ACCOUNTING?

American Institute of Certified Public

 Accounting is an information system
Accountants.
that reports on the economic
activities and financial condition of a Accounting is the art of recording,
business or other organization. classifying and summarizing in a
 It is a system of maintaining records significant manner and in terms of
of a company’s operations and money, transactions and events which
communicating that information to are, in part at least, of a financial
decision makers. character, and interpreting the results
 Accounting information can be used thereof.
in various ways such as enabling an
investor predict business success.
Communicating economic Three basic activities – it IDENTIFIES,
information is so important that RECORDS and COMMUNICATES the
accounting is frequently called the economic events relevant to its business.
language of business.

Once the company identifies the

Accounting is defined by different accounting economic events, it records those events in
organizations as follows: order to provide a history of its financial
activities. Recording consists of systematic,
Accounting Standards Council chronological diary of events, measured in
pesos. In recording, the company classifies
Accounting is a service activity. Its and summarizes economic events. Finally, if
function is to provide quantitative communicates the collected information to
information, primarily financial in interested users by means of accounting
nature, about economic entities that is reports, called financial statements.
intended to be useful in making Accounting process simplifies the multitude of
economic decisions transactions by aggregating recorded data,
thus making the series of events meaningful
Financial Accounting Standards Board. and easy to understand. Vital element to the
communication process is the accountant’s
Accounting is an information system ability to ANALYZE and INTERPRET the
that measures, processes and reported information through the use of
communicates financial information ratios, percentages, graphs and charts to
about an economic entity highlight significant financial trends and
relationships. Interpretation involves
American Accounting Association. explaining the uses, meaning, and limitations
of reported data.
Accounting is a process of identifying,
measuring and communicating People and organizations need useful
economic information to permit information in order to make good decisions.
informed judgments and decisions by This is where accounting plays a key role. The
users of the information functions of accounting are to measure the
activities of the company and communicate
those measurements to people

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BRANCHES OF ACCOUNTING Management Accounting - incorporates cost
accounting data and adapts them for
2 broad categories: specific decisions which management may
be called upon to make.
Financial Accounting - produces general
purpose accounting information needed
Government Accounting - is concerned with
by external users.
the identification of the sources and uses
Managerial Accounting - provides the of resources of government agencies.
accounting information needed by
internal users, such as managers and Tax Accounting - includes the preparation
employees of tax returns and the consideration of the
tax consequences of proposed business
_________________________________
transactions or alternative courses of
Not-For-Profit Accounting - measures the action.
cost of goods and services they provide,
the efficiency and effectiveness of their
operations, and the ability of the
organization to continue to provide goods
or services.

 is not established for generating profit

Other branches of accounting:

External Auditing - it is the independent

examination that ensures the fairness and
reliability of the reports that management
submit to users. The result of this
examination is embodied in the
independent auditor’s report.

Bookkeeping - is a mechanical task involving

the collection of basic financial data. The
bookkeeper’s task ends where the
accountant’s function begins.

Cost Accounting - deals with the collection,

allocation and control of the cost of
producing specific goods and services.

Financial Management - is a new branch of

accounting intended for setting financial
objectives, making plans based on those
objectives, obtaining the finance needed
to achieve those plans, and generally
safeguarding all the financial resources of
the entity.

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THE CLASSICAL NOTION OF USERS OF ACCOUNTING
STEWARDSHIP INFORMATION
2 Users of Accounting Information:
Micro and small businesses are often 1. INTERNAL USERS - use financial
managed and run by the owners themselves. information to help them carry out
Yet, as the business grows, self-managing the their planning, decision-making and
business requires more time and expertise control responsibilities in the entity.
from the owner who is expected to be the  Managers decide production
ultimate decision maker. Out of this demand, and expansion.
arise the need to hire professional managers.
The manager is the agent or steward of the
owner. Owners have entrusted their business 2. EXTERNAL USERS - use this
to the managers. Management is therefore information to determine whether
accountable to the owner or investors for the their respective concerns are being
custody and safekeeping of the company’s satisfied. These users normally refer to
economic resources. The manager is therefore the general-purpose financial
expected to act to serve the interest, goals and statements prepared by the entity.
objectives of the owner.  Investors decide whether to
invest in stock.
 Employees decide
The corporate form of business employment opportunities.
organization arises during the Industrial  Creditors decide whether to
Revolution. Corporate owners, the lend money.
shareholders, were no longer the managers of  Suppliers decide the ability to
their business. Manager had to create pay for supplies.
accounting systems to report to the owners  Customers decide whether to
the results of their stewardship of the purchase products.
business. In stewardship or agency theory, a  Competitors decide market
conflict between the owner and the manager share and profitability.
can be inevitable. This situation created a need  Regulators decide on social
for an independent report to provide welfare.
assurance that management’s financial  Tax Authorities decide on
representations are reliable. taxation policies.
 Local Communities decide on
environmental issues.

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HISTORY OF ACCOUNTING the modern accountant, recorded the
agreed-upon transaction on a small mound
o Accounting records have been found of clay with the parties affixing “their
several thousand years ago in various signatures” on it. This clay was allowed to
parts of the world. Even before the dry and served as the record of the
birth of Christ, evidences show that transaction. For the more important
accounting systems were used in records, clays were kiln-dried. Clay tablets
Greece. Romans kept records written dated around 3600 B.C. in Babylonia were
in alphabet. Italian merchants found to contain records on payments of
borrowed the Arabic numeral system wages. The rulers of these civilizations used
and later arithmetic, which led to the accounting to keep track of the cost of labor
development of the double-entry and materials used in building structures
bookkeeping. like the great pyramids of the pharaohs of
Egypt.
PRIMITIVE ACCOUNTING
The Accounting Review, October 1966,
People have counted and kept records
published an article authored by H.P. Hain
throughout history. Archeologists have
entitled “Accounting Control in the Zenon
established that the origin of keeping
Papyri.” The article described Zenon Papyri
accounts in form of certain Clay Tokens -
discovered in 1905 which reflected
cones, disks, spheres and pellets – found in
information about construction projects,
Mesopotamia (modern Iraq) were dated as
agricultural activities, and business
far as 8500 B.C. These tokens represented
operations of the private estate of
such commodities as sheep, jugs of oil,
Appollonius for a period about thirty years
bread or clothing and were used in the
during the 3rd century, B.C. This proved the
Middle East to keep records. The tokens
use of accounting system in Greece before
were often sealed in clay balls, called bullae,
the 5th century, B.C.
which were broken on delivery so the
shipment could be checked against the
invoice making it the first bills of lading. Accounting is one of our oldest skills. The
Tokens were later replaced by symbols earliest collections of understandable
impressed on Wet Clay Tablets. Experts writing track how many bushels of grain
consider this stage of record keeping the came into the king’s warehouse. Tablets
beginning of the art of writing, which spread recorded who brought in the grain and how
rapidly along the trade routes and took hold much the king took as his share. Even in the
throughout the known civilized world. early days, tax collecting is an activity
closely linked to accounting.
Account records date back to the ancient
civilizations of Babylonia, Greece, Egypt, and The presence of bookkeeping in the ancient
China. People in these civilizations world has been attributed to the following
maintained various types of records of factors:
business activities. During the 1st dynasty of
Babylonia (2286-2242 B.C.), its law which 1. the invention of writing;
was based on the Code of Hammurabi, 2. the introduction of Arabic numerals;
requires merchants trading goods to give 3. the decimal system;
buyers a sealed memorandum containing 4. the diffusion of knowledge of algebra;
the agreed price before it can be considered 5. the presence of inexpensive writing
enforceable. The Scribe, the predecessor of materials;
6. the rise of literacy; and

