Language of Business. Accounting serves as a means of communication. It

communicates the results of business operations to various parties (owners, lenders,
investors, government, employees and other agencies) who are directly or indirectly
interested on the economic affairs of the business. It informs them the economic status of
a business organization. It gives them insights regarding the true financial standing of
the business as accountants interpret and communicate them through financial reports.

Accounting serves to provide the basis for planning, budgeting and decision-making in
every personal life and business activities. Accounting reports the inflow, outflow and
results of economic resources of any economic entity.

Accounting thus plays an essential role to businessmen. It helps them to easily find out
needed information anytime to answer the following business questions:

a. How much is the increase in capital as a result of business operations? (Profitability)

Chapter 2: The Accounting Profession

b. Are there available funds to finance the business operations? (Liquidity)

c. Can the business pay its long-term obligations to others? (Solvency)
d. Can the business sustain its long-term profitability and cash flow? (Stability)
e. How much borrowed capital and owners capital are invested in the business?
(Capital Structure)
f. Is there excess cash available for investment opportunities and other uncertainties?
(Financial Flexibility)

5. The Eye of the Business. Bookkeeping records, as the initial part of accounting
activities, enable the owner of a business to check on his financial progress.

Adequate accounting records assist the owner to prepare plans for the future, avoid
material mistakes, analyse the causes of changes that take place, and draw the best
choice among economic alternatives.

Accountants are economic detectives. Auditing, as an advanced part of the accounting

activity, verifies the truthfulness of the financial reports concerning the business results
of operations and financial condition.

Accounting facilitates management functions regarding planning, budgeting, controlling

and decision-making. Accounting information describes both management and
employees performance ad makes possible eliminate the commission of frauds and
thefts within the enterprise.

Functions of Accounting

The primary function of accounting is to provide financial reports to various end-users for economic
decision-making (PAS No.1)

This is achieved through the use of accounting functions as follows:

1. Recording. This accounting function is employed to ensure that all business

transactions are recorded in a systematic manner in property books of accounts. The
recording is done is a Journal Book and subsidiary books such as cash journal,
purchase journal and sales journal. Only transactions that are financial in nature are
recorder in books of accounts.
 2. Classifying. It is concerned with systematic analysis of recorded business transactions
and events, with a view to group those that are similar in nature as one cluster in any
accounting element called assets, Liabilities or Capital. The classifying work of
accounting is done in the Ledger Book.

3. Summarizing. This involves presenting the classified data in a manner which is

understandable and useful to the end-users of accounting information. This process
leads to the preparation of the (a) Trial Balance, (b) Statement of Comprehensive Income
and (c) Statement of financial Position.

4. Analysing and Interpreting. This is the final function of accounting. The recorded
financial data are analysed and interpreted in a manner that the end-users can make a
meaningful judgement about the financial condition and profita bility of the business
operations. The data is also used for preparing the future plan and framing of business
policies.

5. Communicating. After being meaningfully analysed and interpreted, the accounting

information has to be communicated to the intended end-user. This is done through the
distribution of accounting reports such as the Statements of Comprehensive Income and
Financial Position including additional information in the form of accounting ratios,
graphs, diagrams, Statement of cash flows, and notes to the Financial Statements.

6. Protecting the property of business. Accounting evaluates the usefulness of the

business resources. It provides internal control to secure them and ensure that
unauthorized use of business property shall not be made.

7. Preparing legal requirements. Accounting facilitates the preparation of governmental

reportorial requirements and ensures compliance of reporting in time. The accounting
records and supporting documents serves as proofs of real transactions as contained in
the financial accounting reports.

The functions of accounting are comparable to the stages of accounting work and purpose for
which they may be ascribed.

The Basic Function of accounting is describes as the process of identifying, measuring, and
communicating economic information to permit informed judgement for an economic decision.
(American Accounting Association)

The advanced or critical function of accounting is its audit function to test the reliability of the
financial reports, trace fraudulent transactions, and locate and rectify accounting errors.
Chapter 2: The Accounting Profession

Purpose of Accounting

The purpose of accounting is to help end-users see the true picture of the business in financial terms.

To achieve this purpose, the financial reports prepared by accountants must be understandable,
relevant, reliable, and for general-purpose. It must contain information that is complete, neutral and
free form error. It is achieved when financial statements are made in conformity with prevailing
accounting standards called the generally accepted accounting principles (GAAP).

