Chapter 1: THE ACCOUNTANCY PROFESSION • Current Value – includes fair value,

value in use, fulfillment value and

ACCOUNTING current cost.

Accounting Standards Council definition of accounting: 3. COMMUNICATING as the Formal Component

➢ Accounting is a service activity. The accounting • Preparing and distributing accounting
function is to provide quantitative information, reports to potential users of accounting
primarily financial in nature, about economic information.
entities, that is intended to be useful in making
economic decisions. Accounting is the “Universal Language of Business”

Committee on Accounting Terminology of AICPA Recording/Journalizing – process of systematically

definition of accounting: maintaining a record of all business transactions after
➢ Accounting is the art of recording, classifying and being identified and measured.
summarizing in a significant manner in terms of
money, transactions and events which are in part Classifying – sorting of similar and interrelated economic
at least of a financial character and interpreting transactions into their respective classes. Thus,
the results thereof. accomplished by posting to the ledger (group of accounts
which are systematically categorized).
American Accounting Association in its Statement of
Basic Accounting Theory definition of accounting: Summarizing – preparation of financial statements.
➢ Accounting is the process of identifying,
measuring and communicating economic FINANCIAL STATEMENTS
information to permit informed judgement and ➢ Statement of Financial Position
decision by users of information. ➢ Statement of Comprehensive Income
➢ Statement of Cash Flows/
American Accounting Association definition of ➢ Statement of Changes in Equity
accounting that has stood the test of time: ➢ Notes to Financial Statements
➢ The very purpose of accounting is to provide
quantitative information to be useful in making THE ACCOUNTANCY PROFESSION
economic decisions.
Republic Act No. 9298 – Philippine Accountancy Act of
ACCOUNTING COMPONENTS 2004
• law regulating the practice of accountancy in the
1. IDENTIFYING as the Analytical Component Philippines.
• Recognition or nonrecognition of
business activities as “accountable” Republic Act No. 10912 – Continuing Professional
events. Development (CPD) Act of 2016
• An event is accountable or quantifiable • law mandating and strengthening the continuing
if it affects the assets, liabilities and professional development program for all
equity. regulated professions, including accountancy
• Only economic activities (may be profession.
external or internal transactions) are • Acquisition of advanced knowledge, skill and
recognized in accounting. proficiency.
• Raises and enhances the technical skill and
2. MEASURING as the Technical Component competence of CPA’s.
• Assigning of peso amounts to
accountable economic events.
• Historical Cost – original acquisition cost
and the most common measure of
financial transactions.
CPD CREDIT UNITS c. GOVERNMENT ACCOUNTING
• Renewal is every 3 years • Accounting of all transactions
• Under BOA, all CPA’s regardless of are of involving the receipt and
sector/practice should comply with 120 CPD disposition of government funds
CREDIT UNITS (mandatory), for accreditation of and property and interpreting
a CPA to practice the profession results thereof.
• For renewal of license, ONLY 15 CPD CREDIT • Focus is the custody and
UNITS administration of public funds.
• 65 years old are EXEMPTED for renewals • Bureau of Internal Revenue (BIR)
Commission on Audit (COA)
Board of Accountancy (BOA) Securities and Exchange
• the body authorized by law to promulgate rules Commission (SEC)
and regulations affecting the practice of the Bangko Sentral ng Pilipinas (BSP)
accountancy profession in the Philippines.
• In charge of preparing and grading PH CPA Definition of Terms:
examination held every May and October each Auditing – starts after preparation of FS.
year. Bookkeeping – procedural, concerned with development
and maintenance of accounting records. The “how” of
Limitations of Public Practice accounting.
• Should be passer of CPALE and be registered Accountancy – the profession of accounting practice.
CPA’s in the Philippines. Accounting – reference only to particular field of
• Minimum of three (3) years meaningful accountancy.
experience Financial Accounting - recording business transactions
• Involved agencies are PRC & BOA only. and preparation of financial statements.
Managerial Accounting – accumulation and preparation
Certified Public Accountants generally practice their of financial reports for internal users only, it emphasizes
profession in three main areas, namely: developing accounting information for use within the
entity only.
a. PUBLIC ACCOUNTING – renders independent
and expert financial service to the public. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
➢ AUDITING – examination of FS by • Accounting rules, procedures and practices
independent CPA for opinions as to • Represent the rules, procedures, practice, and
fairness. standards followed in the preparation and
➢ TAXATION – includes preparation of presentation of financial statements.
annual tax returns and determination of • Principles have developed on the basis of
tax consequences. experience, reason, custom, usage, and practical
➢ MANAGEMENT ADVISORY SERVICES – necessity.
offers advices on installation of • Overall Purpose of Accounting Standards:
computer system, quality control, o The overall purpose of accounting
installation and modification of standards is to identify proper
accounting system, budgeting, forward accounting practices for the
planning and forecasting. preparation and presentation of
financial statements.
b. PRIVATE ACCOUNTING – CPAs employed in ➢ Formally GAAP – Now Philippine Accounting
business entities, major objective is to assist Standards (PAS)/ Philippine Financial Reporting
management planning and controlling Standards (PFRS)
operations
➢ Accounting Staff
➢ Chief Accountant
➢ Internal Auditor
➢ Controller (highest accounting officer)
 Financial Reporting Standards Council (FRSC) pronouncements continue to be
promulgates PAS/PFRS designated as International Accounting
Standard (IAS)
Composition of FRSC (composed of 15 members) o Declared that merits of proposed
Board of Accountancy (BOA) 1 standards are assessed from a position
Securities and Exchange Commission (SEC) 1 if neutrality
Bangko Sentral ng Pilipinas (BSP) 1
Bureau of International Revenue (BIR) 1 ➢ In the past years, most PAS are based on
Commission on Audit (COA) 1 American accounting standards. At present, the
Major organization of preparers and users FRSC has adopted entirely all IAS and IFRS.
of financial statements –
Financial Executive Institute of
➢ Philippine Financial Reporting Standards (PFRS)
the Philippines (FINEX) 1
a. PFRS which correspond to IFRS
Accredited national professional organization of
CPAs: 2 The PFRS are numbered the same as their
Public Practice 2 counterpart in IFRS
Commerce and Industry 2
Academe or Education 2 b. PAS which correspond to IAS
Government
14 The PAS are numbered the same as their
Total counterpart in IAS

