CHAP 1

OVERVIEW of FINANCIAL ACCOUNTING

FINANCIAL REPORTING
© Statement of Financial Position
© Statement of income
© Statement of Cash Flows
© Notes to financial statements (and Statement of Changes in Equity)
- The Statement of Financial Position presents the financial position of the
company on a particular date.
- The income statement summarizes the results of operating activities
- The statement of cash flows discloses the changes in cash during a period.
DEVELOPMENT OF FINANCIAL ACCOUNTING, REPORTING STANDARDS
Two major sets of accounting standard: FRS, US.GAAP
In Vietnam we call VAS (26 cái – 20 năm) dựa trên IAS IFRS)

INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) AND

SUPPORTING ORGANIZATIONS
• IASB members include accounting profession, analysts, academics, regulators, and government.
• IFRS Foundation selects members, oversees, and ensures adequate funding.
• IFRS Advisory Council advises on agenda and work priorities.
• IFRS Interpretations Committee seeks to resolve accounting issues and interpret existing IFRS.
• International Organization of Securities Commissions (IOSCO) provides regulatory oversight of IASB.
• IASB is a private and non-governmental body with no authority to enforce the use of IFRS.

OBJECTIVE OF FINANCIAL REPORTING

Qualitative Characteristics
- Understandability - Faithful representation - Verifiability
- Fundamental - Enhancing - Timeliness
- Relevance - Comparability - Understandability
Elements
Financial Position Measurement of Elements
• Assets Underlying Assumptions • Basis of measurement
• Liabilities • Going concern Capital and Capital Maintenance
• Equity Recognition of Elements • Concepts of capital
Performance • Probability of future economic • …. maintenance and
• Income benefits determination of profit
• Expenses • Reliability of measurement
Financial Statements
- Statement of financial position - Statement of cash flows
- Income statement - Statement of changes in shareholder’s equity
Statement of comprehensive income - Notes and supplementary disclosures
Constraints Cost effectiveness

CHAP 2
REVIEW OF THE ACCOUNTING PROCESS
THE ACCOUNTING PROCESSING CYCLE
During the Accounting Period (daily)
Source documents ⇒ transaction analysis ⇒Record in journal ⇒ post to ledger
At the end of AP
⇒unadjusted trial balance ⇒ record n post adjusting entries ⇒ adjusted trial balance ⇒ financial statements
At the end of the year
⇒ close temporary accounts ⇒ post-closing trial balance

ACCOUTING EQUATION FOR A CORPORATION

A = L + SE

ACCOUNT RELATIONSHIPS
Debits and credits affect the Statement of Financial Position Model as follows:

ACCOUNTING PROCESSING CYCLE

On January 1, $40,000 was borrowed from a bank and a note payable was signed. General jourrnal
- Cash (an asset) increases by $40,000.
- Notes Payable (a liability) increases by $40,000.

1. General ledger: The “T” account is a shorthand format of an account used by accountants to analyze
transactions. It is not part of the bookkeeping system.

2. Posting journal entries: Post the debit portion of the entry to the Cash ledger account.
Ex: On July 1, the owners invest $60,000 in a new business, Dress Right Clothing Corporation.

We follow the same procedure to post the credit portion of the entry to the Ordinary Share Capital account.

3. A trial balance is a listing of all accounts and their balances at a point in time. Debits = Credits
4. Adjusting entries
- Prepayments (Deferrals) :Transactions where cash is paid or received before a related expense or
revenue is recognized
- Accruals Transactions where cash is paid or received after a related expense or revenue is recognized.
- Estimates

5. Post-closing trial balance

- Lists permanent accounts and their balances.
- Total debits equal total credits.

CASH VERSUS ACCRUAL

ACCOUNTING
Cash Basis Accounting
- Revenue is recognized when cash is received.
- Expenses are recognized when cash is paid

Ex: Carter Company has sales on account totaling $100,000 per year for three years. Carter collected $50,000
in the first year and $125,000 in the second and third years. The company prepaid $60,000 for three years’
rent in the first year. Utilities are $10,000 per
year, but in the first year only $5,000 was
paid. Payments to employees are $50,000 per
year.

Accrual Accounting
- Revenue is recognized when earned.
- Expenses are recognized when incurred.

