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ACCOUNTING defined is a service activity. Its function is to provide quantitative information, primarily financial
in nature, about economic entities, that is intended to be useful in making economic decision.

UNDERLYING ASSUMPTIONS
The Framework sets out the underlying assumptions of financial statements:
1. Going Concern in the absence of evidence to the contrary, the accounting entity is viewed as continuing in
operation indefinitely.

2. Accounting Entity under this assumption, the business enterprise is separate from the owners, managers and
employees who constitute the firm. Accordingly, the transactions of the business should not be merged with the
transactions of the owners.

3. Time Period this assumption requires that the indefinite life of an enterprise is subdivided into time periods or
accounting periods which are usually of equal length for the purpose of preparing financial reports on financial
position, performance and cash flows.
Fiscal period or Accounting period one year or period of twelve months.
a. Calendar year twelve consecutive months ending December 31.

b. Natural year twelve month period that ends on any month when the business is at the lowest or slack
(off-peak) season.

4. Monetary Unit the information presented should be expressed in terms of money.
Two aspects of Monetary Unit:
a. Quantifiability meaning that the assets, liabilities, capital, revenue and expenses should be stated in
terms of a unit of measure which is the peso in the Philippines.

b. Stability of peso meaning that the purchasing power of the peso is stable or constant and that its
instability is insignificant and therefore may be ignored.


CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Summary of terms and concepts that is the foundation and standard of preparing and presenting the general
purpose financial statements.
Concerned with the common needs of all users of financial statements.
Does not cover special financial statements or reports that are prepared for a specific group of user.

Users and their Information Needs
The two principal classes of users of financial statements are:
a. Primary Users (present and potential investors, lenders, suppliers and other trade creditors) and,
b. Other Users (employees, customers, governments and their agencies and the general public.) All of these
categories of users rely on financial statements to help them in decision making. Common to all of these user
groups is their interest in the ability of an enterprise to generate cash and cash equivalents and of the timing and
certainty of those future cash flows.

NOTE: While all of the information needs of these user groups cannot be met by financial statements, there are
information needs that are common to all users, and general purpose financial statements focus on meeting these
needs.


SCOPES OF CONCEPTUAL FRAMEWORK
Scope 1. Defines the objective of financial reporting
Scope 2. Identify the qualitative characteristics of useful financial information
Scope 3. States the definition, recognition and measurement of the elements from which financial statements are
constructed
Scope 4. Concepts of capital and capital maintenance


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Scope 1: Financial Reporting Objective and Limitations
Provides financial information about a reporting entitys economic resources, claims, and changes in resources
and claims;
Provides the external users financial information that are useful to them in making economic decisions;
Provides information to aid the users in assessing the effectiveness and efficiency management has discharged
their responsibilities to use the entitys existing resources;
Does not provide all the information needed by the users.
Information is based on estimates and professional judgment rather than exact representation.
Information provided cannot accommodate specific need of specific user.

Economic resources and claims (Assets and Liabilities)
- information about the nature and amounts of a reporting entitys economic resources and claims assists users
to assess that entitys financial strengths and weaknesses; to assess liquidity and solvency, and its need and
ability to obtain financing; Note: Liquidity availability of cash in the near future to cover current maturing
obligation. Solvency availability of cash over a long term to meet financial commitments when they fall due.
- information about the claims and payment requirements assists users to predict how future cash flows will be
distributed among those with a claim on the reporting entity; and
- A reporting entitys economic resources and claims are reported in the statement of financial position.

Changes in economic resources and claims
- Result from that entitys performance and from other events or transactions such as issuing debt or equity
instruments. Users need to be able to distinguish between both of these changes;
- Information about a reporting entitys financial performance during a period, representing changes in
economic resources and claims other than those obtained directly from investors and creditors, is useful in
assessing the entitys past and future ability to generate net cash inflows;
- Information may also indicate the extent to which general economic events have changed the entitys ability to
generate future cash inflows; and
- The changes in an entitys economic resources and claims are presented in the statement of comprehensive
income.

Financial performance reflected by past cash flows
- Information about a reporting entitys cash flows during the reporting period also assists users to assess the
entitys ability to generate future net cash inflows. This information indicates how the entity obtains and
spends cash, including information about its borrowing and repayment of debt, cash dividends to shareholders,
etc.
- The changes in the entitys cash flows are presented in the statement of cash flows.