+ The Chairman who is presently a Senior c. Philippine Interpretations which correspond

Accounting Practitioner
to Interpretations of the IFRIC and
*They shall have a term of 3 years renewable for another
Interpretations developed by the PIC
term
An accountant’s primary task is to supply financial
➢ The Philippine Interpretations Committee (PIC)
information so that the statement users could make
was formed by the FRSC in August 2006 and has
informed judgement and better decision.
replaced the Interpretations Committee (IC)
formed by ASC in May 2000.
➢ PIC prepares interpretations of PFRS for approval
by the FRSC.
➢ International Accounting Standards Committee
(IASC)
o counterpart of PIC in the International
Accounting Standards Board (IASB) is
the International Financial Reporting
Interpretations Committee (IFRIC)
o private sector body, with the objective
of achieving uniformity in accounting
principles around the world.
o Formed in June 1973

➢ International Accounting Standards Board

(IASB)
o Replaced the International Accounting
Standards Committee (IASC)
o The IASB publishes standards in a series
of pronouncements called International
Financial Reporting Standards (IFRS)
o However, the IASB has adopted the
body standards issued by the IASC which
Chapter 2: OBJECTIVES OF FINANCIAL REPORTING AUTHORITATIVE STATUS
• Conceptual Framework is not an accounting
History of the Framework standard.
➢ April 1989 - Framework for the preparation and • If there is a standard or an interpretation that
presentation of financial statements (the specifically applies to a transaction, the standard
Framework) was approved by IASC Board or interpretation overrides the Conceptual
➢ July 1989 - Framework was published Framework.
➢ April 2001 - Framework adopted by the IASB • In the absence of a standard or an interpretation
➢ September 2010 - Conceptual Framework for that specifically applies to a transaction,
Financial Reporting 2010 approved by the IASB management shall consider the applicability of
➢ March 2018 - Conceptual Framework for the Conceptual Framework in developing and
Financial Reporting 2018 (the Framework) applying an accounting policy that results in
published information that is relevant and reliable.
• Nothing in the CONCEPTUAL FRAMEWORK
The Conceptual Framework for Financial Reporting is overrides any specific IFRS, ACCOUNTITNG
a complete, comprehensive and single document STANDARDS ALWAYS PREVAIL.
promulgated by the IASB
USERS OF FINANCIAL INFORMATION/TARGET USERS
CONCEPTUAL FRAMEWORK defined
• It is a summary of the terms and concepts that PRIMARY USERS
underlie the preparation and presentation of Provides resources to the entity. Parties to whom
financial statements for external users. general purpose financial reports are primary
• Describes the concepts for general purpose directed.
financial reporting Existing and potential investors
• Provide an overall theoretical foundation for - Concerned with the risk inherent in and
accounting. returned provided by their investment.
Conceptual Framework provides the foundation for Lenders and other creditors
standards that: - Ae interested in information which
a) Contribute to transparency by enhancing the enables them to determine whether
international comparability and quality of their loans, interests, and other
information. amounts owed into them will be paid
b) Strengthen accountability by reducing the when due.
information gap between the providers of capital
and the people to whom they have entrusted SECONDARY/OTHER USERS
their money. Users of financial information other than existing
c) Contribute to economic efficiency by helping the and potential investors, lenders, and other creditors.
investors or the users o the financial statement Thus, reports are not primarily directed to them.
to identify opportunities and risks across the Employees
world. - Interested in the information on the
stability and profitability of the entity
PURPOSES OF REVISED CONCEPTUAL FRAMEWORK for their benefits.
a) To assist the International Accounting Standards Customers
Board (IASB) to develop IFRS based on consistent - Have interest in information about the
concepts. continuance of an entity.
b) To assist preparers of financial statements to Government agencies
develop consistent accounting policy. - Interested in the allocation of resources
c) To assist preparers of financial statements to and activities of the entity.
develop accounting policy when a standard Public
allows a choice of an accounting policy. - Interested in the substantial
d) To assist all parties to understand and interpret contribution to the local economy
the IFRS Standards. (number of employment and patronage
of local suppliers).
SCOPE OF REVISED CONCEPTUAL FRAMEWORK • Consequently, financial reporting should provide
1. Objective of financial reporting information useful in assessing the amount,
