CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD

DEFINITION OF ACCOUNTING

The Accounting Standards Council provides the following IDENTIFYING

definition:
This accounting process is the recognition or nonrecognition
Accounting is a service activity. The accounting function is to of business activities as "accountable" events.
provide quantitative information, primarily financial in nature,
about economic entities, that is intended to be useful in Not all business activities are accountable.
making economic decision.
For example, the hiring of employees, the death of the entity
The Committee on Accounting Terminology of the president and the entering into a contract are all business
American Institute of Certified Public Accountants provides activities but such events are not accountable because such
the following definition: activities cannot be quantified or expressed in terms of a unit
of measure.
Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of money, An event is accountable or quantifiable when it has an effect
transactions and events which are in part at least of a on assets, liabilities and equity.
financial character and interpreting the results thereof.
In other words, the subject matter of accounting is economic
The American Accounting Association in its Statement of activity or the measurement of economic resources and
Basic Accounting Theory offers the following definition: economic obligations.

Accounting is the process of identifying, measuring and Only economic activities are emphasized and recognized in
communicating economic information to permit informed accounting.
judgment and decision by users of the information.
Sociological and psychological matters are beyond the
Important points province of accounting.

The following important points made in the definition of EXTERNAL AND INTERNAL TRANSACTIONS
accounting should be noted:
Economic activities of an entity are referred to as transactions
One -Accounting is about quantitative information. which may be classified as external and internal.
Two- The information is likely to be financial in nature.
Three - The information should be useful in decision making. External transactions or exchange transactions are those
economic events involving one entity and another entity.
The definition that has stood the test of time is the definition
given by the American Accounting Association. Examples of external transactions are:
a. Purchase of goods from a supplier
This definition states that the very purpose of accounting is to b. Borrowing money from a bank
provide quantitative information to be useful in making an c. Sale of goods to a customer
economic decision. d. Payment of salaries to employees
e. Payment of taxes to the government
The definition also states that accounting has a number of
components, namely: Internal transactions are the economic activities that take
place entirely within the entity only. No other parties are
a. Identifying as the analytical component. involved.
b. Measuring as the technical component.
c. Communicating as the formal component. Production and casualty loss are examples of internal
transactions.

Production is the process by which resources are transformed

into products.

Casualty is any sudden and unanticipated loss from fire, flood,

earthquake and other event ordinarily termed as an act of God.
MEASURING OVERALL OBJECTIVE OF ACCOUNTING

Measuring is the accounting process of assigning of peso The overall objective of accounting is to provide quantitative
amounts to the accountable economic transactions and events. financial information about a business useful to statement
users particularly owners and creditors in making economic
If accounting information is to be useful, it must be expressed decisions.
in terms of a common financial denominator.
Accounting is an information system that measures business
Financial statements without monetary amounts would be activities, processes information into financial reports and
largely unintelligible or incomprehensible. communicates the reports to decision makers.

The measurement bases are historical cost and current value. An accountant's primary task is to supply financial
information so that the statement users could make informed
Historical cost is the original acquisition cost and the most judgment and better decision.
common measure of financial transactions.
Financial reports tell us how well an entity is performing in
Current value includes fair value, value in use, fulfillment terms of profit and loss and where it stands in financial terms.
value and current cost.
THE ACCOUNTANCY PROFESSION
COMMUNICATING
At present, Republic Act No. 9298 is the law regulating the
Communicating is the process of preparing and distributing practice of accountancy in the Philippines.
accounting reports to potential users of accounting
information. This law is known as the Philippine Accountancy Act of 2004.

Identifying and measuring are pointless if the information Accountancy has developed as a profession attaining a status
contained in the accounting records cannot be communicated equivalent to that of law and medicine.
in some form to potential users.
In the Philippines, in order to qualify to practice the
Actually, the communicating process is the reason why accountancy profession, a person must finish a degree in
accounting has been called the "universal language of Bachelor of Science in Accountancy and pass a very difficult
business" government examination given by the Board of Accountancy.

Implicit in the communication process are the recording, The Board of Accountancy is the body authorized by law to
classifying and summarizing aspects of accounting. promulgate rules and regulations affecting the practice of the
accountancy profession in the Philippines.
Recording or journalizing is the process of systematically
maintaining a record of all economic business transactions The Board of Accountancy is responsible for preparing and
after they have been identified and measured. grading the Philippine CPA examination.