-
- The function of financial accounting is to identify, measure and communicate financial information about
economic entities to interested parties.
- Accrual accounting provides a better indication of ability to generate cash flows than does information
limited to the financial effects of cash receipts and cash payments.
- The primary objective of accrual basis accounting is the measurement of income.
 CHAP 3
THE STATEMENT OF FINANCIAL POSITION AND
FINANCIAL DISCLOSURES

THE STATEMENT OF FINANCIAL POSITION

Reports a company’s financial position on a particular date.
Limitations:
- The Statement of Financial Position does not portray the market value of the entity as a going concern nor
its liquidation value.
- Resources such as employee skills and reputation are not recorded in the Statement of Financial Position.
Usefulness:
- The Statement of Financial Position describes many of the resources a company has for generating future
cash flows.
- It provides liquidity information useful in assessing a company’s ability to pay its current obligations.
- It provides long-term solvency information relating to the riskiness of a company with regard to the
amount of liabilities in its capital structure.
 ASSETS
Assets are resources controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
- Current investment used to trade stocks
- Long term investment: mua để đó chứ chưa có ý định sử dụng
Bond – creditors. Stocks – shareholders

CURRENT ASSETS:
- Will be converted to cash or consumed within one year or the
operating cycle, whichever is longer. (Cash, Cash Equivalents,
Short term investments, Receivables, Inventories, Prepaid
Expenses, Supply )
o Cash equivalents: include certain negotiable items such as
commercial paper, money market funds, and Treasury bills.
(tương đương tiền, quyết định dựa trên thời hạn 3 tháng)
Operating Cycle of a Typical Manufacturing Company

NONCURRENT ASSETS:
Not expected to be converted to cash or consumed within one year or the operating cycle, -whichever is
longer. (Investments Property, Plant, & Equipment, Intangibles, Other Asset)
Investments
- Not used in the operations of the business.
- Include both debt and equity securities of other corporations, noncurrent receivables, and cash set aside for
special purposes.
Property, Plant, and Equipment
- Are tangible, long-lived, and used in the operations of the business.
- Include land, buildings, equipment, machinery, and furniture.
- Reported at original cost less accumulated depreciation.
Intangible assets
- Used In the operations of the business but have no physical substance.
- Include patents, copyrights, and franchises.
- Reported net of accumulated amortization.
Other Assets
- Include long-term prepaid expenses, any noncurrent assets not falling in one of the other classifications.
(VN quyết định PPT hay equipment dựa trên giá trị đơn lẻ dưới 30tr)

Liabilities
Liabilities are present obligations of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits

CURRENT LIABILITIES (<3 THÁNG)

Obligations are expected to be satisfied through current assets or creation of other current liabilities within one
year or the operating cycle, whichever is longer (Accounts Payable, Notes Payable (VN không có) Accrued
Liabilities, Unearned Revenues, Current Maturities of Long-Term Debt)

LONG-TERM LIABILITIES
Obligations that will not be satisfied within one year or operating cycle, whichever is longer. (Long-term
Notes, Mortgages, Long-term Bonds, Pension Obligations, Lease Obligations)
 Shareholders’ Equity
Shareholders’ Equity is the residual interest in the assets of the entity after deducting all its liabilities (Issued
Capital, Retained Earnings, Treasury shares, capital reserve, translation reserve and other reserves, and other
comprehensive income items)
- Under Vietnamese regulations, current items must be presented before non-current items.
- IFRS does not prescribe the format of financial statements, but current items often be reported after non-
current items.

Disclosure Notes
- Operating characteristics of entity.
- Accounting period, accounting monetary unit.
- Accounting Standards and Regime applying by the entity.
- Related parties information;
Summary of Significant Accounting Policies: Conveys valuable information about the company’s
choices from among various alternative accounting methods.
Subsequent Events: A significant development that takes place after the company’s financial year-end but
before the financial statements are issued.
Noteworthy Events and Transactions: Transactions or events that are potentially important to evaluating
a company’s financial statements, e.g., related-party transactions, errors, and fraud.

