CHAPTER 1: THE ACCOUNTANCY PROFESSION

INTRODUCTION

Knowing the overall environment in which financial accounting is practiced

and the way how financial reports are produced is vital for any person utilizing
that information for decision purposes. This begins with knowing the very nature
of the accounting process and its purpose as well as the principles and concepts
underlying financial accounting and reports.
Accounting is one of the various disciplines created and developed by
mankind in an attempt to best utilize scarce resources and hence improve the
living standard of society. It has been in use starting from the very ancient
civilization of mankind and has evolved over time to the in response economic
needs of society. Nowadays, accounting is used almost by all economic entities
irrespective of their purpose, nature, and scope.
Accounting is relevant in all walks of life and it is absolutely essential in the
world of business. It is the language of business. Learning accounting is like learning
a new language. This module is essential to fully understand the accounting profession
and the standard-setting bodies that regulate the practice of the accountancy
profession.

Learning Objectives:
At the end of the lecture, the students will be able:
 To define accounting
 To identify the overall objective of accounting
 To discuss the practice of the accountancy profession in the Philippines
 To explain the Continuing Professional Development in the field of accounting
 To discuss the meaning of Generally Accepted Accounting Principles
 To identify the standard-setting body in the Philippines

PRE-ACTIVITY
Answer the following questions and try to reflect on them.
1. What made you choose the accountancy program?
2. What are your plans after you graduate from this program?
3. What job do you aspire to have in the future?
PRESENTATION OF CONTENTS
DEFINITION
There are three commonly accepted definitions of accounting.
a. Accounting Standards Council (ASC)
Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities, that is
intended to be useful in making economic decisions.

b. American Institute of Certified Public Accountants (AICPA)

Accounting is 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 a financial character, and interpreting the results
thereof.

c. American Accounting Association (AAA)

Accounting is the process of identifying, measuring, and communicating
economic information to permit informed judgment and decisions by users
of the information.

OVERALL OBJECTIVE
The overall objective of accounting is to provide quantitative financial
information about a business that is useful to statement users, particularly owners and
creditors in making economic decisions. This purpose includes providing information
that can be used in evaluating management’s effectiveness in fulfilling stewardship
and other managerial responsibilities.
An accountant's primary task is to supply financial information so that the
statement users could make an informed judgment and better decision. The essence
of accounting is decision usefulness. Investors and other users are interested in
financial accounting information necessary in making important and significant
economic decisions.
The following important points made in the definitions of accounting should be
noted:
1. Accounting is about quantitative information.
2. The information is likely to be financial in nature, which means it has
something to do with finances or in simple terms, money.
3. The information should be useful in decision-making
The definition that has stood the test of time is the definition given by the
American Accounting Association. This definition states the very purpose of
accounting is to provide quantitative information to be useful in making economic
decisions. The definition also states that accounting has a number of components,
namely:
a. Identifying as the analytical component.
b. Measuring as the technical component.
c. Communicating as the formal component.
 Identifying
This accounting process involves the recognition or non-recognition of business
activities as “accountable events”.
Recognition refers to the process of including the effects of accountable event
in the statement of financial position or statement of comprehensive income through a
journal entry.
Not all business activities are accountable. An event is accountable or
quantifiable when it has an effect on assets, liabilities, and equity. In other words, the
subject matter of accounting is the economic activity or the measurement of economic
resources and economic obligations.
 Economic Activities
The economic activities of an entity are referred to as transactions that
may be classified as external and internal.
External transactions are those economic events involving one entity
and another entity.
 Types of External Transactions
i. Exchange (reciprocal transfer) – an event wherein there is a
reciprocal giving or receiving of economic resources or
discharging of economic obligations between an entity and an
external party.
ii. Non-reciprocal transfer – a one-way transaction in which the
party giving something does not receive anything.
iii. External event other than transfer – an event that involves
changes in the economic resources or obligations of an entity
caused by an external party or source but does not involve
transfers of resources and obligations.
Internal transactions are those involving the entity only.
 Types of Internal Transactions
i. Production – the process by which resources are transformed
into finished goods.
ii. Casualty – an unanticipated loss from disasters or other
fortuitous events.
External Transactions Internal Transactions
Purchase of goods from a supplier Production of goods
Borrowing money from a bank Casualty loss
Sale of goods to a customer Sale of goods to branch office
Payment of salaries of employees
Payment of taxes to the government
Payment of debt to creditors
Donations
Obsolescence
Changes in fait value and price levels
 Non-accountable events are not recognized but disclosed only in the notes if
they have accounting relevance. They may also be recorded through a memorandum
entry.
 Measuring
This accounting process is the assigning of peso amounts to accountable
economic transactions and events. Several measurement bases are used in
accounting which includes, but are not limited to, historical cost, fair value, present
value, realizable value, current cost, and sometimes, inflation-adjusted cost. The most
commonly used is historical cost. This is usually combined with other measurement
bases.
If accounting information is to be useful, it must be expressed in terms of a
common financial denominator. As in our case, the Philippine peso is the unit of
measuring accountable economic transactions. Financial statements without
monetary amounts would be largely unintelligible or incomprehensible.

