OVERVIEW OF ACCOUNTING

Definition of Accounting

The term accounting is defined in various ways by authoritative bodies in the profession. Presented below
are some of these guiding definitions:
• Accounting is a service activity. Its function is to provide quantitative information, primarily financial
in nature, about economic entities, that is intended to be useful in making economic decisions.
(Accounting Standards Council)
• Accounting is the art of recording, classifying, and summarizing in a significant manner and terms
of money, transactions, and events, which are, in part at least, of a financial character and
interpreting the result thereof. (American Institute of Certified Public Accountants)
• Accounting refers to the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by users of the information. (American
Accounting Association)

The rules and basic concepts of accounting are commonly referred to as principles. The word “principle” is
used in the sense of general law or rule that is to be used as a guide to action. This means that accounting
principles are not hard rules and provide management discretion in its application provided that the
objective of accounting is achieved.

Accounting as a science and art

Accounting is a science which has been systematically gathered, classified, and organized. Accounting is
also an art as it requires the exercise of creative and critical thinking.

Accounting as an information system

Accounting is aptly called the language of business because it conveys financial information. The activities
include identifying and measuring economic activities, processing information, and communicating this
information to decision makers.

Activities in the Accounting Process

The three (3) definitions of accounting broadly identify three (3) important activities in the accounting
process which are identifying, measuring, and communicating.

Identifying refers to the recognition or non-recognition of accountable events. Not all business activities
are accountable. An event is accountable or quantifiable when it has an effect on assets, liabilities, and
equity. The subject matter of accounting is an economic activity or the measurement of economic resources
and economic obligations. Only the economic activities are emphasized and recognized in accounting.

Types of Economic Events or Transactions

Economic activities of an entity are referred to as transactions which may be external or internal. External
transactions involve an entity and another external party, while internal transactions do not involve an
external party.

Below are some examples of economic and non-economic activities:

Economic Activities Non-economic Activities

• Purchase of materials and • Business plan that has not been
suppliesSale of goods and materializedRelationship between
services Payment of employees
salaries • Investor perception
• Receipt of payment from customers • Attitude of senior management
Below are some examples of internal and external transactions:

External Internal
• Sale of goods • Production
• Receipt of notes Casualty
receivable Distribution to
owners Changes in fair
value

Accounting covers the economic transactions and events only. Non-economic activities are outside the
scope of accounting.

Measuring in accounting is the process of determining the monetary amounts at which the elements of
financial statements are to be recognized and carried in the financial statements. As mentioned in the
definition, transactions must be a part of a financial character which serves as the common denominator.
Accountable economic transactions are measured in currency.

Various measurement bases include but not limited to the following:

• Historical cost
• Current value
o Fair value
o Value in use
o Current cost

Communicating is the process of preparing and distributing accounting reports to potential users of
accounting information. The end goal of accounting is to provide information to users to allow intelligible
decision making. The communicating process includes the following:
1. Recording refers to the process of systematically maintaining a record of all economic business
transactions.
2. Classifying refers to the sorting or grouping of similar and interrelated economic transactions or
simply posting to the ledger.
3. Summarizing refers to the preparation of the financial statements.

Basic Purpose of Accounting

The basic purpose of accounting is to provide financial information about a business that is useful in making
economic decisions. It follows that the primary responsibility of an accountant is to apply accounting
principles to supply information so that the users could make informed judgment and better decisions.

Users of Financial Information

The main products of the accounting process are general purpose financial statements. These financial
statements are prepared to meet the common needs of most users, both external and internal. Some
examplesof the primary users of the financial statements, as well as the decisions they make based on this
information, are as follows:

Users Economic decision to be made

Management • To decide when to buy, hold, or sell an equity investment
• To assess the stewardship or accountability of management
Employees • To assess the ability of the entity to pay and provide otherbenefits to
its employees
Creditors • To assess the security of the amounts lent to the entity
Investors • To determine distributable profits and dividends
Customers • To assess the financial position of its suppliers
Government • To regulate the activities of entities
• To determine taxation policies
• To prepare and use national statistics

Accounting Concepts and Principles

Accounting concepts and principles are a set of broad conventions that have been devised to provide a
basic framework for financial reporting. As financial reporting involves significant professional judgments
by accountants, these concepts and principles ensure that the users of financial information are not mislead
by the adoption of accounting policies and practices that go against the spirit of the accountancy profession.

