CHAPTER 1 PRETEST
employee relationship, while private practice involves an
The standards issued by the IASB are the International
Financial Reporting Standards.
 IASB is the international counterpart of FRSC.
 In conjunction with the International Financial Reporting
Standards, FRSC adopted all the standards made by
IASB, and later on it was called Philippine Financial
Reporting Standards.
Changes to reporting standards are primarily made in response
to common needs.
 Any type of changes and any type of amendments a
standard has, that is due to the users’ needs.
 Any standards or the conceptual framework itself talks
about prevailing financial statements for the common
needs.
 Our main goal as accountants is to cater the common
needs of our users, not a specific need by a particular
user.
 ‘Doing financial statements solely because this
government needs it’ is not allowed in accounting.
 Accountants are preparing financial statements for the
common needs because we don’t want to be biased.
Accounting policies prescribed by a regulatory are sometimes
referred to as regulatory standards.
 Regulatory parties – government
BOA consists of a chairperson and 6 members appointed by
the President of the Philippines.
 The members of the BOA undergo process of
nomination by PICPA (official organization of
accountants). PICPA gives 5 nominees per vacancy.
After PICPA submits its nominees, it will go to PRC
BOA, and BOA will lessen the nominees into three.
Then the President of the Philippines will choose in each
vacancy.
 The president has a term of 3 years. Every term, a
member must rest for 1 year. But any member of the
BOA can only be part of the BOA for a maximum of 12
years.
In the absence of a standard that specifically applies to a
transaction or event, management shall use its judgment in
developing and applying an accounting policy.
 Any accountants’ judgment or the management’s
judgment itself is okay to apply if we do not have certain
accounting standard we can apply.
 Hierarchy in applying accounting treatment in a
particular accounting issue: accounting standards,
conceptual framework, judgment
For financial statements to be useful, they should be prepared
using reporting standards that are generally acceptable.
 Generally accepted accounting principles – these are
accounting principles and accounting concepts that is
applied here in the Philippines and internationally.
 Generally accepted accounting principles is another way
on how we can report or address any accounting issue.
But if we have a specific accounting standards that
prevail, we use it.
Public practice of accounting does not involve an employer-
employer-employee relationship.
 Public practice – these are accountants working in a
firm (SGV, etc.)
 Public practice – the relationship between the accountant
towards his or her clients is only on a contractual basis.
 Private practice – government accounting, academe
 Private practice – accountants working in a company
(Jollibee, etc.)
 Private practice – contract between the accountant and
the company
 Private practice – contract between client and the
company
General purpose financial statements are those statements that
cater to the common needs of external users.
 In financial reporting, we don’t cater to the specific
needs of our users, rather, we focus more on the general
or common needs of our external users.
The primary objective of financial reporting is to provide
information useful in assessing the amounts and timing of
future cash flows, to provide information about economic
resources, claims to those resources, and changes in those
resources, and to provide information that is useful in making
investment and credit decisions.
 The secondary objective of financial reporting is to
provide information useful in assessing management’s
stewardship or the effectiveness of the entity’s
management.
 Our roles as accountants are we gather information,
summarize transactions, put it into financial statements,
and give it to our users for them to arrive at a decision.
A financial report includes the financial statements plus other
information provided outside the financial statements.
 Financial report is broader than financial statement.
 There are a lots of financial reports other than financial
statement.
Prudence is the use of caution when making estimates under
conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated.
 Very skeptic in prudence
 Whenever there is confusion on how much we should
report our assets and liabilities, as well as our income
and expenses, don’t overstate our assets and income.
While don’t measure liabilities and expenses if we don’t
have source if how much is lacking.
 If we overstate our assets and income, it will look good
on paper.
 If we understate our liabilities and expense, it will also
look good on paper.
Changes in accounting policies are disclosed in the notes.
 Changing in accounting policies – when you deal with
your inventories. for example, you are selling computer
parts (inventory). in the treatment of your inventory,
kung kayo ay gumagamit ng FIFO (first in, first out) sa
first year of operation, but hindi na nagw-work ang FIFO
sa second year of operation so you want to switch with
specific identification (anything will go out first).
notes by frey angeleigh galvezo
Classifying involves the grouping of similar and interrelated
items into their respective classes through posting in the
ledger.
 Posting is the process.
When measurement is unaffected by estimates, the items
measured are said to be valued by fact.
 How do we identify historical cost? By estimates or
facts.
 If it is fact, the information is available; there is a direct
resource or a basis to that estimate
 If it is estimate, there is no direct information that says
how much. In using estimate, you can use your
judgment.
The accounting standards used in the Philippines are the
PFRSs, which are based on IFRS. The PFRSs comprise the
following: (1) PFRSs, (2) PASs, and (3) Interpretations.
 PFRS are more modern standards compared to PAS.
 PAS is made by FASB (Financial Accounting Standards
Board).
Auditing is the process of evaluating the correspondence of
certain assertions with established criteria and expressing an
opinion.
 Auditing starts when accounting ends.
 The work of an auditor involves corroborating available
information whether the amounts or the contents of the
financial statements speaks the truth and nothing but the
truth.
 The work of an auditor is to check if the financial
statements prepared by the accountants are correct.
Bookkeeping is the process of recording the accounts or
transactions of an entity.
 A bookkeeper cannot sign financial statements, only an
accountant.
International Financial Reporting Interpretations Committee
(IFRIC)
 It is an accounting body that issue interpretations about
the standards for the users to understand.
Recognition is the process of including the effects of an
accountable event in the financial statements.
 To check whether is qualified for recognition, did it meet
the definition of asset, liabilities, equity, income, and
expense? Would it provide useful information?
 Recognition – it qualifies to be part of the financial
statements
 Derecognition – eliminating transactions or elements
from financial statements
 Fully depreciated: 0 or salvage value
 formula of computing the depreciation expense: (cost –
salvage value) ÷ useful life
 salvage value or residual value – the cost that you can
get if you sell the equipment at the end of its useful life
 if it doesn’t have a salvage value, its value is 0.
CHAPTER 1
The Need for Financial Reporting
Accounting
 It 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.
 FRSC defines accounting as a service activity. Our
main service to cater the financial needs of our
clients.
 It is an art. It is an art of recording, classifying,
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 result
thereof.