Classifying is is the the sorting or grouping of similar similar This computer-based examination is offered twice a year, one
and and in May and another one in October, in authorized testing
centers around the country.
Classifying is accomplished by posting to the ledger.

The ledger is a group of accounts which are systematically

categorized into asset accounts, liability accounts, equity
accounts, revenue accounts and expense accounts.

Summarizing is the preparation of financial statements

which include the statement of financial position, income
statement, statement of comprehensive income, statement of
changes in equity and statement of cash flows.
LIMITATION OF THE PRACTICE OF PUBLIC The Bureau of Internal Revenue requires audited financial
ACCOUNTANCY statements to accompany the filing of annual income tax
return.
Single practitioners and partnerships for the practice of public
accountancy shall be registered certified public accountants Banks and other lending institutions frequently require an
in the Philippines. audit by an independent CPA before granting a loan to the
borrower.
A certificate of accreditation shall be issued to certified public
accountants in public practice only upon showing in Creditors and prospective investors place considerable
accordance with rules and regulations promulgated by the reliance on audited financial statements on making economic
Board of Accountancy and approved by the Professional decision.
Regulation Commission that such registrant has acquired a
minimum of three years of meaningful experience in any of Taxation
the areas of public practice including taxation.
Taxation service includes the preparation of annual income
The Securities and Exchange Commission shall not register tax returns and determination of tax consequences of certain
any corporation organized for the practice of public proposed business endeavors.
accountancy.
The CPA not infrequently represents the client in tax
ACCREDITATION TO PRACTICE PUBLIC investigations.
ACCOUNTANCY
To offer this service effectively and efficiently, the public
Certified public accountants, firms and partnerships of accountant must be thoroughly familiar with the tax laws and
certified public accountants, including partners and staff regulations and updated with changes in taxation law and
members are required to register with the Board of court cases concerned with interpreting taxation law.
Accountancy and Professional Regulation Commission for the
practice of public accountancy. MANAGEMENT ADVISORY SERVICES

The Professional Regulation Commission upon favorable Management advisory services have become increasingly
recommendation of the Board of Accountancy shall issue the important in recent years although audit and tax services are
Certificate of Registration to practice public accountancy undoubtedly the mainstay of public accountants.
which shall be valid for 3 years and renewable every 3 years
upon payment of required fees. The term management advisory services has no precise
coverage but is used generally to refer to services to clients on
Certified Public Accountants generally practice their the following matters:
profession in three main areas, namely: a. Advice on installation of computer system
a. Public accounting b. Quality control
b. Private accounting c. Installation and modification of accounting system
c. Government accounting. d. Budgeting
e. Forward planning and forecasting
PUBLIC ACCOUNTING
PRIVATE ACCOUNTING
The field of public accounting or public accountancy is
composed of individual practitioners, small accounting firms Many Certified Public Accountants are employed in business
and large multinational organizations that render independent entities in various capacity as accounting staff, chief
and expert financial services to the public. accountant, internal auditor and controller.

Public accountants usually offer three kinds of services, The highest accounting officer in an entity is known as the
namely auditing, taxation and management advisory services. controller.

As a matter of fact, large multinational accounting firms have The major objective of the private accountant is to assist
separate division for each of these services. management in planning and controlling the entity's
operations.
Auditing
Private accounting includes maintaining the records,
Auditing has traditionally been the primary service offered producing the financial reports, preparing the budgets and
by most public accounting practitioners. controlling and allocating the resources of the entity.

Auditing or external auditing is the examination of financial

statements by independent certified public accountant for the
purpose of expressing an opinion as to the fairness with which
the financial statements are prepared.

Actually, external auditing is the attest function of

independent CPAs.
GOVERNMENT ACCOUNTING Exemption from CPD

Government accounting encompasses the process of analyzing, A CPA shall be permanently exempted from CPD
classifying, summarizing and communicating all transactions requirements upon reaching the age of 65 years.
involving the receipt and disposition of government funds and
property and interpreting the results thereof. However, this exemption applied only to the renewal of CPA
license and not for the purpose of accreditation to practice the
The focus of government accounting is the custody and accountancy profession.
administration of public funds.

Many Certified Public Accountants are employed in some ACCOUNTING VERSUS AUDITING
branches of the government, more particularly Bureau of
Internal Revenue, Commission on Audit, Securities and In a broad sense, accounting embraces auditing.
Exchange Commission and Bangko Sentral ng Pilipinas.
Auditing is one of the areas of accounting specialization.