• Relevance. Information should be relevant to the decision-making needs of the user. Information
is relevant if it helps users of the financial statements in predicting future trends of the business or
confirming or correcting any past predictions they have made. The same piece of information which
assists users in confirming their past predictions may also be helpful in forming future forecasts.

• Reliability. Information is reliable if a user can depend upon it to be materially accurate and if it
faithfully represents the information that it purports to present. Significant misstatements or
omissions in financial statements reduce the reliability of information contained in them.

• Matching Principle. Matching Principle requires that expenses incurred by an organization must
be charged to the income statement in the accounting period in which the revenue, to which those
expenses relate, is earned.

• Timeliness. Timeliness principle in accounting refers to the need for accounting information to be
timely presented to the users for their decision-making needs.

• Neutrality. Information reported in the financial statements must be free from bias. It should reflect
a balanced view of the activities of the company without trying to present them in the way the
company wanted it to be presented. Information may be deliberately biased or systematically
biased.

• Faithful Representation. Presented information in the financial statements should faithfully

represent the transaction and events that occur during a period. Faithfull representation requires
that transactions and events should be accounted for in a manner that represents their true
economic substance rather than the mere legal form. This concept is known as Substance Over
Form. This requires that if the substance of transaction differs from its legal form, then such
transaction should be accounted for in accordance with its substance and economic reality.

• Prudence. Financial statements preparation requires the use of professional judgment in adopting
accounting policies and estimates. Prudence requires that accountants should exercise a degree
of cautiousness in adopting policies and significant estimates giving the assets and income of the
entity are not overstated whereas liability and expenses are not understated.

• Completeness. Reliability of information contained in the financial statements is achieved only if

the complete financial information is provided relevant to the business and financial decision-
making needs of the users. Therefore, information must be complete in all material respects.
Incomplete information reduces not only the relevance of the financial statements; it also decreases
its reliability since users will be basing their decisions on information which only presents a partial
view of the activities of the entity.

• Monetary Unit Assumption. Money Measurement Concept in accounting, also known as

Measurability Concept, means that only transactions and events that are capable of being
measured in monetary terms are recognized in the financial statements. All transactions and events
recorded in the financial statements must be condensed to a unit of monetary currency. Where it
is not possible to assign a reliable monetary value to a transaction or event, it shall not be recorded
in the financial statements.

• Comparability. Financial statements of one (1) accounting period can be compared to another for
the users to develop meaningful conclusions about the trends in an entity's financial performance
and position over time. Comparability of financial statements over different accounting periods can
be ensured by the application of similar accountancy policies over a period of time.

• Consistency. Financial statements of one (1) entity must also be consistent with other entities
within the same line of business. This should aid users in analyzing the performance and position
of one (1) company relative to the industry standards. It is therefore necessary for entities to adopt
accounting policies that best reflect the existing industry practice.

• Understandability. Transactions and events must be accounted for and presented in the financial
statements in a manner that is easily understandable by a user who possesses a reasonable level
of knowledge of the business, economic activities, and accounting in general provided that such a
user is willing to study the information with reasonable diligence.

• Materiality Concept. Information is material if its omission or misstatement could influence the
economic decisions of users taken based on the financial statement

• Going Concern Assumption. Going concern is one (1) of the fundamental assumptions in
accounting where preparation of financial statements is based. Financial statements are prepared
assuming that a business entity will continue to operate in the foreseeable future without the need
or intention on the part of management to liquidate the entity or to significantly limit its operational
activities.

• Accrual Concept. Financial statements are prepared under the Accruals Concept of accounting
which requires that income and expense must be recognized in the accounting periods to which
they relate rather than on cash basis. An exception to this general rule is the cash flow statement
whose main purpose is to present the cash flow effects of transaction during an accounting period.

• Business Entity Concept. Financial accounting is based on the premise that the transactions and
balances of a business entity are to be accounted for separately from its owners. The business
entity is therefore considered to be distinct from its owners for the purpose of accounting.

• Realization Concept. Realization concept, also known as revenue recognition principle, refers to
the application of accruals concept towards the recognition of revenue (income). Under this
principle, revenue is recognized by the seller when it is earned regardless of whether cash from
the transaction has been received or not.