 Aspects of Accounting: Recording, Classifying,
Summarizing, Interpreting
 recording – journals
 classifying – ledgers
 summarizing – financial statements and other
accounting reports
 interpreting – e.g., comparative financial statements
explained to clients for them to make a decision
 It is a process. It is the process of identifying,
measuring, and communicating economic information to
permit informed judgments and decisions by users of the
information.
 Process does not have an ending.
 Our role as accountant ends when the business also
ends.
 Most acceptable and/or most used definition of
accounting
 All the three definitions above talks about economic
information and financial information. It is because an
accountant handles the financial aspect of the business.
 They also talk about decision making.
Accounting – it 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)
ASPECTS OF ACCOUNTING
Identifying
 It is the process of analyzing events and transactions to
determine whether or not they will be recognized.
 Recognition – refers to 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.
 Two criteria for us to recognized a transaction or
an account: It would provide useful information; It
must meet the definition of an asset (it is the
resources owned and controlled by an entity that
will help to the inflow of resources; has future
economic benefits), liability (credits of the entity),
equity (residual interest), income, and expenses.
 All the assets our entity has come from our
creditors and the owners.
 sole proprietorship – owner’s equity
 partnership – partner’s capital (name capital)
 corporation – shareholders’ equity (most complex)
 Accountable event – one that affects the assets,
liabilities, equity, income or expenses of an entity
 Accountable event – it is also known as economic
activity
notes by frey angeleigh galvezo
 Economic activity – it is the subject matter of
accounting
 Only economic activities are emphasized and recognized
in accounting. Sociological and psychological matters
are not recognized.
 Non-accountable events 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.
 Any accountable event can be an external event or an
internal event.
 External events – events that involve an entity and
another external party; the entity transacts with a third
party outside the entity.
 Exchange (reciprocal transfer) – an event
wherein there is a reciprocal giving and receiving of
economic resources or discharging of economic
obligations between an entity and an external party.
 sale
 purchase
 payment of liabilities
 receipt of notes receivable in exchange for
accounts receivable
 Non-reciprocal transfer – a “one way” transaction
in that the party giving something does not receive
anything in return while the party receiving does
not give anything in exchange.
 donations
 gifts or charitable contributions
 payment of taxes
 imposition of fines
 theft
 provision of capital by owners
 distributions to owners
– FASB (ASC) 845
 External event other than itself – 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.
 changes in fair values and price levels
 obsolescence
 technological changes
 vandalism
 Internal events – events that do not involve an external
party; contracting with yourself
 Production – the process by which resources are
transformed into finished goods
 conversion of raw materials into finished
products
 production of farm products
 Casualty – an unanticipated loss from disasters or
other similar events
 loss from fire, flood, and other catastrophes
Measuring
 it involves assigning numbers, normally in monetary
terms, to the economic transactions and events.
 measurement bases: historical cost, fair value, present
value, realizable value, current cost, inflation-adjusted
value
 historical cost and fair value are the common
measurement bases that we are using
 financial statements are said to be prepared using a
mixture of costs and values.
 cost include historical cost and current cost, while values
include fair value, present value, realizable value,
inflation-adjusted value
 the use of estimates is essential in providing relevant
information. thus, financial statements are said to be a
mixture of fact and opinion.
 when measurement is affected by estimates, the
times measured are said to be valued by opinion.
 estimates of uncollectible amounts of
receivables
 depreciation and amortization expenses, which
are affected by estimates of useful life and
residual value
 estimated liabilities, such as provisions
 retained earnings, which is affected by 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
Communicating
 it is the process of transforming economic data into
useful accounting information, such as financial
statements and other accounting reports, for
dissemination to users.
 it involves interpreting the significance of the processed
information.
 three aspects of the communicating process of
accounting
 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; includes the preparation of
financial statements and other accounting reports
 interpreting – the 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
 the basic purpose of accounting is to provide
information that is useful in making economic
decisions
 economic entities use accounting to record economic
activities, process data, and disseminate information
intended to be useful in making economic decisions
 economic entity – it is a separately identifiable
combination of persons and property that uses or controls
economic resources to achieve certain goals or objectives
 not-for-profit entity – one that carries ot some
socially desirable needs of the community or its
members and whose activities are not directed
towards making profit
 business entity – one that operates primarily for
profit
notes by frey angeleigh galvezo
 economic activities – activities that affect the economic
resources (assets) and obligations (liability), and
consequently, the equity of an economic entity
 production – the process of converting economic
resources into outputs of goods and services that are
intended to have greater utility than the required
inputs
 exchange – the process of trading resources or
obligations for other resources or obligations
 consumption – the process of using the final output
of the production process
 income distribution – the process of allocating
rights to the use of output among individuals and
groups in society
 savings – the process of setting aside rights to
present consumption in exchange for rights to
future consumption
 investment – the process of using current inputs to
increase the stock of resources available for output
as opposed to immediately consumable output
 after you summarize the financial information through
our financial statements, you need to communicate that
financial statement to any user.
 Types of information provided by accounting:
 Quantitative information – information expressed
in numbers, figures, quantities, or units
 Qualitative information – information expressed
in words or descriptive form
 Financial information – information expressed in
money; combination of quantitative and qualitative
 Types of accounting information classified as to users’
needs:
 General purpose accounting information –
provided under financial accounting; designed to
meet the common needs of most statement users;
governed by generally accepted accounting
principles (GAAP – anywhere, anyone can use or
apply it to their transactions; to avoid being biased)
represented by the Philippine Financial Reporting
Standards (PFRSs)
 Special purpose accounting information –
directing or for single use; designed to meet the
specific needs of particular statement users; it is
provided by other types of accounting other than
financial accounting
Sources of information in financial statements
 Information in the financial statements is not obtained
exclusively from the entity’s accounting records. Some
are obtained from external sources.
 fair value measurements
 resolutions of uncertainties
 future lease payments
 contractual commitments
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.
Accounting as an information system
 Accounting identifies and measures economic activities,
processes information into financial reports, and
communication these reports to decision makers.
