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Conceptual
Framework
and
Accounting ACCTG 103

Standards S.Y. 2021-2022

2nd Semester

Overview of
Accounting

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Learning Objectives

• Define accounting and state its basic purpose.

• Explain the basic concepts applied in accounting.
• State the branches of accounting and the sectors in the practice
of accountancy.
• Explain the importance of a uniform set of financial reporting
standards.

Definition of Accounting

Accounting is “the process of

identifying, measuring, and
communicating economic information
to permit informed judgment and
decisions by users of information.”

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Three important activities

1. Identifying - the process of analyzing events and

transactions to determine whether or not they will be
recognized. Only accountable events are recognized.
2. Measuring - involves assigning numbers, normally in
monetary terms, to the economic transactions and events.
3. Communicating - the process of transforming economic
data into useful accounting information, such as financial
statements and other accounting reports, for dissemination to
users.

What is Recognition?

Recognition refers to the process of including the effects

of accountable event in the statement of financial
position or the statement of comprehensive income
through journal entry

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What is Accountable Event?

• is one that affects the assets, liabilities, equity income

and expenses of an entity.
• also known as economic activity

Accountable Event vs Non-

Accountable Events

Accountable Events Non-Accountable

Events
Recognized in the books Disclosure only
of accounts

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Types of Events
1. External events – events that involve an external party.
a. Exchange (reciprocal transfer) – reciprocal giving and receiving
b. Non-reciprocal transfer – “one way” transaction
c. External event other than transfer – an event that involves changes in the
economic resources or obligations of an entity caused by an external party or external
source but does not involve transfers of resources or obligations.

2. Internal events – events that do not involve an external party.

a. Production – the process by which resources are transformed into finished goods.
b. Casualty – an unanticipated loss from disasters or other similar events.

Measurement
• The several measurement bases used in accounting include, but not limited to, the
following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.
• The most commonly used is historical cost. This is usually combined with the other
measurement bases.
• Accordingly, financial statements are said to be prepared using a mixture of costs and
values.
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Valuation by fact or opinion

• When measurement is affected by estimates, the items measured are
said to be valued by opinion.
• Estimates of uncollectible amounts of receivables
• Depreciation and amortization
• Estimated Liabilities
• Retained earnings (various estimates of income and expenses)
• When measurement is unaffected by estimates, the items measured are
said to be valued by fact.
• Ordinary share capital valued at par value
• Land stated at acquisition cost
• Cash measured at face amount
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Communicating
• Recording – refers to the process of systematically
committing into writing the identified and measured
accountable events in the journal through journal entries.
• Classifying – involves the grouping of similar and
interrelated items into their respective classes through
postings in the ledger.
• Summarizing – putting together or expressing in
condensed form the recorded and classified transactions
and events. This includes preparation of financial
statements and other accounting reports.
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Basic purpose of accounting

• The basic purpose of accounting is to provide

information about economic activities intended to
be useful in making economic decisions.

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Economic Entities

Is a separately identifiable combination of person

and property that uses or controls economic resources to
achieve certain goals or objectives.
 Not-for-profit entity
 Business entity

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Economic Activities

This are activities that affect the economic resources

(assets) and obligations (liabilities), and consequently,
the equity of an economic entity.
 Production
 Exchange
 Consumption
 Income distribution
 Savings
 Investment
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Types of information provided

by Accounting
1. Quantitative Information
- expressed in numbers, quantities, or units
2. Qualitative Information
- expressed in words or descriptive form
3. Financial Information
- expressed in money

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Types of accounting information

classified as to users’ needs
• General purpose accounting information
- designed to meet the common needs of most
statement users. This information is governed by the
Philippine Financial Reporting Standards (PFRSs).
• Special purpose accounting information
- designed to meet the specific needs of particular
statement users. This information is provided by
other types of accounting, e.g., managerial
accounting, tax basis accounting, etc.
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Sources of information in
Financial Statements
 entity’s accounting records
 external sources
 Fair value measurements
 Resolution of uncertainties
 Future lease payments
 Contractual commitments

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Accounting as science and art

• as a Social Science
Accounting is a body of knowledge which has been
systematically gathered, classified and organized.
• as a Practical Art
Accounting requires the use of creative skills and
judgment.

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Accounting as an Information
System
Accounting identifies and measures economic
activities, processes information into financial reports,
and communicates these to decision makers.

