HISTORY

THE NEW CONCEPTUAL FRAMEWORK

What is accounting?
-Accounting is a service activity. Its function is to
provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be
useful in making economic decision. (ASC)
What is the basic purpose of accounting?
-To provide quantitative financial information about a
business that is useful to statement users in making
economic decisions
RA No. 9298 (The Philippine Accountancy Act of 2004)

-the law regulating the practice of accountancy in the

Philippines
3 Main Areas where CPAs Practice their Profession
1. Public Accounting- Public accountants render their
financial services to the public.
a. Auditing- primary service of a CPA
b. Taxation
c. Management Advisory Services
2. Private Accounting- Private accountants are employed
in business entities as an accounting staff, chief
accountant, internal auditor, and controller.
3.Government Accounting employed by various
government agencies e.g. BIR, COA, SEC, DBM
Terms:
Auditing an auditor examines the financial statements
to ascertain whether they are in conformity with
generally accepted accounting principles.
Bookkeeping- is the procedural aspect of accounting
and largely concerned with the development and
maintenance of accounting records.
Financial Accounting- primarily concerned with the
recording of business transactions and the eventual
preparation of financial statements primarily intended
for external users (i.e. creditors, investors and
prospective investors)

Philippine Accounting Standards

Accounting Standards made the
Council (ASC)

Financial Reporting
Standards Council
(FRSC)

SFAS and PAS

makes the
PFRS

International Accounting Standards

made the
International
Accounting Standards
Committee (IASC)

IAS

International
makes the
Accounting Standards
Board (IASB)

IFRS

*Our Philippine GAAP now moves toward to conform to

the international accounting standards. Currently,
Philippines isfully compliant with IFRS. Therefore:
PAS and PFRS = IAS and IFRS
ACCOUNTING ASSUMPTIONS
-are the basic notions or fundamental premises or
foundation on which the accounting process is based.
The new conceptual framework mentions only one
assumption-the going concern assumption.
Going Concern Assumption- means the accounting
entity is viewed as continuing in operations indefinitely
unless there is an evidence to the contrary. Its the very
foundation of the cost principle (assets are recorded at
their acquisition cost rather their market value).
OTHER ASSUMPTIONS not mentioned in the new
framework but are implicit in accounting:

Managerial Accounting- same as financial accounting

but the financial reports are primarily intended for
internal users (the management )only.

Accrual accounting - income is recognized when

earned regardless of when received and expense is
recognized when incurred regardless of when paid.

Generally Accepted Accounting Principles (GAAP)

GAAP encompasses the conventions, rules, procedures
and standards necessary to define what is accepted
accounting practice.

*Matching Principle- requires that those costs and

expenses incurred in earning revenue shall be
reported in the same period

Philippine GAAP is composed of the following:

1. Accounting Standards (PAS/PFRS, IFRS/PFRS)
2. Several laws affecting the accountancy profession (tax
laws)
3. Interpretations (IFRIC)
3.Conceptual Framework-in absence of any standard or
interpretation

Accounting Entity Assumption- the entity is separate

from the owners, managers, and employees who
constitute the entity. Therefore, the transactions of the
entity shall not be merged with the transactions of the
owners and vice versa.
Time Period Assumption- requires the indefinite life of
an entity is subdivided into time periods or accounting
periods. Accounting periods may be :
a. Calendar Year- a twelve-month period that ends
on December 31.
b. Fiscal Year- a twelve-month period that begins and
ends on any month

Monetary Unit Assumption-it has two aspects:

a. Quantifiability Aspect- means that every element in
the financial statements are stated in terms of a unit of
measure which is the peso in the Philippines.
b.Stability of Peso Aspect- means that the purchasing
power of the peso is stable or constant and that its
stability is insignificant and therefore may be ignored.

Users of Financial Information:

1. Primary users- existing and potential investors,
lenders and other creditors.
2. Other Users- employees, customers, government, and
the public
CONCEPTUAL FRAMEWORK
-is the theoretical foundation that underlies the
preparation and presentation of financial statements.
-in the absence of any standard or interpretation that
specifically applies to a transaction, management shall
consider the applicability of the conceptual framework
in developing and applying an accounting policy that
results to information that is relevant and reliable.
Scope of Conceptual Framework:
1. Objective of Financial Reporting
-the objective of financial reporting is 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.
2.Qualitative Characteristics of the Financial
Information
- Qualitative characteristics are the qualities or attributes
that make financial accounting information useful to the
users. They are classified into:
a. Fundamental Qualitative Characteristics- relate to
the content or substance of the financial information.
a.1Relevance- relevant financial information is capable
of making a difference in the decision made by
users
a.2Faithful
Representation- to be
faithfully
represented, financial information must be
complete, neutral/free from bias, free from error.
b. Enhancing Qualitative Characteristics- relate to the
presentation or form of the financial information.
b.1Comparability- means the ability to bring together
the financial information for the purpose of
noting points of likeness, difference, and
trends.
b.1.1Consistency- refers to the use of the same
accounting method for an item in the
financial statement so that comparison
will be justifiable.
b.2Understandabilityrequires
that
financial
information must be comprehensible or
intelligible to be useful to the users of the
information