• Dual Aspect Concept. Also known as Duality Principle, is a fundamental convention of accounting
that necessitates the recognition of all aspects of an accounting transaction. Dual aspect concept
is the underlying basis for double entry accounting system.

• Historical Cost Concept. Assets need to be assigned some value in the accounting books.
Recognizing these values can be at their historical cost, market value, replacement value, or their
potential business value. Historical Cost is clearly the most objective, reliable, and verifiable value
of the lot. Historical Cost Convention requires assets to be recorded at their historical value unless
it is prudent to recognize a lower value (e.g., due to impairment). Historical Cost is therefore the
default value assigned to assets.

• Verifiability Concept. Verifiability means that the accounting information presented in financial
statements must be verifiable by independent accountants. Accounting information presented in
the financial statements is considered verifiable if two (2) independent accountants (e.g., auditors)
can reasonably conclude based on their verification that it is a fair reflection of the underlying
transactions and circumstances.

Common Branches of Accounting

• Financial Accounting. Branch of accounting that focuses on general purpose financial

statements.

• Managerial accounting. Refers to the accumulation and communication of information for use by
internal users or management

• Cost Accounting. It is the systematic recording and analysis of costs of materials, labor, and
overhead incident to production.

• Auditing. It is the process of evaluating the correspondence of certain assertions with established
criteria and expressing opinion thereon.

• Tax accounting. The preparation of tax returns and rendering of tax advice, such as the
determination of the consequences of certain proposed business endeavors.

• Government Accounting. Refers to the accounting for the government and its instrumentalities,
placing emphasis on the custody of funds, the purposes for which those funds are committed, and
the responsibility and accountability of the individuals entrusted with those funds.

Republic Act No. 9298

Professional Regulatory Board of Accountancy

Professional Regulatory Board of Accountancy (BOA), under the supervision and administrative control of
the Professional Regulation Commission (PRC), supervises and regulates practice of accountancy in the
Philippines. The BOA consists of a chairperson and six (6) members appointed by the President of the
Philippines.

Scope of Practice

Under Republic Act No. 9298 known as the Philippine Accountancy Act of 2004, the practice of accountancy
includes but not limited to the following:

• Practice of Public Accountancy. Shall constitute a person, be it his/her individual capacity, or as

a staff member in an accounting or auditing firm, holding out himself/herself as one skilled in the
knowledge, science, and practice of accounting, and as a qualified person to render professional
services as a certified public accountant. The Association of Certified Public Accountants in Public
Practice (ACPAPP) is the national organization of Certified Public Accountants in the Philippines
who are engaged in public practice.

• Practice in Commerce and Industry. Shall constitute in a person involved in decision making
requiring professional knowledge in the science of accounting, or when such employment or
position requires that the holder thereof must be a certified public accountant. he Association of
Certified Public Accountants in Commerce and Industry (ACPACI) is the national organization of
Certified Public Accountants in the commerce & industry sector in the Philippines.

• Practice in Education/Academe. Shall constitute in a person in an educational institution which

involve teaching of accounting, auditing, management advisory services, fiancé, business law,
taxation, and other technically related subject. The National Association of CPAs in Education
(nACPAE) is the national organization of accounting educators in the Philippines.
• Practice in Government. Shall constitute in a person who holds, or is appointed to, a position in
an accounting professional group in government or in a government-owned and/or controlled
corporation. The Government Association of Certified Public Accountants (GACPA) is an
organization of accounting professionals who work individually in various government agencies
nationwide.

Examination, Registration and Licensure

The Certified Public Accountant Examinations

All applicants for registration for the practice of accountancy shall be required to undergo a licensure
examination to be given by the Board.

Qualifications of Applicant for Examinations

Any person applying for examination shall establish the following requisites to the satisfaction of the BOA
that he/she:
• is a Filipino citizen;
• is of good moral character;
• is a holder of the degree of Bachelor of Science in Accountancy conferred by the school, college,
academy or institute duly recognized and/or accredited by the PRC on Higher Education or other
authorized government offices; and
• has not been convicted of any criminal offence involving moral turpitude.

