Financial Accounting Theory and Practice Vol 1
Definition of Accounting
 Accounting is about quantitative information.
 The information is likely to be financial in nature.
 The information should be useful in decision-making.
Components of Accounting
1. Identifying- recognition or non-recognition of
business activities as “accountable” events.
2. Measuring- assigning of peso amounts to the
accountable economic transactions and events.
3. Communicating- preparing and distributing
accounting reports to potential users of accounting
information.
a. Recording
b. Classifying
c. Summarizing
} Aspect of accounting
Accounting as an Information System- Input- process- output
Overall Objective of Accounting
To provide quantitative financial information about a
business that is useful to statement users particularly owners
and creditors, in making economic decisions
The Accountancy Profession
 RA 9298- law regulating the practice of
accountancy in the Philippines.
 Board of Accountancy (BOA) - body authorized
by law to promulgate rules and regulations
affecting the practice of accountancy profession
in the Philippines.
Fields of Accountancy Profession
1. Public Practice- renders independent and expert
financial services to the public.
2. Private Practice- assists management in planning and
controlling the entity’s operations
3. Government- focuses in the custody and
administration of public funds
4. Academe
Limitations of the Practice of Public Accountancy- single
practitioners and partnerships only; a certificate of
accreditation shall be issued to CPAs in public practice, which
shall be valid for three (3) years.
CONCEPTUAL FRAMEWORK (1989)
Official titles:
1. Conceptual Framework of Accounting
2. Framework for Preparation and Presentation of FS
Scope:
1. Objective of Financial Statements
2. Qualitative Characteristics of Financial Statements
3. Elements of Financial Statements
4. Concepts of Capital and Capital Maintenance
Qualitative Characteristics of Financial Statements:
1. Relevance (deals with content)
-Timeliness, Feedback Value and Predictive Value
2. Reliability (deals with content)
-Faithful Representation, Substance Over Form,
Prudence and Neutrality and Completeness
3. Comparability (deals with Presentation)
4. Understandability (deals with Presentation)
Underlying Assumptions: Accrual Basis and Going Concern
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Continuing Professional Development (CPD) – refers to the
inculcation, assimilation and acquisition of knowledge, skill
proficiency and ethical and moral values after initial
registration of the CPA.
Accounting versus…
 Auditing- examination of FS by independent CPA for
the purpose of expressing an opinion as to the fairness
with which the FS are prepared.
 Bookkeeping- procedural and largely concerned with
development and maintenance of accounting records.
 Accountancy- refers to the profession of accounting
practice.
Financial Accounting versus Managerial Accounting
Financial accounting focuses on general purpose
reports known as financial statements intended for both
internal and external users while managerial accounting is the
accumulation and preparation of financial reports for internal
users only.
Generally Accepted Accounting Principles- represent the
“rules, procedures, practice and standards followed in the
preparation and presentation of financial statements.
Financial Reporting Standards Council (FRSC)- its main
function is to establish and improve accounting standards that
will be generally accepted in the Philippines. It is composed of
15 members- a Chairman and 14 representatives.
Philippine Interpretations Committee- its role is to provide
timely guidance on financial reporting issues not specifically
addressed in current PFRS.
International Accounting Standards Committee (IASC)- to
achieve uniformity in the accounting principles which are used
by business and other organizations for financial reporting
around the world.
Components of Philippine Financial Reporting Standards
(PFRS):
1. Philippine Financial Reporting Standards
2. Philippine Accounting Standards
3. Philippine Interpretations
CONCEPTUAL FRAMEWORK (2010)
Official titles:
1. Conceptual Framework for Financial Reporting
2. The PFRS/ IFRS Framework
Scope:
1. Objectives of Financial Reporting
2. Qualitative Characteristics of FS
3. Elements of Financial Statements
4. Concepts of Capital and Capital Maintenance
5. The Reporting Entity
Qualitative Characteristics of Financial Statements:
1. Relevance (fundamental)
- Predictive Value and Feedback Value
2. Faithful Representation (fundamental)
-Freedom from Error, Neutrality and Completeness
3. Comparability (enhancing)
4. Understandability (enhancing)
5. Timeliness (enhancing)
6. Verifiability (enhancing)
Underlying Assumptions: Going Concern
 Financial Accounting Theory and Practice Vol 1

Basic Accounting Assumptions: Four Recognition Principles to be Followed in the Preparation

1. Going Concern and Presentation of Financial Statements:
2. Accounting Entity 1. Asset recognition principle- includes cost principle
3. Time Period 2. Liability recognition principle
4. Monetary Unity 3. Income recognition principle
4. Expense recognition principle- includes matching
Conceptual Framework- a summary of the terms and concepts principle
that underlie the preparation and presentation of financial
statements for external users. General Criteria to be Met for an Element to be Recognized:
1. Probability of flow of future economic benefits
Purposes of Conceptual Framework 2. Measurement Reliability
a. Assist FRSC in developing PFRS and its review and
adoption of existing IFRS Exceptions to the Point of Sale Recognition of Income:
b. Assist preparers of FS in applying PFRS and in 1. Installment method
dealing with topics that have yet to form the subject 2. Cost recovery method
of a PFRS 3. Cash method
c. Assist auditors in forming an opinion on whether FS 4. Percentage of completion method
comply with PFRS 5. Production method
d. Assist users in interpreting information contained in
the FS Other Income Recognition
e. Provides interested parties with information about 1. Interest
formulation of PFRS by FRSC 2. Royalties
3. Dividends
Authoritative Status of Conceptual Framework 4. Installation fees
If there is a standard or an interpretation that 5. Subscription revenue
specifically applies to a transaction, the standard or 6. Admission fees
interpretation overrides the Conceptual Framework. 7. Tuition fees

Users of Financial Information Three Applications of Matching Principle:

a. Primary users- existing and potential investors, and
lenders and other creditors
b. Other users- employees, customers, government and
their agencies, and the public
Financial Reporting
 Objective- to provide financial information about the
reporting entity that is useful to existing and potential
investors, lenders and other creditors in making
decisions about providing resources to the entity.
 Target users- primarily the primary user group
 Specific objectives- economic decisions, assessing
future cash flows, financial position and financial
performance.
Limitations of Financial Reporting
a. It does not provide all information the primary users
group needs.
b. It does not show the value of an entity but helps the
primary users estimate the value of the entity.
c. It intends to provide common information to all users.
d. To a large extent, general purpose financial reports are
based on estimate and judgment rather than exact
depiction.
Other Concerns About Qualitative Characteristics:
1. Materiality
2. Conservatism
3. Cost constraint on useful information
1. Cause and effect association
2. Systematic and rational allocation
3. Immediate recognition
Four Measurement Bases:
1. Historical cost
2. Current cost
3. Realizable value
4. Present value
Concepts of Capital Maintenance
1. Financial Capital- net income occurs when financial
or nominal amount of net assets at the end of the
period exceeds the financial or nominal account of the
net assets at the beginning of the period, after
excluding distributions and contributions by owners
during the period.
2. Physical Capital- net income occurs when the physical
productive capital of the entity at the end of the period
exceeds the physical productive capital at the
beginning of the period, after excluding distributions
to and contributions from owners during the period.
-End of Handout-
-JF Amistoso, CPA

Elements of Financial Statements

1. Asset
2. Liability
3. Equity
} Financial Position

4. Income } Financial Performance

5. Expense

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