CHAPTER 1: THE ACCOUNTANCY PROFESSION

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 nonrecognition 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 referred 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 a 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 fire, 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, current cost, realizable value and present value.

Historical cost is the most common measure of financial transactions.

Communicating

Communicating is the process of preparing and distributing accounting reports 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 a

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 of2004".

Accountancy has developed as a profession attaining a 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 twice a year, one in May and
another one in October, in authorized testing 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 register 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 members 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 shall 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

d. Academe/ Education

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 has 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 toрay.
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 Ассountant.

CPD credit units

The CPD credit units refer to the CPD credit hours required for the renewal of CPA license and
accreditation of a 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 in a compliance period of three years.to

However, the initial implementation of the 120 CPD credit units is gradual in the following
period:

2017 80 credit units

2018 100 credit units
2019 120 credit units
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.

The Continuing Professional Development is required for the renewal of CPA license and
accreditation of CPA to practice the accountancy profession.

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 statements 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 as 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 field 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
Philippínes.

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 1
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 FRSC.

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 on 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 IFRIC which has already replaced the Standing Interpretations
Committee or SIC.

INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE

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 counterpart in
International Accounting Standards.

c. Philippine Interpretations which correspond to Interpretations of the IFRIC and the Standing
Interpretations Committee, and Interpretations developed by the Philippine Interpretations
Committee.

Source: Conceptual Framework and Accounting Standards, 2018 First Edition by Conrado
Valix, Jose Prealta & Christian Aris Valix.