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COURSE OUTLINE

PRINCIPLES OF ACCOUNTING The aims of this course:

Chapter 1
(1) Understanding of a basic
accounting system in Accounting in Action
enterprises (C1)
Chapter 2: Chapter 5: Accounting for
The Recording Merchandising Operations
(2) Understanding and applying
major steps of the accounting
cycle in a service company Chapter 3: Chapter 6:
(C2-4) and a merchandising Adjusting the Inventories
company (C5-6) Accounts

Chapter 4: Completing
the Accounting Cycle

COURSE INTRODUCTION (3) Introducing the Uniform Chapter 7

Instructor: PhD, MA, MBA. Nguyễn Thị Thu accounting system in The Vietnamese Accounting System
School of Accounting Vietnamese enterprises (C7)

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INTRODUCTION AND LEARNING OBJECTIVES

PRINCIPLES OF ACCOUNTING
Whatever your pursuits or
occupation, the need for financial
information is inescapable.

You cannot earn a living, spend

money, buy on credit, … without
using, financial information.

Good decision-making
depends on good information

CHAPTER 1: ACCOUNTING IN ACTION

Instructor: PhD, MA, MBA. Nguyễn Thị Thu
School of Accounting

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Accounting Environment
IDENTIFY THE ACTIVITIES AND USERS ASSOCIATED WITH ACCOUNTING
Managers

2Non-managers
Information needs
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(Journalize)
Business transactions
Giao dịch kinh tế/Nghiệp vụ kinh tế

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*Identification
the economic events affect financial position of company (transactions)
*Recording
journalize day by day
only manager, others are external users
Internal Users Internal Users & Management Accounting

Internal
Decision Management
Managerial Statements
makers Accounting

direct relationship
Reporting format is flexible and
based on the type of information
needed

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Non-manager employee is external user too

External Users External Users & Financial accounting
Accounting
External
Decision makers Financial Statements Financial Accounting

Should be accordance with

indirect relationship
Information The conceptual
needs framework and standards
Accounting
Organizations (*) necessary to prepare
reporting format
Influence inflexible
Financial Statements
Taxing authorities: Does the company comply with the tax laws?
Regulatory agencies: Is the company operating within prescribed rules? (*)
Labor unions: Does the company have the ability to pay increased wages USA: SEC, FASB… and GAAP
and benefits to union members? International: IASB… and Conceptual Framework, IFRS/IAS
Vietnam: MOF… and VAS, Uniform Accounting System

9 information generally and perdictically 10

Investors and Creditors: direct financial benefits
Others indirect benefits
they make financing decisions= financial accounting

The Relationship Between

DO IT! 1 Basic Concepts
Information Users and Public Accounting

External Board of T
Decision makers Financial Statements
Directors

Audited by outside accountants

to increase
Need useful confidence in their reliability
Information potentially have ACTION
1. True. PLAN
a conflict of interest 2. False.
• Review the basic concepts discussed.
Accordance with investors Bookkeeping involves only the recording step.
with GAAP/ • Develop an understanding of the key terms used.
3. False.
and creditors
IFRS/VAS Accountants analyze and interpret information in reports as part of the communication step.
4. False.
The two most common types of external users are investors and creditors.
5. True.

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financial accounting 1.T
manage accounting 2.F. bookkeeping only in recording process
auditing 3. F Accountants prepare and interpret information in financial reports
task accounting 4. F .... investors and creditors
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Ethics in Financial Reporting

Ethics
The Building Blocks of Accounting Beliefs that Accepted
distinguish right
standards of good
from wrong and bad behavior
EXPLAIN THE BUILDING BLOCKS OF ACCOUNTING

ACCOUNTING STANDARS/IFRS
ETHICS ASSUMPTIONS PRINCIPLES

three building blocks are included in conceptual framework

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Accounting Standards IASB - Conceptual framework

ENSURE HIGH -QUALITY FINANCIAL REPORTING

International Accounting Standards The Objective of general purpose

1st give for external users
Board (IASB) head in London financial reporting
• Determines International Financial Elements of Financial Statement
Reporting Standards (IFRS) Qualitative characteristics of Include 5 Elements:
• Used in 130 countries 2nd
useful financial information Assets, Liabilities, Equity,
Income, Expenses.
Financial Accounting Standards Board
(FASB) head in New York 3rd Recognition, measurement, disclosure Concepts for elements of FS
need convergence
• Determines generally accepted accounting
principles (GAAP) (hôi tụ) to reduce the
• Used by most companies in the U.S. gap of two system

