Overview of Accounting

1. OVERVIEW OF
ACCOUNTING

3. Definition of Accounting
“Accounting is the process of identifying, measuring and
communicating economic information to permit
informed judgment by users of the information. ”
American Accounting Association

4. Definition of Accounting
 Accounting is about quantitative information
 The information is financial in nature
 The information should be useful in decision making

5. Three Important activities included in
the definition of accounting
 IDENTIFYING
 MEASURING
 COMMUNICATING

6. IDENTIFYING
 analyzing events and transactions
 recognition refers to the process of including the
effects of an accountable event in the financial
statement
 ONLY accountable event are recognized
- non accountable events are disclosed or
recorded through memorandum entry

7. Types of events or transactions
 External events – involve an entity and external
party
- Exchange (reciprocal transfer)
- Non reciprocal transfer
- External event other than transfer
 Internal events – do not involve an external party
 Production
 Casualty

8. MEASURING
 involve assigning numbers
 measurement basis used are historical cost, fair
value, present value, realizable value, current
cost
 financial statements are said to be prepared
using mixture of cost and values

9. VALUATION by FACT or OPINION
 use of estimates (e.g allowance for bad debts,
depreciation and amortization)
 valued by fact (unaffected by estimates) (e.g
ordinary share capital at par, land at cost, cash at
face amount)

10. COMMUNICATING
 process of transforming economic data into
useful information
 also involves interpreting its significance
 recording, classifying and summarizing
 BSP require certain financial ratios to be
disclosed

11. COMMUNICATING
 process of transforming economic data into
useful information
 also involves interpreting its significance
 recording, classifying and summarizing
 BSP require certain financial ratios to be
disclosed

12. BASIC PURPOSE OF ACCOUNTING
The basic purpose of accounting is to provide information
that is useful in making economic decision.
 ECONOMIC ENTITY – Not for profit vs business entity
 ECONOMIC ACTIVITIES – includes production,
exchange, consumption, income distribution, savings
and investment

13. TYPES OF ACCOUNTING
INFORMATION CLASSIFIED AS TO
USER NEEDS
• designed to meet the common needs
of the users. Governed by GAAP
(PFRSs).
General
Purpose
• designed to meet the specific needs
of particular statement users (e.g
managerial accounting, tax basis
accounting)
Special
Purpose –

14. THE ACCOUNTANCY PROFESSION
 Republic Act No. 9298 (Philippine Accountancy Act of
2004)
 To qualify to practice the accountancy profession you
must be a graduate of BSA program and pass a very
difficult government examination by BOA

15. BOARD OF ACCOUNTACY
 authorized by law to promulgate rules and regulations
on the practice of accountancy in the Philippines
 responsible for preparing and grading the CPALE
 CPALE is given twice a year on May and October
 current chairman Mr. NOE G. QUINANOLA

16. ACCREDITATION
 minimum of three years meaningful experience
 CPA, firms and partnership are required to register with
BOA (certificate of registration is valid for 3 years and
renewable every 3 years)
 Public Accounting, Private Accounting, Government,
Academe

17. CPD
 Continuing Professional Development is the inculcation
and acquisition of advance knowledge, skill, proficiency,
values in the profession.
 CPD credit units for CPA is required for the renewal
and accreditation of a CPA
 120 CPD units in compliance period of 3 years
 Exempted from CPD (65 years old)

18. ACCOUNTING CONCEPTS
 Principles upon which the process of accounting is
based. It is used interchangeable with accounting
postulates and accounting theory.
 Most concepts are derived from Conceptual
Framework and PFRS
 Some are implicit because of their long term used

19. Question?
Give one accounting concepts and explain.

20. ACCOUNTING CONCEPTS
1. Double entry system – two parts dr. and cr.
2. Going concern assumption – indefinite period of time
3. Separate entity – view separately from its owner
4. Stable monetary unit – stated in terms of a common
unit of measure
5. Time period – divided into series of reporting periods
6. Materiality concepts – professional judgment
7. Cost benefit

