FM 10 – Dr.
Cedric Val Naranjo, CPA
Accounting: Nature and Concepts
Purpose: to provide report to the users of financial
statements
Function: can be use by the users in making economic
decisions
What is Accounting?
- 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. (AICPA)
Financial Character – is has an effect on your financial
statement/assets/liab
Interpreted – for decision-making
- 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 decision. (FRSC)
Quantitative Information – can be translated into numbers
Economic Entities – (financial character)
When will it be useful in making Economic Decision? -
interpreting/analyze the results/data
Common Denominator
- Service Entity
- Main objective is to provide QUANTITATIVE
INFORMATION
- Information is FINANCIAL in character about
economic entities
- The information is intended in making economic
decisions.
ACCOUNTING IS AN ANALYTICAL AND CONSTRUCTIVE
PROCESS
Data Measured
Transactions Communicated
Events Processed USERS
- Data, Transaction and Events must be Quantitative
and Financial in Character so that we can measure it
because we have the numbers
- Measuring (Recording)
- Processing (Classifying and Summarizing)
What way to communicate our output in accounting to our
users?
- That is through financial statements (medium of
communication to intended users)
Procedural Steps in Accounting Cycle
Analyzing Transactions (determine whether it is
qualitative(interpretation) or quantitative, financial or non-
financial(interpretation), or will it be useful in economic
decision) -> Journalizing (Recording) -> Posting
(Summarizing)-> Trial Balance (Initial report)-> Adjusting
Entries(bec of accruals, pre-payments, to correct entries, also
called as correcting entries)
Adjusted Trial Balance (after the adjustment)-> Financial
Statements (Output to be given to the users, ang gamiton
para e analyze ang transaction)-> Closing Entries -> Post-
Closing Trial Balance -> Reversing Entries(prepare the book
for next year)
Facts
- Only accountable events are recorded in the
accounting books (TRUE)
- Accounting is a service activity (TRUE)
- Although bookkeeping and accounting are
interrelated, they are not the same (TRUE)
- The purpose of accounting is to provide information
that is useful in making any business decision (FALSE)
- A transaction or event is recorded in the accounting
records only if it has an effect on the assets,
liabilities, equity, income or expenses of the business
(TRUE)
- The main purpose of accounting is to provide
information that is useful in making economic
decisions (TRUE)
- In accounting the “recording” is also called
Journalizing
- Which of the following statements regarding the
recording of events is valid???? Only accountable
events are recorded in the accounting books
- Erroneous financial statements can lead to bad
financial decisions (TRUE)
- Financial information is information expressed in
terms of money (TRUE)
FM 10 – Dr. Cedric Val Naranjo, CPA
Purpose of the Framework
1. To assist the IASB (the board) to develop IFRS
that are based on consistent concepts.
2. To assist preparers to develop consistent
accounting policies when no standard applies to
a particular transaction or other event, or when
a standard allows a choice of accounting policy
3. Assist all parties to understand and interpret the
Standards
Structure of the Framework
1. The Objective of General Purpose Financial
Reporting
2. Qualitative Characteristics of Useful Financial
Information
3. Financial Statements and the Reporting Entity
4. The Elements of the Financial Statements
5. Recognition and Derecognition
6. Measurement
7. Presentation and Disclosure
8. Concepts of Capital and Capital Maintenance
Key Take-aways
1. Conceptual Framework is not a standard, nothing in
the conceptual framework can override any standard
for any requirement of an accounting standard. In
other words, the accounting standard are still more
powerful that the conceptual framework
2. The Conceptual Framework assists the board or the
IASB, the preparers of financial statement, and all
other parties.
3. A revision of the Framework does not automatically
revise a standard.
4. Accounting standards are intended to contribute to
transparency, strengthen accountability, and
contribute to economic efficiency.
1. The primary users of general purpose reports
existing and potential investors, lenders and other
creditors.
2. We need to provide them information like resources
and claims, changes to resources and claims, and
information about entity’s resources.
1. Fundamental characteristics are necessary for
information to be useful. These include relevance
and faithful representation.
2. Information is relevant if it has either predictive
value, confirmatory value, or both; it must also be
material.
3. Faithful representation is further characterized by
completeness, neutrality, and freedom from error.
4. Enhancing characteristics improve information.
These are comparability, verifiability, timeliness, and
understandability.
1. Financial statements provide useful information
to aid users in decision making.
2. The financial statements are: statement of
financial position, statement of financial
performance, and other statements and notes.
3. The reporting entity can either be a single
entity, a portion of an entity, or more than one
entity.
4. Consolidated financial statements are prepared
for entities with parent-subsidiary relationship.
Otherwise, it is called combined financial
statements.
1. The elements of Financial Statements are:
assets, liabilities, equity, income and
expenses
2. An asset is a present economic resource
controlled by the entity as a result of past
events
3. A liability is a present obligation of the
entity to transfer an economic resource as a
result of past events
4. Equity = Assets – Liabilities
5. Income and expenses are movements in
assets or liabilities that affect equity other
than contributions by or distribution to
owners.
6. A unit of account determines the level at
which an asset or liability is grouped (or
ungrouped) for financial reporting.
7. An executory contract is a contract or a
portion thereof that is equally
FM 10 – Dr. Cedric Val Naranjo, CPA
unperformed. Executory contract are effects of investments by owners and
usually one unit of account. distributions made to owners.

