Conceptual

Framework &
Accounting Standard

Definition of Accounting Accounting as the “Language of Business”

The following authorities on the field of accounting 1. Accounting is the medium of communication
defined accounting as. through which financial reports are furnished
to intended users for decision making.
Accounting Standards Council (ASC)- A Service Activity.
2. Accounting helps business answer the
The accounting function is to provide quantitative following business questions:
information primarily financial in nature, about economic o Profitability- “How much is the increase in
entities, that is intended to be useful in making economic capital as a result of business
decision. operations?”
o Liquidity- “Are there available funds to
American Institute of Certified Public Accountant (AICPA)-
finance the business operations?”
An Art
o Solvency- “Can business pay its long-
Accounting is an art of recording, classifying, and term obligations to others?”
summarizing in a significant manner and in terms of o Stability- “Can the business sustain its
money, transactions and events which are part at least of long-term profitability and cash flow?
a financial character and interpreting the results thereof. o Capital Structure- “How much
investments are from Capital or
American Accounting Association (AAA)- A Process
borrowed from Creditors?”
Accounting is the process of identifying, o Financial Flexibility- “Is there excess cash
measuring, and communicating economic information to available for opportunities and
permit informed judgement and decision by users of the uncertainties?”
information
Accounting as the “Eyes of the Business
• Accounting helps owners the following business activities:
o Check on their financial progress
o Prepare plans to the future
o Avoid material mistakes
o Analyze causes of changes
o Choose the best amongst economic alternatives
• Accounting are economic detectives using the audit function by verifying the truthfulness of
financial reports.

3600 BC (approx.) 1700s- French Revolution

• Record keeping already common from • The throughout study of
Mesopotamia, China, India to Central & South accounting and development of
America. accounting theory began.
• The oldest evidence of this practice was the
1760 – 1830- Industrial Revolution
“clay tablet”
• Mass production and great
13th to 15 centuries (approx.)
importance of Fixed Asset
• 1339 is the earliest recorded history of the
1900s- Global Industrial Economy
“double-entry bookkeeping” (DEB) accounting
system • Developing changes in accounting
o “Massari Ledgers of Commune of Genoa” – practice such as mergers,
The oldest DEB because of separate pages acquisitions, and reporting systems
were used for debit and credit (T-Account or 2000s- Technological Advancements &
Ledger or Venetian Method) Global Trade
o In Florence Italy – DEB records wherein debits
were written over credits (Florentine Method • Computer-assisted accounting
or Journal Entries) practice and reporting were
o 1494 – an Italian monk and mathematician, developed rapidly
wrote “Summa de Arithmetica Geometria, • Globalization of business and
Proportioni et Proportionalita” the first book diverse accounting practice has
that was published containing a detailed been standardized in an
chapter of in this book, Pacioli introduced international accounting setting
three (3) important record books;
▪ Memorandum Book- for all information
on a transaction
▪ Journal Book- Book of Original Entry
▪ Ledger Book- Book of Final Entry
Four (4) Sectors of the Accounting Practice
1. This practice is when accountant offer their professional services for a fee and who engages NOT as an
employee of the company
o External Auditing – primarily centers on the critical examination of financial statements by an
independent CPA to express an opinion regarding the fairness of the contents of the financial
statements
o Tax service- deals with the accountant’s preparation of the client’s income tax returns, business and
transfer taxes
o Managerial advisory services- provide assistance and advice to the management to their clients
regarding finance, budgeting, business policies, and organization procedures, systems, product costs,
distribution and other business activities
2. Private Accounting- Accountants that engages as an employee of a private enterprise or non-profit
organization
o Financial Accounting – Primarily concerned with the recording and classifying of business
transactions culminating in the preparation of general-purpose financial statements or reports
regarding the business’ financial position, operating results and cash activities in accordance with
the GAAP.
o Internal Auditing – deals with determining the operational efficiency of the company regarding
protection of the company’s assets, accuracy and reliability of the accounting data.