2. Qualitative characteristics of useful financial timing and uncertainty of prospects for future net
information cash inflows to the entity.
3. Financial statements and reporting entity
4. Elements of financial statements ECONOMIC RESOURCES AND CLAIMS
5. Recognition and derecognition
6. Measurement Financial Position – information about the
7. Presentation and disclosure entity’s economic resources (asses) and the claims
8. Concepts of capital and capital maintenance (liability & equity) against reporting entity.
Otherwise stated, information about financial
OBJECTIVES OF FINANCIAL REPORTING position can help users to assess the entities liquidity,
(Forms the foundation of the Conceptual Framework) solvency, and the need for additional financing.
➢ The overall objective of financial reporting is to Liquidity – the availability of cash in the
provide financial information useful for decision near future to cover currently maturing
making. obligations.
➢ Financial reporting is the provision of financial Solvency – the availability of cash over a
information about an entity to external users long-term to meet financial
that is useful to them in making economic commitments when they fall due.
decisions and for assessing the effectiveness of
the entity’s management. FINANCIAL PERFORMACE - Comprises revenue, expense
➢ Financial reports also include nonfinancial and net income or loss for a period of time. Thus, it is the
information such as description of major level of income earned by the entity through the efficient
products and a listing of corporate officers and and effective use of its resources.
directors.
USEFULNESS OF FINANCIAL PERFORMANCE
Annual Financial Statements – principal way of a) Information about financial performance helps
providing financial information to external users. users to understand the returns that the entity
has produced on the economic resources.
SPECIFIC OBJECTIVES OF FINANCIAL REPORTING b) Information about the return the entity has
➢ To provide information useful in making produced provides an indication of how well
decisions about providing resources to the entity management has discharged its responsibilities
➢ To provide information useful in assessing the to make efficient and effective of the entity’s
cash flow prospects of the entity economic resources.
➢ To provide information about entity resources, c) Information about past financial information is
claims and changes in resources and claims usually helpful in predicting the future returns on
(refers to assets, liabilities, capital/equity, and the entity’s economic resources.
performance of the entity). d) Information about financial performance during
a period is useful in assessing the entity’s ability
Economic Decisions to generate future cash inflows from operation.
• Investors need general purpose financial reports
in order to enable them in making decisions Accrual Accounting
whether to but, sell, or hold equity investments, • Used to measure financial performance of the
provide/settle loans and other forms of credit. entity.
• Under the accrual basis, the effects of
Assessing Cash Flow Prospects transactions and other events are recognized
• Decision about buying, selling o holding equity when they occur and not as cash is received or
instruments depend on the returns that they paid.
expect from an investment. • Income is recognized when earned regardless of
• Decisions about providing/settling loans and when received and expense is recognized when
other forms of credit depends on principal and incurred regardless of when paid.
interest payments or other returns they expect.
LIMITATIONS OF FINANCIAL REPORTING
a) General purpose financial report do not and
cannot provide all of the information that
existing and potential investors, lenders and
other creditors need.
b) 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) Intended to provide common information to
users and cannot accommodate every request
for information
d) To a large extend, reports are based on estimate
and judgement 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.
Chapter 3: QUALITATIVE CHARACTERISTICS - practical rule in accounting which dictates that
strict adherence to GAAP is not required when
QUALITATIVE CHARACTERISTICS items are not significant enough to affect the
- Are the qualities or attributes that make financial evaluation, decision, and fairness of the financial
accounting information useful to others. statements.
- The objective is to ensure that the information is - The doctrine of convenience
useful to the users in making economic decisions. - A quantitative threshold linked to quantitative
- Classified into fundamental qualitative characteristics of relevance.
characteristics and enhancing qualitative - The relevance of information is affected by its
characteristics. nature and materiality.

