INTERMEDIATE ACCOUNTING 1

INSTRUCTOR: HAMOD M. GULIDTEM, CPA

CHAPTER 1
“THE ACCOUNTANCE PROFESSION”
LEARNING OBJECTIVES:
 To understand the definition of accounting.
 To describe the overall objective of accounting.
 To describe the practice of the accountancy profession in the Philippines.
 To understand the Continuing Professional Development in the field of accounting.
 To know the meaning of generally accepted accounting principles.
 To identify the standard-setting body in the Philippines.
 To describe the creation of the International Accounting Standards Board.
 To know the meaning of IFRS.

1. DEFINITION OF ACCOUNTING

1.1 Definition:

a) Accounting is a service activity. Its function is to provide quantitative information,

primarily in nature, about economic entities, that is intended to be useful in making
economic decisions. – Accounting Standards Council (ASC)

b) 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. – American Institute of Certified Public
Accountants (AICPA)

c) Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgment and decision by users of the information. –
American Accounting Association (AAA)

1.2 Important points made in the definition of accounting should be noted:

a) Accounting is about quantitative information.
b) The information is likely to be financial in nature.
c) The information should be useful in decision making.

The definition 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.

1.2.1 Identifying

Identifying is the recognition or non-recognition of business activities as “accountable

events.

 Not all business activities are accountable (for example, hiring of employees, the death
of the entity president and entering into a contract).
 An event is accountable or quantifiable when it has an effect on assets, liabilities and
equity.
 The subject matter of accounting is economic activity or the measurement of economic
resources (assets) and economic obligations (liabilities). Only economic activities are
emphasized and recognized in accounting.
 Sociological and psychological matters are beyond the province of accounting.

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 1.2.1.1 External and Internal transactions

Economic activities of an entity are referred to as transactions which are

classified as external and internal.

a) External transactions – (or exchange transactions) are those economic events

involving one entity and another entity. For example, purchase of goods from a
supplier, borrowing money from a bank and sales of goods to a customer.

b) Internal transactions – are economic events involving the entity only. For example,
production and casualty loss.

1.2.2 Measuring

Measuring is the assigning of peso amounts to the accountable economic transactions and
events.

 For accounting information to be useful, it must be expressed in terms of a common

financial denominator.
 The Philippine peso is the unit of measuring accountable economic transactions.
 The measurement bases are historical cost, current cost, realizable value and present
value. Historical cost is the most common measure of financial transactions.

1.2.3 Communicating

Communicating is the process of preparing and distributing accounting reports to the

potential users of accounting information. It is the reason why accounting has been called
the universal language of business.

1.2.3.1 Recording, Classifying and Summarizing

a) Recording – (or journalizing) is the process of systematically

maintaining a record of all economic business transactions after they
have been identified and measured.

b) Classifying – is the sorting or grouping of similar and interrelated

economic transactions into their respective classes. It is accomplished
by posting to the ledger.

c) Summarizing – is the preparation of financial statements.

1.3 Accounting as an Information System

Accounting is an information system that measures business activities, processes

information into reports and communicates the reports to the decision makers.

A key product of this information system is a set of financial statements – the documents
that reports financial information about an entity to decision makers.

2. 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”.

The essence of accounting is decision – usefulness.

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3. THE ACCOUNTANCY PROFESSION

3.1 Republic Act No. 9298 (a.k.a Philippine Accountancy Act of 2004)
 It is the law regulating the practice of accountancy in the Philippines.

3.2 Qualification to Practice the Accountancy Profession

1. A person must finish a degree in Bachelor of Science in Accountancy and
2. Pass the Licensure Examination for Certified Public Accountants (LECPA) given by
the Board of Accountancy.

3.3 Board of Accountancy (BOA)

 The body authorized by law to promulgate rules and regulations affecting the practice
of the accountancy profession in the Philippines.
 Responsible for preparing and grading the Philippine LECPA.

