DEFINITION OF ACCOUNTING

The Accounting Standards Council provides the following definition:

Accounting is a service activity.

The accounting function is to provide quantitative information, primarily financial in

nature, about economic entities, that is intended to be useful in making economic decision.

The Committee on Accounting Terminology of the American Institute of Certified Public

Accountants defines accounting as follows:

Accounting is the art of recording, classifying and summarizing in a significant manner

and in terms of money, transactions and events which are in part at least of a financial

character and interpreting the results thereof.

The American Accounting Association in its Statement of Basic Accounting Theory

defines accounting as follows:

Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgment and decision by users of the information.

Important Points

The following important points made in the definition of accounting should be noted:

One — Accounting is about quantitative information.

Two — The information is likely to be financial in nature.

Three — The information should be useful in decision making.

The definition that has stood the test of time is the definition given by the American

Accounting Association.

This definition states that the very purpose of accounting is to provide quantitative

information to be useful in making an economic decision.

The definition also states that accounting has a number of components, namely:

a. Identifying as the analytical component.

b. Measuring as the technical component.

c. Communicating as the formal component.

Identifying

This accounting process is the recognition or non-recognition of business activities as

"accountable" events.

Not all business activities are accountable.

For example, the hiring of employees, the death of the entity president and the entering

into a contract are all business activities but such events are not accountable because

they cannot be quantified or expressed in terms of a unit of measure.

An event is accountable or quantifiable when it has an effect on assets, liabilities and

equity.

In other words, the subject matter of accounting is economic activity or the

measurement of economic resources and economic obligations.

Only economic activities are emphasized and recognized in accounting.

Sociological and psychological matters are beyond the province of accounting.

External and internal transactions

Economic activities of an entity are reffered to as transactions which may be classified

as external and internal.

External transactions or exchange transactions are those economic events involving one

entity and another entity

Examples of external transactions are:

a. Purchase of goods from a supplier

b. Borrowing money from bank

c. Sale of goods to a customer

d. Payment of salaries to employees

e. Payment of taxes to the government

Internal transactions are economic events involving the entity only.

Internal transactions are the economic activities that take place entirely within the

entity.

Production and casualty loss are examples of internal transactions.

Production is the process by which resources are transformed into products.

Casualty is any sudden and unanticipated loss from Ere, flood, earthquake and other event

ordinarily termed as an act of God.

Measuring

This accounting process is the assigning of peso amounts to the accountable economic

transactions and events.

If accounting information is to be useful, it must be expressed in terms of a common

financial denominator.

Financial statements without monetary amounts would be largely unintelligible or

incomprehensible.

The Philippine peso is the unit of measuring accountable economic transactions.

The measurement bases are historical cost and current value.

Historical cost is the original acquisition cost and the most common measure of financial

transactions.

Current value includes fair value, value in use, fulfillment value and current cost.

Communicating

Communicating is the process of preparing and distributing accounting to potential users

of accounting information.

Identifying and measuring are pointless if the information contained in the accounting

records cannot be communicated in some form to potential users.

Actually, the communicating process is the reason why accounting has been called the

"universal language of business".

Implicit in the communication process are the recording, classifying and summarizing

aspects of accounting.

Recording or journalizing is the process of systematically maintaining a record of all

economic business transactions after they have been identified and measured.

Classifying is the sorting or grouping of similar and interrelated economic transactions

into their respective classes.

Classifying is accomplished by posting to the ledger.

The ledger is a group of accounts which are systematically categorized into asset

accounts, liability accounts, equity accounts, revenue accounts and expense accounts.

Summarizing is the preparation of financial statements which include the statement of

financial position, income statement, statement of comprehensive income, statement of

changes in equity and statement of cash flows.

Accounting as an information system

Accounting is an information system that measures business activities, processes

information into reports and communicates the reports to decision makers.

A key product of this information system is a set of financial statements — the

documents that report financial information about an entity to decision makers.

Financial reports tell us how well an entity is performing in terms of profit and loss and

where it stands in financial terms.

Overall objective of accounting

The overall objective of accounting is to provide quantitative financial information about

o business that is useful to statement users particularly owners and creditors in making

economic decisions.

An accountant's primary task is to supply financial information so that the statement

users could make informed judgment and better decision.

The essence of accounting is decision-usefulness.

Investors and other users are interested in financial accounting information necessary in

making important and significant economic decisions.

THE ACCOUNTANCY PROFESSION

At present, Republic Act No. 9298 is the law regulating the practice of accountancy in

the Philippines.

This law is known as the Philippine Accountancy Act of 2004.