15 16 financial position: Assets, Liabilities, Equity

financial Performance: Revenue, Sales and Income
Income include revenue and other income

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The Objective of Financial Reporting Qualitative Characteristics

Qualitative characteristics of useful financial information:
The Objective of general purpose financial reporting: The primary users of Financial information is useful when it is relevant and represents faithfully what it purports to represent. The
general purpose financial reporting are present and potential investors, usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable.

lenders and other creditors, who use that information to make decisions.
Fundamental
Qualitative
Characteristics

Enhancing
Qualitative
Characteristics

Relevance: financial information is capable of making Faithful representation: the numbers and descriptions match
a difference in a decision. what really existed or happened—they are factual.

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Assumptions and Principles of Accounting Assumptions of Accounting

Recognition, Measurement, and Disclosure for elements of FS ASSUMPTIONS PROVIDE A FOUNDATION FOR THE ACCOUNTING PROCESS

Assumptions Going-Concern Monetary Unit Time Period Economic Entity 1. Economic Entity Assumption: requires that the activities of the entity be kept
separate and distinct from the activities of its owner and all other economic
entities. Typical entity forms are proprietorship, partnership, corporation.
Measurement Expense
Revenue
Principles Historical Cost/Fair Full Disclosure Recognition
Recognition
value (Matching) 2. Monetary unit assumption: requires that companies include in the accounting
records only transaction data that can be expressed in money terms.
Constraints Materiality Benefit vs Cost

Materiality constraint: is a threshold Cost-benefit constraint: The cost of

3. Going-concern: means that accounting information reflects a presumption the
business will continue operating.
used to determine whether business providing the information must be
transactions are important to the weighed against the benefits that can
4. Time period: presumes that the life of a company can be divided into time
financial results of a business. be derived from using it.
periods, such as months and years.

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Principles of Accounting DO IT! 2 Building Blocks of

Accounting
Indicate whether each of the five statements presented below is true or false. If false, indicate
1. Measurement: means that accounting information is based on actual cost. how to correct the statement.
IFRS generally uses one of two measurement principles, the historical cost principle or the fair 1. Convergence refers to efforts to reduce differences between IFRS and U.S. GAAP.
value principle. 2. The primary accounting standard-setting body headquartered in London is the International
Accounting Standards Board (IASB).
Historical cost principle (or cost principle): dictates that companies record assets at their cost. This is
true not only at the time the asset is purchased, but also over the time the asset is held.
3. The historical cost principle dictates that companies record assets at their cost. In later
periods, however, the fair value of the asset must be used if fair value is higher than its cost.
Fair value principle: states that assets and liabilities should be reported at fair value (the price received
to sell an asset or settle a liability).
4. Relevance means that financial information matches what really happened; the information
is factual.
2. Revenue Recognition: provides guidance on when a company must recognize 5. A business owner’s personal expenses must be separated from expenses of the business to
revenue. comply with accounting’s economic entity assumption.

3. Matching/Expense recognition: prescribes that a company must record its ACTION PLAN
expenses incurred to generate the revenue. 1. True. 2. True. 3. False. The historical cost principle dictates that companies record
• Review
assets the discussion
at their of ethics
cost. Under the andcost
historical financial reporting
principle, standards.
the company must also use cost
4. Full disclosure: requires a company to report the details behind financial in• Develop an understanding
later periods. of representation
4. False. Faithful the key termsmeans
used. that financial information
statements that would impact users’ decisions. matches what really happened; the information is factual. 5. True.

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Types of Organizations Recognition Issue

When a business transaction should be recorded?

