Accounting is a measurement and information system

that identifies, measures, records, and communicates

quantitative information about an economic entity
that owners and prospective owners, managers,
creditors and prospective creditors, taxing
authorities, regulatory agencies and other decision
makers use as basis for making economic decisions.
The primary purpose of accounting is to provide
quantitative information, about economic entities, that
is to be used as basis for formulation of economic
decisions.
 The users of accounting information are classified
either as external users or internal users and either as
direct users or indirect users.
The Conceptual Framework for Financial Reporting
identifies the present and potential investors, creditors
and lenders as the primary external users of financial
statements.
Direct Users
Users with direct interest use financial information
as a tool to protect their own interest in the enterprise.
They include the owners, managers, creditors, suppliers,
customers, employees and taxing authority.
Indirect Users
Users that use accounting information to provide
advice to or protect the interest of a direct user. These
indirect users include regulatory agencies, labor unions
and financial and legal consultants.
 Direct Users
1. Owners – They use the financial statements to keep track of
the enterprise’s financial condition and financial performance
to make decisions whether they should hold or sell their equity
interests.
2. Managers – Financial information serves as a measure for
making future financial decisions and a measure of its
effectiveness.
3. Creditors – Through the financial information, they assess the
ability of the enterprise to pay its loans and the interest
attaching to such loans.
4. Suppliers – They determine whether the cost of such goods
and services will be paid when due. They are dependent upon
the continuation of the enterprise as a major customer.
 Direct Users
5. Customers – have an interest in information about the
continuance of an enterprise, especially when they have a
long-term involvement with, or are dependent on, the
enterprise as their supplier.
6. Employees – evaluate the financial status of the enterprise to
assess the latter’s ability to provide remuneration, retirement
benefits and employment opportunities.
7. Taxing authority – They rely on financial information to
determine whether business entities comply with prescribed
rules and regulations. They are dependent on the financial
information to collect correct amount of taxes, to determine
taxation policies and to set basis for national income and
similar statistics.
Indirect Users
1. Regulatory agencies – protect the interest of the investors
and the public
2. Labor unions – protect the interest of the employees
3. Financial and legal consultants – provide advice and
assistance to their clients who may be customers, lenders or
suppliers of the firm
Financial Accounting – is the broadest branch of
accounting, focusing on the needs of external users. It
is concerned with the recognition, measurement and
communication of economic resources, economic
obligations and changes in economic resources and
economic obligations.
Management Accounting – serves the information
needs of the internal users. The managers and active
owners use accounting information in making and
implementing short-term and long-range plans for the
enterprise.
Cost Accounting – is concerned with the measurement
and recognition of cost of services provided or
products manufactured.
Tax Accounting – is concerned with the computation
of taxes and preparation of tax returns submitted to a
taxing authority.
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.
 Bookkeeping – refers only to one phase of accounting, the
recording phase. Other phases of accounting include classifying,
summarizing and communicating information and interpreting
the results thereof.
 Auditing – refers to an independent examination of the
financial statements conducted by a certified public accountant
for the purpose of rendering an opinion as to the fairness of the
presentation of the financial statements.
 The development of accounting as a discipline is generally credited
to an Italian monk named Luca Pacioli, who introduced the system of
recording business transactions into debit and credit parts.
 From the date of its organization in 1973 up to 2001, the
International Accounting Standards Committee (IASC) developed a
set of uniform global accounting standards, called International
Accounting Standards (IAS), and promoted the use and application of
these standards.
 The IAS Committee was reconstituted in 2001 as the International
Accounting Standards Board (IASB). The IASB took the initiative to
undertake an improvements project in the light of queries and
criticisms raised in relation to the IAS by securities regulators,
professional accountants, and other interested parties.
 The accounting standards that originated from the works of the IAS
Committee, even if improved or revised by the IAS Board, are known
as International Accounting Standards. The standards that originated
from the works of IAS Board are called International Financial
Reporting Standards (IFRSs).
 IFRS include the following:
(a) The specific International Financial Reporting Standards;
(b) The interpretations made by the International Financial Reporting
Interpretations Committee (IFRIC, the body that interprets the works
of the IASB);
(c) The International Accounting Standards; and
(d) The interpretations made by the Standing Interpretations Committee
(SIC, the body that interpreted the works of the IAS Committee)
• The IASB is under the governance of the IFRS Foundation, which is an
independent, not-for-profit private sector organization.
• One of the primary functions of the IFRS Foundation is to govern and
oversee the activities of its standard-setting body, which is the IASB.
• The IASB follows a due process in the development of financial
reporting standards. The due process involves interested individuals
and organizations around the world and comprises the following
stages:
(1) Setting the agenda;
(2) Planning the project;
(3) Developing and publishing the discussion paper;
(4) Developing and publishing the exposure draft;
(5) Developing and publishing the standard; and
(6) After the standard is issued.
• The Accounting Standards Council (ASC) was formed on
November 18, 1981 to study the accounting standard-setting
process in the Philippines.
• The ASC was succeeded by the Financial Reporting Standards
Council (FRSC), which was established in 2006 by the Board of
Accountancy.
• The Board of Accountancy is the body that regulates the
practice of accountancy in the Philippines.
• The Financial Reporting Standards Council was established by
the Board of Accountancy under the Implementing Rules and
Regulations of the Philippine Accountancy Act of 2004.
• The FRSC carries on the decision made by the ASC to converge
Philippine accounting standards with the International Financial
Reporting Standards (IFRSs) issued by the International
Accounting Standards Board.
• The FRSC formed the Philippine Interpretations Committee (PIC)
in November 2006 for the latter to issue implementation
guidance on the Philippine Financial Reporting Standards.
• Due process involves the following steps (Preface to PFRSs,
paragraph 19):
(a) Consideration of pronouncement of IASB;
(b) Formation of a task force, when deemed necessary, to give advice
to the FRSC;
(c) Issuing for comment an exposure draft approved by a majority of
the FRSC members; comment period will be at least 60 days, unless
a shorter period (not less than 30 days) is considered appropriate
by the FRSC;
(d) Consideration of all comments received within the comment period
and, when appropriate, preparing a comment letter to the IASB;
and
(e) Approval of a standard or an interpretation by a majority of the
FRSC members.
• The PFRS are based on the Conceptual Framework for Financial
Reporting, which addresses the concepts underlying the
information presented in general purpose financial statements.
• The Conceptual Framework covers the following scope: the
objective of financial statements; the qualitative characteristics
of financial information; the definition, recognition and
measurement of the elements of financial statements; and the
concept of capital and capital maintenance.
The objective of general purpose financial statements is to provide
information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making
economic decisions.

