CHAPTER 1 THE ACCOUNTANCY PROFESSION TECHNICAL KNOWLEDGE To understand the definition of accounting. To identify the overall objective of accounting. To describe the practice of the accountancy profession in the Philippines. To understand the Continuing Professional Development in the field of accounting. To know the meaning of generally accepted accounting principles. To identify the standard-setting body in the Philippines. To describe the creation of the International Accounting Standards Board. To know the meaning of IFRS. Scanned with CamScannerDEFINITION OF ACCOUNTING The Accounting Standards Council provides the following definition: Accounting is a service activity. The accounting function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. The Committee on Accounting Terminology of the American Institute of Certified Public Accountants defines accounting as follows: 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. 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. Scanned with CamScannerImportant points The following important points made in the definition of accounting should be noted: One ~ Accounting is about quantitative information, Two ~ The information is likely to be financial in nature, Three — The information should be useful in decision making. The definition that has stood the test of time is the definition given by the American Accounting Association. ‘This definition states that the very purpose of accounting is to provide quantitative information to be useful in making an economic decision. The definition also states that accounting has a number of components, namely: a. Identifying as the analytical component. b. Measuring as the technical component. c, Communicating as the formal component. Identifying This accounting process is the recognition or nonrecognition of business activities as “accountable” events. Not all business activities are accountable. For example, the hiring of employees, the death of the entity president and the entering into a contract are all business activities but such events are not accountable because they cannot be quantified or expressed in terms of a unit of measure. An event is accountable or quantifiable when it has an effect on assets, liabilities and equity. In other words, the subject matter of accounting is economic activity or the measurement of economic resources and economic obligations. Only economic activities are emphasized and recognized in accounting. Sociological and psychological matters are beyond the province of accounting. Scanned with CamScannerExternal and internal transactions Economic activities of an entity are referred to as transactions which may be classified as external and internal. External transactions or exchange transactions are those economic events involving one entity and another entity, Examples of external transactions are: a. Purchase of goods from a supplier b. Borrowing money from a bank c. Sale of goods to a customer d. Payment of salaries to employees e. Payment of taxes to the government Internal transactions are economic events involving the entity only. Internal transactions are the economic activities that take place entirely within the entity. Production and casualty loss are examples of internal transactions. Production is the process by which resources are transformed into products. Casualty is any sudden and unanticipated loss from fire, flood, earthquake and other event ordinarily termed as an act of God. Measuring This accounting process is the assigning of peso amounts to the accountable economic transactions and events, Tf accounting information is to be useful, it must be expressed in terms of a common financial denominator. Financial statements without monetary amounts would be largely unintelligible or incomprehensible. The Philippine peso is the unit of measuring accountable economic transactions, The measurement bases are historical cost and current value. Historical cost is the original acquisition cost and the most common measure of financial transactions, Current value includes fair value, value in. use, fulfillment value and current cost, Scanned with CamScannerCommunicating Communicating is the process of preparing and distributing accounting reports to potential users of accounting information. Identifying and measuring are pointless if the information contained in the accounting records cannot be communicated in some form to potential users. Actually, the communicating process is the reason why accounting has been called the “universal language of business”. Implicit in the communication process are the 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. Classifying is accomplished by posting to the ledger. The 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 financial statements which include the statement of financial position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows. Accounting as an information system Accounting 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 — the documents that report financial information about an entity to decision makers. Financial reports tell us how well an entity is performing in terms of profit and loss and where it stands in financial terms. Scanned with CamScannerOverall objective of accounting The overall objective