USING FINANCIAL STATEMENT INFORMATION

Comparative Financial Statements: Allow financial statement users to compare year-to-year financial
position, results of operations, and cash flows.
Horizontal Analysis: Expresses each item in the financial statements as a percentage of that same item in
the financial statements of another year (base amount).
Vertical Analysis: Involves expressing each item in the financial statements as a percentage of an
appropriate corresponding total, or base amount, within the same year.
Ratio Analysis: Allows analysts to control for size differences over time and among firms.

LIQUIDITY RATIOS
Measures a company’s ability to satisfy its short-term liabilities

Provides a more stringent indication of a company’s ability to pay its current liabilities

FINANCING RATIOS
Indicates the extent of reliance on creditors, rather than owners, in providing resources

Indicates the margin of safety provided to creditors

 CHAP 4
THE INCOME STATEMENT, STATEMENT OF
CASH FLOWS
An income statement for a hypothetical manufacturing company that you can refer to as we proceed through
the chapter. Gain: unexpected salary,… (không nhận được thường xuyên.

INCOME FROM CONTINUING OPERATIONS

Revenues: Inflows of resources resulting from providing goods or services to customers.
Expenses: Outflows of resources incurred in generating revenues.
Gains and Losses: Increases or decreases in equity from peripheral or incidental transactions of an entity.
Income Tax Expense: Because of its importance and size, income tax expense is a separate item.

OPERATING VERSUS NONOPERATING INCOME

Operating Income (sustainable income) Nonoperating Income
Includes revenues and expenses directly related to Includes gains and losses and revenues and
the principal revenue- generating activities of the expenses related to peripheral or incidental
company activities of the company

INCOME STATEMENT
Multiple step cái để học

SINGLE step
U. S. GAAP vs. IFRS
There are more similarities than differences between income statements prepared according to IFRS and those
prepared according to U.S. GAAP.
US GAAP
• Has no minimum requirements • “Bottom line” called net income or net loss.
o SEC requires that expenses be classified • Report extraordinary items separately.
by function.
IFRS
• Specifies certain minimum information to be reported on the face of the income statement.
• Allows expenses classified by function or natural description.
• “Bottom line” called profit or loss.
• Prohibits reporting extraordinary items.

EARNINGS QUALITY
Earnings quality refers to the ability of reported earnings to predict a company’s future earnings.
Transitory Earnings versus Permanent Earning

MANIPULATING INCOME AND INCOME SMOOTHING

“Most executives prefer to report earnings that follow a smooth, regular, upward path.” ~Ford S. Worthy,
Two ways to manipulate income:
1. Income shifting (chuyển từ future income hoặc income khác để đạt đủ KPI)
2. Income statement classification

THE STATEMENT OF CASH FLOWS

• Provides relevant information about a company’s cash receipts and cash disbursements.
• Helps investors and creditors to assess
o future net cash flows o long-term solvency.
o liquidity
• Required for each income statement period reported.

CASH FLOWS FROM OPERATING ACTIVITIES

Inflows from (+)
• sales to customers.
• interest and dividends received from investments.
Outflows for (-)
• purchase of inventory. • income taxes.
• salaries, wages, and other operating expenses. • dividends paid. Còn có thể thay đổi
• interest on debt.
Both inflows and outflows of cash that result from activities reported on the income statement; The cash effects of the elements of net
income are reported as cash flows from operating activities; Cash received from customers, Cash paid to suppliers of inventory, Cash paid
to empoyees, Cash paid to banks and other creditors, Cash paid to the government, Cash paid for various expenses, Paying interest on debt

TWO FORMATS FOR REPORTING OPERATING ACTIVITIES

Direct Method Reports the cash effects of each operating activity
- Under the direct method, the cash effect of each operating activity is reported directly in the statement.
Indirect Method Starts with accrual net income and converts to cash basis
- By the indirect method, we arrive at net cash flow from operating activities indirectly by starting with
reported net income and working backwards to convert that amount to a cash basis.

CASH FLOWS FROM INVESTING ACTIVITIES

Inflows from (+)
• sale of long-lived assets used in the business. • collection of nontrade receivables.
• sale of investment securities (shares, bonds).
• interest or dividends received from investments. (có thể để ở mở nhưng sẽ hơi mơ hồ, ở VN không dể
nhưng international thì được)
Outflows for: (-)
• purchase of long-lived assets used in the business.
• purchase of investment securities (shares and bonds).
• loans to other entities.