Accounting enables a business to maintain complete and orderly prepared records of economic
events by way of preparing books while facilitating the information for various purposes.

In a highly competitive world of business, a well-informed management is vital for the survival
of a business organization. The management must have an accurate information about the
reporting entity at the right time to keep due control over the affairs of the enterprise and to
effect economic decisions with minimal uncertainty.

Objective of Accounting

The overall objective of financial reporting is to provide general-purpose financial statements

about the reporting entity that is useful to present potential user groups, especially stockholders
and creditors to assist them in making sound economic decisions as capital providers.

Financial information that is decision-useful to capital providers may also be useful to other
users of financial reporting who are not capital providers.

This objective underscores the fact that financial reporting is not an end in itself. Instead, the
output of the financial accounting process serves as useful input for making rational
investment, and other similar economic decisions.

To achieve this accounting objective, a business entity must prepare general-purpose financial
statements. General-purpose financial reporting helps users who lack the ability to demand all
the financial information they need from an entity and therefore, must rely, at least partly, on
the information provided in the financial statements.
Specific Objectives: Particularly, the objective of accounting can be summarized in the
following manner:

1. To ascertain the results of operations during a period. The main objective of the
business is to determine the overall profitability of the business over a set period of time.

A financial report called Statement of Comprehensive Income (SCI) is prepared for this
purpose. This statement describes the overall results of business operations whether the
business earned profit or suffered loss during the accounting period (usually a year).

Accountants should not only confine with the objective of completing he preparation of
the financial statements but their objective is to ascertain the integrity, reliability or
accuracy of the companys reported operating performance.

2. To ascertain the financial position. For financial statement users. It is also very
important to know the financial health or financial condition of the firm.

A statement called Statement of Financial Position (SFP) is prepared for this purpose. It
shows the business financial condition (assets, liabilities and owners contribution) on a
particular day and is usually prepared once a year on the last day of financial period.

Accountants should ensure that the information purported in the SFP should contain
reliable information regarding the companys assets, liabilities and equities. They must
exist and must be valued fairly at the date of SFP.

3. To maintain control over assets. Accounting implements internal control the

systematic measures (such as reviews, checks and balances, method and procedures)
instituted by an organization to:

a. Conduct its business in orderly manner;

b. Safeguard its assets and resources;
c. Deter and detect errors, fraud, and theft;
d. Ensure accuracy and completeness of its accounting data;
e. Produce reliable and timely financial management information; and
f. Ensure adherence to its policies and plans.

4. To aid management in planning and performance evaluation. Financial reports serve

as basis for budget by forecasting cash flows, sales, production, expenses, etc. These
forecasted financial reports serve as references that help management evaluate the
overall performance of the enterprise.
Chapter 2: The Accounting Profession

Accounting also provides significant information to management to carry out its daily
tasks and operations properly and efficiently. Such information helps management in
planning, organizing, and controlling its various activities.

5. To provide information to government agencies and other legal purposes. Accounting

information facilitates the work of tax authorities by analysing the financia l statements
of business organization. Through financial reports, the government agencies could
check that the funds being raised by the business are from legal sources.

Financial statements will expose any fraud or any wrong business practice of an
organization, thus, the general public can refrain using, buying, or investing in products
of such organizations who have been involved in malpractices.

Financial reports also serve as good evidence to attest the truthfulness of financial
reports in any legal investigation or court of law.

Scope of Accounting

Knowledge of accounting is essential to all who wish to understand our modern economic
system. It is because accounting in some way touches all aspects of economic activities (profit or
non-profit business) including government and personal finances.

All types of businesses (from sole proprietorship and partnership to all types of corporation)
need financial information before a sound and more reliable economic decision can be made.

All types of businessmen are required to prepare government reports such as income taxes,
business taxes, and social security returns. This government report must be based upon
adequate business records prepared through the use of accounting.

The success or failure of a business may often be traced to the king of accounting records that
are kept.

Users of Accounting Information

The users of accounting information may be classified on the extent of their participation in the
affairs of the business that is, internal users comprising the management group, and external users
comprising the financing and public groups.
The Management Group. Internal users are those who own and/or manage and control the
business entity.

To help them make relevant economic decisions in achieving the goal of the firm, the
management group needs more detailed accounting information.

Internal financial reports are usually prepared exclusively for the use of internal users for the
efficient operation and control of business activities.

These reports are not governed by the generally accepted accounting principles. The area of
accounting that is concerned with internal reporting is referred to as management accounting.

