Accounting is the process of identifying, measuring and communicating economic information

to permit informed judgment and decision by users of the information.

Financial Statements are documents that report financial information about an entity to
decision makers.

Components of Accounting
Identifying- it is the recognition of business activities as accountable events.
An event is accountable when it has an effect on assets, liabilities and equity
Economic activities of an entity are referred to as transactions.
Internal Transactions are economic events involving the entity only.
External Transactions are economic events involving one entity and another
entity.

Measuring- it is the assigning of peso amounts to the accountable economic transactions and events.
The measurement bases are historical cost, current cost, realizable value and present value.

Communicating- it is the process of preparing and distributing accounting reports to potential users of
accounting information.

Recording- is the process of systematically maintaining a record of all economic business
transactions after they have been identified and measured.
Classifying- is the sorting of similar and interrelated economic transactions into their respective
classes.
Summarizing- is the preparation of financial statements.

The Accountancy Profession
Republic Act no. 9298- Philippine Accountancy Act of 2004

Board of Accountancy- the body authorized by law to promulgate rules and regulations affecting the
practice of accountancy profession in the Philippines.

Limitation 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.

The SEC shall not register any corporation organized for the practice of public accountancy.

Public Accounting

Auditing- it is the examination of financial statements by independent CPA for the purpose of
expressing an opinion as to the fairness with which the financial statements are prepared.
Taxation Service- includes the preparation of annual income tax returns and determination of
tax consequences of certain proposed business endeavors.
Management Advisory Services- it include advice on installation of computer system, quality
control, installation and modification of accounting system, budgeting, forecasting, design or
modification of retirement plans and entity mergers and takeovers.

Private Accounting- includes maintaining the records, producing the financial reports, preparing the
budgets and controlling and allocating the resources of the entity.

Government Accounting- its focus is the custody and administration of public funds.


Generally Accepted Accounting Principles
GAAP represent the rules, procedures, practice and standards followed in the preparation and
presentation of financial statements.

Financial Reporting Standards Council
The FRSC is the accounting standard setting body created by the PRC upon recommendation of
the BOA to assist the BOA in carrying out its powers and functions provided under R.A Act no. 9298.

The approved statements of the FRSC are known as Philippine Accounting Standards (PAS) and
Philippine Financial Reporting Standards (PFRS).

Philippine Interpretations Committee
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 current PFRS.

International Accounting Standards Board
The IASB publishes its standards in a series of pronouncements called International Financial Reporting
Standards (IFRS).

The IFRS is a global phenomenon intended to bring about greater transparency and a higher degree of
comparability in financial reporting.

Philippine Financial Reporting Standards collectively include all of the following:
a. PFRS which correspond to IFRS.
b. PAS which correspond to IAS.
c. Philippine Interpretations which correspond to Interpretations of IFRIC and the Standing
Interpretations Committee and Interpretations developed by PIC.

Underlying Assumptions
Accounting assumptions or postulates are the fundamental premises on which the accounting process
is based.
Going Concern- the financial statements are normally prepared on the assumption that the entity will
continue in operations for the foreseeable future.

Accounting entity- under this assumption, the entity is separate from the owners, managers and
employees who constitute the entity.

Time Period- it requires that the indefinite life of an entity is subdivided into time periods which are
usually of equal length for the purpose of preparing financial reports.

Accounting period is one year or a period of twelve months
Calendar year- a twelve-month period that ends on December 31.
Natural Business year- is a twelve-month period that ends on any month when the
business is at the lowest or experiencing slack season.

Conceptual Framework
It is an attempt to provide an overall theoretical foundation for accounting which will guide standard-
setters, preparers and users of financial information in the preparation and presentation of statements.

In the absence of a standard or an interpretation that specifically applies to a transaction, management
shall consider the applicability of the Conceptual Framework in developing and applying an accounting
policy that results in information that is relevant and reliable.

