Definition of Accounting Types of events or transactions

Accounting is "the process of identifying, 1. External events- are events that involve an
measuring, and communicating economic entity and another external party.
information to permit informed judgments and
Types of External events
decisions by users of the information." -
(American Association of Accountants) i. Exchange (reciprocal transfer) - an
event wherein there is a reciprocal
Three important activities included in the
giving and receiving of economic
definition of accounting
resources or discharging of economic
1. Identifying obligations between an entity and an
external party.
2. Measuring
Examples: sale, purchase, payment
3. Communicating
of liabilities, receipt of notes receivable in
Identifying exchange for accounts receivable, and the
like.
Identifying is the process of analyzing events
and transactions to determine whether or not ii. Non-reciprocal transfer is a "one way"
they will be recognized. transaction in that the party giving
something does not receive anything in
 Recognition refers to the process of return while the party receiving does not
including the effects of an accountable give anything in exchange.
event in the statement of financial
position or the statement of Examples: donations, gifts or
comprehensive income through a charitable contributions, payment of taxes,
journal entry. imposition of fines, theft, provision of capital
by owners, distributions to owners', and the
Only accountable events are recognized like.
(ie., journalized). An accountable event is one
that affects the assets, liabilities, equity, 1 FASB Accounting Standards Codification
income or expenses of an entity. It is also (ASC) 845
known as economic activity, which is the
iii. External event other than transfer an
subject matter of accounting. Only economic
event that involves changes in the
activities are emphasized and recognized in
economic resources or obligations of an
accounting. Sociological and psychological
entity caused by an external party or
matters are not recognized.
external source but does not involve
Non-accountable events are not recognized transfers of resources or obligations.
but disclosed only in the notes, if they have
Examples: changes in fair values
accounting relevance. Disclosure only in the
and price levels, obsolescence,
notes is not an application of the recognition
technological changes, vandalism, and the
process. A non-accountable event that has an
like.
accounting relevance may be recorded through
a memorandum entry. 2. Internal events - are events that do not
involve an external party.
 d. Retained earnings, which is affected by
various estimates of income and expenses
Types of Internal events
When measurement is unaffected by
a. Production - the process by which
estimates, the items measured are said to be
resources are transformed into finished
valued by fact.
goods. Examples: conversion of raw
materials into finished products, Examples:
production of farm products, and the
a. Ordinary share capital valued at par
like.
value
b. Casualty - an unanticipated loss from
disasters or other similar events. b. Land stated at acquisition cost
Examples: loss from fire, flood, and
other catastrophes. c. Cash measured at face amount

Measuring Communicating

Measuring involves assigning numbers, Communicating is the process of transforming

normally in monetary terms, to the economic economic data into useful accounting
transactions and events. information, such as financial statements and
other accounting reports, for dissemination to
Several measurement bases are used in users. It also involves interpreting the
accounting which include, but not limited to, significance of the processed information.
historical cost, fair value, present value,
realizable value, current cost, and sometimes The communicating process of accounting
inflation- adjusted costs. The most commonly involves three aspects:
used is historical cost. This is usually combined 1. Recording - refers to the process of
with the other measurement bases. systematically committing into writing the
Accordingly, financial statements are said to be identified and measured accountable events in
prepared using a mixture of costs and values. the journal through journal entries.
Costs include historical cost and current cost
while values include the other measurement 2. Classifying - involves the grouping of
bases. similar and interrelated items into their
respective classes through postings in the
Valuation by fact or opinion ledger.
The use of estimates is essential in providing 3. Summarizing - putting together or
relevant information. Thus, financial statements expressing in condensed form the recorded
are said to be a mixture of fact and opinion. and classified transactions and events. This
When measurement is affected by includes the preparation of financial statements
estimates, the items measured are said to be and other accounting reports.
valued by opinion. Examples: Interpreting the processed information
a. Estimates of uncollectible amounts of involves the computation of financial statement
receivables. ratios. Some regulatory bodies, such as the
Bangko Sentral ng Pilipinas (BSP), require
b. Depreciation and amortization expenses, certain financial ratios to be disclosed in the
which are affected by estimates of useful life notes to financial statements.
and residual value.
c. Estimated liabilities, such as provisions.
