1CFAS-OVERVIEW-OF-ACCOUNTING

Conceptual Framework & Accounting Standards

Overview of Accounting

  • Author: Zeus Vernon B. Millan

Learning Objectives

  • Define accounting and its basic purpose.

  • Explain basic concepts applied in accounting.

  • State branches of accounting and practice sectors.

  • Importance of uniform financial reporting standards.

Definition of Accounting

  • Defined as the process of identifying, measuring, and communicating economic information to support informed decisions by users. (Source: American Association of Accountants)

Three Important Activities

  1. Identifying:

    • Analyzing events and transactions to recognize accountable events only.

  2. Measuring:

    • Assigning monetary values to transactions and events.

  3. Communicating:

    • Transforming data into useful information like financial statements for users.

Types of Events

External Events:

  • Involve external parties:

    • Exchange: Reciprocal giving and receiving.

    • Non-reciprocal Transfer: One-way transactions.

    • Other External Events: Changes in resources or obligations without transfers.

Internal Events:

  • Do not involve external parties:

    • Production: Transforming resources into finished goods.

    • Casualty: Unexpected losses from disasters.

Measurement

  • Several measurement bases include:

    • Historical cost

    • Fair value

    • Present value

    • Realizable value

    • Current cost

    • Inflation-adjusted costs

  • Historical cost is the most common, often combined with other bases.

Valuation by Fact or Opinion

  • Valued by Opinion: Affected by estimates.

  • Valued by Fact: Unaffected by estimates.

Basic Purpose of Accounting

  • The main goal is to provide information on economic activities useful for decision making.

Types of Accounting Information

Classified by Users’ Needs:

  1. General Purpose Accounting Information:

    • Meets common needs; governed by Philippine Financial Reporting Standards (PFRS).

  2. Special Purpose Accounting Information:

    • Tailored to specific user needs; facilitated via managerial or tax accounting.

Basic Accounting Concepts

  1. Double-entry system: Records each event in two parts—debit and credit.

  2. Going concern: Assumption of indefinite operational continuity.

  3. Separate entity: Entity treated separately from its owners.

  4. Stable monetary unit: Financial statement amounts in a common unit, ignoring purchasing power changes.

  5. Time Period: Business life divided into reporting periods.

  6. Materiality: Information omission or misstatement can influence decisions.

  7. Cost-benefit: Processing costs should not exceed benefits.

Basic Accounting Concepts - Continuation

  1. Accrual Basis of Accounting: Recognizes transaction effects when they occur, regardless of cash changes.

  2. Historical Cost Concept: Asset value determined by acquisition cost.

  3. Concept of Articulation: Components of financial statements interrelated.

  4. Full Disclosure Principle: Financial statements disclose significant details while ensuring understandability.

  5. Consistency Concept: Accounting policies consistently applied across periods.

Basic Accounting Concepts - Continuation

  1. Matching: Costs recognized as expenses when related revenue recognized.

  2. Residual Equity Theory: Assets - Liabilities - Preferred Equity = Ordinary Equity.

  3. Fund Theory: Focus on custody and administration of funds.

  4. Realization: Conversion of non-cash assets into cash.

  5. Prudence (Conservatism): Care in estimates to avoid overstating assets or income.

Common Branches of Accounting

  1. Financial Accounting: General purpose financial statements focus.

  2. Management Accounting: Special purpose reports for management use.

  3. Cost Accounting: Analysis of production costs.

  4. Auditing: Evaluating assertions against criteria and expressing opinions.

  5. Tax Accounting: Preparing tax returns and advising on tax implications.

  6. Government Accounting: Accounting practices within governmental entities focusing on public fund custody.

Four Sectors in the Practice of Accountancy

  1. Public Accountancy: Auditing or accounting services to multiple clients.

  2. Commerce and Industry: Private sector roles requiring CPA knowledge.

  3. Education/Academe: Teaching accounting and related subjects.

  4. Government: Accounting roles that require CPA but work within government agencies.

Philippine Financial Reporting Standards (PFRSs)

  • PFRSs are adopted from the International Financial Reporting Standards (IFRSs) by the Financial and Sustainability Reporting Standards Council (FSRSC).

  • Includes:

    • IFRS Accounting Standards

    • IFRS for SMEs Accounting Standard

    • IFRS Sustainability Disclosure Standards

The Need for Reporting Standards

  • Entities must adhere to uniform reporting standards to prevent misleading financial statements.

  • Generally Acceptable: Standards created by authoritative bodies or accepted principles proven useful over time.

  • The establishment process is democratic, requiring consensus among practicing accountants.