Accounting as a language of business
 Accounting is often referred to as a “language of
business” because it is fundamental to the
communication of financial information
Creating and Critical thinking in accounting
 Creative thinking – involves the use of imagination and
insight to solve problems by finding new relationships
(ideas) among items of information; most important in
identifying alternative solutions
 Critical thinking – involves the logical analysis of
issues, using inductive or deductive reasoning to test new
relationships to determine their effectiveness; most
important in evaluating alternative solutions
 Creative skills and judgment are exercised in problem
solving. Steps in problem solving:
1. recognizing a problem
2. identifying alternative solutions
3. evaluating the alternatives
4. selecting a solution from among the alternatives
5. implementing the solution
ACCOUNTING CONCEPTS
 Double-entry system
 each accountable event is recorded in two parts –
debit (receive) and credit (let go)
 Going concern assumption
 the entity is assumed to carry on its operations for
an indefinite period of time
 we view an entity as continuing its operations
indefinitely (no ending)
 the only time a corporation, a business or an entity
will be put into an end is if it faces liquidation or
dissolution (it affirms that a business ends)
 the measurement basis involving mixture of costs
and values is appropriate only when the entity is a
going concern
 realizable value – the appropriate measurement
basis if the entity is a liquidating concern (e.g.,
estimated selling price less estimated costs to sell
for assets and expected settlement amount for
liabilities
 Separate entity (Accounting entity/Business entity
concept/Entity Concept)
 the entity is viewed 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
 it defined the area of interest of the accountant
 Stable monetary unit (Monetary unit assumption)
 assets, liabilities, equity, income, and expenses are
stated in terms of a common unit of measure, which
is the peso in the Philippines; convert it into peso if
it is not in peso
 the purchasing power of the peso is regarded as
stable or constant and that its instability is
insignificant and therefore ignored (if the inflation
rate increases, the purchasing power decreases,
and vice versa)
notes by frey angeleigh galvezo
  to be useful, accounting information should be
stated in a common denominator
 Time Period (Periodicity/Accounting Period)
 the life of the entity is divided into series of
reporting periods (monthly, annually, semi-
annually)
 an accounting period is usually 12 months and may
either be a calendar year (starts on January 1 and
ends on December 31 of that same year) or a fiscal
year (covers 12 months but starts on a date other
than January 31) period.
 Materiality concept
 information is material if its omission or
misstatement could influence economic decisions
 it is a matter of professional judgment and is based
on the size and nature of an item being judged
 a transaction might be material to one entity, but
immaterial to another entity
 Cost-benefit
 the cost of processing and communicating
information should not exceed the benefits to be
derived from it
 the benefit must always exceeds the cost, para sa
point of view natin, may gain
 Accrual Basis of accounting
 the effects of transactions and other events are
recognized when they occur (and not as cash is
received or paid)
 recorded in the accounting records and reported in
the financial statements of the periods to which they
relate
 the receipt of cash is not taken into consideration
when we record or recognize transactions
 kahit hindi pa bayad, it is already recognized
 opposite of cash basis of accounting (we
recognized income when received, we recognized
expense when paid; used when filing BIR records)
 more accurate and relevant financial
statements
 Historical cost concept (Cost principle)
 the value of an asset is determined on the basis of
acquisition cost
 the cost of an asset on the date of acquisition upon
payment (new amount)
 e.g., sept. 1, you bought a printer of 30000
(historical cost)
 this concept is not always maintained
 some PFRSs require the departure from this
concept, such as when inventories are measure at
net realizable value (NRV) rather than at cost when
applying the “lower of cost and NRV”
measurement
 Consistency concept
 the financial statements are prepared on the basis of
accounting principles that are applied consistently
from one period to the next.
 changes in accounting policies are made only when
required or permitted by the PFRSs or when the
change results to more relevant and reliable
information
 we must be consistent, but inevitable changes must
be disclosed to notes to financial statements
 we must remain consistent (it is the way) to
maintain comparability (it is the goal)
 Matching principle (Association of cause and effect)
 costs are recognized as expenses when the related
revenue is recognized
 e.g., cost of good sold (for example: sept. 1,
nagbenta ka ng sampung ballpen na you bought for
5 pesos, but you sell it for 10 pesos. sales is 100
pesos. cost of goods sold is 50 pesos. gross profit is
50 pesos. – dapat on the same day na nag-report ka
ng sale na 100, doon din papasok ang cost of goods
sold, kasi expense ang cost of goods sold––dapat
nagma-match sila)
 Realization
 it is the process of converting non-cash assets (e.g.,
land, equipment) into cash or claims for cash
 the concept that deals with revenue recognition
 most of the times, we realize when we are in
liquidation process, and if we have more liabilities
than cash.
 Prudence
 it is the use of caution when making estimates
under conditions of uncertainty, such that assets or
income are not overstated and liabilities or expenses
are not understated
 the one which has the least effect on equity is
chosen
 it is applying the sense of caution in determining
what amount to use in the transactions
 the exercise of prudence does not allow the
deliberate understatement of assets or overstatement
of liabilities in order to create hidden reserves
because the financial statements would not be
faithfully represented
 cookie jar reserve – example of a hidden reserve
 it is a form of fraudulent reporting wherein
during periods of high profits, liabilities are
overstated through excessive provisions of
expenses or non-recognition of income
 in subsequent periods, when the entity’s
financial performance is poor, the “cookie
jar reserve” is reversed to income in order to
report high profits
 management engages in such fraud because
of various reasons, which may include
smoothing earnings in order to secure
bonuses over time, defer profits to the
periods when they are evaluated for
promotion or for election as members of the
board of directors, or to show profits when
other entities belonging to the same industry
show declining financial performance
 Expense recognition concepts/principles
(different ways on how we recognize expense)
 matching concept (direct association of costs and
revenues) – when recognizing expense, the related
revenue is also recorded on the same period; costs
that are directly related to the earning of revenue
are recognized as expenses in the same period the
related revenue is recognized
 systematic and rational allocation – costs that are
not directly related to the earning of revenue are
initially recognized as assets and recognized as
expenses over the periods their economic benefits
are consumed, using some method of allocation; an
example is when we depreciate assets; when the
equipment is deteriorating, we recognize
depreciation expense (as we use a particular asset,
notes by frey angeleigh galvezo
 we also recognize depreciation from that); other
examples are amortization, expensing of
prepayments, and effective interest method
 immediate recognition – costs that do not meet the
definition of an asset, or ceases to meet the
definition of an asset, are expensed immediately
(e.g., water bill, electricity bill–they are
automatically recognized as an expense; other
examples are casualty losses and impairment
losses)
 Concept of Articulation
 all of the components of a complete set of financial
statements are interrelated
 the preparation of a worksheet (and the eventual
completion of the financial statements) recognizes
that the financial statements are fundamentally
interrelated and interact with each other
 e.g., when evaluating an entity’s ability to generate
future cash flows, all the financial statements
should be used and not only the statement of cash
flows
 receivables and payables in the statement of
financial position provide information on
expected cash receipts and cash disbursements
in future periods
 income and expenses in the statement of profit
or loss and other comprehensive income
provide information on the entity’s ability to
generate cash flows from its operations
 information on issued and unissued shares in
the statement of changes in equity provides
information on the availability of equity
financing
 information on historical changes in cash and
cash equivalents in the statement of cash flows
helps users assess future sources and uses of
funds