Profit or Not-for-profit * Traditionally:

For Profit organizations the title transfers when the buyer accepts delivery
Service business or the bill is received or paid
Organizations
Merchandising business
Manufacturing business * The recognition issue is not always solved easily

Large
Amount
Owner: one Small
Effected by Distorted
Legal forms Partners: two or more Long Subjectivism information
Sole proprietorship Owner Shareholders: one Timely
Partnership Partners
Short Materiality
Corporation Shareholder(s)
LLC or LLP

23 Corporation limits liabilities 24

limited company: creditors take risk if company bankrupt
unlimited company: owners take risk if company bankrupt

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Measurement Issue Time Period (Accounting Period)

What value should be placed on the transaction?
one accounting period: 1, 3, 6, 12-month (Fiscal Year)
Recognition Reporting Calendar year
Point Point 1/1----->31/12
Interim
Exchange
period
price Business cycle:
Lower Season
Bookkeeping
(Original/Historical Cost)
| | | Life of business
|
Contra *Transactions have effects on
Asset more than one accounting period

*Long-term Assets
Current Value

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Transactions relating to more than 1 Matching Rule

period * Assign revenues to the accounting period in which the goods are sold or services are rendered in the period
Jul Sign an agreement to provide services of 200 millions VND to a
* Assign expenses to the accounting period in which they are used to generate revenues/produce income the period
customer in Sep and Oct.
Aug Receive payments from the customer, 50 millions VND in cash. Revenues: Total of Cash Receipts
Cash Basic
Sep Perform 60% services for the agreement signed in Jul. Accounting Expenses: Total of Cash Payments ghi nhận ở kì mk thu tiền
Receive payments from the customer, 50 millions VND in cash.
Accrual
Oct Perform 40% services for the agreement signed in Jul.
Accounting
Record the financial effects of transactions in the periods in which they ghi nhận ở kì mà mk thực
occur rather than only in the periods in which cash is received/paid
Nov Receive payments from the customer, 50 millions VND in cash. hiện cung cấp dịch vụ
Cost: $8/unit; Sale Price $20/unit
Jul Aug Sep Oct Nov 1st
st
Period
Period Purchased 100units
••Purchased 100units Revenue
Revenue 90x20=1800
90x20 = 1800
Cash receipts 0 50 50 50 • Sold
•Sold 90units
90units Expense 100x8 = 800
Expense a)a) 100x8=800
Revenues 0 0 120 80 0 b) 90x8 = 720
b) 90x8=720
2nd Period ••Purchased
nd Period
Purchased 100units
100units Revenue
Revenue 110x20 = 2200
110x20=2200
Time period assumptions ••Sold
Sold 110units
110units Expense
Expense a) 100x8 = 800
a) 100x8=800
Revenue recognition b) 110x8 = 880
b) 110x8=880

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one accounting period: 1, 3, 6, 12-month (Fiscal Year)
Interim period

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Financial Position
State the accounting equation, and define its components Economic Resource

T HE B ASIC A CCOUNTING E QUATION

The entity’s belongings The claims against those
Results of past events resources
Future economic benefit

Assets = Claims
Assets: resources a business owns (e.g. Cash,
Receivables, Supplies, Equipment, Land, Buildings). Assets = Liabilities + Equity
Liabilities: claims against assets, i.e. existing debts and
Owner’s Equity
obligations (e.g. Accounts Payable, Taxes Payable). Partners’ Equity
Equity: the ownership claim on a company’s total assets. Shareholders’ Equity

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Equity Operating Cycle

Trading Companies

Cash Merchandise Cash

Inventories

Producing Companies

Cash Raw material WIP Finished

Cash
Plants Goods
Equipments
Labor
Expenses Revenues
Share capital—ordinary: describes the amounts paid in by shareholders for the ordinary shares
they purchase. Net Income
Revenues: are the gross increases in equity resulting from business activities entered into for (Loss)
the purpose of earning income. Revenues usually result in an increase in an asset.
Expenses: are the cost of assets consumed or services used in the process of earning revenue.
Dividends: are distribution of cash or other assets to shareholders. They are not an expense. Owner’s Equity

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DO IT! 3 Equity Effects Learning Objective 1.4

Classify the following items as issuance of shares (I), dividends (D), Analyze the effects of business transactions
revenues (R), or expenses (E). on the accounting equation.
Then indicate whether each item increases or decreases equity.
a. Rent Expense. c. Dividends. Accounting Information System:
b. Service Revenue. d. Salaries and Wages Expense. The system of collecting and processing transaction data and
communicating financial information to decision-makers.
ACTION
a. Rent PLANExpense is an expense (E); it decreases equity.
•b. Understand the sources
Service Revenue is a of revenue.
revenue (R); it increases equity. Accounting cycle: The steps companies follow each period to
•c. Understand
Dividends what causes expenses.
is a distribution to shareholders (D); it decreases equity. record transactions and eventually prepare financial statements:
• Review the rules for changes in equity: Investments and revenues
d. Salaries and Wages Expense is an expense (E); it decreases
increase equity. Expenses and dividends decrease equity.
equity.
• Recognize that dividends are distributions of cash or other assets to
shareholders.

