FRAMEWORK OF ACCOUNTING

ACCOUNTING is a
service activity.

• To provide quantitative
information, primarily
financial in nature, about
economic entities, that is
needed to be useful in making
economic decision.
What are the three important activities in
the accounting process as embodied in
the accounting definition?

Identifying

Measuring

Communicating
 Identifying

• recognition or nonrecognition of
“accountable” events.

An event is accountable or
quantifiable when it has an effect
on assets, liabilities and equity.
-sociological and psychological
matters are not included in it.
 Two classifications of economic
transactions or events

External Internal
transactions transactions

- events involving one - events involving the

entity and another entity only.
entity.
Ex: purchase of Ex: production and
merchandise from a casualty loss
supplier, borrowing of
money from a bank, sale
of merchandise to
customer
Measuring

• the process of determining the monetary

amounts at which the elements of the FS are to
be recognized and carried in the BS and IS.

The measurement bases are:

 Historical cost
 Current cost
 Realizable value
 Present value
 Communicating

• the process of preparing and distributing

accounting reports to potential users of
accounting information.

Implicit in this process are the:

 Recording
 Classifying
 Summarizing
Recording or journalizing
-systematically maintaining a record of all economic
business transactions after they have been identified and
measured.

Classifying
-sorting or grouping of similar and interrelated economic
transactions into their respective class.

Summarizing
-preparation of FS.
 What do you understand by
the accountancy profession?

Republic Act No. 9298 is

the law regulating the
practice of accountancy in
the Philippines.
This is also known as
“Philippine Accountancy
Act of 2004”.
The Board of Accountancy is the body
authorized by law to promulgate rules
and regulations affecting the practice of
accountancy profession in the
Philippines.
• The PRC upon recommendation of BOA shall
issue Certificate of Registration to practice
public accountancy which shall be valid for
3 years and renewable every 3 years upon
payment of required fees.
 What is public accounting?

It is the practice of the

accountancy profession.
Practitioners render
independent and expert
financial services to public
such as:
 Auditing
 Taxation
 Management advisory
services
Auditing or external auditing is the examination of
FS by independent CPA for the purpose of
expressing an opinion as the fairness with which
the FS are prepared.

Taxation service includes the preparation of annual

income tax returns and determination of tax
consequences of certain proposed business
endeavors.

Management advisory service 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.
 It means that CPAs
What is private are employed in
accounting? business entities in
various capacity as
accounting staff, chief
accountant, internal
auditor and controller.

The objective is to assist

management in planning
and controlling the entity’s
operations.
 Explain briefly
government
accounting.
It 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.

Its focus is the custody and

administration of public
funds.
 Distinguish financial and
managerial accounting.

Financial accounting is
concerned with the recording
of business transactions and
eventual preparation of FS
 Financial accounting
focuses on general purpose
reports known as FS. These
are intended for internal and
external users.

Managerial accounting is the

accumulation and preparation
of financial reports for internal
users only.
What is the meaning of generally
accepted accounting principles?

GAAP encompass the

conventions, rules and
procedures necessary to
define what is accepted
accounting practice.
 GAAP represent the “rules, procedures,
practice and standards followed in the
preparation and presentation of FS.”

• In the Philippines, it is
initially formalized
through the creation of
the Accounting
Standards Council
(ASC)
The approved statements of the ASC are
previously known as “Statement of
Financial Accounting Standards”

SFAS are now known as

Philippine Accounting
Standards (PAS) and
Philippine Financial
Reporting Standards
(PFRS)
What is the purpose of accounting
standards?

To identify the proper

accounting practices
for the preparation and
presentation of FS.
 Accounting standards
create a common
understanding between
preparers and users of FS
particularly on how items
are treated.
PAS 1 Presentation of financial statements

PAS 2 Inventories

PAS 7 Statement of cash flows

PAS 8 Accounting policies, changes in

accounting estimates and errors

PAS 10 Events after reporting period

PAS 11 Construction contracts

PAS 12 Income taxes

PAS 16 Property, plant and equipment

PAS 17 Leases

PAS 18 Revenue
PAS 19 Employee benefits

PAS 20 Government grants and government

assistance
PAS 21 The effects of changes in foreign
exchange rates

PAS 23 Borrowing costs

PAS 24 Related party disclosures

PAS 26 Accounting and reporting by
retirement benefit plans
PAS 27 Consolidated and separate financial
statements

PAS 28 Investment in associate

PAS 29 Financial reporting in

hyperinflationary economies

PAS 31 Interest in joint ventures

PAS 32 Financial instruments – disclosure and
presentation

PAS 33 Earnings per share

PAS 34 Interim financial reporting

PAS 36 Impairment of assets

PAS 37 Provisions, contingent liabilities and

contingent assets
PAS 38 Intangible assets

PAS 39 Financial instruments – recognition

and measurement

PAS 40 Investment property

PAS 41 Agriculture

PFRS 1 First time adoption of PFRS

PFRS 2 Share based payment

PFRS 3 Business combinations

PFRS 4 Insurance contracts

PFRS 5 Noncurrent assets held for sale and

discounted operations
PFRS 6 Exploration and evaluation of mineral
resources
PFRS 7 Financial instruments – disclosures

PFRS 8 Operating segments

PFRS 9 Financial instruments

The FRSC now replaces the ASC.

The Financial Reporting

Standards Council (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. No. 9298.
 The main function of FRSC is to
establish and improve accounting
standards that will be generally
accepted in the Philippines.
The FRSC is composed of 15 members with a
Chairman and 14 representative from the following:

Board of Accountancy 1
Securities and Exchange Commission 1
Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
Commission on Audit 1
Major organization of preparers and users of FS 1
Accredited nat’l professional organization of CPAs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2
Total 14
 What do you understand by the
Philippine Interpretations Committee?

