BSA – MICOLLE DUSARAN OPRECIO 5.

Payment of taxes to the government

INTERNAL TRANSACTIONS
DEFINITION OF ACCOUNTING  Are economic events involving one entity only?
Accounting Standards Council  Are economic activities that take place entirely
 Accounting is a service activity. within the entity?
 The accounting function is to provide  Production and casualty loss are examples of
quantitative information, primarily financial in internal transactions.
nature, about economic entities, that is  Production is the process by which resources
intended to be useful in making economic are transformed into products.
decisions.  Casualty is any sudden and unanticipated loss
American Institute of Certified Public Accountant from fire, flood, earthquake and any other
 Accounting is the art of recording, classifying, event ordinarily termed as act of God.
and summarizing in a significant manner and in MEASURING
terms of money, transactions and events which  Is the assigning of peso amounts to the
are in part at least of a financial character and accountable economic transactions and events?
interpreting results thereof.  Accounting information must be expressed with
AMERICAN ACCOUNTING ASSOCIATION a common financial denominator.
 Accounting is the process of identifying,  Philippine peso is the unit of measuring
measuring, and communicating economic accountable economic transactions.
information to permit informed judgments and  The measurement bases are historical cost and
decision by users of the information. current value.
IMPORTANT POINTS IN THE DEFINITION OF ACCOUNTING  Historical cost is the most common measure of
1. Accounting is about quantitative information. financial transactions.
2. The information is likely to be financial in  Current value includes fair value, value in use,
nature. fulfillment value and current cost.
3. The information should be useful in decision COMMUNICATING
making.  Is the process of preparing and distributing
“The very purpose of accounting is to provide accounting reports to potential users of
quantitative information to be useful in making accounting information?
economic decisions”  Identifying and measuring are pointless if the
information contained in the accounting
COMPONENTS OF ACCOUNTING records cannot be communicated in some form
1. Identifying – analytical component. to potential users.
2. Measuring – technical component.  Communicating is the reason why accounting
3. Communicating – formal component. has been called the “Universal language of
IDENTIFYING business”.
 Is the recognition or non-recognition of  Implicit in the communication process are the
business activities as accountable events? recording, classifying and summarizing aspects
 Not all business activities are accountable. of accounting.
 An event is accountable or quantifiable when it  Recording or Journalizing is the process of
has an effect on assets, liabilities, and equity. systematically maintaining a record of all
 The subject matter of accounting is economic economic business transactions after they have
activity or the measurement of economic been identified and measured.
resources and economic obligations.  Classifying is the sorting of grouping of similar
INTERNAL AND EXTERNAL TRANSACTIONS and interrelated economic transactions into
External transactions their respective classes. Classifying is
 Are those economic events involving one entity accomplished by posting to the ledger
and another entity.  Ledger is a group of accounts which are
Examples: systematically categorized into asset accounts,
1. Purchase of goods from a supplier liability accounts, equity accounts, revenue
2. Borrowing money from the bank accounts and expense accounts.
3. Sale of goods to a customer  Summarizing is the preparation of financial
4. Payment of salaries of employees statements. STATEMENTS!
ACCOUNTING AS AN INFORMATION SYSTEM ACCREDITATION OF THE PRACTICE OF PUBLIC
 Accounting is an information system that ACCOUNTANCY
measures business activities, process  CPAs, firms and partnerships of CPAs, including
information into reports and communicates the partners and staff members are required to
reports to decision makers. register with the Board of Accountancy and
 A key product of this information system is a set PRC for the practice of public accountancy.
of financial statements – the document that  The issued PRC certificate of registration shall
report financial information about an entity to be valid for three (3) years and renewable
decision makers. every three years upon payment of required
 Financial reports tell us how well an entity is fees.
performing in terms of profit and loss and Three main areas of practice (CPA)
where it stands in financial terms.  Public accounting
OVERALL OBJECTIVE OF ACCOUNTING  Private accounting
 Provide quantitative financial information about  Government accounting
a business that is useful to statement users PUBLIC ACCOUNTING
particularly owners and creditors in making  Is composed of individual practitioners, small
economic decisions. accounting firms and large multinational
 An accountant’s primary task is to supply organizations that render independent and
financial information so that the statement expert financial services to the public.
users could make informed judgement or better  Offers three (3) kinds of services, namely
decision. auditing, taxation and management advisory
 The essence of accounting is decision- services.
usefulness. AUDITING
THE ACCOUNTANCY AS A PROFESSION  Primary service offered by most public
 Republic act 9298 is the law regulating practice accounting practitioners.
of accountancy in the Philippines.  Or external auditing is the examination of
 The law is known as ”Philippine Accountancy financial statements by independent certified
Act of 2004” public accountant for the purpose of expressing
 Board of Accountancy is the body authorized by an opinion as to the fairness with which the
the law to promulgate rules and regulations financial statements are prepared.
affecting the practice of the accountancy  Attest function of independent CPAs.
profession in the Philippines. TAXATION
 Board of Accountancy is responsible for  Taxation service includes the preparation of
preparing and grading the Philippine CPA annual income tax returns and determination
examination. of tax consequences of certain proposed
 Exam is offered twice a year. May and October. business endeavors.
LIMITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY MANAGEMENT ADVISORY SERVICES
 Single practitioners and partnerships for the  Management advisory services is used generally
practice of public accountancy shall be to refer to services to clients on matters of
registered certified public accountants in the accounting, finance, business policies,
Philippines. organization procedures, product cost,
 A certificate of accreditation shall be issued to distribution and many other phases of business
certified public accountants in public practice conduct operations.
only upon showing in accordance with the rules Management advisory includes:
and regulations promulgated by the Board of 1. Advice on installation of computer system
accountancy and approved by the Professional 2. Quality control
Regulation Commission that such registrant has 3. Installation and modification of accounting
acquired a minimum of three (3) years of system.
meaningful experience in any areas of public 4. Budgeting
practice including taxation. 5. Forward planning and forecasting
 The Securities and Exchange Commission shall 6. Design and modification of retirement plans
not register any corporation organized for the 7. Advice on mergers and consolidation
practice of public accountancy.
  Excess credit units earned shall not be carried
over to the next three-year period unless it is
PRIVATE ACCOUNTING earned for masteral and doctoral degrees.
 Many CPAs are employed in a business entity in  CPD has become mandatory for CPA
various capacity as accounting staff, chief  CPD is required for the renewal of CPA license
accountant, internal auditor, and controller. and accreditation of CPA to practice the
 Controller – highest accounting officer in an accountancy profession.
entity. EXEMPTION FROM CPD
 Major objective is to assist management in  A CPA shall be permanently exempted from
planning and controlling the entity’s operations. CPD requirements upon reaching the age of 65
 Includes maintaining the records, producing the years.
financial reports, preparing the budgets and  This exemption is applied only to the renewal of
controlling and allocating the resources of the CPA license and not for the purpose of
entity. accreditation to practice the Accountancy
 Also responsible for the determination of the profession.
various taxes the entity is obliged to pay. ACCOUNTING VS. AUDITING
GOVERNMENT ACCOUNTING  Accounting embraces auditing
 Encompasses the process of analyzing,  Auditing is one of the areas of accounting
classifying, summarizing, and communicating all specialization.
transactions involving the receipt and  Accounting is constructive in nature
disposition of government funds and property  Accounting ceases when financial statements
and interpreting the results thereof. are already prepared.
 The focus of government accounting is the  Auditing is analytical.
custody and administration of public funds.  The work of an auditor begins when the work of
Branches of the government with accountants: accountant ends.
a) Bureau of Internal Revenue  After the financial statements are prepared, the
b) Commission on Audit auditor will begin to perform the task of
c) Department of Budget and Management auditing.
d) Securities and Exchange Commission  The auditor examines the financial statements
e) Bangko Sentral ng Pilipinas to ascertain whether they are in conformity
CONTINUING PROFESSIONAL DEVELOPMENT (CPD) with generally accepted accounting principles.
 Republic Act No. 10912 Is the law maintaining ACCOUNTING VS. BOOKKEEPING
and strengthening the continuing professional  Bookkeeping is procedural
development program for all regulated  Bookkeeping is the “how” of accounting
professions, including the accountancy  Accounting is the conceptual and is concerned
profession. with the “why”, reason or justification for any
 CPD refers to the inculcation and acquisition of actin adopted.
advanced knowledge, skill, proficiency and  Bookkeeping is a procedural element of
ethical moral values after the initial registration accounting as arithmetic is a procedural
of the Certified Public Accountant for element of mathematics.
assimilation into professional practice and ACCOUNTING VS. ACCOUNTANCY
lifelong learning.  Broadly speaking, these terms are synonymous.
 CPD raises and enhances the technical skill and  Both refer to the entire field of accountancy
competence of the Certified Public Accountant. theory and practice.
CPD CREDIT UNITS  Accountancy refers to the profession of
 CPD credit units refer to the CPD credit hours accounting practice.
required for the renewal of CPA license and  Accounting is used as a reference only to a
accreditation of a CPA to practice the particular field of accountancy such as public
accountancy profession every 3 years. accounting, private accounting and government
 Regardless of the sector, practice shall be accounting.
required to comply with 120 CPD credit units in FINANCIAL ACCOUNING VS. MANAGERIAL ACCOUNTING
a compliance period of three years,
  Financial accounting is primarily concerned with  The approved statements of FRSC are known as
the recording of business transactions and the Philippine Accounting Standards (PAS) and
eventual preparation of financial statements. Philippine Financial Reporting Standards
 Financial accounting focuses on general (PFRS).
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 COMPOSITION OF FRSC
investors.  Composed of 15 members.
 Managerial accounting is the accumulation and  The chairman and members of the FRSC shall
preparation of financial reports for internal have a term of 3 years renewable for another
users only. term.