o Tax Accounting – embraces the preparation of various tax returns and tax planning necessary to
minimize the impact of taxes on the entity.
o Cost Accounting – The determination of inventory costs and/or product costs of the
manufactured goods. Data produced from cost accounting are used by the management for
planning, budgeting and controlling purposes.
o Not-for Profit Accounting – Special accounting for charitable organizations, philanthropic
foundations, religious groups, governmental agencies, schools and cooperatives.
o Socio-economic Accounting – concerns the measurement of the impact of business or
governmental agency’s decision on the public sector.
o Accounting Systems Design – includes the evaluation of the company’s control system to find out
any area of improvement
3. Government Accounting – focuses on the proper custody of government funds and their purposes. The
following are several agencies that many accountants are employed:
o Bureau of Internal Revenue (BIR)
o Commission on Audit (COA)
o Department of Finance (DOF)
o Department of Budget and Management (DBM)
o Banko Sentral ng Pilipinas (BSP)
4. Accounting Education – involves teaching and preparation of curriculums in high schools, colleges,
universities or review centers of the following subjects:
o Financial Accounting
o Management Accounting
o Taxation
o Other business-related subjects
Forms of Business
Business – is any economic activity conducted primarily for profit. Below are the most common forms of
business
1. Sole or Single Proprietorship – A business entity owned by one person called a sole proprietor
2. Partnership – A business entity owned by two (2) or more persons called partners who have agreed to
contribute money, property, and industry to a common fund with the intention of dividing the profits
among themselves
3. Corporation – A business registered as an artificial person under the operation of law. Its existence is
evidenced by its Articles of Incorporation and Corporate By-Laws registered with the Securities and
Exchange Commission (SEC)
4. Cooperative
Business Activities
A business may be classified based on its primary activities. The common types of businesses as to their nature
or main activities are as follows:
1. Servicing – This Activity earns through rendering a service in exchange for a fee
2. Merchandising – The business engages in the buying and selling of goods. It ears primarily by marking
up the cost from purchased goods that it sells to customers.
3. Manufacturing – This business converts raw materials into finished goods that are to be sold at selling
price.

This is also called the "accounting cycle", which Steps in the Accounting Cycle
refers to a series of repetitive activities of There are nine (9) basic steps in the accounting
recording, summarizing and reporting economic cycle, which includes phases on recording,
transaction from the beginning to the end of the classifying, and summarizing.
accounting period.
RECORDING PHASE
Aspects of the Accounting Process
1. Analyzing the transaction (business
1. Identifying - This includes recognizing document)
business transaction or events that are 2. Journalizing
reportable
2. Measuring - This assigns peso amounts to CLASSIFYING PHASE
the accountable economic transactions 3. Posting
and events.
3. Communicating - This constitute the SUMMARIZING PHASE
preparation and distribution of accounting 4. Preparing the unadjusted trial balance
reports to potential users of accounting 5. Preparing adjusting entries
information 6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing the post-closing trial balance
9. Preparing reversing entries
This is where the accountant gathers information
from source documents and determines the impact Journalizing
of the transaction on the financial position as
This is the process of recording the
represented by the equation “assets equals liabilities
transactions in the appropriate journals. A journal is
plus equity”.
a chronological record of transactions also known as
Impact of the transaction the book of original entry. Although all transactions
could be recorded in the general journal, it is more
In order to determine if a transaction has an
efficient to use special journals in recording a large
impact to the financial position of an entity, it must
number of like transactions..
be considered if it is either a) Accountable or b) Un-
Accountable. Special journals that enterprises usually use are:
a. Accountable events are monetary • Sales Journal – Only sales of merchandise
transaction that are recorded in the on account are
Accounting Books • Cash receipts journal – All types of cash
b. Un-accountable events are non-monetary receipts are
events that are not recorded in the • Purchase journal – Used to record all
Accounting Books purchases on account (merchandise,
equipment and supplies)
Accountable Events
• Cash disbursement journal – All payments of
Accountable events can be further classified cash for any purpose are recorded.
