CHAPTER 1 : OVERVIEW OF ACCOUNTING
Conceptual Framework and Accounting Standards
Book by Zeus Millan 2020
ACCOUNTING
● “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 decisions.”
(Accounting Standards Council
or ASC)
● “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.” (Committee on
Accounting Terminology of the
American Institute of Certified
Public Accountants or CAT of
AICPA)
● "Accounting is the process of
identifying, measuring, and
communicating economic
information to permit informed
judgments and decisions by
users of the information."
(American Association of
Accountants or AAA)
IDENTIFYING
● the process of analyzing events
and transactions to determine
whether or not they will be
recognized.
● analytical component
RECOGNITION
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● the process of including the
effects of an accountable event
in the statement of financial
position or the statement of
comprehensive income through a
journal entry.
ACCOUNTABLE EVENT
● only accountable events are
recognized (i.e., journalized).
● the one that affects the assets,
liabilities, equity, income or
expenses of an entity.
● also known as economic activity,
which is the subject
matter of accounting.
● only economic activities are
emphasized and recognized in
accounting.
● sociological and psychological
matters are not recognized.
NON-ACCOUNTABLE EVENT
● are not recognized but disclosed
only in the notes, if they have
accounting relevance.
● disclosure only in the notes is not
an application of the recognition
process.
● a non-accountable event that
has an accounting relevance
may be recorded through a
memorandum entry.
TYPES OF EVENTS OR TRANSACTIONS
EXTERNAL EVENTS
● events that involve an entity and
another external party.
CHAPTER 1 : OVERVIEW OF ACCOUNTING
Conceptual Framework and Accounting Standards
Book by Zeus Millan 2020

● an event that involves changes in

TYPES OF EXTERNAL EVENTS
the economic resources or
obligations of an entity caused
EXCHANGE (RECIPROCAL TRANSFER) by an external party or external
source but does not involve
● an event wherein there is a transfers of resources or
reciprocal giving and receiving obligations.
of economic resources or ● examples:
discharging of economic ○ changes in fair values and
obligations between an entity price levels
and an external party. ○ obsolescence
● examples: ○ technological changes
○ sale ○ vandalism
○ purchase
○ payment of liabilities
○ receipt of notes receivable INTERNAL EVENTS
in exchange for accounts ● events that do not involve an
receivable external party.

NON-RECIPROCAL TRANSFER TYPES OF INTERNAL EVENTS

● is a "one way" transaction in that

the party giving something does
PRODUCTION
not receive anything in return
while the party receiving does not ● the process by which resources
give anything in exchange. are transformed into finished
● examples: goods.
○ donations ● examples:
○ gifts or charitable ○ conversion of raw
contributions materials into finished
○ payment of taxes products
○ imposition of fines ○ production of farm
○ theft products
○ provision of capital by
owners CASUALTY
○ distributions to owners
● an unanticipated loss from
disasters or other similar events.
EXTERNAL EVENT OTHER THAN
● examples:
TRANSFER
○ loss from fire
○ flood and other
catastrophes

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CHAPTER 1 : OVERVIEW OF ACCOUNTING
Conceptual Framework and Accounting Standards
Book by Zeus Millan 2020

measured are said to be valued

MEASURING by opinion.
● examples:
● involves assigning numbers, ○ estimates of uncollectible
normally in monetary terms, to ○ amounts of receivables
the economic transactions and ○ depreciation
events. (e.g., peso) ○ amortization expenses -
● several measurement bases are which are affected by
used in accounting include (but estimates of useful life and
not limited to): historical cost, residual value
fair value, present value, ○ estimated liabilities (such
realizable value, current cost, as provisions)
and sometimes inflation- ○ retained earnings - which
adjusted costs. is affected by various
● most commonly used is estimates of income and
historical cost, usually combined expenses
with the other measurement
bases.
VALUED BY FACT
● financial statements are said to
be prepared using a mixture of ● when measurement is
costs and values. unaffected by estimates, the
items measured are said to be
valued by fact.
COSTS
● examples:
● includes historical cost and ○ ordinary share capital
current cost. valued at par value
○ land stated at acquisition
VALUES cost
○ cash measured at face
● includes the other measurement
amount
bases.