 Managerial accounting is the area of accounting PHILIPPINE INTRPRETATIONS COMMITTEE
that emphasizes developing accounting  Formed by the FRSC in August 20006 and has
information for use within an entity. replaced the interpretations Committee formed
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) by the ASC in May 2000
 Are the accounting rules, procedures, practices.  The role of PIC is to prepare interpretations of
 Developed on the basis of experience, reason, PFRS for approval by the FRSC and to provide
custom, usage and practical necessity. timely guidance on financial reporting issues
 Represent the rules, procedures, practice and not specifically addressed in the current PFRS.
standards followed in the preparation and  Interpretations are intended to give
presentation of financial statements. authoritative guidance on issues that are likely
 Laws that must be followed in financial to receive divergent or unacceptable treatment
reporting. because the standards do not provide specific
 The process of establishing GAAP is a political and clear-cut rules and guidelines.
process which incorporates political actions of  The counterpart of the PIC in the UK is the
various interested user group as well as International Financial Reporting
professional judgement, logic and research. Interpretations committee or IFRIC which has
PURPOSE OF ACCOUNTING STANDARDS already replaced the Standing Interpretations
 To identify proper accounting practices for the Committee. SIC
preparation and presentation of financial
INTERNATIONAL ACCOUNTING STANDARDS
statements.
COMMITTEE
 Accounting standards create a common
understanding between preparers and users of  Is an independent private sector body, with the
financial statements particularly the measurement objective of achieving uniformity in the
of assets and liabilities accounting principles which are used by
 A set of high quality accounting standards is a business and other organizations for financial
necessity to ensure comparability and uniformity in reporting around the world
financial statements based on the same financial  Formed in June 1973.
information.  Headquartered in London, UK
FINANCIALREPORTING STANDARDS COUNCIL (FRSC) OBJECTIVES OF IASC
 GAAP is initially formulized through creation of  To formulate and publishing the public interest
the Accounting Standards Council (ASC). accounting standards to be observed in the
 FRSC replaces ASC presentation of financial statements and to
 FRSC is the accounting standard setting body promote their worldwide acceptance and
created by the PRC upon the recommendation observance.
of the Board of Accountancy in carrying out its  To work generally for the improvement and
powers and functions under R.A. Act N0. 9298 harmonization of regulations, accounting
 Main function is to establish and improve standards and procedures relating to the
accounting standards that will be generally presentation of financial statements.
accepted in the Philippines. INTERNATIONAL ACCOUNITNG STANDARDS BOARD
 The accounting standards promulgated by the  This replaces the IASC
FRSC constitute the “highest hierarchy” of GAAP
in the Philippines.
  IASB publishes standards in a series of a. Philippine Financial Reporting Standards which
pronouncements called International Financial correspond to the International Financial
Standards Committee or IFRS Reporting Standards.
 has adopted the body of standards issued by
IASC The PFRS are numbered the same as their
 The pronouncements of IASC continue to be counterpart in IFRS.
designated as “International Accounting b. Philippine Accounting Standards which
Standards” or IAS correspond to International Accounting
 The IASB standard-setting process includes in Standards
the correct order research, discussion paper,
exposure draft and accounting standard. The PAS are numbered the same as their
MOVE TOWARD IFRS counterpart in IAS.
 Standards issued by other standard-setting c. Philippine interpretations which correspond to
bodies such as the USA Financial Accounting interpretations of the IFRIC and the Standing
Standards Board (FASB) and the IASB are Interpretations Committee, and Interpretations
considered in developing accounting standards developed by the Philippine Interpretations
that will generally accepted in the Philippines. committee.
 In the past years, Philippine standards issued
are based on the American Accounting CHAPTER 2
Standard. CONCEPTUAL FRAMEWORK
 At present, the FRSC has adopted in their  The Conceptual Framework for financial
entirely all International Accounting standards reporting is a complete, comprehensive, and
and International Financial Reporting Standards. single document promulgated by the
 The move towards IFRSC is essential to achieve International Accounting Standards Board.
the goal of one uniform and globally accepted  Is a summary of the terms and concepts that
financial reporting standards. underlie the preparation and presentation of
 The Philippines is fully compliant with IFRS financial statements for external users.
effective January 2005, a process which was  Describes the concepts for Generally Purpose
started back in 1997 in moving from USA GAAP Financial Reporting.
to IFRS/  Is an attempt to provide an overall theoretical
FACTORS TO BE CONSIDERED IN DECIDING TO MOVE foundation for accounting.
TOTALLY TO INTERNATIONAL ACCOUNTING STANDARDS:  Is intended to guide standard-setters, preparers
a. Support of international accounting standards and users of financial information in the
by Philippine organizations such as the preparation and presentation of statements.
