DEFINITION OF ACCOUNTING INTERNALTRANSACTIONS

Accounting Standards Council Are economic events involving one entity only.
• Accounting is a service activity. Are economic activities that take place entirely
The accounting function is to provide within the entity.

quantitative information, primarily financial in Production and casualty loss are examples of
nature, about economic entities, that is internal transactions.
intended to be useful in making economic Production is the process by which resources
decisions. are transformed into products.
AmericanInstitute of Certified Public Accountant Casualty is any sudden and unanticipated loss

Accounting is the art of recording, classifying, from fire, flood, earthquake and any other event
and summarizing in a significant manner and in ordinarily termed as act of God.
terms of money, transactions and events which MEASURING
are in part at least of a financial character and Is the assigning of peso amounts to the
interpreting results thereof. accountable economic transactions and events.
AMERICAN ACCOUNTING ASSOCIATION Accounting information must be expressed with
Accounting is the process of identifying, a common financial denominator.
measuring, and communicating economic Philippine peso is the unit of measuring
information to permit informed judgementand accountable economic transactions.
decision by users of the information. The measurementbases are historical cost and
IMPORTANTPOINTS IN THE DEFINITION OF ACCOUNTING Current value,

1. Accounting is about quantitative information. Historical cost is the most common measure of
2. The information is likely to be financial financial transactions.
nature. Current value includes fair value, value in use,
3. the information should be useful in decision fulfillment value and current cost.
making. cOMMUNICATING
"The very purpose of accounting is to provide is the process of preparing and distributing

quantitative information to be useful in making accounting reports to potential users of

economic decisions" accounting information.
Identifying and measuring are pointless if the
COMPONENTS OF ACCOUNTING information contained in the accounting records
1. Identifying -analytical component. cannot be communicated in some form to
2. Measuring -technical component. potential users.
3. Communicating -formalcomponent. Communicating is the reason why accounting
IDENTIFYING has been called the "Universal language of
• Is the recognition or non-recognition of business".
business activities as accountable events. • Implicit in the communication process are the
Not all business activities are accountable. recording, classifying and summarizing aspects
An event is accountable or quantifiable when it of accounting.
has an effect on assets, liabilities, and equity. Recording or Journalizing is the process of
The subject matter of accounting is economic systematically maintaining a record of all

activity or the measurement of economic economic business transactions after they have
resources and economic obligations. been identified and measured.
INTERNAL AND EXTERNAL TRANSACTIONS Classifying is the sorting of grouping of similar

External transactions and interrelated economic transactions into

Are those economic events involving one entity their respective classes. Classifying is

and another entity. accomplished by posting to the ledger

Examples: Ledger is a group of accounts which are
1. Purchase of goodsfrom a supplier systematically categorized into asset accounts,
2. Borrowing money from the bank liability accounts, equity accounts, revenue
3 Sale of goodsto a customer accounts and expense accounts.
4. Payment of salaries of employees Summarizing is the preparation of financial
5. Payment of taxes to the government statements. STATEMENTS!
ACCOUNTING AS AN INFORMATION SYSTEM information into reports and communicates the
Accounting is an information system that reports to decision makers.
measures business activities, process
 A key product of this information system is a set ACCREDITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY
of financial statements the document that CPAs, firms and partnerships of CPAs, including
report financial information about an entity to partners and staff members are required to
decision makers. register with the Board of Accountancy and PRC
Financial reports tell us how well an entity is for the practice of public accountancy.
performing in terms of profit and loss and The issued PRC certificate of registration shall
where it stands in financial terms. be valid for three (3)years and renewable every
OVERALL OBJECTIVEOF ACCOUNTING three years upon payment of required fees.
Provide quantitative financial information about Three main areas of practice (CPA)
a business that is useful to statement users Public accounting
particularly owners and creditors in making Private accounting
economic decisions. Government accounting
An accountant's primary task is to supply PUBLIC ACCOUNTING
financial information so that the statement Is composed of individual practitioners, small
users could make informed judgementor better accounting firms and large multinational
decision.
organizations that render independent and
The essence of accounting is decision expert financialservices to the public.
usefulness. Offers three (3) kinds of services, namely
THE ACCOUNTANCY AS A PROFESSION auditing, taxation and management advisory
Republic act 9298 is the law regulating practice services.

of accountancy in the Philippines. AUDITING

The law is known as "Philippine Accountancy Primary service offered by most public
Act of 2004" accounting practitioners.
Board of Accountancyis the body authorized by Or external auditing is the examination of
the law to promulgate rules and regulations financial statements by independent certified
affecting the practice of the accountancy public accountant for the purpose of expressing
profession in the Philippines. an opinion as to the fairness with which the
Board of Accountancy is responsible for financial statements are prepared.
preparing and grading the Philippine CPA Attest function of independent CPAs.
examination. TAXATION
Exam is offered twice a year. May and October. Taxation service includes the preparation of
LIMITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY annualincome tax returns and determination
Single practitioners and partnerships for the of tax consequences of certain proposed
practice of public accountancy shall be business endeavors.
registered certified public accountants in the MANAGEMENT ADVISORY SERVICES
Philippines. Management advisory services is used generally
A certificate of accreditation shall be issued to
to refer to services to clients on matters of
certified public accountants in public practice accounting, finance, business policies,

only upon showingin accordance with the rules organization procedures, product cost,

and regulations promulgated by the Board of distribution and many other phases of business
accountancy and approved by the Professional conduct operations.
Regulation Commission that such registrant has Management advisory includes:
acquired a minimum of three (3) years of 1. Advice on installation of computer system
meaningful experience in any areas of public 2. Quality control
practice including taxation. 3. Installation and modification of accounting
The Securities and Exchange Commission shall
system.
not register any corporation organized for the 4. Budgeting
practice of public accountancy. 5. Forward planning and forecasting
6. Design and modification of retirement plans
7. Advice on mergers and consolidation
PRIVATE ACCOUNTING Controller - highest accounting officer in an
Many CPAsareemployed in a business entity in entity.