 Communicating
This is the process of preparing and distributing accounting reports to potential
users of accounting information. It also involves interpreting the significance of the
processed information. This process is the reason why accounting has been called
“the universal language of business.”
Implicit in the communication process is the recording, classifying, and
summarizing aspects of accounting.
1. Recording
Recording or journalizing is the process of systematically maintaining a
record of all economic business transactions after they have been identified and
measured.
2. Classifying
Classifying is the sorting of similar and interrelated economic
transactions into their respective classes. This is accomplished by posting to
the ledger. A ledger is a group of accounts that are systematically categorized
into asset accounts, liability accounts, equity accounts, revenue accounts, and
expense accounts.
3. Summarizing
This is the preparation of financial statements which include the
statement of financial position, income statement, statement of comprehensive
income, statement of changes in equity, and statement of cash flows.
Accounting is also an information system that measures business activities,
processes information into reports, and communicates the reports to decision-makers.
A key product of this information system is a set of financial statements – the
documents that report financial information about an entity to decision-makers.
Financial reports tell us how well an entity is performing in terms of profit and loss
and where it stands in financial terms. The essence of accounting is decision-
usefulness. An accountant’s primary task is to supply financial information so that
the statement users could make informed judgments and better decisions.
 Bookkeeping refers to the process of recording the accounts or transactions of
an entity. It normally ends with the preparation of the trial balance. Unlike accounting,
bookkeeping does not require the interpretation of the significance of the processed
information.

THE ACCOUNTANCY PROFESSION

At present, Republic Act No. 9298 is the law regulating the practice of
accountancy in the Philippines. This law is known as the Philippine Accountancy
Act of 2004. Accountancy has developed as a profession attaining a status equivalent
to that of law and medicine.
In the Philippines, to qualify to practice the accountancy profession, a person
must finish a degree in Bachelor of Science in Accountancy and pass a very difficult
government examination given by the Board of Accountancy. The Board of
Accountancy is the body authorized by law to promulgate rules and regulations
affecting the practice of the accountancy profession in the Philippines. It is also
responsible for preparing and grading the Philippine CPA examination.