Related to the acquisition and disposition of assets, other than (a) inventory and (b) assets classified as cash equivalents. The category
includes cash paid to acquire; Property, plant and equipment; Investments in securities of other firms; Receivables (by making loans to
others); Later transactions related to these acquisitions, such as the sale of the assets and the collection of loans, also are classified as
investing activities

CASH FLOWS FROM FINANCING ACTIVITIES (DÙNG ĐỂ CÂN BẰNG)

Inflows from:
• sale of shares to owners.
• borrowing from creditors through notes, loans, mortgages, and bonds.
Outflows for:
• owners for the repurchase or reacquisition of shares previously sold.
• owners in the form of dividends or other distributions (VN KHÔNG cho phép để ở operating act)
• creditors for the repayment of the principal amounts of debt.
• creditors for the payment of interest on debt

Result form the external financing of a business. The category includes cash received from the issuance of: common and preferred stock;
Bonds and other debt securities. Later transactions related to the sale of these securities, such as paying dividends to shareholders, the
purchase of treasury stock, and the repayment of debt, also are classified as financing activities.
 CHAP 7
CASH AND RECEIVABLES

CASH AND CASH EQUIVALENTS

Cash:
- Currency and coins
- Balances in current bank accounts
- Items for deposit such as checks and money orders from customers
Cash equivalents are short-term, highly liquid investments that can be readily converted to cash.
- Money market funds
- Treasury bills: người phát hành muốn mượn tiền nên phát hành trái phiếu kho bạc, sau đó người mua sẽ
nhận lại khoản tiền sau 1 tgian + tiền lãi
- Commercial paper

INTERNAL CONTROL
- Encourages adherence to company policies and procedures
- Promotes operational efficiency
- Minimizes errors and theft
- Enhances the reliability and accuracy of accounting data (phiếu thu, phiếu chi,..)

INTERNAL CONTROL PROCEDURES

Cash Receipts
- Separate responsibilities for receiving cash, recording cash transactions, and reconciling cash balances.
- Match the amount of cash received with the amount of cash deposited.
- Close supervision of cash-handling and cash-recording activities.
Cash Disbursements
- All disbursements, except petty cash, made by check.
- Separate responsibilities for cash disbursement documents, check authorization, check signing, and
record keeping.
- Checks should be signed only by authorized individuals.

ACCOUNTS RECEIVABLE
- Result from the credit sales of goods or services to customers
- Are classified as current assets

CASH DISCOUNTS
Gross Method
- Sales are recorded at the invoice amounts
- Sales discounts are recorded as reduction of
revenue if payment is received within the
discount period.
Net Method
- Sales are recorded at the invoice amount less
the discount.
- Sales discounts forfeited are recorded as
interest revenue if payment is received after the discount period
Ex: On October 5, Hawthorne sold merchandise for $20,000 with terms 2/10, n/30. On October 14, the
customer sent a check for $13,720 taking advantage of the discount to settle $14,000 of the amount. On
November 4, the customer paid the remaining $6,000.
SALES RETURNS
- Merchandise may be returned by a customer to a supplier.
- A special price reduction, called an allowance, may be given as an incentive to keep the merchandise.
- To avoid misstating the financial statements, sales revenue and accounts receivable should be reduced
by the amount of returns in the period of sale if the amount of returns is anticipated to be material.
Ex: During the first year of operations, Hawthorne sold $2,000,000 of merchandise that had cost them
$1,200,000 (60%). Industry experience indicates 10% return rate. During the year $130,000 was returned
prior to customer payment. Record the returns and the end of the year adjustment.

NOTES RECEIVABLE
A written promise to pay a specific amount at a specific future date.
Face amount of the note × Annual interest rate × Fraction of the annual period = Interest
Even for maturities less than 1 year, the rate is annualized.

RECEIVABLES MANAGEMENT

This ratio measures how many times a company converts its receivables into cash each year.