21. ACCOUNTING CONCEPTS
8. Accrual Basis – income recognized when earned/expense
when incurred
9. Historical cost concept – acquisition cost
10. Concept of Articulation – components of FS are
interrelated
11. Full disclosure principle – sufficient detail to disclose
matters keeping in mind the cost
12. Consistency concept – accounting principles are
consistently applied from one period to another.
13. Matching Principles – cost are recognized when related
revenue is recognized

22. ACCOUNTING CONCEPTS
14. Entity theory – proper income determination
15. Proprietary theory – proper valuation of assets
16. Residual equity concept – applicable when there are
two classes of shares
17. Fund theory – custody and administration of funds
18. Realization – conversion of non cash assets
19. Prudence (conservatism) – caution in making
estimates

23. ACCOUNTING CONCEPTS
Cookie jar reserve is a form of fraudulent
reporting wherein during the periods of
high profits, liabilities are overstated
through excessive provision of expenses
and non-recognition of income

24. Expense Recognition Principle
Matching Principle
– direct association of costs and
revenues (e.g cost of sales, freight
out, sales commissions)
Systematic and rational allocation
– cost not directly related to the
earnings are initially recognized as
asset and recognized as expense
over a period of time (e.g
depreciation expense, amortization,
expensing of prepayments and
effective interest method.)

25. Common Branches of Accounting
Financial
Accounting
• It focuses on general purpose financial statement
• Cater to the common needs of external users
• Governed by PFRS
Management
Accounting
• Accumulation and communication of information used by internal users
• Offshoot is management advisory services
Cost
Accounting
• Systematic recording and analysis of the cost of material, labor and overhead

26. Common Branches of Accounting
Auditing
• Process of evaluating the corresponding of certain assertion
with established criteria and expressing an opinion thereon
Tax
Accounting
• Preparation of tax returns and rendering tax advice
Government
accounting
• Place emphasis on custody of public funds

27. Common Branches of Accounting
Fiduciary
Accounting
• Refers to handling of accounts managed by a person entrusted with the custody of property
Estate
Accounting
• Refers to handling of accounts for fiduciaries who wind up the affairs of a deceased person
Other
Acounting
• Social Accounting Accounting System
• Institutional Accounting
• Accounting Research

28. FOUR SECTORS IN THE PRACTICE OF
ACCOUNTANCY
PRACTICE
PUBLIC
PRIVATE
EDUCATION
ACADEME

29. ACCOUNTING STANDARDS
Philippine Financial Reporting Standards
Philippine Accounting Standards
Interpretations

30. Question?
Why do we need a reporting standards?

31. Hierarchy of Reporting Standards
1. PFRS
2. Management judgment (developing and applying)
2.1 requirement by PFRS dealing with similar and
related issues
2.2 conceptual framework
2.3 may also consider other standard setting bodies,
accounting literature and accepted industry practice

32. ACCOUNTING STANDARD SETTING
BODIES AND OTHER RELEVANT
ORGANIZATIONS

33. FRSC
• Official accounting standard setting body
• 15 individual (1 chairperson 14 members)
PIC
• Committee formed by the ASC
• Reviewing the interpretation of the IFRIC for approval and adoption
BOA
• Regulatory board created by RA 9298
• Consists of 6 members appointed by the President
• Board shall elect a vice chairpersons for a term of 1 year

34. SEC
• Tasked in regulating corporations, partnerships capital and investment
markets and investing public
BIR
• Administers the provisions of the NIRC
• Task of collecting taxes
BSP
• Influence the selection and application of accounting policies by banks
and other entities

35. CDA
• Influence the selection and application of accounting policies by
cooperatives
Other relevant
organizations
• IFRIC
• IFRS Advisory Council
• IFAC
• International Organization of Securities COmmissions

36. NORWALK AGREEMENT
 A memorandum of understanding towards achieving a
common goal of having a one set of global standards.
 make their existing financial reporting fully compatible
 coordination of future work program