into two (2) namely:
Type of journal entries according to form:
1. Business Transactions- These involve the
ordinary business activities of an entity • Simple journal entry – One which contains a
depending on the industry. There are two (2) single debit and a single credit
types of business transactions namely: • Compound journal entry – One which has
a. External Business Transaction- These are two or more elements and often
arm's length transactions with an outside representing two or more
party in exchange of resources Accounts are the storage units of accounting
o Selling of Service or Merchandise information and used to summarize changes in
o Collection & Payment assets, liabilities and equity including income and
b. Internal Business Transaction- These are expenses. The following are a broad classification of
transactions that takes place within the kinds of accounts:
enterprise such as:
o Conversion of Raw Materials to o Real account – Statement of financial
Finished Goods position or so-called permanent accounts.
o Supplies Withdrawn or transfer of These accounts are not closed and
supplies to another department carryover to the next accounting period. (ex.
2. Accounting Events- These involve the Cash, AR and PPE)
occasional or non-ordinary business activities o Nominal account – Income statement or
of an entity such as: temporary capital accounts. These accounts
o Losses due to Fortuitous Events(these are closed at the end of the accounting
are unforeseeable events or acts of period. (ex. Sales and expenses)
God), ex. theft, earthquake, etc) o Mixed account – A combination of real and
o Decline in Market Value nominal accounts. (ex. Prepaid expenses)
 o Clearing account – Holds temporarily certain Before a trial balance is made, amounts on each
information pending transfer to other ledger side of the accounts from the General Ledger are
accounts. totaled or FOOTED.
o Controlling account – The general ledger
• A closed or zero-balance account is when
account that summarizes the detailed
the ending balance of the accounts' debit is
information in a subsidiary
EQUAL to its Credit
o Suspense account – Is an account that holds
temporarily certain information pending for • An Open account is when either debit or
disposition. credit is higher than the other;
o Reciprocal account – Has a counterpart in o Debit balance = Debit > Credit
another book with in the entity or in another o Credit balance = Debit < Credit
ledger or another What are the Types of Errors?
o Principal account – An account that is
o Incorrect usage of accounts
independent or can stand alone.
o Double Entry or Posting
o Auxiliary account – An account that cannot
o Omission of a journal entry
stand alone and are technically neither
assets, liabilities nor income What are the causes when Debit and Credits is
NOT EQUAL?
Posting
o Posting an Item to the wrong side of the
This is the third process of the accounting process
account
wherein, It is the process of transferring data from
o Posting an Item to the wrong side of the
the journal to the appropriate accounts in the
account
general ledger and subsidiary ledger. This process
o Omission of posting of a journal entry either
classifies all accounts that were recorded in the
debit or credit
journals
o Posting the same account twice
Kinds of ledgers o Wrong calculation of account balances
o General ledger – Includes all the accounts Preparing the adjusting entries
appearing on the financial
To take up accruals, expiration of prepayments and
o Subsidiary ledgers – Affords additional detail
deferrals, estimations and other events often not
in support of certain general ledge
signaled by new source documents. Adjusting
Chart of Accounts- It is a listing of the names of the entries are made at the end of each accounting
accounts that a company has identified and made period. The concepts involved behind adjusting
available for recording transactions in its general entries are ACCRUAL, MATCHING OF COSTS
ledger AGAINST REVENUE and ACCOUNTING
Preparing the unadjusted trial balance Typical Adjusting Entries classified according to
A list of general ledger accounts with their timing of cash flow.
respective debit or credit balance. 1. Prepayments and Deferrals – The cash flow
The purpose of the unadjusted trial balance is to precedes the revenue or the expense
provide evidence that the total debits in the general recognition.
ledger equal the total credits and prepares the 2. Accruals – Income or expense recognition
accounts for adjustments. precedes the cash
 • Accrued Income – Income earned but Preparing the closing entries
not yet received. A receivable is always
Recorded and posted for the purpose of closing all
debited and income is recognized
nominal or temporary accounts to the income
(credited)
summary account and the resulting net income or
• Accrued expenses – Expenses incurred loss is afterwards closed to the capital or retained
but not yet An expense is recognized earnings account.