Recognition is the process of capturing for inclusion in

the statement of financial position or the statement(s)
of financial performance an item that meets the
definition of one of the elements of financial
statements.

Derecognition is the removal of all or a part of a

recognized asset or liability from an entity’s financial
position.

1. There are two measurement bases: historical

cost and current value.
2. There are three choices for current value: fair
value, value in use/fulfillment value; current
cost.
3. Fair value and value in use/fulfillment value are
both exit values while historical cost and
current cost are both entry values.
4. We need to consider the nature of the
information provided, other factors, and
qualitative characteristics in deciding which
measurement basis to use

1. Focus on presentation and disclosure

objectives and principles, not merely the
rules.
2. Classifying information in a manner that
groups similar items and separates
dissimilar items.
3. Aggregating information in such a way that
it is not obscured either by unnecessary
detail or by excessive aggregation.

1. Financial concept of capital is net assets =

equity while physical concept of capital is
the productive capacity. Under the financial
capital maintenance there is profit if the
ending net assets are greater than the
beginning net assets, after taking out the
FM 10 – Dr. Cedric Val Naranjo, CPA
6/23/2021 Financial Statements

Video # 3 FS Presentation - Structured presentation (there must be a guideline

Financial Statement – one of the output of the
accounting process/cycle
- This is the report that we published to the users, or
to those outside the company, they can access or go
over with that
Financial Statement Preparation
on how to do it) of the financial position, financial
performance and cash flows of an entity
- Includes notes which contain additional information
like definition of the item, measurement or valuation
procedures and disclosures requirements.
Purpose of FS
Provide information about the following:

PAS/IAS1 = Philippine Accounting Standard/International 1. Financial Position

Accounting Standard1 – bible of the accountants, guided by 2. Financial Performance
the policies on how to properly account, record and 3. Cash Flows
summarize 4. Management Stewardship of Resources