 the notes to financial statements provides
information on the quality of earnings (e.g.,
whether income or expenses are realized or
unrealized or whether they are recurring or
non-recurring
 Full disclosure principle
 recognizes that the nature and amount of
information included in the financial statements
reflect a series of judgmental trade-offs
 the trade-offs strive for sufficient detail to
disclose matters that make a difference to
users, yet
 the trade-offs strive for sufficient condensation
to make the information understandable,
keeping in mind the costs of preparing and
using it
 Entity theory
 the accounting objective is geared towards proper
income determination
 proper matching of costs against revenues is the
ultimate end
 emphasizes the income statement and is
exemplified by the equation “Assets = Liabilities +
Capital”
 Proprietary theory
 the accounting objective is geared towards the
proper valuation of assets
 emphasizes the importance of the balance sheet and
is exemplified by the equation “Assets – Liabilities
= Capital”
 Residual Equity Theory
 applicable when there are two classes of shares
issued, i.e., ordinary and preferred
 the equation is “Assets – Liabilities – Preferred
Shareholders’ Equity = Ordinary Shareholders’
Equity”
 applied in the computation of book value per share
and return on equity
 Fund Theory
 the accounting objective is neither proper income
determination nor proper valuation of assets but the
custody and administration of funds
 the objective is directed towards cash flows,
exemplified by the formula “cash inflows – cash
outflows = fund”
 used in government accounting and fiduciary
accounting
Accounting concepts – refer to the principles upon which the
process of accounting is based
Accounting assumptions (accounting postulates) –
fundamental concepts or principles and basic notions that
provide the foundation of the accounting process
Accounting theory – logical reasoning in the form od a set of
broad principles that (i) provide a general frame of reference
by which accounting practice can be evaluated and (ii) guide
the development of new practices and procedures; the
organized set of concepts and related principles that explain
and guide the accountant’s action in identifying, measuring,
communicating accounting information; comprises the
Conceptual Framework and the Philippine Financial
Reporting Standards (PFRSs)
 Most accounting concepts are derived from the
Conceptual Framework and the Philippine Financial
Reporting Standards (PFRSs)
 However, some accounting concepts are implicit,
meaning they are not expressly stated in the Framework
or PFRSs but are generally accepted because of their
long-time use in the profession.
Common branches of accounting
1. Financial accounting – the branch of accounting that
focuses on general purpose financial statements
 General purpose financial statements – those
statements that cater to the common needs of
external users, primarily the potential and existing
investors, and lenders and other creditors
 governed by the Philippine Financial Reporting
Standards
 in preparation of the general purpose financial
statements, we apply Philippine Financial Reporting
Standards (PFRS–new standards, PAS–some of these are
used today, Interpretations–if there are issues or point of
clarifications on the standards, the PIC issue
interpretations for any users to understand easily the
standards)
 broader than management accounting
 caters external and internal users
 the product of financial accounting is general purpose
financial statements
notes by frey angeleigh galvezo

Financial accounting vs. Financial reporting
 they both focus on general purpose financial statements
 financial reporting endeavors to promote principles that
are also useful in “other financial reporting”
 “other financial reporting” comprises information
provided outside the financial statements that assists in
the interpretation of a complete set of financial
statements or improves users’ ability to make efficient
economic decisions
 financial statements – the structured representation of an
entity’s financial position and results of its operations
 financial statements – the end product of the accounting
process and the means by which information gathered
and processed are periodically communicated to users
 financial report – includes the financial statements plus
other information provided outside the financial
statements that assists in the interpretation of a complete
set of financial statements or improves users’ ability to
make efficient economic decisions
 financial reporting – 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
 primary objective of financial reporting is to provide
information about an entity’s economic resources, claims
to those resources, and changes in those resources
 secondary objective of financial reporting is to provide
information useful in assessing the entity’s management
stewardship (i.e., how efficiently and effectively the
entity’s management has discharged its responsibilities
to use the entity’s economic resources
2. Management accounting
 refers to the accumulation and communication of
information for use by internal users or management
 an offshoot of management accounting is management
advisory services which includes services to clients on
matters of accounting, finance, business policies,
organization procedures, product costs, distribution, and
many other phases of business conduct and operations
 if the financial accounting follows PFRS, management
accounting follows management’s objectives, rules, and
regulations
 caters to internal users
 the product of management accounting is management
reports (whatever management reports the internal users
needed, management accountants will provide)
3. Cost accounting
 the systematic recording and analysis of the costs of
materials, labor, and overhead incident to production
 e.g., manufacturing business (handles raw materials,
labor, overhead)
 systematic recording and analysis of the costs of
materials (to produce finished goods), labor, overhead
(not directly to the main expenses; e.g., utility expense,
factory rent) incident to production
 related to production
4. Auditing
 the process of evaluating the correspondence of certain
assertions with established criteria and expressing an
opinion thereon
 checking the credibility and correctness of financial
statements prepared by an accountant
 audit is the systematic process of objectively obtaining
and corroborating evidence in the subject matter
(financial statements)
 checking of the financial statements whether they are
aligned with the standards and/or they corroborate with
the actual evidences provided
5. Tax accounting
 the preparation of tax returns and rendering of tax
advice, such as the determination of the tax
consequences of certain proposed business endeavors
 income tax - most common tax return
 why is there a need to pay income tax? it is because the
taxation laws are stating that the benefits that we receive
from the income must be paid to the government (it is
like giving back to the government)
6. Government accounting
 the accounting for the government and its
instrumentalities, placing emphasis on the custody of
public funds, the purposes for which those funds are
committed, and the responsibility and accountability of
the individuals entrusted with those funds
 Commission on Audit - states auditor; auditor of
government agencies
7. Fiduciary accounting
 the handling of accounts managed by a person entrusted
with the custody and management of property for the
benefit of another
8. Estate accounting
 the handling of accounts for fiduciaries who wind up the
affairs of a deceased person
9. Social accounting (social and environmental accounting or
social responsibility reporting)
 the process of communicating the social and
environmental effects of an entity’s economic actions to
the society
10. Institutional accounting
 the accounting for non-profit entities other than the
government
11. Accounting systems
 the installation of accounting procedures for the
accumulation of financial data and designing of
accounting forms to be used in data gathering
12. Accounting research
 the careful analysis of economic events and other
variables to understand their impact on decisions
 includes a broad range of topics, which may be related to
one or more of the other branches of accounting, the
economy as a whole, or the market environment
 if there are issues or point of clarifications existing about
accounting, this is a choice for us to carefully analyze the
notes by frey angeleigh galvezo
 different accounting events related to the issue and also
other variables that has a direct impact to that certain
issue
 it is to find solution to the existing issue, or to state
recommendations
Bookkeeping vs. Accounting
 Bookkeeping – more on procedural; it is the process of
recording the accounts or transactions of an entity; the
book must be updated on time; normally ends with the
preparation of the trial balance
 Accounting – preparation of financial statements;
require the interpretation of the significance of the
processed information
 Accounting is more broader than bookkeeping.