FUNDAMENTAL QUALITATIVE CHARACTERISTICS Materiality is a relativity – materiality of an item

- Relates to the contents or substance of financial depends on relative size rather than absolute
information. size. What is material for one entity might be not
- RELEVANCE and FAITHFUL REPRESENTATION for another.
Item Material – an item is material if knowledge
APPLICATION OF QUALITATIVE CHARACTERISTICS of it could reasonably affect or influence the
1. Identify economic phenomenon or transactions economic decision of the primary users of the
that has a potential to be useful. financial statements.
2. Identify the type of information about
phenomenon or transactions that would be most New Definition from the IASB: Information is
relevant and can be faithfully represented. material if the omission, misstatement and
3. Determine whether the information is available. obscuring of the information could reasonably
affect the economic decision of primary users.
RELEVANCE a. Could reasonably be expected to
• Capacity of information to influence a influence/Reasonability
decision. b. Obscuring Information – presentation
• To be relevant, the financial information must of financial information is not readily
be capable of making a difference in decision understood nor clearly expressed.
made by users. Thus, characterized by deliberate
• Information that does not bear on an vagueness, ambiguity and
economic decision is useless. abstruseness.
e.g. Statement of Financial Position – c. Primary Users – include the existing
Financial Position, Income Statement – and potential investors, lenders and
Performance other creditors.