This ratio is an approximation of the number of days the average accounts receivable balance is outstanding.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS (nợ khó đòi - nợ xấu)
Net realizable value is the amount of the accounts receivable that the business expects to collect.
- Income Statement Approach
- Balance Sheet Approach
• Composite Rate • Aging of Receivables

giá trị thuần có thể thực hiện được

2 cách xác định: dựa trên thời gian quá hạn nợ và tình hình của khách hàng

INCOME STATEMENT APPROACH

- Focuses on past credit sales to make estimate of bad debt expense.
- Emphasizes the matching principle by estimating the bad debt expense associated with the current
period’s credit sales
Bad debt expense is computed as follows:
Current Period Credit Sales × Estimated Bad Debt % = Estimated Bad Debt Expense

Ex: In 2013, MusicLand has credit sales of $400,000 and estimates that 0.6% of credit sales are
uncollectible. What is Bad Debt Expense for 2013?
MusicLand computes estimated Bad Debt Expense of $2,400.
$ 400,000 × 0.60% = $ 2,400
Bad debt expense 2,400
Allowance for uncollectible accounts. 2,400

BALANCE SHEET APPROACH

- Focuses on the collectability of accounts receivable to make the estimate of uncollectible accounts.
- Involves the direct computation of the desired balance in the allowance for uncollectible accounts.
1. Compute the desired balance in the Allowance for Uncollectible Accounts.
2. Bad Debt Expense is computed as:

Desired Balance in Allowance for Uncollectible Accounts

-- Existing Year-End Balance in Allowance Uncollectible Accounts
= Estimated Bad Debt Expense

Composite Rate On Dec. 31, 2013, MusicLand has $50,000 in Accounts Receivable and a $200 credit
balance in Allowance for Uncollectible Accounts. Past experience suggests that 5% of receivables are
uncollectible. What is MusicLand’s Bad Debt Expense for 2013?
Aging of receivables (tính tuổi nợ của kh)
1. Year-end Accounts Receivable is broken down into age classifications.
2. Each age grouping has a different likelihood of being uncollectible.
3. Compute desired uncollectible amount.
4. Compare desired uncollectible amount with the existing balance in the allowance account.

UNCOLLECTIBLE ACCOUNTS
As accounts become uncollectible, this entry is made: (sau khi dự tính, khách hàng không trả)
Allowance for uncollectible accounts 500
Accounts receivable 500
When a customer makes a payment after an account has been written off, two journal entries are required.(ghi rồi nhưng kh muốn trả)
Accounts receivable. 500
Allowance for uncollectible accounts 500
Cash. 500
Accounts receivable 500
Direct Write-off Method. If uncollectible accounts are immaterial, bad debts are simply recorded as they occur (without the use of an
allowance account).
Bad debts expense xxx
Accounts receivable. xxx
 CHAP 8 -9
INVENTORIES
RECORDING AND MEASURING INVENTORY
Types of Inventory
- Merchandise Inventory: Goods acquired for resale
- Manufacturing Inventory: Raw Materials / work-in-progress / Finished Goods
Process of Manufacturing Inventories

INVENTORY SYSTEMS
Two accounting systems are used to record transactions involving inventory:
Perpetual Inventory System: The inventory account is continuously updated as purchases and sales are
made. (ghi liên tục ngay khi bán cả cost of goods sale rồi sales, đảm bảo số lượng)
Periodic Inventory System: The inventory account is adjusted at the end of a reporting cycle. (chỉ ghi
tổng lại sau khi đếm ở cuối kì chứ không biết cụ thể mỗi lần bán
Transaction or Event Periodic Inventory Perpetual Inventory
Routine purchases of various Costs debited to purchases
Costs debited to inventory account
inventory items account
No accounting entries made to Debit Cost of goods sold and credit
Sale of inventory
inventory inventory
Physical count to
End-of-period accounting entries No separate determination of cost of goods
determine ending inventory
and related activities sold necessary
and cost of goods sold

PERPETUAL INVENTORY SYSTEM

Ex1: Lothridge Wholesale Beverage Company (LWBC) begins 2013 with $120,000 in inventory. During the period it purchases on
account $600,000 of merchandise for resale to customers.
Inventory 600,000
Accounts payable. 600,000
Purchase of merchandise inventory on account
- Returns of inventory are credited to the inventory account.
- Discounts on inventory purchases can be recorded using the gross or net method.
Ex2: During 2013, LWBC sold, on account, inventory with a retail price of $820,000 and a cost basis of $540,000, to customers.
2013 Accounts receivable. 820 000
Inventory. 600000 Sales revenue 820 000
Accounts payable 600000 Record sales on account.
Purchase of merchandise inventory on account. Cost of goods sold 540 000
Inventory. 540 000
Record cost of goods sold.
2013
PERIODIC INVENTORY SYSTEM
The periodic inventory system is not designed to track either the quantity or cost of merchandise inventory.
Cost of goods sold is calculated, after the physical inventory count at the end of the period.