Examples of internal financial reports are variance analysis of cost of production, differential cost
report of capital budgeting, etc.

The Financing Group & Public Group. External users (the financing and public groups) do not
own and/or manage and control the business entity.

They have no direct access to the management of the business, but they use financial reports to
satisfy some of their needs for financial information.

The external users and their respective needs as catered by the financial reports include the
following:

1. Investors. To assess the risk of investments portfolio, investors need information to help
them determine whether they should buy, hold or sell their investment.

2. Employees. Workers are interested in the financial statements to determine the employers
stability and profitability. Moreover, enterprises capability to provide remuneration,
retirement benefits and employees opportunities may be evaluated through financial
reports.

3. Lenders. Financial statements are used by lenders to determine whether borrowers can
pay their loans and interest attached to them when due.

4. Suppliers and other trade creditors. Supplier uses the financial statements of their
customers to determine the continuity of the latters business. They are interested in the
information that enables determine whether debts owed to them will be paid when due.
Trade creditors are likely be interested in an enterprise over a shorter period than lenders
unless they are dependent upon the continuation of the enterprise as a major customer.

5. Customer. Customers use the financial statements of their suppliers to assess the latters
continuity in business because some customers are
Chapter 2: The Accounting Profession

Dependent on the existence of their suppliers to ensure the availability of supplies that
will sustain their business operation.

6. Government and its agencies. In allocating the national resources, the government is
interested in the financial reports of an enterprise for statistics, income taxes and other
regulatory policies.

7. Public. Financial reports may assist the people by providing information about the trends
and recent developments in the prosperity of the enterprise and range of its activities.

External financial reports are usually prepared for those who have no direct access to the
management of the business. The preparation of these reports is governed by the generally
accepted accounting principles. The area of accounting that concerned with the preparation and
presentation of external reports is referred to as financial accounting.

Examples of external financial reports are statement of financial position, statement of

comprehensive income and cash flow statement.

USERS OF ACCOUNTING INFORMATION

INTERNAL USERS EXTERNAL USERS

MANAGEMENT FINANCING GROUP PUBLIC GROUP

GROUP
Investors Government
Sole proprietors Potential investors Regulatory agencies
Partner Trade creditors Taxing authorities
Board of Directors Banks and other Labor unions
Officers financing institution Employees
Managers
Retirees
Supervisors
Economic planners
Customers

Internal Financial External Financial Reports

Reports
 BASIC ACCOUNTING

Bookkeeping, Accounting, and Auditing

Bookkeeping is the initial activity or clerical part of accounting. It is primarily concerned with
procedures in the making and keeping of accounting records. It is the how of the accounting.

Accounting is the developed form of bookkeeping. It is the conceptual and logical part of the
service activity. It decides the methodology of such recording. It usually answers the question
why?

Accounting starts where bookkeeping ends. As the bookkeeper records transactions in the book
of accounts, the accountant classifies, summarizes and prepares financial statements from the
recorded transactions. The accountant also designs, analyses, and interpret such records and
financial statements.

Auditing is the critical part of accounting. It is performed after the accounting work ends. After
the financial statements are prepared, the auditor examines them to verify their truthfulness
and compliance with generally accounting principles.

Auditing confirms the credibility of financial statements and protects or ensures the confidence
of financial users. It usually answers the question how true?

The Classical Notion of Accounting Stewardship

The stewardship role of accounting is classified as follows:

1. Valuation Accounting gives emphasis on how accounting measures the value of the firm.

Under valuation perspective, accounting is used as tool to measure the value of the firm.
Regardless of market condition, accountants could still account for the value of the firm
since its resources are measured with the established monetary unit.

When the markets are perfect and complete, assets and changes in book value of
owners equity can be measured at their market value (mark-to-market accounting).

When markets are not perfect and complete, accounting can still be used to approximate
the change in the value of the firm.

2. Stewardship gives emphasis on how accounting affects the value of the firm.
Chapter 2: The Accounting Profession

Stewardship accounting is usually used when owners of the business are not directly involved
in its operation. They entrust their enterprises assets and activities to the decisions if hired
managers in accordance with the goals of the firm. Accounting serves as stewards in this
purpose when it is used to assess and control the firms activities.

Accounting data are useful in providing information to a firms owners regarding the truthful
financial condition and results of operation of an enterprise.