Philippine SEC, Board of Accountancy and  Conceptual Framework is the underlying theory
PICPA. for the development of accounting standards
b. Increasing internalization of business which has and revision of previously issues accounting
heightened the interest in a common language standards.
for financial reporting.  Conceptual Framework will be used in future
c. Improvement of international accounting standard-setting decision but no changes will be
standards or removal of free choices of made to the current IFRS.
accounting treatments. THE CONCEPTUAL FRAMEWORK PROVIDES THE
d. Increasing recognition of international FOUNDATION FOR STANDARDS THAT:
accounting standards by the World Bank, Asian a. Contribute to transparency
Development Bank and World Trade b. Strengthen accountability
Organization. c. Contribute to economic efficiency
PHILIPPINE FINANCAL REPORTING STANDARDS PURPOSES OF REVISED CONCPTUAL FRAMEWORK
 The Financial Reporting Standards Council a. To assist the IASB to develop IFRS standards
issues standards in a series of pronouncements based on consistent concepts.
called “Philippine Financial Reporting b. To assist preparers of financial statements to
Standards” or PFRS develop consistent accounting policy when no
PFRS COLLECTIVELY INCLUDE ALL OF THE FOLLOWING: Standard applies to a particular transaction or
 other event or when an issue is not yet  Shareholders are also interested in information
addressed by an IFRS. which enable them to assess the ability of the
c. To assist preparers of financial statements to entity to pay dividends.
develop accounting policy when a standard Lenders and Other Creditors
allows a choice of an accounting policy.  Existing and potential lenders and other
d. To assist all parties to understand and interpret creditors are interested in information which
the IFRS standards. enables them to determine whether their loans,
interests thereon and other amounts owing
them will be paid when due.
Other users
 Are users of financial information other than
AUTHORITATIVE STATUS OF CONCEPTUAL FRAMEWORK the existing and potential investors, lenders and
 If there is a standard or an interpretation that other creditors.
specifically applies to a transaction, the  Are so called because they are parties that may
standard or interpretation overrides the find the general purpose financial reports useful
conceptual framework. but the reports are not directed to them
 In the absence of a standard or an primarily.
interpretation that specifically applies to a Employees
transaction, management shall consider the  Are interested in information about the stability
applicability of the conceptual framework in and profitability of the entity
developing and applying an accounting policy  The employees are interested in information
that results in information that is relevant and which enables them to assess the ability of the
reliable. entity to provide remuneration, retirement
 Conceptual Framework is not An International benefits, and employment opportunities.
Financial Reporting Standard. Customers
 Nothing in the Conceptual Framework overrides  Have an interest in information about the
any specific IFRS. continuance of an entity especially when they
 In case of conflict, The International Financial have a long-term involvement with or are
Reporting Standards shall prevail over the dependent on the entity.
conceptual framework. Government and their agencies
USERS OF FINANCIAL INFORMATION  Government and their agencies are interested
Under the Conceptual Framework for financial in the allocation of resources and therefore the
reporting, the users of financial information are activities of the entity.
classified into two:  These users require information to regulate the
1. Primary users activities of the entity, determine taxation
2. Other users policies, and as a basis for national income and
Primary users similar statistics.
 Includes the existing and potential investors, Public
lenders and other creditors.  Entities affect members of the public in variety
 Are the parties to whom general purpose of ways.
financial reports are primarily directed.  Entities make substantial contribution to the
 Such users cannot require reporting entities to local economy in many ways including the
provide information directly to them and number of people they employ and their
therefore must rely on general purpose patronage of local suppliers.
financial reports for much of the financial  Financial statements may assist the public by
information they need. providing information about the trend and the
Existing and Potential Investors range of its activities.
 Are concerned with the risk inherent in and SCOPE OF REVISED CONCEPTUAL FRAMEWORK
return provided by their investment. a. Objective of financial reporting
 Investors need information to help them b. Qualitative characteristics of useful financial
determine whether they should buy, hold or sell information
c. Financial statements and reporting entity
d. Elements of financial statements
 e. Recognition and derecognition  The overall objective of financial reporting is to
f. Measurement provide information that is useful for decision
g. Presentation and disclosure making.
h. Concepts of capital and capital maintenance  The conceptual framework places more
A. OBJECTIVE OF FINANCIAL REPORTING emphasis on the importance of providing
 The objective of financial reporting forms the information needed to assess the management
foundation of conceptual framework. stewardship of the entity’s economic resources.
 The overall objective of financial reporting is to Specific objectives of financial reporting:
provide financial information about the a. To provide information useful in making
reporting entity that is useful to existing and decisions about providing resources to the
potential investors, lenders and other creditors entity.
in making decision about providing resources b. To provide information useful in assessing cash
to the entity. flow prospects of the entity.
 The objective of financial reporting is the “why”, c. To provide information about entity resources,
purpose or goal of accounting. claims, and changes in resources and claims.
 Financial Reporting is the provision of financial
information about an entity to external users
that is useful to them in making economic Economic decisions
decisions and for assessing he effectiveness of  Existing and potential investors need general
an entity’s management. purpose financial reports in order to enable
 Financial Reporting encompasses not only them in making decisions whether to buy, sell
financial statements but also other information or hold equity investments
such as financial highlights, summary of  Lenders and other creditors need general
important financial figures, analysis of financial purpose financial reports in order to enable
statements and significant ratios. them in making decisions whether to provide or
 Financial reports also include nonfinancial settle loans and other forms of credit.
information such as description of major Assessing cash flow prospects
products and listing of corporate officers and  Decisions about buying, selling etc. depends on
directors. returns that existing and potential investors
Target users expect from an investment.