CONTINUING PROFESSIONAL DEVELOPMENT In a limited sense, accounting is essentially constructive in

(CPD) nature. Accounting ceases when financial statements are
already prepared.
Republic Act No. 10912 is the law mandating and
strengthening the continuing professional development On the other hand, auditing is analytical. The work of an
program for all regulated professions, including the auditor begins when the work of the accountant ends.
accountancy profession.
After the financial statements are prepared, the auditor will
All certified public accountants shall abide by the begin to perform the task of auditing.
requirements, rules and regulations on continuing professional
development to be promulgated by the Board of Accountancy, The auditor examines the financial statements to ascertain
subject to the approval of the Professional Regulation whether they are in conformity with generally accepted
Commission. accounting principles.

Continuing professional development is the acquisition of ACCOUNTING VERSUS BOOKKEEPING

advanced knowledge, skill and proficiency.
Bookkeeping is procedural and largely concerned with
Continuing professional development raises and enhances the development and maintenance of accounting records.
technical skill and competence of the Certified Public
Accountant. Bookkeeping is the "how" of accounting.

CPD credit units Accounting is conceptual and is concerned with the why,
reason or justification for any action adopted.
The CPD credit units refer to the CPD credit hours required
for the renewal of CPA license and accreditation of a CPA to Bookkeeping is a procedural element of accounting as
practice the accountancy profession every three years. arithmetic is a procedural element of mathematics.

Under the new BOA Resolution, all Certified Public ACCOUNTING VERSUS ACCOUNTANCY
Accountants regardless of area or sector of practice shall be
required to comply with 120 CPD credit units. Broadly speaking, the two terms are synonymous because
they both refer to the entire field of accounting theory and
The Continuing Professional Development is required for the practice.
renewal of CPA license and accreditation of CPA to practice
the accountancy profession. Technically speaking, however accountancy refers to the
profession of accounting practice.
The Continuing Professional Development has become
mandatory for Certified Public Accountants. Accounting is used in reference only to a particular field of
accountancy such as public accounting, private accounting
As recently promulgated, only 15 CPD credit units are and government accounting.
required for the renewal of CPA license.

However, 120 CPD credit units are required for

accreditation of a CPA to practice the accountancy profession.

Excess credit units earned shall not be carried over to the next
three-year period, except credit units earned for masteral and
doctoral degrees.
FINANCIAL ACCOUNTING VERSUS MANAGERIAL FINANCIAL REPORTING STANDARDS COUNCIL
ACCOUNTING
In the Philippines, the development of generally accepted
Financial accounting is primarily concerned with the accounting principles is formalized initially through the
recording of business transactions and the eventual creation of the Accounting Standards. Council or ASC.
preparation of financial statements.
The Financial Reporting Standards Council or FRSC now
Financial accounting focuses on general purpose reports replaces the Accounting Standards Council.
known as financial statements intended for internal and
external users. The FRSC is the accounting standard setting body created by
the Professional Regulation Commission upon
Financial accounting is the area of accounting that emphasizes recommendation of the Board of Accountancy to assist the
reporting to creditors and investors. Board of Accountancy in carrying out its powers and
functions provided under R.A. Act No. 9298.
Managerial accounting is the accumulation and preparation of
financial reports for internal users only. The main function is to establish and improve accounting
standards that will be generally accepted in the Philippines.
In other words, managerial accounting is the area of
accounting that emphasizes developing accounting The accounting standards promulgated by the Financial
information for use within an entity. Reporting Standards Council constitute the highest hierarchy
of generally accepted accounting principles in the Philippines.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES The approved statements of the FRSC are known as
Philippine Accounting Standards or PAS and Philippine
Accounting has evolved through time changing with the needs Financial Reporting Standards or PFRS.
of society. As new types of transactions occur in trade and
commerce, accountants develop rules and procedures for COMPOSITION OF FRSC
recording them.
The FRSC is composed of 15 members with a Chairman who
These accounting rules, procedures and practices came to be had been or is presently a senior accounting practitioner and
known as generally accepted accounting principles or simply 14 representatives from the following;
GAAP.
Board of Accountancy 1
The principles have developed on the basis of experience, Securities and Exchange Commissions 1
reason, custom, usage and practical necessity. Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
Generally accepted accounting principles represent the rules, Commission on Audit 1
procedures, practice and standards followed in the preparation Major organizations of preparers and users of
and presentation of financial statements. Financial statements- Financial Executives
Institute of the Philippines or FINEX 1
Generally accepted accounting principles are like laws that Accredited national professional organization of CPAs;
must be followed in financial reporting. Public Practice 2
Commerce and Industry 2
The process of establishing GAAP is a political process which Academe or Education 2
incorporates political actions of various interested user groups Government 2
as well as professional judgment, logic and research. Total 14