COMMUNICATING
VALUATION BY FACT OR OPINION
● is the process of transforming
● economic data into useful
● the use of estimates is essential accounting information, such as
in providing relevant information. financial statements and other
● financial statements are said to accounting reports, for
be a mixture of fact and opinion. dissemination to users.
● also involves interpreting the
VALUED BY OPINION significance of the processed
information.
● when measurement is affected
by estimates, the items

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CHAPTER 1 : OVERVIEW OF ACCOUNTING
Conceptual Framework and Accounting Standards
Book by Zeus Millan 2020

FINANCIAL STATEMENTS
SUMMARIZING
● Statement of Financial Position or
Balance Sheet ● putting together or expressing in
condensed form the recorded
● Statement of Comprehensive and classified transactions and
Income or Income Statement events.
● Statement of Changes in Equity ● includes the preparation of
● Statement of Cash Flows financial statements and other
● Notes to the Financial Statements accounting reports.

THE 3 ASPECTS OF COMMUNICATING INTERPRETING

PROCESS OF 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.” (Committee on
Accounting Terminology of the
American Institute of Certified
Public Accountants or CAT of
AICPA)
● processed information involves
the computation of financial
statement ratios.
● some regulatory bodies, such as
the Bangko Sentral ng Pilipinas
(BSP), require certain financial
ratios to be disclosed in the notes
to financial statements.
BASIC PURPOSE OF ACCOUNTING
● provide information that is useful
in making economic decisions.

RECORDING
SOURCES OF INFORMATION
● refers to the process of
systematically committing into ● needed when making economic
writing the identified and decisions.
measured accountable events in ● financial statements are one of
the journal through journal the sources.
entries. ● other sources may include:
○ current events
○ industry publications
CLASSIFYING
○ internet resources
● involves the grouping of similar ○ professional advices
and interrelated items into their ○ expert systems
respective classes through
postings in the ledger.
ECONOMIC ENTITY

● use accounting to record

economic activities, process
data, and disseminate

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CHAPTER 1 : OVERVIEW OF ACCOUNTING
Conceptual Framework and Accounting Standards
Book by Zeus Millan 2020

information intended to be useful ● process of trading resources or

in making economic decisions. obligations for other resources or
● a separately identifiable obligations.
combination of persons and
property that uses or controls
CONSUMPTION
● economic resources to achieve
certain goals or objectives. ● process of using the final output
of the production process.

ECONOMIC ENTITY MAY EITHER BE:

INCOME DISTRIBUTION

● process of allocating rights to the

NOT-FOR-PROFIT ENTITY
use of output among individuals
● one that carries out some socially and groups in society.
desirable needs of the
community or its members.
SAVINGS
● activities are not directed
towards making profit. ● process of setting aside rights to
present consumption in
exchange for rights to future
BUSINESS ENTITY
consumption.
● one that operates primarily for
profit.
INVESTMENT

● process of using current inputs to

ECONOMIC ACTIVITIES
increase the stock of resources
● are activities that affect the available for output as opposed
economic resources (assets) to immediately consumable
and obligations (liabilities), and output.
consequently, the equity of an
economic entity.
TYPES OF INFORMATION PROVIDED BY
ACCOUNTING
ECONOMIC ACTIVITIES INCLUDES:

QUANTITATIVE INFORMATION
PRODUCTION
● information expressed in
● process of converting economic numbers, quantities, or units.
resources into outputs of goods
and services that are intended to
QUALITATIVE INFORMATION
have greater utility than the
required inputs. ● information expressed in words or
descriptive form.

EXCHANGE

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CHAPTER 1 : OVERVIEW OF ACCOUNTING
Conceptual Framework and Accounting Standards
Book by Zeus Millan 2020

● found in the notes to financial

statements as well as on the face
of the other financial statements.

FINANCIAL INFORMATION

● information expressed in money.

● is also quantitative information
because monetary amounts are
normally expressed in numbers.

TYPES OF ACCOUNTING INFORMATION

AS TO USER’S NEEDS

GENERAL PURPOSE ACCOUNTING

INFORMATION

● designed to meet the common

needs of most statement users.
● provided under financial
accounting.
● governed by Generally Accepted
Accounting Principles (GAAP).
● represented by the Philippine
Financial Reporting Standards
(PFRSS).

SPECIAL PURPOSE ACCOUNTING

INFORMATION

● designed to meet the specific

needs of particular statement
users.
● provided by other types of
accounting other than financial
accounting.
● examples:
○ managerial accounting
○ tax basis accounting

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