Ingredients of Relevance Factors of Materiality

a. Predictive Value – financial information • Depends on the magnitude and nature of the
can be used as an input to processes financial information.
employed by users to predict future value.
Thus, financial information has predictive Relative Size of an Item – in relation to
value if it can help users accurately predict the total of the group to which the item
outcome of events. belongs is taken into account.
b. Confirmatory Value – financial information
provides feedback about previous Nature of the Item – may be inherently
evaluations. Thus, it enables users confirm material because by its very nature it
or correct earlier expectations. affects economic decision.
o However, information has both
predictive and confirmatory value
because it is interrelated. FAITHFUL REPRESENTATION
• Means that financial reports represent
Materiality economic phenomena or transaction in words
 and numbers. Thus, descriptions and figures ▪ Contingent Gain – is not recognized
must match what really existed. but disclosed only.
• The actual effects of the transactions shall be Expressions of Conservatism
properly accounted. "Anticipate no profit and provide for probable
and measurable loss."
Ingredients of Faithful Representation "In the matter of income recognition, the
a. Completeness – requires that relevant accountant takes the position that no matter
information should be presented in a way how sure the businessman might be in capturing
that facilitates understanding and avoids the bird in the bush, he, the accountant, must see
erroneous implication. Financial it in the hand."
Statements shall be accompanied by notes "Don't count your chicks until the eggs hatch".
to financial statement (notes provide
necessary disclosures by Philippine c. Free from Error – there are no errors or
Financial Reporting Standards). missions in the description of the
o Standard of adequate disclosure / phenomenon or transaction. Thus, an
Principle of full disclosure estimate of an unobservable value cannot
- This results to completeness. be determined to be accurate or inaccurate
- Means that all significant and so this does not mean to be perfectly
relevant information leading to accurate in all respects.
the preparation of FS shall be o Measurement uncertainty – present
clearly reported. during estimations and affects faithful
- Best ascribed by disclosure of representation if the level of
any financial facts significant uncertainty in providing an estimate is
enough to influence the high.
judgement of informed users. o Substance over form – transactions and
events are accounted in accordance
b. Neutrality – neutral depiction is without with their substance and not merely
bias in the preparation or presentation of their legal form.
financial information. Thus, the
information is directed to the common Substance over form is not considered a
needs of many users and not to the separate component of faithful representation
particular needs of specific users. because it would be redundant.
To be neutral is to be fair.
o Prudence – the exercise of care and Faithful Representation inherently represents
caution when dealing with the the substance of an economic phenomenon or
uncertainties in the measurement transaction rather than merely representing the
process such that assets or income are legal form.
not overstated and liabilities or
expenses are not understated. Example of substance over form:
Neutrality is supported by the exercise of An example is when the lessee leased property from
prudence. the lessor The terms of the lease provide that the lease
o Conservatism – is synonymous with transfers ownership of the asset to the lessee by the end of
prudence. This means that when the lease term. In form, the contract is a lease as popularly
alternatives exist, the alternative which understood. But in substance, in reality, if the "transfer of
ownership provision" is to be considered, the real intent of
has the least effect on equity should be
the parties. is an installment purchase of an asset by the
chosen.
lessee from the lessor. Accordingly, the lessee shall record an
“in case of doubt, record any loss and do
acquisition of right of use asset and set up a liability to the
not record any gain”
lessor. The periodic rental is conceived as an installment
▪ Contingent Loss – “provision” if the payment representing interest and principal.
loss is probable and the amount can
be reliably measured.
ENHANCING QUALITATIVE CHARACTERISTICS Thus, it is inappropriate for an entity to leave
- This relates to the presentation or form of the accounting policies unchanged when better and
financial information. acceptable alternatives exist.
- Intended to increase the usefulness of the
financial information that is relevant and 3. UNDERSTANDABILITY
faithfully represented. • Requires that financial information must be
comprehensible or intelligible if it is to be
1. VERIFIABILITY most useful.
• Means that different knowledgeable and • Clear and concise presentation of
independent observers could reach information.
consensus, although not necessarily • This is very essential because a relevant and
complete agreement, that a particular faithfully represented information may
depiction is a faithful representation. prove useless if it is not understood by users.
• Verifiability implies consensus
4. TIMELINESS
Types of Verification • Financial information must be available or
1. Direct Verification – verifying through communicated early enough when a
direct observation. E.g. counting cash decision is to be made.
2. Indirect Verification – checking inputs to • Generally, the older the information, the less
a model, formula, or other technique useful.
and recalculating the inputs using the
same methodology. o Cost constraint on useful information
- Cost is a pervasive constraint on the
2. COMPARABILITY information that can be provided by
• the ability to bring together for the purpose financial reporting
of noting points of likeness and difference. - In other words, the cost constraint is a
• Uniform application of accounting method consideration of the cost incurred in
within an entity (the quality of information generating financial information against
that allows comparisons within a single the benefit to be obtained from having
entity through time or from one accounting the information.
period to the next, also known as horizontal - The benefit derived from the
comparability or intracomparability) or information should exceed the cost
between and across entities (the quality of incurred in obtaining the information.
information that allows comparisons - However, the evaluation of the cost
between two or more entities engaged in constraint is substantially a judgmental
the same industry, also known as process. Assessing whether the cost of
intercomparability or dimensional reporting outweighs or falls short of the
comparability.) benefit is difficult to measure and
becomes a matter of professional
Ingredient of Comparability judgment.
a. Consistency – not the same as
comparability. This refers to the use of
the same method for the same item,
either from period to period within an
entity or in a single period across
entities. Comparability is the goal and
consistency help to achieve the goal. It
is the uniform application of accounting
method from period to period within an
entity.
Chapter 4: FINANCIAL STATEMENTS AND REPORTING Income and expenses = during the reporting
ENTITY UNDERLYING ASSUMPTIONS period

