Chapter 1

ENVIRONMENT AND
THEORETICAL STRUCTURE OF
FINANCIAL ACCOUNTING

© 2013 The McGraw-Hill Companies, Inc.

 Slide 2

Contents

1.1 Nature of Accounting

1.2 Legal environment of accounting

1.3 Accounting principles

1.4 Elements of financial statements

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 Slide 3

1.1 NATURE OF ACCOUNTING

Financial
Proc Reporting
DATA essin Inform
g ation
Management
Reporting
Financial Accounting & Managerial Accounting
FA
o Users:
➔Internal & External
o Characteristics:
➔Comply with Accounting principles
➔ Reflects past events
o Information requirement :
➔Requires high objectivity.
o Types of reports :
➔Mandatory Financial reports
➔Periodic basis
➔Legally binding
MA
o Users:
➔Internal
o Characteristics: :
➔Flexible, customized to the
business
➔Towards the future
o Information requirement :
➔Requires timeliness
o Types of reports :
➔Customized Reports
➔Regularly basis
➔Legally Non-binding
 Slide 5

FINANCIAL STATEMENTS

SoFP IS SoCF Notes

Cash flow Supply

Present Demonstrate
formation detailed
financial the business
and used information
position of situation of
by the on the
enterprises enterprises
enterprises financial
at a time. in a certain
in a certain statements
period
period
 Slide 6

1.2 The legal environment of Vietnamese accounting

1
Accounting Law

2
Accounting Standards

3
Accounting regimes
 Slide 7

Accounting Law

The highest legal document

Specify the principle issues

As the basis, the foundation of accounting

standards and accounting regime
 Slide 8

Accounting Law What?

 Contents
◦ Definitions
◦ Roles of accountings
◦ General principles applied
◦ Basic regulation on accounting practices: documents,
codes, journals, statements, physical counts…
◦ Accounting system of an entity
◦ Accounting services
◦ Enforcement of law
 Slide 9

Accounting standards What?

Accounting standards include regulations

and guidelines for basic accounting
principles, contents, methods, and
procedures. They are the most common
basis for bookkeeping and preparing
financial statements in order to provide
honest, consistent and objective
evaluation about financial position and
results of businesses.
 Slide 10

Accounting standards Why?

 Example
Company ABC bought a machine for 100 million
VND. Useful life of the machine: 5 year.
This year, ABC lent this machine to another
company for an annual fee of 30 million VND.
What was ABC’s profit/loss this year?

Option 1 Option 2

Loss: 70 million Profit: 10 million

 Slide 11

Accounting standard

Group 1 Group 2 Group 3

Standards
Specific on making
Framework and
accounting
standards presenting
financial
statements
 Slide 12

National Assembly

Accounting Law

Ministry of Finance
(Combine with: Department of Accounting and Auditing Regulations)

Accounting Standard + Circular guiding of Accounting Standard

Accounting Regime

Guiding the method Guiding the Guiding the

of preparing and accounting regime of accounting regime of
presenting the enterprises small and medium
consolidated Cir. 200/2014/TT-BTC enterprises
financial statements Cir. 75/2015/TT-BTC Cir.133/2016/TT-BTC
Cir. 202/2014/TT-BTC Cir. 53/2016/TT-BTC …
© 2013 The McGraw-Hill Companies, Inc.
 Slide 13

ACCOUNTING REGIME

Specific
Cir.200 Cir.133 Accounting
regime

Published Accounting regimes

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 Slide 14

Accounting regime according to Cir.200

Accounting Documents
(Guideline) 1

Accounting Accounts
4

2 Finacial Statement

3 Ledger
(Guideline)
 Accounting Codes
- Type 1:
- Type 2: Asset
- Type 3: Liability
- Type 4: Owner’s Equity Resources
- Type 5: Revenue
- Type 6: Expense
- Type 7: Other Income Business
- Type 8: Other Expense
process
- Type 9: Income Summary
 ▪ STRUCTURE OF ACCOUNTS

Debit Account 1 , 2 Credit Debit

Account 3 , 4 Credit
Beg. Bal. Beg. Bal.

