framework of accounting2.ppt
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New ConceptualFramework of
Accounting
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Definition of Accounting
Accounting is the art of recording,classifying, and summarizing in asignificant manner and in terms of
money, transactions and eventswhich are in part at least of afinancial character and interpreting
the results thereof.
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Accounting is the process ofidentifying, measuring andcommunicating economic information
to permit informed judgment anddecision by users of the information
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Important points
1. Accounting is about quantitativeinformation
2. Financial in nature
3. Information should be useful indecision making
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Components o f Accounting
Identifying as the analyticalcomponent
Measuring as the technicalcomponent
Communicating as the formalcomponent
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A. Identifying
The recognition or nonrecognition ofbusiness activities as accountableevents
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Economic Activities
1. External transactions (purchase ofmerchandise from a supplier,borrowing money from a bank, sale
of merchandise to customer andpayment of salaries to employees
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Economic Activities
2. Internal transactions economicevents involving the entity only e.g.Production, casualty
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B. Measuring
The assigning of peso amounts to theaccountable economic transactionsand events
Historical cost the most commonmeasure of financial transactions
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C. Communicating
The process of preparing anddistributing accounting reports topotential users of accounting
information
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Recording/ Journalizing is theprocess of systematically maintaininga record of all economic business
transactions after they have beenidentified and measured.
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Classifying is the sorting or groupingof similar and interrelated economictransactions into their respective
classes.
Posting to the ledger group ofaccounts
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Summarizing is the preparation offinancial statements which includethe statement of financial position,
income statement, statement ofcomprehensive income, statement ofcash flows and statement of changes
in equity.
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The Accountancy
ProfessionRA 9298 Philippine
Accountancy Act of 2004
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Board of Accountancy
The body authorized by law topromulgate rules and regulations thepractice of the accountancy
profession in the Philippines
PRC to issue Certificate ofRegistration
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Public Accounting
Auditing - the attest function
Taxation Service
Management Advisory Services
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Private Accounting
Accounting staff
Chief accountant
Internal auditor Controller
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Government Accounting
Encompasses the process ofanalyzing, classifying, summarizingand communicating all transactions
involving the receipt and dispositionof government funds and propertyand interpreting the results thereof
(BIR, COA, DBM,SEC, NBI)
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Continuing Professional
Education
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Accounting vs Auditing
Accounting constructive in nature
Auditing - analytical
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Accounting vs Bookkeeping
Bookkeeping procedural andlargely concerned with developmentand maintenance of accounting
records (how of accounting)
Accounting conceptual and isconcerned with the why, reason or
justification for any action adopted
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Accounting vs Accountancy
Accountancy refers to the professionof accounting practice
Accounting used in reference onlyto a particular field of accountancysuch as public accounting, privateaccounting, and government
accounting
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Financial Accounting vs Managerial
Accounting
Financial accounting generalpurpose reports, internal andexternal users
Managerial Accounting accumulation and preparation offinancial reports for internal usersonly
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Generally Accepted Accounting
Principles
Encompass the conventions, rulesand procedures necessary to definewhat is accepted accounting practice.
These principles have developed onthe basis of experience, reason,custom, usage, and practical
necessity. SFAS, PAS, PFRS
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Purpose of accounting
standards To identify proper accounting
practices for the preparation andpresentation of financial statements
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FINANCIAL REPORTING
STANDARDS COUNCIL The accounting standard setting
body created by the ProfessionalRegulation Commission upon
recommendation of the Board ofAccountancy to assist the BOA incarrying out its powers and functions
under RA No. 9298
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FRSC
Main function is to establish andimprove accounting standards thatwill be generally accepted in the
Philippines
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FRSC
15 members
BOA, SEC, BSP, BIR, COA, Majororgn of preparers and users of FS (1each)
Accredited national professionalorganization of CPAs (ACPAPP,
ACPACI, ACPAE, ACPAG
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Philippine Interpretations
Committee Formed by FRSC in 2006
Interpretations are intended to giveauthoritative guidance on issuesthat are likely to receive divergent orunacceptable treatment because thestandards do not provide specific
clearcut rules and guidelines
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Philippine Financial Reporting
Standards PFRS IFRS
PAS IAS
PI - IFRIC
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Underlying Assumptions
Accounting Assumptions are thebasic notions or fundamentalpremises on which the accounting
process is based.
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Underlying Assumption
1. Going Concern
In the absence of evidence to thecontrary, the accounting entity isviewed as continuing in operationindefinitely thus assets are recordedat cost.
Cost principle/ continuity assumption
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Underlying Assumptions
2. Accrual ( no longer mentioned in theNEW Conceptual Framework)
- Income is recognized when earnedregardless of when received and expenseis recognized when incurred regardless ofwhen paid.