 Financial reporting is directed primarily to the  Decisions about settling loans and other forms
existing and potential investors, lenders and of credit depends on principal and interest
other creditors which compose the primary user payments that potential lenders and other
group. creditors expect from other returns they expect
 The reason is that existing and potential  financial reporting should provide information
investors, lenders and other creditors have the useful in assessing the amount, timing and
most crucial and immediate need for uncertainty of prospects for future net cash
information in financial reports. inflows to the entity
 The primary users of financial information are Economic resources and claims
the parties that provide resources to the entity.  General purpose financial reports provide
 Information that meets the needs of specified information about financial position of a
primary users is likely to meet the needs of reporting entity.
their users such as employees, customers,  Financial position is the information about the
government and their agencies. entity’s economic resources and the claims
 The Management of a reporting entity is also against the reporting entity.
interested in financial information about the  Economic resources are the assets and the
entity. claims are the liabilities and equity of the entity.
 Management need not rely on general purpose  Financial position comprises the assets,
financial reports because it is able to obtain or liabilities, and equity of an entity at a particular
access additional financial information moment in time.
internally.  Liquidity is the availability of cash in the near
Specific Objectives of financial reporting future to cover currently maturing obligations.
  Solvency is the availability of cash over a long c. General purpose financial reports are intended
term to meet financial commitments when they to provide common information to users and
fall due. cannot accommodate every request for
CHANGES IN ECONOMIC RESOURCES AND CLAIMS information
 General purpose financial reports also provide d. To large extent, general purpose financial
information about the effects of transitions and reports are based on estimate and judgement
other events that change the economic rather than exact depiction.
resources and claims. Management stewardship
 Changes in economic resources and claims  Information about how effectively management
result from financial performance and from has discharged its responsibilities to use the
other events or transactions, such as issuing entity’s economic resources helps users to
debt or equity instruments. assess management stewardship of those
 Financial performance of an entity comprises resources.
revenue, expenses, and net income or loss for a  Such information is useful for predicting how
period of time. management will use the entity’s economic
 Financial performance is the level of income resources in future periods.
earned by the entity through the efficient and  the information can be useful for assessing
effective use of its resources. entity’s prospects for the future net cash flows.
 The financial performance of an entity is also CHAPTER 3
known as results of operations and is portrayed QUALITATIVE CHARACTERISTICS
in the income statement and statement of  Are the qualities or attributes that make
comprehensive income. financial accounting information useful to the
Usefulness of financial performance others.
 Information about financial performance helps  In deciding which information to include in
users to understand the return that the entity financial statements, the objective is to ensure
has produced on the economic resources. that the information is useful to the users in
 Information about the return the entity has making economic decisions.
produced provides an indication on how well  Decisions about buying, selling etc. depends on
management has discharged its responsibilities returns that existing and potential investors
to make efficient and effective use of the expect from an investment.
entity’s economic resources. Classifications of Qualitative characteristics:
 Information about past financial performance is a. Fundamental Qualitative Characteristics
usually helpful in predicting the future returns b. Enhancing Qualitative Characteristics
on the entity’s economic resource. Fundamental Qualitative Characteristics
 information about financial performance during a. Relevance
a period is useful in assessing the entity’s ability b. Faithful representation
to generate future cash inflows from  Information must be both relevant and
operations. faithfully represented if it is to be useful
Accrual accounting Application of qualitative characteristics
 Accrual accounting means that income is 1. Identify an economic phenomenon that has the
recognized when earned regardless of when potential to be useful
received and expense is recognized when 2. Identify the type of information about the
incurred regardless of when paid. phenomenon that would be most relevant and
Limitations of financial reporting can be faithfully represented.
a. General purpose financial reports do not and 3. Determine whether the information is
cannot provide all of the information that available.
existing and potential investors, lenders and Relevance
other creditors need.  is the capacity of the information to influence a
b. General purpose financial reports are not decision.
designed to show the value of an entity but the  To be relevant, the financial information must
reports provide information to help primary be capable of making a difference in the
users estimate the value of an entity. decisions made by users.
  Relevance requires that the financial  Example: 100k is small for SM but for small
information should be related or pertinent to businesses, its malaki like wth. San sila mag get
the economic decisions. ng 100k in an instant unlike SM na may big kita
 Information that does not bear on an economic every day.
decision is useless. When is an item material?
 Information must be relevant to the decision  “An item is material if knowledge of it would
making needs of the users. affect or influence the decision of the informed
Ingredients of relevance users of the financial statements.”
 Financial information is capable of making  There is no strict or uniform rule for
difference if it has predictive value and determining whether the item is material or not
confirmatory value.  Very often, this is dependent on good
 Financial information has predictive value if it judgement, professional expertise and common
can be used as an input to processes employed sense.
by users to predict future outcome.  Information is material if its omission or
 Financial information has predictive value when misstatement could influence the economic
it can help users increase the like hood of decision that the users make on the basis of the
correctly or accurately predicting or forecasting financial information about an entity.
outcome of events.
 Financial information has confirmatory value if
it provides feedback about previous evaluations.
 Financial information has confirmatory value Factors of materiality
when it enables users confirm or correct earlier  In the exercise of judgement in determining
expectations. materiality, the relative size and nature of an
 Often, Information has both predictive and item is considered.
confirmatory value,  The size of an item in relation to the total of the
 The predictive and confirmatory roles of group to which the item belong is taken into
information are interrelated. account.