They assist the owners to determine whether the decisions made by managers and other
workers are consistent with the goals of the firm, and take appropriate actions on the matter.
The accounting information determines the effectiveness and efficiency of the decisions made
and the works performed.

Financial reports help determine the worth of workers and the enterprise as a whole. They also
help determine the best future economic decisions by comparing alternative data on activities
that would increase or decrease the worth of the firm.

Specialized Fields or Branches of Accounting

CMO No. 3 series of 2007 provides four (4) major specialized fields of accounting, namely (1)
Public Accounting, (2) Private Accounting, (3) Government Accounting, and (4) Accounting
Education.

Public Accounting (Practice in Public Accountancy)

When accountants offer their professional services to clients for a fee like other professionals
(e.g. lawyers, doctors, and engineers) do, they are said to be in public accounting. An
accountant who engages in public accounting is not an employee of a client company.

Examples of public accounting firms include Sycip, Gorres, Velayo and Company (SGV & Co.);
Isla Lipan and Company; Punongbayan and Araullo.

The following are the branches of accounting under this category:

1. External Auditing primarily centers on the critical examination of financial statements

by an independent CPA to express an opinion regarding the fairness of the contents of
the financial statements.

An audit does not cover 100% of accounting records. Instead, the CPA reviews a
statistically selected sample of records, and then issues an audit report.
 2. Tax Services deals with the accountants preparation of the clients income tax return,
business and transfer taxes. He represents the client in tax assessment and investigations
conducted by the BIR.

Tax accountants must be constantly familiar with the dynamic tax laws, BIR regulations
and local tax laws affecting their clients to effectively dispense advises regarding tax
minimization.

3. Managerial Advisory Services provides assistance to the management. Accountants

generally provide industrial advice to their clients regarding accounting, finance,
budgeting, business policies, and organization procedures, systems, product costs, and
distribution and other business activities.

As a requirement, an external auditor should be licensed CPA; but a tax consultant or a

management consultant need not be a CPA.

Private Accounting (Practice in Commerce and Industry )

Accountants are said to be in private accounting when they are employed in a private enterprise
or in a non-profit organization. Large companies divide their accounting staffs into departments
according to specialized accounting functions.

The branches of accounting under this category are as follows:

1. Financial Accounting is primarily concerned with the recording and classifying

business transactions culminating in the preparation of general-purpose financial
statements or reports regarding the business financial position, operating results and
cash activities in accordance with the GAAP.

2. Internal Auditing deals with determining the operational efficiency of the company
regarding protection of the companys assets, accuracy and reliability of the accounting
data, and adherence to prescribed managerial policies. The process is known as financial
internal auditing.

A company may hire internal auditors as employees or outsourced auditors for internal
auditing function. They do not report to an accounting or financial officer because that
arrangement would destroy the element of independence critical to their w ork. Instead,
they report directly to an audit committee of the corporations board of directors.

3. Tax Accounting embraces the preparation of various tax returns and tax planning
necessary to minimize the impact of taxes on the firm. Tax accountants are th us
specialists in both tax compliance and tax planning.
 Tax compliance means following the many detailed and specific rules of the taxing
authorities in preparing tax returns. The term tax planning refers to the study of the
possible tax effects of various proposed financial transactions in order to minimize taxes
and maximize profits.

4. Cost Accounting has something to do with determining the inventory cost and/or
product costs of the manufactured goods and assisting in product pricing activities of
the company. Cost accounting data are generally used by the management for planning
and controlling purposes.

5. Budgeting covers the efficient management of cash by anticipating or predicting

monetary objectives in the future period.

6. Accounting Systems Design primarily includes the evaluation of the companys control
system to find out any area of improvement. It includes the establishment of a
computerized accounting system. An accountant who works as a system analyst also
designs the accounting forms and installs accounting procedure for the accumulation of
accounting data.

7. International Accounting encompasses special accounting for international transactions,

comparisons of accounting principles in different countries, and harmonization of
diverse accounting standards worldwide and tax requirements of all the countries in
which the company does business. A CPA may work as an international accountant or
an international auditor.

8. Not-for-Profit Accounting deals with special accounting for charitable organizations,

philanthropic foundations, religious groups, governmental agencies, hospitals, schools,
and cooperatives. Not-for-Profit organizations may earn profits, but they do not
distribute the income to owners. The profits are usually left in the organization and used
for the benefit of the public which they serve.