ACCOUNTANCY – refers to the profession or practice of
accounting
Four sectors in the practice of accountancy
Under R.A. 9298 also known as the “Philippine Accountancy
Act of 2004,” (all professional accountants or all individuals
exercising the accountancy profession must adhere to this
law) the practice of accounting is sub-classified into the
following:
 Practice of Public Accountancy
 does not involve an employer-employee
relationship between the accountant and the client
 involves the rendering of audit or accounting
related services to more than one client on a fee
basis
 working in a firm
 For example, you are auditing the financial
statements of JFC Corp. You are not the employee
of JFC Corp., rather you are an employee of the
auditing firm.
 Practice of Commerce and Industry
 previously called as private accountancy
 employed within a company or a business
 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 required that the
holder thereof must be a certified public accountant
 Practice in Education/Academe
 employment in an educational institution which
involves teaching of accounting, auditing,
management advisory services, finance, business
law, taxation, and other tecnically related subjects
 if you are teaching accounting or any board-related
subjects, you are considered working in a
education/academe sector
 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, including those performing proprietary
functions, where decision making requires
professional knowledge in the science of
accounting, or where civil service eligibility as a
certified public accountant is a prerequisite
 if you are working in accounting department of any
government agency (COA – audit government
agencies)
USERS OF ACCOUNTING INFORMATION
Two major types of accounting users
 External Users – users outside the company or entity;
third parties
 Customers – they want to assess if they will have a
long-term relationship with that company; they
want to know whether that company will continue
its operations
 Creditors – they want to know if the company has
the ability to pay
 Potential Investors – they want to know if they’ll
be able to gain dividends
 Government – they want to know if they are able
to pay taxes on time; and for regulatory purposes
 Academe – they want to share to their students...
(for example, a teacher used JFC as an example. A
teacher will give you a copy of financial students of
a company outside, and will make you audit it.)
 Public – they want to know if a company can
sustain their needs in a long-run;
 Internal Users – connected or within the entity
 Management – they want to know the financial
position and performance for them to have a basis
on what to change, on how to run the business; for
them to continuously upgrade the business; for
them to efficiently and effectively run the business
 Employees – they want to know if the company can
pay you your salary and give you benefits
 Owners or Stockholders – owners want to know if
the business is still gaining profit; stockholders
(term used in revised corporation code) and
shareholders (used in accounting) want to know if
the company earns more and more as years go by,
by that, you will know if your dividends will get
bigger and bigger.
Accounting standards
 The Philippine Financial Reporting Standards (PFRSs)
represent the generally accepted accounting principles
(GAAP) in the Philippines
 The PFRSs are Standards and Interpretations adopted by
the Financial Reporting Standards Council (FRSC). They
comprise PFRSs, PASs, Interpretations
 PFRSs are accompanied by guidance to assist entities in
applying their requirements. A guidance states whether it
is an integral part of the PFRSs. A guidance that is an
integral part of the PFRSs is mandatory
The need for reporting standards
 For financial statements to be useful, they should be
prepared using reporting standards that are generally
acceptable Otherwise, each entity would have to develop
its own standards.
 If that is the case, every entity may just present any asset
or income it wants and omit any liability or expense it
does not want.
 Financial statements would not be comparable, the risk
of fraudulent reporting is heightened, and economic
decisions based on these financial statements would be
grossly incorrect.
notes by frey angeleigh galvezo
 For this reason, entities should follow a uniform set of
reporting standards when preparing and presenting
financial statements.
The term “generally acceptable” means that either:
 the standard has been established by an authoritative
accounting rule-making body, e.g., the PFRSs adopted
by the FRSC; or
 the principle has gained general acceptance due to
practice over time and has veen proven to be most
useful, e.g., double-entry recording and other implicit
concepts
 The process of establishing financial accounting
standards is a democratic process in that a majority of
practicing accountants must agree with a standard before
it becomes implemented.
