CHAPTER 1

ACCOUNTING IN ACTION

Accounting Principle
 LEARNING OBJECTIVES

Identify the use and users of accounting and the objective

LO1 of financial reporting.

LO2 Compare the different forms of business organization.

Explain the building blocks of accounting: ethics and the

LO3
concepts included in the conceptual framework
Contents

1. Why is accounting important?

2. Using accounting information
3. Forms of business organization
4. Generally accepted Accounting Principles
5. Objective of Financial Reporting
 1. Why is accounting important?

Identifies
The
Accounting is the Records economic
information system events of an
Communicates organization

Interested
users
 1. Why is accounting important?

Understanding the basics of accounting

learning how to read

and interpret financial invest in a business
information you plan to own your
own business in the
work for someone helpful for almost every future
else in their business endeavour you can
think of.
 2. Using accounting information
Internal users
Internal users of accounting information plan, organize and run companies. They work for
the company
Finance director Production supervisors

Is there Forecasts of Which production Production

enough cash to cash flows for line is the most Budget
pay the bills? the next year profitable?

Human resources
personel
Marketing manager

How many employees

What price should Projections of Analyses of
can we afford to hire
we sell products for profit from new salary cost
this year?
to maximize profits? sales campaigns
 External users

❖ Investors, who are owners or potential ❖ Customers are interested in

owners of the business, use accounting whether a company will continue
information to make decisions to buy, hold, to honor its product warranties
or sell their ownership interest. and support its product lines.

❖ Creditors – persons or other businesses that ❖ Regulatory agencies want to

are owed money by the business, such as know whether the company is
suppliers and bankers – use the accounting respecting established rules.
information to evaluate the risks of granting
credit or lending money.

❖ Taxation authorities want to know whether

the company respects the tax laws.
 DO IT 1.1 Users of accounting information

Users of accounting Whether they An example of a question that might be asked

information are an internal by that user
or external
user
1. Creditor External Will the business be able to pay back the loan?
The
following is 2. Viet Nam Revenue Agency Internal Is the company following the tax laws?
the list of
some users 3. Investor External Should I invest money in the company?
of
accounting 4. General manager of the Internal How much will it cost to produce the product?
information. production department
for each user
indicate 5. Manager of the human Internal Can the company afford to give the employees
resources department. raises?
 3. Forms of Business Ownership

Proprietorship Partnership Corporation

◆ Generally owned ◆ Owned by two or ◆ Ownership divided

by one person. more persons. into shares of
◆ Often small stock
◆ Often retail and
service-type service-type ◆ Separate legal
businesses businesses entity organized
◆ Owner receives under state
◆ Generally
any profits, corporation law
unlimited
suffers any personal liability ◆ Limited liability
losses, and is
◆ Partnership
personally liable
agreement
for all debts.

LO 5 Explain the monetary unit assumption

and the economic entity assumption.
 Summary of the important characteristics of each
organizational form a business

Characteristic Proprietorship Parnership Corporation

Owners one Two or more One or more

Owner’s liability unlimited unlimited Limited
Private or public Private Usually private Private or public
Taxation of profits Paid by the owned Paid by the parners Paid by the corporation
Life of organization Limited Limited Unlimited
Separate legal Not a separate legal Not a separate legal Not a separate legal entity
entity from its owners entity from the parners from the shareholders

DO IT 1.2 Answer the question:

1. Number and type of owners?
2. If it has limited or unlimited liability
3. If it is a separate legal entity from its owners
11
4. General Accepted Accounting Principle
General Accepted
Accounting Principles

Ethics in financial Conceptual Accounting standard

reporting Framework

Standards specify how to report

economic events. Business
transactions can be complex and it is
For financial information to have up to the professional accountant to
value to its users, whether internal
ensure that transactions are correctly
or external, it must be prepared by
recorded and relevant.
individuals with high standards of
ethical behavior. Ethics in
accounting is of the utmost Which is a coherent system that
importance to accountants and guides the development and
decision makers who rely on the application of accounting principles
financial information they and standards and leads to subjective
produce. of financial reporting.
The conceptual framework of accounting
 Foundation concepts

Reporting entity concept Going concern assumption

This concept requires that the The going concern assumption is the
accounting for a reporting entity’s assumption that the reporting entity will
economic activities be kept separate continue to operate in the foreseeable
and distinct from the accounting for future. The going concern assumption
the activities of its owner and all other presumes that the company will operate
reporting entities. long enough to use its resources for the
intended purpose and to complete the
company’s commitments.
 Foundation concepts

Monetary unit concept

Periodicity concept This concept makes it
The periodicity concept guides organizations possible for accounting to
in dividing up their economic activities into quantify economic events.
distinct time periods. The most common time The monetary unit concept
periods are months, quarters, and years. does prevent some relevant
information from being
included in the accounting
records.
Ex. The health of the owner, the quality of service, and the morale of employees
would not be included, because they can not be reliably quantified in monetary
amounts.
 Recognition

Not all events are recorded

Ex. Suppose a new employee is hired.
and reported in the financial
Should this event be recorded in the company’s
statements. Only events that
accounting records?
cause changes in the
The answer is no.
business’s economic
Why? Because the hiring of an employee will lead
resources or changes to the
to future accounting transactions (the payment of
claims on those resources
a salary after the work has been completed). It has
are recorded and reported.
not occurred at the time of hiring.
These transactions are called
accounting transactions.
 Measurement

Measurement is the process

Ex. If Echo Company purchased land for
of determining the amount
$100,000, the land is recorded in Echo’s records
that should be recognized. At
at it cost of $100,000. The land is an economic
the time something is
resource of the business and $100,000 is referred
acquired, the transaction is
to as the land’s historical cost.
first measured at the amount
of cash that was paid or at
If the land’s value has increased to $120,000?
the value exchanged.
➢ Report the land at its historical cost of
$100,000
➢ Report the land at its fair value of $120,000
 Transaction identification process

Event: Purchase computer Answer question from Pay rent

potential customer

Is there a change in economic resources or claims on the resources of the

company and can the event be measured in monetary terms?

Record Don’t record Record

 DO IT 1.3 Building Blocks of Accounting
Indicate whether each of the five statements presented below true or false
1. The historical cost principle dictates that companies record economic resources at
their cost. In later periods, however, the fair value of the resources must be used if
the fair value is higher than its cost.

2. Relevance means that financial information matches what really happened, the
information is factual.

3. The business owner’s personal expenses must be separate from the expenses of
the business to comply with accounting’s reporting entity concept.

4. All events are recorded in the financial statements

5. All companies in Viet Nam must report their financial statement using IFRS
 5. Elements of the financial statement

ASSETS LIABILITIES OWNER’S EQUITY

• Present economic resources • Present obligations to • The owner’s claim
controlled by the business that transfer an economic on the assets
have the potential to produce resource o Residual amount of
economic benefits. Ex: accounts payable, assets minus liabilities
Ex: accounts receivable, salaries payable
merchandise inventory,
vehicles
 Elements of the financial statement

REVENUES
Revenues result from business activities that are undertaken to earn a profit, such as
performing services, selling merchandise inventory, renting property, and lending
money

EXPENSES
Expenses are the costs of assets that are consumed and services that are used in a
company’s business activities.
 Thank you for your listening!

QUESTION AND ANSWER