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 7. the existence of a standard medium 14th centuries. Quipu, knotted cords of
of exchange. different lengths and colors, were to keep
accounting records.
A. C. Littleton in Accounting Evolution to 1990
lists seven preconditions for the emergence
Development of more formal account-
of systematic bookkeeping:
keeping methods is attributed to the
1. The Art of Writing since bookkeeping merchants and bankers of Florence, Venice
is first of all a record. and Genoa during the 13th to 15th centuries.
2. Arithmetic since the mechanical
aspect of bookkeeping consists of a
sequence of simple computations. The Genoese system was probably a
3. Private Property since bookkeeping is development of the Ancient roman system.
concerned only with recording the Commercial activity had been flourishing in
facts about property and property Genoa for a long time and the Genoese
rights. system assumed the concept of business
4. Money (i.e. among economy) since entity. Because it recorded items in terms of
bookkeeping is unnecessary except as money, it was the first to imply that unlike
it reduces all transactions in terms could be compared in terms of a
properties or property rights to this common monetary unit. The system also
common denominator. implied some understanding of the
5. Credit (i.e. uncompleted transactions) distinctions between capital and income
since there would be little impulse to that it included both expenses and equity
make any record whatever if all accounts. The oldest double-entry books
exchanges were completed on spot. were the Massari (treasury officials) ledgers
6. Commerce since a merely local trade of the Commune of Genoa dating from
would never have created enough 1340.
pressure (volume of business) to
stimulate men to coordinate diverse
ideas into a system. Double-entry bookkeeping is not a discovery
7. Capital since without capital of science but an outcome of continued
commerce would be trivial and credit efforts to meet the changing necessities of
would be inconceivable. trade. German philosopher Oswald Spengler
wrote in The Decline of the West (1928)
MIDDLE AGES AND THE GENOESE SYSTEM that the invention of double-entry
bookkeeping was the decisive event in
Northern Italy’s literacy has become European economic history.
widespread as a result of the crusades from
the 11th to the 13th centuries. Arabic
numerals were used in trades with the Near
East allowing columns of numbers to be
added and subtracted. A semblance of an
international banking system was also
functioning as evidenced by the prevalent
use of credit.

The Inca Empire, which spanned the west

coast of South America throughout the 11th to

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THE FLORENTINE APPROACH TO kingdom of France, as it appear in the
REPORTING “ledger.” The ledger, however, relates
exclusively to the branch at Salon, a town in
Renaissance Florentine markets were a the independent county of Provence.
fascinating combination, in the form of Amatino Manucci was a partner in Giovanni
account books and double-entry Farolfi & Company, a merchant partnership
bookkeeping, and of informal social based in Florence.
networks, constructed out of the
surrounding rules of Florentine sociality. To
Financial records that he kept for the firm’s
them, doing business and living life were
branch in Salon, Provence, survive from
intertwined. Friendship is emotional but
12991300. Although these records are
was instrumental to doing business. A major
incomplete, they show enough detail to be
achievement in Florence was the
identified as double-entry bookkeeping.
development of large associations and
These details include the use of debits and
compagnie (partnership that pooled capital
credits and duality of entries. They are the
initially within family groups and then from
oldest known existing examples of the
outside the family groups). Account books
double-entry system.
were consistent with social exchange and
made it easier and formal. The explosion of
commercial credit, at that time, required a AMATINO MANUCCI was the inventor of
system of recording. double-entry bookkeeping. He managed to
construct a comprehensive and fully-
articulated set of double-entry records, with
The earliest evidence of business
a regular balancing procedure on closure of
bookkeeping in Florence, France was
the General Ledger.
evidenced by the bank ledger fragments of
1211 (transcribed in 1887 by Pietro Santini)
and with the development of accounting in He used five books – general ledger, two
Tuscany, Italy during the 13th century, as merchandise ledgers, expenses ledger, and
evidenced in the account-books or extracts. cash book (with the white ledger as the
But, these were in form of “narrative” or sixth) – constituted what looks very like a
“paragraph accounting record (a sezioni true double-entry system. In addition, there
sovrapposte), perhaps derived from the were at least two subsidiary books.
“charge and discharge” format used in
public accounts. The system was primitive,
He gave importance to the aspect of
accounts were not related in any special
financial control. The books were logically
way (in terms of equality of entries), and
subdivided, with segregation of cash and
balancing of accounts was lacking.
goods accounts from the main ledger, a
perpetual inventory of each line of
The emergence of double-entry itself, was agricultural produce and each grade of cloth
first witnessed in the “ledgers” of Renieri (or or yarn dealt in, and full records of debtors
Rinieri) Fini & Brothers (1296-1305) and and creditors, expenses, profits, interest
Giovanni Farolfi & Company (1299-1300). and partner’s drawings, as well as the state
of account with the head office at Nimes,
and an estimate (15% per annum) of the
GIOVANNI FAROLFI & COMPANY, was a
expected rate of return on capital
firm of Florentine merchants whose head
employed.
office was Nimes in Languedoc, in the

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 Sombart, an eminent economist sociologist,
believed that “double-entry bookkeeping is
THE VENETIAN APPROACH born of the same spirit as the system of
Galileo and Newton.”
LUCA PACIOLI, a Franciscan friar and a
celebrated mathematician, is generally
associated with the introduction of double- SAVARY AND THE NAPOLEONIC
entry bookkeeping. In 1494, he published COMMERCIAL CODE
his book entitled “Summa de Arithmetica,
Geometria, Proportioni et Proportionalita” The earliest systematized form of
or “Everything about Arithmetic, Geometry, accounting regulation developed in
Proportions and Proportionality.” It continental Europe, starting in France in
includes, “Particularis de Computis et 1673. The government introduced the
Scripturis” or “Details of Calculation and submission of an annual fair value
Recording,” describing double-entry statement of financial position to protect
bookkeeping. His treatise reflected the the economy from bankruptcies. This period
practices of Venice at the time, which saw the personification of accounts, such as
became known as the Method of Venice of the practice of treating accounts as
the Italian method. Therefore, he did not independent, living entities; and the
invent double-entry bookkeeping, but standardization of debits on the left and
rather described what were prevalent credits on the right.
accounting practices of the day.