- Outlines the provisions and requirements in
preparing and presenting the financial statements
PFRS – Philippine Financial Reporting Standards
OBJECTIVES OF PAS/IAS1
1. Prepare the basis for presentation of
GENERAL-PURPOSE FINANCIAL STATEMENT –
can be use by anyone
2. Ensure comparability (Previous periods and
other entities) – can compare FS from prior
years, succeeding years, but also to compare
various/different entities
3. Sets out OVER-ALL REQUIREMENTS
(Presentation, Structure and Minimum
Requirements) – PAS is use as a basis on how to
properly present, proper structure of FS and
what are the minimum requirements
Scope of PAS/IAS1
1. Entities that prepare and present general purpose
financial statement in accordance with PFRS
2. Entities whether or not they need to prepare
consolidated financial statements or separate
financial statements
General Purpose Financial Statement
- Those intended to serve users who are not in
position to require financial reports tailored to their
particular information needs – it will serve everyone
(public) – covered with PAS/IAS1
What are the Components of the FS
1. Statement of Financial Position
2. Statement of Comprehensive Income
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to Financial Statements
- May use titles other than those stated
- Equal prominence (all components are important)
NOT INCLUDED:
1. Financial Review by Management
2. Environmental Reports
3. Other Similar Reports
Features of the FS
1. Fair Presentation and Compliance – includes ALL
necessary information that will influence the
decision of economic users
2. Going Concern – financial statements must be
prepared on a going concern basis unless
management either intends to liquidate the entity or
to cease trading, or has no realistic alternative but to
do so. Disclose any significant doubt upon the
entity’s ability to continue as a going concern.
3. Consistency Presentation – the presentation and
classification of items in the FS shall be retained
from one period to the next unless: A significant
change in the nature of the entity’s operations has
occurs; or An IFRS requires a change in presentation
4. Materiality, Aggregation and Offsetting –
Materiality and Aggregation – an entity shall present
separately: Each class of similar items; and items of
dissimilar nature or function unless they are
immaterial
5. Comparative Information – Comparatives – for all
amounts reported in the current period’s financial
FM 10 – Dr. Cedric Val Naranjo, CPA
statement we must include the previous period - Specific principles, bases conventions, rules and
amounts practices applied by an entity in preparing and
presenting FS
Basic Features of Fair Presentation
Changes in Accounting Policies
- Faithful representation of the effects of transactions,
other events and conditions - Required by the standard
- Application of PFRS, with additional disclosures - It results in the FS providing reliable and more
- Shall make explicit and unreserved statement of relevant information
compliance with PFRS - Applied from initial application (retrospectively –
from the very beginning)
Statement of Compliance – the consolidated financial
statements of the company were prepared in compliance Accounting Estimates
with Philippine Financial Reporting Standards (PFRSs)
- Involves judgment based on the latest available,
reliable information

Is Departure from the framework prohibited? Like:

No! But it shall disclose the following: - Bad Debt

- It has departed from a particular requirement to
achieve a fair presentation
- The title of the Standard or Interpretation from
which the entity has departed, the nature of the
departure
- Financial impact of the departure
- Obsolescence
- Fair Value of Assets and Liabilities
- Useful life of depreciable assets
Adjustment of the carrying amount of an asset or liability, or
the amount of the periodic consumption of an asset.
Prospective Adjustment (from this point onwards)

Accrual Basis (still in the Going Concern assumption) Accounting Errors

- Effects of transaction and other events are
recognized when they occur and not as cash is
received or paid and they are recorded in the
accounting records and reported in the FS of the
periods to which they relate.
- It informs users not only of past transactions
involving the payment and receipt of cash but also of
obligations to pay cash in the future and of resources
that represent cash to be received in the future.
- Include the effect of Mathematical mistakes,
mistakes in applying accounting policies, oversights
or misinterpretation of facts, and fraud
Treatment of Errors:
RETROSPECTIVELY
- Restarting the comparative amount
- Restarting the opening balances

Materiality (if it will affect your decision)

- Omission of misstatement that could influence the

economic decisions of users taken on the basis of
the financial statements
- Depends on the size and nature

Offsetting

- An entity shall not offset assets and liabilities, unless

required or permitted by an IFRS

Reporting Period
- FS shall be presented at least ANNUALY

If presented longer or shorter:

a. Reason for using a longer or shorter period

b. The fact that the amounts are not entirely
comparable

Accounting Policies