CHAPTER 1

THE ACCOUNTING PROFESSION

Ninia C. Pauig-Lumauan, MBA, CPA

2nd Semester 2021
Lyceum of Aparri

Intermediate Accounting Part 1

 DEFINITION OF ACCOUNTING

The Accounting Standards Council provides the

following definition:
• Accounting is a service activity.
• The accounting function is to provide
quantitative information, primarily financial
in nature, about economic entities, that is
intended to be useful in making economic
decision.

Intermediate Accounting Part 1

 DEFINITION OF ACCOUNTING
The Committee on Accounting Terminology of
the American Institute of Certified Public
Accountants (AICPA) defines accounting as
follows:
• Accounting is the art of recording, classifying
and summarizing in a significant manner and
in terms of money, transactions and events
which are in part at least of a financial
character and interpreting the results thereof.

Intermediate Accounting Part 1

 DEFINITION OF ACCOUNTING
The American Accounting Association in its
Statement of Basic Accounting Theory defines
accounting as follows:
• Accounting is the process of identifying,
measuring and communicating economic
information to permit informed judgment and
decision by users of the information.
• The definition that has stood the test of time
is the definition above.

Intermediate Accounting Part 1

 IMPORTANT POINTS
• The following points made in the definition of
accounting should be noted:
1) Accounting is about quantitative information.
2) The information is likely to be financial in nature.
3) The information should be useful in decision
making.
• The definition given by the American Accounting
Association states that the very purpose of
accounting is to provide qualitative information
to be useful in making an economic decision.

Intermediate Accounting Part 1

 IMPORTANT POINTS
• The definition given by the American
Accounting Association also states that
Accounting has a number of components,
namely:
a) Identifying as the analytical component
b) Measuring as the technical component
c) Communicating as the formal component

Intermediate Accounting Part 1

 IDENTIFYING
• This accounting process is the recognition or
non-recognition of business activities as
“accountable” events.
• Not all business activities are accountable.
Ex. Hiring of employees, death of the entity
president and entering into a contract are all
business activities but such events are not
accountable because they cannot be
quantified or expressed in terms of a unit of
measure.
Intermediate Accounting Part 1
 IDENTIFYING
• An event is accountable or quantifiable when
it has an effect on assets, liabilities and equity.
In other words, the subject matter of
accounting is economic activity or the
measurement of economic resources and
economic obligations.
EXTERNAL AND INTERNAL TRANSACTIONS
• Economic activities of an entity are referred
to as transactions which may be classified as
external and internal.

Intermediate Accounting Part 1

EXTERNAL AND INTERNAL TRANSACTIONS
• External transactions or exchange
transactions are those economic activities
involving one entity and another entity.
Examples of external transactions are:
a) Purchase of goods from a supplier
b) Borrowing money from a bank
c) Sale of goods to a customer
d) Payment of salaries to employees
e) Payment of taxes to the government
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 EXTERNAL AND INTERNAL TRANSACTIONS
• Internal transactions are economic events
involving the entity only. These are the
economic activities that takes place entirely
within the entity.
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.
Intermediate Accounting Part 1
 MEASURING
• This accounting process is the assigning of peso
amounts to the accountable economic
transactions or events. If accounting
information is to be useful, it must be expressed
in terms of a common financial denominator
like the Philippine peso.
• The measurement bases are historical cost,
current cost, realizable value and present value.
• Historical cost is the most common measure of
financial transactions.
Intermediate Accounting Part 1
 COMMUNICATING

• Communicating is the process of preparing and

distributing accounting reports to potential users of
accounting information. Actually, the communicating
process is the reason why accounting has been called
the “universal language of business.”
• Implicit in the communication process are the
recording, classifying, and summarizing aspects of
accounting.
1. Recording or journalizing is the process of
systematically maintaining a record of all economic
business transactions after they have been identified
and measured.
Intermediate Accounting Part 1
 COMMUNICATING

2. Classifying is the sorting or grouping of similar and

interrelated economic transactions into their respective
classes. 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.
3. Summarizing is the preparation of financial statements
which include the Statement of Financial Position,
Statement of Comprehensive Income, Statement of
Changes in Equity and Statement of Cash Flows.
Intermediate Accounting Part 1
ACCOUNTING AS AN INFORMATION SYSTEM
• Accounting is an information system that
measures business activities, processes information
into reports and communicate the reports to
decision makers.
• A key product of this information system is a set of
Financial Statements – the documents that report
financial information about an entity to decision
makers.
• These reports tell us how well an entity is
performing in terms of profit and loss and where it
stands in financial terms.
Intermediate Accounting Part 1
 OVERALL OBJECTIVE OF ACCOUNTING
• The overall objective of accounting is to “provide
quantitative financial information about a
business that is useful to statement users
particularly owners and creditors in making
economic decisions”.
• An accountant’s primary task is to supply
financial information so that the statement
users could make informed judgment and better
decision.
• The essence of accounting is decision usefulness.
Intermediate Accounting Part 1
 THE ACCOUNTANCY PROFESSION

