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CHAPTER OBJECTIVES
• Explain accounting concepts, roles and functions of accounting in the economy.
•
CHAPTER 1 – •
Explain the users of accounting information
Classify accounting objects
OVERVIEW OF • Explain the content and meaning of accounting principles and requirements.
• Describe the accounting environment.
ACCOUNTING • Identify types of businesses

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CHAPTER STRUCTURE 1. NATURE OF ACCOUNTING

Accounting
1.1. The necessity of accounting in the economy
methods 1.2. Accounting cycles
Accounting Accounting 1.3. Accounting concepts
assumptions environment
and
1.4. Functions of accounting
Accounting
Nature of equation principles 1.5. Users of accounting information
accounting
Introducing
1.6. Accounting classification
the chapter 1.7. Requirements for Accounting information
1.8. Responsibilities of accounting

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1.2. ACCOUNTING CYCLES

1.1. THE NECESSITY OF ACCOUNTING IN THE
ECONOMY Consider the following context: you are assigned to be in charge of
accounting work at ABC Bakery Manufacturing Company. To be able to
PROFIT AND provide information about the company's profit and loss results, what
Manage,
Production LOSS
impact INFORMATION
do you need to do?
and business
activities ASSETS OBSERVING: Economic and financial events arising at the entity
How does the production process take place?

Human Survival and

What inputs are involved in the production process?
ACCOUNTING
society development Question: After observing, list the main input factors involved in the
production process at ABC company?
Accounting appeared due to the requirements of society
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1.2. ACCOUNTING CYCLES

1.2. ACCOUNTING CYCLES

OBSERVING: Flour MEASURING:

Sugar
Egg Quantify accounting objects in the form of volume,
quantity, length,...
Milk
Depreciation of machinery and equipment What is the quantity of raw materials?
Labor
How many products are produced?
Question: After observing, what is the next task of the accountant?

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OBSERVING MEASURING Question: After performing

1.2. ACCOUNTING CYCLES
measurement work, what is the
Flour 2 kg next task of the accountant?
CALCULATING
Sugar 0,5 kg
Egg 10 eggs Use calculations according to accounting methods to calculate economic
indicators, mainly general indicators.
Milk 1 liter
Depreciation of machinery What is the value of materials issued?
and equipment 2 hours

Labour hours 2 hours What is the value of finished goods?

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OBSERVING MEASURING CALCULATING (1.000 dong) 1.2. ACCOUNTING CYCLES

Flour 2 kg 50 Record economic transactions arising at the

Product cost = ? RECORDING:
Sugar 0,5 kg 20 entity in the accounting system

Egg 10 eggs 30 Product price =

The recording process is also the process in which
Milk 1 liter 50 Gross profit = ? accountants process information according to
Depreciation of Machinery 2 hours 150 their own methods (for example, classifying,
Question: After performing synthesizing information).
and Equipment
calculations, what is the next
Labour hours 2 hours 200
task of the accountant? Question: What is the purpose of recording?

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1.2. ACCOUNTING CYCLES 1.3. DEFINITION OF ACCOUNTING

Accounting will provide useful information for According to Accounting Law (Vietnam) [No. 88-2015-
people who need to use accounting information
PROVIDE INFORMATION: QH13]: Accounting means the work of collecting, processing,
to make decisions (through the accounting
checking, analyzing and providing economic and financial information
reporting system).
in the forms of value, in kind, and labor in working hours.

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1.3. DEFINITION OF ACCOUNTING 1.4. FUNCTIONS OF ACCOUNTING

PROVIDING INFORMATION
- The Financial Accounting Standards Board: Accounting is a science
• Provide information about financial performance of an entity
used to collect, process and communicate financial information in to users
monetary form so that users can make decisions based on it.