GENERAL OBJECTIVE OF FINANCIAL STATEMENT UNDERLYING ASSUMPTIONS

Financial statements provide information about ➢ Accounting assumptions or accounting postulates
economic resources of the reporting entity, claims are the basic notions or fundamental premises on
against the entity and changes in economic resources which accounting process is based.
and claims. ➢ Serve as the foundation or bedrock of accounting to
Financial statements provide financial information avoid misunderstanding but rather enhance the
about an entity’s assets, liabilities, equity, income and understanding and usefulness of the financial
expenses useful to users of financial information in: statements.
a) Assessing future cash flows to the reporting entity.
b) Assessing management stewardship of the GOING CONCERN (explicit in the conceptual framework)
entity’s economic resources. • The going concern or continuity assumption means
that in the absence of evidence to the contrary, the
The financial information is provided in the following: accounting entity is viewed as continuing operation
1. Statements of Financial Position, by recognizing indefinitely.
assets, liabilities and equity • The going concern postulate is the very foundation
2. Income Statement, by recognizing income and of cost principle. Thus, assets are normally recorded
expenses at cost.
3. Statement of Cash Flows, by recognizing cash flows
from operating, investing and financing activities ENTITY CONCEPT/ACCOUNTING ENTITY
4. Statement of Changes in Equity, by recognizing (implicit in the conceptual framework)
contributions from equity holders and distribution • The entity is separate and distinct from its owners
to equity holders and other business enterprises.
5. Notes to Financial Statement, by recognizing • Accordingly, transactions of the entity shall not be
disclosures required by accounting standards merged with the personal transactions of the
owners.
TYPES OF FINANCIAL STATEMENT • Each business is an independent accounting entity.
1. Consolidated Financial Statements – prepared • When a parent and subsidiary relationship exists,
when the reporting entity comprises both the parent consolidated financial statements are prepared in
and its subsidiaries as a single reporting entity. recognition of single economic/accounting entity.
Parent has the control over the entity.
2. Unconsolidated Financial Statements – prepared PEIODICITY CONCEPT/TIME PERIOD
when the reporting entity is the parent alone. • Concept behind providing financial accounting
3. Combined Financial Statements – prepared when information about economic activities at specific
the reporting entity comprises two or more entities time periods.
that are not linked by a parent and subsidiary • This assumption requires that the indefinite life of an
relationship. entity is subdivided into accounting periods which
are usually of equal length for the purpose of
Reporting Entity preparing financial statements.
• Entity that is required or chooses to prepare • Thus, during the lifetime of an entity, accountants
financial statements. Thus, it is not necessarily a produces financial statements at arbitrary points in
legal entity. time in accordance with periodicity.

Reporting Period MONETARY UNIT

• The period when financial statements are prepared • The financial statements should be stated in terms
for general purpose financial reporting. of a common financial denominator.
• Financial statements must be prepared on an Two Aspects of Monetary Unit:
annual basis or a period of 12 months. 1. Quantifiability Aspect – means that the assets, liabilities, equity,
• Assets, liabilities and equity = end of reporting income and expenses should be stated in terms of a unit.
period 2. Stability of the Peso – purchasing power of peso is stable and that
its instability is insignificant.