FINONE
OVERVIEW
Accounting – process of identifying, measuring and communicating economic information
to permit informed judgment and decisions by users of information
Identifying – process of analyzing events and transactions to determine whether or not
they will be recognized in the books. ONLY ACCOUNTABLE EVENTS ARE RECOGNIZED.
Recognition – process of including the effects of an accountable event in the statement of
financial position or the statement of profit or loss and other comprehensive income
through a journal entry made in the books.
TYPES OF EVENTS
1. External Events
A. Exchange / Reciprocal Transfer – event wherein there is a reciprocal
giving and receiving of economic resources and/or economic obligations
B. Non-reciprocal Transfer – event in which an entity transfers (or receives)
economic resources to (from) another entity without directly receiving
(or giving) value in exchange
C. External Event other than transfer – involves changes in the economic
resources or obligations of an entity caused by an external party but does
not involve transfers of resources or obligations
2. Internal Events
A. Production – resources are transformed into finished goods
B. Casualty – unanticipated loss from disasters or other similar events
Measuring – assigning numbers to the economic transactions and events
MEASUREMENT BASES ASSETS LIABILITIES
Historical Cost amount of cash/cash amount of proceeds
equivalents paid or fair value received in exchange for
of the consideration given at the obligation or the
the time of their acquisition amounts of cash/cash
equivalents expected to be
paid to satisfy the liability
Current Cost (Replacement amount of cash/cash undiscounted amount of
Cost or Current Repurchase equivalents that would have to cash/cash equivalents that
Price) be paid if the same/equivalent would be required to
assets is acquired currently settle the obligation
currently
Realizable (Settlement) amount of cash/cash undiscounted amount of
Value equivalents that could cash/cash equivalents
currently obtained by selling expected to be paid to
the asset in an orderly disposal satisfy the liabilities
Present Value Present discounted value of Present discounted value
the future net cash inflows of the future net cash
outflows
Fair Value – price that would be received to sell an asset or paid to transfer a liability at
the measurement date
Fair Value less Costs to Sell - *costs to sell – incremental costs directly attributable to the
disposal of an assets (excluding finance costs and income tax expense)
Revalued Amount (Appraised Value or Depreciated Replacement Cost)– asset’s fair
value at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment loss
Inflation-adjusted Costs – valuation of non-monetary items restated to the measuring
unit current at the end of the reporting period
- required only for reporting entities operating in a
hyperinflationary economy
* Use of estimates is essential in the preparation of financial statements in order to provide
relevant information
Communicating – process of transforming economic data into useful accounting
information for dissemination to users
1. Recording – process of systematically committing to writing accountable events
identified and measured in the books of account in a systematic and chronological
manner
2. Classifying – grouping of similar and interrelated items into their respective classes
3. Summarizing – putting together or expressing in condensed or brief form the
recorded and classified transactions and events
* Basic purpose of accounting: provide quantitative financial information about economic
activities intended to be useful in making economic decisions
Economic Entity – separately identifiable combination of persons and property that uses
or controls economic resources to achieve certain goals or objectives
a. Not-for-Profit Entity – carries out some socially desirable needs of the community
or its members whose activities are not directed towards making profit
b. Business Entity – operates primarily for profit
Economic Activities – activities that affect the economic resources and obligations and
consequently, the equity of an economic entity
a. Production – converting economic resources into outputs
b. Exchange – process of trading resources or obligations
c. Consumption – using the final output
d. Income Distribution – allocating rights to the use of outputs
e. Savings – set aside rights to present consumption in exchange for rights to future
consumption
f. Investment – using current inputs to increase the stock of resources available for
