INTERMEDIATE ACCOUNTING FINANCIAL ACCOUNTING AND REPORTING I

CHAPTER 1: NEW CONCEPTUAL FRAMEWORK

I. ACCOUNTING MEANING
Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic activities, that is intended to be useful in making
economic decisions.
- It is an 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.
- Is an information system that measures business activities, processes information into
reports, and communicates the reports to decision makers.
A key product of this information system is a set of FINANCIAL STATEMENTS – documents that report
financial information about an entity to the decision maker.
Components of Accounting

1. Identifying as the analytical component → recognition or non-recognition of business activities

as accountable events. (Accountable means quantifiable)
2. Measuring as the technical component → assigning of peso amounts to the accountable
economic transactions and events. Expressing accounting information in terms of a common
financial denominator.
Financial statements without monetary amounts would be largely unintelligible or
incomprehensible. The measurement bases are historical cost, current cost, realizable value and
present value.

3. Communicating as the formal component. –> preparing and distributing accounting reports to
potential users of accounting information. Implicit in the communication process are the process
of recording, classifying, and summarizing aspects of accounting.
• Recording or journalizing is the process of systematically maintaining a record of all economic
business transactions after they have been identified and measured.
• Classifying – is the sorting or grouping of similar and interrelated economic transactions into
their respective classes. It is accomplished by posting to the ledger. Ledger is a group of
accounts which are systematically categorized into asset accounts, liability accounts, equity
accounts, revenue accounts, and expense accounts.
• Summarizing – is the preparation of FS which include SFP, IS, SCI, SCE and CFS.
THE ACCOUNTANCY PROFESSION
RA 9298 is the law regulating the practice of accountancy in the Philippines. This is known as the
Philippine Accountancy Act of 2004. In PH, in order to qualify to practice the accountancy profession, a
person must finish a degree in BSA and pass a very difficult government examination given by the Board
of Accountancy.
Board of Accountancy – is the body authorized by law to promulgate rules and regulations affecting the
practice of the accountancy profession in the Philippines. They are responsible for preparing and grading
the Philippine CPA examination. The computer-based examination is offered twice a year, one in May
and one in October, in authorized testing centers around the country.
Limitation of the practice of public accountancy
Single practitioners and partnerships for the practice of public accountancy shall be registered CPAs in
the PH. A certificate of accreditation shall be issued to CPA in public practice only upon showing in
accordance with rules and regulations promulgated by BOA and approved by PRC that such registrant
has acquired minimum of 3 years of meaningful experience in any of the areas of public practice including
taxation.
SEC shall not register any corporation organized for the practice of public accountancy.
Accreditation to practice public accountancy.
CPAs, firms and partnerships of CPAs, including partners and staff members thereof, are required to
register with BOA and PRC for the practice of public accountancy. PRC upon favorable recommendation
of BOA shall issue a COR to practice public accountancy which shall be valid for 3 years and renewable
every 3 years upon payment of required fees.
CPAs generally practice their profession in three main areas, namely public accounting, private
accounting and government accounting.
Public Accounting
Practitioners that render independent and expert financial services to the public. Public accountants
collect professional fees for their services, much the same as lawyers and doctors do. Public accountants
usually offer 3 kinds of services.