of accounting is to provide ooectale financial information aboul a business ooh ts dite to statement users particularly owners and cre ‘8 in making economic decisions. An accountant’s primary task is to supply, financial information so that the statement users could make informed judgment and better decision. The essence of accounting is decision-usefulness. Investors and other users are interested in financial accounting information necessary in making important and significant economic decisions. THE ACCOUNTANCY PROFESSION At present, Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines. This law is known as the Philippine Accountancy Act of 2004. Accountancy has developed as a profession attaining a status equivalent to that of law and medicine. In the Philippines, in order to qualify to practice the accountancy profession, a person must finish a degree in Bachelor of Science in Accountancy and pass a very difficult government examination given by the Board of Accountancy. The Board of Accountancy is the body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession in the Philippines. The Board of Accountancy is responsible for preparing and grading the Philippine CPA examination. This computer-based examination is offered twice a year, one in May and another one in October, in authorized testing centers around the country. Scanned with CamScannerLimitation of the practice of public accountancy Single practitioners and partnerships for the practice of public accountancy shall be registered certified public accountants in the Philippines. A certificate of accreditation shall be issued to certified public accountants in public practice only upon showing in accordance with rules and regulations promulgated by the Board of Accountancy and approved by the Professional Regulation Commission that such registrant has acquired a minimum of three years of meaningful experience in any of the areas of public practice including taxation. The Securities and Exchange Commission shall not register any corporation organized for the practice of public accountancy. Accreditation to practice public accountancy Certified public accountants, firms and partnerships of certified public accountants, including partners and staff members thereof, are required to register with the Board of Accountancy and Professional Regulation Commission for the practice of public accountancy. The Professional Regulation Commission upon favorable recommendation of the Board of Accountancy shall issue the Certificate of Registration to practice public accountancy which shall be valid for 3 years and renewable every 3 years upon payment of required fees. Certified Public Accountants generally practice their profession in three main areas, namely: a. Public accounting b. Private accounting c. Government accounting. Scanned with CamScannerPUBLIC ACCOUNTING The field of public accounting or public accountancy is comy of individual practitioners, small accounting firms and storey multinational organizations that render independent and expert financial services to the public. ntants usually offer three kinds of services, Public accou! 8 , c taxation and management advisory services, namely auditing, As a matter of fact, l separate division sfor each of Auditing Auditing has traditionally been the primary service offered by most public accounting practitioners. rnal auditing is the examination of financial statements by independent certified public accountant for the purpose of expressing an opinion as to the fairness with which the financial statements are prepared. Actually, external auditing is the attest function of independent CPAs. The Bureau of Internal Revenue requires audited financial statements 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 audited financial statements on making economic decision. large multinational accounting firms have these services. Auditing or extei Taxation Taxation service includes the preparation of annual income tax returns and determination of tax consequences of certain proposed business endeavors. The CPA not infrequently represents the client in tax investigations. To offer this service effectively and efficiently, the public accountant must be thoroughly familiar with the tax laws and regulations and updated with changes in taxation law and court cases concerned with interpreting taxation law. 8 Scanned with CamScannerManagement advisory services Management advisory services have become incroasingly important in recent years although audit and tax services are undoubtedly the mainstay of public accountants, The term management advisory services has no precise coverage but is used generally to refer to services to clients on matters of accounting, finance, business policies, organization procedures, product costs, distribution and many other phases of business conduct and operations. Specifically, management advisory services include: Advice on installation of computer system Quality control Installation and modification of accounting system . Budgeting . Forward planning and forecasting Design and modification of retirement plans . Advice on mergers and consolidations PRIVATE ACCOUNTING Many Certified Public Accountants are employed in business entities in various capacity as accounting staff, chief