 Historical costs (most commonly used)

OVERVIEW OF 

Present Value
Fair Value

ACCOUNTING 

Realizable Value
Current Cost
 Inflation-adjusted costs
Accounting FSs are said to be prepared using a mixture of costs
Is the process of identifying, measuring, and values.
and communicating economic information to
 COSTS include historical cost and current
permit informed judgments and decisions by users
cost.
of information (American Association of
Accountants)  VALUES include other measurement
bases.
Often refereed to as a “language of
business” because it is fundamental to the Valuation by fact or opinion
communication of financial information.
Use of estimated is essential in providing relevant
information. Thus, FSs are said to be a mixture of
THREE IMPORTANT fact and opinion.
ACTIVITIES IN  ESTIMATES means the items
ACCOUNTING measured are said to be valued by
OPINION.
IDENTIFYING o Examples:
 Estimates of uncollectible
Analyzing events or transactions to know if they amounts of receivables
should be recognized or not.  Depreciation and
amortization expenses,
 If recognized, make a journal entry.
which are affected by
 Only accountable events are
estimates of useful life
recognized/journalized.
and residual value
ACCOUNTABLE  Estimated liabilities, such
EVENTS/ECONOMIC ACTIVITY as provisions
are one that affects assets, liabilities, equity,  Retained Earnings, which
income, or expenses of an entity. is affected by various
 NON-ACCOUNTABLE EVENTS are estimates of income and
not recognized but if there is accounting expenses.
relevance, it should be disclosed to notes to  UNAFFECTED BY ESTIMATES
financial statements through a memorandum means that the items measured are said
entry. to be valued by FACT.
o Examples:
MEASURING  Ordinary share capital
Involves assigning numbers, usually in monetary valued at par value
terms, to economic transactions and events.  Land stated at acquisition
cost
Several measurement bases include but not limited  Cash measured at face
to: amount
 ECONOMIC ENTITY
A separately identifiable combination of
COMMUNICATING persons and property that uses or controls economic
resources to achieve certain goals or objectives.
Process of transforming economic data into
useful accounting information, such as FSs and
other accounting reports, for dissemination to users.

THREE ASPECTS
TYPES OF INFORMATION
 Recording – process of systematically PROVIDED BY
committing into writing the identified and ACCOUNTING
measured accountable events in the journal
through journal entries  QUANTITATIVE INFORMATION
 Classifying – grouping of similar and - expressed in numbers, quantities, or
interrelated items into their respective units
classes through postings in the ledger  QUALITATIVE INFORMATION
 Summarizing – expressing in condensed - expressed in words or descriptive
form the recorded and classified transactions form
and events. - found in the notes to FSs as well as
- includes the preparation of FSs and on the face of the other FSs
other accounting reports  FINANCIAL INFORMATION
- expressed in money
Interpreting involves the computation of financial
statement ratios. TYPES OF ACCOUNTING
- Bangko Sentral ng Pilipinas (BSP) require INFORMATION
certain financial ratios to be disclosed in the notes to
financial statements. CLASSIFIED AS TO USERS’
BASIC PURPOSE OF NEEDS
ACCOUNTING  GENERAL PURPOSE ACCOUNTING
INFORMATION
Basic purpose is to provide information that is - designed to meet the common needs of
useful in making economic decisions. most statement users
- provided under financial accounting
Various sources of information:
- governed by GAAP represented by the
 Financial Statements PFRSs
 Current events  SPECIAL PURPOSE ACCOUNTING
 Industry publications INFORMATION
 Internet resources - designed to meet the specific needs of
 Professional advices particular statement users
 Expert systems - provided by other types of accounting
other than financial accounting, e.g.,
managerial accounting and tax basis
accounting
 Examples of Accounting Concepts:

SOURCES OF INFORMATION IN  DOUBLE-ENTRY SYSTEM - each

FINANCIAL STATEMENTS accountable event is recorded in two parts –
debit and credit
Information in the FSs is not obtained exclusively  GOING CONCERN ASSUMPTION
from the entity’s accounting records. Some are – the entity is assumed to carry on its
obtained from external sources. operations for an indefinite period of time
Examples: - mixture of costs and values is appropriate
only when the entity is a going concern
 Fair value measurements
 LIQUIDATING CONCERN
 Resolutions of uncertainties
- the appropriate measurement
 Future lease payments basis is realizable value
 Contractual commitments (estimated selling price less costs
to sell for assets and expected
ACCOUNTING AS SCIENCE AND
settlement amount for liabilities)
ART  SEPARATE ENTITY (Business Entity
 As a social science, accounting is a body of Concept)
knowledge which has been systematically - the entity is viewed separately from its
gathered, classified, and organized. owners
 As a practical art, accounting requires the - personal transactions of the owners are not
use of creative skills and judgment. recorded in the entity’s accounting records
 STABLE MONETARY UNIT
ACCOUNTING CONCEPTS (Monetary Unit Assumption)
- ALEIE are stated in terms of a common
Refer to the principles upon which the process of unit (common denominator) of measure, the
accounting is based. Philippine peso; and
Used interchangeably with: - the purchasing power of the peso is
regarded as stable or constant and instability
 ACCOUNTING ASSUMPTIONS is ignored.
(Accounting postulates)  TIME PERIOD (Periodicity) – the life of
- fundamental concepts or principles and the entity is divided into series of reporting
basic notions that provide the foundation of periods
the accounting process  CALENDAR YEAR – starts on
 ACCOUNTING THEORY January 1 and ends on December
- set of broad principles that provide general 31 of the same year.
frame for reference by which accounting  FISCAL YEAR – also covers 12
practice can be evaluated months but starts on a date other
- guide the development of new practice and than January 1
procedures  MATERIALITY CONCEPT –
- comprises the Conceptual Framework and information is material if its omission or
the Philippine Financial Reporting misstatement could influence economic
Standards (PFRSs) decisions
- a matter of professional judgment
 COST-BENEFIT (Cost  MATCHING (Association of cause and
constraint/Reasonable assurance) – the cost effect) – costs are recognized as expenses
of processing and communicating when the related revenue is recognized
information should not exceed the benefits  ENTITY THEORY (income
to be derived from it. statement) – the accounting objective is
 ACCRUAL BASIS OF geared towards proper income
ACCOUNTING – income is recognized determination.
when earned rather than when cash is - proper matching of costs against revenues
collected and expenses are recognized when - ASSETS=LIABILITIES+CAPITAL
incurred rather than when paid.  PROPRIETARY THEORY (balance
- recorded in the accounting records and sheet) - the accounting objective is geared
reported in the FSs of the periods to which towards proper valuation of assets
they relate - ASSETS-LIABILITIES=CAPITAL
 HISTORICAL COST CONCEPT – the  RESIDUAL EQUITY THEORY –
value of an asset is determined on the basis applicable when there are two classes of
of acquisition cost shares issued – ordinary and preferred
- this concept is not always maintained such - ASSETS-LIABILITIES-PREFERRED
as when inventories are measured at NRV SHAREHOLDERS’ EQUITY=ORDINARY
rather than at cost when applying the “lower SHAREHOLDERS’ EQUITY
of cost and NRV” measurement - applied in the computation of book value
 CONCEPT OF ARTICULATION – all per share and return on equity
the components of a complete set of  FUND THEORY – accounting objective
financial statements are interrelated. is the custody and administration of funds
- when users use the FSs in making - cash inflows – cash outflows=fund
decisions, they need to use each financial - used in government accounting and
statements in conjunction with the other FSs. fiduciary accounting
 FULL DISCLOSURE PRINCIPLE –  REALIZATION – process of converting
companies should disclose all information non-cash assets into cash or claims for cash
that is relevant to their financial statements. - concept that deals with revenue recognition
 CONSISTENCY CONCEPT – the FSs  PRUDENCE (Conservatism) – the use of
are prepared on the basis of accounting caution when making estimated under
principles that are applied consistently from conditions of uncertainty, such that assets or
one period to the next income are not overstated and liabilities or
- Changes in accounting policies are made expenses are not understated.
only when: - when exercising prudence, the one which
 Required or permitted by the has the least effect on equity is chosen
PFRSs  SUBSTANCE OVER FORM - concept
 When the change results to that the financial statements and
more relevant and reliable accompanying disclosures of a business
information should reflect the underlying realities of
accounting transactions
Changes in accounting policies are disclosed Example: You are a man, that’s the
in the notes FORM, but if you are a woman at heart,
that’s SUBSTANCE
EXPENSE RECOGNITION External users are those who are not involved in
managing the entity
PRINCIPLES
 MATCHING CONCEPT (Direct Financial Statements vs.
association of costs and revenues) – costs Financial Report
that are directly related to the earning of
revenue are recognized as expenses in the FINANCIAL STATEMENTS are the structured
same period the related revenue is representation of an entity’s financial position and
recognized. results of its operations. They are the end product of
Examples: cost of inventory is the accounting process.
initially recognized as asset and recognized
as expense (cost of sales) when the FINANCIAL REPORT includes FSs plus other
inventory is sold; freight out and sales information provided outside the FSs that assists in
commissions the interpretation of a complete set of FSs or
 SYSTEMATIC AND RATIONAL improves users’ ability to make efficient economic
ALLOCATION – costs that are not decisions
directly related to the earning of revenue are
initially recognized as assets and recognized Financial
as expenses over the periods their economic Financial Report
Statements
benefit are consumed, using some method of
allocation Statements of Financial Statements of Financial
Examples: the cost of equipment is Position Position
initially recognized as asset and
Statement of profit or Statement of profit or loss
subsequently recognized as depreciation loss and other and other comprehensive
expense over the periods the equipment is comprehensive income income
used; amortization, expensing of
prepayments, and effective interest method Statement of changes in Statement of changes in
equity equity
of allocation
 IMMEDIATE RECOGNITION – costs Statement of cash flows Statement of cash flows
that do not meet the definition of an asset, or
Notes Notes
ceases to meet the definition of an asset, are
expensed immediately Additional statement of Additional statement of
Examples: casualty losses and financial position financial position
impairment losses
Other information
FINANCIAL ACCOUNTING
PRIMARY OBJECTIVE OF FINANCIAL
Branch of accounting that focuses on general REPORTING
purpose financial statements
To provide information about an entity’s
Governed by the Philippine Financial Reporting economic resources, claims to those resources,
Standards (PFRSs) and changes in those resources.
SECONDARY OBJECTIVE OF a. The standard has been established by an
FINANCIAL REPORTING authoritative accounting rule-making body,
e.g., the PFRSs adopted by the FRSC; or
To provide information useful in assessing b. The principle has gained several acceptances
the entity’s management stewardship (how due to practice over time and has been
efficiently and effectively the entity’s management proven to be most useful, e.g., double-entry
has discharged its responsibilities to use the entity’s recording and other implicit concepts
economic resources)
Majority of practicing accountants must agree with
BOOKKEEPING a standard before it becomes implemented.