 3. Consumption - the process of using the final
output of the production process.
4. Income distribution - the process of
Basic purpose of accounting
allocating rights to the use of output among
The basic purpose of accounting is to provide individuals and groups in society.
information that is useful in making economic
5. Savings - the process of setting aside rights
decisions.
to present consumption in exchange for rights
Various sources of information are used to future consumption.
when making economic decisions and the
financial statements are only one of those
sources. Other sources may include current Types of information provided by
events, industry publications, internet accounting
resources, professional advices, expert
1. Quantitative information - information
systems, etc.
expressed in numbers, quantities, or units.
Economic entities use accounting to
2. Qualitative information - information
record economic activities, process data, and
expressed in words or descriptive form.
disseminate information intended to be useful
Qualitative information is found in the notes to
in making economic decisions.
financial statements as well as on the face of
An economic entity is a separately the other financial statements.
identifiable combination of persons and
3. Financial information - information
property that uses or controls economic
expressed in money. Financial information is
resources to achieve certain goals or
also quantitative information because monetary
objectives. An economic entity may either be a:
amounts are normally expressed in numbers.
a. Not-for-profit entity - one that carries out
Types of accounting information classified
some socially desirable needs of the
as to users' needs
community or its members and whose activities
are not directed towards making profit; or 1. General purpose accounting information -
designed to meet the common needs of most
b. Business entity - one that operates primarily
statement users. This information is provided
for profit.
under financial accounting. General purpose
Economic activities are activities that information is governed by generally accepted
affect the economic resources (assets) and accounting principles (GAAP) represented by
obligations (liabilities), and consequently, the the Philippine Financial Reporting Standards
equity of an economic entity. Economic (PFRSS).
activities include:
2. Special purpose accounting information -
1. Production - the process of converting designed to meet the specific needs of
economic resources into outputs of goods and particular statement users. This information is
services that are intended to have greater utility provided by other types of accounting other
than the required inputs. than financial accounting, e.g, managerial
accounting, tax basis accounting.
2. Exchange - the process of trading resources
or obligations for other resources or Sources of information in financial
obligations. statements
Information in the financial statements is not Creative skills and judgment are
obtained exclusively from the entity's exercised in problem solving. The following are
accounting records. Some are obtained from the steps in problem solving:
external sources. For example, fair value
1. Recognizing a problem
measurements, resolutions of uncertainties,
future lease payments, and contractual 2. Identifying alternative solutions
commitments are only a few of the information
presented in the financial statements that are 3. Evaluating the alternatives
derived from external sources. 4. Selecting a solution from among the
alternatives
5. Implementing the solution

Accounting as science and art

1. As a social science, accounting is a body of Accounting Concepts
knowledge which has been systematically Accounting concepts refer to the principles
gathered, classified and organized. upon which the process of accounting is based.
2. As a practical art, accounting requires the The term "accounting concepts" is used
use of creative skills and judgment. interchangeably with the following terms:

Accounting as an information system  Accounting assumptions (Accounting

postulates) fundamental concepts or
Accounting identifies and measures economic principles and basic notions that provide
activities, processes information into financial the foundation of the accounting
reports, and communicates these reports to process.
decision makers.  Accounting theory - is logical reasoning
in the form of a set of broad principles
Accounting as a language of business
that (i) provide a general frame of
Accounting is often referred to as a "language reference by which accounting practice
of business" because it is fundamental to the can be evaluated and (ii) guide the
communication of financial information. development of new practices and
procedures. It is the organized set of
Creative and Critical thinking in accounting
concepts and related principles that
The practice of accountancy requires the explain and guide the accountant's
exercise of creative and critical thinking. action in identifying, measuring,
communicating accounting information.
a. Creative thinking involves the use of Accounting theory comprises the
imagination and insight to solve problems by Conceptual Framework and the
finding new relationships (ideas) among items Philippine Financial Reporting
of information. It is most important in identifying Standards (PFRSS).
alternative solutions.