various capacity as accounting staff, chief Major objective is to assist management in

accountant, internal audito, and controller. planning and controlling the entity's operations.
 Includes maintaining the records, producing the CPD has become mandatory for CPA
financial reports, preparing the budgets and CPD is required for the renewal of CPA license
controlling and allocating the resources of the and accreditation of CPA to practice the
entity.
accountancy profession.
Also responsible for the determination of the EXEMPTION FROM CPD
various taxes the entity is obliged to pay.
A CPA shall be permanently exempted from
GOVERNMENT ACCOUNTING CPD requirements upon reaching the age of 65
Encompasses the process of analyzing,
years.
classifying, summarizing, and communicating all
This exemption is applied only to the renewal of
transactions involving the receipt and
CPA license and not for the purpose of
disposition of government funds and property accreditation to practice the Accountancy
and interpretingthe results thereof. profession.

The focus of government accounting is the ACCOUNTING VS. AUDITING

custody and administration of public funds. Accounting embraces auditing
Branches of the governmentwith accountants: Auditing is one of the areas of accounting
a) Bureau of Internal Revernue specialization.

b) Commissionon Audit Accounting is constructive in nature

c) Departmentof Budget and Management Accounting ceases when financial statements
d) Securities and Exchange Commission are already prepared.
e) Bangko Sentral ng Pilipinas
Auditing is analytical.

cONTINUING PROFESSIONAL DEVELOPMENT (CPD) The work of an auditor begins when the work of
Republic Act No. 10912 Is the law maintaining accountant ends.
and strengthening the continuing professional After the financial statements are prepared, the
development program for all regulated auditor will begin to perform the task of
professions, including the accountancy auditing.
profession. The auditor examines the financial statements
CPD refers to the inculcation and acquisition of to ascertain whether they are in conformity
advanced knowledge, skill, proficiency and with generally accepted accounting principles.

ethical moral values after the initial registration ACCOUNTING VS. BOOKKEEPING
of the Certified Public Accountant for
Bookkeeping is procedural
assimilation into professional practice and Bookkeeping is the "how"of accounting
lifelong learning. Accounting is the conceptual and is concerned
CPD raises and enhances the technical skill and with the "why", reason or justification for any
competenceof the Certified Public Accountant. actin adopted.
CPD CREDITUNITS
Bookkeeping is a procedural element of
CPD credit units refer to the CPD credit hours
accounting as arithmetic is a procedural
required for the renewal of CPA license and elementof mathematics.
accreditation of a CPA to practice the ACCOUNTING VS.ACCOUNTANCY
accountancy profession every 3 years. Broadly speaking, these termsare synonymous.
Regardless of the sector, practice shall be Both refer to the entire field of accountancy
required to comply with 120 CPD credit units in theory and practice.

a compliance period of three years, Accountancy refers to the profession of

Excess credit units earned shall not be carried
accounting practice.
over to the next three-year period unless it is
Accounting is used as a reference only to a

earned for masteral and doctoral degrees. particular field of accountancy as public
such
accounting, private accounting and government
accounting.
FINANCIAL ACCOUNING VS. 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 cOMPOSITION OF FRSC
that emphasizes reporting to creditors and Composed of 15 members.
investors.
The chairman and members of the FRSC shall

Managerial accounting is the accumulation and have a term of 3 years renewable for another
preparation of financial reports for internal term.
users only. PHILIPPINE INTRPRETATIONSCOMMITTEE
Managerial accounting is the area of accounting
Formed by the FRSC in August 2flf1f\6 and has
that emphasizes developing accounting
replaced the interpretations Committee formed
an entity.
information for use within
by the ASC in May 2flflfl
GENERALLY ACCEPTEDACCOUNTING PRINCIPLES (GAAP)
The role of PIC is to prepare interpretations of
Are the accounting rules, procedures, practices.
PFRS for approval by the FRSC and to provide
Developed on the basis of experience, reason,
timely guidance on financial reporting issues not
custom, usage and practical necessity.
specifically addressed in the current PFRS.
Represent the rules, procedures, practice and are intended to
Interpretations give
standards followed in the preparation and authoritative guidance on issues that are likely
presentation of financial statements.
to receive divergent or unacceptable treatment
Laws that must be followed in financial
because the standards do not provide specific
reporting.
and clear-cut rules and guidelines.
The process of establishing GAAP s a political
The counterpart of the PlC in the UK is the
process which incorporates political actions of International Financial Reporting
various group as well
interested user as
Interpretations committee or IFRIC which has
professional judgement, and research. logic
already replaced the Standing Interpretations
PURPOSE OF ACCOUNTING STANDARDS SIC
Committee.
To identify proper accounting practices for the
INTERNATIONAL ACCOUNTING STANDARDS
preparation and presentation of financial

statements. COMMITTEE
Accounting standards create common Is an independent private sector body, with the

understanding between preparers and users of objective of achieving uniformity in the

financial statements particularly the measurement of accounting principles which are used by
assets and liabilities business and other organizations for financial