Financial Reporting
It is the provision of financial information about an entity to external users that is useful to them in
making economic decisions and for assessing the effectiveness of the entitys management.
Specific Objectives:
a. To provide information useful in making decisions about providing resources to the entity.
b. To provide information useful in assessing the prospects of future net cash flows to the
entity.
c. To provide information about entity resources, claims and changes in resources and claims.

Accrual Accounting means that income is recognized when earned regardless of when received and
expense is recognized when incurred regardless of when paid.

Qualitative Characteristics
Fundamental Qualitative Characteristics
Relevance- it is the capacity of the information to influence a decision.
Ingredients of relevance:
a. Predictive Value- financial information has predictive value when it can help users
increase the likelihood of accurately predicting the outcome of events.
b. Confirmatory Value- financial information has confirmatory value when it enables
users to confirm or correct earlier expectations.

Materiality- a sub quality of relevance based on the nature or magnitude or both of the
items to which the information relates.
Information is material if its omission could influence the economic decision that the
users make on the basis of the financial information about an entity.

Faithful Representation- it means that the actual effects of the transactions shall be properly
accounted for and reported in the financial statements.
Ingredients of Faithful representation:
a. Completeness- requires that relevant information should be presented in a way that
facilitates understanding and avoids erroneous implication.
b. Neutrality- the information contained in the financial statements must be free from
bias.
c. Free from error- there are no errors or omissions in the description of the
phenomenon or transaction, and the process used to produce the reported
information has been selected and applied with no errors in the process.

Conservatism- in case of doubt, record any loss and do not record any gain.
Prudence- it is the desire to exercise care and caution when dealing with the
uncertainties in the measurement process such that assets or income are not overstated
and liabilities or expenses are not understated.

Enhancing Qualitative Characteristics
Comparability- it is the enhancing qualitative characteristic that enables users to identify and
understand similarities and dissimilarities among items.

Intra comparability- quality of information that allows comparisons within a single
entity from one accounting period to the next.
Inter comparability- quality of information that allows comparisons between two or
more entities engaged in the same industry.

Consistency- 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.
However, if the change would result to more useful and meaningful information, then
such change shall be made.

Understandability- it requires that financial information must be comprehensible if it is to be
most useful.

Verifiability- it means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is a faithful
representation.

Direct Verification- verifying an amount or other representation through direct
observation, e.g., by counting cash.
Indirect Verification- checking the inputs to a model, formula or other technique and
recalculating the inputs using the same methodology.
Timeliness- means that financial information must be available early enough when a decision is
to be made.

Cost constraint on useful information
The benefit derived from the information should exceed the cost incurred in obtaining the
information.

Elements of Financial Statements

Related to the measurement of financial position:
Assets- resources controlled by the entity as a result of past transactions or events and from which
future economic benefits are expected to flow to the entity.
Liabilities- present obligations of the entity arising from past transactions or events the settlement of
which is expected to result in an outflow from the entity of resources embodying economic benefits.
Equity- residual interest in the assets of the entity after deducting all of its liabilities.

Related to the measurement of financial performance:
Income- increase in economic benefit during the accounting period in the form of increase in asset or
decrease in liability that results in increase in equity, other than contribution from equity participants.
Expense- decrease in economic benefit during the accounting period in the form of a decrease in the
asset or increase in liability that results in decrease in equity, other than distribution to equity
participants.

Recognition of Elements

Asset Recognition Principle
An asset is recognized when it is probable that future economic benefits will flow to the entity
and the asset has a value that can be measured reliably.

Cost Principle- this principle requires that assets should be recorded initially at original
acquisition cost.
In a cash transaction, cost is equivalent to the cash payment.
In a noncash or an exchange transaction, the cost is equal to the fair value of the asset
given or fair value of the asset received, whichever is clearly evident.
In the absence of fair value, the cost is equal to the carrying amount of the asset given.

Liability Recognition Principle
A liability is recognized when it is probable that an outflow of resources embodying economic
benefits will be required for the settlement of a present obligation and the amount of the obligation
can be measured reliably.