REVISED CONCEPTUAL FRAMEWORK Qualitative characteristics of useful financial

The Framework addresses: information

A. The objective of general-purpose ✓ The qualitative characteristics of useful
financial reporting financial reporting identifies the types of
B. Qualitative characteristics of useful information are likely to be most useful to
financial information users in making decisions about the
C. Financial statements and the reporting reporting entity on the basis of
entity information in its financial report. The
D. The elements of financial statements qualitative characteristics apply equally
E. Recognition and derecognition to financial information in general
F. Measurement purpose financial reports as well as to
G. Presentation and disclosure financial information provided in other
H. Concepts of capital and capital ways.
maintenance ✓ Financial information is useful when it is
The Objective of general-purpose financial relevant and represents faithfully what it
reporting purports to represent.
▪ The primary users of general-purpose ✓ The usefulness of financial information is
financial reporting are present and enhanced if it is comparable, verifiable,
potential investors, lenders and other timely and understandable.
creditors, who use that information to Fundamental qualitative characteristics
make decisions about buying, selling or 1. Relevance
holding equity or debt instruments, 2. Faithful representation
providing or settling loans or other forms Relevance
of credit, or exercising rights to vote on, ▪ Relevant financial information is capable
or otherwise influence, management’s of making a difference in the decisions
actions that affect the use of the entity’s made by users.
economic resources. ▪ Financial information is capable of
▪ The primary users need information making a difference in decisions if it has
about the resources of the entity not only predictive value, confirmatory value, or
to assess an entity's prospects for future both. The predictive value and
net cash inflows but also how effectively confirmatory value of financial
and efficiently management has information are interrelated.
discharged their responsibilities to use Materiality is an entity-specific aspect of
the entity's existing resources (i.e., relevance based on the nature or magnitude (or
stewardship). both) of the items to which the information
relates in the context of an individual entity's
financial report. Verifiability
Faithful representation ✓ Verifiability helps to assure users that
• General purpose financial reports information represents faithfully the
represent economic phenomena in words economic phenomena it purports to
and numbers. represent.
• Financial information must not only be ✓ Verifiability means that different
relevant, it must also represent faithfully knowledgeable and independent
the phenomena it purports to represent. observers could reach consensus,
• Faithful representation means although not necessarily complete
representation of the substance of an agreement, that a particular depiction is
economic phenomenon instead of a faithful representation.
representation of its legal form only. Timeliness
• A faithful representation seeks to ✓ Timeliness means that information is
maximize the underlying characteristics available to decision-makers in time to be
of completeness, neutrality and freedom capable of influencing their decisions.
from error. Understandability
A neutral depiction is supported by the exercise ✓ Classifying, characterizing and
of prudence. Prudence is the exercise of caution presenting information clearly and
when making judgements under conditions of concisely makes it understandable. While
uncertainty. some phenomena are inherently complex
Enhancing qualitative characteristics and cannot be made easy to understand,
1. Comparability to exclude such information would make
2. Verifiability financial reports incomplete and
3. Timeliness potentially misleading.
4. Understandability ✓ Financial reports are prepared for users
5. Comparability who have a reasonable knowledge of
Information about a reporting entity is more business and economic activities and
useful if it can be compared with a similar who review and analyze the information
information about other entities and with similar with diligence.
information about the same entity for another The cost constraint on useful financial reporting
period or another date. • Cost is a pervasive constraint on the
Comparability information that can be provided by
✓ Comparability enables users to identify general purpose financial reporting.
and understand similarities in, and Reporting such information imposes
differences among, items. costs and those costs should be justified
 by the benefits of reporting that Liability
information. • A liability is a present obligation of the
Financial statements and the reporting entity entity arising from past events, the
Objective and scope of financial statements settlement of which is expected to result
The objective of financial statements is to in an outflow from the entity of resources
provide information about an entity's assets, embodying economic benefits.
liabilities, equity, income and expenses that is Equity
useful to financial statements users in assessing • Equity is the residual interest in the
the prospects for future net cash inflows to the assets of the entity after deducting all its
entity and in assessing management's liabilities.
stewardship of the entity's resources. Income
The Elements of Financial Statements • Income is increases in economic benefits
Financial statements portray the financial during the accounting period in the form
effects of transactions and other events by of inflows or enhancements of assets or
grouping them into broad classes according to decreases of liabilities that result in
their economic characteristics. These broad increases in equity, other than those
classes are termed the elements of financial relating to contributions from equity
statements. participants.