Hierarchy of Reporting Standards
 When selecting its accounting policies, an entity
considers the following in descending order:
1. PFRSs
2. management shall use its judgment
 in making judgment
a. management shall refer to, and consider the
applicability of the requirements in PFRSs dealing with
similar and related issues
b. the conceptual framework
c. management may also consider the pronouncements of
other standard-setting bodies
d. management may also consider the accounting
literature and accepted industry practices
 selection of appropriate accounting policies – entity’s
management
 proper application of accounting principles –
professional judgment of the accountant
Accounting Standard Setting Bodies and Other Relevant
Organizations
1. Financial Reporting Standards Council (FRSC)
 it is the financial accounting standard setting body in the
Philippines created under the Philippine Accountancy
Act of 2004 (R.A. No. 9298)
 before FRSC, there is Financial Accounting Standards
Board (FASB) – they issue PAS
 they issue PFRS
 total of 15 members – 14 regular members, and 1
chairman (term of 3 years, renewable for another 3
years)
2. Philippine Interpretations Committee (PIC)
 a committee formed by the Accounting Standards
Council (ASC), the predecessor of FRSC, with the role
of reviewing the interpretations of the International
Financial Reporting Interpretations Committee (IFRIC)
for approval and adoption by the FRSC
 they issue the interpretations
 they review the interpretations coming from the
International Financial Reporting Interpretations
Committee (IFRIC) for their approval and then whether
the FRSC will adopt
3. Board of Accountancy (BOA)
 it is the official professional regulatory board created
under R.A. No. 9298 to supervise the registration,
licensure and practice of accountancy in the Philippines
 their responsibility revolves on the before (supervise
schools, offering accountancy program; supervise the
CPALE), during (monitor those who are exercising the
profession), and after of an accountant
 total of 7 members – 1 chairman, 6 members (they can
come in any field of accounting; all four practice of
accountancy are equally represented)
 they work together in preparing the questions on CPALE
(one member to one subject)
 they can elect a vice chairman with a term of 1 year
 maximum of 12 years term
4. Securities and Exchange Commission (SEC)
 it is the government agency tasked in regulating
corporations and partnerships, capital and investment
markets, and the investing public.
 protect state public
 member of IOSCO
 some SEC rulings affect the accounting requirements of
entities and the adoption and application of accounting
5. Bureau of Internal Revenue (BIR)
 administers the provisions of the National Internal
Revenue Code (old tax law that we use in the
Philippines, but some provisions are still used)
 TRAIN Law - new tax law
 it is the government agency that is tasked to do the tax
(any tax; e.g., income tax, estate tax, value-added tax)
 in accounting, we use accrual basis. for BIR, they use
cash basis
 these provisions do not always reflect the goals of
financial reporting
 they do at times influence the choice of accounting
methods and procedures
6. Bangko Sentral ng Pilipinas (BSP)
 it influences the selection and application of accounting
policies by banks and other entities performing banking
functions
 they also monitor pawnshops, lending institutions,
because we also don’t want na sumusobra ang interest na
pinapatong ng isang institution or pawnshop
7. Cooperative Development Authority (CDA)
 influences the selection and application of accounting
policies by cooperatives
Accounting policies prescribed by a regulatory body (e.g.,
BSP, CDA) are sometimes referred to as regulatory
accounting principles
INTERNATIONAL ACCOUNTING STANDARDS
International Accounting Standards Board (IASB)
 international counterpart of FRSC
 it is the standard-setting body of the IFRS Foundation
(they want to regulate the accounting process; they want
to produce generally accepted accounting principles;
they want to create uniform standards that we can use)
with the main objectives of developing and promoting
global accounting standards
 established in April 1, 2001 as part of the International
Accounting Standards Committee (IASC)
notes by frey angeleigh galvezo
 IASB has no former names. It has been IASB since then.
 IFRSs: IFRS, IAS, Interpretations
 IASC foundation – non-profit organization based in
Delaware, USA and is the parent of the IASB, which is
based in London
 July 1, 2010 – the IASC Foundation was renamed to
International Financial Reporting Standards Foundation
 June 1973 – IASC was founded
 ten national jurisdictions – Canada, Australia, Ireland,
Mexico, Germany, UK, Japan, US, Netherlands
Process of Accounting (the steps before we can formally
issue a standard)
1. the staff identifies and reviews issues associated with a
topic and considers the application of the Conceptual
Framework to the issues (before you can issue a standard,
there must be a current or existing issue first);
2. study of national accounting requirements and practice,
including consultation with national standard-setters (can go
to BIR, and get their opinion);
3. consulting the trustees and the Advisory Council about the
advisability of adding the topic to the IASB’s agenda;
4. formation of an advisory group to give advice to the IASB
on the project;
5. publishing a discussion document for public comment;
6. publishing an exposure draft for public comment;
7. publishing with an exposure draft a basis for conclusions
and the alternative views of any IASB member who opposes
publication;
8. consideration of all comments received;
9. holding a public hearing and conducting field tests, if
necessary; and
10. publishing a standard, including (i) a basis for
conclusions, explaining, among other things, the steps in the
IASB’s due process and how the IASB dealt with public
comments on the exposure draft, and (ii) the dissenting
opinion of any IASB member.
Other relevant international organizations
1. International Financial Reporting Interpretations
Committee (IFRIC)
 it is a committee that prepares interpretations of how
specific issues should be accounted for under the
application of IFRS
 former Standards Interpretations Committee (SIC)
2. IFRS Advisory Council
 previously known as the Standards Advisory Council
(SAC)
 it is a group of organizations and individuals with an
interest in international financial reporting
 members are appointed by IFRS Foundation
 advising on priorities within the IASB’s work program
 members are appointed by the IFRS foundation which
also appoints members to the IASB
3. International Federation of Accountants (IFAC)
 it is a non-profit, non-governmental, non-political
organization that represents the worldwide accountancy
profession
 its mission is to develop and enhance the profession to
provide services of consistently high quality in the public
interest
 open to all accountancy bodies recognized by law of
consensus
4. International Organization of Securities Commissions
(IOSCO)
 it is an international body of security commissions
MOVE TO IFRSs
 Federal Accounting Standards Board (FASB) – U.S.
national standard setting body
THE FUTURE OF IFRSs
 Norwalk Agreement – memorandum of understanding
FASB and IASB entered into
CHAPTER 2 PRETEST
All changes in an entity’s economic resources and claims to
those resources result from the entity’s financial position.
The qualitative characteristics of useful information apply
only to the financial information provided in the financial
statements.
According to IFRS Practice Statement 2 Making Materiality
Judgements, cost is not an important consideration when
making materiality judgments. (because in materiality, we
look into its size and nature)
When making materiality judgments, a quantitative
assessment alone is not always sufficient to conclude that an
item of information is not material. (because there is
qualitative assessment pa)
Materiality judgments apply only to items that are recognized
but not to those that are unrecognized.
The more significant the qualitative factors are, the higher the
quantitative thresholds will be. Thus, an item with a zero
amount can be material in light of qualitative thresholds.
(directly proportional relationship of the qualitative factors
and quantitative thresholds)
The Conceptual Framework is concerned with the provision
of financial information to primary users.
The fundamental qualitative characteristics are relevance and
faithful representation.
The enhancing qualitative characteristics are comparability,
verifiability, timeliness, and understandability.