The complete set of financial statements includes the following:

a. A statement of financial position (conventionally called the balance
sheet),
b. A statement of comprehensive income (to broaden the information
formerly presented in an income statement),
c. A statement of cash flows,
d. A statement of changes in equity and
e. The notes to the financial statements, which explain the accounting
policies and other information which cannot be appropriately
presented on the face of the financial statements.
• Accrual accounting means that income is recognized when
earned regardless of when received and expense is recognized
when incurred regardless of when paid.
• The accrual basis recognizes the effects of the transactions
when the transactions occur, rather than when cash is received or
paid.
• Going concern means that the accounting entity is viewed as
continuing in operation indefinitely in the absence of evidence
to the contrary.
• Also known as continuity assumption.
• In making the assessment about the going concern assumption,
management shall take into account all available information
about the future which is at least twelve months from the end
of reporting period.
A. Relevance
Relevant information should bear on the economic decisions to be
made by the users. Relevant information possesses three qualities:
1. Confirmatory value (or feedback value) – the quality of information that
confirms earlier expectation
2. Predictive value – enables its users to make forecasts and plan their future
actions
3. Materiality – provides a threshold or cutoff point for recognition

B. Faithful representation
Faithful representation is the quality of being honest to the users. It has
three components:
a) Completeness – A complete depiction shall include all information
necessary for a user to understand the phenomenon being depicted.
b) Neutrality – Neutral information is impartial and is not biased
towards the particular needs or desires of specific users.
c) Freedom from error – The process used to produce the information
has been carefully selected and appropriately applied.
A. Comparability
Comparable information enables users to identify similarities
and differences between different sets of economic circumstances. The
presentation of comparable information requires the consistent adoption
of accounting policies.

B. Verifiability
Verifiability means reaching consensus if another
knowledgeable and independent observers use the same measurement
process. Verification can be direct or indirect.
 Direct verification – applies direct observation, as counting cash
 Indirect verification – means redoing the process of measurement
C. Timeliness
Timely information is provided early enough for the users
to use it as a basis for making decision.

D. Understandability
Understandable financial information is presented using
forms and terminologies that are adapted to the users’ range of
understanding. Understandability depends not only on the quality
of the information but also on the quality of the users.
Elements of Financial Position
a. Assets – These are the resources controlled by the entity as a
result of past events and from which future economic benefits
are expected to flow to the enterprise.
b. Liabilities – A liability is a present obligation of an enterprise
arising from past events, the settlement of which is expected to
result in an outflow from the entity of economic resources
embodying economic benefits.
c. Equity – Equity is the residual interest in the assets of the
entity after deducting all its liabilities.
Elements of Performance
d. Income – Income is increases in economic benefits during an
accounting period in the form of inflows or enhancements of assets
or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
 Revenue – earned from sale of goods or services or by allowing
others to use enterprise resources
 Gains – arise from incidental disposal of assets of the enterprise and
from activities other than sale of goods and services in the normal
course of business
e. Expenses – Expenses are decreases in economic benefits during the
reporting period in the form of outflows or depletion of assets or
incurrence of liabilities that result in decreases in equity, other than
those relating to distributions to equity participants.
The Conceptual Framework identifies two general criteria for the recognition of
financial statement elements.
(1) It is probable that there is an inflow or outflow of economic benefits; and
(2) The element has a cost or value that could be reliably measured.

4 measurement bases under Conceptual Framework:

1. Historical cost – the cost of acquisition;
2. Current cost (or fair value) – the amount of cash or cash
equivalents that would have to be paid if the same asset
or an equivalent asset is acquired currently;
3. Realizable value – the asset’s disposal value reduced by
disposal costs, or the liabilities’ settlement amount
including settling costs; and
4. Present value – the discounted future cash flows.
Thank you!