Professional Documents
Culture Documents
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Materials for the subject
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Materials for the subject
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CONTENTS OF THE SUBJECT
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CONTENTS OF CHAPTER 1
1.1. The history of development of accounting
• Roman empire
• Medieval Developments
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THE ANCIENT HISTORY
• Accounting records dating back more than 7,000 years have
been found in Mesopotamia.
• The early development of accounting was closely related to
developments in writing, counting, and money. May be
related to the taxation and trading activities of temples.
• Other early accounting records were also found in the ruins
of ancient Babylon, Assyria and Sumer, which date back
more than 7,000 years
• During the 2nd millennium BC,[12] the expansion of
commerce and business expanded the role of the accountant.
• By about the 4th century BC, the ancient Egyptians and
Babylonians had auditing systems for checking movement in
and out of storehouses, including oral "audit reports",
resulting in the term "auditor"
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ROMAN EMPIRE
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MEDIEVAL AND RENAISSANCE PERIODS
+ Accountancy professionalization
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MODERN PROFESSIONAL ACCOUNTING
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1.1. The history of development of accounting
Min
Management
Max
Scarce/limited resources 13
1.1. The history of development of accounting
Accounting as a management
tool
Accountanting as a career
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1.2.1. Accounting as a management tool
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1.2.2. Accounting as a career
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1.2.2. Accounting as a career
Accounting process:
Accounting
Recording
Transactions Quantification reports
classification
in $ terms Analysis &
summarisation
interpretation
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1.2.3. Accounting as a social science
Liability
Asset
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1.2.3. Accounting as a social science
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1.2.4. What is accounting?
Process of identifying,
measuring, recording
& communicating
economic information
to permit informed
judgements and economic
decisions by users of the
information
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Identification
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Measurement
Measurement
Definition: process of expressing assets of one
entity in terms of money
Reasons:
Assets with differently physical forms
Needs of useful information; inventories, fixed
assets
Unit of money: $ U.S, VND…
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Recording
groups or categories
Communication
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1.3. The users of accounting information
Managers Lenders
Officers Investors
Internal Auditors Governments
Sales Staff Consumer groups
Employees External auditors
Owners… Customers…
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1.3. The users of accounting information
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1.4. Types of accounting
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1.4. Types of accounting
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1.5. Accounting concepts and accounting principles
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1.5.1. Accounting concepts
Moneytary
unit concept
Accounting
unit
(business Concepts
entity)
Concept
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1.5.1.1. “Business entity” concept
Definition
other businesses.
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1.5.1.1. “Business entity” concept
Notes:
+ The business and its owner(s) are two separate
existence entity
+ Any private and personal incomes and expenses of the
related parties should not be treated as the incomes
and expenses of the business
+ A reporting entity is an entity that chooses, or is
required, to present general purpose financial
statements.
+ It does not have to be a legal entity and can comprise
only a portion of an entity or two or more entities
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1.5.1.1. “Business entity” concept
Example:
Example:
Mr. Sam owns a company. He uses two different
credit cards – one for the payment of business
expenses and one for the payment of personal
expenses. He pays $200 as the electricity bill of his
company using his personal credit card.
According to business entity concept, the electricity
bill of the business should have been paid using
company’s credit card.
What does the company treat with the payment of
200$? 39
1.5.1.2. “Money measurement” concept
Definition
The money measurement concept states that a
business should only record an accounting
transaction if it can be expressed in terms of money.
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1.5.1.2. “Money measurement” concept
- Notes:
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1.5.1.2. “Money measurement” concept
• Accounting currency:
• A specific unit of currency used in recording
transactions within the financial books of a
company or business.
• Accounting currency and home currency might be
different.
• If transactions are in other currencies, they must
be translated into the accounting currency (foreign
exchange translation). 42
1.5.1.2. “Money measurement” concept
• Example:
The CEO of Fine Enterprise delivers a lecture to the
employees in a special meeting that can be helpful in
raising the employees’ morale and completing the current
projects on time.
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1.5.1.2. “Money measurement” concept
Example:
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1.5.1.2. “Money measurement” concept
Example:
The Fast transport company has five trucks. One of its
truck is seriously damaged in a road accident and is being
repaired.
The company can only account for the amount of
insurance or any expenses that it actually has to pay to get
the truck in working condition but cannot record the loss
of revenue caused by the time the truck takes to
be overhauled.
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1.5.1.3. “Time period” concept
Definition
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1.5.1.3. “Accounting period” concept
Accountants divide the economic life of a business into artificial
time periods (Time Period Concept).
.....
Jan. Feb. Mar. Apr. Dec.
Generally a
Alternative Terminology
month, The time period assumption
is also called the
quarter, or periodicity assumption.
year. 48
LO 1
1.5.1.3. “Time period” concept
Fiscal and Calendar Years
Monthly and quarterly time periods are called interim
periods.
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1.5.1.3. “Time period” concept
Question
The time period assumption states that:
a. revenue should be recognized in the
accounting period in which it is earned.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided
into artificial time periods.
d. the fiscal year should correspond with the
calendar year.
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LO 1
1.5.1.3. “Time period” concept
Example:
Example:
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1.5.2.1. Principles are bases for the measurement of accounting
objects
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Historical cost principle
The historical cost principle states that businesses
must record and account for elements of financial
statements (most assets and liabilities) at their
purchase or acquisition price
Transactions are recorded at their cost when they
occurred instead of current value.
Historical cost is a term used instead of the
term cost. Cost and historical cost usually mean the
original cost at the time of a transaction. 55
Historical cost principle
Examples:
Pam's Restaurant, LLC was formed in 1985. It purchased
a building soon after in 1986 for $20,000. Total, some 30
plus years later, Pam's is still in business. The original
building is still on the balance sheet for $20,000 even
though the current fair market value of the building is
well over $200,000. Pam's will keep the building on its
balance sheet for $20,000 until it is either retired or sold.