A set of high quality accounting standards is a reporting around the world

necessity to ensure comparabilityand uniformity in Formed in June 1973.
financial statements based on the same financial
Headquartered in London, UK
information.
OBJECTIVESOF IASC
FINANCIALREPORTING STANDARDS COUNCIL (FRSC)
To formulate and publishing the public interest
GAAP is initially formulized through creation of
accounting standards to be observed in the
the Accounting Standards Council (ASC).
ASC presentation of financial statements and to
FRSC replaces
promote their worldwide acceptance and
FRSC is the accounting standard setting body
observance.
created by the PRC upon the recommendation
To work generally for the improvement and
of the Board of Accountancy in carrying out its
harmonization of regulations, accounting
powers and functions under R.A. Act 9298
Nfl.
standards and procedures relating to the
Main function is to establish and improve
presentation of financial statements.
accounting standards that will be generally
INTERNATIONAL ACCOUNITNG STANDARDS BOARD
accepted in the Philippines.
This replaces the lASC
The accounting standards promulgated by the
IASB publishes standards in a series of
FRSC constitute the "highest hierarchy" of GAAP
pronouncements called International Financial
in the Philippines.
StandardsCommitteeor IFRS
The approvedstatements FRSC are known as
of
has adopted the body of standards issued by
Philippine Accounting Standards (PAS) and
IASC
Philippine Financial Reporting Standards
The pronouncements of IASC continue to be
(PFRS).
designated as "International Accounting
Standards" or IAS
 The lASB standard-setting process includes in the The PAS are numbered the same as their
correct order research, discussion paper,
counterpart in IAS.

exposure draft and accounting standard. C

Philippine interpretations which correspond to
MOVE TOWARD IFRS
interpretations of the IFRIC and the Standing
Standards issued by other standard-setting
Interpretations Committee, and Interpretations
bodies such as the USA Financial Accounting
developed by the Philippine Interpretations
Standards Board (FASB) and the ASB are committee.
considered in developing accounting standards
that will generally accepted in the Philippines. CHAPTER 2
In the past years, Philippine standards issued CONCEPTUAL FRAMEWORK
are based on the American Accounting
The Conceptual Framework for financial
Standard.
reporting is a complete, comprehensive, and
At present, the FRSC has adopted in their
single document promulgated by the
entirely all International Accounting standards
International Accounting Standards Board.
and International Financial Reporting Standards. Is a summary of the terms and concepts that
The move towards IFRSC is essential to achieve
underlie the preparation and presentation of
the goal of one uniform and globally accepted financial statements for external users.

financial reporting standards.

Describes the concepts for Generally Purpose
The Philippines is fully compliant with IFRS Financial Reporting.
effective January 2005, a process which was Is an attempt to provide an overall theore tical
started back in 1997 in moving from USA GAAP foundation for accounting.
to IFRS/
Isintended to guide standard-setters, preparers
FACTORS TO BE CONSIDERED IN DECIDING TO MOVE and users of financial information in the
TOTALLY TO INTERNATIONAL ACCoUNTING STANDARDS:
preparation and presentation of statements.
a. Support of internationalaccounting standards by
Conceptual Framework is the underlying theory
Philippine organizations such as the Philippine
for the development of accounting standards
SEC, Board of Accountancy and PICPA.
and revision of previously issues accounting
b. Increasing internalization of business which has
standards.
heightened the interest in a common language
Conceptual Framework will be used in future
for financial reporting.
standard-setting decision but no changes will be
C. Improvement of international accounting
made to the current IFRS.
standards or removal of free choices of
THE CONCEPTUAL FRAMEWORK PROVIDES THE
accounting treatments.
FOUNDATION FOR STANDARDS THAT:
d. Increasing recognition of international
a. Contribute to transparency
accounting standards by the World Bank, Asian
b. Strengthen accountability
Development Bank and World Trade
C. to economicefficiency
Contribute
Organization.
PURPOSES OF REVISEDCONCPTUAL FRAMEWORK
PHILIPPINE FINANCAL REPORTING STANDARDS a.
To assist the IASB to develop IFRS standards
The Financial Reporting Standards Council
based on consistent concepts.
issues standards in a series of pronouncements b To assist preparers of financial statements to
called "Philippine Financial Reporting
develop consistent accounting policy when no
Standards" or PFRS
Standard applies to a particular transaction or
PFRS COLLECTIVELY INCLUDE ALLOF THE FOLLOWING:
other event or when an issue is not yet
a. Philippine Financial Reporting Standards which
addressed by an IFRS.
correspond to the International Financial
To assist preparers of financial statements to
C
Reporting Standards.
develop accounting policy when a standard
allows a choice of an accounting policy.
The PFRS are numbered the same as their
d To assist all parties to understand and interpret
counterpart in IFRS.
the IFRS standards.
b. Philippine Accounting Standards which
correspond to International Accounting
Standards
AUTHORITATIVE STATUSOF CONCEPTUALFRAMEWORK standard or interpretation overrides the
If there is a standard or an interpretation that conceptual framework.
specifically applies to a transaction, the
 In the absence of a standard or an but the reports are not directed to them
interpretation that specifically applies to a primarily.

transaction, management shall consider the Employees

applicability of the conceptual framework Are interested in information about the stability

developing and applying an accounting policy and profitability of the entity

that results in information that is relevant and The employees are interested in information
reliable.
which enables them to assess the ability of the
Conceptual Framework is not An International entity to provide remuneration, retirement
Financial Reporting Standard. benefits,and employmentopportunities.
Nothing in the Conceptual Framework overrides Customers
any specific IFRS. Have an interest in information about the
In case of conflict, The International Financial continuance of an entity especially when they
Reporting Standards shall prevail over the have a long-term involvement with or are
conceptual framework. dependenton the entity.
USERS OF FINANCIALINFORMATION Government and their agencies
Under the Conceptual Framework for financial
Government and their agencies are interested in
reporting, the users of financial information are the allocation of resources and therefore the
classified into two: activities of the entity.

