CONCEPTUAL FRAMEWORK • Materiality concept – information is material if its omission or

OVERVIEW OF ACCOUNTING: C1 misstatement could influence economic decisions.

Accounting is “the process of identifying, measuring, and • Cost-benefit – the cost of processing and communicating
communicating economic information to permit informed information should not exceed the benefits to be derived from it
judgment and decisions by users of information.” - Basic Purpose • Accrual Basis of accounting – effects of transactions are
1. Identifying - the process of analyzing events and transactions recognized when they occur (and not as cash is received or paid)
to determine whether or not they will be recognized. Only and they are recognized in the accounting periods to which they
accountable events are recognized. relate.
2. Measuring - involves assigning numbers, normally in monetary • Historical cost concept – the value of an asset is determined on
terms, to the economic transactions and events. the basis of acquisition cost.
3. Communicating - the process of transforming economic data • Concept of Articulation – all of the components of a complete
into useful accounting information, such as financial statements set of financial statements are interrelated.
and other accounting reports, for dissemination to users. • Full disclosure principle – financial statements provide
Types of Events sufficient detail to disclose matters that make a difference to
1. External events – events that involve an external party. users, yet sufficient condensation to make the information
a. Exchange (reciprocal transfer) – reciprocal giving and understandable, keeping in mind the costs of preparing and
receiving using it.
b. Non-reciprocal transfer – “one way” transaction • Consistency concept – financial statements are prepared on
c. External event other than transfer – an event that involves the basis of accounting policies which are applied consistently
changes in the economic resources or obligations of an entity from one period to the next.
caused by an external party or external source but does not • Matching – costs are recognized as expenses when the related
involve transfers of resources or obligations. revenue is recognized.
2. Internal events – events that do not involve an external party. • Residual equity theory – this theory is applicable where there
a. Production – the process by which resources are are two classes of shares issued, ordinary and preferred. The
transformed into finished goods. equation is “Assets – Liabilities – Preferred Shareholders’ Equity
b. Casualty – an unanticipated loss from disasters or other = Ordinary Shareholders’ Equity.”
similar events. • Fund theory – the accounting objective is the custody and
administration of funds.
Measurement • Realization – the process of converting non-cash assets into
• The several measurement bases used in accounting include, cash or claims for cash.
but not limited to, the following: Historical cost, Fair value, • Prudence (Conservatism) – the inclusion of a degree of caution
Present value, Realizable value, Current cost, and Sometimes in the exercise of the judgments needed in making the estimates
inflation-adjusted costs. required under conditions of uncertainty , such that assets or
• The most commonly used is historical cost. This is usually income are not overstated and liabilities or expenses are not
combined with the other measurement bases. Accordingly, understated.
financial statements are said to be prepared using a mixture of
costs and values. Common branches of accounting
• Financial accounting - focuses on general purpose financial
Valuation by fact or opinion statements.
• When measurement is affected by estimates, the items • Management accounting – focuses on special purpose financial
measured are said to be valued by opinion. reports for use by an entity’s management.
• When measurement is unaffected by estimates, the items • Cost accounting - the systematic recording and analysis of the
measured are said to be valued by fact. costs of materials, labor, and overhead incident to production.
• Auditing - the process of evaluating the correspondence of
Types of accounting information classified as to users’ needs certain assertions with established criteria and expressing an
• General purpose accounting information - designed to meet opinion thereon.
the common needs of most statement users. This information is • Tax accounting - the preparation of tax returns and rendering
governed by the Philippine Financial Reporting Standards of tax advice, such as the determination of tax consequences of
(PFRSs). • Special purpose accounting information - designed to certain proposed business endeavors.
meet the specific needs of particular statement users. Thi s • Government accounting - refers to the accounting for the
information i s provided by other types of accounting, e.g., government and its instrumentalities, placing emphasis on the
managerial accounting, tax basis accounting, etc. custody of public funds, the purposes for which those funds are
committed, and the responsibility and accountability of the
Basic Accounting Concept individuals entrusted with those funds.
• Double-entry system – each accountable event is recorded in
two parts – debit and credit. Four sectors in the practice of accountancy
• Going concern - the entity is assumed to carry on its operations 1. Practice of Public Accountancy - involves the rendering of
for an indefinite period of time. audit or accounting related services to more than one client on a
• Separate entity – the entity is treated separately from its fee basis.
owners. 2. Practice in Commerce and Industry - refers to employment in
• Stable monetary unit - amounts in the financial statements are the private sector in a position which involves decision making
stated in terms of a common unit of measure; changes in requiring professional knowledge in the science of accounting
purchasing power are ignored. and such position requires that the holder thereof must be a
• Time Period – the life of the business is divided into series of CPA.
reporting periods.
3. Practice in Education/Academe – employment in an (a) Predictive value - information can be used in making
educational institution which involves teaching of accounting, predictions
auditing, management advisory services, finance, business law, (b) Feedback/Confirmatory value - the information can be
taxation, and other technically related subjects. used in confirming past predictions
4. Practice in the Government – employment or appointment to Materiality – entity-specific aspect of relevance, influence or not