Most accounting concepts are derived from
b. Critical thinking involves the logical analysis the Conceptual Framework and the Philippine
of issues, using inductive or deductive Financial Reporting Standards (PFRSS).
reasoning to test new relationships to However, some accounting concepts are
determine their effectiveness. It is most implicit, meaning they are not expressly stated
important in evaluating alternative solutions. in the Framework or PFRSS but are generally
accepted because of their long-time use in the
profession.
Examples of accounting concepts: calendar year period starts on January 1 and
ends on December 31 of that same year. A
1. Double-entry system - each accountable
fiscal year period also covers 12 months but
event is recorded in two parts - debit and
starts on a date other than January. 1.
credit.
6. Materiality concept - information is material if
2. Going concern assumption - the entity is
its omission or misstatement could influence
assumed to carry on its operations for an
economic decisions. Materiality is a matter of
indefinite period of time. Meaning, the entity
professional judgment and is based on the size
does not expect to end its operations in the
and nature of the item being judged.
foreseeable future.
7. Cost-benefit (Cost constraint/ Reasonable
The measurement basis involving
assurance) - the cost of processing and
mixture of costs and values is appropriate only
communicating information should not exceed
when the entity is a going concern. If the entity
the benefits to be derived from it.
is a liquidating concern, the appropriate
measurement basis is realizable value, i.e., 8. Accrual Basis of accounting the effects of
estimated selling price less estimated costs to transactions and other events are recognized
sell for assets and expected settlement amount when they occur (and not as cash is received
for liabilities. or paid) and they are recorded in the
accounting records and reported in the
3. Separate entity (Accounting entity / Business
financial statements of the periods to which
entity concept / Entity concept) the entity is
they relate.
viewed separately from its owners.
Accordingly, the personal transactions of the Under accrual basis, income is
owners among themselves or with other recognized when earned rather than when
entities are not recorded in the entity's cash is collected and expenses are recognized
accounting records. This concept defines the when incurred rather than when cash is paid.
area of interest of the accountant.
9. Historical cost concept (Cost principle) - the
4. Stable monetary unit (Monetary unit value of an asset is determined on the basis of
assumption) acquisition cost.
a. Assets, liabilities, equity, income and This concept is not always maintained.
expenses are stated in terms of a common unit Some PFRS require the departure from this
of measure, which is the peso in the concept, such as when inventories are
Philippines; and measured at net realizable value (NRV) rather
than at cost when applying the "lower of cost
b. The purchasing power of the peso is
and NRV measurement.
regarded as stable or constant and that its
instability is insignificant and therefore ignored. 10. Concept of Articulation - all of the
components of a complete set of financial
*To be useful, accounting information
statements are interrelated. The preparation of
should be stated in a common denominator.
a worksheet (and the eventual completion of
For example, amounts in foreign currencies
the financial statements) recognizes that the
should be translated into pesos.
financial statements are fundamentally
5. Time Period (Periodicity Accounting period) - interrelated and interact with each other.
the life of the entity is divided into series of Accordingly, when users use the financial
reporting periods. An accounting period is statements in making decisions, they need to
usually 12 months and may either be a use each financial statement in conjunction
calendar year or a fiscal year period. A with the other financial statements.
 For example, when evaluating an reliable information. Changes in accounting
entity's ability to generate future cash flows, all policies are disclosed in the notes.
the financial statements should be used and
13. Matching (Association of cause and effect)
not only the statement of cash flows.
- costs are recognized as expenses when the
- Receivables and payables in the statement of related revenue is recognized.
financial position provide information on
14. Entity theory the accounting objective is
expected cash receipts and cash
geared towards proper income determination.
disbursements in future periods.