Materiality  The nature of an item may be inherently
 Materiality is a practical rule in accounting material because by its very nature it affects
which dictates that strict adherence to GAAP is economic decision.
not required when the items are not significant Faithful representation
enough to affect evaluation, decision and  Faithful representation means that financial
fairness of the financial statements. reports represent economic phenomena or
 The materiality concept is also known as the transactions in words and numbers.
Doctrine of Convenience  The descriptions and figures must match what
 Materiality is really a quantitative “threshold” really existed or happened.
linked very closely to the qualitative  Faithful representation means that the actual
characteristic of relevance. effects of the transactions shall be properly
 The relevance of information is affected by its accounted for and reported in the financial
nature and materiality. statements.
 Materiality is a sub quality of relevance based Ingredients of faithful representation
on the nature or magnitude or both of the items a. Completeness
to which the information relates. b. Neutrality
 The conceptual framework does not specify a c. Free from error
uniform quantitative threshold for materiality Completeness
or predetermine what could be material in a  Completeness requires that relevant
particular situation. information should be presented in a way that
Materiality is a relativity facilitates understanding and avoids erroneous
 Materiality of an item depends on the relative implication.
size rather than absolute size.  Completeness id the result of the adequate
 What material for one entity may be immaterial disclosure standard or the principle of full
for another. disclosure.
  A complete depiction includes all information  Prudence is the exercise of care and
necessary for a user to understand the caution when dealing with the
phenomenon being depicted, including all uncertainties in the measurement process
necessary descriptions and explanations. such that assets or income are not
Standard of adequate disclosure
overstated and liabilities or expenses are
 Standard of adequate disclosure means that all
not understated.
significant and relevant information leading to
the preparation of financial statements shall be  Neutrality is supported by the exercise of
clearly reported. prudence.
 The accountant shall disclose a material fact Conservatism
known to him which is not disclosed in the  Conservatism is synonymous with
financial statements but disclosure of which is prudence.
necessary in order that the financial statements  Conservatism means that when alternatives
would not be misleading. exist, the alternative which has the least
 The standards of adequate disclosure is best effect on equity should be chosen.
described by disclosure of any financial facts  Conservatism means “in case of doubt,
significant enough to influence the judgement
record any loss and do not record any gain”
of the informed users.
 Contingent loss is recognized as a
“provision” if the loss is probable and the
amount can be reliably measured
Notes to financial statements  Contingent gain is not recognized but
 To be complete, the financial statements shall disclosed only.
be accompanied by “notes to financial  It is to be emphasized that conservatism is
statements” not a license to deliberately understate net
 the purpose of the notes is to provide income and net assets.
necessary disclosures required by Philippine Expressions of Conservatism
Financial Reporting Standards.  “Anticipate no profit and provide for
Neutrality
probable and measurable loss”
 A neutral depiction is without bias in the
 “In the matter of income recognition, the
preparation or presentation of financial
accountant takes the position that no
information.
matter how sure the business man might be
 A neutral depiction is not slanted, weighted,
in capturing the bird in the bush, he, the
emphasized, de-emphasized or otherwise
accountant, must see it in hand”
manipulated to increase the probability that
 “Don’t count your chicks until the eggs
financial information will be received
hatch”
favorably or unfavorably by users.
Free from error
 To be neutral, the information contained in
 Free from error means there are no errors
the financial statements, must be free from
or omissions in the description of the
bias.
phenomenon or transaction.
 The financial information should not favor
 The process used to produce he reported
one party to the detriment of another
information has been selected and applied
party.
with no errors in the process.
 The information is directed to the common
 Free from error does not mean perfectly
needs of many users, and not to the
accurate in all aspects.
particular needs of specific user.
Measurement uncertainty
 Neutrality is synonymous with the all-
 Measurement uncertainty arises when
encompassing principle of fairness
monetary amounts in financial reports
 To be neutral is to be fair.
cannot be observed directly and must
Prudence
instead be estimated.
  Measurement uncertainty can affect Enhancing qualitative characteristics:
faithful representation if the level of a. Comparability
uncertainty in providing an estimate is b. Understandability
HIGH. c. Verifiability
d. Timeliness
 The use of reasonable estimate is an
Comparability
essential part of providing financial
 Comparability means the ability to bring
information and does not undermine the together for the purpose of noting points of
usefulness of the financial information. likeness and difference.
 As long as the estimate is clearly and  Comparability is the enhancing qualitative
accurately described and explained, even a characteristic that enable users to identify and
high level of measurement uncertainty does understand similarities and dissimilarities.
not affect the usefulness of the financial  Comparability within an entity is the quality of
information. information that allows comparisons within a
Substance over form single entity through time or from accounting
 The economic substance of transactions period to the next
 Intracomparability or horizontal comparability
and events are usually emphasized when
is the comparability within an entity
economic substance differ from the legal
 Intercomparability or dimensional
form. comparability is the comparability across
 Substance over form is not considered a entities.
separate component of faithful representation  For information to be comparable, like things
because it would be redundant. must look alike and different things must look
 Faithful representation inherently represents different.
the substance of an economic phenomenon or  Comparability is not enhanced by making unlike
transaction rather than merely representing things look alike or making like things look
legal form. different.