1. Auditing -> examination of financial statements by independent CPAs for purposes of expressing
an opinion as to the fairness with which the FS are prepared. BIR requires audited FS to
accompany the filing of annual income tax return. Banks and other lending institutions frequently
require an audit by an independent CPA before granting a loan to the borrower. Creditors and
prospective investors place considerable reliance on AFS on making economic decisions.
2. Taxation Service -> includes preparation of annual income tax returns and determination of tax
consequences of certain proposed business endeavors. To offer this service effectively and
efficiently, the public accountant must be thoroughly familiar with the tax laws and regulations and
updated with the changes in taxation law and court cases concerned with interpreting taxation
law.
3. Management Advisory Services -> services to clients on matters of accounting, finance,
business policies, organization procedures, product costs, distribution and many other phases of
business conduct and operations. Advice on installation of computer system, quality control,
modification
of accounting system, budgeting, forecasting, design or modification of retirement plans and even
company managers and takeovers.
Private Accounting
Many CPAs are employees in business entities in various capacity as accounting staff, chief accountant,
internal auditor and controller.
The highest accounting officer in an entity is known as the controller.
The major objective of the private accountant is to assist management in planning and controlling the
entity’s operations.
Government Accounting
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.
Continuing Professional Education
All CPAs shall abide by the requirements, rules and regulations on continuing prof ed to be promulgated
by the BOA, subject to the approval of PRC, in coordination with the accredited national professional
organization of CPAs or any duly accredited educational institutions. 120 units starting 2019.
Accounting vs. Auditing
Accounting is essentially constructive in nature. It ends when FS are prepared.
While Auditing is analytical. The work of an auditor begins when the work of accountants end.
Accounting vs. Bookkeeping
Bookkeeping is procedural and largely concerned with the development and maintenance of accounting
records. It is the “how” of accounting. Accounting is conceptual and is concerned with the “why” or the
reason or justification for any action adopted.
Accounting vs. Accountancy
Accountancy refers to the profession of accounting practice,
while accounting is used in reference only to a particular field of accountancy such as public accounting,
private accounting and government accounting.
Financial Accounting vs. Managerial Accounting
Financial accounting is primarily concerned with the recording of business transactions and eventual
preparation of financial statements. It focuses on providing reports or FS to external users such as
investors and creditors. Managerial accounting is the accumulation and preparation of reports for internal
use only.
Generally Accepted Accounting Principles – the accounting rules, procedures and practices to be
followed. These are conventional, meaning, they become GAAP by agreement often tacit agreement
rather than by formal derivation from a set of postulates and basic concepts. These are developed based
on experience, reason, custom, usage and practical necessity.
The accounting standards promulgated by the Accounting Standards council constitute the “highest
hierarchy” of GAAP.
SFAS – Statements of Financial Accounting Standards, the approved statements of ASC. These are now
known as PAS or PFRS.
Purpose of Accounting Standards - to identify proper accounting practices for the preparation and
presentation of financial statements. This creates a common understanding between preparers and users
of FS particularly on how items, the measurement as treated.
FRSC (Financial Reporting Standards Council) – replaces the Accounting Standards Council. The
accounting standard setting body created by PRC upon recommendation of BOA to assist in carrying out
its powers and functions provided under R.A.9298. Consist of 15 members with a chairman who is a
senior accounting practitioner.

PIC- to prepare interpretations of PFRS for approval of the FRSC.

IASC (international accounting standards committee) – independent private sector body, with the
objective of achieving uniformity in the accounting principles which are used by businesses and other
organizations for financial reporting around the world.
Accounting Assumptions
Are the basic notions or fundamental promises on which the accounting process is based. These are
known as postulates. These serve as the foundation or bedrock of accounting in order to avoid
misunderstanding but rather enhance understanding and usefulness of the FS.

1. Going Concern – in the absence of evidence to the contrary, the accounting entity is viewed as
continuing operation indefinitely. AKA continuity assumption.
2. Accounting entity – specific business organization, which may be proprietorship, partnership or
corporation. The entity is separate from its owners, managers, and employees who constitute the
entity.
3. Time period - indefinite life of an entity is subdivided into time periods or accounting periods
which are usually of an equal length for the purpose of preparing financial reports on financial
position and performance of the company. Maybe calendar year or fiscal year (natural business
year).
4. Monetary unit – quantifiability aspect means all items in FS should be measured at PHP in the
PH. Stability of peso assumption means that the purchasing power of peso is stable or constant
and that its instability is insignificant and therefore maybe ignored.
Conceptual Framework – summary of the terms and concepts that underlie the preparation and
presentation of FS to external users.

Users of FS

• Primary users – existing and potential investors, lenders and other creditors.
• Other users – employees, customers, governments and their agencies, public.
Financial Reporting – provision of financial information about an entity to external users that is
useful to them in making economic decisions.
Liquidity – availability of cash in the near future to cover currently maturing obligations.
Solvency – availability of cash over a long term to meet financial commitments when they fall
due.
Accrual accounting - depicts the effects of transactions and other events and circumstances on
an entity’s economic resources and claims in the periods in which those effects occur.