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Historical cost principle
Examples:
Jeff's Construction, LLC bought a piece of
equipment in 2010 for $10,000. Today this piece
of equipment is only worth $2,000. Jeff would
still report the equipment at its purchase price of
$10,000, less depreciation, even though its
current fair market value is only $2,000.
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Historical cost principle
Examples:
A herbal medicine company purchases a piece of land
for growing herbs on it, paying $25,000 in cash. The
company will enter $25,000 as the cost of the land in its
accounting records. In a booming real estate market,
the fair market value of the land five years later might be
$35,000. Although the market price of the land has
significantly increased, the amount entered in
the balance sheet and other accounting records would
continue unchanged at the cost of $25,000. 58
Historical cost principle
Examples:
The New York Company purchased a tract of land for
$50,000 on January 1, 2010. Today the fair market
value of the land is $65,000. Although the economic
value or market price of the land has increased, the
company would continue reporting it at its historical
cost of $50,000
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Market value principle
• Examples:
Jeff's Construction, LLC bought a piece of equipment
in 2010 for $10,000. Today this piece of equipment is
only worth $2,000. Jeff would report the equipment
at the price of $2,000.
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“Lower of cost and market” principle
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“Lower of cost and market” principle
Mulligan Imports resells five major brands of golf clubs, which are
noted in the following table. At the end of its reporting year,
Mulligan calculates the lower of its cost or net realizable value in the
following table:
Lower of
Quantity Inventory Market
Product Line Unit Cost Cost
on Hand at Cost per Unit or Market
Free Swing 1,000 $190 $190,000 $230 $190,000
c. Matching principle
d. Materiality principle
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Cash basis accounting principle
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Accrual basis accounting principle
• Accrual basis: Revenues are recognized when they are earned and
expenses are matched to revenues or the accounting period when
they are incurred (rather than paid)
Example 1:
Revenue recognition. A company sells $10,000 of
green widgets to a customer in March, which pays the
invoice in April.
- Under the cash basis, the seller recognizes the sale
in April, when the cash is received.
- Under the accrual basis, the seller recognizes the
sale in March, when it issues the invoice.
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EXAMPLES: Cash and Accrual
Example 2:
Expense recognition. A company buys $500 of office
supplies in May, which it pays for in June.
- Under the cash basis, the buyer recognizes the
purchase in June, when it pays the bill.
- Under the accrual basis, the buyer recognizes the
purchase in May, when it receives the supplier's
invoice.
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EXAMPLES: Cash and Accrual
Example 3:
Suppose John rents a house from Sam at $100,000 per year.
Now consider the following three cases in which John pays
cash to Sam and records rent expense.
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EXAMPLES: Accrual
Example 4:
Commission. A salesman earns a 5% commission on
sales shipped and recorded in January. The
commission of $5,000 is paid in February. You
should record the commission expense in
January.
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EXAMPLES: Accrual
Example 5
Depreciation (Amortization). A company acquires
production equipment for $100,000 that has a
projected useful life of 10 years. It should charge
the cost of the equipment to depreciation expense
at the rate of $10,000 per year for ten years.
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EXAMPLES: Matching principle
Example 6:
Employee bonuses. Under a bonus plan, an employee
earns a $50,000 bonus based on measurable
aspects of her performance within a year. The
bonus is paid in the following year. You should
record the bonus expense within the year when
the employee earned it.
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Accrual basis accounting principle
Exercises 1:
Exercises 2
On 20/12/N, company X sold goods to company Y for 150
million VND. 50% of the amount was paid immediately by cash
in bank. Company Y agreed to pay the remaining amount on
10/1/N+1.
Required: Determine revenue of X for the year N and N + 1, if:
A. Company X applied cash accounting principle
B. Company X applied accrual accounting principle
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Materiality Principle
Examples:
A classic example of the materiality concept or the materiality
principle is the immediate expensing of a $10 wastebasket that
has a useful life of 10 years. The matching principle directs you
to record the wastebasket as an asset and then depreciate its
cost over its useful life of 10 years. The materiality principle
allows you to expense the entire $10 in the year it is acquired
instead of recording depreciation expense of $1 per year for 10
years. The reason is that no investor, creditor, or other
interested party would be misled by not depreciating the
wastebasket over a 10-year period. 79
Materiality principle
Examples
You may have prepaid $100 of rent on a post office box that
covers the next six months; under the matching principle, you
should charge the rent to expense over six months. However,
the amount of the expense is so small that no reader of the
financial statements will be misled if you charge the entire
$100 to expense in the current period, rather than spreading it
over the usage period. In fact, if the financial statements are
rounded to the nearest thousand or million dollars, this
transaction would not alter the financial statements at all.
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1.5.2.3. Principles are bases for qualitative accounting
information
a. Objectivity
b. Consistency
c. Prudence
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Objectivity Principle
Examples
• GOING CONCERN
The business will continue in operational existence
for the foreseeable future
Example:
o Possible losses form the closure of business will not
be anticipated in the accounts
o Prepayments, depreciation provisions may be carried
forward in the expectation of proper matching against
the revenues of future periods
o Fixed assets are recorded at historical cost
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1.6. Requirements for accounting information
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1.6.1. The fundamental qualitative characteristics
Predictive
value
Relevance Confirmatory
value
Completeness
Faithful
representation Neutral
Free from
error
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1.6.1. The fundamental qualitative characteristics
Comparability
Verifiability
Timeliness
Understandability
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1.6.2. Enhancing qualitative characteristics