The essence of accrual accounting is the
recognition of accounts receivable,accounts payable, prepaid expenses,accrued expenses, deferred income andaccrued income
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Basic Assumptions
Accounting entity
Time period
Monetary unit
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Accounting Entity
In financial accounting, theaccounting entity is the specificbusiness enterprise, which may be a
proprietorship, partnership orcorporation.
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Accounting Entity
Under this assumption, the businessenterprise is separate from theowners, managers, and employeeswho constitute the firm.
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Basic Assumptions
Time Period
Requires that the indefinite life of anentity is subdivided into time periodsor accounting periods which areusually of equal length for thepurpose of preparing financial
reports on financial position,performance and cash flows.
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Accounting period
A. Natural business year a twelvemonth period that ends on anymonth when the business is at thelowest or experiencing slack season
B. Calendar year twelve-month
period that ends on December 31.
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Underlying Assumptions
Monetary Unit
Quantifiability assets, liabilities,capital, income and expenses should
be stated in terms of a unit ofmeasure which is the peso.
Stability the purchasing power of
the peso is stable or constant andthat its instability is insignificant andtherefore may be ignored.
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CONCEPTUAL FRAMEWORK
A summary of the terms andconcepts that underlie thepreparation and presentation of
financial statements for externalusers
P f C t l
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Purpose of Conceptual
Framework To assist the FRSC in developing
accounting standards that willrepresent Philippine GAAP
To assist preparers of financialstatements in applying standardsand in dealing with issues not yet
covered by GAAP To assist the FRSC in its review and
adoption of IFRS
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4. To assist users of financialstatements in interpreting the
information contained in the financialstatements
5. To assist auditors in forming an
opinion as to whether financialstatements conform with PhilippineGAAP
6. To provide information to thoseinterested in the work of the FRSC inthe formulation of PFRS
A th it ti t t f
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Authoritative status of
conceptual framework 1. If there is a standard or
interpretation that specifically appliesto a transaction, the standard or
interpretation overrides theConceptual Framework
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2. In the absence of a standard ofinterpretation, management shallconsider the applicability of the
Conceptual Framework Conceptual Framework is not a
Standard; does not override any
specific PFRS
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In case where there is a conflict, therequirements of the PFRS shallprevail over the Conceptual
Framework
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Users of Financial Information
Primary users the parties to whomgeneral purpose financial reports areprimarily directed; existing and
potential investors, Lenders andother creditors
Other users employees,customers,
government and other agencies,public
S f C t l
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Scope of Conceptual
Framework Objective of financial reporting
Qualitative characteristics of usefulfinancial information
Definition, recognition andmeasurement of the elements fromwhich financial statements are
constructed
Concepts of capital and capitalmaintenance
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Objective of Financial Statement
The objective of financial statementsis to provide information about thefinancial position, performance and
cash flows of an entity that is usefulto a wide range of users in makingeconomic decisions.
-common needs of users
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Financial Statements
1.Financial Position of an entitycomprises its assets, liabilities, andequity at a particular time. It
pertains to the economic resources,liquidity, solvency, financial structureand capacity for adaptation of an
entity
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Liquidity availability of cash in thenear future to cover currentlymaturing obligations
Solvency the availability of cashover a long term to meet financial
commitments when they fall due.
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Financial structure The source offinancing for the assets of the entity.It indicates what amount of assets
has been financed by creditors(liability) and how much has beenfinanced by owners (owners equity)
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Capacity for adaptation the abilityof the entity to use its available cashfor unexpected requirements and
investment opportunities (financialflexibility)
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Financial Statements
2. Performance
- comprises its revenue, expensesand net income or loss for a period of
time. The level of income earned bythe entity through the efficient useand effective use of its resources.
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Financial Statements
3. Cash Flows
Information about cash flows isuseful in order to assess the
operating, investing, and financingactivities of the entity during aperiod.
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Accounting Concepts
1. Entity theory
Accounting objective is gearedtoward proper income determination.
Proper matching of cost againstrevenue is the ultimate end.
Assets = Liabilities + Capital
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Accounting Concepts
2. Proprietary Theory
Accounting objective is directedtoward proper valuation of assets
Assets-Liabilities= Capital
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Accounting Concepts
3. Residual Equity Theory The accounting objective is also
proper valuation of assets. This isapplicable where there are twoclasses of shareholders, ordinaryand preference.
Assets Liabilities-Preferenceshareholders equity= OrdinaryShareholders equity
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Accounting Concepts
Fund Theory The accountingobjective is neither proper incomedetermination nor proper valuation
of assets but the custody andadministration of funds
Fund = Cash inflows-cash outflows
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Financial Reporting
Encompasses not only financialstatements but also other means ofcommunicating information that
relates directly or indirectly to thefinancial accounting process.