Qualitative characteristics
1. Relevance – capacity of the information to influence a decision.
*Materiality – depends on a relative size rather than absolute size. An item is material if an
omission or misstatement could influence the economic decision of the informed users of the
FS. Size and nature of an item are the factors of materiality.
2. Faithful representation – actual effects of the transaction shall be properly accounted for
and reported in the FS.
Ingredients of Faithful representation
• Completeness – adequate disclosure standard. Nature, numerical depiction and nature of
numerical depiction
• Neutrality – free from bias. Principle of fairness
• Free from error - no errors or omissions in the description of the phenomenon or transaction,
and the process used to produce the reported info has been selected and applied with no errors
in the process.
Substance over form – An example is when the lessee leased property from the lessor with the
intention to transfer ownership of the asset to the lessee at the end of the lease term. In form,
lease contract. In substance, installment purchase of property.
 Conservatism - when alternative exists, the alternative with the least impact shall be chosen. In
case of doubt, record any loss and not recognize any gain.
Prudence – the desire to exercise care and caution while dealing with uncertainties in the
measurement process such that assets and income are not overstated and liabilities or
expenses are not understated.
Don’t count your chicks until the eggs hatch.
Anticipate no profit and provide for probable and measurable loss.

Enhancing qualitative characteristics

• Comparability – ability to bring together for the purpose of noting points of likeness and
differences.
• Understandability – FS must be comprehensible or intelligible if it is to be useful. Classifying,
characterizing and presenting information clearly and concisely make it understandable.
• Verifiability – different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful
representation.
• Timeliness – financial information must be available or communicated early enough when a
decision is to be made.

Elements of FS
Assets – defined as resources controlled by the entity as a result of past transactions or events and from
which future economic benefits are expected to flow to an entity.
Liabilities - present obligations of the entity arising from past transactions or events the settlement of
which is expected to result in an outflow from the entity resources embodying economic benefits.
Equity – residual interest in the assets of the entity after deducting all of its liabilities.
Income – increase in an economic benefit during the accounting period in the form of inflow or increase
in asset or decrease in liabilities that results in increase in equity, other than the contribution from equity
participants.
Expense – decrease in economic benefit during the accounting period to the form of an outflow or
decrease in asset or increase in liability that results in decrease in equity, other than distribution to equity
participants.
RECOGNITION OF ELEMENTS:

• Asset recognition principle

When probable that future economic benefits will arise and it has a cost or value that can be
measured reliably.
Cost principle- assets must be recognized initially at its original cost.
• Liability recognition principle
When probable that outflow of economic benefits will be required to settle the obligation and
the amount of obligation can be measured reliably. Types of settlement:
1. Payment of cash
2. Transfer of noncash assets
3. Provision of services
4. Replacement of obligation with another obligation
5. Conversion of the obligation into equity
• Income recognition principle
Point of sale is point of income recognition.
Freight charges – FOB shipping point and FOB destination
 Exceptions to the point of sale :
• Installment method – revenue is recognized at the point of collection.
• Cost recovery method or sunk cost method – all collections are first applied to the cost,
excess to be recognized as income. When collection is very uncertain.
• Cash method – revenue is recognized when received regardless of when earned.
• Percentage of completion method – revenue is recognized at the point of production.
Expense recognition principle
*Matching principle – no gain if there is no pain
Costs and expenses incurred in earning a revenue shall be reported in the same period.
Measurement of elements

• Historical cost- amount of cash or cash equivalent paid or the fair value of the consideration
given to acquire and asset at the time of acquisition. “Past purchase exchange price”
• Current cost – amount of cash or cash equivalent that would have to be paid if the same or
equivalent asset was acquired currently.
• Realizable value – amount that could currently be obtained by selling an asset in an orderly
disposal.
• Present value – discounted value of the future net cash inflows that the item is expected to
generate in the normal course of business.