Proper matching of costs against revenues is
- Income and expenses in the statement of the ultimate end. This theory emphasizes the
profit or loss and other comprehensive income income statement and is exemplified by the
provide information on the entity's ability to equation "Assets = Liabilities + Capital."
generate cash flows from its operations.
15. Proprietary theory - the accounting
- Information on issued and unissued shares in objective is geared towards the proper
the statement of changes in equity provides valuation of assets. This theory emphasizes
information on the availability of equity the importance of the balance sheet and is
financing. exemplified by the equation "Assets-Liabilities
= Capital."
- Information on historical changes in cash and
cash equivalents in the statement of cash flows 16. Residual equity theory - this theory is
helps users assess future sources and uses of applicable when there are two classes of
funds. shares issued, ie, ordinary and preferred. The
equation is "Assets - Liabilities - Preferred
- The notes to financial statements provides
Shareholders' Equity = Ordinary Shareholders'
information on the quality of earnings, e.g.,
Equity." This theory is applied in the
whether income or expenses are realized or
computation of book value per share and return
unrealized or whether they are recurring or
on equity.
non-recurring.
17. Fund theory - the accounting objective is
11. Full disclosure principle this principle
neither proper income determination nor proper
recognizes that the nature and amount of
valuation of assets but the custody and
information included in the financial statements
administration of funds. The objective is
reflect a series of judgmental trade-offs. The
directed towards cash flows, exemplified by the
trade- offs strive for:
formula "cash inflows minus cash outflows
a. sufficient detail to disclose matters that make equals fund." This concept is used in
a difference to users, yet government accounting and fiduciary
accounting.
b. sufficient condensation to make the
information understandable, keeping in mind 18. Realization the process of converting non-
the costs of preparing and using it. cash assets into cash or claims for cash. It is
also the concept that deals with revenue
12. Consistency concept - the financial recognition.
statements are prepared on the basis of
accounting principles that are applied For example, realization occurs when
consistently from one period to the next. goods are sold for cash or in exchange for
Changes in accounting policies are made only accounts receivable or notes receivable. The
when required or permitted by the PFRSS or goods are non-cash assets and they are
when the change results to more relevant and converted into cash or, in the case of the
receivables, claims for cash.
19. Prudence (Conservatism) - is the use of recognized as expenses over the periods their
caution when making estimates under economic benefits are consumed, using some
conditions of uncertainty, such that assets or method of allocation.
income are not overstated and liabilities or
For example, the cost of equipment is
expenses are not understated. In other words,
initially recognized as asset and subsequently
when exercising prudence, the one which has
recognized as depreciation expense over the
the least effect on equity is chosen.
periods the equipment is used. Other examples
However, the exercise of prudence does include amortization, expensing of
not allow the deliberate understatement of prepayments, and effective interest method of
assets or overstatement of liabilities in order to allocation.
create hidden reserves because the financial
22. Immediate recognition - costs that do not
statements would not be faithfully represented.
meet the definition of an asset, or ceases to
An example of a hidden reserve is the meet the definition of an asset, are expensed
"cookie jar reserve." It is a form of fraudulent immediately. Examples include casualty losses
reporting wherein during periods of high profits, and impairment losses.
liabilities are overstated through excessive
Common branches of accounting
provisions of expenses or non-recognition of
income. In subsequent periods, when the 1. Financial accounting - is the branch of
entity's financial performance is poor, the accounting that focuses on general purpose
"cookie jar reserve" is reversed to income in financial statements.
order to report high profits. Management
engages in such fraud because of various  General purpose financial statements
reasons, which may include smoothing are those statements that cater to the
earnings in order to secure bonuses over time, common needs of external users,
defer profits to the periods when they are primarily the potential and existing
evaluated for promotion or for election as investors, and lenders and other
members of the board of directors, or to show creditors. External users are those who
profits when other entities belonging to the are not involved in managing the entity.
same industry show declining financial  Financial accounting is governed by the
performance. Philippine Financial Reporting
Standards (PFRSS).