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Accounting as a Language of
Business
Because it is the fundamental to the communication
of financial information.

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Creative and Critical Thinking

a. Creative Thinking
- Involves the use of imagination and insight to solve
problems by finding new relationships (ideas) among items
of information. (identifying alternative solutions)
b. Critical Thinking
- Involves the logical analysis of issues, using inductive or
deductive reasoning to test new relationships to determine
their effectiveness. (evaluating alternative solutions)

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Steps in Problem Solving

Recognizing a problem
Identifying alternative solutions
Evaluating the alternatives
Selecting a solution from among the alternatives
Implementing the solution

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Accounting Concepts

Refer to the principles upon which the process of

accounting is based.

 Most accounting concepts are derived from the

Conceptual Framework and the Philippine Financial
Reporting Standards (PFRSs)

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Basic Accounting Concepts

• Double Entry System • Concept of Articulation
• Going Concern • Full disclosure principle
• Separate Entity • Consistency Concept
• Stable Monetary Unit • Matching
• Time Period • Residual Equity Theory
• Materiality Concept • Fund Theory
• Cost-benefit • Realization
• Accrual Basis of accounting • Prudence
• Historical Cost Concept 25

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Double Entry System

Each accountable event is recorded in two parts

 Debit
 Credit

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Going Concern Assumption

the entity is assumed to carry on its operations for

an indefinite period of time.
the entity does not expect to end its operations in
the foreseeable future
The measurement basis involving mixture of costs and
values is appropriate only when the is a going concern.
If the entity is a liquidating concern, the appropriate
measurement basis realizable value
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Separate Entity

• also know as Accounting Entity / Business Entity

Concept / Entity Concept
• the entity is treated separately from its owners
The personal transactions of the owners among themselves
or with other entities are not recorded in the entity’s
accounting records.

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Stable Monetary Unit

• also knows as Monetary Unit Assumption

• amounts in the financial statements are stated in terms
of a common unit of measure
• changes in purchasing power are ignored.

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Time Period

• also known as Periodicity / Accounting Period

• the life of the business is divided into series of
reporting periods.
 Calendar Year (starts on Jan 1 and ends on Dec 31)
 Fiscal Year ( covers 12 months but starts on a date other
than Jan 1)

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Materiality Concept

• information is material if its omission or

misstatement could influence economic
decisions.
• Materiality is a matter of professional judgment
and is based on the size and nature of the item being
judged.

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Cost-benefit

• also known as Cost Constraint / Reasonable assurance

• the cost of processing and communicating information
should not exceed the benefits to be derived from
it.

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Accrual Basis of Accounting

• the effects of transactions are recognized when they

occur (and not as cash is received or paid) and they are
recognized in the accounting periods to which they
relate

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Historical Cost Concept

• also knows as Cost Principle

• the value of an asset is determined on the basis of
acquisition cost.

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Concept of Articulation

• all of the components of a complete set of financial

statements are interrelated
• when users use the financial statements in making
decisions, they need to use each financial statement in
conjunction with the other financial statements.

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Full Disclosure Principle

• financial statements provide sufficient detail to

disclose matters that make a difference to users, yet
sufficient condensation to make the information
understandable, keeping in mind the costs of preparing
and using it.

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Consistency Concept

• financial statements are prepared on the basis of

accounting policies which are applied
consistently from one period to the next.
• Changes in accounting policies are made only when
required and permitted by the PFRSs or when the
change results to more relevant and reliable
information.
• Changes in accounting policies are disclosed in the
notes.
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Matching

• also know as Association of Cause and Effect

• costs are recognized as expenses when the related
revenue is recognized

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Residual Equity Theory

• this theory is applicable where there are two classes of

shares issued, ordinary and preferred.
• The equation is “Assets – Liabilities – Preferred
Shareholders’ Equity = Ordinary Shareholders’ Equity.”

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Fund Theory

• the accounting objective is the custody and

administration of funds.

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Realization

• the process of converting non-cash assets into

cash or claims for cash.

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Prudence

• also known as Conservatism

• the inclusion of a degree of caution in the exercise
of the judgments needed in making the estimates
required under conditions of uncertainty , such that
assets or income are not overstated and
liabilities or expenses are not understated.