9. Socio-economic Accounting concerns the measurement of the impact of business or

government agencys decision on the public sector. An accountant who is engaged in
social accounting augments his accounting study with courses in social sciences.

The social accountant makes recommendations on how any funds being spent for the
good of the general public can benefit the greatest number of people. This also includes
a specialized study on environmental accounting.
 BASIC ACCOUNTING

Government Accounting (Practice in the Government)

Government Accounting mainly focuses on the proper custody of government funds and their
purposes. It is generally used in accounting for the national government and its political
instrumentalities provinces, cities, municipalities, and barangays.

Many accountants are employed in several government agencies such as the Bureau of Internal
Revenue (BIR), Commission on Audit (COA), the Department of Finance (DOF), and the
Department of Budget and Management (DBM).

Accounting Education (Practice in Education/Academe)

Accounting Education involves teaching accounting, taxation, and some business subjects. A
CPA who intends to teach in college level is required to have masters degree. Faculty members
of some universities are encouraged to finish doctorate degree and required to engage in
research work.

Accounting educators prepare the curriculum for accounting education. Some write several
books in accounting, taxation and other related business fields.

Many CPAs are also involved in other businesses or other fields of accountancy profession and
at the same time working as professors, researchers and reviewers in various universities,
colleges, and review centers.
Chapter 2: The Accounting Profession

SPECIALIZED FIELDS OR BRANCHES OF

ACCOUNTING

PRIVATE ACCOUNTING PUBLIC ACCOUNTING

Financial External Accounting

Tax Accounting
Accounting
Services
Tax Services
Internal
Auditing Budgeting
Services Management Advisory
Cost Accounting Services

International
Accounting GOVERNMENT ACCOUNTING
Accounting
System Design
Services Socio-economic ACCOUNTING EDUCATION
Not-for-Profit Accounting
Accounting

The Profession of Accountancy

Accountancy is not the only one of the most prestigious professions, but also one of the highest
paid. It has a very high marketability because all businesses, whether profit or non-profit, need
the service of accountants.

An employees knowledge of accounting makes him more valuable in the firm because
accounting in some way touches on all aspects of business.

The value of basic accounting knowledge in so many careers has made it a required course in
almost all programs of study in a business field. A student who chooses this course is certainly
making one of the greatest investments in his future.

As a profession, accountancy has evolved to the level of medicine, law, engineering, and
theology. Accountancy is a relative newcomer to the ranks of the professions, but it has
achieved widespread recognition in recent decades.
Professions Common Characteristics

All of the recognized professions have several common characteristics the most important of
which are as follows:

Standards of Admission to the Profession. Attaining a license requires an individual to meet

minimum CPA standards for education and experience.

The individual must pass the uniform CPA examination, showing mastery of the body of
knowledge described above. Once licensed, CPAs must adhere to the ethics of the profession or
else risk governmental and public sanctions.

Responsibility to Serve the Public. A CPA is a representative of the public creditors,

shareholders, consumers, employees, etc. in the financial reporting process. The role of the
independent auditor is to ensure that financial statements are fair to all parties.

Public accountants must maintain a high degree of independence from their clients if they are to
be of service to the larger community.

Complex Body of Knowledge. Any practitioner or student of accounting has only to look at the
abundance of authoritative pronouncements governing financial reports to realize that
accounting is a complex body of knowledge.

One reason why such pronouncements continue to proliferate is that accounting must reflect
what is taking place in an increasingly complex environment. As the environment cha nges
such as the trend towards globalization of businesses accounting principles and auditing
practices must adapt.

The continual growth in the common body of knowledge for practicing accountants has led
the PICPE to enact continuing education requirements for CPAs. The need for technical
competence and familiarity with current standards of practice is embodied in the Code of
Professional Ethics (CPE)/

Need for Public Confidence. Physician, lawyers, engineers, certified public accountants, and all
other professionals must have the confidence of the public to be successful. To the CPA,
however, public confidence is of special significance. The CPAs product is credibility. Without
public confidence, the auditors attest function serves no useful purpose.

Professional ethics in public accounting, as in other professions, has developed the gradually
and is still in a process of change as the practice of public accounting continues to change.
Chapter 2: The Accounting Profession

COMMON CHARACTERISTICS OF A
PROFESSION

Standards of Responsibility to Complex Body of Need for Public

Admission to the Serve the Public Knowledge Confidence
Profession

Basic Professional Values and Ethics

For the protection of the public, client, the accounting practitioner, and the accounting
profession itself, a CPA should possess the following basic professional values and ethics:

1. Reputation. A good moral character is a requirement for admission to the CPA exam. A
CPA should maintain public trust and confidence. He is expected to refrain from
immoral or dishonourable conduct discreditable to the accounting profession.