 Representing a legal form that differs from the Consistency
economic substance of the underlying  Is not the same as comparability.
economic phenomenon or transaction could  in broad sense, consistency refers to the use of
not result in a faithful representation. the same method for the same item, either
Example of substance over form from period to period within an entity or in a
When the lessee leased a property from the lessor. The single period across entities.
terms of the lease provide that the lease transfers  Comparability is the goal and consistency helps
ownership from the asset to the lessee by the end of to achieve that goal.
the lease term.  In a limited sense, consistency is the uniform
In form, the contract is a lease as popularly understood. application of accounting method from period
But in substance, in reality, if the “transfer of to period within an entity.
ownership provision” is to be considered, the real intent  On the other hand, comparability is the
of the parties is an installment purchase of an asset by uniform application of accounting method from
the lessee from the lessor. period to period between and across entities in
ENHANCING QUALITATIVE CHARACTERISTIC the same industry.
 The enhancing qualitative characteristics relate  It is inappropriate for an entity to leave
to the presentation or form of the financial accounting policies unchanged when better and
information. acceptable alternatives exists.
 The enhancing qualitative characteristics are Understandability
intended to increase the usefulness of the  Understandability requires that financial
financial information that is relevant and information must be comprehensive and
faithfully represented. intelligible if it is to be most useful.
 Relevant and faithfully represented financial  The information should be presented in a form
information is useful but the information would and expressed in terminology that a user
be most useful if it is comparable, understands.
understandable, verifiable and timely.
  Classifying, characterizing and presenting  Generally, the older the information, the less
information “clearly and concisely” makes it useful.
understandable.  Some information may continue to be timely
 An essential quality of the information provided long after the end of reporting period because
in financial statements is that it is readily some users may need to identify and assess
understandable by users. trends.
 The users shall have an understanding pf the  Timeliness enhances the truism that without
complex economic activities, financial knowledge of the past, the basis for prediction
accounting process and the terminology in the will usually be lacking and without interest in
financial statements. the future, knowledge of the past is sterile.
 Financial statements cannot realistically be  What happened in the past would become the
understandable to everyone. basis of what would happen in the future.
 Financial reports are prepared for users who Cost constraint on useful information
have a reasonable knowledge of business and  Cost is a pervasive constraint on the
economic activities who review and analyze he information that can be provided by financial
information diligently. reporting.
 Understandability is very essential because a  Reporting financial information imposes cost
relevant and faithfully represented information and it is important that such cost is justified by
would prove useless if it is not understood by the benefit derived from the financial
users. information.
Verifiability  The cost constraint is the consideration of the
 Verifiability means that different cost incurred in generating financial information
knowledgeable and independent observers can against the benefit to be obtained from having
reach consensus, although not necessarily the information.
complete agreement, that a particular depiction  The benefit derived from the information
is a faithful representation. should exceed the cost incurred in obtaining the
 Verifiability implies consensus information.
 The financial information is verifiable in the  The evaluation of the cost constraint is
sense that it is supported by evidence so that an substantially a judgmental process.
accountant that would look into the same  Assessing whether the cost of reporting
evidence would arrive at the same economic outweighs or falls short of the benefit is difficult
decision or conclusion. to measure and becomes a matter of
 Verifiable information provides results that professional judgement.
would be substantially duplicated by measurers
using the same measurement method.
 Verifiability helps assure users that information CHAPTER 4
represents the economic phenomenon or GENERAL OBJECTIVE OF FINANCIAL STATEMENTS
transaction it purports to represent.  Financial statements provide information about
Types of verification economic resources of the reporting entity,
 Direct verification means verifying an amount claims against the entity and changes in the
or other representation through direct economic resources and claims.
observation, for example, by counting cash.
 Indirect verification means checking the inputs  Financial statements provide financial
to a model, formula or other technique and information about an entity’s asset, liabilities,
recalculating the inputs using the same equity, income and expenses useful to users of
methodology. financial statements in:
Timeliness a. Assessing future cash flows to the
 Timeliness means that financial information reporting entity.
must be available or communicated early b. Assessing management stewardship of
enough when a decision is to be made. the entity’s economic resource.
 Relevant and faithfully represented financial  The financial information is provided in the
information furnished after a decision is made is following:
useless or of no value.
 1. Statement of financial position, by parent’s assets, liabilities, income and expenses
recognizing assets, liabilities and equity. and not about of the subsidiaries.
2. Statement of financial performance, by  Such information can be useful to the existing
recognizing income and expense and potential investors, lenders and other
3. Other statements and notes by creditors of the parent because a claim against
presenting and disclosing information the parent typically does not give the holder of
about: the claim against subsidiaries
a. Recognized assets, liabilities,  Information provided in unconsolidated
equity, income and expenses financial statements is typically not sufficient to
b. Unrecognized assets and meet the requirement needs of primary users
liabilities  When consolidated financial statements are
c. Cash flows required, unconsolidated financial requirements
d. Contribution from equity cannot serve s substitute.
holders and distribution to Combined financial statements
equity holders  Combined financial statements provide financial
e. Method, assumption and information about assets, liabilities, equity,
judgement in estimating income and expense of two or more entities not
amount presented. linked with a parent and subsidiary
Types of financial statements relationship.