Standards prevail over the Conceptual Framework.
Comparability is the goal and consistency is the means to
achieve it.
Information is understandable if it is presented in a clear and
concise manner.
Offsetting is generally not appropriate because it combines
dissimilar items.
Financial concept of capital states that capital is regarded as
the invested money or invested purchasing power.
notes by frey angeleigh galvezo
Physical concept of capital states that capital is regarded as
the entity’s productive capacity.
The going concern principle is the only underlying
assumption mentioned in the Conceptual Framework.
Qualitative characteristics are the qualities or attributes that
make financial accounting information useful to the users.
Consolidated financial statements are reported by a parent and
subsidiaries.
Combined financial statements are reported by two or more
entities not linked by parent-subsidiary relationship.
The capital maintenance approach or net assets approach
means that net income occurs only after the capital used from
the beginning of the period is maintained.
CHAPTER 2
Purpose of the Conceptual Framework
 The Conceptual Framework describes the objective of,
and the concepts for, general purpose financial reporting.
1. assist the IASB in developing standards that are based on
consistent concepts (conceptual framework is the root of
every standard that we already have; conceptual
framework contains all general provisions that we can
use in a particular item or transaction)
2. assist prepares in developing consistent accounting
policies when no standard applies to a particular
transaction or other event, or when a standard allows a
choice of accounting policy (to supplement any
standards); and
3. assist all parties in understanding and interpreting the
standards (helps the users to understand and
comprehend well the financial statements).
Foundation for the Development of Standards
 promote transparency by enhancing the international
comparability and quality of financial information
 the IASB wants a uniform accounting treatment all
over the world
 how an entity manages or uses its resources; how
the fund was used
 presentation and disclosure chapter–it mandates us
to disclose whatever financial information
 reporting financial statements
 strengthen accountability by reducing the
information gap between providers of capital and
the entity’s management
 lessen the information gap between the reporting
entity and providers of capital (creditors, investors)
 they want to be assured that the company will pay
on time or give their dividends
 contribute to economic efficiency by helping investors to
identify opportunities and risks around the world, thus
improving capital allocation. the use of a single, trusted
accounting language lowers the cost of capital and
reduces international costs
Status of the Conceptual Framework
 The Conceptual Framework is not a Standard. If there is
a conflict between a Standard and the Conceptual
Framework, the requirement of the Standard will prevail
 To meet the objectives of general purpose financial
reporting, a Standard sometimes contains requirements
that depart from the Conceptual Framework. In such
cases, the departure is explained in the ‘Basis for
Conclusions’ on that Standard.
 The Conceptual Framework may be revised from time to
time based of the IASB’s experience of working with it.
However, revisions do not automatically result to
changes in the Standards – not until after the IASB goes
through its due process of amending a Standard
Scope of the Conceptual Framework
 The Conceptual Framework – concerned with general
purpose financial reporting.
 General purpose financial reporting – involves the
preparation of general purpose financial statements
CONCEPTS THAT UNDERLIE GENERAL PURPOSE
FINANCIAL REPORTING
THE OBJECTIVE OF FINANCIAL REPORTING
 to provide financial information about the reporting
entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about
providing resources to the entity
 the foundation of the Conceptual Framework
Primary users (primary source of capital)
 existing and potential investors
 lenders and other creditors
 these users cannot demand information directly
from reporting entities and must rely on general
purpose financial statements for much of their
financial information
 general purpose financial reports do not directly
show the value of a reporting entity
 however, they provide information that helps users
in estimating the value of an entity
 Conceptual Framework – establishes the concepts
that underlie those estimates and judgments
Decisions about providing resources to the entity
 the primary users’ decisions about providing resources to
the entity involve decisions on:
a. buying, selling, or holding investments
b. providing or settling loans and other forms of credit;
or
c. exercising voting or similar rights that could influence
management’s actions relating to the use of the entity’s
economic resources
 these decisions depend on the investor/lender/other
creditor’s expected returns (e.g., investment income or
repayment of loan)
 expectations about returns, in turn, depend on
assessments of the entity’s (i) prospects for future net
cash inflows and (ii) management stewardship (two
concepts: liquidity––the entity has the ability to pay
short term obligations––and solvency––long term
obligations)
 to make these assessments, investors, lenders and other
creditors need information on:
notes by frey angeleigh galvezo
 a. the economic resources of the entity, claims and
against the entity and changes in those resources and
claims
b. how efficiently and effectively the entity’s
management has utilized the entity’s economic resources
Information on Economic resources, Claims, and Changes
(Economic Phenomena)
 Financial position
 shows the as of status
 information on economic resources (assets) and
claims against the reporting entity (liabilities and
equity)
 Changes in economic sources and claims
 financial performance
 information on financial performance (income and
expenses) and other transactions and events that
lead
Economic resources and Claims
 Information about the nature and amounts of an entity’s
economic resources (assets) and claims (liabilities and
equity) can help users to identify the entity’s financial
strengths and weaknesses
 that information can help users in assessing the entity’s
 liquidity and solvency
 needs for additional financial and how successful it
is likely to be in obtaining that financing (if whether
they will add funds)
 management’s stewardship on the use of economic
resources (how efficient and effectively the entity)
 All these contribute to the assessment of the entity’s
ability to generate future cash flows. For example:
 information on currently maturing receivables and
obligations can help users assess the timing of
future cash flows
 information about the nature of economic resources
can help users assess whether a resource can
produce future cash flows independently or only in
combination with other resources
 information on liquidity and solvency can help
users assess the entity’s ability to obtain additional
financing. Overleverage (use of too much debt)
may cause difficulty in obtaining additional
financing
 information about priorities and payment
requirements of claims can help users predict how
future cash flows will likely to be distributed
among the claims
Changes in economic resources and claims
 these result from
 financial performance (income and expenses)
 other events and transactions
 information on financial performance – helps users
assess the entity’s ability to produce return from its
economic resources
 information on the variability of the return helps users in
assessing the uncertainty of future cash flows
 information based on accrual accounting – provides
better basis for assessing an entity’s financial
performance than information based solely on cash
receipts and payments during the period
 information on past cash flows – helps users assess the
entity’s ability to generate future cash flows by providing
users a basis in understanding the entity’s operating,
investing and financing activities, assessing its liquidity
and solvency, and interpreting other information about
its financial performance
QUALITATIVE CHARACTERISTICS
 it identifies the types of information that are likely to be
most useful to the primary users in making decisions
using an entity’s financial report
 apply to information in the financial statements as well
as to financial information provided in other ways
1. Fundamental qualitative characteristics – make
information useful to users; usefulness of the information
 Relevance
 can make a difference in the decisions of users
 Predictive value – can help users in making
predictions about future outcomes
 Confirmatory value (feedback value) – helps users
in confirming their previous predictions
 Materiality
 information is omitting, misstating or
obscuring it could reasonably be expected to
influence decisions that the primary users of a
specific entity’s general purpose financial
statements make on the basis of those financial
statements
 we measure by its size and nature
 ‘entity-specific’ aspect of relevance
 depends on the facts and circumstances
surrounding a specific entity
 Conceptual Framework and the Standards do
not specify a uniform quantitative threshold
for materiality.