This legal requirement for businesses to

Although Pacioli made no claim to keep accounting records was first
developing the art of bookkeeping, he has introduced in the Ordonnance de
been regarded as the “Father of Double- Commerce of 1673 which was put through
entry Accounting.” He stated that the by Jean-Baptiste Colbert during the reign of
purpose of bookkeeping was “to give the Louis XIV, and the Napoleonic Commercial
trader without delay information as to his Code of 1807, that influenced the
assets and liabilities.” Pacioli also advised bookkeeping provisions of commercial law
computation of a periodic profit and the throughout Continental Europe,
closing of the books. He said, “It is always Francophone Africa, and beyond.
good to close the books each year,
especially if you are in a partnership with
others. Frequent accounting makes for long The Napoleonic Code or Code Napoléon is the
friendship.” French civil code, established under
NAPOLÉON BONAPARTE on March 21, 1804.
The Commercial Code was adopted in 1807.
The Italian bookkeeping prospered with the
development of the commercial republics of
Italy and the use of the double-entry method Jacques Savary, the elder (1622-1690) in an
in the fourteenth century. early accounting text stated, “If this
merchandise is starting to deteriorate, or go
out of style, or is that which one judges he
Goethe, the famous German poet and could find at the factory or wholesalers at
dramatist, referred to double-entry 5% or less, it must be reduced to this price.”
bookkeeping as “one of the finest Although this is the oldest known
discoveries of human intellect.” Werner formulation of the lower-pf-cost-or-market

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principle, several earlier accounting texts
recommended current cost rather than The expanded business operations initiated
historical cost valuation of inventory in by the Industrial Revolution required
specific examples where the market increasingly large amount of funds to build
valuation is lower. Inventory valuation at factories and purchase machinery. This
the lower-of-cost-ormarket was required by need resulted to the development of the
the Code of Commerce in France in 1673, in corporate form of organization. In England,
Prussia in 1794, and in the German statutory establishments of corporations
Commercial Code of 1884. As Savary was dated as early as 1845. The growth of
the principal author, the French Commercial corporations spurred the development of
Code of 1673 was also called the Code accounting standards. Corporate owners,
Savary. the shareholders, were no longer the
managers of their business. Manager had to
create accounting systems to report to the
In the 17th century, NICOLAS PETRI was the
owners the results of their stewardship of
first person to group similar transactions in
the business. This situation created a need
a separate record and enter the monthly
for an independent report to provide
totals in the journal, rather than recording
assurance that management’s financial
all transactions seriatim, that is, in a series.
representations are reliable.

In 1769, BENJAMIN WORKMAN published

Those with some experience in bookkeeping
The American Accountant, the earliest known
or the liking for the subject became
American accounting textbook.
accountants. Some of them had gone into
THE INDUSTRIAL REVOLUTION AND THE “public practice” as early as the mid-17th
SHARE-ISSUING COMPANY century. As early as 1799, there were 11
practicing accountants in London. Less than
Accounting practice dates from antiquity 50 years later, 210 accountants were listed
but the formation of an accounting and the numbers in other principal cities
profession was closely tied to the rise of a had grown commensurately.
modern industrial society in Britain during
the late 18th century. The need for Accountancy, however, was still an
accounting services emerged slowly, but by indeterminate calling in Britain as late as the
the early decades of the 19 th century a flurry 1830s. Men then engaged in accounting not
of textbooks and handbooks on accounting only made simple accounts but also found it
had appeared, reflecting the impact of the financially necessary to act as auctioneers,
Industrial Revolution. appraisers, agents and debt collectors. The
profession was shaped by legislation.
This revolution, which occurred in England
from the mid-18th to the mid-19th century, Accountancy reached the shores of the
changed the method of producing United States of America as a natural result
commercial goods from the handicraft of the investments being made by British
method to the factory system. With this businessmen into the land of opportunities.
change came the problem of costing for a In 1900, a preliminary report of the
large volume of products. The specialized Industrial Commission produced in 1898,
field of cost accounting emerged to meet suggested that an independent public
this need for the analysis of various costs. accounting profession should be established

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to curtail some corporate abuses. During accounting principles (GAAP), in the final
the International Congress of Accountants reckoning, the Tax Code will prevail.
in 1904, the American Association of Public
Accountants was formed as the professional
organization of accountants in the United SCHMALENBACH AND THE CHARTS OF
States. ACCOUNTS

Eugen Schmalenbach (1873-1955) was a

INCOME TAXATION AND CONFLICTS WITH German academician and economist. He
FINANCIAL ACCOUNTING was born in Halver, and attended Leipzig
College of Commerce starting 1898.
Xin Dynasty’s Emperor Wang Mang instituted Schmalenbach was a professor at the
an unprecedented tax – the income tax – at University of Cologne and a contributor to
the rate of 10% of profits, for professionals German language journals on the subjects
and skilled labor. of economics, business management and
financial accounting.

To pay for weapons and equipment in

preparation for the Napoleonic Wars, In the early 1920s, Professor Schmalenbach
William Pitt the Younger of Britain levied an was frustrated repeatedly with his failure to
income tax in his budget of December 1798. compare meaningfully the financial data
The 1862 Union Government established made available by different companies. This
the Bureau of Internal Revenue to assess led to a research on the problem and the
personal and income taxes to help finance publication of his book, the Model Chart of
the Civil War. In 1943, the US Congress Accounts. With this book, he laid the
passed income tax withholding as the only foundation for all subsequent developments
way to collect on high tax rates to fund in uniform accounting in Germany. It also
World War II. The Philippines’ Bureau of became the basis for corresponding efforts
Internal Revenue (BIR) was created through in other European countries.
the passage of Reorganization Act No. 1189
dated July 2, 1904. On August 1, 1904, the
Schmalenbach claimed that important
BIR was formally organized and made
information could be gained from a firm’s
operational under the Secretary of Finance.
accounts. The results of one’s firm should
show through-flows more usefully than
Financial accounting is conservative and it’s balances. What he termed “Dynamic
about matching efforts and results. Tax Balances” were to be promptly and
accounting, in turn, is about improving the regularly prepared and presented, so that
timing of collections. Note that “taxes are external changes and internal efficiencies
the lifeblood of the government and their could be gauged, inter-firm comparisons
prompt and certain availability are an were also to be facilitated.
imperious need.” This difference in
perspective produces conflicts.