End. Bal. End. Bal.

Debit Revenue (511, 515) (Normal account) Slide 17

Credit
-Revenue
deductions
-Net sales transfer
to Acc. 911

Deduction of Revenue (521) (Contra account)

Transfer to Acc.(511)
Debit Expenses (Type 6) Credit Slide 18

Acc. 154
(621,622,627)
Transfer
Acc. 911
(632,635,641,642)
 Slide 19

Acc. 811,821 Acc. 711

Acc. 911
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In future, VAS will be changed in VFRS in

harmonizing trend with IAS and IFRS

© 2013 The McGraw-Hill Companies, Inc.

2 Slide 21

1
1.3. Accounting Principles

1. Accrual
2. Going concern Using for recording
3. Cost (to ledger)
4. Matching
5. Consistence
6. Prudence
Different from the
7. Materiality principles of
presentation of
financial
statements
© 2013 The McGraw-Hill Companies, Inc..
 Slide 22

Accounting Principals according to VAS

Accrual basis
All economic and financial operations of enterprises,
which are related to assets, liabilities, owners’ equity,
revenues, and costs must be recorded in accounting
books at the time they arise, not at the time of the
actual receipt or payment of cash or cash
equivalents. Financial statements made on the basis
of accrual shall reflect the financial status of
enterprises in the past, at present and in the future.

© 2013 The McGraw-Hill Companies, Inc.

 Slide 23

Accounting Principals according to VAS

Going concern
Financial statements must be made on the basis of
the assumption that enterprises are operating
continuously and will continue business activities
normally in the near future, i.e., they have no
intention or are not compelled to cease operation or
to substantially downscale their operation. Where
reality differs from the continuous operation
assumption, the financial statements must be made
on another basis, which must be explained.

© 2013 The McGraw-Hill Companies, Inc.

 Slide 24

Accounting Principals according to VAS

Historical cost
Assets must be recognized according to their historical
cost. The historical cost of an asset shall be calculated
according to the cash amount or cash equivalent
already paid or to be paid, or according to the
reasonable value of the asset at the time the asset is
recognized. The assets’ historical costs must not be
modified except otherwise prescribed in specific
accounting standards .

© 2013 The McGraw-Hill Companies, Inc.

 Slide 25

Accounting Principals according to VAS

Matching
The recognition of revenues and that of costs must
match. When a revenues is recognized, a
corresponding cost related to the creation of such
revenue must be recognized. Costs corresponding to
revenues include costs of the period in which
revenues are created and costs of the previous
periods or payable costs related to the revenues of
such period.

© 2013 The McGraw-Hill Companies, Inc.

 Slide 26

Accounting Principals according to VAS

Consistency
The accounting policies and methods selected by
enterprises must be applied consistently within at least
one accounting year. Where appear changes in the
selected accounting policies or methods, the reasons
for and impacts of such changes must be presented in
the explanations of financial statements.

© 2013 The McGraw-Hill Companies, Inc.

 Slide 27

Accounting Principals according to VAS

Prudence
Prudence means the examination, consideration and
anticipation needed to establish accounting estimates under
uncertain conditions. The prudence principle requires that:
a/ The reserves must be set up, which must not be too big;
b/ The values of assets and incomes are not overestimated;
c/ The values of liabilities and costs are not underestimated;
d/ Revenues and incomes shall be recognized only when
there are solid evidences of the possibility of obtaining
economic benefits, while costs must be recognized when
there are evidences of the possibility of arising costs.

© 2013 The McGraw-Hill Companies, Inc.

 Slide 28

Accounting Principals according to VAS

Materiality
Information shall be considered material in cases
where the insufficiency or inaccuracy of such
information may distort significantly the financial
statements, thus affecting the economic decisions of
the users of the financial statements. Materiality
depends on the amount and nature of information or
errors assessed in particular circumstances. The
materiality of information must be examined both
quantitatively and qualitatively

© 2013 The McGraw-Hill Companies, Inc.