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Analyzing Business Transactions Expanding the Accounting Equation for analysis

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Effects of Transactions on the Accounting Equation

Accounting Equation
2 Elements Assets = Claims Beginning Ending Increase/Decrease

Assets $130,000 $210,000 $80,000

2 changes
- Liabilities 45,000 120,000 75,000

4 Cases = Owner’s Equity $ 85,000 $ 90,000 $ 5,000

Owner’s Equity
(1) (2) (3) (4)
3 Elements Assets = Liabilities + Equity Beginning $85,000 $85,000 $85,000 $85,000
+ Investments 0 0 3,000 10,000
2 changes - Dividends 0 12,000 0 2,000
+/- Income/loss (a) 5,000 (b) 17,000 (c) 2,000 (d) (3,000)
= Ending $90,000 $90,000 $90,000 $90,000

? Cases
End Equity = Beg Eq + Inv + Income (-loss) – Div
(1) 90 = 85 + 0 - 0 + X => x = 90 – 85 = 5

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Elements of FS – Rev/Exp/Asset/Lia/Equity Analyzing Transactions - Key Points

1 Telephone
Telephone Expense 660 Classify
Classify and
and calculate
calculate these
1 Expense 660 these Key points of analyzing transactions:
2 Other elements:
2 Other Expense
Expense 680
680 elements:
3
3 Rent
Rent Expenses
Expenses 2,550
2,550 Revenues:
Revenues: 15,000
4
4 Salary
Salary Expenses
Expenses 6,000
6,000 5,110
Expenses:
Expenses: 9,890
5 Owner’s Each transaction must be analyzed in terms of its effect on:
5 Owner’s Investment
Investment 74,000
74,000 P1
6 Owner’s (660+680+2,550+6,000) a. The three components of the basic accounting equation.
6 Owner’s Drawing
Drawing 3,360
3,360 b. Specific types (kinds) of items within each component.
7 Consulting Assets:
7 Consulting Revenue
Revenue 15,000
15,000 Assets: 83,250
8
8 Machines
Machines 36,000
36,000 (2,000+13,000+4,250+
9
9 Accounts
Accounts Receivable
Receivable 13,000
13,000 P2 The two sides of the equation must always be equal.
36,000+28,000)
10
10 Accounts Payable
Accounts Payable 7,500
7,500 Liabilities: 7,500
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11 Office
Office Equipment
Equipment 28,000
28,000
12 Cash 2,000 Owner’s Equity: 75,750
12 Cash 2,000 The Share Capital—Ordinary and Retained Earnings columns indicate the
13 Office P3
13 Office Supplies
Supplies 4,250
4,250 (74,000+5,110-3,360) causes of each change in the shareholders’ claim on assets.
or (83,250-7,500)

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Transactions– Softbyte Co. Recording/Journalizing Transactions

