CHAPTER 1: THE ACCOUNTING PROFESSION
Definition of accounting
The Accounting Standards Council provides the following definition:
Accounting is a service accounting which function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic decision.
The Committee on Accounting Terminology of the American Institute of Certified Public Accountants
defines accounting as follows:
Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events which are part at lease of a financial character and interpreting the
results thereof.
The American Accounting Association in its Statement of Basic Accounting Theory defines accounting as
follows:
Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of the information.
The definition also states that accounting has a number of components, namely:
a. Identifying
This accounting process is the recognition or nonrecognition of business activities as “accountable”
events. An event is accountable or quantifiable when it has an effect on assets, liabilities and equity.
External and internal transactions
Economic activities of an entity are referred to as transactions which may be classified as external and
internal.
External transactions or exchange transactions are those economic events involving one entity and
another entity.
Examples of external transactions are:
a) Purchase of goods from a supplier
b) Borrowing money from a bank
c) Sale of goods to a customer
d) Payment of salaries to employees
e) Payment of taxes to the government
Internal transactions are economic events involving the entity only.
b. Measuring
This accounting process is the assigning of peso amounts to the accountable economic transactions and
events.
The measurement bases are historical cost and current value.
Historical cost is the original acquisition cost and the most common measure of financial transactions.
Current value includes fair value, value in use, fulfillment value and current cost.
c. Communicating
Communicating is the process of preparing and distributing accounting reports to potential users of
accounting information.
The communicating process is the reason why accounting has been called the “universal language of
business”.
Implicit in the communicating process are the recording, classifying and summarizing aspects of
accounting.
Accounting as an information system
Accounting is an information system that measures business activities, processes information into
reports an communicate the reports to decision makers.
The Accountancy Profession
At present, Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines.
This law is known as the Philippine Accountancy Act of 2004.
Certified Public Accountants (CPAs) generally practice their profession in three main areas, namely:
1. Public accounting
2. Private accounting
3. Government accounting
Public Accounting
The field of public accounting or public accountancy is composed of individuals practitioners, small
accounting firms and large multinational organizations that render independent and expert financial
services to the public. They offer three kinds of services, namely auditing, taxation and management
advisory services.
Auditing or external auditing is the examination of financial statements by independent certified public
accountant for the purpose of expressing an opinion as to the fairness with which the financial
statements are prepared.
Taxation service includes the preparations of annual income tax returns and determination of tax
consequences of certain proposed business endeavors.
Management advisory services has no precise coverage but is used generally to refer to services to
clients on matters of accounting, finance, business policies, organization procedures, product costs,
distribution and many other phases of business conduct and operations.
Private Accounting
The major objective of the private accountant is to assist management in planning and controlling the
entity’s operations. It includes maintaining the records, producing the financial reports, preparing the
budgets and controlling and allocating the resources of the entity.
Government Accounting
Government accounting encompasses the process of analyzing, classifying, summarizing and
communicating all transactions involving the receipt and disposition of government funds and property
and interpreting the results thereof.
Continuing Professional Development (CPD)
Republic Act No. 10912 is the law mandating and strengthening the continuing professional
development program for all regulated professions, including the accountancy profession.
CPD refers to the inculcation and acquisition of advanced knowledge, skill, proficiency, and ethical and
moral values after the initial registration of the CPA for assimilation into professional practice and
lifelong learning.
Accounting versus auditing
Auditing is one of the areas of accounting specialization. In a limited sense, accounting is essentially
constructive in nature. Accounting ceases when financial statements are already prepared. On the other
hand, auditing is analytical. The work of an auditor when the work of the accountant ends.
Accounting versus bookkeeping
Bookkeeping is procedural and largely concerned with development and maintenance of accounting
records. Accounting is conceptual and is concerned with the why, reason or justification for any action
adopted.
Accounting versus accountancy
Broadly speaking, the two terms are synonymous because they both refer to the entire field of
accounting theory and practice. Technically speaking, however accountancy refers to the profession of
accounting practice.
Financial accounting versus managerial accounting
Financial accounting focuses on general purpose reports known as financial statements intended for
internal and external users. It is the area of accounting that emphasizes reporting to creditors and
investors. Managerial accounting is the accumulation and preparation of financial reports for internal
users only.
Generally Accepted Accounting Principles (GAAP)
GAAP represent the rules, procedures, practice and standards followed in the preparation and
presentation of financial statements. The process of establishing GAAP is a political process which
incorporates political actions of various interested user groups as well as professional judgment, logic
and research.
Financial Reporting Standards Council (FRSC)
The FRSC is the accounting standard setting body created by the Professional Regulation Commission
upon recommendation of the Board of Accountancy (BOA) to assist the BOA in carrying out its powers
and functions provided under R.A. No. 9298.
The main function is to establish and improve accounting standards that will be generally accepted in
the Philippines.
The approved statements of the FRSC are known as Philippine Accounting Standards or PAS and
Philippine Financial Reporting Standards or PFRS.
Philippine Interpretations Committee (PIC)
PIC was formed by the FRSC in August 2006 which main role is to prepare interpretations of PFRS for
approval by the FRSC and to provide timely guidance on financial reporting issues not specifically
addressed in current PFRS.
International Accounting Standards Committee (IASC)
The IASC is an independent private sector body, with the objective of achieving uniformity in the
accounting principles which are used by business and other organizations for financial reporting around
the world.
International Accounting Standards Board (IASB)
IASB now replaces IASC. The IASB publishes standards in a series of pronouncements called International
Financial Reporting Standards or IFRS. The pronouncements of the IASC continued to be designated as
“International Accounting Standards” or IAS.
Philippine Financial Reporting Standards (PFRS)
The FRSC issued standards in a series of pronouncements called the PFRS.
The PFRS collectively include all of the following:
a) PFRS which correspond to IFRS
b) PAS which corresponds to IAS
c) Philippine Interpretations which corresponds to Interpretations of the International Financial
Reporting Interpretations Committee (IFRIC) and the Standing Interpretations Committee, and
Interpretations developed by the PIC.
MULTIPLE CHOICE PROBLEMS
1. What is the law regulating the practice of accountancy in the Philippines?
a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. R.A. No. 9892
2. It is the body authorized by law to promulgated rules and regulations affecting the practice of the
accountancy profession in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountants
c. Securities and Exchange Commission
d. Financial Reporting Standards Council
3. What are the three main areas in the practice of the accountancy profession?
a. Public accounting, private accounting and managerial accounting
b. Auditing, taxation and managerial accounting
c. Financial accounting, managerial accounting and corporate accounting
d. Public accounting, private accounting and government accounting
4. The Continuing Professional Development is required for
a. Renewal of CPA license
b. Accreditation to practice the accountancy profession
c. Both renewal of CPA license and accreditation to practice the accountancy profession
d. Neither renewal of CPA license nor accreditation to practice the accountancy profession
5. General accepted accounting principles
a. Are accounting principles based on law
b. Derive their credibility and authority from law
c. Derive their authority from regulatory authority
d. Derive their credibility and authority from recognition and acceptance by the accountancy
profession