All returns required to be filed by the Tax

Code shall be prepared always in conformity
with the provisions of the Tax Code. In case
of conflicts with generally accepted

9
THE RISE OF THE GROUP OF COMPANIES
AND THE NEED FOR CONSOLIDATED There existed complex relationships
ACCOUNTS between US Steel and its many subsidiaries
such that PW Managing Partner Arthur
Railroads, heavy users of debt financing in Lowes Dickinson believed that the
the late 1800s, were the first American stockholders could be informed adequately
firms to issue balance sheets to absentee of the entity’s relative financial condition
creditors. By 1880, the US railroad system only through a consolidation of accounts. Us
had accumulated $4.6 billion of investments Steel’s consolidated financial statements
which was roughly equivalent to 40% of the rapidly became a landmark in accounting
American economy’s annual output. history. The era of modern financial
Depreciation was formally considered given accounting had dawned. Scientific American
that the railroad companies used higher wrote that it was “the most complete and
value and longer-lived equipment – circumstantial report ever issued by any
locomotives, rail cars and track – than great American corporation,” noting that
previous established enterprises. With the the company’s total assets of over $1.5
hauling of freight, the equipment gradually billion dwarfed the $50 million appropriated
lost productive capacity and needed to be by Congress for the Spanish-American war
replaced. Due to these, problems arise such several years earlier.
as the clarity of the timing of wear and tear
and matching of revenues and expenses. Since the early 1900s, business
organizations changed rapidly. The
The concept of depreciation was introduced increasing complexity of the world’s
when the 1909 US corporate income tax law acquisitions, and the growth of
permitted a deduction for depreciation multinational corporations, fostered new
charges in the calculation of taxable income. internal and external reporting consolidated
At the beginning of the 20 th century, some accounts and control systems. With
managers began to use depreciation to widespread ownership of modern
smooth reported earnings. A 1912 Journal corporations came new audit and reporting
of Accountancy editorial complained that procedures and new agencies became
depreciation had become a tool used by involved in promulgating accounting
management to counter fluctuations in standards like stock exchanges, securities
profits. In good years, heavy depreciation regulating commissions, and internal
charges were made. Bad years saw no revenue agencies.
provision or an inadequate charge.
INFORMATION AGE AND CLOUD
On March 12, 1903, United States Steel COMPUTING
published consolidated financial statements
as of December 31, 1902, together with Dan Brinklin and Bob Frankston wrote
Price Waterhouse & Company’s (PW) Visicalc for the Apple II, the first electronic
assurance that they were audited and found spreadsheet, the most important business
correct. US Steel resulted from the application for the personal computer.
amalgamation of various steel producers at Tremendous advances in information
that time. It’s the first billion-dollar technology have further revolutionized
corporation which controlled 75% of the US accounting in recent years. Tasks that are
Steel business. time-consuming when done manually can

10
now be done with speed, consistency, Aside from international mergers and
precision and reliability by computers. consolidations, securities markets are now
There is an abundance of accounting crossing boundaries as well. Euronext was
applications causing the way of doing created out of the combination of the
business to change. As they say, information former Amsterdam, Brussels, Lisbon, and
technology is it, you either breathe it or Paris stock exchanges. NASDAQ and London
perish. shares can be bought on the stock exchange
of Hongkong. AMEX shares are traded in
Singapore. Even the Philippines’ “PLDT”
The evolution of technology had
traded at the Philippine Stock Exchange
exponentially speed up with the
(PSE) also trade at NYSE. This calls for the
introduction of internet. With internet
global harmonization of accounting
connectivity, business have conquered
standards.
cross-border markets. The borderless
market and business activities posed ACCOUNTANCY PROFESSION IN
another challenge to the accountancy THE PHILIPPINES
profession. To address this, cloud
computing software, such as enterprise Bookkeeping was introduced in the
resource planning (ERP) systems were Philippines during the Spanish era. A
introduced. Accounting and assurance tasks bookkeeper was then called “Tenedor de
started to be done online. With databases Libro.” During the American occupation in the
stored in the cloud, many business country, U.S. practices and procedures were
transactions and financial information introduced.
became almost readily available on real-
time.
In 1923, accounting was legally recognized
as a profession in the Philippines when the
INTERNATIONALIZATION OF MARKETS sixth Philippines Legislature approved Act
AND REPORTING No. 3105 on March 17, 1923. This law
created the Board of Accountancy vested
The dramatic increase in foreign with authority to promulgate rules and
investments and world trade and the regulations, to set professional standards
formation of regional economic groups such for the accounting profession practice and
as the European Union and the Association to issue certified public accountant Figure
of South-East Asian Nations (ASEAN) posed 1-7. BOA Logo certificates to those who
problems concerning the international have qualified in accordance with the
activities of business. It became more requirements of the law. The Board then
complex involving reconciling of accounting was composed of a chairman and two
practices of different nations in which each members. The first Board of Accountancy
multinational company operates, as well as was composed of Chairman W. W. Larkin,
dealing with accounting problems specific to and, Domingo Dikit and Felix Tiongson, as
international business. The different members. In this same year, the first
accounting practices can completely licensure examination for public
obscure the comparisons and analyses used accountants was given.
by foreign investors to assess various Philippine Institute of Certified Public
investment opportunities. Accountants (PICPA), the accredited
professional organization (APO) of
accountants in the Philippines, was founded

11
in November 1929 by a group of illustrious need to harmonize the standards among
pioneers in the accounting profession. They Southeast Asian countries and in the world.
are Enrique Caguiat, Santiago de la Cruz, The applicable standards were revised to
Francisco Dalupan, Jaime Hernandez, Felipe apply to Philippine business industries and
Ollada, Ramon del Rosario, Antonio termed as Philippine Accounting Standards
Sanchez, Jose Torres, Artemio Tulio, (PAS). All PAS were fully implemented in
Clemente Uson and Jesus Zulueta. W. W. 2005.
Larkin, holder of CPA Certificate No. 1, was
its first president. The accreditation started
The effort to harmonize accounting
on October 2, 1973, when PICPA was
standards in the world led to the
awarded Certificate of Accreditation No. 6,
convergence agreement between the U.S.
by then PRC Chairman Eric Nubla, after
Financial Accounting Standards Board
having complied with the requirements for
(FASB) and Britain’s International
accreditation under Presidential Decree
Accounting Standards Board (IASB). As a
No. 223. This distinction, which result of convergence, International
recognized the Institute as the bonafide Financial Reporting Standards (IFRS) were
professional organization of CPAs, issued. In the Philippines, the Financial
likewise gave PICPA the responsibility Reporting Standards Council of the
of setting into motion a scheme for the Philippines replaced ASC to review and
integration of all CPAs in the country. adopt applicable IFRSs. The adopted IFRSs
Over the years, PICPA has been are termed as Philippine Financial Reporting
sustaining its accreditation with PRC Standards (PFRS). The convergence efforts
and has been awarded twice as PRC continues until today.
most outstanding APO from among
other professional organizations. PICPA
The year 2018 marks the 95th anniversary
operated with various committees
of the establishment of the accountancy
taking charge of the different services
profession in the Philippines and the
offered to the members. creation of the Board of Accountancy. From
43 registered accountants in 1923, the
number of Certified Public Accountants
The Committee on Accounting Principles
(CPAs) has grown to over 185,000 by
which operated under PICPA was charged
January of 2018. Many of these
the function to study and adopt U.S.
professionals have distinguished themselves
accounting principles applicable to the
not only in the field of accountancy but in
country. In 1981, the Accounting Standards
many areas of human endeavor. Among the
Council (ASC) was formed to formalize the
distinguished luminaries belonging to the
accounting standard-setting function of
roster of CPAs follows:
PICPA. By 1995, 22 Statement of Financial
Accounting Standards (SFAS) were approved • Jaime Hernandez and Paciano Dizon,
and published. SFAS, comprising the the first and second Filipino Auditor
generally accepted accounting principles Generals of the Commission on Audit,
(GAAP), focused on the commercial and • Manuel Villar, a billionaire
industrial enterprises except for SFAS 19 businessman, former Senate
which discussed principles for banks and President and Speaker of the House
financial institutions. In the same year, the of Representatives,
ASC started to adopt the International • Washington Sycip, past president of
Accounting Standards (IAS) to address the the International Federation of