In all cases, an accountant should manifest proper professional behavior to elevate the
standing of the profession and to enhance the confidence of the client and the public in
the profession and in the individual practitioner and the accounting firm.

2. Integrity and Due Care. A CPA should be straightforward and honest in performing
professional services.

Integrity is the result of the accountants independence which is the foundation and
cornerstone of the accounting profession. An accountant will automatically not be
considered independent under the following circumstances:

a. If he has or had, during the period of report, any direct financial interest in the client
or any of its parents or subsidiaries, or any material indirect financial interest.
b. If, during the period of his report, he was connected with the client (or parents or
subsidiaries) as promoter, underwriter, voting trustee, director, officer, or employee.

Due Care in the performance of professional services is exercised when an adequate

examination has been made, generally accepted auditing standards were adhered to, all
necessary procedures in the
 circumstances were performed, proper care alertness were exercised during the
examination, and material matters were properly disclosed.

3. Competence. A CPA professes to have the requisite qualifications and technical skills to
render satisfactory service.

Competence is achieved and measured by formal professional studies, practical training,

profession of a CPA certificate, continuing professional education, innate intelligence,
and the capacity to analyse and evaluate situations and arrive at sound judgements with
respect to the complex problems encountered in the accounting engagement.

The basic rule is that the CPA should not offer or perform services which he is not
competent to perform. His competence moreover, must correspond with the high
standards expected of a professional person.

4. Objectivity. A CPA should show absolute impartiality in the expression of an opinion

on the fairness of the financial statements. As auditor, the CPA should make unbiased
and objective judgements in the performance of his examination and in the
consideration of the facts which underline his opinions.

The CPAs responsibility extends to the public in general. It is therefore expected that he
will make an impartial and independent examination.

5. Client Relations and Confidentiality. The relationship between the accountant and the
client is confidential. Any vital information obtained by the accountant in the course of
the engagement should not be divulged to a third party without the clients consent.

The report rendered by the accountant must be submitted directly to the client who can
then furnish copies to whomever he wishes.

6. Fees and Remuneration. An accounting fee should not be based upon the findings or
results of the auditors examination or services.

An arrangement for a fee that is contingent upon the auditors findings or service may
affect his independence. The consequence could be a misinterpretation of the
examination findings or results of services.

Thus, the CPA must make an adequate examination corresponding to his report and
opinion, regardless of limitations of time and fee.

7. Publicity and Advertising. An accountant is forbidden to advertise his professional

attainments or services. Publication in a newspaper, magazine, or similar medium of an
announcement is prohibited.
 Advertising is associated commercial practices in which the emphasis is upon personal
gain. It is inconsistent with the practice of a profession which emphasizes service to the
public.

An accountant should not ask for clients either directly or indirectly.

Competitive bidding by CPAs for an auditing engagement is generally held to be

unethical. It is a form of solicitation and, as such, is unprofessional and against the
public interest.

He should not encroach into the practice of another accountant.

8. Breaches of Contract. The obligations of the accountant to the client rest upon the
agreed scope of the engagement which, in effect, represents a contractual agreement.
The accountant is liable to the client for any material breach of this contract.

The auditor is liable to the client for negligence in the examination. Fraudulent action by
the accountant also renders him liable.

An accountant is not liable to third parties for simple or ordinary negligence because
this would expose the accountant to an indeterminate liability to the entire business
community. He is, however, liable for fraud, material misinterpretation, and gross
negligence.

9. Unlawful Activities. The following are considered to be unlawful acts of a CPA which
shall be sufficient grounds for a court proceeding against him:

a. Immoral or dishonorable conduct

b. Fraud in the acquisition of the certificate of registration

c. Gross negligence or incompetence in the practice of his profession

d. Addiction to alcoholic beverages or to any habit forming drugs rendering him

incompetent to practice his profession.

e. False or extravagant or unethical advertisement wherein other things than his name,
profession, limitation or practice, office and home address are mentioned.

f. Issuing an accountants certificate covering the examination of the clients accounts

without observing the necessary auditing standards.

g. Aiding or acting as a dummy for unqualified or unregistered persons to practice

accountancy
 h. Violation of any provision of the ethical standards.

i. Insanity and other conducts discreditable to the accounting profession.

