Module 1 – The Accounting Profession

Lesson 1: Overview of Accounting-3

Accounting was defined in many ways. According to the Accounting Standards Council:

"Accounting is a service activity, which function is to provide quantitative information,

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

According to the Committee on Accounting Terminology of the American Institute of Certified

Public Accountants:

"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."

 In the Philippines: Philippine Institute of Certified Public Accountants

 Its Junior version is: Junior Philippine Institute of Accountants

According to the American Accounting Association:

"Accounting is “the process of IDENTIFYING, MEASURING and COMMUNICATING

economic information to permit informed judgments and decisions by users of the information."

Even if these definitions seem to be different, it all emphasizes three important points:

1. Accounting is about quantitative information.

2. The information is likely to be financial in nature.
3. 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. It states the very purpose of accounting which 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:

 Identifying as the analytical component - Analyzing events and transactions to determine

whether or not they will be recognized.
  Measuring as the technical component - Involves assigning numbers, normally in monetary
terms, to the economic transactions and events.
 Communicating as the formal component - Transforming economic data into useful
accounting information, such as financial statements and other accounting reports, for
dissemination to users.

IDENTIFYING

This accounting process is the recognition or nonrecognition of business activities as

"accountable" events. There are a lot of economic events that might be occurring in a business but
not all of those business activities are accountable. For example, the induction of a new president is
a very important event for a company but such events are not accountable because it 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, income or expenses of an entity.

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.

Recognition – the process of including the effects of an accountable event in the statement
of financial position or the statement of comprehensive income through a journal entry.

External and Internal Transactions

 Economic activities which are also called transactions may be classified into two - internal
event and external event.

External events are those economic events involving one entity and another entity. It can
be an exchange (e.g. purchase of goods from supplier where both parties give something to
another party), non-reciprocal transfer (e.g. donation where only one of the parties give
something to another party) or transactions other than transfer but involves another entity (e.g.
increase in fair value of a stock investment).

Internal events are the economic activities that take place entirely within the entity.
Examples are production or casualty. Production is the process by which resources are
transformed into products (e.g. converting raw materials into finished goods through a
manufacturing process) while casualty is any sudden and unanticipated loss from fire, flood,
earthquake and other even ordinarily termed as an act of God (e.g. loss of inventories due to flood).

MEASURING

It is a process of assigning peso amounts to accountable economic transactions and events.

If accounting is to be useful, it must be expressed in terms of a common financial denominator.
Financial statements without monetary amounts would be largely unintelligible and
incomprehensible. In the Philippines, the Philippine peso is the unit of measuring accountable
economic transactions. The measurement bases are historical cost and current value.

 Financial statements are said to be prepared using a mixture of cost and values.
 Valuation by opinion – when measurement is affected by estimates. [ex. Building (Accum.
Dep.) – through useful life and salvage value]
 Valuation by fact - Several measurement bases are used in accounting which include, but
not limited to, historical cost, fair value, present value, realizable value, current cost and
sometimes inflation-adjusted cost.
o Fair value – market value. ex. Foreign exchange, stocks, and net realizable value
o Historical cost - is the original cost of an asset recorded in an entity's accounting
records. It is the most common measure of financial transactions.
o Current cost - includes fair value, value in use, fulfillment value and current cost.
COMMUNICATING

It 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.
 Summarizing is the preparation of financial statements which include the statement of
financial position, statement of comprehensive income, statement of changes in equity and
statement of cash flows.

RECORDING CLASSIFYING SUMMARIZING

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 (primary users
because A = L +C) in making economic decisions. (other users: customers, employees, managers,
public, and tax authorities)

The essence of accounting is decision-usefulness.

Lesson 2: The Accountancy Profession-2

The Accountancy Profession is regulated by RA 9298 or the Philippine Accountancy Act

of 2004. In the Philippines, in order to qualify to the practice of 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 accountancy
profession in the Philippines. They are the ones responsible for preparing and grading the
Philippine CPA examination. This examination is offered twice a year, one in May and another one
in October, in authorized testing centers around the country.

 Dr, Noe Quiñanola is the present Professional Regulatory Commission Board of

Accountancy (BoA) Chairman.

THREE MAIN AREAS OF ACCOUNTANCY PRACTICE

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

 Public Accounting - these are individual practitioners, accounting firms and large
multinational organizations that render independent and expert financial services to the
public. Public accounting usually offers three kinds of services, namely auditing, taxation
and management advisory services.
o Auditing - traditionally 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.
External auditing is the attest function of independent CPAs.
o Taxation - includes the preparation of annual income tax returns and
determination of tax consequences of certain proposed business endeavors. The
CPA frequently represents the client in tax investigations.
o Management advisory services - has no precise coverage but generally refer to
services to clients on matters of accounting, finance, business policies, organization
procedures, product costs, distribution and many other business conduct and
operations.
  Private Accounting - CPAs employed in business entities in various capacity as accounting
staff, chief accountant, internal auditor and controller. The major objective of the private
accountant is to assist management in planning and controlling the entity's operations.
 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.

LIMITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY

Out of the three areas of Accountancy practice, it is public accountancy that has strict
limitations before one can perform those services under his/her own name. Those in the practice of
public accountancy shall:

 be registered CPAs in the Philippines.

 obtain a valid certificate of accreditation as CPA in Public Practice . This shall be issued to
CPAs only upon showing in accordance with the rules and regulations promulgated by the
Board of Accountancy and approved by the Professional Regulatory Commission that such
registrant has acquired a minimum of three years meaningful experience in any areas of
public practice including taxation. This certificate shall be valid for 3 years and renewable
every 3 years upon payment of required fees.
 not be a corporation. THE SEC shall not register any corporation organized for the practice
of public accountancy.

ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY

 A certificate of accreditation shall be issued to CPAs in public practice only upon showing
that such registrant has acquired a minimum of three years of meaningful experience in any
of the areas of public practice including taxation.
 The PRC, upon favorable recommendation of the BOA 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.
CONTINUING PROFESSIONAL DEVELOPMENT

Continuing Professional Development is the inculcation and acquisition of advanced

knowledge, skill, proficiency, and ethical and moral values after the initial registration of the CPA
for assimilation into professional practice and lifelong learning. Under the new BOA Resolution, all
CPAs regardless of area or sector of practice shall be required to comply with 120 CPD credit units
in a compliance period of three years. Excess credit units shall not be carried over to the next three-
year period, except credit units earned for masteral and doctoral degrees. The continuing
professional development is required for the renewal of CPA license and accreditation of CPA to
practice public accountancy as it raises and enhances the technical skill and competence of the
Certified Public Accountant.

Exemption from CPD

A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65
years. However, this exemption is applied only to the renewal of CPA license and not for the
purpose of accreditation to practice the accountancy profession.

Lesson 3: The Development of Accounting Standards-3

Accounting VS Auditing

 In a broad sense, accounting embraces auditing.

 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 accountant ends.

ACCOUNTING

Accounting Auditing
AUDITING

ACCOUNTING
Accounting VS Bookkeeping

 Bookkeeping is procedural while Accounting is

conceptual BOOKKEEPING
  Bookkeeping is a procedural element of accounting.

Accounting VS Accountancy

 Broadly speaking, the two terms are synonymous. ACCOUNTANCY

 Technically speaking, accountancy refers to the

profession while accounting refers only to a
particular field of accountancy. ACCOUNTING

Financial Accounting VS Managerial Accounting

Financial Accounting
Managerial
- Focuses on general Accounting
purpose financial
-Accumulation and
statements
preparation of
intended for
financial reports for
internal and
internal users only.
external users

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) are the accounting rules, procedures,
practices and standards followed in the preparation and presentation of financial statements. The
principles have been developed based on experience, reason, custom, usage and practical necessity.
GAAP are like laws that must be followed in the preparation and presentation of financial
statements. 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

 To identify proper accounting practices for the preparation and presentation of financial
statements.
  A set of high-quality accounting standards is a necessity to ensure comparability and
uniformity in financial statement based on the same financial information.

The Financial Reporting Standards Council (FRSC)

In the Philippines, the development of the GAAP is formalized initially through the creation
of the Accounting Standards Council (ASC). But today, the FRSC already replaced the ASC. The FRSC
is the accounting standard setting body created by the PRC upon recommendation of the BOA to
assist the BOA in carrying out its powers and functions provided under R.A. 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 FRSC known as the Philippines
Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS), constitute the
highest hierarchy of generally accepted accounting principles in the Philippines. The approved
statements of the FRSC are known as Philippine Accounting Standards (PAS) and Philippine
Financial Reporting Standards (PFRS).

Composition of the 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:

The Chairman and the members of 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 (PIC)

The PIC was formed by the FRSC on August 2006 and has replaced the Interpretations
Committee or IC formed by the ASC 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 guidance. The counterpart of
PIC in the United Kingdom is the International Financial Reporting Interpretations Committee
(IFRIC) which has already replaced the Standing Interpretations Committee (SIC).

International Accounting Standards Committee

The 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 on 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:

 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.
 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 IASB now replaces the IASC. The IASB published standards in a series of
pronouncements called International Financial Reporting Standards (IFRS). However, the IASB has
adopted the body of standards issued by the IASC called the International Accounting Standards
(IAS). The IASB standard-setting process includes in the correct order research, discussion paper,
exposure draft and accounting standard.

Move Towards IFRS

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 starting January 2005, a process of moving
from USA GAAP to IFRS was started back in 1997. The following factors are considered in deciding
to move totally to IFRS:

 Support of international accounting standards by Philippine organizations such as SEC, BOA

and PICPA.
 Increasing internationalization of business which has heightened interest in a common
language for financial reporting.
 Improvement of IAS or removal of free choices of accounting standards.
 Increasing recognition of IAS by the World Bank, Asian Development Bank and World Trade
Organization.

Philippine Financial Reporting Standards

The FRSC issues standards in a series of pronouncements called "Philippine Financial

Reporting Standards (PFRS)". The Philippine Financial Reporting Standards collectively include all
of the following:

 Philippine Financial Reporting Standards which correspond to International Financial

Reporting Standards. (PFRS = IFRS)
 Philippine Accounting Standards which correspond to International Accounting Standards.
(PAS = IAS)
 Philippine Interpretations which correspond to Interpretations of the IFRIC and the
Standing Interpretations Committee and Interpretations developed by the Philippine
Interpretations Committee. (PIC interpretations = IIC interpretations)