a position in an accounting professional group in the government (2) Faithful representation - means the information provides a
or in a government–owned and/or controlled corporation where true, correct and complete depiction of what it purports to
decision making requires professional knowledge in the science represent.
of accounting, or where civil service eligibility as a CPA is a (a) Completeness - all information necessary for users to
prerequisitE. understand are disclosed.
Accounting standards in the Philippines (b) Neutrality (free from bias)
• Philippine Financial Reporting Standards (PFRSs) are Standards (c) Free from error
and Interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise: II. Enhancing qualitative characteristics - enhance the usefulness
1. Philippine Financial Reporting Standards (PFRSs); of information
2. Philippine Accounting Standards (PASs); and (1) Comparability - identifying similarities and differences
3. Interpretations between different sets of information
(2) Verifiability - different users could reach consensus
The need for reporting standards (3) Timeliness - information is available to users in time
• Entities should follow a uniform set of generally acceptable (4) Understandability - users are expected to have: a. reasonable
reporting standards when preparing and presenting financial knowledge of business activities; and b. willingness to analyze
statements; otherwise, financial statements would be the information diligently.
misleading.
• The term “generally acceptable” means that either: Primary users – are those who cannot demand information
a. the standard has been established by an authoritative directly from reporting entities. The primary users are:
accounting rule-making body; or (a) Existing and potential investors
b. the principle has gained general acceptance due to practice (b) Lenders and other creditors.
over time and has been proven to be most useful. • Only the common needs of primary users are met by the
• The process of establishing financial accounting standards is a financial statements.
democratic process in that a majority of practicing accountants
must agree with a standard before it becomes implemente The objective of general purpose financial statements is to
provide financial information about the reporting entity’s assets,
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING: C2 liabilities, equity, income and expenses that is useful in assessing:
When there is a conflict between the Conceptual Framework and a. the entity’s ability to generate future net cash inflows; and b.
a PFRS, the PFRS will prevail. management’s stewardship over economic resources.
In the absence of a standard, management shall consider the
Conceptual Framework in making its judgment in developing and A reporting entity is one that is required, or chooses, to prepare
applying an accounting policy that results in useful information. financial statements, and is not necessarily a legal entity. It can
• The objective of general purpose financial reporting is to be a single entity or a group or combination of two or more
provide financial information about the reporting entity that is entity.
useful to primary users in making decisions about providing
resources to the entity. The objective of general purpose Generally Accepted Accounting Principle
financial reporting forms the foundation of the Conceptual Going concern - Financial statements are normally prepared on
Framework. the assumption that the reporting entity is a going concern,
meaning the entity has neither the intention nor the need to end
Scope of the Conceptual Framework its operations in the foreseeable future.
The Conceptual Framework is concerned with general purpose Reporting period - Financial statements are prepared for a
financial reporting - involves the preparation of general purpose specific period of time (i.e., the reporting period: 1 YEAR) and
financial statements. The Conceptual Framework provides the include comparative information for at least one preceding
concepts regarding the following: reporting period.
1. The objective of financial reporting
2. Qualitative characteristics of useful financial information Elements of Financial Statements
3. Financial statements and the reporting entity Relate to the Entity’s financial position
4. The elements of financial statements 1. Asset - a present economic resource controlled by the entity
5. Recognition and derecognition as a result of past events. An economic resource is a right that
6. Measurement has the potential to produce economic benefits.
7. Presentation and disclosure A. Right – asset refers to a right, and not necessarily to a
8. Concepts of capital and capital maintenance physical object, e.g., the right to use, sell, lease or transfer a
building.
Qualitative Characteristics B. Potential to produce economic benefits – the right has a
I. Fundamental qualitative characteristics - make information potential to produce economic benefits for the entity.
useful to users. C. Control – means the entity has the exclusive right over
(1) Relevance - Information is relevant if it can affect the the benefits of an asset and the ability to prevent others
decisions of users. from accessing those benefit.
2. Liability - a present obligation of the entity to transfer an obligations, to which recognition criteria and measurement
economic resource as a result of past event. concepts are applied.
A. Obligation – An obligation is “a duty or responsibility that
an entity has no practical ability to avoid.” (CF 4.29) An
obligation can be either legal obligation or constructive Measurement bases
obligation. 1. Historical cost of:
B. Transfer of an economic resource – the obligation has the a. an asset is the consideration paid to acquire the asset plus
potential to require the transfer of an economic resource to transaction costs.
another party. b. a liability is the consideration received to incur the liability
C. Present obligation as a result of past events – A present minus transaction costs.
obligation exists as a result of past events if: a. the entity c. Historical cost is updated over time to depict the following:
has already obtained economic benefits or taken an action; - Depreciation, amortization, or impairment of assets
and b. as a consequence, the entity will or may have to - Collections or payments that extinguish part or all of the asset
transfer an economic resource that it would not otherwise or liability
have had to transfer - Unwinding of discount or premium when the asset or liability is