10. Disciplinary Procedures. A written charge under oath should be submitted to the BOA
for a complaint against a CPA. Five days after the filing of the complaint, the respondent
CPA should be given a copy of the said complaint requiring him to answer it.

The BOA then conducts an administrative investigation of which the decision is to be

made by a majority of its members.

The respondent CPA has the right to be represented by counsel, to have a speedy and
public hearing, and to confront and to cross-examine witnesses against him.

The decision of the BOA becomes final within 30 days after receipt by the respondent of
a copy of the decision unless, during the same period, he has appealed to the PRC,
whose decision is deemed final.

Career Opportunities in the Accounting Profession

After completing the program and passing the CPA licensure examination, the graduates can
pursue a career in accountancy and related professions.

Specific jobs vary widely among the four major fields of accountancy: public practice, commerce
and industry, government and education. Specific sample opportunities are the following:

Entry-Level Positions:

1. Public Practice: Audit Staff, Tax Staff, management Services/Consulting Staff

2. Commerce and Industry: Financial Accounting & Reporting Staff, management Accounting
Staff, Tax Accounting Staff, Internal Audit Staff, Financial Analyst, Budget Analyst, Credit
Analyst, Cost Accountant

3. Government: Accounting and Budget Clerk, State Accounting Examiner, State Accountant,
LGU Accountant, Revenue Officer, Audit Examiner, Budget Analyst, Financial Services
Specialist

4. Education: Junior Accounting Instructor

Chapter 2: The Accounting Profession

Middle Level Positions:

1. Public practice: Audit Manager, Tax Manager, Consulting Manager

2. Commerce and Industry: Comptroller, Senior System Information Auditor, Senior Fraud
examiner, Senior Forensic Auditor
3. Government: State Accountant V, Director III and Director IV, Government Accountancy and
Audit, Financial Service Manager, Audit Service Manager, Senior Auditor
4. Education: Senior Faculty, Accounting Department Chair, College Dean

Advanced Positions:

1. Public Practice: Partner, Senior Partner, Senior Consultant/Financial Advisor

2. Commerce and Industry: Chief Financial Officer, Chief Information Officer, Comptroller
3. Government: National Treasurer, VP for Finance/CFO (for GOCCs), Commissioner, Associate
Commissioner, Assistant Commissioner (COA,BIR,BOC)
4. Education: VP for Academic Affairs, VP for Finance, VP for Administration, College or
University President

Accountancy profession offers several career opportunities with promising benefits both in
economics and social status in the society.
An accountant with proper training and competence generally ends up in a managerial
position. Coupled with entrepreneurial ability, most accountants are successful in business.

Many CPAs form professional partnerships as well as service businesses which are successfully
contributing quality services and trainings, and helping the economy by providing employment
here and abroad.

Being exposed to diverse business activities, most accountants are engaged in profitable work,
such as finance, merchandising, manufacturing, authorship, politics, presidential advising,
education, management and even marketing.

Accountancy offers various career opportunities. It is considered as one of the most sought-after
preparatory undergraduate courses for Law profession because accountancy subjects include
some major courses in the College of Law, namely: commercial laws, taxation, political science,
labor
and banking laws. Moreover, passing the CPA exam requires the most stringent discipline,
rigid training and tedious preparation.

Business Organization Served by Accountants

Business is any economic activity conducted primarily for profit. To engage in business is to
supply goods and services to earn profit or income. Below are the most common forms of
businesses served by accountants.

1. Sole or single proprietorship. A business entity owned by one person called a sole
proprietor. A private of profession (CPA, Lawyer, or Physician) owned by an individual
practitioner is also an example of a single proprietorship business.

Advantages Disadvantages

Easiest to start and set up; Unlimited liability

only few legal requirements Owner is legally
Only one (owner) decides liable for all business debts.
for the business. Limited resources (capital,
All profits are for the owner managerial skills, etc)
The owner, not the All losses are borne by
business, is taxed. owner
Easy to dissolve. Limited life business is
automatically terminated
due to owners death,
insanity or imprisonment.