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Financial Reports represent themain product of financial reporting.
Financial reports include not onlyfinancial statements but also otherinformation such as financial
highlights, summary of importantfinancial figures, analysis of financialstatements and significant ratios.
These also include nonfinancial
information such as description ofmajor products and a listing ofcorporate officers and directors
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Objective of Financial Reporting
The overall objective if financialreporting is to provide informationthat is useful for decision making
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Specifically,
A. to provide information useful inmaking decisions about providing
resources to the entity B. To provide information useful in
assessing cash flow prospects
C. To provide information aboutentity resources, claims to thoseresources and changes in them
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Qualitative Characteristics
The qualities or attributes that makefinancial accounting informationuseful to the users
A. Fundamental qualitativecharacteristics
Relevance and faithful representation
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B. Enhancing qualitativecharacteristics
Understandability, comparability,
verifiability, timeliness
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Relevance
The capacity of information to makea difference in a decision by helpingusers form predictions about the
outcome of past, present and futureevents, or confirm and correctexpectations.
The capacity of the information toinfluence a decision
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Relevance
Financial information should berelated or pertinent to the economicdecisions. Information that does not
bear on an economic decision isuseless.
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Ingredients of relevance
1. Predictive value when it can helpusers increase the likelihood ofcorrectly or accurately predicting or
forecasting outcome of events
2. Confirmatory or Feedback value
when it enables users to confirm orcorrect earlier expectations
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Ingredients of relevance
3. Timeliness providing informationto the decision maker while it has acapacity to affect a decision.
Relevant information furnished aftera decision is made is useless or of novalue.
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Materiality
Doctrine of convenience
Practical rule in accounting whichdictates that strict adherence to
GAAP is not required when the itemsare not significant enough to affectthe evaluation, decision, fairness of
the financial statements
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When is an item material?
Depends on good judgment,professional expertise and commonsense
Information is material is itsomission or misstatement couldinfluence the economic decision that
the users make on the basis of thefinancial information about an entity
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Factors of materiality
Size and nature
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Faithful Representation
That financial reports representeconomic phenomena or transactionsin words and numbers
Descriptions and figures match whatreally existed or happened
Ingredients of Faithful
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Ingredients of Faithful
Representation 1. Completeness
2. Neutrality
3. Free from error
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Completeness
Relevant information should bepresented in a way that facilitatesunderstanding and avoids erroneous
implication The result of the adequate disclosure
standard or the principle of full
disclosure
Standard of adequate
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Standard of adequate
disclosure Accountant shall disclose a material
fact known to him which is notdisclosed in the financial statements
but disclosure of which is necessaryin order that the statements wouldnot be misleading
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Notes to Financial Statements
To provide necessary disclosuresrequired by PFRS
Provide narrative description or
disaggregation of the itemspresented in the financial statementsand information about items that do
not qualify for recognition
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Neutrality
The contained in the financialstatements must be free from bias.The financial information should not
favor one party to the detriment ofanother party
Principle of fairness
F f E
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Free from Error
There are no errors or omissions inthe description of the phenomenon,and the process used to produce the
reported information has beenselected and applied with no errorsin the process.
S b t O F
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Substance Over Form
The economic substance oftransactions and events are usuallyemphasized when economic
substance differs from legal form
C ti
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Conservatism
Inconsistent with neutrality
When alternatives exist, thealternative which has the least effect
on equity should be chosen
Understatement of net income andnet assets
Synonymous with prudence
P d
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Prudence
The desire to exercise care andcaution when dealing with theuncertainties in the measurement
process such that assets or incomeare not overstated and liabilities orexpenses are not understated
Enhancing Qualitative
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Enhancing Qualitative
Characteristics Intended to increase
El t f Fi i l St t t
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Elements of Financial Statements
A. Financial Position
Assets
Liabilities
Equity
B. Performance
Income Expenses
Assets resources controlled by the
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Assets resources controlled by theentity as a result of past transactions
or events and from which futureeconomic benefits are expected toflow to the entity
Liabilities present obligations of theentity arising from past transactionsor events the settlements of which is
expected to result in an outflow fromthe entity of resources embodyingeconomic benefits
Equity the residual interest in the
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Equity the residual interest in thenet assets of the entity after
deducting all of its liabilities
Income- Increase in economic
benefits during the accounting periodin the form of inflow or increase inasset or decrease in liability that
results in increase in equity, otherthan contribution from equityparticipants
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Income- decrease in economicbenefits during the accounting periodin the form of outflow or decrease in
asset or increase in liability thatresults in decrease in equity, otherthan distribution to equity
participants
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