1. Primary users These users require information to regulate the

2. Other users activities of the entity, determine taxation
Primary users policies, and as a basis for national incomeand
Includes the existing and potential investors, similar statistics.
lenders and other creditors. Public
Are the parties to whom general purpose • Entities affect members of the public in variety
financial reports are primarily directed. of ways.
Such users cannot require reporting entities to Entities make substantial contribution to the
provide information directly to them and localeconomy in many ways including the
therefore must rely on general purpose financial number of people they employ and their
reports for much of the financial information patronage of local suppliers.
they need. Financial statements may assist the public by
Existing and Potential Investors providing information about the trend and the
Are concerned with the risk inherent in and range of its activities.

return provided by their investment. SCOPE OF REVISEDCONCEPTUAL FRAMEWORK

Investors need information to help them Objective of financial reporting
determine whetherthey should buy, hold or sell b. Qualitative characteristics of useful financial

Shareholders are also interested in information information

which enable them to assess the ability of the C. Financial statements and reporting entity

entity to pay dividends. d. Elements of financial statements

Lenders and Other Creditors e. Recognition and derecognition
Existing and potential lenders and other f. Measurement
creditors are interested in information which g. Presentation and disclosure
enables them whethertheir loans,
to determine h. Concepts of capital and capital maintenance
interests thereon and other amounts owing A. OBJECTIVEOF FINANCIALREPORTING
them will be paid when due. • The objective of financial reporting forms the
Other users foundation of conceptual framework.
Are users of financial information other than the The overall objective of financial reporting is to
existing and potential investors, lenders and provide financial information about the
other creditors. reporting entity that is useful to existing and
Are so called because they are parties that may potential investors, lenders and other creditors
find the general purpose financial reports useful in making decision about providing resources
to the entity.

The objective of financial reporting is the "why",

purpose or goal of accounting.
 Financial Reporting is the provision of financial Economicdecisions
information about an entity to external users
Existing and potential investors need general
that is useful to them in making economic purpose financial reports in order to enable
decisions and for assessing he effectiveness of them in making decisions whether to buy, sell or
an entity's management. hold equity investments
Financial Reporting encompasses not only Lenders and other creditors need general
financial statements but also other information
purpose financial reports in order to enable
such as financial highlights, summary of them in making decisions whetherto provide or
important financial figures, analysis of financial settle loans and other formsof credit.
statements and significant ratios.
Assessing cash flow prospects
Financial reports also include nonfinancial
Decisions about buying, selling etc. depends on
information such as description of major returns that existing and potential investors
products and listing of corporate officers and expect from an investment.
directors.
Decisions about settling loans and other forms
Target users of credit depends on principal and interest
Financial reporting is directed primarily to the payments that potential lenders and other
existing and potential investors, lenders and creditors expect from other returns they expect
other creditors which compose the primary user
financial reporting should provide information
group. useful in assessing the amount, timing and
The reason is that existing and potential
uncertainty of prospects for future net cash
investors, lenders and other creditors have the inflows to the entity

most crucial and immediate need for Economicresources and claims

information in financial reports.
General purpose financial reports provide
The primary users of financial information are
information about financial position of a
the parties that provide resources to the entity. reporting entity.

Information that meets the needs of specified Financial position is the information about the
primary users is likely to meet the needs of their entity's economic resources and the claims
users such a
employees, customers,
against the reporting entity.
governmentand their agencies. Economic resources are the assets and the
The Management of a reporting entity is also claims are the liabilities and equity of the entity.
interested in financial information about the
Financial position comprises the assets,
entity.
liabilities, and equity of an entity at a particular
Management need not rely on general purpose moment in time.

financial reports because it is able to obtain or

Liquidity is the availability of cash in the near
access additional financial information
future to cover currently maturing obligations.
internally.
Solvency is the availability of cash over a long
SpecificObjectives of financial reporting term to meet financial commitmentswhen they
The overallobjective of financial reporting is to
fall due.
provide information that is useful for decision CHANGES IN ECONOMIC RESOURCES AND CLAIMS
making.
General purpose financial reports also provide
The conceptual framework places more information about the effects of transitions and
emphasis on the importance of providing
other events that change the economic
information needed to assess the management resources and claims.
stewardship of the entity's economicresources. Changes in economic resources and claims
Specificobjectives of financial reporting: result from financial performance and from
a. To provide information useful in making other events or transactions, such as issuing
decisions about providing resources to the
debt or equity instruments.
entity.
Financial performance of an entity comprises
b To provide information useful in assessing cash revenue, expenses, and net income or loss for
a
flow prospects of the entity.
period of time.
To provide information about entity resources,
claims, and changes in resources and claims.

Financial performance is the level of income The financial performance of an entity is also
earned by the entity through the efficient and known as results of operations and is portrayed
effective use of its resources.
 in the income statement and statement of CHAPTER 3
comprehensive income. QUALITATIVECHARACTERISTICS
Usefulness of financialperformance Are the qualities or attributes that make financial
Information about financial performance helps accounting information useful to the others.
users to understand the return that the entity In deciding which information to include in