Changes in economic resources and claims not resulting from financial performance
- Information about changes in an entitys economic resources and claims resulting from events and transactions
other than financial performance, such as the issue of equity instruments or distributions of cash or other assets
to shareholders is necessary to complete the picture of the total change in the entitys economic resources and
claims.
- The changes in an entitys economic resources and claims not resulting from financial performance is
presented in the statement of changes in equity.

Accrual means that income is recognized when earned regardless of when received and expenses is recognized
when incurred regardless of when paid.


Scope 2: Qualitative Characteristics of Useful Financial Information
1. Relevance the capacity of information to influence a decision.
Ingredients of Relevance:
A. Predictive Value help users forecast outcome of events.

B. Confirmatory Value help users confirm or correct earlier expectations. Formerly known as Feedback Value.

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C. Materiality Information is material if its omission or misstatement could influence the economic decision of
users. Therefore, strict adherence to GAAP is not required when the items are not significant enough to affect
the evaluation, decision and fairness of the financial statements. This concept is also known as the
DOCTRINE OF CONVENIENCE.
Factors of Materiality:
i. Size of the item pertains to the relation of an item to a group which it belongs.
ii. Nature of the item pertains to the effect of an item to economic decision.


2. Faithful Representation actual effects of the transactions should be properly accounted and reported in the
financial statements. (Replaced the term Reliability)
Ingredients of Faithful Representation:
A. Completeness relevant information should be presented in a way that facilitates understanding and avoids
erroneous implication. Involves FULL DISCLOSURE or ADEQUATE DISCLOSURE.

B. Neutrality the financial information should not favor one party to the detriment of another party. To be
neutral is to be FAIR, free from bias.

C. Free from error that there are no errors (whether omitted or committed) in the description of the transactions
or events, and the process used to produce the reports has been properly selected and applied with no errors in
the process.


Under the Old Conceptual Framework
NOTE: Conservatism or Prudence when alternative exists, the alternative which has the least effect on equity
should be chosen. Applications of conservatism are as follows:
For Assets if there are two acceptable values, the LOWER value is selected.
For Contingent Loss provision is recognized when such loss is PROBABLE and MEASURABLE.
For Contingent Gain is not recognized but ONLY DISCLOSED.

NOTE: Prudence DOES NOT justify deliberate overstatement of liabilities or expenses or deliberate
understatement of assets or income, because the financial statements could not be neutral and, therefore, not have
the quality of reliability.

NOTE: Substance over form (reality over legality) economic substance of transactions and events are usually
emphasized when economic substance differs from legal form.


Enhancing Qualitative Characteristics:
A. Comparability means the ability to bring together for the purpose of noting points of likeness and difference,
which may be made within an enterprise or between enterprises.

B. Consistency this principle is implied in the characteristic of comparability. This principle requires that the
accounting methods and practices should be applied on a uniform basis from period to period.

C. Verifiability information are supported by evidences/documents that enable different accountant analyzing the
evidences to arrive at the same conclusion or result.
a. Direct Verification through direct observation such as inventory counting.
b. Indirect Verification through other means such as recalculating the data using the same methodology.

D. Timeliness information must be available or communicated early enough when a decision is to be made.

E. Cost constraint (Cost-benefit factor) the benefit derived from the information should exceed the cost incurred in
obtaining the information.


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Scope 3: Elements, Recognition and Measurement of Elements of Financial Statements
A. Elements of Financial Statements
As to Financial Position:
1. Assets resources controlled by the enterprise as a result of past transactions or events and from which
future economic benefits are expected to flow to the enterprise. (Things OWNED by the company.)

2. Liabilities present obligations of the enterprise arising from past transactions or events, the settlement of
which is expected to result in an outflow of resources from the enterprise. (Things OWED by the
company.)

3. Equity the residual interest in the assets of the enterprise after deducting all its liabilities. (Claims of the
OWNER on the company)

As to Performance:
1. Income inflows of future economic benefits that increase equity (in the form of inflows or enhancements
of assets or decreases of liabilities), other than contributions or investments by owners.
a. Revenue arises in the course of the ordinary activities of an entity, and is referred to by a variety of
different names including sales, fees, interest, dividends, royalties and rent.
b. Gain represent other items that meet the definition of income and may, or may not, arise in the
course of the ordinary activities of an enterprise.