Accountancy has developed as a profession attaining status equivalent to that of law and

medicine.

In the Philippines, in order to qualify to practice the accountancy profession, a person

must finish a degree in Bachelor of Science in Accountancy and pass a very difficult

government examination given by the Board of Accountancy.

The Board of Accountancy is the body authorized by law to promulgate rules and

regulations affecting the practice of the accountancy profession in the Philippines.

The Board of Accountancy is responsible for preparing and grading the Philippine CPA

examination.

This computer-based examination is offered a year, one in May and another one in

October, in authorized centers around the country.

Limitation of the practice of public accountancy

Single practitioners and partnerships for the practice of public accountancy shall be

registered certified public accountants in the Philippines,

A certificate of accreditation shall be issued to certified public accountants in public

practice only upon showing in accordance with rules and regulations promulgated by the

Board of Accountancy and approved by the Professional Regulation Commission that such

registrant has acquired a minimum of three years of meaningful experience in any of the

areas of public practice including taxation.

The Securities and Exchange Commission shall not resister any corporation organized for

the practice of public accountancy

Accreditation to practice public accountancy

Certified public accountants, firms and partnerships of certified public accountants,

including partners and staff member thereof, are required to register with the Board of

Accountancy and Professional Regulation Commission for the practice of public

accountancy.

The Professional Regulation Commission upon favorable recommendation of the Board of

Accountancy issue the Certificate of Registration to practice public accountancy which

shall be valid for 3 years and renewable every 3 years upon payment of required fees.

Certified Public Accountants generally practice their profession in three main areas,

namely

a. Public accounting

b. Private accounting

c. Government accounting

PUBLIC ACCOUNTING
The field of public accounting or public accountancy is composed of individual

practitioners, Small accounting firms and large multinational organizations that render

independent and expert financial services to the public.

Public accountants usually offer three kinds of services, namely auditing, taxation and

management advisory services.

As a matter of fact, large multinational accounting firms have separate division for each

of these services.

Auditing

Auditing has traditionally been the primary service offered by most public accounting

practitioners.

Auditing or external auditing is the examination of financial statements by independent

certified public accountant for the purpose of expressing an opinion as to the fairness

with which the financial statements are prepared.

Actually, external auditing is the attest function of independent CPAs.

The Bureau of Internal Revenue requires audited financial statements to accompany the

filing of annual income tax return. Banks and other lending institutions frequently require

an audit by an independent CPA before granting a loan to the borrower.

Creditors and prospective investors place considerable reliance on audited financial

statements on making economic decision.

Taxation

Taxation service includes the preparation of annual income tax returns and determination

of tax consequences of certain proposed business endeavors.

The CPA not infrequently represents the client in tax • investigations.

To offer this service effectively and efficiently, the public accountant must be

thoroughly familiar with the tax laws and regulations and updated with changes in

taxation law and court cases concerned with interpreting taxation law.

Management advisory services

Management advisory services have become increasingly important in recent years

although audit and tax services are undoubtedly the mainstay of public accountants.

The term management advisory services hag no precise coverage but is used generally to

refer to services to clients on matters of accounting, finance, business policies,

organization procedures, product costs, distribution and many other phases of business

conduct and operations.

Specifically, management advisory services include:

a. Advice on installation of computer system

b. Quality control

c. Installation and modification of accounting system

d. Budgeting

e. Forward planning and forecasting

f. Design and modification of retirement plans

g. Advice on mergers and consolidations

PRIVATE ACCOUNTING
Many Certified Public Accountants are employed in business entities in various capacity as

accounting staff, chief accountant, internal auditor and controller.

The highest accounting officer in an entity is known as the controller.

The major objective of the private accountant is to assist management in planning and

controlling the entity's operations.

Private accounting includes maintaining the records, producing the financial reports,

preparing the budgets and controlling and allocating the resources of the entity.

The private accountant has also the responsibility for the determination of the various

taxes the entity is obliged to pay.

GOVERNMENT ACCOUNTING
Government accounting encompasses the process of analyzing, classifying, summarizing

and communicating all transactions involving the receipt and disposition of government

funds and property and interpreting the results thereof.

The focus of government accounting is the custody and administration of public funds.
Many Certified Public Accountants are employed in many branches of the government,

more particularly:

a. Bureau of Internal Revenue

b. Commission on Audit

c. Department of Budget and Management

d. Securities and Exchange Commission

e. Bangko Sentral ng Pilipinas

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

Republic Act No. 10912 is the law mandating and strengthening the continuing

professional development program for all regulated professions, including the

accountancy profession.