has produced on the economic resources. financial statements, the objective is to ensure
Information about the return the entity has that the information is useful to the users in
produced provides an indication on how well making economicdecisions.
management has discharged its responsibilities Decisions about buying, selling etc. depends on
to make efficient and effective use of the
returns that existing and potential investors
entity'seconomic resources. expect from an investment.
Information about past financial performance is
Classifications of Qualitative characteristics:
usually helpful in predicting the future returns a. FundamentalQualitative Characteristics
on the entity's economic resource. b. Enhancing Qualitative Characteristics
information about financial performanceduring Fundamental Qualitative Characteristics
a period is useful in assessing the entity's ability a. Relevance
to generate future cash inflows from operations. b. Faithful representation
Accrual accounting Information must be both relevant and faithfully
Accrual accounting means
income is that
represented if it is to be useful
recognized when earned regardless of when
Application of qualitative characteristics
received and expense is recognized when 1. ldentify an economicphenomenon that has the
incurred regardless of when paid. potential to be useful
Limitations of financial reporting
2. Identify the type of information about the
a. General purpose financial reports do not and phenomenon that would be most relevant and
cannot provide all of the information that can be faithfully represented.
existing and
potential investors, lenders and fl. Determine whetherthe information is available.
other creditors need.
Relevance
purpose not
b. General financial reports are
• is the capacity of the information to influence a
designed to show the value of an entity but the decision.
reports provide information to help primary
To be relevant, the financial information must
users estimate the value of an entity.
be capable of making a difference in the
C General purpose financial reports are intended
decisions made by users.
to provide common information to users and Relevance requires that the financial
cannot accommodate every request for
information should be related or pertinent to
information
the economic decisions.
d. To large extent, general purpose financial Information that does not bear on an economic
reports are based on estimate and judgement decision is useless.
rather than exact depiction. Information must be relevant to the decision
Management stewardship making needs of the users.
Information about how effectively management Ingredients of relevance
has discharged its responsibilities to use the Financial information is capable of making
entity's economic resources helps users to difference if it has predictive value and
assess management stewardship of those confirmatory value.
resources.
Financial information has predictive value if
it
Such information is useful for predicting how can be used as an input to processes employed
management will use the entity's economic by users to predict future outcome.
resources in future periods.
Financial information has predictive value when
the information can be useful for assessing it can help users increase the like hood of
entity's prospects for the future net cash flows.
correctly or accurately predicting or forecasting
outcome of events.
Financial information has confirmatory value if it

provides feedbackaboutprevious evaluations.

 Financial information has confirmatory value
Factors of materiality
when it enables users confirm or correct earlier In the exercise of judgement in determining
expectations.
materiality, the relative size and nature of an
Often, Information has both predictive and item is considered.
confirmatory value, The size of an item in relation to the total of the
The predictive and confirmatory roles of
group to which the item belong is taken into
information are interrelated.
account.
Materiality
The nature of an item may be inherently
Materiality is a practical rule in accounting
material because by its very nature it affects
which dictates that strict adherenceto GAAP is
economic decision.
not required when the items are not significant
Faithful representation
enough to affect evaluation, decision and Faithful representation means that financial
fairness of the financial statements.
reports represent economic phenomena or
The materiality concept is also known as the transactions in words and numbers.
Doctrine ofConvenience The descriptions and figures must match what
Materiality is really a quantitative "threshold"
really existed or happened.
linked very closely to the qualitative
Faithful representation means that the actual
characteristic of relevance.
effects of the transactions shall be properly
The relevance of information is affected by its
accounted for and reported in the financial

nature and materiality. statements.

Materiality is a sub quality of relevance based Ingredients of faithful representation
on the nature or magnitude or both of the items a. Completeness
to which the information relates.
b. Neutrality
The conceptual framework does not specify a C. Free from error
uniform quantitative threshold for materiality or
Completeness
predetermine what could be material in a Completeness requires that relevant
particular situation. information should be presented in a way that
Materiality is a relativity
facilitates understanding and avoids erroneous
• Materiality of an item depends on the relative implication.
size rather than absolute size.
Completeness id the result of the adequate
What material for one entity may be immaterial disclosure standard or the principle of ful
for another. disclosure.
• Example: 1f\k is small for SM but for small
A complete depiction includes all information
businesses, its malaki like wth. San sila mag get necessary for a user to understand the
ng 1flflk in an instant unlike SM na may big kita
phenomenon being depicted, including all
everyday. necessary descriptions and explanations.
When is an item material? Standard of adequate disclosure
"An itemn is material if knowledge of it would Standard of adequate disclosure means that all

affect or influence the decision of the informed

significant and relevant information leading to
users of the financial statements."
the preparation of financial statements shall be
There is no strict or uniform rule for
clearly reported.
determining whether the item is material or not The accountant shall disclose a material fact
• Very often, this is dependent on good known to him which is not disclosed in the
judgement,professional expertise and common financial statements but disclosure of which is

sense.
necessary in order that the financial statements
Information is material if its omission or
would not be misleading.
misstatement could influence the economic The standards of adequate disclosure is best
decision that the users make on the basis of the
described by disclosure of any financial facts
financial information about an entity.
significant enough to influence the judgement
of the informed users.

Notes to financial statements the purposeof the notes is to provide necessary

To be complete, the financial statements shall disclosures required by Philippine Financial

be accompanied by "notes to financial Reporting Standards.

statements" Neutrality
 A neutral depiction is without bias in the Expressions of Conservatism
preparation or presentation of financial no profit and
"Anticipate provide for
information.
probableand measurable loss"
A neutral depiction is not slanted, weighted, "In the matter of income recognition, the
emphasized, de-emphasized or otherwise accountant takes the position that no
manipulated to increase the probability that matter how sure the business man might be
financial information will be received in capturing the bird in the bush, he, the
favorably or unfavorably by users. accountant, must see it in hand"
To be neutral, the information contained in
"Don't count your chicks until the eggs
the financial statements, must be free from hatch"
bias. Freefrom error
The financial information should not favor Free from error means there are no errors
one party to the detriment of another or omissions in the description of the
party. phenomenon or transaction.
The information is directed to the common The process used to produce he reported
needs of many users, and not to the information has been selected and applied
particular needs of specific user. with no errors in the process.
Neutrality is synonymous with the all Free from error does not mean perfectly
encompassing principle of fairness accurate in all aspects.
To be neutral is to be fair. Measurement uncertainty
Prudence Measurement uncertainty arises when
Prudence is the exercise of care and caution
monetary amounts in financial reports
when dealing with the uncertainties in the cannot be observed directly and must
measurement process such that assets or instead be estimated.
income are not overstated and liabilities or Measurement uncertainty can affect faithful

expenses are not understated. representation if the level of uncertainty in

Neutrality is supported by the exercise of providing an estimate is HIGH.

prudence. The use of reasonable estimate is an
Conservatism essential part of providing financial
Conservatism is synonymous with prudence. information and does not undermine the
Conservatism means that when alternatives usefulness of the financial information.

exist, the alternative which has the least As long as the estimate is clearly and
effect on equity should be chosen. accurately described and explained, even a
Conservatism means "in case of doubt, high level of measurement uncertainty does
record any loss and do not record any gain" not affect the usefulness of the financial

Contingent loss is recognized as information.