• Republic Act No. 9298 is the law regulating

the practice of accountancy in the Philippines.
This law is known as the “Philippine
Accountancy Act of 2004.”
• In the Philippines, in order to qualify to
practice the accountancy profession, a person
must finish a degree in Bachelor of Science in
Accountancy and pass a very difficult
government examination given by the Board
of Accountancy.
Intermediate Accounting Part 1
 THE ACCOUNTANCY PROFESSION
• The Board of Accountancy is the body
authorized by law to promulgate rules and
regulations affecting the practice of the
accountancy profession in the Philippines.
• The Board of Accountancy is also responsible
for preparing and grading the Philippine CPA
licensure examination. This computer- based
examination is offered twice a year, one in
May and another one in October in authorized
testing centers around the country.

Intermediate Accounting Part 1

 PUBLIC ACCOUNTING
• The field of public accounting of public accounting
or public accountancy is composed of individual
practitioners, small accounting firms and large
multinational organizations that render independent
and expert financial services to the public.
• Public accountants usually offer three kinds of
services, namely auditing, taxation and
management advisory services.
• The Securities and Exchange Commission shall not
register any corporation organized for the practice of
public accountancy.

Intermediate Accounting Part 1

LIMITATIONS OF THE PRACTICE OF PUBLIC
ACCOUNTING
• Single practitioners and partnerships for the practice of
public accountancy shall be registered certified public
accountants in the Philippines.
•A certificate of accreditation shall be issued to certified
public accountants only upon showing in accordance
with rules and regulations promulgated by the Board of
Accountancy and approved by the Professional
Regulation Commission that such registrant has acquired
a minimum of three years of meaningful experience in
any of the areas of public practice including taxation.

Intermediate Accounting Part 1

 ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY

• Certified public accountants, firms and partnerships

of certified public accountants and staff members
thereof, are required to register with the Board of
Accountancy and Professional Regulation
Commission for the practice of public accountancy.
• The Professional Regulation Commission upon
favorable recommendation of the Board of
Accountancy shall issue the Certificate of
Registration to practice public accountancy which
shall be valid for three (3) years and renewable
every three (3) years upon payment of required
fees. Intermediate Accounting Part 1
 ACCREDITATION TO PRACTICE PUBLIC
ACCOUNTANCY
• Certified public accountants generally practice their
profession in three main areas, namely public
accounting, private accounting and government
accounting.
• To practice external auditing for taxation purposes, a
certified public accountant has to be accredited with
the Bureau of Internal Revenue and/or the Securities
and Exchange Commission.
• To practice external auditing for taxation purposes of
cooperatives, a certified public accountant has to be
accredited both with the Bureau of Internal Revenue
and the Cooperative Development Authority.
Intermediate Accounting Part 1
 AUDITING
• Auditing has traditionally been the primary
service offered by most public accounting
practitioners.
• Auditing or external auditing is the “examination
of financial statements by independent certified
public accountants 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.

Intermediate Accounting Part 1

 AUDITING
• The Bureau of Internal Revenue requires audited
financial statements to accompany the filing of
annual income tax return and is a mandatory
requirement for taxpayers with a gross annual
income of Php 3 M and above.
• Banks and other lending institutions frequently
require an audit by an independent CPA before
granting a loan to the borrower.
• Creditors and prospective investors place
considerable reliance on audited financial
statements on making economic decision.
Intermediate Accounting Part 1
 TAXATION
• Taxation service includes the preparation of
annual income tax returns and determination of
certain proposed business endeavors.
• To offer this service effectively and efficiently,
the public accountant must be thoroughly
familiar with the tax laws and regulations and
updated with changes in taxation law and court
cases concerned with interpreting taxation law.
• The CPA not infrequently represents the client
in tax investigations.
Intermediate Accounting Part 1
 MANAGEMENT ADVISORY SERVICES
• Management advisory services have become
increasingly important in recent years, although
audit and tax services are undoubtedly the
mainstay of public accountants.
• The term “management advisory services” has
no precise coverage but is used generally to
refer to services to clients on matters of
accounting, finance, business policies,
organization procedures, products costs,
distribution and many other phases of business
conduct and operations.
Intermediate Accounting Part 1
 MANAGEMENT ADVISORY SERVICES
• Specifically, management advisory services include:
a) Advice on installation of computer system
b) Quality control
c) Installation and modification of accounting
system.
d) Budgetting
e) Forward planning and forecasting
f) Design and modification of retirement plans
g) Advice on mergers and consolidations.

