DEFINITION OF ACCOUNTING - ACCOUNTING IS THE PROCESS OF IDENTIFYING, MEASURING, AND

COMMUNICATING ECONOMIC INFORMATION TO PERMIT INFORMED JUDGMENTS AND DECISIONS BY USERS OF

THE INFORMATION. - AMERICAN ASSOCIATION OF ACCOUNTANTS

THREE IMPORTANT ACTIVITIES INCLUDED IN THE DEFINITION OF ACCOUNTING.

IDENTIFYING, MEASURING and COMMUNICATING

IDENTIFYING – is the process of analyzing events and transactions to determine whether or not they will
be recognized; only ACCOUNTABLE EVENTS ARE RECOGNIZED. IT IS THE ONE THAT AFFECTS THE ASSETS,
LIABILITIES, EQUITY, INCOME, or EXPENSES ON AN ENTITY

;RECOGNITION REFERS TO THE PROCESS OF INCLUDING THE EFFECTS OF AN ACCOUNTABLE EVENT IN

THE STATEMENT OF FINANCIAL POSITION OR THE STATEMENT OF COMPREHENSIVE INCOME THROUGH A
JOURNAL ENTRY

MEASURING -ASSIGNING NUMBERS, NORMALLY IN MONETARY TERMS, to ECONOMIC TRANSACTIONS AND

EVENTS.

COMMUNICATING -process of TRANFORMING ECONOMIC DATA INTO USEFUL ACCOUNTING INFORMATION, SUCH
AS FINANCIAL STATEMENTS AND OTHER ACCOUNTING REPORTS, FOR DISSEMINATION TO USERS. ;IT ALSO
INVOLVES INTERPRETING THE SIGNIFICANCE OF THE PROCESSED INFORMATION.

Recording, Classifying, summarizing

• Basic purpose of accounting

• Accounting as science and art

• Accounting as an information system

• Accounting as a language of business

• Accounting concepts

• Double entry system

• Going concern assumption

• Separate entity

• Stable monetary unit

• Time period

• Cost-benefit

• accrual basis of accounting

Common branches of accounting FOUR SECTORS IN THE PRACTICE OF ACC

• financial accounting > Practice of public accountancy

• Management accounting > Practice In Commerce and Industry

• Cost accounting > Practice in education/ Academe

 • Auditing > Practice In Government

• Tax accounting

• Government accounting

• Accounting education

Elements of A financial STATEMENT

• An asset is a resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.

• A liability is a present obligation of the entity arising from past events,.

• Equity is the residual interest in the assets of the entity after deducting all its liabilities. A=l+E

CURRENTS ASSETS- IT EXPECT TO REALIZE THE ASSET WITHIN 12 MONTHS

>Cash > Accounts Receivable > Office and Store supplies

>Inventories > Prepaid Expenses

Non-Currents assets- all other assets (that are not current) shall be classified as non-current assets.

It expects to realize the asset more than 12 months.

>Land > Building >Equipment >Land Improvement (Parking lot, fences)

>Machineries >Intangible Assets (Copyright, trademarks, franchise)

>Investment Property (Paupahan) >Investment in an associate (Holding stocks from other company)

• Current liabilities- It expects to settle the liability in its normal operating cycle. the liability is due to be
settled within twelve months. the liability is due to be settled within twelve months. Accounts payable,
Rent payable, Salaries payable, Utilities payable, Short term notes payable, Current income tax payable

• Non-Current liabilities- all other liabilities (that are not current) shall be classified as non-current
liabilities. The liability is due to be settled more than twelve months.

• Bonds payable, Long-term notes payable

• Income is also called as revenue. It is the total amount of a business earns in a specific period.

• Service revenue, Landscaping revenue, Rent revenue

• Expense is a cost that a business incur in running their operations.

• Transportation expense, Salaries expense, Utilities expense

Income > expense = profit

Income < expense = loss

EQUITY CAPITAL- INVESTMENT ; WITHDRAWAL- WITHDRAWAL MADE BY THE OWNER/PARTNE

HISTORY OF THE FRAMEWORK

APRIL 1989 – Framework for the Preparation and Presentation of Financial Statements (the Framework) was
approved by the IASC Board.