3. Equity - residual interest in the assets of the entity after measured at amortized cost.
deducting all its liabilities. 2. Current value
ASSET - LIABILITIES = EQUITY a. Fair value - is “the price that would be received to sell an
Relate to the Entity’s financial performance asset, or paid to transfer a liability, in an orderly transaction
4. Income - increases in assets, or decreases in liabilities, that between market participants at the measurement date.”
result in increases in equity, other than those relating to b. Value in use and fulfilment value - “the present value of the
contributions from holders of equity claims.” cash flows, or other economic benefits, that an entity expects to
5. Expenses - decreases in assets, or increases in liabilities, that derive from the use of an asset and from its ultimate disposal.”
result in decreases in equity, other than those relating to Fulfilment value is “the present value of the cash, or other
distributions to holders of equity claims.” economic resources, that an entity expects to be obliged to
transfer as it fulfils a liability.”
Recognition & Derecognition c. Current cost:
1. The recognition process - is the process of including in the A. Asset is “the cost of an equivalent asset at the measurement
statement of financial position or the statement(s) of financial date, comprising the consideration that would be paid at the
performance an item that meets the definition of one of the measurement date plus the transaction costs that would be
financial statement elements (i.e., asset, liability, equity, income incurred at that date.”
or expense). This involves recording the item in words and in B. Liability is “the consideration that would be received for an
monetary amount and including that amount in the totals of equivalent liability at the measurement date minus the
either of those statements. transaction costs that would be incurred at that date.
Recognition criteria
An item is recognized if: a. it meets the definition of an asset, Current cost and historical cost are entry values (i.e., they
liability, equity, income or expense; and b. recognizing it would reflect prices in acquiring an asset or incurring a liability),
provide useful information, i.e., relevant and faithfully whereas fair value, value in use and fulfilment value are exit
represented information values (i.e., they reflect prices in selling or using an asset or
A. Relevance - The recognition of an item may not provide transferring or fulfilling a liability).
relevant information if, for example:
a. it is uncertain whether an asset or liability exists; or Considerations when selecting a measurement basis
b. an asset or liability exists, but the probability of an inflow • When selecting a measurement basis, it is important to
or outflow of economic benefits is low. However, the consider the following:
presence of one or both of the foregoing does not a. The nature of information provided by a particular
automatically lead to the non-recognition of an item. Other measurement basis (e.g., measuring an asset at historical cost
factors should also be considered may lead to the subsequent recognition of depreciation or
B. Faithful representation - The level of measurement impairment, while measuring that asset at fair value would lead
uncertainty and other factors can affect an item’s faithful to the subsequent recognition of gain or loss from changes in fair
representation, but not necessarily its relevance. value).
C. Measurement uncertainty - exists if the asset or liability needs b. The qualitative characteristics, the cost-constraint, and other
to be estimated. A high level of measurement uncertainty does factors (e.g., a particular measurement basis may be more
not necessarily lead to the non-recognition of an asset or liability verifiable or more costly to apply than the other measurement
if the estimate provides relevant information and is clearly and bases)
accurately described and explained. However, measurement
uncertainty can lead to the non-recognition of an asset or a Measurement of Equity
liability if making an estimate is exceptionally dif icult or • Total equity is not measured directly. It is simply equal to
exceptionally subjective. difference between the total assets and total liabilities.
• Because different measurement bases are used for different
2. Derecognition process - is the removal of a previously assets and liabilities, total equity cannot be expected to be equal
recognized asset or liability from the entity’s statement of to the entity’s market value nor the amount that can be raised
financial position. Occurs when the item ceases to meet the from either selling or liquidating the entity.
definition of an asset or liabilities. • Equity is generally positive, although some of its components
Unit of account - is “the right or the group of rights, the can be negative. In some cases, even total equity can be negative
obligation or the group of obligations, or the group of rights and such as when total liabilities exceed total assets.
Presentation and Disclosure
• Information is communicated through presentation and
disclosure in the financial statements.
• Effective communication makes information more useful:
a. focusing on presentation and disclosure objectives and
principles rather than on rules.
b. classifying information by grouping similar items and
separating dissimilar items.
c. aggregating information in a manner that it is not obscured
either by excessive detail or by excessive summarization.

Presentation and disclosure objectives and principles

• The objectives are specified in the Standards.
• The principles include:
a. the use of entity-specific information is more useful that
standardized descriptions, and :
b. duplication of information is usually unnecessary

Classification
• Classifying means combining similar items and separating
dissimilar items.
• Offsetting of assets and liabilities is generally not appropriate.
Classification of income and expenses
• Income and expenses are classified as recognized either in:
a. profit or loss; or
b. other comprehensive income

Aggregation is “the adding together of assets, liabilities, equity,

income or expenses that have shared characteristics and are
included in the same classification.”

Concepts of Capital and Capital Maintenance

• Financial concept of capital – capital is regarded as the
invested money or invested purchasing power. Capital is
synonymous with equity, net assets, and net worth.
• Physical concept of capital – capital is regarded as the entity’s
productive capacity, e.g., units of output per day.

ASSET - LIABILITIES - PREFERRED STOCK = ORDINARY SHARE