2. Partnership. A business entity owned by two or more persons called partners who
have agreed to contribute money, property and industry to themselves. Many small
business and most professional service groups are partnerships

Advantages Disadvantages
Easy to form Mere Unlimited liability A
agreement organizes a general partner is legality
partnership. liable for the unpaid debts
of the partnership.
Joint resources of partners
All partners may be held
(capital, skills, etc.) liable for the action of one
Lesser government partner.
supervision Consensual and restricted
Tax-exempt if professional transfer of ownership.
partnership ,but subject to Limited life disagreement
or change of partner may
dissolve
Chapter 2: The Accounting Profession

Corporate tax if commercial the partnership. Incapacity, insanity

partnership or death of a partner terminates the
partnership.

3. Corporation. A business registered as an artificial person under the operation of the law.
Is existence is evidence by its Articles of Incorporation and Corporate By-Laws
registered with the Securities and Exchange Commission (SEC)

A corporation that issues shares equity to shareholders is called a profit corporation. A

corporation that does not issue share equity is a non-profit corporation.

Advantages Disadvantage
Limited liability shareholders Most costly and difficult to
are not legally liable for the organize
corporate unpaid liabilities. Only the board of directors
Power of succession it can and other authorized officers
continue to exist in spite of can bind the corporation in
death, withdrawal or changes contracts
of officers and shareholders. Shareholders have limited
Unrestricted transfer of access ad control over
ownership management and operations
Greater source of resources More stringent
(capitalization, skills, etc.) government supervision and
Renewable and perpetual life restrictions
a corporation may renew its Corporations are taxed at a
registered life every 50 years. flat 30% income tax rate
(effective 2009). If a
corporation incurred loss in
its 4th year of operation, it
should still be taxed of 2%
based on its gross income.

Primary Activities of Business

A business may be classified based on its primary activities. The most common types of
businesses as to their nature or main activities are as follows:

1. Servicing. To earn revenue, this business renders services to clients in exchanging for a
fee. Therefore, the primary product of this business is service.
2. Merchandising. This business engages in the buying and selling of goods. Its
earnings are primarily derived from the mark-up (profit) it adds to the cost of goods it
sells to the customers.
3. Manufacturing. The business converts raw materials into finished goods that are to be
sold at selling price.
In the conduct of business transactions, the concepts of separate accounting entity shall
always be observed that is, the transactions of the business must be accounted separately
from the owners personal activities.

Being a separate accounting entity, the business acquires is assets, incurs its liabilities and
expenses, and earns its income separate and distinct from the owner(s).

The Accountant of the 21 st Century

An accountant is expected to be a responsible practitioner imbued with competence,

integrity, discipline, moral value and mental independence in the practice of his profession.

To become a CPA, one must pass the CPA Licensure Exam given by the government
through the Board of Accountancy (BOA)

To keep up with the higher standard in the practice of profession and be competitive
globally, he is required to acquire accreditations from the accounting authoritative bodies
through continuing education by attending seminars, conferences, going back to school or
conducting research for the profession.

Generally, accountants are involved in a work with confidentiality regarding the financial
status of a client company. They are needed not only to record the business transactions but
also to analyse the financial data for business economic decisions.

The accountants work may involve management consultancy, business planning, financial
and business advising, economic forecasting as financial analyst, detecting economic frauds
and business decision making.

With the many worlds that an accountant may engage into, he is expected to possess
intellectual communication and interpersonal skills.
Chapter 2: The Accounting Profession

THE STAIRWAY OF CREDITED PUBLIC ACCOUNTANT

Chapter 2 - REVIEW QUESTIONS
Chapter Discussions:

1. Define accounting based on the definitions given by the following accounting

authorities:
a. American Institute of Certified Public Accountants (AICPA);
b. Accounting Standard Council (ASC); and
c. American Accounting Association (AAA).
2. Explain the nature of accounting

3. Explain the functions of accounting

4. Distinguish the basic function of accounting from the advanced/critical function of

accounting.

5. What is the purpose of accounting?

6. What is the overall objective of financial accounting?

7. What are the specific objectives of financial accounting?

8. Distinguish a statement of comprehensive income from a statement of financial position.

9. What is the scope of accounting?

10. Who are the two major groups of users of accounting information?

11. Distinguish bookkeeping from accounting.

12. Discuss the classical notion of accounting stewardship

13. What are the four specialized fields of accounting? Enumerate their respective branches.

14. Distinguish public accounting over private accounting practice.

15. Explain the nature of accounting profession.

16. What are the most common characteristics among professions?

17. Enumerate and explain the basic professional values and ethics of an accounting
profession.

18. What are the career opportunities in the accounting profession?

19. Describe the business organizations served by accountants.