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Fundamentals of Accounting and
the Accounting Profession
Accounting Definition and Concepts
Accounting Definition
Accounting is a service activity and its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions. This accounting definition is given by the American Accounting Association.
Key Points in the Definition
Accounting is a service activity. Accounting provides quantitative information. Accounting information is primarily financial in nature. Accounting information is about economic entities. Accounting information is intended to be useful in making economic decisions.
Accounting as a Process
The accounting process involves the following components:
Identifying: The recognition or non-recognition of business activities as accountable events. Measuring: The assigning of peso amounts to the accountable events. Communicating: The preparation and distribution of accounting reports to users of accounting information.
Accountable Events
The events that affect the entity and in which other entities participate are known as accountable events. These events must have an effect on the entity's assets, liabilities, or equity.
Measurement in Accounting
The most common financial attribute used in measuring financial information is historical cost. Other measurement bases include current cost, realizable value, and present value.
Communication in Accounting
The 'communicating' process of accounting includes recording, classifying, summarizing, and interpreting the financial information.
Objectives of Accounting
The overall objective of accounting is to provide quantitative information about an entity that is useful in making economic decisions.
Accountancy Profession in the Philippines
Legal Framework
The law promulgating the practice of the accountancy profession in the Philippines is Republic Act No. 9298, also known as the Philippine Accountancy Act of 2004.
Regulatory Bodies
Board of Accountancy (BOA): The body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession in the Philippines. Financial Reporting Standards Council (FRSC): The standard-setting body in the Philippines at the present time.
Areas of Practice
The three main areas in the practice of the accountancy profession are:
Public accounting Private accounting Government accounting
Certified Public Accountants (CPAs)
CPAs are licensed by the Professional Regulation Commission (PRC) upon favorable recommendation of the BOA. CPAs in public practice must have a minimum of 3 years of meaningful experience in public practice. CPAs are required to complete 60 Continuing Professional Development (CPD) credit units for accreditation to practice the accountancy profession.
Accounting Standards and Frameworks
Philippine Financial Reporting Standards (PFRS)
The Philippine Financial Reporting Standards collectively include:
PFRS corresponding to IFRS PAS corresponding to IAS Philippine Interpretations corresponding to IFRIC and SIC Interpretations and Interpretations developed by PIC
The Conceptual Framework for Financial
Reporting
Objectives and Concepts
The Conceptual Framework is intended to establish the objectives and concepts for use in developing standards of financial accounting and reporting. It provides the 'why' of accounting by defining the basic objective, terms, and concepts of accounting.
The underlying theme of the Conceptual Framework is decision usefulness, which aims to provide quantitative financial information about an entity that is useful in making rational economic decisions.
Authoritative Status
The Conceptual Framework has the highest level of authority. In the absence of a standard or interpretation that specifically applies to a transaction, management shall consider the applicability of the Conceptual Framework in developing and applying an accounting policy that results in information that is relevant and faithfully represented.
The Conceptual Framework applies not only when the International Accounting Standards Board (IASB) develops new or revised standards, but also when management is required to develop an accounting policy for a transaction not covered by a specific standard or interpretation.
Purposes of the Conceptual Framework
The Conceptual Framework serves the following purposes:
To provide definitions of key terms and fundamental concepts. To assist accountants in selecting among alternative accounting and reporting methods. To assist the IASB in the standard-setting process.
The Conceptual Framework does not aim to provide specific guidelines for resolving situations not covered by existing accounting standards, nor is it intended to lead to uniformity of financial statements or eliminate alternative accounting principles.
Relationship to GAAP
The Conceptual Framework is not intended to establish GAAP in financial reporting. Instead, it provides the objectives and concepts for use in developing standards of financial accounting and reporting.
GAAP refers to the accounting principles, standards, and practices that have been developed based on factors such as usage and practical necessity. The Conceptual Framework is intended to guide the development of GAAP, but it
does not define the meaning of 'present fairly in accordance with GAAP' or establish the hierarchy of sources of GAAP.
Revenue Recognition
In the context of revenue recognition, a wholesale bakery would normally recognize revenue when goods are delivered to the customer. Revenue from artistic performances would be recognized when the event takes place.
Expense Recognition
Expense is a decrease in economic benefit during the accounting period related to a decrease in asset or an increase in liability that results in a decrease in equity other than distributions to owners.