12
 Accountants, the only Asian who has
held the position, and founder of SGV
& Co. and the Asian Institute of
Management (AIM),
• Jose Diokno, former senator of the
Philippines and Secretary of Justice,
• Wenceslao Lagumbay and Alberto
Romulo, former senators,
• Ambassador Alfredo Yuchengo and
Andres Soriano, founder of the
country’s leading conglomerates,
• Heide Mendoza, presently the Under-
Secretary-General for Internal
Oversight Services, Office of the
United Nations, and
• Dante Gierran, the present National
Bureau of Investigation Director

More CPAs have been cabinet members,

heads of government agencies, chairmen
and members of corporations and
institutions, leaders in global institutions,
heads and professors in the academe, and
entrepreneurs. Definitely, the accounting
professionals play an integral part of the
country’s development.

The increasing complexity of professional

regulation and developments in the practice
of the profession have occasioned the
expansion of the Board of Accountancy
from a president and two members under
Act No. 3105 in 1923, through a chairman
and five members under Republic Act No.
5166 (The Accountancy Act of 1967), to
seven comprised of a chairman and six
members under Presidential Decree No. 692
(The Revised Accountancy Law) in 1975. PD
692 governed the profession for almost
three decades until the Republic Act No.
9298 (Philippine Accountancy Act of 2004)
was passed. The results of the public
consultations on the revisions of the
Philippine Accountancy Act of 2004 are now
pending in Congress.

13
 accomplish its objectives by bringing
a systematic, disciplined approach to
evaluate and improve the
effectiveness of risk management,
control, and governance processes.
ACCOUNTANCY PROFESSION
4. CMO No. 30 for Bachelor Of Science
IN THE FUTURE In Accounting Information System -
combines knowledge in business,
In 2017, Commission on Higher Education accounting and computer systems. It
(CHED) issued the following CHED involves partnering with management
Memorandum Orders (CMOs) to govern the operations and decision-making, by
new and revised programs under the coordinating the information
Accountancy Education: technology activities, providing
expertise in choosing the best
1. CMO No. 27 for Bachelor Of Science
software or designing and
In Accountancy - a profession that
maintaining the overall information
involves providing assurance and
system, assessing the integrity of
audit services for statutory financial
systems, assessing the inefficiencies
reporting, tax-related services,
of a company’s system and
management advisory services
recommending improvements to
partnering in management decision-
assist management in the formulation
making, devising planning and
and implementation of an
performance and control systems,
organization’s strategy.
and providing expertise in financial
reporting and control to assist various
stakeholders in making decisions. The required General Education and major
areas required by the profession such as:
2. CMO No. 28 for Bachelor Of Science 1. Accounting, finance and related
In Management Accounting - knowledge
involves partnering in management 2. Organizational and business
decision-making, devising planning knowledge; and
and performance management 3. Information technology, knowledge
systems, and providing expertise in and competencies
financial reporting and control to
assist management in the formulation
Pending the passage of the proposed
and implementation of an
amendment to the present Accountancy
organization’s strategy.
Law, only the graduates of the BS in
Accountancy program shall be eligible to
3. CMO No. 29 for Bachelor Of Science
take the CPA Licensure Examination. The
In Internal Auditing - a profession
proposed revision of the Accountancy Law,
that enhances and protects
organizational value by providing however, will require a two-tier
stakeholders with risk-based, examination.
objective and reliable assurance,
advice and insight. It is an
independent, objective assurance and
consulting activity designed to add
value and improve an organization’s
operations. It helps an organization

14
 Loan Officer, Senior Budget Officer,
Senior Internal Auditor,
Senior Information Systems Officer,
Senior Compliance Officer

THE ACCOUNTING c. Government: State Accountant V,

Director III and Director IV,
PROFESSION: CAREER Government Accountancy and
OPPORTUNITIES Audit, Financial Services
Manager, Audit Service Manager,
Senior Auditor
Commission on Higher Education (CHED)
Memorandum Orders (CMOs) 2730, s. 2017 d. Education: Senior Faculty,
provided the following list of job Accounting Department Chair,
opportunities for graduates. Program Head

3. ADVANCED POSITIONS
1. ENTRY-LEVEL JOBS
a. Public Practice: Partner, Senior
a. Public Practice: Junior Analyst,
Partner, Senior Consultant/Financial
Consulting staff, Junior Internal Audit
Advisor, Partner of Advisory
Staff,
Services
Associate Consultant

b. Commerce and Industry: Cost Analyst, b. Commerce and Industry: Finance

Investment Analyst, Accountancy Staff, Director/ Chief Financial Officer,
Tax Accounting Staff, Financial Analyst, Chief Information Officer, Chief
Budget Analyst, Credit Analyst, Cost Audit Executive, Chief Risk Officer,
Accountant, Internal Auditing Staff, Chief Compliance
Compliance Officer, Tax Auditor, Officer
Financial
c. Government: National Treasurer,
Auditor, Management Accounting Staff
Vice President for Finance/CFO (for
c. Government: State Accounting GOCCs), Commissioner, Associate
Examiner, NBI Agent, Treasury Agent, Commissioner, Assistant
State Accountant, LGU Accountant, Commissioner, (COA, BIR,
Revenue Officer, Audit Examiner, BOC)
Budget Officer,
d. Education: Vice President for
Financial Services Specialist
Academic Affairs, Dean
d. Education: Junior Accounting Instructor

2. MIDDLE-LEVEL POSITIONS
a. Public Practice: Senior Consulting
Manager, Financial Advisory Manager,
Senior
Internal Audit Manager, Managing
Consultant, Lead Consultant

b. Commerce and Industry:

Controller/Comptroller, Senior
Information Systems Auditor, Senior

15
 AUDIT SERVICES involve examining
a company’s accounting records in
order to issue an opinion about
whether the company’s financial
statements conform to generally
SPECIALIZED ACCOUNTING accepted accounting principles. The
FIELDS auditor’s opinion adds credibility to
the statements, which are prepared
The practice of accountancy include, but not by the company’s management.
limited to, the following:
TAX SERVICES include both
1. Practice of Public Accountancy - shall determining the amount of tax due
constitute in a person, be it his/her and tax planning to help companies
individual capacity, or as a partner or as minimize tax expense.
a staff member in an accounting or
auditing firm, holding out himself/herself CONSULTING SERVICES cover a
as one skilled in the knowledge, science wide range of activities that
and practice of accounting, and as a includes everything from installing
qualified person to render professional sophisticated computerized
services as a certified public accountant; accounting systems to providing
or offering or rendering, or both, to personal financial advice.
more than one client on a fee basis or
otherwise, services such as the audit or
verification of financial transaction and 2. Practice in Commerce and Industry
accounting records; or the preparation, - shall constitute in a person
signing, or certification for clients of involved in decision making
reports of audit, balance sheet, and requiring professional knowledge in
other financial, accounting and related the science of accounting, or when
such employment or position
schedules, exhibits, statements or
requires that the holder thereof
reports which are to be used for
must be a certified public
publication or for credit purposes, or to
accountant.
be filed with a court or government
agency, or to be used for any other
Also called in private accounting,
purpose; or the design, installation, and
accountants in commerce and
revision of accounting system; or the
industry usually work for a specific
preparation of income tax returns when
company or nonprofit organization.
related to accounting procedures; or
They perform wide variety of
when he/she represents clients before
functions for their employers from
government agencies on tax and other
classifying and recording
matters related to accounting or renders
transactions, billing customers and
professional assistance in matters
collecting amounts due, ordering
relating to accounting procedures and
merchandise, paying suppliers,
the recording and presentation of
preparing and analyzing financial
financial facts or data.
statements, developing budgets,
measuring costs, assessing
performance, and making decisions.

16
 Aside from the CPA title, other
internationally recognized
professional certifications suit for
private accountants. For example,
the Institute of Certified
Management Accountants issues
the Certified Management DOUBLE ENTRY
Accounting (CMA) designation. The BOOKKEEPING
Institute of Internal Auditors (IIA)
issues the Certified Internal Auditor Fra. Luca Pacioli’s Summa de Arithmetica is
(CIA) designation. These are widely comprised of 36 short chapters in
recognized indicators of technical bookkeeping. It has three books – the
competence and integrity on the memorandum, the journal and the ledger.
holder. All of these certifications According to him, in order to be successful,
require meeting education every merchant needs three essential
requirements, passing a technical things: sufficient cash or credit, a good
examination, and obtaining relevant bookkeeper, and an accounting system to
work experience. view the business affairs at a glance.

3. Practice in Education/Academe - shall Pacioli introduces double-entry accounting

constitute in a person in an educational system in his book – in which for every
institution which involve teaching of debet dare (should give) there exists a
accounting, auditing, management debet habere (should have or should
advisory services, finance, business law, receive). Modern bookkeeping still have
taxation, and other technically related these principles but adapted to suit modern
subjects: Provided, That members of the conditions.
Integrated Bar of the Philippines may be
allowed to teach business law and
taxation subjects. The first book in Summa, the memorandum
is the book where all transactions are
4. Practice in the Government- shall recorded, in the currency in which they are
constitute in a person who holds, or is conducted, at the time they are conducted.
appointed to, a position in an accounting The memorandum prepared in
professional group in government or in a chronological order is a narrative
government– owned and/or controlled description of the business’s economic
corporation, including those performing events. The memorandum is important
proprietary functions, where decision because the use of supporting documents
making requires professional knowledge to support transactions is not observed. The
in the science of accounting, or where a journal is the merchant’s private book
civil service eligibility as a certified public containing entries made in one currency, in
accountant is a prerequisite.
chronological order, and in narrative form.
The ledge is the alphabetical listing of all
accounts along with the running balance of
each particular account.

17
Financial statements are not yet prepared CONFIDENTIALITY - Accountants are expected
during this time but Pacioli recommended to respect the confidentiality of
annual balancing to determine the success information acquired as a result of
or failure of the business and to find errors. professional and business relationships
and, therefore, not disclose any such
information to third parties without
proper and specific authority, unless there
is legal or professional right or duty to
BASIC PROFESSIONAL disclose, nor use the information for the
VALUES AND ETHICS personal advantage of the professional
accountant or third parties.
A distinguishing mark of the accountancy
profession is its acceptance of the PROFESSIONAL BEHAVIOR - to comply with
responsibility to act in public interest. relevant laws and regulations and avoid
Therefore, a professional accountant’s any action that discredit the profession.
responsibility is not exclusively to satisfy the
needs of an individual client or employer. In
acting in the public interest, a professional FORMS OF BUSINESS
accountant shall observe and comply with ORGANIZATION
the Code of Ethics for professional
accountants. A professional accountant SOLE PROPRIETORSHIP - is the simplest
shall comply with the following fundamental form of business organization where
principles: capital is owned and provided by one
person called “proprietor.”

INTEGRITY - to be straightforward and honest - unable to pay its legal obligations to

in all professional and business creditors, the owner may be forced to
relationships. Integrity also implies fair surrender personal assets, such as
dealings and truthfulness. homes, cars, computers, and furniture
to satisfy those debts.
OBJECTIVITY - to not allow bias, conflict of
interest or undue influence of others to PARTNERSHIP - the capital of the business is
override professional or business owned or provided by two or more
judgments. persons called “partners”. Partners’
agreements are embodied in the
PROFESSIONAL COMPETENCE AND DUE CARE “Articles of Co-Partnership.”
- to maintain professional knowledge and
skill at the level required to ensure that a - If unable to pay its legal obligations to
client or employer receives competent creditors, the owners may be forced to
professional service based on current surrender personal assets, such as
developments in practice, legislation and homes, cars, computers, and furniture
techniques and act diligently and in to satisfy those debts.
accordance with applicable technical and
professional standards. CORPORATION - the biggest and most
complicated form of business
organization. It requires more formality
to organize and manage but its economic

18
 life may last up to fifty (50) years, subject CLASSES OF BUSINESS
to renewal. It is organized by at least five ORGANIZATION AS TO
but not more than fifteen (5-15) persons
called “Incorporators” and the capital,
NATURE OF OPERATION
called “share capital” is divided into units
SERVICE BUSINESSES - derive its income by
called “shares.” Each share has a
providing services to their clients. Most
designated value called “Par value.” A
common examples include doctors,
corporation is governed by the Board of
lawyers and accountants.
Directors.
MERCHANDISING BUSINESSES - sell goods
- The major advantage of the corporate
to customers that other entities make.
form of business is the limited liability
The business is therefore engaged in
of the corporation’s stockholders.
buying goods and commodities or any
Limited liability means the stockholders
form of finished products and sells
are not held personally responsible for
theses for profit. A merchandising entity
the financial obligations of the
is either a retail or wholesale company.
corporation. If the business fails,
stockholders can lose no more than the MANUFACTURING BUSINESSES - make the
investment they already made by goods that they sell to their customers.
purchasing stock. In other words, They are engaged in buying raw
stockholders are not obligated to pay materials and supplies to be processed
the corporation’s remaining debts out or manufactured, converting them into
of their own pockets. finished products for sale at a profit.

