PRINCIPLES OF
ACCOUNTING
Hanoi School of Business & Management
Nguyen Thi Hang Nga
1 Accounting in Business
Learning Objectives
After studying this chapter, you should be able to:
[1]Understand the purpose and importance of accounting, accounting ethics
and GAAP.
[2] Identify accounting equation and its components and analyze business
transactions’ effects on accounting equation
[3] Gain knowledge on financial statements: what are they and how to
prepapare basic financial statements.
C1 Importance of Accounting
Accounting
Identifying
Select transactions and events
Recording
Input, measure and classify
Communicating
Prepare, analyze and interpret
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C2 Users of Accounting
Information
External Users Internal Users
•Lenders •Consumer Groups •Managers •Sales Staff
•Shareholders •External Auditors •Officers/Directors •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
C2 Opportunities in Accounting
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C2
Accounting Jobs by Area
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C3
Ethics - A Key Concept
Ethics
Beliefs that Accepted standards
distinguish right of good and bad
from wrong behavior
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C3
Ethics - A Key Concept
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C4 Generally Accepted
Accounting Principles
Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).
Relevant Information Affects the decision of its users.
Reliable Information Is trusted by users.
Comparable Is helpful in contrasting
Information organizations.
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C4
Setting Accounting Principles
Financial Accounting Standards Board
is the private group that sets both
broad and specific principles.
The Securities and Exchange Commission is the
government agency that establishes reporting
requirements for companies that issue stock to the public.
The International Accounting Standards Board (IASB)
issues International Financial Reporting Standards that
identify preferred accounting practices to create harmony
among accounting practices of different countries.
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
C4
International Standards
The International Accounting Standards Board (IASB), an
independent group (consisting of 16 individuals from many
countries), issues International Financial Reporting Standards
(IFRS) that identify preferred accounting practices.
IASB
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
C4
International Standards
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C4 Principles and Assumptions
of Accounting
Revenue Recognition Principle
1. Recognize revenue when it is earned. Cost Principle
2. Proceeds need not be in cash. Accounting information is based on
3. Measure revenue by cash received actual cost. Actual cost is
plus cash value of items received. considered objective.
Full Disclosure Principle
Matching Principle A company is required to report the
A company must record its expenses
details behind financial statements that
incurred to generate the revenue reported.
would impact users’ decisions.
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
C4 Accounting Assumptions
Now Future
Going-Concern Assumption Monetary Unit Assumption
Express transactions and events in
Reflects assumption that the business
monetary, or money, units.
will continue operating instead of being
closed or sold.
Business Entity Assumption
A business is accounted for separately from other Time Period Assumption
business entities, including its owner. Presumes that the life of a company can
be divided into time periods, such as
months and years.
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
C4
Forms of Business Entities
Sole
Sole Partnership
Partnership Corporation
Corporation
Proprietorship
Proprietorship
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C4
Characteristics of Businesses
Characteristic Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
Limited liability no* no* yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes
* Proprietorships and partnerships that are
set up as LLCs provide limited liability.
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
C4
Corporation
Owners of a corporation are called
shareholders (or stockholders). Shareholders are
not personally liable for corporate acts. When a
corporation issues only one class of stock, we
call it common stock (or capital stock).
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
C4
Sarbanes-Oxley (SOX)
Congress passed the Sarbanes-Oxley Act to help curb financial abuses at
companies that issue their stock to the public. Management must issue a report
stating that its internal controls are effective. Auditors must verify the
effectiveness of internal controls.
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
A1 Transaction Analysis and the
Accounting Equation
Accounting Equation
Assets = Liabilities + Equity
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A1
Assets
Cash
Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled by Land
a company
Store Buildings
Supplies
Equipment
A1
Liabilities
Accounts Notes
Payable Payable
Creditors’
claims on
assets
Taxes Wages
Payable Payable
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A1
Equity
Owner’s
Claims on
Assets
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P1 Transaction Analysis Equation
The accounting equation MUST remain in balance
after each transaction.
Assets
Assets = Liabilities
Liabilities + Equity
Equity
P1
Transaction 1: Investment by Owners
On December 1, Chas Taylor invests
$30,000 cash to start a consulting business.
The accounts involved are:
(1) Cash (asset)
(2) Owner Capital (equity)
Transaction 2: Purchase
P1
Supplies for Cash
Chas Taylor’s company, FastForward
purchases supplies paying $2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction 3: Purchase
P1
Equipment for Cash
FastForward purchases equipment for
$26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction 4: Purchase
P1
Supplies on Credit
FastForward purchases Supplies of $7,100 on
account.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
Transaction 5: Provide
P1
Services for Cash
The company provides consulting services
receiving $4,200 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction 6 and 7: Payment
P1
of Expenses in Cash
The company pays $1,000 rent and $700 in
salary to the company’s only employee.
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
P1
Summary of Transactions
Other transactions were executed during December and the summary of
all transactions is shown below:
P2
Financial Statements
Let’s prepare the financial statements reflecting the
transactions we have recorded.
1.Income Statement
2.Statement of Owner’s Equity
3.Balance Sheet
4.Statement of Cash Flows
P2 Income Statement
The income statement describes a company’s revenues
and expenses along with the resulting net income or
loss over a period of time due to earnings activities.
P2
STATEMENT OF OWNER’S EQUITY
P2 Balance Sheet
The Balance Sheet describes a company’s financial
position at a point in time.
P2
Statement of Cash Flows
A2
Decision Analysis
Return on assets (ROA) is stated in ratio form as
income divided by assets invested.
Net income
Return on assets =
Average total assets
A3
1A Return and Risk Analysis
Many different Risk is the uncertainty
returns may be about the return we will
reported. earn.
The lower the risk, the lower our expected return.
ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.
C5
1B - Business Activities and
the Accounting Equation
There are three major types of activities in any organization:
1. Financing Activities – Provide the means organizations
use to pay for resources such as land, buildings, and
equipment to carry out plans.
2. Investing Activities - Are the acquiring and disposing of
resources (assets) that an organization uses to acquire
and sell its products or services.
3. Operating Activities – Involve using resources to
research, develop, and purchase, produce, distribute,
and market products and services.