3.4 Limitation of the Practice of Public Accountancy

 Single practitioners and partnerships for the practice of public accountancy shall be
registered CPAs in the Philippines.
 A Certificate of Accreditation (CoA) shall be issued to certified public accountants in
public practice only upon showing in accordance with rules and regulations by the BOA
and approved by the Professional Regulation Commission that such registrant has
acquired a minimum of 3 years of meaningful experience.
 The SEC shall not register any corporation organized for the practice of public
accountancy.

3.5 Accreditation to Practice Public Accountancy

 To practice public accountancy, practitioners shall be register with the BOA and
PRC.
 The PRC upon favorable recommendation of the BOA shall issue the Certificate of
Registration (CoR) to practice public accountancy which shall be valid for 3 years
and renewable every 3 years upon payment of required fees.

3.6 Public Accounting, Private Accounting and Government Accounting

CPAs generally practice their profession in 3 main areas, namely:

1. Public accounting
2. Private accounting
3. Government accounting

3.6.1 Public Accounting

 This field of public accounting 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 3 kinds of services, namely:
1. Auditing
 Primarily services offered by most public accounting practitioners
 Examination of FS by independent CPA for the purpose of expressing an
opinion as to the fairness with which the financial statements are prepared.
 External auditing is the attest function of independent CPAs.

2. Taxation
 Preparation of annual income tax returns and determination of tax
consequences of certain proposed business endeavors.

3. Management Advisory Services

 Refers to services to clients on matters of accounting, finance, business
policies, organization procedures, product costs, distribution and many
other phases of business conduct and operations.

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 3.6.2 Private Accounting
 Employed in business entities in various capacity as accounting staff, chief
accountant, internal auditor and controller (the highest accounting officer in an
entity).
 Major objective: to assist management in planning and controlling the entity’s
operations.

3.6.3 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.
 Focus: the custody and administration of public funds.
 Employed in many branches of the government (BIR, COA, DBM, SEC, and
BSP, and etc.)

4. CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

4.1 CPD Law: Republic Act No. 10912

 The law mandating and strengthening the CPD program for all regulated professions,
including the accountancy profession.

4.2 CPD Definition

 Refers to the inculcation and acquisition of advanced knowledge, skill, proficiency, and
moral values after the initial registration of the Certified Public Accountant for
assimilation into professional practice and lifelong learning.

4.3 CPD Credit Units

 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.
 Regardless of area or practice, all CPAs shall be required to comply with 120 CPD
credit units in a compliance period of 3 years.

4.3.1 120 CPD Credit Units Implementation

 The initial implementation is gradual in the following period:
2017 - 80 credit units
2018 - 100 credit units
2019 - 120 credit units

4.3.2 Excess Credit Units

 Excess credit units earned shall not be carried over the next three years period,
except credit units earned for masteral and doctoral degrees.

4.3.3 CPD Purposes

 The CPD is required for the renewal of CPA license and accreditation of CPA to
practice the accountancy profession.

4.4 Exemption from CPD

 A CPA shall be permanently exempted from CPD requirements upon reaching the
age of 65 years. However, this exemption applied only to the renewal of CPA license
and not for the purpose of accreditation to practice the accountancy profession.

5. FINANCIAL ACCOUNTING VS MANAGERIAL ACCOUNTING

5.1 Financial Accounting

 Focuses on general purpose reports known as financial statements intended for internal
and external users.
 The area of accounting that emphasizes to creditors and investors.

5.2 Managerial Accounting

 Accumulation and preparation of financial reports for internal users only.
 The area of accounting that emphasizes developing accounting information for use
within an entity.
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6. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

6.1 GAAP Definition

 GAAP represent rules, procedures, practice and standards followed in the preparation
and presentation of financial statements. These are developed on the basis of
experience, reason, custom, usage and practical necessity.
 GAAP are like laws that must be followed in financial reporting.
 The process of establishing GAAP is a social process which incorporates political
actions of various interested user groups as well as professional judgment, logic and
research.