- The disadvantage of the corporate form - Examples are car manufacturer, home
of business is the higher tax burden on appliance manufacturer and furniture
the owners. Generally, the corporate shop. An agriculture business is engaged
income tax rate is greater than the in planting of crops and sells its
individual income tax rate. Moreover, a products either in raw or finished form
corporation’s income is taxed twice— for a profit.
first when the company earns it and HYBRID COMPANIES - those involved in
pays corporate income taxes on it, and more than one type of activity which are
then again when stockholders pay manufacturing, merchandising, service
personal income taxes on amounts the and agriculture.
firm distributes to them as dividends.
This is called double taxation. Any
income of a sole proprietorship or a
partnership is taxed only once, and at
the personal income tax rate.
-

COOPERATIVES - operates similar to a

corporation though voting is based on
“one-man, one-vote” basis.

19
OPERATING CYCLE

An operating cycle is the length of

BUSINESS ACTIVITIES TO
time lapsed from the disbursement of cash MEASURE
until it reverted back to cash. The phases and
duration of time to complete an operating FINANCING ACTIVITIES - are transactions
cycle varies depending on the nature of the involving external sources of funding.
business operation, the products business There are two basic sources of this
entities produced, and other external and external funding – the owners of the
internal factors affecting each phase. The size company who invest their own funds in
of the business also affects the operating the business, and creditors who lend
cycle. money to the company. With this
financing, the company engages in
OPERATING CYCLE OF A SERVICE CONCERN investing activities.
ENTITY

INVESTING ACTIVITIES - include the purchase

and sale of (1) long-term resources such as
land, buildings, equipment, and machinery
and (2) any resources not directly related
to a company’s normal operations. Once
these investments are in place, the
company has the resources needed to run
OPERATING CYCLE OF A MERCHANDISING the business and can perform operating
ENTITY activities.

OPERATING ACTIVITIES - include transactions

that relate to the primary operations of
the company, such as providing products
and services to customers and the
associated costs of doing so, like utilities,
taxes, advertising, wages, rent, and
OPERATING CYCLE OF A MANUFACTURING maintenance.
ENTITY

OPERATING CYCLE OF AN AGRICULTURAL

ENTITY

20
 GOING CONCERN - The financial statements
are normally prepared on the assumption
that an entity is a going concern and will
ACCOUNTING CONCEPTS AND continue in operation for the foreseeable
future. Hence, it is assumed that the entity
PRINCIPLES
has neither the intention nor the need to
liquidate or curtail materially the scale of its
Underlying Assumptions
operations. Hence, in the absence of
information to the contrary, a business
ACCRUAL BASIS - the effects of transactions
entity will be presented to continue to
and other events are recognized when they
operate indefinitely. This assumption is
occur (and not as cash or its equivalent is
critical to many broad and specific
received or paid) and they are recorded in
accounting principles. It provides
the accounting records and reported in the
justification for measuring many assets
financial statements of the periods to which
based on their original costs (a practice
they relate. Financial statements prepared
known as the historical cost principle). If we
on the accrual basis inform users not only of
knew an enterprise was going to cease
past transactions involving the payment and
operations in the near future, we would
receipt of cash but also of obligations to pay
measure assets and liabilities not at their
cash in the future and of resources that
original costs but at their current liquidation
represent cash to be received in the future.
values which should be appropriately
Hence, they provide the type of information
disclosed.
about past transactions and other events
that is most useful to users in making
ECONOMIC ENTITY ASSUMPTION - we can
economic decisions.
identify all economic events with a particular
economic entity. In other words, only
business transactions involving the entity
should be reported as part of that entity’s
financial accounting information. Another key
aspect of this assumption is the distinction
between the economic activities of owners
and those of the company.

21
MONETARY UNIT ASSUMPTION - Information a difference in a decision even if some users
would be difficult to use if, for example, we choose not to take advantage of it or are
listed assets as “three machines, two trucks, already aware of it from other sources.
and a building.” According to the monetary Financial information is capable of making a
unit assumption, in order to measure difference in decisions if it has predictive
financial statement elements, we need a unit value or confirmatory value.
or scale of measurement. A monetary unit
like the Philippine peso is the most
Financial information has Predictive Value if
appropriate common denominator to express
it can be used as an input to processes
information about financial statement
employed by users to predict future
elements and changes in those elements. The
outcomes. Financial information need not be
common denominator in Europe is the euro
a prediction or forecast to have predictive
while dollar in the U.S. If an entity has
value. Financial information with predictive
operations throughout the world, it must
value is employed by users in making their
translate all its financial information to
own predictions. Financial information has
common monetary unit often that of the
Confirmatory Value if it provides feedback
parent company, under the monetary unit
about (confirms or changes) previous
assumption.
evaluations. The predictive value and
confirmatory value of financial information
PERIODICITY ASSUMPTION - relates to the
are interrelated. Information that has
qualitative characteristic of timeliness.
predictive value often also has confirmatory
External users need periodic information to
value. For example, revenue information for
make decisions. The periodicity assumption
the current year, which can be used as the
divides the economic life of an enterprise
basis for predicting revenues in future years,
(presumed to be indefinite) into artificial time
can also be compared with revenue
periods for periodic financial reporting.
predictions for the current year that were
made in past years. The results of those
comparisons can help a user to correct and
improve the processes that were used to
make those previous predictions.

Materiality. Information is material if

omitting it or misstating it could influence
decisions that the primary users of general
purpose financial reports make on the basis
QUALITATIVE of those reports, which provide financial
CHARACTERISTICS OF information about a specific reporting entity.
In other words, materiality is an entity-
FINANCIAL STATEMENTS
specific aspect of relevance based on the
nature or magnitude, or both, of the items to
Fundamental Qualitative Characteristics
which the information relates in the context
of an individual entity’s financial report.
1. RELEVANCE
Consequently, a uniform quantitative
An information is relevant if it is capable of threshold for materiality or predetermined
making a difference to the decisions made by quantity on what could be material in a
users. Information may be capable of making particular situation cannot be specified.

22
 items, factors and circumstances that might
2. FAITHFUL REPRESENTATION affect their quality and nature, and the
process used to determine the numerical
Information must faithfully represent the depiction.
substance of what it purports to represent. A
faithful representation is, to the maximum Neutrality. A neutral depiction is without bias
extent possible, complete, neutral and free in the selection or presentation of financial
from error. A faithful representation is information. A neutral depiction is not
affected by level of measurement slanted, weighted, emphasised, de-
uncertainty. emphasised or otherwise manipulated to
increase the probability that financial
Substance over Form. Financial reports information will be received favourably or
represent economic phenomena in words and unfavourably by users. Neutral information
numbers. To be useful, financial information does not mean information with no purpose
must not only represent relevant or no influence on behaviour. On the
phenomena, but it must also faithfully contrary, relevant financial information is, by
represent the substance of the phenomena definition, capable of making a difference in
that it purports to represent. In many users’ decisions.
circumstances, the substance of an economic
phenomenon and its legal form are the same. Prudence. Neutrality is supported by the
If they are not the same, providing exercise of prudence. Prudence is the
information only about the legal form would exercise of caution when making judgements
not faithfully represent the economic under conditions of uncertainty. The exercise
phenomenon. of prudence means that assets and income
are not overstated and liabilities and
expenses are not understated. Equally, the
To be a perfectly faithful representation, a exercise of prudence does not allow for the
depiction would have three characteristics. It understatement of assets or income or the
would be complete, neutral and free from overstatement of liabilities or expenses. Such
error. Of course, perfection is seldom, if ever, misstatements can lead to the overstatement
achievable. The objective is to maximise or understatement of income or expenses in
those qualities to the extent possible. future periods.

