Framework of Accounting2.ppt

7/28/2019 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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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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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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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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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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Framework of Accounting2.ppt