"provision" the loss is probable and the

if Substance over form
amount can be reliably measured The economic substanceof transactions and
Contingent gain is not recognized but events are usually emphasized when
disclosed only. economic substance differ from the legal
It is to be emphasized that conservatism is form.
not a license to deliberately understate net Substance over form is not considered a

income and net assets. separate component of faithful representation

because it would be redundant.
Faithful representation inherently represents
the substance of an economic phenomenon or

transaction rather than merely representing

legal form.

Representing form that differs from the

a legal phenomenon or transaction could not result in a
economicsubstance of the underlying economic faithful representation.
Exampleof substance over form
When the lessee leased a property from the lessor. The Consistency
terms of the lease provide that the lease transfers Is not the same as comparability.
ownershipfrom the asset to the lessee by the end of in broad sense, consistency refers to the use of
the lease term.
the same method for the same item, either
In form,the contract is a lease as popularly understood. from period to period within an entity or in a

But in substance, in reality, if the "transfer of ownership single period across entities.
provision" is to be considered, the real intent of the Comparability is the goal and consistency helps
parties is an installment purchase of an asset by the
to achieve that goal.
lessee from the lessor.
In a limited sense, consistency is the uniform
ENHANCING QUALITATIVECHARACTERISTIC application of accounting method from period
The enhancing qualitative characteristics relate to period within an entity.
to the presentation or form of the financial
On the other hand, comparability is the uniform
information.
application of accounting method from period
The enhancing qualitative characteristics are to period between and across entities in the
intended to increase the usefulness of the same industry.
financial information that is relevant and
It is inappropriate for an entity to leave
faithfully represented. accounting policies unchanged when better and
Relevant and faithfully represented financial acceptable alternatives exists.
information is useful but the information would
Understandability
be most useful if it is comparable, Understandability that financial
requires
understandable, verifiable and timely.
information must be comprehensive and
Enhancing qualitative characteristics:
intelligible if it is to be most useful.
a. Comparability
The information should be presented in a form
b. Understandability and expressed in terminology that a user
c. Verifiability understands.
d. Timeliness
Classifying, characterizing and presenting
Comparability information "clearly and concisely" makes it

Comparability means the ability to bring understandable.

together for the purpose of noting points of
An essential quality of the information provided
likeness and difference.
in financial statements is that it is readily
Comparability is the enhancing qualitative
understandable by users.
characteristic that enable users to identify and The users shall have an understanding pf the
understand similarities and dissimilarities. economic financial
complex activities,
Comparability within an entity is the quality of accounting process and the terminology in the
information that allows comparisons within a financial statements.
single entity through time or from accounting Financial statements cannot realistically be
period to the next
understandable to everyone.
Intracomparability or horizontal comparability
Financial reports are prepared for users who
is the comparability within an entity
have a reasonable knowledge of business and
Intercomparability or dimensional
economic activities who review and analyze he
comparability is the comparability across information diligently.

entities.
Understandability is very essential because a

For information to be comparable, like things relevant and faithfully represented information
must look alike and different things must look would prove useless if it is not understood by
different. users.
Comparability is not enhanced by making unlike Verifiability
things look alike or making like things look Verifiability means that different knowledgeable
different.
and independent observers can reach

consensus, although not necessarily complete

agreement, that a particular depiction is a
faithful representation.
Verifiability implies consensus

The financial information is verifiable in the accountant that would look into the same
sense that it is supported by evidence so that an
 evidence would arrive at the same economic The evaluation of the cost constraint is
decision or conclusion.
substantially a judgmental process.
Verifiable information provides results that
Assessing whether the cost of reporting
would be substantially duplicated by measurers outweighs or falls short of the benefit is ifficult
using the same measurement method. to measure and becomes a matter of

Verifiability helps assure users that information

professional judgement.
represents the economic phenomenon or
transaction it purports to represent.
Types of verification CHAPTER 4
Direct verification means verifying an amount GENERAL OBJECTIVE OF FINANCIALSTATEMENTS
or other representation through direct
Financial statements provide information about
observation, for example, by counting cash.
economic resources of the reporting entity,
Indirect verification means checking the inputs claims against the entity and changes in the
to a model, formula or other technique and economic resources and claims.
recalculating the inputs using the same
methodology. Financial statements financial
provide
Timeliness
information about an entity's asset, liabilities,
Timeliness means that financial information
equity, income and expenses useful to users of
must be available or communicated early financial statements in:

enough when a decision is to be made. Assessing future cash flows to the

Relevant and faithfully represented financial
reporting entity.
information furnished aftera decision is made is
b. Assessing management stewardship of
useless or of no value.
the entity's economicresource.
Generally, the older the information, the less
The financial information is provided in the
useful.
following:
Some information may continue be timely
1. Statement of financial position, by
long after the end of reporting period because
recognizing assets, liabilities and equity.
some users may need to identify and assess 2. Statement of financial performance, by
trends.
recognizing incomeand expense
Timeliness enhances the truism that without and notes
3. Other statements by
knowledge of the past, the basis for prediction
presenting and disclosing information
will usually be lacking and without interest in about:
the future, knowledge of the past is sterile. a. Recognized assets, liabilities,
What happened in the past would become the equity, income and expenses
basis of whatwould happen in the future. b. Unrecognized assets and
Cost constraint on useful information liabilities