6.2 Purpose of Accounting Standards

 Overall Purpose: To identify proper accounting practices for the preparation and
presentation of financial statements.
 Create a common understanding between preparers and users of financial statements
particularly the measurement of assets and liabilities.
 A set of high-quality reporting accounting standards is a necessity to ensure
comparability and uniformity in financial statements based on the same financial
information.

7. FINANCIAL REPORTING STANDARDS COUNCIL (FRSC)

7.1 Development of GAAP in the Philippines

 The development of GAAP is formalized initially through the creation of the
Accounting Standards Council (ASC). The FRSC now replaces the ASC.

ASC FRSC

7.2 FRSC: Powers and Functions

 FRSC is the accounting standard setting body created by PRC upon recommendation
of the BOA to assist the BOA in carrying out its powers and functions under R.A Act
No. 9298.
 The main functions: 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
GAAP in the Philippines.
 The approved statements of the FRSC are known as Philippine Accounting Standards
(PAS) and Philippine Financial Reporting Standards or (PFRS).

7.2.1 Philippine Financial Reporting Standards (PFRS)

 The FRSC issues standards in a series of pronouncements called “PFRS”.
 The PFRS collectively include all of the following:
1. Philippine Financial Reporting Standards CPFRS)
 Correspond to International Financial Reporting Standards (IFRS)

2. Philippine Accounting Standards (PAS)

 Correspond to International Accounting Standards (IAS)

3. Philippine Interpretations
 Correspond to Interpretations of the IFRIC and the Standing
Interpretations Committee, and Interpretations developed by the
Philippine Interpretations Committee.

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 7.3 FRSC Composition and Their Terms

7.3.1 Composition

The FRSC is composed of 15 members with a Chairman who had been or is

presently a senior accounting practitioner and 14 representatives from the
following:

Board of Accountancy (BOA) 1

Securities and Exchange Commission (SEC) 1
Bangko Sentral ng Pilipinas (BSP) 1
Bureau of Internal Revenue (BIR) 1
Commission on Audit (COA) 1
Financial Executives Institute of the Philippines (FINEX) 1
Accredited national professional organization of CPAs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2
Total 14

7.3.1 Terms
 The Chairman and members of FRSC shall have a term of 3 years renewable for
another term. Any member of the ASC shall not be disqualified from being
appointed to the FRSC.

7.4 Philippine Interpretation Committee (PIC)

 It was formed by FRSC in August 2006 and has replaced the Interpretations Committee
(IC) formed by ASC in May 2000.
 Role: To prepare interpretations (intended to give authoritative guidance on issues that
are likely to receive unacceptable treatment) of PFRS for approval by the FRSC and to
provide timely guidance on financial reporting issues not specifically addressed in
current PFRS.

8. INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC)

8.1 IASC
 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.

8.2 Objectives
1. 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.
2. To work generally for improvement and harmonization of regulations, accounting
standards and procedures relating to the presentation of financial statements.

9. INTERNALTIONAL ACCOUNTING STANDARS BOARD (IASB)

IASB now replaces the IASC. IASB published standards in a series of pronouncements called
the International Financial Reporting Standards (IFRS). However, the IASB adopted the body
of standards issued by the IASC.

The pronouncements of the IASC continue to be designated as International Accounting

Standards (IAS).

The IASB standard setting process includes the correct order namely:
1. Research
2. Discussion Paper
3. Exposure Draft
4. Accounting Standard
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10. MOVE TOWARD IFRS

 The FRSC has adopted in their entirety all IAS and IFRS.
 The move toward IFRS is essential to achieve the goal of one uniform and globally
accepted financial reporting standards.

The following factors are considered in deciding to move totally to IAS:

1. Support of international accounting standards by Philippine organizations, such as
the SEC, BOA and PICPA.
2. Increasing internalization of business which heightened interest in common
language for financial reporting.
3. Improvement of international accounting standards or removal of free choices of
accounting treatments.
4. Increasing recognition of international accounting standards by the World Bank,
Asian Development Bank and World Trade Organization.

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