Intermediate Accounting Part 1

 PRIVATE ACCOUNTING
• Many CPAs are employed in business entities in various
capacity as accounting staff, chief accountant, internal auditor
and controller.
• The highest accounting officer in an entity is known as the
controller.
• The major objective of the private accountant is to assist
management in planning and controlling the entity’s
operations.
• Private accounting includes maintaining the records, producing
the financial reports, preparing the budgets and controlling
and allocating the resources of the entity. The private
accountant has also the responsibility for the determination of
the various taxes the entity is obliged to pay.
Intermediate Accounting Part 1
 GOVERNMENT ACCOUNTING
• Government accounting “encompasses the process of
analyzing, classifying, summarizing and communicating all
transactions involving the receipt and disposition of
government funds and property and interpreting the results
thereof.”
• The focus of government accounting is the custody and
administration of public funds.
• Many CPAs are employed in many branches of the
government, more particularly:
a) Bureau of Internal Revenue
b) Commission on Audit
c) Department of Budget and Management
d) Securities and Exchange Commission
e) Bangko Sentral ng Pilipinas
Intermediate Accounting Part 1
 CONTINUING PROFESSIONAL
DEVELOPMENT (CPD)
• Under Resolution 59 of the Board of
Accountancy, the term Continuing Professional
Development is used in lieu of Continuing
Professional Education.
• Continuing Professional Development refers to
the inculcation, assimilation and acquisition of
knowledge, skill, proficiency and ethical and
moral values after the initial registration as
Certified Public Accountant.
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 CONTINUING PROFESSIONAL DEVELOPMENT
(CPD)
• Continuing Professional Development raises and
enhances the technical skill and competence of the
Certified Public Accountant mainly through attendance
of related trainings, seminars and workshops.
• All CPAs shall abide by the requirements, rules and
regulations on continuing professional development by
the Board of Accountancy , subject to the approval of
the Professional Regulation Commission, in
coordination with the accredited national professional
organization of certified public accountants or any duly
accredited educational institutions.

Intermediate Accounting Part 1

 CPD Credit Units
• The CPD credit units refer to the CPD credit
hours required for the renewal of CPA License
and accreditation of a CPA to practice the
accountancy profession every three years.
• The total CPD credit units shall be 60 credit
units for three years.
• Under the new BOA Resolution, the required
60 credit units may be earned in any of the
three years preceding the year of application
for accreditation.
Intermediate Accounting Part 1
 CPD Credit Units
• Excess credit units earned shall not be carried
over to the next three year period, except credit
units earned for masteral and doctoral degrees.
• It is to be emphasized that the Continuing
Professional Development has become
mandatory for Certified Public Accountants.
• The Continuing Professional Development is
required for the renewal of CPA License and
accreditation of a CPA to practice the
accounting profession.
Intermediate Accounting Part 1
 EXEMPTIONS FROM CPD
• A CPA shall be permanently exempted from
CPD requirements upon reaching the age of
65 years.
• However, this exemption is applied only to the
renewal of CPA License with the Professional
Regulation Commission and not for the
purpose of accreditation with BOA, BIR, CDA,
and SEC, to practice the accountancy
profession.

Intermediate Accounting Part 1

 EXEMPTIONS FROM CPD
• A CPA shall be temporarily exempted from
compliance with the CPD requirements under
the following circumstances:
a. The CPA is working or practicing the profession
or furthering studies abroad.
b. The exemption is for the duration of stay
abroad.
c. The CPA has been out of the country for at
least two years immediately prior to the date
of renewal of license and accreditation.
Intermediate Accounting Part 1
 ACCOUNTING VS AUDITING
• In a broad sense, accounting embraces auditing.
Auditing is one of the areas of accounting
specialization.
• In a limited sense, accounting is essentially
constructive in nature. Accounting ceases when
financial statements are already prepared.
• On the other hand, auditing is analytical. The
work of an auditor begins when the work of the
accountant ends.