Cost is a pervasive constraint on the information c. Cash flows

that can be provided by financial reporting. d. Contribution from equity
Reporting financial information imposes cost holders and distribution to
and it is important that such cost is justified by equity holders
the benefit derived from the financial
e. Method, assumption and
information.
judgement in estimating
The cost constraint is the consideration of the
amount presented.
cost incurred in generating financial information
Types of financial statements
against the benefit to be obtained from having Consolidated financial statements -these are
the information.
the financial statements prepared when the
The benefit derived from the information
reporting entity comprises both the parent and
should exceed the cost incurred in obtaining the its subsidiaries.

information. Unconsolidated financial statement -these are

the financial statements prepared when the

reporting entity is the parent alone.
Combined financial statements - these are the

financial statements when the reporting entity

 comprises two or more entities that are not The following can be considered as a reporting entity:
linked by a parent and subsidiary relationship a. Individual corporation, partnership or
Consolidated financialstatements proprietorship
Consolidated financial statements provide b. The parent alone
information about the assets, liabilities, income C. The parent and its subsidiaries as a single
and expenses of both the parent and its reporting entity
subsidiaries as a single reporting entity. d. Two or more entities without parent and
The parent is the entity that exercises control subsidiary relationshipas a single entity
over the subsidiaries. e A reportable business segmentof an entity
Consolidated information is useful for existing Reporting period
and potential investors, lenders and other The reporting period is the period when financia
creditors of the parent in their assessment f statemets are prepared for general purpose
future net cash flows of the parent. financial reporting
This because net cash flows to the parent
is Financial statements may be prepared on an
include distributions to the parent from its interim basis
subsidiaries.
Interim financial statements are not required
Consolidated financial statements are not but optional.
designed to provide separate information about Financial statements must be prepared on an
the assets, liabilities, equity, income and annual basis
expenses of a particularsubsidiary Financial statements are prepared for a specific

A subsidiary's own financial statements are period of time and provide information about:
designed to provide such information a. Assets, liabilities and equity at the end
Unconsolidated financial statements of the reporting period
Unconsolidated financial statements are b. Income and expense during the
deigned to provide information about the accounting period
parent's assets, liabilities, incomeand expenses Financial statements also provide comparative
and not aboutof the subsidiaries. information at least one preceding reporting
Such information can be useful to the existing period to identify and assess change in trends.
and potential investors, lenders and other Financial statements may include information
creditors of the parent because a claim against about transactions and other events that

the parent typically does not give the holder of occurred after the end of reporting period if the
the claim against subsidiaries information is necessary to meet the general
Information provided in unconsolidated objective of financial statements.
financial statements is typically not sufficient to Underlying assumptions
meet the requirement needs of primary users Accounting assumptions are the basic notions r
When consolidated financial statements are fundamental premises on which the accounting
required, unconsolidated financial requirements process is based
cannot serve s substitute. Accounting assumptions are also known as
Combined financial statements postulates.
Combined financial statements provide financial Accounting assumptions serve as the
information about assets, liabilities, equity, foundation or bedrock of accounting in order to
incomeand expense of twO or more entities not avoid misunderstanding but rather enhance the
linked with a parent and subsidiary understanding and usefulness of the financial

relationship. statements.
Reporting entity the conceptual framework for financial
A reporting entity is an entity that is required or reporting only mentioned one assumption,
choses to prepare financial statements namely going concern.
The reporting entity can be a single entity or a Implicit in accounting are the basic assumptions
portion of an entity, or can comprise more than of accounting entity, time period and monetary
one entity. unit
A reporting entity is not necessarily a legal

entity.

Going concern The going concern or continuity assumption

means that in the absence of evidenceto the
 contrary, the accounting entity is viewed as The accounting period may be a calendar
continuing in operation indefinitely. year or a natural business year.
the going concern postulate is the very A calendar year is a twelve-month period
foundation of the cost principle. that ends on December 31.
If there is evidence that the entity would A Natural business year is a twelve-month
experience large and persistent losses or period that ends on any month when the
that the entity's operations are to be
business is at the lowest or experiencing
terminated,the going concern assumption slack season.
is abandoned.
Monetary unit
Accounting entity The monetary unit assumption has two
In financial accounting, the accounting aspects, namely quantifiability and stability
entity the specific business organization,
is of the peso.
which may be a proprietorship, partnership The quantifiability aspect means that the
or corporation. assets, liabilities, equity, income and
Under this assumption, the entity is expenses should be stated in terms of a unit
separate from the owners, managers, and of measure which is peso in the Philippines
employees who constitute the entity.
The stability of the peso assumption means
The reason for the entity assumption is to
that the purchasing power of peso is stable
have fair presentation of financial
and constant and that its instability is
statements
insignificant and therefore may be ignored
The personal transactions of the owners The stable peso postulate is actually an
shall not be allowed to distort the financial
amplification of the going concern
statementsof the entity assumption so much so that adjustments
Each business is an independent accounting
are unnecessary to reflect any changes in
entity. purchasing power.
Time period
The accounting function is to account for
A complete accurate report on the financial nominal pesos only and not for constant
position and performance of an entity pesos or changes in purchasing power.
cannot be obtained until the entity is finally
There is a significant gap between historical
dissolved and liquidated.
cost and current replacement cost
Users of financial information need timely An entity may choose the revaluation model
information for making an economic
as an accountingpolicy
decision