Ray and Barbara Neal decide to start a smartphone app development company that they incorporate as Softbyte. Tr Elements (A, L, Eq, Rev, Ex) Increase/Decrease Amount
1 Ray and Barbara Neal invest €15,000 cash in the business in exchange for €15,000 of ordinary 1 Asset (Cash) increase Equity (Share Capital) Increase 15,000
shares.
2 Softbyte SA purchases computer equipment for €7,000 cash. 2 Asset (Equipment) increase Asset (Cash) Decrease 7,000
3 Softbyte SA purchases headsets (and other computer accessories expected to last several months) 3 Asset (Supplies) increase Liabilities (Accounts Payable) Increase 1,600
for €1,600 from Mobile Solutions. Mobile Solutions agrees to allow Softbyte to pay this bill in October.
4 Softbyte SA receives €1,200 cash from customers for app development services it has performed. 4 Asset (Cash) increase Equity (Service Revenue) Increase 1,200
5 Softbyte SA receives a bill for €250 from Programming News for advertising on its website but 5 Equity (Expense+) Decrease Liabilities (Accounts Payable) increase 250
postpones payment until a later date.
6 Softbyte SA performs €3,500 of app development services for customers. The company receives cash 6 Asset (Cash) increase Equity (Service Revenue) Increase 1,500
of €1,500 from customers, and it bills the balance of €2,000 on account. Asset (Acc. Receivable) increase Equity (Service Revenue) Increase 2,000
7 Softbyte SA pays the following expenses in cash for September: office rent €600, salaries and wages 7 Asset (Cash) Decrease Equity (Expense+) Decrease 1,700
of employees €900, and utilities €200.
8 Asset (Cash) Decrease Liabilities (Accounts Payable) Decrease 250
8 Softbyte SA pays its €250 Programming News bill in cash.
9 Softbyte SA receives €600 in cash from customers who had been billed for services (in Transaction 6). 9 Asset (Cash) increase Asset (Acc. Receivable) Decrease 600
10 Softbyte SA pays a dividend of €1,300 in cash to Ray and Barbara Neal, the shareholders of Softbyte. 10 Asset (Cash) Decrease Equity (Dividends+) Decrease 1,300

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Tabular Analysis DO IT! 4 Tabular Analysis

ACTION PLAN
• Analyze the effects of each transaction on the accounting equation.
• Use appropriate category names (not descriptions).
• Keep the accounting equation in balance.

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Learning Objective 1.5 Financial Statement Relationships

Describe the five financial statements and how they are prepared
Assets = Liabilities + Equity Statement of
1. Income statement: presents the revenues and expenses and resulting net Financial
income or net loss for a specific period of time. Position

2. Retained earnings statement: summarizes the changes in retained

earnings for a specific period of time. Investments/ + Retained - Dividends + Income Equity changes
Share Capital Earnings (-) (Loss) Statement
3. Statement of financial position: reports the assets, liabilities, and equity (Retained
of a company at a specific date. (Sometimes referred to as a balance Earnings)
sheet.)
Revenues - Expenses = Income Income
4. Statement of cash flows: summarizes information about the cash inflows
(Loss) Statement
(receipts) and outflows (payments) for a specific period of time.
5. Comprehensive income statement: presents other comprehensive
income items that are not included in the determination of net income in 1.

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Income Statement Retained Earnings Statement

• The information provided by
• The income statement lists this statement indicates the
revenues first, followed by reasons why retained earnings
expenses. increased or decreased during
• Then, the statement shows net the period. If there is a net loss,
income (or net loss). it is deducted with dividends in
• When revenues exceed the retained earnings
expenses, net income results. statement.
• When expenses exceed • The first line of the statement
revenues, a net loss results. shows the beginning retained
• The income statement does earnings amount.
not include investment and • Then add net income (or
dividend transactions subtract net loss) and subtract
between the shareholders and dividends.
the business in measuring net • The retained earnings ending
income. balance is the final amount on
the statement.

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Statement of Financial Position Statement of Cash Flows

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Comprehensive Income Statement DO IT! 5 Financial Statement Items

Other comprehensive income items are not part of net income but are considered
important enough to be reported separately.
This statement immediately follows the income statement.
IFRS Alternative:
IFRS allows an alternative statement format in which the information contained in
the income statement and the comprehensive income statement are combined in
a single statement, referred to as a statement of comprehensive income.

ACTION PLAN: * Remember the basic accounting equation: assets must equal liabilities plus
equity. * Review previous financial statements to determine how total assets, net income,
and equity are computed.

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1-54
Learning Objective 1.6*
Career Opportunities in Accounting PRINCIPLES OF ACCOUNTING
Public Accounting
Individuals in public accounting offer expert service to the general public, in much the same
way that doctors serve patients and lawyers serve clients.
Choices: Auditing, taxation, management consulting
Private Accounting
Individuals in private accounting are employees of for-profit companies and not-for-profit
organizations.
Choices: Cost accounting, budgeting, accounting information system design and
support, tax planning and preparation, internal auditing
Governmental Accounting
Choices: Tax authorities, local governments, law enforcement agencies, company
regulators, accounting educators at public colleges and universities
Forensic Accounting FINISH
Choices: Investigate theft and fraud using accounting, auditing, and investigative skills

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