Expense recognition principles
Financial accounting vs. Financial reporting
20. Matching concept (Direct association of
costs and revenues) - costs that are directly The term "financial accounting" is often used
related to the earning of revenue are interchangeably with the term "financial
recognized as expenses in the same period the reporting." Although, both financial accounting
related revenue is recognized. and financial reporting focus on general
purpose financial statements, the latter
For example, the cost of inventory is endeavors to promote principles that are also
initially recognized as asset and recognized as useful in "other financial reporting."
expense (ie., cost of sales) when the inventory
is sold. Other examples include freight-out and "Other financial reporting" comprises
sales commissions; these are expensed in the information provided outside the financial
period the related sales are recognized. statements that assists in the interpretation of a
complete set of financial statements or
21. Systematic and rational allocation-costs improves users' ability to make efficient
that are not directly related to the earning of economic decisions.
revenue are initially recognized as assets and
Financial statements vs. Financial report 2. Management accounting refers to the
accumulation and communication of
 Financial statements are the structured
information for use by internal users or
representation of an entity's financial
management. An offshoot of management
position and results of its operations.
accounting is management advisory services
They are the end product of the
which includes services to clients on matters of
accounting process and the means by
accounting, finance, business policies,
which information gathered and
organization procedures, product costs,
processed are periodically
distribution, and many other phases of
communicated to user’s respective
business conduct and operations.
authors.
 A financial report includes the financial 3. Cost accounting is the systematic recording
statements plus other information and analysis of the costs of materials, labor,
provided outside the financial and overhead incident to production.
statements that assists in the
4. Auditing is the process of evaluating the
interpretation of a complete set of
correspondence of certain assertions with
financial statements or improves users'
established criteria and expressing an opinion
ability to make efficient economic
thereon.
decisions.
5. Tax accounting the preparation of tax returns
and rendering of tax advice, such as the
determination of the tax consequences of
certain proposed business endeavors.
6. Government accounting refers to the
accounting for the government and its
instrumentalities, placing emphasis on the
custody of public funds, the purposes for which
those funds are committed, and the
responsibility and accountability of the
individuals entrusted with those funds.
Financial reporting is the provision of financial 7. Fiduciary accounting refers to the handling
information about an entity that is useful to of accounts managed by a person entrusted
external users, primarily the investors, lenders, with the custody and management of property
and other creditors, in making investment and for the benefit of another.
credit decisions.
8. Estate accounting refers to the handling of
Primary objective of financial reporting accounts for fiduciaries who wind up the affairs
of a deceased person.
To provide information about an entity's
economic resources, claims to those 9. Social accounting (social and environmental
resources, and changes in those resources. accounting or social responsibility reporting) -
the process of communicating the social and
Secondary objective of financial reporting
environmental effects of an entity's economic
To provide information useful in assessing the actions to the society.
entity's management stewardship (i.e., how
10. Institutional accounting the accounting for
efficiently and effectively the entity's
non-profit entities other than the government.
management has discharged its responsibilities
to use the entity's economic resources).
11. Accounting systems the installation of 3. Practice in Education/Academe employment
accounting procedures for the accumulation of in an educational institution which involves
financial data and designing of accounting teaching of accounting auditing, management
forms to be used in data gathering. advisory services, finance, business law,
taxation, and other technically related subjects.
12. Accounting research pertains to the careful
analysis of economic events and other 4. Practice in the Government - employment or
variables to understand their impact on appointment to a position in an accounting
decisions. Accounting research includes a professional group in the government or in a
broad range of topics, which may be related to government-owned and/or controlled
one or more of the other branches of corporation, including those performing
accounting, the economy as a whole, or the proprietary functions, where decision making
market environment. requires professional knowledge in the science
of accounting, or where civil service eligibility
Bookkeeping and Accounting
as a certified public accountant is a
Bookkeeping refers to the process of recording prerequisite.
the accounts or transactions of an entity.
