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Financial Accounting and Reporting 01
Financial Accounting and Reporting 01
Definition of Accounting
The Financial Reporting Standards Council (formerly Accounting Standards Council)
mention the following:
Accounting is a service activity. Its function is to provide qualitative information, primarily
financial nature, about economic entities, that is intended to be useful in making economic
decision
The American Accounting Association in its Statement of Basic Accounting Theory defines
accounting as follows:
Accounting is the process of identifying, measuring and communicating economic information
to permit informed judgment and decision by users of the information
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Board of Accountancy is the body authorized by law to promulgate rules and regulation
affecting the practice of the accountancy profession in the Philippines.
The Securities and Exchange Commission shall not register any corporation organized for
the practice of public accountancy.
Certified Public Accountants generally practice their profession in three main areas: Public
Accounting, Private Accounting and Government Accounting.
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Financial Reporting
Financial Reporting encompasses not only financial statements but also other members of
communicating information that relates directly or indirectly to the financial accounting
process.
Financial Reports represent the main products of financial reporting. Financial reports
include not only financial statements but also other information such as financial highlights,
summary of important financial figures, analysis of financial statements and significant
ratios.
Financial Reports include non financial information such as description of major products
and a listing of corporate officers and directors.
Objective of Financial Reporting
The overall objective of Financial Reporting is to provide information that is useful for
decision making.
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Specifically, the AICPA Financial Accounting Standards Board in its Statement of Financial
Accounting Concepts enumerates the following objectives of financial reporting:
1. Investors
In corporate form of business, the ownership is often separated from the management.
Normally investors provide capital and management runs the business.
The accounting information is used by both actual and potential investors. Actual investors
use this information to know how their funds are used by the management and what is the
expected performance of business in future in terms of profitability and growth. On the
basis of this information, they decide whether to increase or decrease investment in
corporation in future. Potential investors use accounting information to decide whether or
not a particular corporation is suitable for their investment needs.
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2. Lenders
Lenders are individuals or financial institutions that normally lend money to businesses
and earn interest income on it. They need accounting information to assess the financial
performance and position and to have a reasonable assurance that the business to whom
they are going to lend money would be able to return the principal amount as well as pay
interest there on.
3. Suppliers
Suppliers are business individuals or organizations that normally sell merchandise or raw
materials to other businesses on credit. They use accounting information to have an idea
about the future creditworthiness of the business and to decide whether or not to continue
providing goods on credit.
4. Government agencies
Government agencies use financial information of businesses for the purpose of imposing
taxes and regulations.
5. General public
General public also uses accounting information of business organizations. For example,
accounting information is:
6. Customers
Accounting information provides important information to customers about current
position of a business organization and to make a judgment about its future. Customers can
be divided into three groups – manufactures or producers at various stages of production,
wholesalers and retailers and end users or final consumers.
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supply of products. The end users or final consumers are interested in continuous
availability of products and related accessories. Because of these reasons, the accounting
information is of significant importance for all three types of customers
7. Employees
Employees who do not have a hand in core management of the business are considered
external users of accounting information. They are interested in financial information
because their present and future is tied up with the success or failure of the business. The
success and profitability of business ensures job security, better remuneration, job
promotion and retirement benefits.
The Accounting Standards used in the Philippines are the Philippine Accounting
Standards (PAS) and Philippines Financial Reporting Standards (PFRS).
UNDERLYING ASSUMPTIONS
Accounting assumptions are the basic notions or fundamentals premises on which the
accounting process is based. It serves as the foundation of accounting in order to avoid
misunderstanding but rather enhance the understanding and usefulness of the financial
statements.
Accrual Assumption: Income is recognized when earned regardless of when received
and expense is recognized when incurred regardless of when paid.
Going Concern Assumption: Continuing in operation indefinitely. In other words, the
financial statements are normally prepared on the assumption that the entity will
continue to operate in the future. Thus, asset are normally recorded at cost. Market Value
are ignored.
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Accounting Entity: The business enterprise is separate from the owners, managers and
employees who constitute the firm. It means, that every transactions of the firm should
not be merged with the transactions of the owners. The reason for this assumption is to
have a fair presentation of financial statement.
Time Period: The life of a business can be divided into equal time periods. These time
periods are known as accounting periods for which companies prepare their financial
statements to be used by various internal and external parties. The “one-year period” is
traditionally the accounting period because usually it is after one year that the
government reports are required.
Monetary Unit: Only those events and transactions are recorded in books of accounts of
the business which can be measured and expressed in monetary terms. An information
that cannot be expressed in terms of money is useless for financial accounting purpose
and is therefore not recorded .
The FRSC is composed of 15 members with a Chairman who had been or is presently a
senior accounting practitioner and 14 representatives from the following:
Board of Accountancy 1
Commission on Audit 1
Public Practice 2
Academe or Education 2
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Government 2
Total 14
The Chairman and members of the FRSC shall have a term of three years renewable for
another term. Any member of the ASC shall not be disqualified from being appointed to the
FRSC.
International Accounting Standards Committee (IASC)
The International Accounting Standards Committee or AISC is an independent private
sector body, with the objective of achieving uniformly in the accounting principles which
are used by business and other organization for financial reporting worldwide.
From 1983, the membership of IASC included all the professional accountancy bodies that
were members of International Federation of Accountants.
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