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Expense Recognition Principles

• Matching Concept
(Direct association of costs and revenues)
• Systematic and rational allocation
• Immediate recognition

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Common Branches of
Accounting
• Financial Accounting (general purpose FS)
• Management Accounting (special purpose reports)
• Cost Accounting (recording and analysis of manufacturing
cost)
• Auditing (evaluating the correspondence of certain assertions
with established criteria and expressing an opinion thereon)
• Tax Accounting (preparation of tax returns and rendering of
tax advice)
• Government Accounting (for the government and its
instrumentalities) 44

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Financial Reporting

Is the provision of financial information about an entity that is

useful to external users, primarily the Investors, Lenders, and
other Creditors, in making investment and credit decisions.
Financial Statements Financial Report
1. Statement of Financial Position 1. Statement of Financial Position
2. Statement of Profit or Loss and 2. Statement of Profit or Loss and
Other Comprehensive Income Other Comprehensive Income
3. Statement of Changes in Equity 3. Statement of Changes in Equity
4. Statement of Cash Flows 4. Statement of Cash Flows
5. Notes 5. Notes
6. Additional Statement of Financial 6. Additional Statement of Financial
Position Position
7. Other Information 45

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Financial Reporting

Primary Objective
To provide information about an entity’s economic
resources, claims to those resources, and changes in making
investment.
Secondary Objective
To provide information useful in assessing the entity’s
management stewardship.

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Bookkeeping

• refers to the process of recording the accounts or

transactions of an entity
• normally ends with the preparation of the trial balance.
• does not require the interpretation of the
significance of the processed information.

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Accountancy

It refers to the profession of practice of accounting.

 Public Practice
 Private Practice

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Four sectors in the practice of

accountancy (under RA 9298)
1. Practice of Public Accountancy - involves the rendering of audit or
accounting related services to more than one client on a fee basis.
2. Practice in Commerce and Industry - refers to employment in the private
sector in a position which involves decision making requiring professional
knowledge in the science of accounting and such position requires that the
holder thereof must be a CPA.
3. Practice in Education/Academe – employment in an educational
institution which involves teaching of accounting, auditing, management
advisory services, finance, business law, taxation, and other technically related
subjects.
4. Practice in the Government – employment or appointment to a position in
an accounting professional group in the government or in a government–
owned and/or controlled corporation where decision making requires
professional knowledge in the science of accounting, or where civil service
eligibility as a CPA is a prerequisite.
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Accounting standards in the

Philippines
Philippine Financial Reporting Standards (PFRSs) are
Standards and Interpretations adopted by the Financial
Reporting Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

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The Need for Reporting

Standards
Entities should follow a uniform set of generally
acceptable reporting standards when preparing and
presenting financial statements; otherwise, financial statements
would be misleading. Generally acceptable means:
1. The standard has been established by an authoritative
accounting rule-making body (e.g PFRSs adopted by the
FRSC)
2. The principle has gained general acceptance due to
practice over time and has been proven to be most useful. (e.g
double entry recording)
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Hierarchy of Reporting
Standards
1. Philippine Financial Reporting Standards (PFRSs)
2. In the absence of PFRS that specifically applies to a
transaction/event, management shall use its judgment in
developing and applying an accounting policy that results in
information that is relevant and reliable.
1. Management shall refer to, and consider the applicability of
a. The requirements in PFRSs dealing with similar and related isues
b. The Conceptual Framework
2. Management may also consider the following
a. Pronouncements of other standard setting bodies
b. Accounting literature and accepted industry practices
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Accounting Standard-Setting
Bodies
1. Financial reporting Standards Council (FRSC)
2. Philippine Interpretations Committee (PIC)
3. Board of Accountancy (BOA)
4. Securities and Exchange Commission (SEC)
5. Bureau of Internal Revenue (BIR)
6. Bangko Sentral ng Pilipinas (BSP)
7. Cooperative Development Authority (CDA)

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Financial reporting Standards

Council (FRSC)
It is the official accounting standard setting body in the Philippines
created under Philippine Accountancy Act of 2004 (RA No. 9298)

Chairperson 1
Board of Accountancy (BOA) 1
Commission on Audit (COA) 1
Securities and Exchange Commission (SEC) 1
Bangko Sentral ng Pilipinas (BSP) 1
Bureau of Internal Revenue (BIR) 1
A Major organization composed of preparers and users of FS 1
Accredited National Professional Organization of CPAs (PICPA) 8
(2 representatives per sector)
TOTAL (RA 9298 Sec. 9 (A)) 15 54

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Questions?

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First / Last Name

(123) 456-7890

Your Company

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