Accountants practicing under numbers 2
Bookkeeping normally ends with the
to 4 above are considered in private practice.
preparation of the trial balance. Unlike
accounting, bookkeeping does not require the
interpretation of the significance of the
Accounting standards
processed information.
The Philippine Financial Reporting Standards
Accountancy
(PFRSs) represent the generally accepted
Accountancy refers to the profession or accounting principles (GAAP) in the
practice of accounting. The practice of Philippines.
accounting can be broadly classified into two -
The PFRSS are Standards and
(1) Public practice and (2) Private practice.
Interpretations adopted by the Financial
Public practice does not involve an employer-
Reporting Standards Council (FRSC). They
employee relationship while private practice
comprise:
involves an employer-employee relationship,
meaning the accountant is an employee. a. Philippine Financial Reporting Standards
(PFRSS);
Four sectors in the practice of accountancy
b. Philippine Accounting Standards (PAS); and
Under R.A. 9298 also known as the "Philippine
Accountancy Act of 2004," the practice of c. Interpretations
accounting is sub-classified into the following:
PFRSS are accompanied by guidance
1. Practice of Public Accountancy - involves the to assist entities in applying their requirements.
rendering of audit or accounting related A guidance states whether it is an integral part
services to more than one client on a fee basis. of the PFRSS. A guidance that is an integral
part of the PFRSS is mandatory.
2. Practice in Commerce and Industry - refers
to employment in the private sector in a The need for reporting standards
position which involves decision making
requiring professional knowledge in the science For financial statements to be useful, they
of accounting and such position requires that should be prepared using reporting standards
the holder thereof must be a certified public that are generally acceptable. Otherwise, each
accountant. entity would have to develop its own standards.
If that is the case, every entity may just present b. The Conceptual Framework.
any asset or income it wants and omit any
2. management may also consider the
liability or expense it does not want. Financial
following:
statements would not be comparable, the risk
of fraudulent reporting is heightened, and a. Pronouncements of other standard-
economic decisions based on these financial setting bodies
statements would be grossly incorrect. For this
reason, entities should follow a uniform set of b. Accounting literature and accepted
reporting standards when preparing and industry practices
presenting financial statements. (PAS 8.7-.12)
The term "generally acceptable" means that The term "shall" as used in the PFRSS means
either: 'must' or it is required, while the term "may"
1. the standard has been established by an means it is optional or 'may or may not.
authoritative accounting rule-making body, e.g., Although the selection of appropriate
the PFRSS adopted by the FRSC; or accounting policies is the responsibility of the
2. the principle has gained general acceptance entity's management, the proper application of
due to practice over time and has been proven accounting principles is most dependent upon
to be most useful, e.g., double- entry recording the professional judgment of the accountant.
and other implicit concepts. Accounting standard setting bodies and other
The process of establishing financial relevant organizations
accounting standards is a democratic process 1. Financial Reporting Standards Council
in that a majority of practicing accountants (FRSC) - is the official accounting standard
must agree with a standard before it becomes setting body in the Philippines created under
implemented. the Philippine Accountancy Act of 2004 (R.A.
Hierarchy of Reporting Standards No. 9298).

When selecting its accounting policies, an The FRSC is composed of fifteen (15)
entity considers the following in descending individuals - a chairperson who had been or
order: presently a senior accounting practitioner in
any of the scope of accounting practice and
1. Philippine Financial Reporting Standards fourteen (14) representative members:
(PFRS)
2. In the absence of a PFRS that specifically
applies to a transaction or event, management
shall use its judgment in developing and
applying an accounting policy that results in
information that is relevant and reliable.
In making the judgment.
1. management shall refer to, and consider the
applicability of, the following sources in
descending order:
a. The requirements in PFRSS dealing
with similar and related issues;
2. Philippine Interpretations Committee (PIC) is Foundation with the main objectives of
a committee formed by the Accounting developing and promoting global accounting
Standards Council (ASC), the predecessor of standards.