Refers to the process of recording the accounts or HIERARCHY OF REPORTING

transaction of an entity. STANDARDS
Normally ends with the preparation of the trial When selecting its accounting policies, an entity
balance. considers the following in descending order:

Unlike accounting, bookkeeping does not require a. PFRSs

the interpretation of the significance of the b. In the absence of PFRSs, management shall
processed information. use its judgment in developing and applying
an accounting policy that results in
ACCOUNTING information that is relevant and reliable.
In making the judgment:
STANDARDS  Management shall (must)refer to,
and consider the applicability of, the
The Philippine Financial Reporting Standards
following sources in descending
(PFRSs) represent the generally accepted
order:
accounting principles (GAAP) in the Philippines.
o The requirements in PFRs
The PFRSs are Standards and dealing with similar and
Interpretations adopted by the Financial Reporting related issues;
Standard Council (FRSC). They comprise: o The Conceptual Framework
 Management may (optional) also
a. PFRSs (accompanied by guidance to assist consider the following:
entities in applying their requirements) o Pronouncements of other
b. Philippine Accounting Standards (PASs); standard-setting bodies
and o Accounting literature and
c. Interpretations accepted industry practices

The need for reporting standards Although the selection of appropriate accounting
policies is the responsibility of the entity’s
For FSs to be useful, they should be prepared using management, the proper application of
reporting standards that are generally acceptable. accounting principles is most dependent upon
Entities should follow a uniform set of reporting the professional judgment of the accountant.
standards when preparing and presenting FSs.

The term “generally acceptable” means that either:

ACCOUNTING STANDARD SETTING CHANGES IN REPORTING
BODIES AND OTHER RELEVANT STANDARDS
ORGANIZATIONS
Once established, financial reporting standards are
 FINANCIAL REPORTING continually reviewed, revised, or superseded.
Changes to reporting standards are primarily made
STANDARDS COUNCIL (FRSC) – in response to user’s needs. Legal, political,
the official accounting standard setting body business and social environments also influences
in the Philippines created under the changes in reporting standards.
Philippine Accountancy Act of 2004 (R.A.
No. 9298)
 PHILIPPINE INTERPRETATIONS
COMMITTEE (PIC) – a committee
formed by the Accounting Standards
Council (ASC), the predecessor of FRSC,
with the role of reviewing the interpretations
of the International Financial Reporting
Interpretations Committee (IFRIC) for
approval and adoption by the FRSC
 BOARD OF ACCOUNTANCY
(BOA) – the professional regulatory board
created under R.A. No. 9298 to supervise
the registration, licensure, and practice of
accountancy in the Philippines.
 SECURITIES AND EXHANGE
COMMISSION (SEC) – is the
government agency tasked in regulating
corporations and partnerships, capital and
investment markets, and the investing
public.
 BUREAU OF INTERNAL
REVENUE (BIR) – administers the
provisions of the National Internal Revenue
Code
 BANGKO SENTRAL NG
PILIPINAS (BSP) – influences the
selection and application of accounting
policies by banks and other entities
performing banking functions
 COOPERATIVE DEVELOPMENT
AUTHORITY (CDA) – influences the
selection and application of accounting
policies by cooperatives