The exercise of prudence does not imply a

Completeness. A complete depiction includes need for asymmetry, for example, a
all information necessary for a user to systematic need for more persuasive
understand the phenomenon being depicted, evidence to support the recognition of assets
including all necessary descriptions and or income than the recognition of liabilities or
explanations. For example, a complete expenses. Such asymmetry is not a qualitative
depiction of a group of assets would include, characteristic of useful financial information.
at a minimum, a description of the nature of Nevertheless, particular Standards may
the assets in the group, a numerical depiction contain asymmetric requirements if this is a
of all of the assets in the group, and a consequence of decisions intended to select
description of what the numerical depiction the most relevant information that faithfully
represents (for example, historical cost or fair represents what it purports to represent.
value). For some items, a complete depiction
may also entail explanations of significant
facts about the quality and nature of the

23
Free from Error. Faithful representation does both are considered to provide equally
not mean accurate in all respects. Free from relevant information and an equally faithful
error means there are no errors or omissions representation of that phenomenon.
in the description of the phenomenon, and
the process used to produce the reported
information has been selected and applied
with no errors in the process. In this context, 1. Comparability
free from error does not mean perfectly
accurate in all respects. Users’ decisions involve choosing between
alternatives, for example, selling or holding
For example, an estimate of an unobservable an investment, or investing in one reporting
price or value cannot be determined to be entity or another. Consequently, information
accurate or inaccurate. However, a about a reporting entity is more useful if it
representation of that estimate can be can be compared with similar information
faithful if the amount is described clearly and about other entities and with similar
accurately as being an estimate, the nature information about the same entity for
and limitations of the estimating process are another period or another date.
explained, and no errors have been made in Comparability is the qualitative characteristic
selecting and applying an appropriate process that enables users to identify and understand
for developing the estimate. similarities in, and differences among, items.
Unlike the other qualitative characteristics,
When monetary amounts in financial reports comparability does not relate to a single item.
cannot be observed directly and must instead A comparison requires at least two items.
be estimated, measurement uncertainty
arises. The use of reasonable estimates is an Consistency is related to comparability but
essential part of the preparation of financial not the same. Consistency refers to the use of
information and does not undermine the the same methods for the same items, either
usefulness of the information if the estimates from period to period within a reporting
are clearly and accurately described and entity or in a single period across entities.
explained. Even a high level of measurement Comparability is the goal; consistency helps to
uncertainty does not necessarily prevent such achieve that goal.
an estimate from providing useful
information
Uniformity. Comparability is not uniformity.
For information to be comparable, like things
must look alike and different things must look
different. Comparability of financial
information is not enhanced by making unlike
things look alike any more than it is enhanced
by making like things look different.

Some degree of comparability is likely to be

attained by satisfying the fundamental
Enhancing Qualitative Characteristics
qualitative characteristics. A faithful
representation of a relevant economic
The enhancing qualitative characteristics may
phenomenon should naturally possess some
also help determine which of two ways
degree of comparability with a faithful
should be used to depict a phenomenon if

24
representation of a similar relevant economic
phenomenon by another reporting entity. 3. Timeliness
Although a single economic phenomenon can
be faithfully represented in multiple ways, Timeliness means having information
permitting alternative accounting methods available to decision-makers in time to be
for the same economic phenomenon capable of influencing their decisions.
diminishes comparability. Generally, the older the information is the
less useful it is. However, some information
may continue to be timely long after the end
2. Verifiability
of a reporting period because, for example,
some users may need to identify and assess
Verifiability helps assure users that
trends.
information faithfully represents the
economic phenomena it purports to
represent. Verifiability means that different
knowledgeable and independent observers 4. Understandability
could reach consensus, although not
necessarily complete agreement, that a Classifying, characterising and presenting
particular depiction is a faithful information clearly and concisely makes it
representation. Quantified information need understandable. Some phenomena are
not be a single point estimate to be verifiable. inherently complex and cannot be made easy
A range of possible amounts and the related to understand. Excluding information about
probabilities can also be verified. those phenomena from financial reports
might make the information in those financial
Verification can be direct or indirect. Direct reports easier to understand. However, those
verification means verifying an amount or reports would be incomplete and therefore
other representation through direct possibly misleading.
observation, for example, by counting cash.
Indirect verification means checking the Financial reports are prepared for users who
inputs to a model, formula or other technique have a reasonable knowledge of business and
and recalculating the outputs using the same economic activities and who review and
methodology. An example is verifying the analyse the information diligently. At times,
carrying amount of inventory by checking the even wellinformed and diligent users may
inputs (quantities and costs) and recalculating need to seek the aid of an adviser to
the ending inventory using the same cost flow understand information about complex
assumption (for example, using the first-in, economic phenomena.
first-out method).

It may not be possible to verify some

explanations and forward-looking financial
information until a future period, if at all. To
help users decide whether they want to use Cost Constraint
that information, it would normally be
necessary to disclose the underlying Cost is a pervasive constraint on the
assumptions, the methods of compiling the information that can be provided by financial
information and other factors and reporting. Reporting financial information
circumstances that support the information. imposes costs, and it is important that those

25
costs are justified by the benefits of reporting Applying the cost constraint necessitates
that information. There are several types of assessment whether the benefits of reporting
costs and benefits to consider. particular information are likely to justify the
costs incurred to provide and use that
information. In most situations, assessments
Providers of financial information expend
are based on a combination of quantitative
most of the effort involved in collecting,
and qualitative information. Because of the
processing, verifying and disseminating
inherent subjectivity, different individuals’
financial information, but users ultimately
assessments of the costs and benefits of
bear those costs in the form of reduced
reporting particular items of financial
returns. Users of financial information also
information will vary.
incur costs of analysing and interpreting the
information provided. If needed information
is

not provided, users incur additional costs to

obtain that information elsewhere or to
estimate it. Measurement uncertainty

Measurement uncertainty does not prevent

Reporting financial information that is information from being useful. However, in
relevant and faithfully represented helps some cases the most relevant information
users to make decisions with more may have such a high level of measurement
confidence. This results in more efficient uncertainty that the most useful information
functioning of capital markets and a lower is information that is slightly less relevant but
cost of capital for the economy as a whole. An is subject to lower measurement uncertainty.
individual investor, lender or other creditor
also receives benefits by making more
informed decisions. However, it is not
possible for general purpose financial reports
to provide all the information that every user
finds relevant.

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