accountant, internal auditor and controller. Rmepo sp ‘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. Private accounting includes maintaining the records, producing the financial reports, preparing the budgets and controlling and allocating the resources of the entity. The private accountant has also the responsibility for the determination of the various taxes the entity is obliged to pay. Scanned with CamScannerGOVERNMENT ACCOUNTING i the proces, rl nt accounting encompasses rocess of Goreng, claselfying, summarizing and communicating qj} neactl ‘ng the receipt and disposition of actions involving p 1 qovertment funds and property and interpreting the results thereof. The focus of government accounting is the custody and administration of public funds. Many Certified Public Accountants are employed in many branches of the government, more particularly: a. Bureau of Internal Revenue b. Commission on Audit c. Department of Budget and Management d. Securities and Exchange Commission e. Bangko Sentral ng Pilipinas CONTINUING PROFESSIONAL DEVELOPMENT (CPD) Republic Act No. 10912 is the law mandating and strengthening the continuing professional development program for all regulated professions, including the accountancy profession. All certified public accountants shall abide by the requirements, rules and regulations on continuing professional development to be promulgated by the Board of Accountancy, subject to the approval of the Professional . Regulation Commission, in coordination with the accredited national professional organization of certified public accountants or any duly accredited educational institutions. Continuing professional development refers to the inculcation and acquisition of advanced knowledge, skill, proficiency, and ethical and moral values after the initial registration of the Certified Public Accountant for assimilation into professional Practice and lifelong learning. Continuing professional development raises and enhances the technical skill and ifi : sonteae competence of the Certified Public 10 Scanned with CamScannerCPD credit units The CPD credit units refer to the CPD credit hours required for the renewal of CPA license and accreditation of a CPA to practice the accountancy profession every three years. Under the new BOA Resolution, all Certified Public Accountants regardless of area or sector of practice shall be required to comply with 120 CPD credit units. The Continuing Professional Development is required for the renewal of CPA license and accreditation of CPA to practice the accountancy profession. As recently promulgated, only 15 CPD credit units are required for the renewal of CPA license. However, 120 CPD credit units are required for accreditation of a CPA to practice the accountancy profession. Excess credit units earned shall not be carried over to the next three-year period, except credit units earned for masteral and doctoral degrees. It is to be emphasized that the Continuing Professional Development has become mandatory for Certified Public Accountants. Exemption from CPD A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65 years. However, this exemption applied only to the renewal of CPA license and not for the purpose of accreditation to practice the accountancy profession. 11 Scanned with CamScannerAccounting versus auditing In a broad sense, accounting embraces auditing. Auditing is one of the areas of accounting specialization, In a limited sense, accounting is essentially constructive j nature. Accounting ceases when financial statements act already prepared. ad On the other hand, auditing is analytical. The work of an auditor begins when the work of the accountant ends, After the financial statements are prepared, the auditor wil] begin to perform the task of auditing. The auditor examines the financial statements to ascertain whether they are in conformity with generally accepted accounting principles. Accounting versus bookkeeping Bookkeeping is procedural.and largely concerned with development and maintenance of accounting records. Bookkeeping is the “how” of accounting. Accounting is conceptual and is concerned with the why, reason or justification for any action adopted. Bookkeeping is a procedural element of accounting as arithmetic is a procedural element of mathematics. Accounting versus accountancy Broadly speaking, the two terms are synonymous because they both refer to the entire field of accounting theory and practice. Technically speaking, however accountancy refers to the profession of accounting practice. Accounting is used in reference only to a particular field of accountancy such as public accounting, private accounting an government accounting. 12 Scanned with CamScannerFinancial accounting versus managerial accounting Financial accounting is primarily concerned with the recording of business transactions and the eventual preparation of financial statements. Financial accounting focuses on general purpose reports known as financial statements intended for internal and external users, Financial accounting is the area of accounting that emphasizes reporting to creditors and investors. Managerial accounting is the accumulation and preparation of financial reports for internal users only. In other words, managerial accounting is the area of accounting that emphasizes developing. accounting information for use within an entity. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Accounting has evolved through time changing with the needs of society. As new types of transactions occur in trade and commerce, accountants develop rules and procedures for recording them. These accounting rules, procedures and practices came to be known as generally accepted accounting principles or simply GAAP. The principles have developed on the basis of experience, reason, custom, usage and practical necessity. Generally accepted accounting principles represent the rules, procedures, practice and standards followed in the preparation and presentation of financial statements. Generally accepted accounting principles are like laws that must be followed in financial reporting. The process of establishing GAAP is a political process which incorporates political actions of various interested user groups as well as professional judgment, logic and research. 1 Scanned with CamScannerPurpose of accounting standards The overall purpose of accounting standards is to identig, proper accounting practices for the preparation and presentation of financial statements. s create a common understandin, and users of financial statements assets and liabilities. Accounting standard: between preparers particularly the measurement of A set of high-quality accounting standards is a necessity to ensure comparability and uniformity in financial statements based on the same financial information. FINANCIAL REPORTING STANDARDS COUNCIL In the Philippines, the development of generally accepted accounting principles is formalized initially through the creation of the Accounting Standards Council or ASC. 1 Reporting Standards Council or FRSC now The Financial tandards Council. replaces the Accounting S The FRSC is the accounting standard setting body created by the Professional Regulation Commission upon recommendation of the Board of Accountancy to assist the Board of Accountancy in carrying out its powers and functions provided under R.A. Act No. 9298. The main function is to establish and improve accounting standards that will be generally accepted in the Philippines. The accounting standards promulgated by the Financial Reporting Standards Council constitute the "highest hierarchy" of generally acoepted accounting principles in the Philippines. The approved statements of the FRSC are known a9 Philippine Accounting Standards or PAS and Philippine Financial Reporting Standards or PFRS. 14 Scanned with CamScannerComposition of FRSC The FRSC is composed of 15 members with a Chai 3 airm: had been or is presently a senior accounting practitioner ara 14 representatives from the following: Board of Accountancy Securities and Exchange Commission Bangko Sentral ng Pilipinas Bureau of Internal Revenue Commission on Audit Major organization of preparers and users of financial statements — Financial Executives Institute of the Philippines or FINEX Accredited national professional organization of CPAs: Public Practice Commerce and Industry Academe or Education Government Total ‘ The Chairman and members of the FRSC shall haye a term of 3 years renewable for another term. Any member of the ASC shall not be disqualified from being appointed to the FRSC. : : Philippine Interpretations Committee The Philippine Interpretations Committee or PIC was formed by the FRSC in August 2006 and has replaced the Interpretations Committee or IC formed by the Accounting Standards Council in May 2000. The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and to provide timely guidance on financial reporting issues not specifically addressed in current PFRS. In other words, interpretations are intended to give authoritative guidance on issues that are likely to receive divergent or unacceptable treatment because the standards dc not provide specific and clearcut rules and guidelines. Bee IS loo 10 29 v0 The counterpart of the PIC in the United Kingdom is the International Financial Reporting Interpretations Committee or IFRIC' which has already. replaced the ‘Standing Interpretations Committee or IC. ‘ 15 Scanned with CamScannerINTERNATIONAL ACCOUNTING STANDARDS COMMITTEE The International Accounting Standards Committee or LAgg is an independent private sector body, with the objective of achieving uniformity in the accounting principles which arg used by business and other organizations for financial reporting around the world. It was formed in June 1973 through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States of America. The IASC is headquartered in London, United Kingdom. Objectives of IASC a. To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance. b. To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements. INTERNATIONAL ACCOUNTING STANDARDS BOARD The International Accounting Standards Board or IASB now replaces the International Accounting Standards Committee or IASC. The IASB publishes standards in a series of pronouncements called International-Financial Reporting Standards or IFRS. However, the IASB has adopted the body of standards issued by the IASC. The pronouncements of the IASC continue to be designated as "International Accounting Standards" or IAS, The IASB standard-setting process includes in the correct order research, discussion paper, exposure draft an accounting standard. 