JULY 1989 – Framework was published.

APRIL 2001 – Framework adopted by the IASB.

SEPTEMBER 2010 – Conceptual Framework for Financial Reporting 2010 approved by the IASB.

MARCH 2018 – Conceptual Framework for Financial Reporting 2018 (the Framework) published

The Philippine Financial Reporting Standards (PFRS) represents the generally accepted accounting principles
(GAAP) in the Philippines. The PFRS are Standards and Interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise:

Philippine Financial Reporting Standards (PFRS) ; Philippine Accounting Standards (PASs); and Interpretations

PURPOSE of the CONCEPTUAL FRAMEWORK - The Conceptual Framework for Financial Reporting describes the
objective of, and the concepts for, general purpose financial reporting. The purpose of the Conceptual Framework
is to:

 assist the International Accounting Standards Board (IASB) to develop IFRS Standards that are based on
consistent concepts;

 assist preparers to develop consistent accounting policies when no Standard applies to a particular
transaction or other event, or when a Standard allows a choice of accounting policy; and

 assist all parties to understand and interpret the Standards.

• STATUS of the CONCEPTUAL FRAMEWORK - The Conceptual Framework is not a PFRS. When there is a
conflict between the Conceptual Framework and a PFRS, the PFRS will prevail.

• In the absence of a standard, management shall consider the Conceptual Framework in making its
judgment in developing and applying an accounting policy that results in useful information.

SCOPE of the CONCEPTUAL FRAMEWORK - The Conceptual Framework is concerned with general purpose
financial reporting. General purpose financial reporting involves the preparation of General purpose financial
statements. The Conceptual Framework provides the concepts regarding the following:

1. The objective of financial reporting

2. Qualitative characteristics of useful financial information

3. Financial statements and the reporting entity

4. The elements of financial statements

5. Recognition and derecognition

6. Measurement

7. Presentation and disclosure

8. Concepts of capital and capital maintenance

 • Objective of general purpose financial reporting - The objective of general purpose financial reporting is
to provide financial information about the reporting entity that is useful to primary users in making
decisions about providing resources to the entity.

The objective of general purpose financial reporting forms the foundation of the Conceptual Framework

• Primary users are those who cannot demand information directly from reporting entities. The primary
users are:

a. Existing and potential investors b. Lenders and other creditors.

Only the common needs of primary users are met by the financial statements

QUALITATIVE CHARACTERISTICS

I. Fundamental qualitative characteristics ll. Enhancing qualitative characteristics

1. Relevance 1. Comparability

a. Predictive value 2. Verifiability

b. Feedback value 3. Timeliness

>Materiality – entity specific aspect of relevance 4. Understandability

2. Faithful representation

a. Completeness b. Neutrality c. Free from error

Fundamental vs. Enhancing

The Fundamental qualitative characteristics are the characteristics that make information useful to users. The
Enhancing qualitative characteristics are the characteristics that enhance the usefulness of information.

• RELEVANCE - Information is relevant if it can affect the decisions of users. Relevant information has the
following:

a. Predictive Value – the information can be used in making predictions or to predict future outcomes.

b. Confirmatory Value – the information can be used in confirming past predictions.

Materiality – is an ‘entity-specific’ aspect of relevance.

FAITHFUL REPRESENTATION - the information provides a true, correct, and complete depiction of what it purports
to represent. Faithfully represented information has the following:

a. Completeness – all information necessary for users to understand the phenomenon being depicted is provided.

b. Neutrality – information is selected or presented without bias.

c. Free from error – there are no errors in the description and in the process by which the information is selected
and applied

ENHANCING QUALITATIVE CHARACTERISTICS

Comparability – the information helps users in identifying similarities and differences between different sets of
information.

Verifiability– different users could reach consensus as to what the information purports to represent.
Timeliness - the information is available to users in time to be able to influence their decisions.