The elements directly related to financial Expense
position (balance sheet) are: • Expenses are decreases in economic
✓ Assets benefits during the accounting period in
✓ Liabilities the form of outflows or depletions of
✓ Equity assets or incurrences of liabilities that
The elements directly related to performance result in decreases in equity, other than
(income statement) are: those relating to distributions to equity
✓ Income participants.
✓ Expenses Recognition of the elements of financial
The cash flow statement reflects both income statements
statement elements and some changes in ✓ Recognition is the process of
balance sheet elements. incorporating in the balance sheet or
Asset income statement an item that meets the
• An asset is a resource controlled by the definition of an element and satisfies the
entity as a result of past events and from criteria for recognition.
which future economic benefits are ✓ It is probable that any future economic
expected to flow to the entity. benefit associated with the item will flow
 to or from the entity; and the item's cost accrual of employee entitlements or the
or value can be measured with reliability. depreciation of equipment).
Measurement of the Elements of Financial
o An asset is recognized in the balance
Statements or Measurement involves
sheet when it is probable that the future
assigning monetary amounts at which the
economic benefits will flow to the entity
elements of the financial statements are to be
and the asset has a cost or value that can
recognized and reported.
be measured reliably.
The Framework acknowledges that a variety of
o A liability is recognized in the balance
measurement bases are used today to different
sheet when it is probable that an outflow
degrees and in varying combinations in financial
of resources embodying economic
statements, including:
benefits will result from the settlement of
1. Historical cost
a present obligation and the amount at
2. Current cost
which the settlement will take place can
3. Net realizable (settlement) value
be measured reliably.
4. Present value (discounted)
o Income is recognized in the income
Historical cost is the measurement basis most
statement when an increase in future
commonly used today, but it is usually combined
economic benefits related to an increase
with other measurement bases.
in an asset or a decrease of a liability has
Concepts of Capital
arisen that can be measured reliably.
Financial concept of capital
This means, in effect, that recognition of
• Capital is synonymous with net assets of
income occurs simultaneously with the
the enterprise. This is the concept of
recognition of increases in assets or
capital adopted by most enterprises. A
decreases in liabilities (for example, the
financial concept of capital, e.g. invested
net increase in assets arising on a sale of
money or invested purchasing power,
goods or services or the decrease in
means capital is the net assets or equity
liabilities arising from the waiver of a debt
of the entity.
payable).
Physical concept of capital
o Expenses are recognized when a
• Capital is regarded as the productive
decrease in future economic benefits
capacity of the enterprise based on, for
related to a decrease in an asset or an
example, units of output per day.
increase of a liability has arisen that can
Concepts of Capital Maintenance
be measured reliably. This means, in
Financial capital maintenance
effect, that recognition of expenses
• Under this concept, a profit is earned only
occurs simultaneously with the
if the financial (or money) amount of the
recognition of an increase in liabilities or
net assets at the end of the of the period
a decrease in assets (for example, the
 exceeds the financial (or money) amount determines the impact of the
of the net assets at the beginning of the transactions on the financial position.
period, after excluding any distributions 2. Journalizing, the process of recording
to, and contributions from, owners during the transactions in the appropriate
the period. journals. A journal is a chronological
Physical capital maintenance record of transactions also known as
• Under this concept, a profit is earned only the Book of Original Entry. Although all
if the physical productive capacity (or transactions could be recorded in the
operating capability) of the enterprise (or General Journal, it is more efficient to
the resources need to achieve that use special journals in recording many
capacity) at the end of the period like transactions.
exceeds the physical productive capacity Special journals that enterprises use is:
at the beginning of the period, after ✓ Sales Journal
excluding any distributions to, and o only sales of merchandise on
contributions from, owners during the account.
period. ✓ Cash receipts journal
Basic Accounting Concepts and Processes o all types of cash receipts.
STEPS IN THE ACCOUNTING CYCLE ✓ Purchase journal
There are nine (9) basic steps in the accounting o records all purchases on account.
cycle, which includes two (2) phases known as ✓ Cash disbursement journal
recording (steps 1 to 3) and summarizing o all payments of cash.