Intermediate Accounting Part 1

 ACCOUNTING VS AUDITING
• After the financial statements are prepared, the
auditor will begin to perform the task of auditing.
• The auditor examines the financial statements to
ascertain whether they are in conformity with
generally accepted accounting principles.
• The auditor will then state in his/her report
exceptions, especially those material in nature
observed on the financial statements at hand
and usually conducts an exit conference after an
audit engagement to discuss his/her findings.
Intermediate Accounting Part 1
 ACCOUNTING VS BOOKKEEPING
• Bookkeeping is largely procedural and largely
concerned with development and maintenance
of accounting records. Bookkeeping is the “how”
of accounting.
• Accounting is conceptual and is concerned with
the why, reason or any justification for any action
adopted.
• Bookkeeping is a procedural element of
accounting as arithmetic is a procedural element
of mathematics.
Intermediate Accounting Part 1
 ACCOUNTING VS ACCOUNTANCY
• Broadly speaking, the two terms are
synonymous because they both refer to the
entire field of accounting theory and practice.
• Technically speaking, however, accountancy
refers to the profession of accounting practice.
• Accounting is used in reference only to a
particular field of accountancy such as public
accounting, private accounting and
government accounting.

Intermediate Accounting Part 1

 FINANCIAL ACCOUNTING VS MANAGERIAL
ACCOUNTING
• Financial accounting is primarily concerned
with the recording of business transactions
and the eventual preparation of financial
statements. It focuses on general purpose
reports known as financial statements
intended for internal and external users.
• Financial accounting is the area of accounting
that emphasizes reporting to creditors and
investors.
Intermediate Accounting Part 1
 FINANCIAL ACCOUNTING VS MANAGERIAL
ACCOUNTING
• Managerial accounting is the accumulation
and preparation of financial reports for
internal users only.
• In other words, managerial accounting is the
area of accounting that emphasizes
developing accounting information for use
within an entity.

Intermediate Accounting Part 1

 GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
• Generally accepted accounting principles
represent the rules, procedures, practice and
standards followed in the preparation and
presentation of financial statements.
• Accounting has evolved through time changing
with the needs of society. As new types of
transactions occur in trade and commerce,
accountants develop rules and procedures for
recording them.
Intermediate Accounting Part 1
 GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
• The accounting rules, procedures and practices came to
be known as generally accepted accounting principles or
simply GAAP.
• The principles have developed on the basis of
experience, reason, custom, usage and practical
necessity.
• Generally accepted accounting principles are like laws
that must be followed in financial reporting.
• The process of establishing GAAP is a social process
which incorporate political actions of various interested
user groups as well as professional judgment, logic and
research.
Intermediate Accounting Part 1
 PURPOSE OF ACCOUNTING STANDARDS
• The general purpose of accounting standards is to
identify proper accounting practices for the
preparation and presentation of financial statements.
• Accounting standards create a common
understanding between preparers and users of
financial statements particularly the measurement of
assets and liabilities.
• A set of high quality accounting standards is a
necessity to ensure comparability and uniformity in
financial statements based on the same financial
information.
Intermediate Accounting Part 1
 FINANCIAL REPORTING STANDARDS
COUNCIL
• In the Philippines, the development of generally
accepted accounting principles is formalized initially
through the creation of the Accounting Standards
Council or ASC.
• The Financial Reporting Standards Council or FRSC
now replaces the Accounting Standards Council.
• The FRSC is the accounting standard setting body
created by the Professional Regulation Commission
upon recommendation of the Board of Accountancy
to assist the Board of Accountancy in carrying out its
powers and functions provided under RA No. 9298.
Intermediate Accounting Part 1
 FINANCIAL REPORTING STANDARDS
COUNCIL
• FRSC’s main function is to establish and improve
accounting standards that will be generally
accepted in the Philippines.
• The accounting standards promulgated by the
FRSC constitute the “highest hierarchy” of
generally accepted accounting principles in the
Philippines.
• The approved statements of the FRSC are known
as Philippine Accounting Standards or PAS and
Philippine Financial Reporting Standards or PFRS.
Intermediate Accounting Part 1
 COMPOSITION OF THE FRSC
• The FRSC is composed of fifteen (15) members
with a Chairman who had been or is presently
a senior accounting practitioner and fourteen
(14) representatives .
• The Chairman and members of the FRSC shall
have a term of three (3) years renewable for
another term. Any member of the ASC shall
not be disqualified from being appointed to
the FRSC.

Intermediate Accounting Part 1

 COMPOSITION OF THE FRSC
REPRESENTATIVES
Board of Accountancy 1
Securities and Exchange Commission 1
Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
Commission on Audit 1
Major organization of preparers and users of
financial statements- 1
Financial Executives Institute of the
Philippines or FINEX

Accredited national profession organization of

CPAs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2
Total 14
Intermediate Accounting Part 1
 PHILIPPINE INTERPRETATIONS
COMMITTEE
• The Philippine Interpretations Committee or PIC
was formed by the FRSC in August 2006 and has
replaced the Interpretations Committee or IC
formed by the Accounting Standards Council in
May 2000.
• The role of the PIC is to prepare interpretations
of PFRS for approval of the FRSC and to provide
timely guidance on financial reporting issues
not specifically addressed in current PFRS.