Beginning Inventory
+ Net Purchases
Cost of Goods Available for Sale
- Ending Inventory
Cost of Goods Sold
Ex1 Purchases. 600,000 Ex2: Accounts receivable 820,000
Accounts payable. 600,000 Sales revenue 820,000
Purchase of merchandise inventory on account Record sales on account.
No entry is made to record Cost of Goods Sold. A physical count of Ending Inventory shows a balance of $180,000. Let’s calculate
Cost of Goods Sold at the end of 2013.
We need the following adjusting entry to record cost of good sold.

Transaction or Event Periodic Inventory Perpetual Inventory

Routine purchases of various
Costs debited to purchases account Costs debited to inventory account
inventory items
No accounting entries made to Debit Cost of goods sold and credit
Sale of inventory
inventory inventory
Physical count to
End-of-period accounting entries No separate determination of cost of
determine ending inventory and cost
and related activities goods sold necessary
of goods sold

INCLUDED IN INVENTORY
General Rule: All goods owned by the company on the
inventory date, regardless of their location.
- Goods in Transit: Depends on FOB shipping terms
- Goods on Consignment
Expenditures

PURCHASE RETURNS
On November 8, 2013, LWBC returns merchandise that had a cost to LWBC of $2,000, and a cost basis to the seller of 1,600.

Returns of inventory are credited to the Purchase Returns and Allowances account when using the periodic
inventory method. The returns are credited to Inventory using the perpetual inventory method.
PURCHASE DISCOUNTS

Partial payment not

made within the
discount period

INVENTORY COST FLOW ASSUMPTIONS

- Specific identification - First-in, first-out (FIFO)
- Average cost

INVENTORY MANAGEMENT

Designed to evaluate a company’s

effectiveness in managing its investment in
inventory
Average inventory = (Beginning inventory + Ending inventory) / 2

REPORTING -- LOWER OF COST OR MARKET

LCM is a departure from historical cost. The method causes losses to be recognized in the period the
value of inventory declines below its cost rather than in the period that the goods ultimately are sold.
ð Inventories are valued at the lower- of-cost-or market.
Việc lập dự phòng sẽ cho thấy giá trị thấp hơn giữa giá gốc và giá thấp hơn.

Determining market value

+ Estimated selling price
− Cost of Completion
− Cost to sell
= Net Realizable Value / Market Value
• IAS No. 2 defines “market value” as the net realizable value (NRV).
• NRV is the estimated selling price in the ordinary course of business less estimated cost of
completion and disposal (cost to sell).
Lower of Cost or Market
An item in inventory has a historical cost of $20 per unit. At year-end we gather the following per unit
information: selling price = $30, cost to complete and dispose = $4
How would we value this item in the statement of financial position?
 Chapter 13
CURRENT LIABILITIES AND CONTINGENCIES

CHARACTERISTICS OF LIABILITIES
Present Obligation . . . arising from past events . . . result in an out flow of resources in the future.
- Use cash or other assets to pay off liabilities
- Other liabilities (dùng nợ này chuyển nợ khác)
- Share holder’s equity

WHAT IS A CURRENT LIABILITY?

Current Liabilities
- Obligations payable within one year or one operating cycle, whichever is longer.
- Other situations: For trading purposes, or doesnt have the right to defer settlement for at least 12 months
- Usually all taxes are current, accounts payable, taxes payable, unearned revenues, cash dividends
payable, accrued expenses, short-term notes payable
Chuyển từ retain earning sang divident payable khi trong ngyaf họp cổ đông có công bố giá cổ tức.
Longterm liabilities

OPEN ACCOUNTS AND NOTES

Accounts Payable: Obligations to suppliers for goods purchased on open account.
Trade Notes Payable: Similar to accounts payable, but recognized by a written promissory note.
Short-term Notes Payable Cash borrowed from the bank and recognized by a promissory note.
Credit lines: Prearranged agreements with a bank that allow a company to borrow cash without following
normal loan procedures and paperwork.