- According to the French Accounting Council: Accounting is a system MANAGING

of organizing financial information that allows the collection, • Check economic and financial phenomena arising at the
arrangement, and recording of initial information in the form of entity
• Advise and propose to managers economic solutions to
numbers, then through information processing, will provide all the increase the business performance efficiency
information appropriate to the needs of different information users. 16

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1.5. USERS OF ACCOUNTING INFORMATION 1.5. USERS OF ACCOUNTING INFORMATION

Managers, board of directors,…. Information provided to Shareholders, government agencies, banks, investors,
EXTERNAL USERS
these users must meet the following requirements: etc. Information provided to external stakeholders must
INTERNAL USERS ensure:
- Fast, timely, appropriate for decision making
- Periodic information
- Can use estimated information
- Absolutely accurate information
- Both compiled and detailed information. Information
needs to be analyzed 17
- Synthesized information

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1.6. ACCOUNTING CLASSIFICATION COMPARE MANAGEMENT ACCOUNTING

AND FINANCIAL ACCOUNTING

Information provided to Criteria Managerial Accounting Financial Accounting

MANAGEMENT ACCOUNTING
internal users Individuals/organizations
Managers/Directors within
Users inside and outside the
a business organization
company (mainly).

≠ Reporting
period
When needed/Regularly Periodically as prescribed

Legal
Optional Compulsory
Information provided to compulsion
FINANCIAL ACCOUNTING
external users
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COMPARE MANAGEMENT ACCOUNTING 1.7. ACCOUNTING REQUIREMENTS

AND FINANCIAL ACCOUNTING
COMPLETENESS
Criteria Managerial Accounting Financial Accounting
• All arising economic and financial transactions are completely
• Focused and forward-looking • Reflecting on the reflected in accounting documents and financial statements
past/history
• Monetary and non-monetary • Only monetary transactions
TIMELINESS
events and information
Information • Relatively accurate • Accurate
• Reflect accounting information in a timely manner
characteristics • Financial statements submitted on time
• Each department/center • Entire organization/business
• Non-compliance with accounting • Comply with accounting UNDERSTANDABILITY
standards standards
• Reflect clear, easy to understand, and accurate accounting
• Flexible and appropriate • Objective and verifiable
data

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1.7. ACCOUNTING REQUIREMENTS

1.8. RESPONSIBILITIES OF ACCOUNTANTS
FAITHFUL REPRESENTATION, UNBIASED
• Correctly reflect the status and nature of the event • Collect and process accounting data according to the subject and content of
• Do not manipulate, distort information accounting work, according to accounting standards and policies.
• Verify and monitor financial revenues and expenditures, collection obligations,
CONTINUITY and debt payments; control the management and use of assets and sources of
• Accounting information and data must be continuous from assets, detect and prevent violations of financial and accounting laws.
establishment to termination of operations; This period's accounting
data must continue the previous period's accounting data. • Analyze accounting information and data: advise and propose solutions to serve
management requirements and economic and financial decisions of the entity.
COMPARABILITY
• Provide accounting information and data according to the provisions of law.
• Classify and arrange accounting information and data
sequentially, systematically, and can be compared and verified.
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CASE CASE
Select events that are recorded in accounting books: 8. The director negotiates to purchase raw materials for production
1. Employee A asked for leave to travel abroad 9. The employees do not comply with the company's working regulations
2. Customers paid to businesses in cash
10. The way that employees use their income
3. Employee A plans to go on a business trip to 3 European countries next
month 11. Business received purchase orders from customers
4. The relationship between employees and management in the company is 12. Business issued raw materials for production
still low
13. Conflicts between employees often occur during the work
5. The deputy director asked for leave due to family matters
14. An employee quit his job
6. The company's employees have just bought a new phone for personal use
7. Business sold goods on credit to customer. 15. Business purchased equipment, paid by bank transfer

2. ACCOUNTING EQUATIONS 2.1. CONCEPTS

2.1. Concepts
 An asset is a present economic resource controlled by
2.2. Asset classification
the entity as a result of past events.
2.3. Accounting equations  A liability is a present obligation of the entity to transfer
an economic resource as a result of past events.
 Equity is the residual interest in the assets of the entity
after deducting all its liabilities.

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CLASSIFICATION OF ASSETS BY STRUCTURE

2.2. ASSET CLASSIFICATION
Cash Cash on hands, Cash in banks

CLASSIFICATION BY STRUCTURE: This classification shows what types of Assets Receivables Trade receivables, Internal receivables, Other receivables
the entity includes? What is the value?
Advances, Prepaid
On Financial Statements, asset classification by structure is commonly referred to Advances, Prepaid expenses, Mortgage, Collaterals and Deposits
expenses
ASSETS
as Assets Inventories Raw materials, supplies, Finished goods, Merchandise goods,
Work in progress
Fixed assets, Investment
CLASSIFICATION BY SOURCE OF ASSETS: This classification shows where the properties Tangible assets, Intangible assets, Investment properties

Assets come from? Assets are formed from what sources? Acquisition of fixed assets, Construction in progress, Extra-
Construction in progress
On the Financial Statement, the sources of Assets are Liabilities and Equity. ordinary repair of fixed assets

Trading securities, Investment in subsidiaries, Investment in joint30

Investments
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CLASSIFICATION OF ASSETS BY STRUCTURE

CLASSIFICATION OF ASSETS BY SOURCE OF ASSETS
Based on the time of conversion into cash, Assets are divided into 2 types:

CURRENT ASSETS
Includes cash and other assets that can be converted into cash and can be sold or
used within no more than 12 months or one normal business cycle of the
enterprise from the reporting date.
Ex: Cash, Prepaid expenses, Inventories, trading securities, ....
Sources of Assets formation include Liabilities and Equity

NON-CURRENT ASSETS
Includes all assets other than current assets
Ex: Tangible fixed assets, Intangible fixed assets, Investment in real estate,
Investment in subsidiaries, ... 32
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CLASSIFICATION BY SOURCE OF ASSETS 2.3. ACCOUNTING EQUATION

Trade payables
Owners’ Equity
Taxes and other payables to State
Budget
Assets = Liabilities + Equity
Retained earnings

Payables to employees
LIABILITIES EQUITY Capital expenditure funds
Liabilities
Borrowings and finance lease
liabilities Investment and development
fund ASSETS +
Other payables
Other equity funds
Deposits received
Equity

Bonus and welfare fund

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2.3. ACCOUNTING EQUATION

3. ACCOUNTING ASSUMPTIONS
Example 1: Ms. Tim plans to establish a company. (Amounts in million dong)
Ms. Tim expects the company will need some Assets as follows :
- 120 cash on hands is required to spend. The basic assumptions of accounting reflect the general and
- Purchase a factory for 400 cash. specific aspects of the accounting environment. These assumptions
- Purchase some goods for 210, of which 140 for cash and the balance on account. are derived from the following sources: Opinions of APB
- Purchase a truck to transport goods for 500 cash. (Accounting Procedure Board - US AICPA) and FASB accounting
Besides, Ms. Tim plans to mortgage real estate to borrow 200 and deposit it in the bank. standards (USA); Conceptual framework of FASB and IASB.
- Assuming the above events come true, determine the company’s Assets and the
amount of Ms. Tim’s Equity.
Economic Going Monetary Accounting
entity concern unit period

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GOING CONCERN ASSUMPTION

ECONOMIC ENTITY ASSUMPTION
The going concern assumption states that the entity is in operation and will
continue to operate for the foreseeable future, at least after 12 months. It is
The economic entity assumption states that every economic entity assumed that the entity has no intention of dissolving or seriously reducing the
can be separately identified and accounted. It is separate from its scale of its operations in the near future.
owners, managers and other companies With the going concern assumption, Assets are intended to be used for
Accountants only records transactions that affect the Assets, production and business activities, with no intention of selling, so accountants
Liabilities or Equity of a particular unit of accountability. report existing Assets at historical cost, regardless of market value.
This is the most basic concept in accounting because it defines the The going concern assumption is an assumption of stability that allows an
clear boundaries of the entity accounted entity to realize its business objectives and fulfill its obligations.
When an entity is not a going concern, the financial statements must be
prepared on a different basis.
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MONETARY UNIT ASSUMPTION ACCOUNTING PERIOD ASSUMPTION