Scope of Examination
The licensure examination for certified public accountants shall cover, but are not limited to, the following
subjects:
• Financial Accounting and Reporting
• Advanced Financial Accounting and Reporting
• Management Advisory Services
• Auditing
• Taxation
• Regulatory Framework for Business Transactions

The BOA, subject to the approval of the PRC, may revise or exclude any of the subjects and their syllabi,
and add new ones as the need arises. (a)

Rating in the Licensure Examination

To be qualified as having passed the licensure examination for accountants, a candidate must obtain a
general average of seventy five percent (75%), with no grade lower than sixty-five percent (65%) in any
given subject. In the event a candidate obtains the rating of seventy-five percent (75%) and above in at
least a majority of subjects as provided for in the Act, he/she shall receive a conditional credit for the
subjects passed: Provided, That a candidate shall take an examination in the remaining subjects within two
(2) years from preceding examination: Provided, further, That if the candidate fails to obtain at least a
general average of seventy-five percent (75%) and a rating of at least sixty-five percent (65%) in each of
the subjects reexamined, he/she shall be considered as failed in the entire examination.

Failing Candidates to Take Refresher Course

Any candidate who fails in two (2) complete Certified Public Accountant Board Examinations shall be
disqualified from taking another set of examinations unless he/she submit evidence to the satisfaction of
the Board that he/she enrolled in and completed at least twenty-four (24) units of subject given in the
licensure examination.

The examination in which the candidate was conditioned together with the removal examination on the
subject in which he/she failed shall be counted as one compete examination.
Issuance of Certificate of Registration and Professional Identification Card
A certificate of registration shall be issued to examinees who pass the licensure examination subject to
payment of fees prescribed by the BOA. The Certificate of Registration shall bear the signature of the
chairperson of the PRC and the chairman and members of the BOA, stamped with the official seal of the
PRC and of the BOA, indicating that the person named therein is entitled to the practice of the profession
with all the privileges appurtenant thereto. The said certificate shall remain in full force and effect until
withdrawn, suspended or revoked in accordance with the Act.

Refusal to Issue Certificate of Registration and Professional Identification Card

The BOA shall not register and issue a certificate of registration and professional identification Card to any
successful examinee convicted by the court of competent jurisdiction of a criminal offence involving moral
turpitude or guilty of immoral and dishonorable conduct to any person or unsound mind. In the event of
refusal to issue certificate for any reason, the BOA shall give the applicant a written statement setting forth
the reasons for such action, which statement shall be incorporated in the record of the BOA.

Suspension and Revocation of Certificate of Registration and Professional Identification Card and
Cancellation of Special Permit
The BOA shall have the power, upon the notice and hearing, to suspend or revoke the practitioner's
certificate of registration and professional identification card or suspend his/her from the practice of his/her
profession or cancel his/her special permit for any of the causes or ground mentioned under Section 23 of
the Act or any of the provisions of the Act, and its implementing rules and regulations, the certified Public
Accountant's Code of Ethics and the technical and professional standards of practice for certified public
accountants.

Reinstatement, Reissuance and Replacement of Revoked or Lost Certificates

The BOA may, after the expiration of two (2) years from the date of revocation of a certificate of registration
and upon application and for reasons deemed proper and sufficient, reinstate the validity of a revoked
certificate of registration and in so doing, may, in its discretion, exempt the applicant from taking another
examination.

A new certificate of registration to replace lost, destroyed, or mutilated certificate/license may be issued,
subject to the rules and promulgated by the BOA and the PRC, upon the payment of the required fees.

Accounting Standards

The accounting standards adopted in the Philippines is called Philippine Financial Reporting Standards
(PFRSs). The PFRSs comprise of standards and interpretations as follows:
• Philippine Financial Reporting Standards (PFRSs);
• Philippine Accounting Standards (PASs); and
• Interpretations.

Accounting and Auditing Standard Setting Bodies and Other Relevant Organizations

• Financial and Sustainability Reporting Standards Council (FSRSC) (b). Established under the
Implementing Rules and Regulations of the Philippine Accountancy Act of 2004 to assist the BOA
in carrying out its power and function to promulgate accounting standards in the Philippines. The
FSRSC’s main function is to establish generally accepted accounting principles in the Philippines.
FSRSC is composed of fifteen (15) individuals including the chairperson. The FSRSC is the
successor of the Accounting Standards Council (ASC).