FRSC, with the role of reviewing the
The IASB was established in April 1,
interpretations of the International Financial
2001 as part of the International Accounting
Reporting Interpretations Committee (IFRIC)
Standards Committee (IASC) Foundation. The
for approval and adoption by the FRSC.
IASC Foundation is a non-profit organization
3. Board of Accountancy (BOA) is the based in Delaware, USA and is the parent of
professional regulatory board created under the IASB, which is based in London. On July 1,
R.A. No. 9298 to supervise the registration, 2010, the IASC Foundation was renamed to
licensure and practice of accountancy in the International Financial Reporting Standards
Philippines. The BOA consists of a chairperson Foundation or IFRS Foundation.
and six (6) members appointed by the
The standards issued by the IASB are
President of the Philippines. The Board shall
the International Financial Reporting Standards
elect a vice-chairperson from among its
(IFRSS), composed of the following:
members for a term of one (1) year.
1. International Financial Reporting Standards
4. Securities and Exchange Commission (SEC)
(IFRSS)
is the government agency tasked in regulating
corporations and partnerships, capital and 2. International Accounting Standards (IASS)
investment markets, and the investing public.
Some SEC rulings affect the accounting 3. Interpretations
requirements of entities and the adoption and The IFRSS are standards issued by the
application of accounting policies. IASB after it replaced its predecessor, the
5. Bureau of Internal Revenue (BIR) - International Accounting Standards Committee
administers the provisions of the National (IASC), in April 1, 2001. The IASS are
Internal Revenue Code. These provisions do standards issued by the IASC which were
not always reflect the goals of financial adopted by the IASB. The PFRSS and PASS
reporting. However, they do at times influence are based on these standards.
the choice of accounting methods and Other relevant international organizations
procedures.
1. International Financial Reporting
6. Bangko Sentral ng Pilipinas (BSP) - Interpretations Committee (IFRIC) - is a
influences the selection and application of committee that prepares interpretations of how
accounting policies by banks and other entities specific issues should be accounted for under
performing banking functions. the application of IFRS where:
7. Cooperative Development Authority (CDA) a. The standards do not include specific
influences the selection and application of authoritative guidance; and
accounting policies by cooperatives.
b. There is a risk of divergent and
Accounting policies prescribed by a unacceptable accounting practices.
regulatory body (e.g., BSP, CDA) are
sometimes referred to as regulatory accounting
principles.
International Accounting Standards
The International Accounting Standards Board
(IASB) is the standard-setting body of the IFRS
 The IFRIC is composed mostly of Accounting Standards Board (FASB), the U.S.
technical partners in audit firms but also national standard setting body.
includes preparers and users. In 2002, IFRIC
The move to IFRSS was primarily
replaced the former Standing Interpretations
brought about by the increasing acceptance of
Committee (SIC) which had been created by
IFRSS world-wide and increasing
the IASC. All of the SIC Interpretations have
internationalization of businesses thereby
been adopted by the IASB.
increasing the need for a common financial
2. IFRS Advisory Council (previously known as reporting standards that minimize, if not
the Standards Advisory Council 'SAC) is a eliminate, inconsistencies of financial reporting
group of organizations and individuals with an among nations.
interest in international financial reporting. The
"A good example of inconsistent
Advisory Council's role includes advising on
national financial reporting is that of German
priorities within the IASB's work program. The
car manufacturer Daimler-Benz AG (prior to its
IASB is required to consult with the Advisory
merger with Chrysler). Daimler-Benz obtained
Council in advance of any board decisions on
a listing of its shares in the US in 1993, and in
major projects that it wishes to add to its
so doing needed to report under both U.S.
agenda.
