CONCEPTUAL FRAMEWORK

&
ACCOUNTING STANDARDS

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 Overview of Accounting

Learning Objectives
• Define accounting and state its basic purpose.
• Explain the basic concepts applied in accounting.
• State the branches of accounting and the sectors in the
practice of accountancy.
• Explain the importance of a uniform set of financial
reporting standards.

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 Definition of Accounting

• Accounting is “the process of identifying,

measuring, and communicating economic
information to permit informed judgment and
decisions by users of information.”
(American Association of Accountants)

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 Three important activities
1. Identifying - the process of analyzing events and transactions to
determine whether or not they will be recognized. Only
accountable events are recognized.

2. Measuring - involves assigning numbers, normally in monetary

terms, to the economic transactions and events.

3. Communicating - the process of transforming economic data

into useful accounting information, such as financial statements
and other accounting reports, for dissemination to users.

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 Types of Events or Transactions
1. External events – events that involve an entity and another
external party.

Types of External events

a. Exchange (reciprocal transfer) – event wherein there is a
reciprocal given and receiving of economic resources or
discharging of economic obligations between an entity and an
external party.
b. Non-recriprocal transfer – a “one-way” transactions
c. External events other than transfer – event that involves
changes in the economic resources or obligations of an entity
caused by an external party or external source but does not
involve transfers of resources or obligations.

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 Types of Events or Transactions
2. Internal events – events that do not involve an external party.

Types of Internal events

a. Production – process by which resources are transformed into
finished goods.
b. Casualty – unanticipated loss from disasters or other similar
events.

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Measurement
• The several measurement bases used in accounting include, but not
limited to, the following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.
• The most commonly used is historical cost. This is usually
combined with the other measurement bases. Accordingly, financial
statements are said to be prepared using a mixture of costs and
values.

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Valuation by fact or opinion

• When measurement is affected by estimates, the items

measured are said to be valued by opinion.

• When measurement is unaffected by estimates, the items

measured are said to be valued by fact.

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Basic purpose of accounting

• The basic purpose of accounting is to provide

information about economic activities intended to be
useful in making economic decisions.

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Types of accounting information classified as to users’ needs

• General purpose accounting information - designed to

meet the common needs of most statement users. This
information is governed by the Philippine Financial
Reporting Standards (PFRSs).

• Special purpose accounting information - designed to

meet the specific needs of particular statement users.
This information is provided by other types of
accounting, e.g., managerial accounting, tax basis
accounting, etc.

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Basic Accounting Concepts
• Double-entry system – each accountable event is recorded in two parts –
debit and credit.

• Going concern - the entity is assumed to carry on its operations for an

indefinite period of time.

• Separate entity – the entity is treated separately from its owners.

• Stable monetary unit - amounts in the financial statements are stated in

terms of a common unit of measure; changes in purchasing power are ignored.

• Time Period – the life of the business is divided into series of reporting periods.

• Materiality concept – information is material if its omission or misstatement

could influence economic decisions.

• Cost-benefit – the cost of processing and communicating information should 11

Basic Accounting Concepts - Continuation

• Accrual Basis of accounting – effects of transactions are

recognized when they occur (and not as cash is received or paid) and
they are recognized in the accounting periods to which they relate.

• Historical cost concept – the value of an asset is determined on

the basis of acquisition cost.

• Concept of Articulation – all of the components of a complete

set of financial statements are interrelated.

• Full disclosure principle – financial statements provide

sufficient detail to disclose matters that make a difference to users,
yet sufficient condensation to make the information
understandable, keeping in mind the costs of preparing and using it.

• Consistency concept – financial statements are prepared on the

basis of accounting policies which are applied consistently from one12
period to the next.
Basic Accounting Concepts - Continuation

• Matching – costs are recognized as expenses when the related

revenue is recognized.

• Residual equity theory – this theory is applicable where there are

two classes of shares issued, ordinary and preferred. The equation is
“Assets – Liabilities – Preferred Shareholders’ Equity = Ordinary
Shareholders’ Equity.”

• Fund theory – the accounting objective is the custody and

administration of funds.

• Realization – the process of converting non-cash assets into cash or

claims for cash.

• Prudence (Conservatism) – the inclusion of a degree of caution in the

exercise of the judgments needed in making the estimates required
under conditions of uncertainty , such that assets or income are not
overstated and liabilities or expenses are not understated. 13
Common branches of accounting

• Financial accounting - focuses on general purpose financial statements.

• Management accounting – focuses on special purpose financial reports for

use by an entity’s management.

• Cost accounting - the systematic recording and analysis of the costs of

materials, labor, and overhead incident to production.

• Auditing - the process of evaluating the correspondence of certain assertions

with established criteria and expressing an opinion thereon.

• Tax accounting - the preparation of tax returns and rendering of tax advice,
such as the determination of tax consequences of certain proposed business
endeavors.

• Government accounting - refers to the accounting for the government and its
instrumentalities, placing emphasis on the custody of public funds, the purposes
for which those funds are committed, and the responsibility and accountability of14
Four sectors in the practice of accountancy

1. Practice of Public Accountancy - involves the rendering of audit or

accounting related services to more than one client on a fee basis.

2. Practice in Commerce and Industry - refers to employment in the

private sector in a position which involves decision making requiring
professional knowledge in the science of accounting and such position
requires that the holder thereof must be a CPA.

3. Practice in Education/Academe – employment in an educational

institution which involves teaching of accounting, auditing, management
advisory services, finance, business law, taxation, and other technically
related subjects.

4. Practice in the Government – employment or appointment to a position

in an accounting professional group in the government or in a government–
owned and/or controlled corporation where decision making requires
professional knowledge in the science of accounting, or where civil service 15
Accounting standards in the Philippines
• Philippine Financial Reporting Standards (PFRSs) are
Standards and Interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

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The need for reporting standards
• Entities should follow a uniform set of generally acceptable
reporting standards when preparing and presenting financial
statements; otherwise, financial statements would be misleading.

• The term “generally acceptable” means that either:

a. the standard has been established by an authoritative accounting
rule-making body; or
b. the principle has gained general acceptance due to practice over
time and has been proven to be most useful.

• The process of establishing financial accounting standards is a

democratic process in that a majority of practicing accountants must
agree with a standard before it becomes implemented.

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END
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