INTEREST
Interest on notes is calculated as follows:
Principal × Annual × Time To Amount Rate Maturity
Amount borrowed
Interest rate is always stated as an annual rate.
Interest owed is adjusted for the portion of the year that the face amount is outstanding.

INTEREST - BEARING NOTES

Ex: On September 1, Eagle Boats
borrows $80,000 from Cooke
Bank. The note is due in 6 months
and has a stated interest rate of
9%. Record the borrowing on
September 1.

Trade note payable - mượn trực tiếp từ người bán

Note payable - từ ngân hàng

How much interest is due to Cooke Bank at year-end, on December 31? Interest is calculated as:
Principal Amount × Annual Rate × Time to maturity = 80000× 9% × 4/12 = $2,400 interest due to Cooke Bank.
 Assume Eagle Boats’ year-end
is December 31. Record the
necessary adjustment at year-
end.

Assume Eagle Boats’ year-end is

December 31.
Record the necessary journal
entry when the note matures on
February 28.

NONINTEREST-BEARING NOTES
- Notes without a stated interest rate carry an implicit, or effective rate.
- The principal of the note includes the amount borrowed and the interest.
Ex: On May 1, Batter-Up Ltd. issued a one-year, noninterest-bearing note with a face amount of $10,600 in exchange for equipment
valued at $10,000. How much interest will Batter-Up pay on the note?
Interest = Face Amount - Amount Borrowed
= $10,600 - $10,000 = $600
What is the effective interest rate on the note?
Interest ÷ Amount = Interest Borrowed Rate
= $ 600 ÷ $ 10,000 = 6.00%

COMMERCIAL PAPER
Commercial paper is a term used for unsecured notes issued in minimum denominations of say $25,000 with
maturities usually ranging from 30 days to 270 days.
Normally, commercial paper is issued directly to the lender and is backed by a line of credit with a bank.
Commercial paper is recorded in the same manner as notes payable.

SALARIES, COMMISSIONS, AND BONUSES

Compensation expenses such as salaries, commissions, and bonuses are liabilities at the financial reporting
date if earned but unpaid. These accrued expenses/accrued liabilities are recorded with an adjusting entry
prior to preparing financial statements.

LIABILITIES FROM ADVANCE COLLECTIONS

Past event => Creates current obligation => Firm transfers resources/ performs services in future
- Deposits (Refundable or Non- Refundable) Advances form customers ứng trc của khách hàng =/ unearned Revenue
- AFC: Nhiều loại rev.có thể thanh toán thành nhiều đợt với nhiều dịch vụ
- Advances from Customers - UR: Chỉ service rev, trả trước cho nhiều kì
- Collections for Third Parties - Đều là liabilities

CONTINGENT LIABILITIES
Contingent liability: nợ tiềm tàng đến từ vụ kiện chưa thanh toán,… không có trong liabilities (là access khi
xuất hiện trong cái trường hợp mang lại tiền cho mình)
- A contingent liability is recorded for (1) a possible obligation; or (2) a present obligation with future
outflows that are not probable or cannot be reliably measured.
- The uncertainties relate to: 1. The existence of the obligation or
2.The probability/amount of outflow
A contingent liability is never accrued, but is only disclosed in the footnotes to the financial statements:
1. The reporting entity must:
• Describe the nature of the contingent liability, and
• Provide an estimate of the financial effect,
2. And if practicable
• Indicate the uncertainties relating to the amount and timing of the outflows, and
• State the possibility of any reimbursement.
3. Note that the cause of the uncertainty must occur before the financial statement date.

PROVISIONS
A provision is a liability as it has all the three characteristics of a one.
- (1) past obligating event has occurred
- (2) present obligation that leads to a
- (3) future outflow of benefits.

The only uncertainties are:

- Timing,and
- Amount of the future outflow of benefits
Different from a contingent liability:
- No uncertainty in the existence of the obligation
- There is a probable outflow

PRODUCT WARRANTIES
- Product warranties inevitably entail costs.
- Like other provisions, the amount of those costs can be reasonably estimated using commonly available
estimation techniques.
- The estimate requires the following entry: