CHAPTER 1

ACCOUNTING IN ACTION
Accounting Principle
Part 1

1. Why is accounting important?

2. Using accounting information
3. Forms of business organization
4. Generally accepted Accounting Principles
5. Objective of Financial Reporting
 LEARNING OBJECTIVES

LO1. Why is accounting important? DO IT! 1.1

Identify the use and users of • Using accounting information Users of accounting
accounting and the objective • Objective of financial reporting information
of financial reporting.

LO2. Forms of business organization DO IT! 1.2

Compare the different forms • Proprietorship Types of business
of business organization. • Parnership organization
• Coporation

LO3. Generally accepted accounting Principles. DO IT! 1.3

Explain the building blocks • Ethics in financial reporting Building blocks of
of accounting: ethics and the • Conceptual framework accounting
concepts included in the • Accounting standards
conceptual framework
 1. Why is accounting important?

Identifies

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

Communicates

Interested
users
 1. Why is accounting important?

Understanding the
basics of accounting

you plan to own

your own business
helpful for almost every
in the future
endeavour you can
think of.
work for someone
learning how to read else in their
and interpret financial business
information

invest in a business
 1. Why is accounting important?

When you study accounting, you will also learn a lot about management, finance, and
marketing, which will give you a solid foundation for your future studies.

You will learn how making a sale is meaningless unless it is a profitable sale and the
money can eventually be collected from the customer.

Marketing managers must also be able to decide on pricing strategies based on costs.
Accounting is what quantifies these costs and explains why a product or service costs
what it does.

=> Whatever you choose, working knowledge of accounting will be relevant and useful.
 2. Using accounting information
Internal users
Internal users of accounting information plan, organize and run companies. They work for
the company
In running a business, internal users must answer many important
question:
To answer the question above, users need detailed information on a
timely basis; that is, it must be available when we needed. Some
example of information that internal user need include:
 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

The following Users of accounting information Whether they An example of a question that might be
is the list of are an internal asked by that user
some users of or external
accounting user, and
information.
For each user
indicate 1. Creditor External Will the business be able to pay back the
loan?
2. Viet Nam Revenue Agency External Is the company following the tax laws?

3. Investor External Should I invest money in the company?

4. General manager of the production Internal How much will it cost to produce the
department product?
5. Manager of the human resources Internal Can the company afford to give the
department. employees raises?
 3. The forms of business organization
Forms of business
organization

Proprietorship Partnership Corporation

A business that is organized

(incorporated) as a separate legal
A business owned
entity under federal or provincial
by one a person is a
proprietorship corporate law is a corporation.

A business owned by two or

more persons who are
associated as parners is a
partnership.

12
 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 entity Not a separate legal entity
entity from its owners 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
 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.

14
The conceptual framework of accounting
 Foundation concepts

Reporting entity concept:

This concept requires that the accounting for a reporting entity’s economic activities be kept
separate and distinct from the accounting for the activities of its owner and all other
reporting entities.

Going concern assumpsion

The going concern assumption is the assumption that the reporting entity will continue to
operate in the foreseeable future. The going concern assumption presumes that the company
will operate long enough to use its resources for the intended purpose and to complete the
company’s commitments.

If a company is not regarded as a going concern, or if there are significant doubts about its
ability to continue as a going concern, then this must be stated in the financial statements,
along with the reason why the company is not regarded as a going concern.
 Foundation concepts

Periodicity concept:
The periodicity concept guides organizations in dividing up their economic activities into
distinct time periods. The most common time periods are months, quarters, and years.

Monetary unit concept

This concept makes it possible for accounting to quantify economic events
Ex. In Viet Nam, we mainly use the VND to record these transactions. However, some
companies report their results in U.S. dollars, or the euro is used in Europe.
The monetary unit concept 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.
In summary, a transaction is recognized in the accounting records if there is a change in the
business’s economic resources or a change to the claims on those resources and the change
can be reliably measured in monetary terms.
 Recognition

Not all events are recorded and reported in the financial statements. Only events that cause
changes in the business’s economic resources or changes to the claims on those resources are
recorded and reported. These transactions are called accounting transactions.

Ex. Suppose a new employee is hired.

Should this event be recorded in the company’s accounting records?
The answer is no.
Why? Because the hiring of an employee will lead to future accounting transactions (the
payment of a salary after the work has been completed). It has not occurred at the time of
hiring.
Once a transaction has been recognized or recorded, it will be included in the financial
statements. One of the key recognition principles is the revenue recognition principle. When
a company agrees to perform a service or sell a product to a customer, it has a performance
obligation. When the company meets this performance obligation, it recognizes revenue.
 Measurement

Measurement is the process of determining the amount that should be recognized. At the time
something is acquired, the transaction is first measured at the amount of cash that was paid or
at the value exchanged.
Ex. If Echo Company purchased land for $100,000, the land is recorded in Echo’s records at
it cost of $100,000. The land is an economic resource of the business and $100,000 is
referred to as the land’s historical cost.
But what should Echo Company do if, by the end of the next year, the land’s value has
increased to $120,000? Historical cost is the primary basis of measurement used in financial
statements, which means that Echo Company would continue to report the land at its
historical cost of $100,000. This is often called the historical cost measurement method.
However, the historical cost may not always be the most relevant measure of certain types of
resources. The fair value may provide more useful information.
Ex. With an investment purchased for the purpose of trading to make a gain, the current
value or market value of the investment provides more relevant information to the user.
Fair value generally would be the amount the resource could be sold for in the market.
 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
• Present economic resources controlled by the business that have the potential to
produce economic benefits.
o Examples: accounts receivable, merchandise inventory, vehicles
LIABILITIES
• Present obligations to transfer an economic resource
o Examples: accounts payable, salaries payable
OWNER’S EQUITY
• The owner’s claim on the assets
o Residual amount of assets minus liabilities
 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