PURPOSE OF ACCOUNTING STANDARDS The Chairman and members of the FRSC shall have a term of
3 years renewable for another term.
The overall purpose of accounting standards is to identify
proper accounting practices for the preparation and PHILIPPINE INTERPRETATIONS COMMITTEE
presentation of financial statements.
The Philippine Interpretations Committee or PIC was formed
Accounting standards create a common understanding by the FRSC in August 2006 and has replaced the
between preparers and users of financial statements Interpretations Committee or IC formed by the Accounting
particularly the measurement of assets and liabilities. Standards Council in May 2000.

A set of high-quality accounting standards is a necessity to The role of the PIC is to prepare interpretations of PFRS for
ensure comparability and uniformity in financial statements approval by the FRSC and to provide timely guidance on
based on the same financial information. financial reporting issues not specifically addressed in current
PFRS.

In other words, interpretations are intended to give

authoritative guidance on issues that are likely to receive
divergent or unacceptable treatment because the standards do
not provide specific and clearcut rules and guidelines.

The counterpart of the PIC in the International Accounting Move toward IFRS
Standards Board is the International Financial Reporting
Interpretations Committee or IFRIC. In developing accounting standards that will be generally
accepted in the Philippines, standards issued by other standard
INTERNATIONAL ACCOUNTING STANDARDS setting bodies such as the USA Financial Accounting
COMMITTEE Standards Board (FASB) and the IASB are considered.

The International Accounting Standards Committee or IASC In the past years, most of the Philippine standards are based
is an independent private sector body, with the objective of on American accounting standards.
achieving uniformity in the accounting principles which are
used by business and other organizations for financial At present, the FRSC has adopted in their entirety all
reporting around the world. International Accounting Standards and International
Financial Reporting Standards.
It was formed in June 1973 through an agreement made by
professional accountancy bodies from Australia, Canada, The move toward IFRS is essential to achieve the goal of one
France, Germany, Japan, Mexico, the Netherlands, the United uniform and globally accepted financial reporting standards.
Kingdom and Ireland, and the United States of America. The
IASC is headquartered in London, United Kingdom. PHILIPPINE FINANCIAL REPORTING STANDARDS

Objectives of IASC The Financial Reporting Standards Council issues standards in

a series of pronouncements called Philippine Financial
a. To formulate and publish in the public interest accounting Reporting Standards or PFRS.
standards to be observed in the presentation of financial
statements and to promote their worldwide acceptance and The Philippine Financial Reporting Standards collectively
observance. include all of the following:
b. To work generally for the improvement and harmonization
of regulations, accounting standards and procedures relating a. Philippine Financial Reporting Standards which correspond
to the presentation of financial statements. to International Financial Reporting Standards.

INTERNATIONAL ACCOUNTING STANDARDS The Philippine Financial Reporting Standards are numbered
BOARD the same as their counterpart in International Financial
Reporting Standards.
The International Accounting Standards Board or IASB now
replaces the International Accounting Standards Committee b. Philippine Accounting Standards which correspond to
or IASC. International Accounting Standards.

The IASB publishes standards in a series of pronouncements The Philippine Accounting Standards are numbered the same
called International Financial Reporting Standards or IFRS. as their counterpart in International Accounting Standards.

However, the IASB has adopted the body of standards issued c. Philippine Interpretations which correspond to
by the IASC. Interpretations of the IFRIC and Interpretations developed by
the Philippine Interpretations Committee.
The pronouncements of the IASC continue to be designated as
International Accounting Standards or IAS.

The IASB standard-setting process includes in the correct

order research, discussion paper, exposure draft and
accounting standard.

The IASB declared that the merits of proposed standards

are assessed from a position of neutrality.

A due process system is employed to enable interested parties

to express their views on issues under consideration.