 it is a matter of judgment
 IFRS Practice Statement 2 Making Materiality
Judgments provides a non-mandatory
guidance that entities may follow in making
materiality judgments
 Materiality Process: Identify (requirement of
the standards), Assess (could influence the
users’ decisions, size and nature, quantitative
and qualitative factors), Organize (for
understandability), Review (allows entity to
step-back)
 Faithful representation
 the information provides a true, correct and
complete depiction of the economic phenomena
 Completeness – all information necessary for users
to understand the phenomenon being depicted is
provided
 Neutrality – information is selected or presented
without bias or not manipulated to increase
profitability that users will receive it favorably or
unfavorably; supported by prudence
 Free from error – does not mean that the
information is perfectly accurate in all respects; no
errors in the description and in the process
2. Enhancing qualitative characteristics – enhance the
usefulness of information; should be maximized to the extent
possible
 Comparability
 helps users identify similarities and differences
between different sets of information that are
provided by a single entity but in different periods
notes by frey angeleigh galvezo
 (intra-comparability) or different entities in a
single period (inter-comparability)
 Verifiability
 if different users could reach a general agreement as
to what the information purports to represent
(consensus)
 Direct verification – involves direct observation
 Indirect verification – checking the inputs to a
model or formula and recalculating the outputs
using the same methodology
 Timeliness
 if it is available to users in time to be able to
influence their decisions
 Understandability
 it is presented in a clear and concise manner
 financial reports are intended for users
 who have reasonable knowledge of business
activities
 who are willing to analyze the information
diligently
The Cost Constraint
 Cost – it is a pervasive constraint on the entity’s ability
to provide useful financial information
FINANCIAL STATEMENTS AND THE REPORTING
ENTITY
Objective and scope of financial statements
 to provide financial information about the reporting
entity’s assets, liabilities, equity, income and expenses
that is useful in assessing
 the entity’s prospects for future net cash inflows
 management’s stewardship over economic
resources
Reporting Period (monthly, quarterly, etc.)
 Comparative information
 at least one preceding reporting period
 Forward-looking information
 provide information about past events, possible
future transactions, and other events
 financial statements do not typically provide this
information about management’s expectations and
strategies for the reporting entity
 Perspective adopted in financial statements
 perspective of the reporting entity
Going concern assumption
 the entity has neither the intention nor the need to end its
operations in the foreseeable future
 if this is not the case, the entity’s financial statements are
prepared on another basis (e.g., measurement at
realizable values rather than mixture of costs and values)
 underlying assumption in the previous version of the
conceptual framework
The reporting entity
 one who owns the financial statements
 one that is required, or chooses, to prepare financial
statements, and is not necessary a legal entity
 sometimes an entity controls another entity
 parent – controlling entity
 subsidiary – controlled entity
 consolidated financial statements – a reporting entity
comprises both the parent and its subsidiaries viewed as
a single reporting entity
 unconsolidated financial statements – a reporting entity
is the parent alone
 combined financial statements – a reporting entity
comprises two or more entities that are not all linked by
a parent-subsidiary relationship (e.g., two subsidiaries)
 individual financial statements – subsidiary alone
 unconsolidated financial statements cannot be used as
substitute for consolidated financial statements
THE ELEMENTS OF FINANCIAL STATEMENTS
 ASSETS
 a present economic resource controlled by the entity
as a result of past events
 an economic resource is a right that has the
potential to produce economic benefits
 Control
 the entity has the exclusive right over the
benefits of an asset and the ability to prevent
others form accessing those benefits
 if one party controls an asset, no other party
controls that asset
 Right
 has the potential to produce economic benefits
 normally arise from law, contract or similar
means
 an entity cannot have a right to obtain
economic benefits from itself
 each right is a separate asset
 the asset is the set of rights and not the
physical object
 Potential to produce economic benefits
 the presence or absence of expenditure is not
necessary in determining the existence of an
asset
 need not be certain
 LIABILITIES
 present obligation of the entity to transfer an
economic resource as a result of past events
 obligation
 duty or responsibility that an entity has no
practical ability to avoid
 legal obligation – results from contract,
legislation, or other operation of law
 constructive obligation – results from an
entity’s action that create a valid expectation
on others that the entity will accept and
discharge certain responsibilities
 always owed to another party
 transfer of an economic resource
 obligation that has the potential to require the
transfer of an economic resource to another
party and not the future economic benefits that
the obligation may cause to be transferred
 need not be certain
 pay cash, deliver goods, render services
 exchange assets with another party on
unfavorable terms
 issue a financial instrument that obliges the
entity to transfer an economic resource
 present obligation as a result of past events
 the entity has already obtained economic
benefits or taken an action
notes by frey angeleigh galvezo
  as a consequence, they entity will transfer an
economic resource
 executory contracts
 equally unperformed––neither party has
fulfilled any of its obligations, or both parties
have partially fulfilled their obligations to an
equal extent
 establishes a combined right and obligation to
exchange economic resources, which are
interdependent and inseparable
 EQUITY
 residual interest in the assets of the entity after
deducting all its liabilities
 reserves – amounts set aside for the protection of
the entity’s creditors or stakeholders from losses
 INCOME
 increases in assets, or decreases in liabilities, that
result in increases in equity, other than those
relating to contributions from holders of equity
claims
 EXPENSES
 decreases in assets, or increases in liabilities, that
result in decreases in equity, other than those
relating to distributions to holders of equity claims

notes by frey angeleigh galvezo