2. Expenses outflows or consumptions of economic benefits that decrease equity (in the form of outflows or
depletions of assets or incurrence of liabilities), other than withdrawal, distribution or dividends to owners.
a. Expenses arise in the course of the ordinary activities of the enterprise include, for example, cost of
sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such as
cash and cash equivalents, inventory, property, plant and equipment.
b. Losses - represent other items that meet the definition of expenses and may, or may not, arise in the
course of the ordinary activities of the enterprise


B. Recognition of the Elements of Financial Statements
Recognition Principle involves the inclusion of peso amount in reporting an asset, liability, income or expense
on the face of the financial statements of an enterprise.
a. Asset Recognition asset is recognized in the balance sheet when it is probable (more likely) that future
economic benefits will flow to the enterprise and the assets has a cost or value that can be measured reliably.
Cost Principle this principle requires assets should be recorded initially at original acquisition price.

b. Liability Recognition liability is recognized in the balance sheet when it is probable that an outflow of
resources required for the settlement of a present obligation and the amount of the obligation can be measured
reliably.

c. Income Recognition income should be recognized when earned. Income should be recognized when it is
probable that an increase in future economic benefit related to increase in asset or decrease in liability and
these effects can be measured reliably. In effect, that recognition of income occurs simultaneously with the
recognition of increases in assets or decreases in liabilities

Income includes the following:
i. Revenue this is earned in the course of the ordinary business activity of the enterprise.
ii. Gain this includes other items that comply with the definition of income but earned from activities
which are not in the course of ordinary business activity.

As a general rule THE POINT OF SALE IS THE POINT OF INCOME RECOGNITION. Exceptions are as
follows:
i. Installment method whereby revenue is recognized at the point of collection. The amount of revenue
is computed by multiplying the amount collected with gross profit rate.


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ii. Cost recovery method whereby revenue is recognized when total collection exceeds the cost of product
sold.
iii. Cash method - cash collected is recognized as revenue in full, whether the earning process is complete or
not.
iv. Production method revenue is recognized at the point of production, whereby the sale of the product is
assured or theres a little chance of failure to sell the product.
v. Percentage of completion method also known as proportional performance. This method recognizes
revenue based on the proportionate part or portion of the work done or completed.

d. Expense Recognition expense are recognized when incurred. Expense should be recognized when it is
probable that a decrease in future economic benefit related to decrease in asset or increase in liability and these
effects can be measured reliably.

Matching Principle requires that cost and expenses incurred in earning the revenue should be reported in the
same period.

Applications of the matching principle
Cause and Effect Association expenses recognized when revenue is earned.

Systematic and Rational Allocation expenses allocated over the periods benefited.

Immediate Recognition outright expense, since uncertain or no future economic benefits can be
associated with future revenue.

C. Measurement of Elements
Measurement is the process involves assigning monetary amounts at which the elements of the financial statements
are to be recognized and reported.

Different bases of measurement:
1. Historical Cost amount given up at the time of acquisition of asset.

2. Current Cost amount that would be to be paid for the acquisition of the asset at present time.

3. Realizable Cost (Settlement Value) amount to could be received if the asset is sold in an orderly disposal.

4. Present Cost (Discounted Value) estimated value today of an amount of cash to be received or paid in the
future.


Scope 4: Concepts of capital and capital maintenance
Approaches in Determining Financial Performance:
1. Transaction Approach the traditional preparation of income statement.

2. Capital Maintenance explains net income is earned only after the capital used from the beginning of the period
is maintained. Income is the amount an entity can distribute to its shareholders and the excess amount at the end
of the year as that of the beginning.
Two concepts of capital maintenance:
a. Financial Capital approach income exists when the financial amount (based on historical cost) of the net
assets at the end of the period exceeds the financial amount of the net assets at the beginning of the period, but
excluding the distributions to and contributions by owners during the period.

b. Physical Capital approach - income exists when the physical capital (based on current cost) at the end of the
period exceeds the physical capital at the beginning of the period, but excluding the distributions to and
contributions by owners during the period.