Understandability – users are expected to have:

a. reasonable knowledge of business activities; and

b. willingness to analyze the information diligently

FINANCIAL STATEMENTS AND THE REPORTING ENTITY –

Objective and scope of financial statements - The objective of general purpose financial statements is to provide
financial information about the reporting entity’s assets, liabilities, equity, income and expenses that is useful in
assessing; a. the entity’s ability to generate future net cash inflows; and b. management’s stewardship over
economic resources.

Reporting period - Financial statements are prepared for a specific period of time (i.e., the reporting period) and
include comparative information for at least one preceding reporting period.

Going concern - Financial statements are normally prepared on the assumption that the reporting entity is a going
concern, meaning the entity has neither the intention nor the need to end its operations in the foreseeable future.

Reporting entity - one that is required, or chooses, to prepare financial statements, and is not necessarily a legal
entity. It can be a single entity or a group or combination of two or more entities.

The elements of financial statements are:

Assets, Liabilities and Equity -These relate to the entity’s financial position.

Income and Expenses -These relate to the entity’s financial performance.

Asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a
right that has the potential to produce economic benefits.

THREE ASPECTS IN THE DEFINITION OF AN ASSET

1. Right – asset refers to a right, and not necessarily to a physical object, e.g., the right to use, sell, lease, or transfer
a building.

2. Potential to produce economic benefits – the right has a potential to produce economic benefits for the entity
that are beyond the benefits available to all others. Such potential need not be certain or even likely – what is
important is that the right already exists and that, in at least one circumstance, it would produce economic benefits
for the entity.

3. Control – means the entity has the exclusive right over the benefits of an asset and the ability to prevent others
from accessing those benefits.

Liability is a present obligation of the entity to transfer an economic resource as a result of past events

THREE ASPECTS IN THE DEFINITION OF A LIABILITY

Obligation – an obligation is “a duty or responsibility that an entity has no practical ability to avoid.” An obligation
can be either legal obligation or constructive obligation.

2. Transfer of an economic resource – the obligation has the potential to require the transfer of an economic
resource to another part.

3. Present obligation as a result of past events – a present obligation exists as a result of past events if:
a. the entity has already obtained economic benefits or taken an action; and

b. as a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have
has to transfer.

INCOME AND EXPENSES

INCOME is “Increase in assets, or decreases in liabilities, that result in increases in equity, other than those
relating to contributions from holders of equity claims”

EXPENSES are “decreases in assets, or increases in liabilities, that result in decreases in equity, other than those
relating to distributions to holders of equity claims.

RECOGNITION AND DERECOGNITION

The recognition process- is the process of including in the statement of financial position or the statements of
financial performance an item that meets the definition of one of the financial statement elements (i.e.,asset,
liability, equity, income or expense). This involves recording the item in words and in monetary amount and
including that amount in the totals of either of those statements.

RECOGNITION CRITERIA- An item is recognized if; IT MEETS THE DEFINITION OF AN ASSET, LIABILITY, EQUITY,
INCOME OR EXPENSE; and RECOGNIZNG IT WOULD PROVIDE USEFUL INFORMATION, I.E., RELEVANT AND
FAITHFULLY REPRESENTED INFORMATION.

RELEVANCE – The recognition of an item may not provide relevant information if, for example; It is uncertain
whether an asset or liability exists; or an asset or liability exists, but the probability of an inflow or outflow of
economic benefits is low.

Faithful representation – The level of measurement uncertainty and other factors can affect an items faithful
representation, but not necessarily its relevance.

Measurement Uncertainty – Exists if the asset or liability needs to be estimated. A high level of measurement
uncertainty does not necessarily lead to the non-recognition of an asset or liability if the estimate provides relevant
information and is clearly and accurately described and explained. However, measurement uncertainty can lead to
the non-recognition of an asset or a liability if making an estimate is exceptionally difficult or exceptionally
subjective.

Derecognition- is the removal of a previously recognized asset or liability from the entity’s statement of financial
position. Also occurs when the item ceases to meet the definition of an asset or liability.