The role of PIC is to prepare

interpretations of PFRS for approval
by FRSC and in the context of the
Framework, to provide timely
guidance on financial reporting
issues not specifically addressed in
current FS.
 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.
 What do you understand by the
International Accounting Standards
Committee (IASC)?

It is an independent private sector

body, with the objective of achieving
uniformity in the accounting
principles which are used by
business and other organizations for
financial reporting around the world.
 The International Accounting
Standards Board or IASB now
replaces the International Accounting
Standards Committee or IASC.

The IASB publishes its

standards in a series of
pronouncements called
“International Financial
Reporting Standards” or
IFRS.
What are accounting assumptions?

These are basic notions or

fundamental premises on which
the accounting process is based.

Accounting assumptions are also

known as postulates.
 The Framework for the
Preparation of FS mentions two
underlying assumptions, namely:

Accrual

Going Concern
 What are the underlying
accounting assumptions?

Accrual
Going concern
Accounting entity
Time period
Monetary unit
 Accrual accounting means that:
Income is recognized when earned
regardless of when received;
Expense is recognized when incurred
regardless of when paid.

The essence of accrual

accounting is the recognition of
accounts receivable, accounts
payable, prepaid expenses,
accrued expenses, deferred
income, and accrued income.
 Going concern assumption means
that the accounting entity is viewed as
continuing in operation indefinitely in
the absence of evidence to the
contrary.

This postulate is the very

foundation of the cost
principle. It is also known
as the continuity
assumption.
 Accounting entity assumption
Under this assumption, the entity is
separate from the owners, managers,
and employees who constitute the
entity.

The reason for this

assumption is to have a
fair presentation of
financial statements.
 Time period assumption requires that
“the indefinite life of an entity is
subdivided into time periods or
accounting periods which are usually of
equal length for the purpose of preparing
financial reports on financial position,
financial performance and cash flows”.
A calendar year is a twelve-month
period that ends on December 31.

A natural business year is twelve-

month period that ends on any
month when the business is at the
lowest or experiencing slack
season.
 The monetary unit
assumption has two
aspects, namely
quantifiability and
stability of the pesos.
 Quantifiability – the assets,
liabilities, equity, income and
expenses should be stated in
terms of a unit of measure is the
peso in the Philippines.

Stability of the peso – the

purchasing power of the peso is
stable or constant and that its
instability is insignificant and
therefore may be ignored.
Consider an equipment that was imported 10
years ago from the US for $100,000 when
the exchange rate was P35 to $1 or an
equivalent of P3,500,000.
If the same equipment is purchased now and
assuming there is no change in the $100,000
purchase price, the replacement cost in terms of
pesos would be in the vicinity of P4,800,000,
considering a current rate of P48 to $1
Obviously, there is a significant gap between
historical cost and current replacement cost.
The entity may apply PAS 16 while on the
other hand, the US GAAP encourages
entities to make supplementary disclosures
relating to the impact of changing prices.
 What do you understand by the
Framework for the Preparation and
Presentation of FS?

The Framework is a summary

of the terms and concepts that
underlie the preparation and
presentation of financial
statements.
 The Framework 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.
Basic purposes of the Framework

1. assist the FRSC in developing accounting

standards that represent Philippine GAAP.

2. assist preparers of FS in applying

accounting standards and in dealing with
issues not yet covered by GAAP.

3. assist the FRSC in its review and adoption

of International Accounting Standards.
Basic purposes of the Framework

4. assist users of FS in interpreting the

information contained in the FS.

5. assist auditors in forming an opinion as to

whether FS conform with Philippine GAAP.

6. provide information to those interested in

the work of FRSC in the formulation of PFRS.
 What is the scope of the Framework?

Objective of FS

Qualitative characteristics that determine the

usefulness of information in FS.

Definition, recognition and measurement of

the elements from which FS are constructed.

Concepts of capital and capital maintenance.

What is the objective of financial
statements?

To provide information about

the financial position, financial
performance and cash flows of
an entity that is useful to a
wide range of users in making
economic decisions.
 What is the financial position of an entity?

It comprises its assets, liabilities

and equity at a particular time.

It pertains to the entity’s:

 Economic resources
 Liquidity
 Solvency
 Financial structure
 Capacity for adaptation
 Economic resources refer to the
assets owned by the entity.
Information about this is useful in
predicting the ability of the entity to
generate cash and cash equivalents.

Liquidity is the availability of cash

in the near future to cover currently
maturing obligations.
Solvency is the availability of cash
over a long term to meet financial
commitments when they fall due.

Information about liquidity and

solvency is useful in predicting the
ability of the entity to comply with
its future financial commitments.
Financial structure is the source of
financing for the assets of the entity.

It indicates what amount of assets has been

financed by creditors which is the borrowed
capital, and how much has been finance by
owners which is the invested or equity capital.
Capacity for adaptation is the
ability of the entity to use its
available cash for unexpected
requirements and investment
opportunities.

It is also known as financial

flexibility.
What is the meaning of financial
performance of an entity?

It comprises its revenue,

expenses and net income or
loss for a period of time.

It is also known as results of

operations and is portrayed in the
income statement and statement of
comprehensive income.
 What is 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 entity’s
management.
There are four concepts in
conjunction with the
objective of financial
statements namely….
1. Entity theory
Assets = Liabilities + Capital

2. Proprietary theory
Assets – Liabilities = Capital

3. Residual equity theory

Assets – Liabilities – Pref. SHE = Ord. SHE

4. Fund theory
Cash inflows – Cash outflows = Fund
  Investors
The users of
the financial  Employees
statements
are…  Lenders

 Suppliers and other trade

creditors

 Customers

 Government and its agencies

 Public
Chapter 1

The End