(steps 4 to 9). Type of journal entries according to form:
1. Analyzing and recording transactions. 1. Simple journal entry
2. Journalizing transactions. ▪ One which contains a single debit
3. Posting transactions to the ledger. and a single credit element.
4. Preparing an unadjusted trial balance. 2. Compound journal entry
5. Preparing adjusting entries. ▪ One which has two or more debit
6. Preparing an adjusted trial balance. and credit elements.
7. Preparing financial statements. Accounts
8. Preparing closing entries. ✓ Used as storage units of accounting
9. Preparing post-closing trial balance. information and used to summarize
RECORDING PHASE changes in assets, liabilities and equity
1. Analyzing the transaction (Business including income and expenses.
Document) this is where the The following are a broad classification of
accountant gathers information and kinds of accounts:
✓ Real account
 o Also called as permanent The purpose of the unadjusted trial
accounts. These accounts are not balance is to provide evidence that the
closed and carryover to the next total debits are equal to the total credits
accounting period. (ex. Cash, AR and prepares the accounts for
and PPE). adjustments.
✓ Nominal account
o Also called as temporary capital B. Preparing adjusting entries
accounts. These accounts are To record accruals, expiration of
closed at the end of the prepayments and deferrals, estimations
accounting period. (ex. Sales and and other events not signaled by source
expenses). documents. Adjusting entries are made
✓ Mixed account at the end of each accounting period.
A combination of real and nominal The concepts involved behind adjusting entries
accounts. (ex. Prepaid expenses). are Accrual, Matching of Costs against Revenue
✓ Reciprocal account and Accounting Period.
Has a counterpart in another book within ✓ Prepayments and Deferrals
the entity or in another ledger or another The cash flow precedes the revenue or
entity. the expense recognition.
✓ Other accounts as necessary. ✓ Accruals
Posting Income or expense recognition precedes
• It is the process of transferring data from the cash flow.
the journal to the appropriate accounts in ✓ Accrued Income
the general ledger and subsidiary ledger. Income earned but not yet received.
This process classifies all accounts that ✓ Accrued expenses
were recorded in the journals. Expenses incurred but not yet paid.
Kinds of ledgers ✓ Estimates
1. General ledger Adjusting entries that do not involve cash
It includes all the accounts appearing on flows.
the financial statements. ✓ Doubtful accounts
2. Subsidiary ledgers The expense to be matched against
Affords additional detail in support of credit sales.
certain general ledger accounts. ✓ Depreciation
SUMMARIZING PHASE Allocation of the cost of fixed assets as
A. Preparing the unadjusted trial balance expense over its useful life.
a list of general ledger accounts with Ending inventory
their respective debit or credit balance.
An adjustment to set up the year-end physical Prepaid Expenses:
count of the inventory. This only applies if the Asset Method
Periodic Inventory System is used. Debit - Prepaid expense (asset)
Preparing the financial statements Credit - Cash
The most important part of the summarizing Adjustment
phase, this is where the processed information Expense
is communicated to external users. Prepaid expense (asset)
Basic financial statements: Expense Method
✓ Statement of Financial Position. Debit – Expense
✓ Income Statement or a Statement of Credit – Cash
Comprehensive Income. Adjustment
✓ Statement of Changes in Equity. Debit – Prepaid Expense
✓ Statement of Cash Flows. Credit – Expense
✓ Notes and Disclosures. Deferred or Unearned Revenue:
Preparing the closing entries Liability Method
Recorded and posted for the purpose of closing Debit – Cash
all nominal or temporary accounts to the income Credit – Unearned (e.g. Rent)
summary account and the income or loss Adjustment
afterwards shall be closed to the capital or Debit – Unearned
retained earnings account. Credit – Income
Preparing the post-closing trial balance Income Method
A listing of general ledger accounts and their Debit – Cash
balances after closing entries have been made. Credit – Income (e.g. Rent_
The post-closing trial balance is the same with Adjustment
the year- end statement of financial position. Debit – Income
The only difference is that valuation accounts Credit – Unearned
like allowances for assets are found in the credit • The purpose of reversing entries is a
side instead of being deducted from the related matter of convenience for accruals and
asset account. consistency for the adjustments in the
Preparing reversing entries following year for prepaid expenses and
The last and optional step in the accounting deferred income when income statement
cycle. Reversing entries are made at the method was used to record the cash flow.
beginning of the new accounting period to • Once again, reversing entries will only
reverse certain adjusting entries from the apply to the following but remember that
succeeding accounting period. they are not necessary and only optional:
Adjusting Entries ✓ Accrued income.
✓ Accrued expense.
✓ Prepaid expense, only if the
expense method was used in
recording the payment.
✓ Unearned income, only if the
income method was used in
recording the collection.