CONCEPTUAL FRAMEWORK
economic activities intended to be useful in making economic
ACCOUNTING STANDARDS
Overview of Accounting
Accounting is “the process of identifying, measuring, and
communicating economic information to permit informed judgment
and decisions by users of information.”
Three important activities
1. Identifying - the process of analyzing events and transactions to
determine whether they will be recognized. Only accountable events
are recognized.
2. Measuring - involves assigning numbers, normally in monetary
terms, to the economic transactions and events.
3. Communicating - the process of transforming economic data into
useful accounting information, such as financial statements and other
accounting reports, for dissemination to users.
Types of Events
1. External events – events that involve an external party.
a. Exchange (reciprocal transfer) – reciprocal giving and receiving.
b. non-reciprocal transfer – “one way” transaction
c. External event other than transfer – an event that involves changes
in the economic resources or obligations of an entity caused by an
external party or external source but does not involve transfers of
resources or obligations.
2. Internal events – events that do not involve an external party.
a. Production – the process by which resources are transformed into
finished goods.
b. Casualty – an unanticipated loss from disasters or other similar
events.
Measurement
• The several measurement bases used in accounting include, but not
limited to, the following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.
• The most used is historical cost. This is usually combined with the
other measurement bases. Accordingly, financial statements are said
to be prepared using a mixture of costs and values.
Valuation by fact or opinion
• When measurement is affected by estimates, the items measured are
said to be valued by opinion.
• When measurement is unaffected by estimates, the items measured
are said to be valued by fact.
Basic purpose of accounting
• The basic purpose of accounting is to provide information about
decisions.
Types of accounting information classified as to users’ needs.
• General purpose accounting information - designed to meet the
common needs of most statement users. This information is governed
by the Philippine Financial Reporting Standards (PFRS).
• Special purpose accounting information - designed to meet the
specific needs of statement users. This information is provided by
other types of accounting, e.g., managerial accounting, tax basis
accounting, etc.
Basic Accounting Concepts
• Double-entry system – each accountable event is recorded in two
parts – debit and credit.
• Going concern - the entity is assumed to carry on its operations for
an indefinite period of time.
• Separate entity – the entity is treated separately from its owners.
• Stable monetary unit - amounts in the financial statements are stated
in terms of a common unit of measure; changes in purchasing power
are ignored.
• Time Period – the life of the business is divided into series of
reporting periods.
• Materiality concept – information is material if its omission or
misstatement could influence economic decisions.
• Cost-benefit – the cost of processing and communicating
information should not exceed the benefits to be derived from it.
• Accrual Basis of accounting – effects of transactions are recognized
when they occur (and
not as cash is received or paid) and they are recognized in the
accounting periods to which they relate.
• Historical cost concept – the value of an asset is determined on the
basis of acquisition cost.
• Concept of Articulation – all of the components of a complete set of
financial statements are interrelated.
• Full disclosure principle – financial statements provide sufficient
detail to disclose matters that make a difference to users, yet
sufficient condensation to make the information understandable,
keeping in mind the costs of preparing and using it.
• Consistency concept – financial statements are prepared on the basis
of accounting policies which are applied consistently from one period
to the next.
• Matching – costs are recognized as expenses when the related
revenue is recognized.
• Residual equity theory – this theory is applicable where there are
two classes of shares issued, ordinary and preferred. The equation is
“Assets – Liabilities – Preferred Shareholders’ Equity = Ordinary
Shareholders’ Equity.”
• Fund theory – the accounting objective is the custody and
administration of funds.
• Realization – the process of converting non-cash assets into cash or
claims for cash.
• Prudence (Conservatism) – the inclusion of a degree of caution in
the exercise of the judgments needed in making the estimates
required under conditions of uncertainty , such that assets or income
are not overstated and liabilities or expenses are not understated.
Common branches of accounting
• Financial accounting - focuses on general purpose financial
statements.
• Management accounting – focuses on special purpose financial
reports for use by an entity’s management.
• Cost accounting - the systematic recording and analysis of the costs
of materials, labor, and overhead incident to production.
• Entities should follow a uniform set of generally acceptable
reporting standards when preparing and presenting financial
statements; otherwise, financial statements would be misleading.
• The term “generally acceptable” means that either:
a. the standard has been established by an authoritative accounting
rule-making body; or
b. the principle has gained general acceptance due to practice over
time and has been proven to be most useful.
• 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.

• Auditing - the process of evaluating the correspondence of certain

assertions with established criteria and expressing an opinion thereon.

• Tax accounting - the preparation of tax returns and rendering of tax

advice, such as the determination of tax consequences of certain
proposed business endeavors.

• Government accounting - refers to 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.

Four sectors in the practice of accountancy

1. Practice of Public Accountancy - involves the rendering of audit or

accounting related services to more than one client on a fee basis.

2. Practice in Commerce and Industry - refers to employment in the

private sector in a position which involves decision making requiring
professional knowledge in the science of accounting and such
position requires that the holder thereof must be a CPA.

3. Practice in Education/Academe – employment in an educational

institution which involves teaching of accounting, auditing,
management advisory services, finance, business law, taxation, and
other technically related subjects.

4. Practice in the Government – employment or appointment to a

position in an accounting professional group in the government or in
a government–owned and/or controlled corporation where decision
making requires professional knowledge in the science of accounting,
or where civil service eligibility as a CPA is a prerequisite.

Philippine Financial Reporting Standards (PFRSs)

• The Philippine Financial Reporting Standards (PFRSs) are

Standards adopted by the Financial and Sustainability Reporting
Standards Council (FSRSC), the official accounting standard-setting
body in the Philippines, from the International Financial Reporting
Standards (IFRSs). The IFRSs consist of the following:

a. IFRS Accounting Standards;

i. International Financial Reporting Standards (IFRSs);

ii. International Accounting Standards (IASs); and

iii. Interpretations

b. IFRS for SMEs Accounting Standard; and

c. IFRS Sustainability Disclosure Standards

The need for reporting standards