All certified public accountants shall abide by the requirements, rules and regulations on

continuing professional development to be promulgated by the Board of Accountancy,

subject to the approval of the Professional Regulation Commission, in coordination with

the accredited national professional organization of certified public accountants or any

duly accredited educational institutions.

Continuing professional development refers to the inculcation and acquisition of advanced

knowledge, skill, proficiency, and ethical and moral values after the initial registration of

the Certified Public Accountant for assimilation into professional practice and lifelong

learning.

Continuing professional development raises and enhances the technical skill and

competence of the Certified Public Accountant.

CPD credit units

The CPD credit units refer to the CPD credit hours required for the renewal of CPA

license and accreditation of n CPA to practice the accountancy profession every three

years.
Under the new BOA Resolution, all Certified Public Accountants regardless of area or

sector of practice shall be required to comply with 120 CPD credit units.

The Continuing Professional Development is required for the renewal of CPA license and

accreditation of CPA to practice the accountancy profession.

As recently promulgated, only 15 CPD credit units are required for the renewal of CPA

license.

However, 120 CPD credit units are required for accreditation of a CPA to practice the

accountancy profession.

Excess credit units earned shall not be carried over to the next three-year period,

except credit units earned for masteral and doctoral degrees.

It is to be emphasized that the Continuing Professional Development has become

mandatory for Certified Public Accountants.

Exemption from CPD

A CPA shall be permanently exempted from CPD requirements upon reaching the age of

65 years.

However, this exemption applied only to the renewal of CPA license and not for the

purpose of accreditation to practice the accountancy profession.

Accounting versus auditing

In a broad sense, accounting embraces auditing.

Auditing is one of the areas of accounting specialization

In a limited sense, accounting is essentially constructive in nature. Accounting ceases

when financial are already prepared.

On the other hand, auditing is analytical. The work of an auditor begins when the work of

the accountant ends.

After the financial statements are prepared, the auditor will begin to perform the task

of auditing,
The auditor examines the financial statements to ascertain whether they are in

conformity with generally accepted accounting principles.

Accounting versus bookkeeping

Bookkeeping is procedural and largely concerned with development and maintenance of

accounting records.

Bookkeeping is the "how" of accounting.

Accounting is conceptual and is concerned with the why, reason or justification for any

action adopted.

Bookkeeping is a procedural element of, accounting ag arithmetic is a procedural element

of mathematics.

Accounting versus accountancy

Broadly speaking, the two terms are synonymous because they both refer to the entire

field of accounting theory and practice.

Technically speaking, however accountancy refers to the profession of accounting

practice.

Accounting is used in reference only to a particular of accountancy such as public

accounting, private accounting, and government accounting.

Financial accounting versus 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 that emphasizes reporting to creditors and

investors. Managerial accounting is the accumulation and preparation of financial reports

for internal users only.

In other words, managerial accounting is the area of accounting that emphasizes

developing accounting information for use within an entity.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Accounting has evolved through time changing with the needs of society. As new types of

transactions occur in trade and commerce, accountants develop rules and procedures for

recording them.

These accounting rules, procedures and practices came to be known as generally accepted

accounting principles or simply GAAP.

The principles have developed on the basis of experience, reason, custom, usage and

practical necessity.

Generally accepted accounting principles represent the rules, procedures, practice and

standards followed in the preparation and presentation of financial statements.

Generally accepted accounting principles are like laws that must be followed in financial

reporting. The process of establishing GAAP is a political process which incorporates

political actions of various interested user groups as well as professional judgment, logic

and research.

Purpose of accounting standards

The overall purpose of accounting standards is to identify proper accounting practices

for the preparation and presentation of financial statements.

Accounting standards create a common understanding between preparers and users of

financial statements particularly the measurement of assets and liabilities.

A set of high-quality accounting standards is a necessity to ensure comparability and

uniformity in financial statements based on the same financial information.

FINANCIAL REPORTING STANDARDS COUNCIL

In the Philippines, the development of generally accepted accounting principles is

formalized initially through the creation of the Accounting Standards Council or ASC.
The Financial Reporting Standards Council or FRSC now replaces the Accounting

Standards Council.

The FRSC is the accounting standard setting body created by the Professional Regulation

Commission upon recommendation of the Board of Accountancy to assist the Board of

Accountancy in carrying out its powers and functions provided under R.A. Act No. 9298.

The main function is to establish and improve accounting standards that will be generally

accepted in the Philippines.

The accounting standards promulgated by the Financial Reporting Standards Council

constitute the "highest hierarchy" of generally accepted accounting principles in the

Philippines.