The time period assumption requires hat

the indefinite life of an entity is subdivided
into accountingperiods which are usually of

equal length for the purpose of preparing

financial on financial
reports position,
performance and cash flows
The accountingperiod or fiscal period is one
year or a period of twelve months
The "one-year period" is traditionally the
accountingperiod because usually it is after

one year that the government reports are

required.
The basic purpose of accounting is The double-entry system of accounting means
Ans: To provide quantitative financial information about that every transaction
a business enterprise that is useful in making rational
economic decision Ans: Affects at least two general ledger accounts and
is recorded by an equal amountof debits and credits
Financial accounting can be broadly defined as the
area of accounting that prepares Which among the rules on debit and credit below
Ans: General purpose financial statements to be used is not correct?
by parties both internal and external to the business Ans: Assets and expenses are debited when
enterprise increased, and liabilities, revenues and equity are
credited when increased
The basic componentsof the financial statements
do not include Debits
Ans: Statement of Cost of Goods Sold Ans: Increase assets and expenses and decrease
liabilities, revenue, and equity
The basic componentsof the financial statements
Ans: Statement of Comprehensive Income, Credits
Statement of Financial Position/ balance sheet, Ans: Decrease assets and expenses and increase
Statement of Cash Flows
liabilities, revenue, and equity

What is the objective of financial statements? Income accounts normally have

Ans: To provide information about the financial balances. These accounts increase on the
position, performance and changes in financial position side and decrease on the
ofan entity that is useful to a wide range of users in side.

making economic decisions Ans: credit; credit; debit

Itis an independent private sector body with the Liabilityaccounts normally have
objective of achieving uniformity in the balances. These accounts increase on the
accounting principles which are used by business side and decrease on the
enterprises for financial reporting around the side.
world Ans: Ans: credit; credit; debit

International Accounting Standards Committee

Owner's Equity accounts normally have
The highest accounting standard-setting balances. These accounts increase on the
authority in the Philippines sideand decrease on the
Ans: Financial Reporting Standards Council side.
Ans: credit; credit; debit
It is the body authorized by law to promulgate
rules and regulations affecting the practice of Asset accounts normally have
accountancy in the Philippines balances. An increase in asset is recorded as a
Ans: Professional Regulatory Board of Accountancy while a decrease in asset is recorded as
a
They encompass the conventions, rules, and Ans: debit; debit; credit
procedures necessary to define what the
accepted accounting practices are Expense accounts normally have
Ans: Generally accepted accounting principles balances. An increase in expense is recorded as a
while a decrease in expense is recorded
The GAAP in the Philippines are now known as as a
Ans: Both PAS and PFRS Ans: debit; debit; credit

Philippine Financial Reporting Standards (PFRS) X purchased a new register system for his
include all of the following, except
grocery store, paying P1,000 in cash and issuing
Ans: Framework for the Preparation and Presentation a P6,000 note payable for the balance owed.As a
of Financial Statements result of this transactions, X's balance sheet
would reflect
The purposeof International Accounting Ans: An increase in assets and an increase in

Standards (|AS) and International Financial liabilities

Reporting Standards (|FRS) is to

Ans: Promote uniform accounting standards among Which among the following is the last step in the
countries of the world
accounting cycle?
Ans: Journalizing and posting of closing entries
The accounting equation
Ans: Shows the claims on the entity's assets What is the correct sequence for recording
represented by creditors and owners transactions and preparing financial statements
Ans: Journal, ledge, trial balance, financial statements
 The premium on a three-year insurancepolicy
Journalizing performed in what phase
is of the expiring on December 31, 2023 was paid in total
accounting process? on January1, 2021. The original payment was
Ans: Recording initially debited to a prepaid assetaccount.The
appropriate journal entry had been recorded on
General ledger serveswhat phase of the December 31, 2021. The balancein the prepaid
process? assetaccount on December 31, 2021 should be
Ans:
accosifying Ans: The same as it would have been if the original
payment had been debited initially to an expense
Which statementabout the trial balanceis account
incorrect?
Ans: A trial balance proves that all amounts have A document prepared to prove the equality of
been posted to the correct amounts debits and credit after all adjustmentsis the
Ans: Adjusted trial balance
X has completed the posting process for the
month of June and has prepared a trial balance in Which financial statementis most useful in
which the debits total P11,000and the credits assessingthe profitability of the business

g
total P11,100. Which of the following errors would enterprise?
be the most likely candidate in causing the trial Ans: Statement of Comprehensive Income
balance not to balanceby P100?
Ans: A P50 debit was posted as a P50 credit The financial statementthat shows the sources
and uses of cash.
The purpose of adjusting entries is to Ans: Statement of Cash Flow
Ans:Apply the realization principle and the matching
principle to transactions affecting two or more A part of financial statementthat shows the
accounting periods corporate profile, estimates and provisions used
by company, and detailed computationand
Adjusting entries areneeded because an entity analysis.
Ans: Uses the accrual basis of accounting Ans: Notes to Financial Statement

Accrualsare The closing process

Ans: Adjusting entries where revenue or expense Ans: Posts all closing entries to the appropriate
recognition precedes cash flow general ledger account

Which of the following least resembles a typical After the accounts have been closed

adjusting entry Ans: The revenue, expenses, and incomesummary

Ans: Debit asset, credit liability accounts have zero balances

Which of the following statementsis false Accumulated depreciation is an example of

adjusting entries? Ans: nominal and contra account
regarding
Ans: Each adjusting entry affects one revenue
account and one expenseaccount Premium on bonds payable is an example of
Ans: real and adjunct account
An accrued expense is an expense
Ans: Incurred but not paid Which an example of a nominal and contra
account?
An unearned revenuecan be best described as an Ans: Sales discount
amount
Ans: Collected and not currently matched with Reversing entries
expense Ans: Impact the statement of financial position and
the income statement

The failure to properly record an adjusting entry

to accruean expense results in
Which of the following statementsregarding
reversing entries is incorrect?
Ans: Understatement of expense and an
understatement of liability
Ans: Reversing entries changeamounts reported in

the statement of financial position for the previous

period
The failure to properly record an adjusting entry
to accrue a revenue results in
Ans: Understatement of revenue and an Which of the following adjusting entries cannot
understatement of asset be subject to reversing entries?
Ans: Deferral of expense under the asset method
and unearned revenue under the liability method