 Slide 29

You’ve known the

principles, make your
choice !
Example
 ABC bough goods which were received on 23
Dec X.
 2 months later, ABC paid for the goods (on 23
Feb X+1)
 When should ABC record the goods in their
accounting ledger?

Option 1 Option 2

23 Dec X 23 Feb X+1

© 2013 The McGraw-Hill Companies, Inc.
 Slide 30

You’ve known the

principles, make your
choice !

 1 Jan, ABC bought 10 products from supplier X

at 1 USD for each.
Supplier X announced that there would be an
increasing in product’s price from Feb into 2
USD each
 Should ABC re-evaluate their inventories?

Option 1 Option 2

Yes No

© 2013 The McGraw-Hill Companies, Inc.

 Slide 31

You’ve known the

principles, make your
choice !

 ABC is using straight-line method for

depreciating on Jan of 20X1. Could it change
into different method on Feb of the same
accounting year?

Option 1 Option 2

Yes No

© 2013 The McGraw-Hill Companies, Inc.

 Slide 32

You’ve known the

principles, make your
choice !
 At 1 Jan 20X1, ABC bought 10 products for sale
(@ 1 USD)
 At the end of the year, the 10 products remained
unsold and be out of date. They are estimated to
be sold at a lower price (@ 0.5 USD) in the next
year. What should accountant do in 20X1?
Option 1 Option 2
Report a loss of 0.5 Do nothing in 20X1.
USD for each products Wait for their sales in
in 20X1 20X2.
© 2013 The McGraw-Hill Companies, Inc.
 Slide 33

You’ve known the

Accounting principles principles, make your
choice !
 Example
Company ABC bought a machine for 100 million
VND. Useful life of the machine: 5 year.
This year, ABC lent this machine to another
company for an annual fee of 30 million VND.
What was ABC’s profit/loss this year?

Option 1 Option 2

Loss: 70 million Profit: 10 million

 Slide 34

1.4 ELEMENTS OF FINANCIAL STATEMENT

◦ Financial Position included: 3 Elements

◦ ASSETS = LIABILITIES + OWNER’S EQUITY

CURRENT
LIABILITY
ASSET

ASSET EQUITY
NON CURRENT OWNER’S
ASSET EQUITY
 Slide 35

Elements of statements of financial

position
Definition

Resource controlled by the entity as a

result of past event & from which future
economic benefits are expected to flow
into the entity
ASSET
Examples
Cash
Account receivables
Inventories
Property, Plant, Equipment

35
 Slide 36

Elements of statements of financial

position
Definition

Present obligation arising from past

events, the settlement of which is
expected to result in an outflow from
the entity of resources embodying
economic benefit
LIABILITY

Example -Trade payables

-Salaries payables
-Loans
-Long-term notes

36
 Slide 37

Elements of statements of financial

position
Definition

Residual interest in the asset of the entity

after deducting all its liabilties
= ASSETS - LIABILITIES
EQUITY
Examples
Share capital
Retained earnings

37
 Slide 38

Elements of Income statement

Income statement

EXPENSE INCOME

38
 Slide 39

Elements of Income statement

INCOME encompasses both REVENUE

and OTHER INCOMES (GAINS)
Total value of economic benefit earned by an
entity during the accounting period, arising
from normal operations and other activities,
excluding capital contributions made by
entity’s shareholders or owners.
Examples: sales, fees, interest received,
rent…
39
 Slide 40

Elements of Income statement

Expenses
Total value of amounts which reduce economic
benefit during the accounting period. They take
the form of an outflows or depletion of assets
(such as cash, property…) or arising of liabilities,
which lead to a decrease in the owner’s equity,
excluding the amounts distributed to
shareholders or owners.
Examples: cost of goods sold, distribution
expenses, other expenses

40
 Slide 41

Valuation models

 Historical cost
 Fair value
 Net realizable value
 Present value
 Replacement cost/current cost
End of Chapter 1

© 2013 The McGraw-Hill Companies, Inc.