The approved statements of the FRSC are known as Philippine Accounting Standards or

PAS and Philippine Financial Reporting Standards or PFRS.

Composition of FRSC

The FRSC is composed of 15 members with a Chairman who had been or is presently a

senior accounting practitioner and .14 representatives from the following:

Board of Accountancy

Securities and Exchange Commission 1

Bangko Sentral ng Pilipinas 1

Bureau of Internal Revenue 1

Commission on Audit 1

Major organization of preparers and users

of financial statements — Financial Executives

Institute of the Philippines or FINEX 1

Accredited national professional organization of CPAs:

Public Practice 2

Commerce and Industry 2

Academe or Education 2
 Government 2

Total 14

The Chairman and members of the FRSC shall have a term of 3 years renewable for

another term. Any member of the ASC shall not be disqualified from being appointed to

the FRSÇ.

Philippine Interpretations Committee

The Philippine Interpretations Committee or PIC was formed by the FRSC in August 2006

and has replaced the Interpretations Committee or IC formed by the Accounting

Standards Council in May 2000.

The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and

to provide timely guidance oh financial reporting issues not specifically addressed in

current PFRS.

In other words, interpretations are intended to give authoritative guidance on issues that

are likely to receive divergent or unacceptable treatment because the standards do not

provide specific and clearcut rules and guidelines.

The counterpart of the PIC in the United Kingdom is the International Financial

Reporting Interpretations Committee or IF RIC which has already replaced the Standing

Interpretations Committee or SIC.

INTERNATIONAL ACCOUNTING STANDARDS CONMITTEE

The International Accounting Standards Committee or IASC is an independent private

sector body, with the objective of achieving uniformity in the accounting principles which
are used by business and other organizations for financial reporting around the world.

It was formed in June 1973 through an agreement made by professional accountancy

bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the
United Kingdom and Ireland, and the United States of America. The IASC is
headquartered in London, United Kingdom.
Objectives of IASC

a. To formulate and publish in the public interest accounting standards to be observed in

the presentation of financial statements and to promote their worldwide acceptance and
observance.

b. To work generally for the improvement and harmonization of regulations, accounting

standards and procedures relating to the presentation of financial statements.

INTERNATIONAL ACCOUNTING STANDARDS BOARD

The International Accounting Standards Board or IASB now replaces the International
Accounting Standards Committee or IASC.
The IASB publishes standards in a series of pronouncements called International
Financial Reporting Standards or IFRS.

However, the IASB has adopted the body of standards issued by the IASC.

The pronouncements of the IASC continue to be designated as "International Accounting

Standards" or IAS.

The IASB standard-setting process includes in the correct order research, discussion
paper, exposure draft and accounting standard.

Move toward IFRS

In developing accounting standards that will be generally accepted in the Philippines,
standards issued by other standard setting bodies such as the USA Financial Accounting
Standards Board (FASB) and the IASB are considered.

In the past years, most of the Philippine standards issued are based on American
accounting standards.

At present, the FRSC has adopted in their entirety all International Accounting
Standards and International Financial Reporting Standards.

The move toward IFRS is essential to achieve the goal of one uniform and globally
accepted financial reporting standards.
 The Philippines is fully compliant with IFRS effective January 2005, a process which was
started back in 1997 in moving from USA GAAP to IFRS.

The following factors are considered in deciding to move totally to international

accounting standards:
a. Support of international accounting standards by Philippine organizations, such as
the Philippine SEC, Board of Accountancy and PICPA.

b. Increasing internalization of business which has heightened interest in a common

language for financial reporting.

c. Improvement of international accounting standards or removal of free choices of

accounting treatments.

d. Increasing recognition of international accounting standards by the World Bank,

Asian Development Bank' and World Trade Organization.

Philippine Financial Reporting Standards

The Financial Reporting Standards Council issues standards in a series of pronouncements
called "Philippine Financial Reporting Standards" or PFRS.

The Philippine Financial Reporting Standards collectively include all of the following:

a. Philippine Financial Reporting Standards which correspond to International Financial

Reporting Standards.
The Philippine Financial Reporting Standards are numbered the same as their counterpart
in International Financial Reporting Standards.

b. Philippine Accounting Standards which correspond to International Accounting

Standards.
The Philippine Accounting Standards are numbered the same as their çounterpart in
International Accounting Standards.

c. Philippine Interpretations which correspond to Interpretations of the I FRIC and the

Standing Interpretations Committee, and Interpretations developed by the Philippine
Interpretations Committee.