• Philippine Interpretations Committee (PIC). FSRSC formed the PIC in August 2006 to assist the
FRSC in establishing and improving financial reporting standards in the Philippines. The role of the
PIC is principally to issue implementation guidance on PFRSs. Implementation guidance approved
by the PIC shall be forwarded to the FSRSC, BOA and PRC for approval before issuance to the
public as final guidance. PIC is composed of fifteen (15) individuals including the chairperson. The
PIC replaced the Interpretations Committee created by the ASC in 2000.
• Auditing and Assurance Standards Council (AASC). An authority in establishing and promulgating
auditing standards in the Philippines to enhance reliability, uniformity, and acceptability of financial
statements in the country. AASC is composed of fifteen (15) individuals including the chairperson.

• Securities and Exchange Commission. The SEC has the authority to prescribe the financial
reporting framework to be used by corporations in the Philippines. These general financial reporting
requirements are set out in Rule 68 of the Securities Regulation Code (SRC).

• Bangko Sentral ng Pilipinas (BSP). The primary regulator of banking institutions. It issues rules and
guidelines that include financial reporting matters.

• Philippine Institute of Certified Public Accountants (PICPA). The accredited professional

organization of Certified Public Accountants by the PRC.

Relevant International Organizations

• International Accounting Standards Board (IASB). The IASB is an independent group of experts
with an appropriate mix of recent practical experience in setting accounting standards, in preparing,
auditing, or using financial reports, and in accounting education.

The standards issued by the IASB are called International Financial Reporting Standards and
composed of the following:
o International Financial Reporting Standards (IFRSs);
o International Accounting Standards (IASs); and
o Interpretations.

The standards issued by the IASB are called IFRSs. The IASB adopted IASs issued by its
predecessor, the International Accounting Standards Committee (IASC). The PFRSs and PASs
are adopted from these standards.

• International Financial Reporting Interpretations Committee (IFRIC). The IFRIC is the interpretative
body of the IASB. The IFRIC works with the IASB in supporting the consistent application of IFRS.
The IFRIC responds to questions about the application of the Accounting Standards and does other
work at the request of the IASB.

• International Federation of Accountants (IFAC). The IFAC is a global organization representing the
accounting profession. IFAC establishes and promotes international standards and speaks for the
profession on public policy issues.

The Need for Global Accounting Standards

While businesses raise capital, engage in transactions, or have worldwide operations and subsidiaries in
several countries, investors look for diversification and investment opportunities around the world. In the
past, having separate sets of national accounting rules across several nations hindered such cross-border
activity. For businesses creating financial statements as well as investors and other parties utilizing those
financial accounts to make economic decisions, this patchwork of accounting regulations frequently
increased costs, complexity, and risk.

Amounts reported in financial statements may have been computed using different methods due to the use
of national accounting standards. Applying global accounting standards address this challenge by providing
internationally accepted accounting standards that brings transparency, accountability, and efficiency to
financial markets worldwide.
(a)
In December 2015, the BOA issued Board Resolution No. 262 (s. 2015) changing and reducing the number of
subjects of the Licensure Examination for Certified Public Accountants from seven (7) subjects to six (6).
(b) In
September 2022, the BOA issued Board Resolution No. 44 (s. 2022) renaming the Financial Reporting Standards
Council to Financial and Sustainability Reporting Standards Council.

References:
Millan, Z. (2022). Conceptual Framework & Accounting Standards. Bandolin Enterprise.
Valix, C., Peralta, J., & Valix, C. (2022). Conceptual Framework and Accounting Standards. GIC Enterprises & Co.,
Inc.
Official Gazette. (2004). Republic Act No. 9298. Retrieved on October 24, 2022, from
https://www.officialgazette.gov.ph/2004/05/13/republic-act-no-9298/
IFRS Foundation. (2016). Who uses IFRS Accounting Standards?: Philippines. Retrieved on October 24, 2022,
https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/view-
jurisdiction/philippines/
Financial and Sustainability and Reporting Standards Council. (n.d.). About the FRSC. Retrieved on October 24, 2022,
https://www.pfrsc.org/government-organization-about-the-fsrsc
Auditing and Assurance Standards Council. (n.d.). Establishing Auditing and Assurance Excellence in the Philippines.
Retrieved on October 24, 2022,
https://aasc.org.ph/#:~:text=The%20Auditing%20and%20Assurance%20Standards,adopting%20standards
%20from%20the%20IAASB.