GAAP and German GAAP. While one might
Members of the Advisory Council are expect that the profit reported would be similar
appointed by the IFRS Foundation which also (as it was exactly the same set of economic
appoints members to the IASB. These transactions being presented), this was not the
members are drawn from different geographic case. The company reported a huge loss of $1
locations and have a wide variety of billion under US GAAP, while at the same time
backgrounds, including users, preparers, reporting a profit of $370 million under its own
academics, auditors, analysts, regulators and domestic German GAAP. This difference was
professional accounting bodies. simply the result of different accounting
practices being used by different countries.
3. International Federation of Accountants
Such significant differences undermine the
(IFAC) is a non- profit, non-governmental, non-
usefulness of financial statements." (source:
political organization of accountancy bodies
The Institute of Chartered Accountants in
that represents the worldwide accountancy
England and Wales, International Financial
profession. Its mission is to develop and
Reporting Standards Certificate Learning
enhance the profession to provide services of
materials.")
consistently high quality in the public interest.
Membership to the IFAC is open to all The future of IFRSS
accountancy bodies recognized by law or
A significant milestone towards achieving the
consensus within their countries.
goal of having one set of global standards was
4. International Organization of Securities reached in October 2002 when the FASB and
Commissions (IOSCO) is an international body the IASB entered into a memorandum of
of security commissions. The Philippine SEC is understanding called the "Norwalk Agreement."
a member of IOSCO.
In this Agreement, the FASB and the
Move to IFRSS IASB formalized their commitment to the
convergence of U.S. GAAP and IFRSS by
Prior to the full adoption of the IFRSS in 2005,
agreeing to use their best efforts to:
the accounting standards used in the
Philippines were previously based on US a. make their existing financial reporting
GAAP, i.e., the Statements of Financial standards fully compatible as soon as
Accounting Standards issued by the Federal practicable, i.e., minimize differences, and
b. coordinate their future work programs to o External events are events which
ensure that once achieved, compatibility is involve an entity and another external
maintained. party. It includes (a) exchanges, (b) non-
reciprocal transfers, and (c) external
Since the publication of the Norwalk
events other than transfers.
Agreement, the IASB and FASB have been
o Internal events are events which do not
working together with the common goal of
producing a single set of global accounting involve an external party. It includes (a)
standards. "In a public statement issued in production and (b) casualties.
January 2017, the outgoing (US) SEC Chair o Measuring is the accounting process of
expressed support for the development of high- assigning numbers, commonly in
quality, globally accepted accounting monetary terms, to the economic
standards, and suggested that the (US) SEC transactions and events. Several
support further efforts by the FASB and IASB measurement bases are used in
to converge their accounting standards to preparing financial statements.
enhance the quality and comparability of o Financial accounting is the branch of
financial reporting." accounting that focuses on the general
purpose financial statements.
(source: o General purpose financial statements
https://www.pwc.com/us/en/clodirect/issues/ifrs are those that cater to the common
-adoption-convergence.html) needs of a wide range of external users.
Changes in reporting standards o External users are those who do not
have the authority to demand financial
Once established, financial reporting standards reports tailored to their specific needs.
are continually reviewed, revised or o The four sectors in the practice of
superseded. Changes to reporting standards accountancy are: (a) public practice, (b)
are primarily made in response to users' commerce and industry, (c) academe,
needs. Users' needs for financial information and (d) government.
change, and so must financial reporting o The accounting standards used in the
standards in order to continually provide useful
Philippines are the PFRSS, which are
information. Legal, political, business and
based on the IFRSS. The PFRSS
social environments also influence changes in
comprise the following: (1) PFRSS, (2)
reporting standards. Regulatory bodies,
PASS, and (3) Interpretations.
lobbyists, laws and regulations, and changes in
o The Financial Reporting Standards
economic environments affect the choice of
Council (FRSC) is the official accounting
accounting treatment provided under the
standard setting body in the Philippines.
reporting standards.
o Financial reporting standards
Summary: continuously change primarily in
response to users' needs.
o Accounting involves the activities of
identifying, measuring, and
communicating information that is useful
in making economic decisions.
o Recognition refers to the process of
incorporating the effects of an
accountable event in the financial
statements through a journal entry.