(debited) and a liability is always credited.
3. Estimates – Adjusting entries that do not The OPEN ACCOUNTS of the revenue and
involve cash expense accounts is closed to the CAPITAL
• Doubtful accounts – The expense to be ACCOUNT
matched against credit What is the income summary account?
• Depreciation - Allocation of the cost of
fixed assets as expense over its useful Income summary is used as another temporary
life account to determine whether the business
4. Ending inventory - An adjustment to set up operations results to income or loss
the year-end physical count of the inventory. Preparing the post-closing trial balance
This only applies if the PERIODIC INVENTORY
SYSTEM IS USED A listing of general ledger accounts and their
balances after closing entries have been made. The
Preparing the financial statements post-closing trial balance is the same with the year-
The most important part of the summarizing phase, end statement of financial position, the only
this is where the processed information is difference is that valuation accounts like allowances
communicated to external users for assets are found in the credit side instead of
being deducted from the related asset
It can also be called the REPORTING Phase wherein
Intended users can make an informed judgement CODE OF PROFESSIONAL ETHICS FOR
and sound decision ACCOUNTANTS

Basic financial statements A distinguishing mark of the accountancy profession

is its acceptance of the responsibility to act in the
o Statement of financial position public interest. Therefore, a professional
o Income statement or a statement of accountant’s responsibility is not exclusively to satisfy
comprehensive income the needs of an individual client or employer.
o Statement of changes in equity
o Statement of cash flows In acting in the public interest, a professional
o Notes and disclosures accountant shall observe and comply with the
following “Code of Professional Ethics”
Preparing the financial statements
STEP 1: Single-Step income statement
STEP 2: Statement of Owner’s Equity
STEP 3: Statement of Financial Position
STEP 4: Statement of Cash Flow
Fundamental Principles
1. Integrity
- To be straightforward and honest in all professional and business relationships & implies fair dealing and
truthfulness.
- A professional accountant shall not knowingly be associated with reports, returns, communications or other
information
where the professional accountant believes that the information
- Contains a materially false or misleading statement;
- Contains statements or information furnished recklessly; or
- Omits or obscures information required to be included where such omission or obscurity would be misleading
2. Objectivity
- To not allow bias, conflict of interest or undue influence of others to override professional or business
judgments.
- A professional accountant shall not perform a professional service if a circumstance or relationship biases or
unduly influences the accountant’s professional judgment with respect to that service.
3. Competence and Due Care
- To maintain professional knowledge and skill at the level required to ensure that a client or employer
receives competent professional services based on current developments in practice, legislation, and
techniques
- To act diligently and in accordance with applicable technical and professional standards.
- Competent professional service requires the exercise of sound judgment in applying professional
knowledge and skill in the performance of such service. Professional competence may be divided into two
separate phases:
◌ Attainment of professional competence.
◌ Maintenance of professional competence.
4. Professional Behavior
- To comply with relevant laws and regulations and avoid any action that discredits the profession.
- In marketing and promoting themselves and their work, professional accountants shall not bring the
profession into disrepute (disgrace/shame)
- Professional accountants shall be honest and truthful and not:
◌ Make exaggerated claims for the services they are able to offer, the qualifications they possess, or
experience they have gained; or
◌ Make disparaging references or unsubstantiated comparisons to the work of others.
5. Confidentiality
- To respect the confidentiality of information acquired as a result of professional and business relationships
- To not disclose any such information to third parties without proper and specific authority, unless there is a
legal or professional right or duty to disclose, nor use the information for the personal advantage of the
professional accountant or third parties.
- The need to comply with the principle of confidentiality continues even after the end of relationships
between a professional accountant and a client or employer.