Accounting does not record all events of an organization but only those  The accounting period assumption assumes that a entity's business cycle
transactions that can be expressed in term of money. can be divided into defined periods of time.
In the process of evaluating, recording and reporting using monetary measures,  Although the going concern assumption assumes that entity operates
currency is considered a fixed unit of measurement. continuously , information about the assets and business results of the
In reality, when the purchasing power of money changes, accountants must entity needs to be divided into periods to evaluate and announce changes
have some solutions to accurately and reasonably reflect company’s related to the entity's resources.
performance and financial position so that it can be compared with previous – The accounting period can be monthly, quarterly or annually.
periods. – This assumption helps accountants prepare financial statements over
a specified period of time, helping accountants provide timely and
useful information for decision making.
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4. ACCOUNTING PRINCIPLES
4. ACCOUNTING PRINCIPLES
Cost
principle

Substance
Accounting principles are conceptualized as the primary guidelines for Matching
over form
accounting work. These are the specific rules on which all the rules of
accounting are established. Accrual
basic
Accounting principles play a very important role in guiding the
preparation and auditing of financial statements.
Consistency Conservatism

Materiality

42
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ACCRUAL BASIS ACCRUAL BASIS

- In 12/N1, the entity sells a batch of goods worth 500 million

VND to customers, on credit. Accountant has recorded revenue,  All transactions of an entity related to Assets, Liabilities,
costs and profits from the goods. Equity, Revenue, and Expenses must be recorded in the
 The selling price of the goods has not been collected but the period in which the events occur, not based on the actual
time of receipt or payment of cash or cash equivalents.
accountant has recorded and declared the revenue and profit. Is
 Financial statements prepared on an accrual basis reflect
it accurate?
the company’s performance and financial position in the
past, present and future.

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COST PRINCIPLE
COST PRINCIPLE
• Assets must be recorded at historical cost/original cost.
In year N1, Company X purchased a house with the purchase price
• The historical cost of an asset is total amount of cash or cash
of 500 million VND. The house needs to be decorated before using. equivalents paid to acquire the asset.
Company X paid 20 million VND for decorating the house. • The historical cost of the asset cannot be changed unless except for
Assume that at the end of year N3, the market value of the house is specific cases.
800 million VND.
 How much is the house reported on the financial statements at
the end of year N1 and N3?

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SUBSTANCE OVER FORM PRINCIPLE

COST PRINCIPLE (GAAP – FASB)
According to Vietnamese accounting law : The business sells cars for 1 billion VND. According to promotion
The value of assets and liabilities is initially recorded at original cost. policy, the business gives the customer a free tire. The market
price of the tire is 30 million VND. The cost of the car is 700
After initial recognition, for some types of assets or liabilities which
million VND, the cost of the tire is 30 million VND.
have value fluctuates frequently according to market prices and can
How will the business record sales during the period?
be reliably measured are recorded at fair value at the end of the
financial reporting period.

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SUBSTANCE OVER FORM PRINCIPLE CONSERVATISM PRINCIPLE

(GAAP – FASB)
- At 31/12/N1, Merchandise inventories at a company are as follows:
The preparation of financial statements must ensure that they accurately + High-end goods: 100 million
reflect the nature of the transaction rather than the form or name of the
transaction. + Normal goods: 50 million
Although the Vietnam Accounting Law and VAS have not officially Also on this day, the net realizable value (NRV) of the above goods
considered ‘substance over form principle’ as a basic principle of was 80 million dong and 60 million dong respectively.
accounting, this is a requirement specifically stipulated in VAS 01; VAS 21
and is the most basic principle to be followed when developing accounting Does the accountant record a loss of 20 million and a profit of 10
policies and regulations million when determining profit or loss in year N1?