output
TYPES OF INFORMATION PROVIDED BY ACCOUNTING
1. Quantitative Information – expressed in number, quantities or units
2. Qualitative Information – expressed in words or descriptive form.
- found in the notes to financial statement
3. Financial Information – expressed in money.
TYPES OF ACCOUNTING INFORMATION CLASSIFIED AS TO USERS’ NEEDS
1. General Purpose – designed to meet the common needs of most statement users
- provided under Financial Accounting
2. Special Purpose – designed to meet the specific needs of particular statement users
- provided by other types of accounting other than financial
accounting
Creative Thinking – use of imagination and insight to solve problems by finding new
relationships/ideas among items of information
Critical Thinking – logical analysis of issues, using inductive or deductive reasoning to test
new relationships/ideas to determine their effectiveness
Accounting Theory – logical reasoning in the form of a set of broad principles that (i)
provide a general frame of reference by which accounting practice can be evaluated and (ii)
guide the development of new practices and procedures
- organized set of concepts and related principles that explain and
guide the accountant’s action in identifying, measuring, communicating accounting
information
- comprises conceptual framework and PFRS
Accounting Postulates – fundamental concepts or principles and basic notions that
provide the foundation of the accounting process
I. Underlying Assumption – explicitly provided in the Conceptual Framework
Going Concern Assumption – entity is assumed to carry on its operations for an indefinite
period of time unless the entity either (1) intends to liquidate the entity or to cease trading
or (2) has no realistic alternative but to do so
*MEASUREMENT BASIS: Going Concern = mixture of costs and values; Liquidating Concern
= Realizable Value
II. Implicit Assumption – not expressly provided in the Conceptual Framework
Separate Entity/Accounting Entity/Business Entity Concept/Entity Concept – entity is
treated separately from its owners. The personal assets, obligations and transactions of
owners are excluded in the financial records
Stable Monetary Unit – assets, liabilities, equity, income and expenses are stated in terms
of a common unit of measure which is the Peso
Time Period/Periodicity/Accounting Period – life of business is divided into series of
reporting period
Calendar Year – period starts from Jan 1 and ends at Dec 31
Fiscal Year – period is also a 12-month period but start at a date other than Jan 1
III. Pervasive – affects all items in the financial statements
Materiality Concept – information is material if its omission or misstatement could
influence economic decisions
- based on the size and nature of an item
Cost-Benefit/Reasonable Assurance/Pervasive Constraint/Cost Constraint – cost of
processing and communicating information should not exceed the benefits to be derived
from it
IV. Other Concepts
Accrual Basis of Accounting – effects of transactions and other events are recognized
when they occur
- income is recognized when earned and expenses are
recognized when incurred regardless of when cash is received or paid
Concept of Articulation – all of the components of a complete set of financial statements
are interrelated
Full Disclosure Principle – nature and amount of information included in the financial
reports reflect a series of judgmental trade-offs
Consistency Principle – financial statements should be prepared consistently from one
period to another
- changes in accounting policies should be made only when
required or permitted by PFRS or when the change would result to more relevant and
reliable information
- changes should be disclosed in the notes
Entity Theory – geared towards the proper income determination
- emphasized income statement and exemplified by the equation
“Assets=Liab+Capital”
Proprietary Theory – geared towards proper valuation of assets
- emphasized the importance of balance sheet and exemplified by the
equation “Assets-Liab=Capital”
Residual Equity Theory – applicable where there are 2 classes of shares issued, ordinary
and preferred
- applied in the computation of book value per share and return
on equity
- equation is “Assets-Liab-Preferred Shareholders’
Equity=Ordinary Shareholders’ Equity”
Fund Theory – objective is neither proper income valuation nor proper valuation of assets
but the custody and administration of funds
- exemplified by the formula “cash inflows-cash outflows=fund”
Realization – process of converting non-cash assets into cash or claims to cash
Prudence/Conservatism – one which has the least effect on equity is chosen
COMMON BRANCHES OF ACCOUNTING
1. Financial Accounting – governed by PFRS
- cater the commons needs of external users
* Before the adoption of IFRS, the accounting standards used in PH were called SFAS
2. Management Accounting – used by internal users or management
3. Cost Accounting – systematic recording and analysis of the costs of materials, labor
and overhead incident to production