Exceptions to the Confidentiality Rule: Scope of Practice
The following are circumstances where professional The practice of accountancy shall include, but not
accountants may be required to disclose confidential limited to, the following:
information or when such disclosure may be
▪ Practice of Public Accountancy
appropriate:
▪ Practice in Commerce and Industry
1. Disclosure is permitted by law and is ▪ Practice in Education/Academe
authorized by the client or the employer; ▪ Practice in Government
2. Disclosure is required by law, for example:
The Professional Regulatory Board of Accountancy
- Production of documents or other
(BOA) and its Composition
provision of evidence in the course of
legal proceedings • composed of a chairman and six (6) members
- Disclosure to the appropriate public • to be appointed by the President of the
authorities of infringements of the law Philippines from
that come to light o a list of three (3) recommendees for each
3. There is a professional duty or right to position and ranked by the Commission
disclose, when not prohibited by law: ▪ from a list of five (5) nominees for
- To comply with the quality review of a each position submitted by the
member body or professional body; accredited national professional
- To respond to an inquiry or investigation organization of CPA’s
by a member body or regulatory body; • BOA shall elect a vice-chairman from among its
- To protect the professional interests of members for a term one (1) year.
a professional accountant in legal
proceedings; or Qualifications of Members
- To comply with technical standards and ☼ Must be a natural-born citizen and a resident of
ethics requirements. the Philippines;
The Philippine Accountancy Act of 2004 (RA 9298) ☼ Must be a duly registered CPA with a least ten
(10) years of work experience in ANY scope of
It is important for aspiring accountants to practice of accountancy.
understand that the profession of accountancy is ☼ Must be of good moral character and must not
governed and regulated within the Philippine Laws, have been convicted of crimes involving moral
especially when you are planning to practice being a turpitude; and
professional accountant in the Philippines. ☼ Must not have any pecuniary interest, directly or
The Philippine Accountancy Act of 2004 also indirectly, in any school, college, university or
known as R.A. 9298 is divided into 5 rules institution conferring an academic degree
necessary for admission to the practice of
1. Declaration of Policy accountancy or where review classes in
2. Objectives & Scope of Practice preparation for the licensure examination are
3. The Professional Regulatory Board of being offered or conducted, nor shall he/she be
Accountancy a member of the faculty or administration
4. Examination, Regulation and Licensure thereof at the time of his/her appointment to
Practice of Accountancy the Board.
5. Penal and Final Provisions
Term of Office Rating in the Licensure Examinations
♥ The Chairman and members of the Board To be qualified as having passed the licensure
shall hold office for a term of three (3) years. examination for accountants, a candidate must
♥ Any vacancy occurring within the term of a
• obtain a general average of seventy-five
member shall be filled up for the unexpired
percent (75%),
portion of the term only.
• with no grades lower than sixty-five percent
♥ No person who has served two (2) successive
(65%) in any given subject.
complete terms shall be eligible for
o In the event a candidate obtains the rating
reappointment until the lapse of one (1) year.
of seventy-five percent (75%) and above
♥ Appointment to fill up an unexpired term is
in at least a majority of subjects he/she
not to be considered as a complete term.
shall receive a conditional credit for the
The Certified Public Accountant Examinations subjects passed:
(adjusted for BOA Resolution 114 Series of 2016) ▪ Provided, That a candidate shall
All applicants for registration for the practice of take an examination in the
accountancy shall be required to undergo a remaining subjects within two
licensure examination to be given by the Board years from the preceding
examination:
Qualifications of Applicants for Examinations • if the candidate fails to obtain at least a
◊ is a Filipino citizen general average of seventy-five percent
◊ is of good moral character; (75%) and a rating of at least sixty-five
◊ is a holder of the degree of Bachelor of Science percent (65%) in each of the subjects
in Accountancy conferred by a school, college, reexamined, he/she shall be considered as
academy or institute duly recognized and/or FAILED in the entire examination.
accredited by the CHED or other authorized
government offices; and
◊ has not been convicted of any criminal offense
involving moral turpitude
SCOPE OF REVISION