 Consolidated financial statements – these are Reporting entity
the financial statements prepared when the  A reporting entity is an entity that is required or
reporting entity comprises both the parent and choses to prepare financial statements
its subsidiaries.  The reporting entity can be a single entity or a
 Unconsolidated financial statement – these are portion of an entity, or can comprise more than
the financial statements prepared when the one entity.
reporting entity is the parent alone.  A reporting entity is not necessarily a legal
 Combined financial statements - these are the entity.
financial statements when the reporting entity
comprises two or more entities that are not The following can be considered as a reporting entity:
linked by a parent and subsidiary relationship a. Individual corporation, partnership or
Consolidated financial statements proprietorship
 Consolidated financial statements provide b. The parent alone
information about the assets, liabilities, income c. The parent and its subsidiaries as a single
and expenses of both the parent and its reporting entity
subsidiaries as a single reporting entity. d. Two or more entities without parent and
 The parent is the entity that exercises control subsidiary relationship as a single entity
over the subsidiaries. e. A reportable business segment of an entity
 Consolidated information is useful for existing Reporting period
and potential investors, lenders and other  The reporting period is the period when financia
creditors of the parent in their assessment f statemets are prepared for general purpose
future net cash flows of the parent. financial reporting
 This is because net cash flows to the parent  Financial statements may be prepared on an
include distributions to the parent from its interim basis
subsidiaries.  Interim financial statements are not required
 Consolidated financial statements are not but optional.
designed to provide separate information about  Financial statements must be prepared on an
the assets, liabilities, equity, income and annual basis
expenses of a particular subsidiary  Financial statements are prepared for a specific
 A subsidiary’s own financial statements are period of time and provide information about:
designed to provide such information a. Assets, liabilities and equity at the end
Unconsolidated financial statements of the reporting period
 Unconsolidated financial statements are b. Income and expense during the
deigned to provide information about the accounting period
  Financial statements also provide comparative  The reason for the entity assumption is to
information at least one preceding reporting have fair presentation of financial
period to identify and assess change in trends. statements
 Financial statements may include information  The personal transactions of the owners
about transactions and other events that
shall not be allowed to distort the financial
occurred after the end of reporting period if the
statements of the entity
information is necessary to meet the general
objective of financial statements.  Each business is an independent accounting
Underlying assumptions entity.
 Accounting assumptions are the basic notions r Time period
fundamental premises on which the accounting  A complete accurate report on the financial
process is based position and performance of an entity
 Accounting assumptions are also known as cannot be obtained until the entity is finally
postulates. dissolved and liquidated.
 Accounting assumptions serve as the  Users of financial information need timely
foundation or bedrock of accounting in order information for making an economic
to avoid misunderstanding but rather enhance
decision
the understanding and usefulness of the
 The time period assumption requires hat
financial statements.
 the conceptual framework for financial the indefinite life of an entity is subdivided
reporting only mentioned one assumption, into accounting periods which are usually of
namely going concern. equal length for the purpose of preparing
 Implicit in accounting are the basic assumptions financial reports on financial position,
of accounting entity, time period and monetary performance and cash flows
unit  The accounting period or fiscal period is one
year or a period of twelve months
 The “one-year period” is traditionally the
Going concern accounting period because usually it is after
 The going concern or continuity assumption one year that the government reports are
means that in the absence of evidence to required.
the contrary, the accounting entity is  The accounting period may be a calendar
viewed as continuing in operation year or a natural business year.
indefinitely.  A calendar year is a twelve-month period
 the going concern postulate is the very that ends on December 31.
foundation of the cost principle.  A Natural business year is a twelve-month
 If there is evidence that the entity would period that ends on any month when the
experience large and persistent losses or business is at the lowest or experiencing
that the entity’s operations are to be slack season.
terminated, the going concern assumption Monetary unit
is abandoned.  The monetary unit assumption has two
Accounting entity aspects, namely quantifiability and stability
 In financial accounting, the accounting of the peso.
entity is the specific business organization,  The quantifiability aspect means that the
which may be a proprietorship, partnership assets, liabilities, equity, income and
or corporation. expenses should be stated in terms of a unit
 Under this assumption, the entity is of measure which is peso in the Philippines
separate from the owners, managers, and  The stability of the peso assumption means
employees who constitute the entity. that the purchasing power of peso is stable
and constant and that its instability is
insignificant and therefore may be ignored
 The stable peso postulate is actually an
amplification of the going concern
assumption so much so that adjustments
are unnecessary to reflect any changes in
purchasing power.
 The accounting function is to account for
nominal pesos only and not for constant
pesos or changes in purchasing power.
 There is a significant gap between historical
cost and current replacement cost
 An entity may choose the revaluation
model as an accounting policy