16 Scanned with CamScannerMove toward IFRS In developing accounting standards that will be generally accepted in the Philippines, standards issued by other standard setting bodies such as the USA Financial Accounting Standards Board (FASB) and the IASB are considered, In the past years, most of the Philippine standards issued are based on American accounting standards. At present, the FRSC has adopted in their entirety all International Accounting Standards and International Financial Reporting Standards. The move toward IFRS is essential to achieve the goal of one uniform and globally accepted financial reporting standards. The Philippines is fully compliant with IFRS effective January 2005, a process which was started back in 1997 in moving from USA GAAP to IFRS. The following factors are considered in deciding to move totally to international accounting standards: a. Support of international accounting standards by Philippine organizations, such as the Philippine SEC, Board of Accountancy and PICPA. b. Increasing jnternalization of business which has heightened interest in a common language for financial reporting. c. Improvement of international accounting standards or removal of free choices of accounting treatments. d. Increasing recognition of international accounting standards by the World Bank, Asian Development Bank" and World Trade Organization. 17 Scanned with CamScannerPhilippine Financial Reporting Standards uncil issues standards The Financial Reporting Standards Co u f “philippine Financial in a series of pronouncements called Reporting Standards" or PFRS. ‘The Philippine Financial Reporting Staridards collectively include all of the following: ting Standards which . ilippi i ial Repor n a. Philippine Financia Pp ting vancial Reporting correspond to Internationa Standards. Reporting Standards are The Philippine Financial ‘ ) counterpart in International numbered the same as their Financial Reporting Standards. b. Philippine Accounting Standards which correspond to International Accounting Standards. The: Philippine Accounting Standards are numbered the same as their counterpart in International Accounting Standards. c. Philippine Interpretations which correspond to Interpretations of the IFRIC and the Standing Interpretations Committee, and Interpretations developed by the Philippine Interpretations Committee. 18. Scanned with CamScannerQUESTIONS 1. Define accounting. 2, What are the important points made in the definition of accounting? 3. Explain "identifying" as a component of accounting. 4, What are transactions? §. Distinguish external transactions and internal transactions. 6. When is a transaction accountable or quantifiable? 7. Explain "measuring" as a component of accounting? 8, What are the measurement bases used in accounting? 9, Explain "communicating" as component of accounting. 10, Explain recording, classifying and summarizing in relation to the communicating component of accounting. 11. Explain why accounting has been called the "universal language of business". 12, Explain accounting as an information system. 18. What is the overall objective of accounting? 14. Describe the accountancy profession. 15, What is R.A. No. 9298? 16. What do you understand by the Board of Accountancy? 17. Explain the limitation of the practice of public accountancy. 19 Scanned with CamScanneraccreditation to practice of accountancy, 18, Explain the ag in the practice of the 19. What are the three main are: accountancy profession? 20, Explain public accounting. 21. What are the three kinds of services offered by CPAs in the practice of public accounting. 22, Explain auditing. 23. Describe the taxation service offered by CPAs. 24, Explain management advisory services. 25. What are some management advisory services offered by CPAs? 26, Explain private acocunting. 27, Explain government accounting. 28, What do you understand by the Continuing Professional Development of CPAs? 29. What is the meaning of CPD credit units? 30. How many CPD credit units are required? 81, What is the purpose of the required CPD credit units? 32. What is the exemption from the CPD requirements? 33. Distinguish accounting and auditing. 34. Distinguish accounting and bookkeeping. 35: Distinguish accounting and accountancy. 20 Scanned with CamScanner6. What is financial accounting? 37. What is managerial accounting? 38. What is the meaning of generally accepted accounti Ang principles or GAAP? : 39. What constitute GAAP in the Philippines? 40. Explain the purpose of accounting standards. 41. What do you understand about the Financial Reporting Standards Council? 42. What is the composition of FRSC? 43. What do you understand about PIC and IFRIC? 44. What do you understand about the International Accounting Standards Committee? 45. What are the twin objectives of the IASC? 46. What is IASB? 47. What do you understand by IFRIC? 48, Explain why the Philippines has moved totally from American accounting standards to international ascounting standards. 49. What do you understand by the "International Financial Reporting Standards"? 50. What are collectively included in "Phil Financial Reporting Standards"? 21 Scanned with CamScanner