b.3Verifiability- means that different knowledge-able

and independent observers could reach
consensus, although not necessarily complete
agreement, that a particular depiction is a
faithful representation.
b.4Timeliness- means having information available to
decision makers in time to influence their
decision.
Other aspects of the above mentioned qualitative
characteristics.
Substance over form- if the substance (or the true
intention of the parties) of the transaction is different
from its form (one that is explicitly stated in the
contract), the substance of the transaction shall be the
one to be accounted for.
Conservatism/Prudence- A conservative user
preferred that possible errors in measurement be in the
direction of understatement rather than overstatement of
net income and net assets. In simplest terms,
conservatism means in case of doubt, record any loss
and do not record any gain.
Materiality (Doctrine of Convenience)- is a practical
rule in accounting which dictates that strict adherence to
GAAP is not required when the items are not significant
enough to affect the evaluation, decision, and fairness of
the financial statements.Materiality is relativity.
3. Definition, recognition and measurement of the
elements from which financial statements are
constructed.
a. Assets- are resources controlled by the entity as a
result of past transaction or events and from which
future economic benefits are expected to flow to the
entity.
b. Liabilities- are present obligations of the entity
arising from past transactions or events the settlement
of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
c. Equity- the residual interest in the assets of the
entity after deducting all its liabilities
d. Income- the increase in economic benefit during the
accounting period in the form of inflow or increase in
assets or decrease in liability that results in increase
in equity, other than contribution from equity
participants.
e. Expense- the decrease in economic benefit during
the accounting period in the form of an outflow or
decrease in asset or increase in liability that results in
decrease in equity, other than distribution to equity
participants.
4. Concepts of capital and capital maintenance
An entitys financial performance is determined using
two approaches:

a. Transaction Approach- the traditional preparation of

an income statement. That is, we record each transaction
that affects an entitys income statement by
debiting/crediting nominal accounts that will later be
shown in the income statement of the entity.

Answers:
1.in conformity with: cost principle, going concern
assumption

b. Capital Maintenance Approach- this means the net

income occurs only after the capital used from the
beginning of the period is maintained. The excess or
well-off after maintaining the beginning capital represent
the net income for the period.

3. in violation with: consistency and comparability

Exercise: Indicate the assumptions, principles, concepts

qualitative characteristics or aspects that were implicitly
used or violated in the following transactions.

6.in conformity with: substance over form

1. A Company bought a machine costing P100, 000. The

entity records it at its acquisition cost although its fair
value at the date of acquisition is P120, 000.

8. in conformity with: relevance and understandability

2. The Mr. Matiyaga, accountant of PLDT presents their

financial statements up to the nearest centavo to show
completeness and accuracy.

10. in violation with: faithful representation and

verifiability

3. XYZ Company uses FIFO or average method of

recording their inventories, depending on which is
higher for a particular period.
4. An electronics entity owned by Juan reports Juans
swimming pool as an asset at its acquisition cost of
P250,000 instead of its current cost of P275,000.
5. An entity simultaneously recorded its cost of sales
whenever a sale takes place.
6. Recognizing an asset that is being leased from a lessor
as your own asset when the lease term is for the major
part of the economic life of the leased asset although the
contract says that the contract is an operating lease.
7. A large entity decides that whenever an asset has a
cost of less than P10,000, the cost will be charged to
expense even though the asset may benefit several
accounting periods.
8. An entity decided not to conform to a specific
standard because in doing so, would make the
companys financial statements more comprehensible
and relevant in making decisions with necessary
disclosures as to the reasons and effect of such deviation.
9. Recording a liability whenever its probable to happen
and disclosing it whenever its possible; disclosing an
asset whenever its probable and recognize only when it
is virtually certain.
10. Mr.Manloloko, an accountant tampered a purchase
invoice by replacing the right amount of P10,000 to
P100,000 and concealed such fraud through its
fraudulent accounting skills.

2. in violation with: materiality and relevance

4. in violation with: accounting entity assumption

5. in conformity with: matching principle

7. in conformity with: materiality

9. in conformity with: conservatism