ACCOUNTING PRINCIPLES

DOAN THUY DUONG

SAA
1-1
 Assessment

Learning Content
1 Attendance and Homework: 10%

2 Progress test 1: 20%

3 Progress test 2: 20%

4 Final exam: 50%

1-2
 Chapter 1: Introduction to
Accounting
Learning Content
1 Purpose of accounting information

2 The regulations of accounting and ethical considerations

3 The main financial statement

4 Qualitative characteristics of useful accounting information

5 Accounting concepts and conventions

1-3 6 Ethical considerations

 1. Purpose of accounting information

Accounting consists of three basic activities—it

 identifies,

 records, and

 communicates

the economic events of an organization to interested users.

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 Three Activities
Illustration 1-1
The activities of the accounting process

The accounting process includes

the bookkeeping function.

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 Who Uses Accounting Data

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask

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 Who Uses Accounting Data

EXTERNAL
USERS

Illustration 1-3
Questions that external
users ask
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 DO IT! 1 Basic Concepts

Indicate whether the following statements are true or false.

1. The three steps in the accounting process are identification,

recording, and communication.

2. Bookkeeping encompasses all steps in the accounting process.

3. Accountants prepare, but do not interpret, financial reports.

4. The two most common types of external users are investors and
company officers.

5. Managerial accounting activities focus on reports for internal users.

Solution: True
1. 2. False
3. False
4. 5. False True

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2. The regulations of accounting

Ethics in Financial Reporting

 Recent financial scandals include: Enron, WorldCom,
HealthSouth, AIG, and other companies.
 Regulators and lawmakers concerned that economy would
suffer if investors lost confidence in corporate accounting. In
response,
► Congress passed Sarbanes-Oxley Act (SOX).

 Effective financial reporting depends on sound ethical

behavior.

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 Generally Accepted Accounting Principles

Financial Statements
Various users 
 Balance
Balance Sheet
Sheet
need financial 
 Income
Income Statement
Statement

 Statement
Statement of
of Owner's
Owner's Equity
Equity
information 
 Statement
Statement of
of Cash
Cash Flows
Flows

 Note
Note Disclosure
Disclosure

The accounting profession

has developed standards
Generally Accepted
Accounting
that are generally accepted
Principles (GAAP)
and universally practiced.

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 Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) – Standards

that are generally accepted and universally practiced. These
standards indicate how to report economic events.

Standard-setting bodies:
► Financial Accounting Standards
Board (FASB)
► Securities and Exchange
Commission (SEC)
► International Accounting
Standards Board (IASB)

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3. The main financial statements

Full set of financial statements

According to IAS 1 Presentation of Financial Statements, a
full set of financial statements is made up of:
o statement of financial position
o statement of profit or loss
o statement of changes in equity
o statement of cash flows
o notes to the financial statements.
 3. The main financial statements

Statement of financial position

o A statement of financial position is a list of the assets and
liabilities of the business. It is a snapshot of the business at a
particular point in time.
• assets are items that the business owns (or controls)
• liabilities are items that the business owes.
o The purpose of a statement of financial position is to show the
total value of the net assets (assets – liabilities) of the
business at the end of each accounting period (normally at
the end of a 12 month period of account set by the business).
An example of a statement of financial position for a company
can be found below.
3. The main financial statements

Statement of financial position for XYZ Ltd at 31 December 20X8

£m £m £m £m
Assets Equity and liabilities
Non­current assets Capital and reserves
Property, plant and equipment X Ordinary share capital X
Goodwill X
Preference share capital X
Investments X
Share premium account X
X
Reserves X
Current assets
Inventories X Retained earnings X
Trade and other receivables X X
Prepayments X Non­current liabilities
Cash and cash equivalents X Loan notes X
X Current liabilities
Trade and other payables X
Total assets X Short term borrowings X
Tax payable X
X