4. Auditing – systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and
communicating the results to interested users
5. Tax Accounting – preparation of tax returns and rendering of tax advice
6. Government Accounting – focusing on the custody of public funds and the
purposes to which such funds are committed
7. Fiduciary Accounting – handling of accounts managed by a person entrusted with
the custody and management of property for the benefit of another
8. Estate Accounting – handling of accounts for fiduciaries who wind up the affairs of
a deceased person
9. Social Accounting – process of communicating the social and environmental effects
of organizations’ economic actions to particular interest groups within society
10. Institutional Accounting – accounting for not-for-profit entities other than
government
11. Accounting Systems – installation of accounting procedures for the accumulation
of financial data and designing of accounting forms to be used in data gathering
Bookkeeping – process of recording the accounts or transactions of an entity
- does not require the interpretation of the processed information
* Public Practice does not involve an employer-employee relationship wile private practice
involves an employer-employee relationship
* The GAAP in the PH are represented by PFRS
- it comprise (i) PFRS, (ii) PAS and (iii)
Interpretation
* Guidance that is an integral part of the PFRS is mandatory while guidance that is not an
integral part of the PFRS does not contain requirements for financial statements
* Majority of practicing accountants must agree with a standard before it becomes
implemented
HIERARCHY OF REPORTING STANDARDS
1. PFRS
2. Absence of Standard or Interpretation, management must use its judgment
* In making a judgment, management must refer to and consider the following in
descending order, (a) requirement and guidance in PFRSs dealing with similar and related
issues and (b) definitions, recognition criteria and measurement concepts for a ssets,
liabilities, income and expenses in the Conceptual Framework
* The management may also consider: (a) most recent pronouncements of other standard-
setting bodies that use a similar conceptual framework to develop accounting standards
and (b) other accounting literature and accepted industry practices
Financial Reporting Standards Council (FRSC) – official accounting standard setting
body in the PH created under the Philippine Accountancy Act of 2004 by the Professional
Regulation Commission upon the recommendation of the BOA
- composed of 15 individuals – a
chairperson who had been or presently a senior accounting practitioner in any of the scope
of accounting and 14 representatives
* Chairperson and 6 members appointed by the President of the PH and the board shall
elect a vice-chairperson from among its members for a term of 1 year
Philippine Interpretations Committee (PIC) – committee formed by the Accounting
Standards Council (ASC) the predecessor of FRSC, with the role of reviewing
interpretations prepared by International Financial Reporting Interpretations Committee
(IFRIC) for the approval and adoption of FRSC
Board of Accountancy (BOA) – professional regulatory board created under R.A. No. 9298
to supervise the registration licensure and practice of accountancy in the PH
International Accounting Standards Board (IASB) – established in 2001 as part of IASC
Foundation with the responsibility of approving IFRSs and related documents
IASC Foundation – non-profit organization based in Delaware, USA and is the parent of the
IASB, which is based in London
IFRSs – standards issued by the IASB after it replace its predecessor, the IASC, in April
2001
IASs – standards issued by the IASC which were adopted by the IASB
- founded in June 1973
IFRIC – committee that prepares interpretations of how specific issues should be
accounted for under the application of IFRS
- replaced the former SIC which had been created by the IASC
Standard Advisory Council (SAC) – group of organizations and individuals with an
interest in international financial reporting
- roles includes advising on priorities within the IASB’s
work program, and the IASB is required to consult with the SAC in advance of any board
decisions on major projects that it wishes to add to its agenda
International Federation of Accountants (IFAC) – non-profit, non-governmental, non-
political organization of accountancy bodies that represents the worldwide accountancy
profession
- mission is to develop and enhance the profession to provide services of consistently high
quality in the public interest
International Organization of Securities Commission (IOSCO) – international body of
security commissions, each of which is responsible for regulating investment markets in its
own country
- established in 1987
Conceptual Framework – coherent system of interrelated basic concepts and
propositions that prescribe objectives, limits, and other fundamentals of financial
accounting and serves as a basis for developing and evaluating accounting principles and
resolving accounting and reporting controversies