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CONSERVATISM PRINCIPLE
MATCHING PRINCIPLE
Conservatism is the consideration and judgment necessary to make
In 1/N1, company A leased a fixed asset to company B, the
accounting estimates under uncertain conditions.
rental fee was 400, the depreciation of the leased asset in
The conservatism principle requires:
January was 300. At the end of the month when company B
a/ Allowance shall be created, but not too high;
returned the asset, the entity discovers that the asset is
b/ Do not overestimate the value of Assets and Income;
damaged while company B uses it. Company A plans to repair
c/ Do not underestimate the value of Liabilities and Expenses;
this asset in February, the expected repair expense is 50.
d/ Revenue and income are only recognized when there is solid evidence of
 What is the profit/loss of the rental in 1/N1?
the ability to obtain economic benefits, while expenses shall be recognized
when there is evidence of the ability to incur expenses.
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CONSISTENCY PRINCIPLE
MATCHING PRINCIPLE - At the beginning of year 1, company A purchased a delivery truck for lease, original cost
was 1,200 million, the entity determined the useful life of this truck to be 12 years. The
rental amount and profit for year 1 are as follows:
• The recognition of revenue and expenses must be consistent with
each other. When recording revenues, expenses generating the Revenue from leasing 120
revenues must be recorded. Depreciation 100
• Expenses corresponding to revenue include expenses of the period Profit 20
in which revenue is generated and expenses of previous periods or
expenses to be paid in the future periods related to the revenue of - At the beginning of year 2, company A redefined the truck's useful life to be 10 years, the
that period. rental for year 2 is as follows:
• The matching principle aims to determine Profit or Loss in a Revenue from leasing 120
reasonable manner Depreciation 110
Profit 10

 Can we conclude that the company’s performance in year 2 is worse than year 1?
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CONSISTENCY PRINCIPLE MATERIALITY PRINCIPLE

• The enterprise accounting policies and methods must be applied

consistently at least in one annual accounting period. In case there is
In 1/N1, a company purchased a set of tables and chairs costing 500,000
a change in the selected accounting policy and method, the reasons
and effects of that change must be explained in the notes to the VND (with the useful life of 2 years) and a production machine costing
financial statements. 550,000,000 VND (with the useful life of 2 years) for use in its production
• The consistency principle helps make information in financial process. The accountant has recorded the full value of these two assets in
statements comparable between periods. January's expenses.
 Is the accountant of company recording expenses properly?

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MATERIALITY PRINCIPLE MULTIPLE-CHOICE QUESTIONS

• Information is considered material in cases where the lack of

information or the inaccuracy of that information can significantly Question 1: The balance of accounting is expressed through
distort the financial statements, affecting the economic decisions of the equation:
users of the financial statements.
a Assets = Sources of Assets
• Materiality depends on the size and nature of the information or errors
assessed in the specific circumstances. The materiality of information b Current Assets + Non-current Assets = Liabilities + Equity
must be considered in both quantitative and qualitative aspects.
• True and fair financial statements do not require absolute accuracy but c Assets = Liabilities + equity
only need to be free from material misstatements  Accountants could
accept immaterial misstatements. d All of the above

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MULTIPLE-CHOICE QUESTIONS MULTIPLE-CHOICE QUESTIONS

Question 3: Accountants only record assets value at the

Question 2: Only record an expense when that expense original cost spent to acquire the assets and do not record
generates revenue, this is the requirement of the asset value at market price, this is a requirement of the
principle: principle:
a Historical cost a Historical cost
b Conservatism
b Conservatism
c Matching
c Materiality
d Consistency
d Matching

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MULTIPLE-CHOICE QUESTIONS
5. ACCOUNTING METHODS
Question 4: Which of the following is true:
• Accounting documents
a Assets = Liabilities - Equity • Measurement methods
• Double entries
b Assets = Liabilities + Equity
• Financial statements
c Liabilities = Assets + Equity

d None of above is true

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6. ACCOUNTING ENVIRONMENT (SELF-STUDY)

RELATIONSHIP BETWEEN ACCOUNTING METHODS

Suggested questions:
Accounting Accounts Financial 1. What is the legal environment of
documents reports accounting? Draw a diagram of the
system of legal normative documents on
accounting in Vietnam.
Costing Costing
2. List ethical principles according to
(input) (output)
Professional ethical standards of
Accounting and Auditing in Vietnam

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7. TYPES OF BUSINESSES IN VIETNAM (SELF-STUDY) WHAT ELSE ???

Suggested questions:
1. Compare the characteristics of different types of businesses in
Vietnam. Above is just the most basic knowledge about accounting
2. If you have enough capital to establish a company, what
product/industry/field do you plan to do business in? And
what type of business will you choose for your company and Need to learn and study more through books and specialized
why? documents

Continue to learn more in the following lessons…

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