Limitations of the Practice of Public Accountancy

 Single practitioners and partnerships for the practice of public accountancy shall
be registered Certified Public Accountants in the Philippines.
 A Certificate of Accreditation shall be issued to Certified Public Accountants in
public practice only upon showing in accordance with rules and regulations
promulgated by the Board of Accountancy and approved by the Professional
Regulation Commission that such registrant has acquired a minimum of three
years of meaningful experience in any of the areas of public practice including
taxation.
 Securities and Exchange Commission shall not register any corporation organized
for the practice of public accountancy.
Accreditation to Practice Public Accountancy
Certified Public Accountants, firms, and partnerships of Certified Public
Accountants, including partners and staff members thereof, are required to register
with the Board of Accountancy and Professional Regulation Commission for the
practice of public accountancy. The Professional Regulation Commission upon
favorable recommendation of the Board of Accountancy shall issue the Certificate of
Registration to practice public accountancy which shall be valid for 3 years and
renewable every 3 years upon payment of required fees.
Scope of the Accountancy Profession
Certified Public Accountants generally practice their profession in three main areas
namely public accounting, private accounting, and government accounting.
1. Public Accounting
The field of public accounting or public accountancy is composed of
individual practitioners, small accounting firms, and large multinational
organizations that render independent and expert financial services to the
public.
Public accountants collect professional fees for their services, much the
same as lawyers and doctors do.
 Public accountants usually offer three kinds of services, namely auditing,
taxation, and management advisory services.
 Auditing
Auditing has traditionally been the primary service offered by most
public accounting practitioners. Auditing, or specifically external auditing,
is the examination of financial statements by an independent certified
public accountant for the purpose of expressing an opinion as to the
fairness with which the financial statements are prepared.
 Taxation Service
This area includes the preparation of annual income tax returns
and the determination of tax consequences of certain proposed business
endeavors. The CPA not infrequently represents the client in tax
investigations. To offer this service effectively and efficiently, the public
accountant must be thoroughly familiar with the tax laws and regulations
and updated with changes in taxation law and court cases concerned
with interpreting taxation law.
 Management Advisory Services
This area has become increasingly important in recent years,
although audit and tax services are undoubtedly the mainstays of public
accountants.
The term "management advisory services" has no precise
coverage but is used generally to refer to services to clients on matters
of accounting, finance, business policies organization procedures,
product costs, distribution, and many other phases of business conduct
and operations. Specifically, management advisory services include
advice on the installation of computer systems, quality control,
installation and modification of accounting systems, budgeting,
forecasting, design or modification of retirement plans, and even entity
mergers and takeovers.
2. Private Accounting
Many Certified Public Accountants are employed in business entities in
various capacities as accounting staff, chief accountant, internal auditors, and
controllers. The highest accounting officer in an entity is known as the
controller.
The major objective of the private accountant is to assist management
in planning and controlling the entity's operations.
Private accounting includes maintaining records, producing financial
reports, preparing budgets, and controlling and allocating the resources of the
entity. The private accountant has also the responsibility for the determination
of the various taxes the entity is obliged to pay.
3. Government Accounting
Government accounting encompasses the process of analyzing,
classifying, summarizing, and communicating all transactions involving the
receipt and disposition of government funds and property and interpreting the
results thereof.
Sectors of the Profession
A further step was taken when the Accountancy Act of 2004 or Republic Act
No. 9298 and its Implementing Rules and Regulations came into form. The law
formally recognized the four sectors of the accountancy profession, namely
Commerce and Industry, Public Practice, Government, and Education/Academe.
1. Commerce and Industry
This sector involves CPAs practicing their profession in the area of private
accounting in a position that involves decision-making requiring professional
knowledge in the science of accounting and such position requires that the holder,
therefore, must be a certified public accountant.
2. Public Practice
This sector involves CPAs practicing their profession in the area of public
accounting, rendering accounting or audit services to more than one client on a
fee basis.
3. Government
This sector involves CPAs practicing their profession in the area of
government accounting, appointment in accounting professional group in the
government or in a government-owned and/or controlled corporation, including
those performing propriety functions, where decision-making requires professional
knowledge or where civil service eligibility as a certified public accountant is a
prerequisite.
4. Education/Academe
This sector includes CPAs who work for a private and public educational
institutions for instruction or teaching and research functions.