Intermediate Accounting Part 1

 PHILIPPINE INTERPRETATIONS
COMMITTEE
• 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 United Kingdom
is the International Financial Reporting
Interpretations Committee or IFRIC which has
already replaced the Standing Interpretations
Committee or SIC.
Intermediate Accounting Part 1
 INTERNATIONAL ACCOUNTING
STANDARDS COMMITTEE
• The International Accounting Standards Committee or
IASC is an independent private sector body, with the
objective of achieving uniformity in the accounting
principles which are used by business and other
organizations for financial reporting around the world.
• It was formed in June 1973 through an agreement
made by professional accountancy bodies from
Australia, Canada, France, Germany, Japan, Mexico,
the Netherlands, the United Kingdom and Ireland, and
the United States of America. The IASC is
headquartered in London, United Kingdom.
Intermediate Accounting Part 1
 OBJECTIVES OF THE INTERNATIONAL
ACCOUNTING STANDARDS COMMITTEE
a. To formulate and publish in the public
interest accounting standards to be observed
in the presentation of financial statements
and to promote their worldwide acceptance
and observance.
b. To work generally for the improvement and
harmonization of regulations, accounting
standards and procedures relating to the
presentation of financial statements.
Intermediate Accounting Part 1
 INTERNATIONAL ACCOUNTING
STANDARDS BOARD
• The International Accounting Standards Board or IASB now
replaces the International Accounting Standards
Committee.
• The IASB publishes standards in a series of
pronouncements called “International Financial Reporting
Standards” or IFRS. The IFRS is a global phenomenon
intended to bring about greater transparency and a higher
degree of comparability in financial reporting. Thus, the
IASB has adopted the body of standards issued by the
IASC.
• The pronouncements of the IASC continue to be
designated as International Accounting Standards or IASC.
Intermediate Accounting Part 1
 Move Toward IFRS
• In developing accounting standards that will be
generally accepted in the Philippines, standards
issued by other standard setting bodies such as
the USA Financial Accounting Standards Board
(FASB) and the IASB are considered.
• In the past years since the establishment of the
accounting profession in the Philippines, most,
if not all of the Philippine standards issued are
based on American accounting standards.

Intermediate Accounting Part 1

 Move Toward IFRS
• However, at present, the FRSC has adopted in
their entirety all International Accounting
Standards and International Financial Reporting
Standards.
• The move toward IFRS is essential to achieve the
goal of one uniform and globally accepted
reporting standards.
• The Philippines is fully compliant with IFRS
effective January 2005, a process which was
started back in 1997 in moving from USA GAAP
to IFRS.
Intermediate Accounting Part 1
 Move Toward IFRS
• The following factors are considered in
deciding to move totally to international
accounting standards:
a. Support of international accounting
standards by Philippine organizations such as
the Philippine SEC, Board of Accountancy and
PICPA.
b. Increasing internalization of business which
has heightened interest in a common
language for financial reporting.
Intermediate Accounting Part 1
 Move Toward IFRS
c. Improvement of international accounting
standards or removal of free choices of
accounting treatments.
d. Increasing recognition of international accounting
standards by the World Bank, Asian Development
Bank and World Trade Organization.
e. Because of the participation of the Philippines in
the liberalization of the Free Trade Act, or trade
across borders, it imperative that we adopt the
international accounting standards.

Intermediate Accounting Part 1

 PHILIPPINE FINANCIAL REPORTING
STANDARDS
• The Financial Reporting Standards Council issues
standards in a series of pronouncements called
“Philippine Financial Reporting Standards” or PFRS.
• The Philippine Financial Reporting Standards
collectively include all of the following:
a. Philippine Financial Reporting Standards which
correspond to International Financial Reporting
Standards. The Philippine Financial Reporting
Standards are numbered the same as their counterpart
in International Financial Reporting Standards.

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 PHILIPPINE FINANCIAL REPORTING
STANDARDS
b. Philippine Accounting Standards which correspond
to International Accounting Standards. The
Philippine Accounting Standards are numbered the
same as their counterpart in International
Accounting Standards.
c. Philippine Interpretations which correspond to
Interpretations of the IFRIC and the Standing
Interpretations Committee and Interpretations
developed by the Philippine Interpretations
Committee.
Intermediate Accounting Part 1