CONTINUING PROFESSIONAL DEVELOPMENT

All Certified Public Accountants shall abide by the requirements, rules, and
regulations on continuing professional development to be promulgated by the Board
of Accountancy, subject to the approval of the Professional Regulation Commission,
in coordination with the accredited national professional organization of certified public
accountants or any duly accredited educational institutions.
Continuing professional development refers to the inculcation and acquisition
of advanced knowledge, skill proficiency, and ethical and moral values after the initial
registration of a Certified Public Accountant for assimilation into professions, practice,
and lifelong learning. Continuing professional development raises and enhances the
technical skill and competence of the Certified Public Accountant.
CPD Credit Units
The CPD credit units refer to the CPD credit hours required for the renewal of
CPA license and accreditation to practice the accountancy profession every three
years.
Under current circumstances, the required number of units for renewal of
license is 15 CPD units and 120 CPD units for renewal of accreditation.
Excess credit units earned shall not be carried over to the next three-year
period, except credit units earned for masteral and doctoral degrees. It is to be
emphasized that Continuing Professional Development has become mandatory for
Certified Public Accountants. Continuing Professional Development is required for the
renewal of CPA license and accreditation.
Exemption from CPD
A CPA shall be permanently exempted from CPD requirements upon reaching
the age of 65 years. However, this exemption applied only to the renewal of CPA
license and not for the purpose of accreditation to practice the accountancy
Profession.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Accounting has evolved through time changing with the needs of society. As
new types of transactions occur in trade and commerce, accountants develop rules
and procedures for recording them. These accounting rules, procedures, and practices
came to be known as generally accepted accounting principles or simply GAAP.
Generally accepted accounting principles are conventional, meaning, they
become generally accepted by agreement often tacit agreement rather than by formal
derivation from a set of postulates and basic concepts. The principles have developed
on the basis of experience, reason, custom, usage, and practical necessity.
Simply stated, generally accepted accounting Principles represent the "rules,
procedures, practice and standards followed in the preparation and presentation of
financial statements."
Generally accepted accounting principles are like laws that must be followed in
financial reporting.
The process of establishing GAAP is a social process that incorporates political
actions of various interested user groups as well as professional judgment, logic, and
research.

ACCOUNTING STANDARDS
The Philippine Financial Reporting Standards (PFRSs) represents the
generally accepted accounting principles (GAAP) in the Philippines.
The Philippine Financial Reporting Standards collectively include all of the
following:
a. Philippine Financial Reporting Standards which correspond to International
Financial Reporting Standards.
b. Philippine Accounting Standards which correspond to International Accounting
Standards.
c. Philippine Interpretations which correspond to Interpretations of the IFRIC and
the Standing Interpretations Committee, and Interpretations developed by the
Philippine Interpretations Committee.
Purpose
For financial statements to be useful, they should be prepared using reporting
standards that are generally acceptable. Otherwise, each entity would have developed
its own standards. If that is the case, every entity may just present any asset or income
it wants and omit liabilities or expense it does not want. Financial statements would
not be comparable, the risk of fraudulent reporting is heightened, and economic
decisions based on these financial statements would be grossly incorrect.
The overall purpose of accounting standards is to identify proper accounting
practices for the preparation and presentation of financial statements. Accounting
standards create a common understanding between preparers and users of financial
statements particularly the measurement, of assets and liabilities.
A set of high-quality accounting standards is a necessity to ensure
comparability and uniformity in financial statements based on the same financial
information.

ACCOUNTING STANDARD-SETTING BODY

 Financial Reporting Standards Council
In the Philippines, the development of generally accepted accounting
principles is formalized initially through the creation of the Accounting
Standards Council or ASC. The Financial Reporting Standards Council or
FRSC now replaces the Accounting Standards Council.
The FRSC is the accounting standard-setting body created by the
Professional Regulation Commission upon recommendation of the Board of
Accountancy to assist the Board of Accountancy in carrying out its powers and
functions provided under R.A. Act No. 9298.
The main function is to establish and improve accounting standards that will
be generally accepted in the Philippines.
The accounting standards promulgated by the Financial Reporting
Standards Council constitute the "highest hierarchy" of generally accepted
accounting principles in the Philippines.

 Philippine Interpretation Committee

The Philippine Interpretations Committee or PIC was formed by the
FRSC in August 2006 and has replaced the Interpretations Committee or IC
formed by the Accounting Standards Council in May 2000. The role of the PIC
is to prepare interpretations of PFRS for approval by the FRSC and in the
context of the Conceptual Framework, to provide timely guidance on financial
reporting issues not specifically addressed in the current PFRS. In other words,
interpretations are intended to give "authoritative guidance" on issues that are
likely to receive divergent or unacceptable treatment because the standards do
not provide specific and clear-cut rules and guidelines. The counterpart of the
PIC in the United Kingdom is the International Financial Reporting
Interpretations Committee or IFRIC which has already replaced the Standing
Interpretations Committee or SIC.

 International Accounting Standards Committee

The International Accounting Standards Committee is an independent
private sector body, with the objective of achieving uniformity in the accounting
principles which are used by businesses and other organizations for financial
reporting around the world.
 It was formed in June 1973 through an agreement made by professional,
accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico,
the Netherlands, the United Kingdom and Ireland, and the United States of
America. The IASC is headquartered in London.
Objectives:
a) To formulate and publish in the public interest accounting
standards to be observed in the presentation of financial statements to
promote their worldwide acceptance and observance.
b) To work generally for the improvement and harmonization of
regulations, accounting standards and procedures relating to the
presentation of financial statements.

 International Accounting Standards Board

The International Accounting Standards Board now replaces the
International Accounting Standards Committee. It was established in April 1,
2001.
The IASB publishes its standards in a series of pronouncements called.
"International Financial Reporting Standards" or IFRS. However, it has adopted
the body of standards issued by the IASC.

ACCREDITED PROFESSIONAL ORGANIZATION

The Philippine Institute of Certified Accountants or PICPA is the accredited
professional organization (APO) of CPAs by the Professional Regulation Commission
(PRC).

References:
Valix, C., et. al. (2020). Conceptual Framework and Accounting Standards. Manila:
GIC Enterprises & Co., Inc.

Zeus Vernon Millan. Conceptual Framework and Accounting Standards.

ASSESSMENT

Exercise 1.1

Determine whether the following statements are true or false.

1. All events and transactions of an entity are recognized in the books of
accounts.
2. CPAs are allowed to establish a corporation for the practice of the profession.
3. Like accounting, bookkeeping also requires the interpretation of the
significance of the processed information.
4. Accounting is about quantitative information.
5. Republic Act No. 9298 is the law regulating the practice of accountancy in the
Philippines
6. The overall objective of accounting is to provide quantitative financial
information about a business that is useful to statement users in making
economic decisions.
7. The most commonly used measurement basis is the historical cost.
8. The required number of units for renewal of a license is 120 CPD units and 15
CPD units for renewal of accreditation.
9. An event is accountable when it has an effect on the three elements of the
balance sheet.
10. Generally accepted accounting principles are like laws that must be followed in
financial reporting.

Exercise 1.2
Identify the terminologies best described by the following statements.
1. Transactions that only involve one entity.
2. Refers to the process of including the effects of accountable
events in the statement of financial position or statement of comprehensive income
through a journal entry.
3. This sector includes CPAs who work for private and public
educational institutions for instruction or teaching and research functions.
4. It is the process of identifying, measuring, and communicating
economic information to permit informed judgment and decisions by users of the
information.
5. It is the accounting standard-setting body created by the
Professional Regulation Commission upon the recommendation of the Board of
Accountancy.
6. It is the accredited professional organization (APO) of CPAs
by the Professional Regulation Commission (PRC).
7. This represents the generally accepted accounting principles
in the Philippines.
8. It is the sorting of similar and interrelated economic
transactions into their respective classes.
9. The highest accounting officer in an entity.
10. Refers to the process of recording the accounts or
transactions of an entity.
ANSWER KEY

Exercise 1.1
1. False
2. False
3. False
4. True
5. True
6. True
7. True
8. False
9. True
10. True

Exercise 1.2
1. Internal Transactions
2. Recognition
3. Education or academe sector
4. Accounting
5. Financial reporting Standards Council
6. Philippine Institute of Certified Accountants or PICPA
7. Philippine Financial Reporting Standards (PFRSs)
8. Classifying
9. Controller
10. Bookkeeping