Total equity and liabilities X

3. The main financial statements

Statement of profit or loss

A statement of profit or loss shows the revenue and the
expenses of a business for the accounting period (normally
12 months in length). It shows the business performance
over that period of time.
The purpose of the statement of profit or loss is to show the
amount of profit or loss that the business has made during
the last accounting period.
An example of a statement of profit or loss for a company
can be found below.
3. The main financial statements

Statement of profit or loss for XYZ Ltd for the year ended 31 December 20X8
£m
Revenue X
Cost of sales (X)

Gross profit X
Other operating income X
Distribution costs (X)
Administrative expenses (X)

Profit from operations X

Finance cost (X)
Investment income X

Profit before tax X

Taxation (X)

Net profit/(loss) for the period X/(X)

4. Qualitative characteristics of useful
financial information
5. Accounting concepts and conventions

Fair presentation
Going concern
Accruals
Consistency
Materiality and aggregated
Offsetting
Business entity concept
Historical cost
6. Ethical considerations
7. Ethical considerations
 Assumptions

MONETARY UNIT ASSUMPTION requires that companies

include in the accounting records only transaction data that can
be expressed in terms of money.

ECONOMIC ENTITY ASSUMPTION requires that activities of

the entity be kept separate and distinct from the activities of its
owner and all other economic entities.
 Sole Trader
Forms of Business
 Partnership
Ownership
 Company

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LEARNING
CONTENT
3 Accounting Equation

Owner's
Assets = Liabilities +
Equity

Basic Accounting Equation

 Provides the underlying framework for recording and
summarizing economic events.
 Assets are claimed by either creditors or owners.
 If a business is liquidated, claims of creditors must be paid
before ownership claims.

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 Basic Accounting Equation

Owner's
Assets = Liabilities +
Equity

Assets
 Resources a business owns.
 Provide future services or benefits.
 Cash, Supplies, Equipment, etc.

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 Basic Accounting Equation

Owner's
Assets = Liabilities +
Equity

Liabilities
 Claims against assets (debts and obligations).
 Creditors (party to whom money is owed).
 Accounts Payable, Notes Payable, Salaries and Wages
Payable, etc.

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 Basic Accounting Equation

Owner's
Assets = Liabilities +
Equity

Owner's Equity
 Ownership claim on total assets.
 Referred to as residual equity.
 Investment by owners and revenues (+)
 Drawings and expenses (-).

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 Owner’s Equity Illustration 1-6
Expanded accounting
equation

Increases in Owner’s Equity

 Investments by owner are the assets the owner puts into the
business.
 Revenues result from business activities entered into for the
purpose of earning income.
► Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.

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 Owner’s Equity Illustration 1-6
Expanded accounting
equation

Decreases in Owner’s Equity

 Drawings An owner may withdraw cash or other assets for
personal use.
 Expenses are the cost of assets consumed or services used in
the process of earning revenue.
► Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.

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 DO IT! 3 Owner's Equity Effects

Classify the following items as investment by owner, owner’s

drawings, revenue, or expenses. Then indicate whether each
item increases or decreases owner’s equity.

Classification Effect on Equity

1. Rent Expense Expense Decrease

2. Service Revenue Revenue Increase

3. Drawings Drawings Decrease

4. Salaries and Wages
Expense Expense Decrease

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LEARNING
CONTENT
4 The main financial statement

Companies prepare four financial statements :

Statement Statement Statement Statement

of profit of change of Financial of Cash
and loss in Equity Position Flows

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 ASSETS –
STATEMENT OF FINANCIAL POSITION

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 CAPITAL – EQUITY
STATEMENT OF FINANCIAL POSITION
Capital (sole trader):

Equity (company)

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 Liabilities-
STATEMENT OF FINANCIAL POSITION

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 Income/Expense
STATEMENT OF PROFIT AND LOSS

 Revenue
 Cost of Sales: the purchase or production cost
of the goods sold
 Gross Profit = Revenue – Cost of Sales
 Profit for the year = Gross profit – expenses +
non-trading income

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ACCOUNTING EQUATION
 Question 1
• Which one of the following can the accounting
equation can be rewritten as?
a) Assets + profit – drawings – liabilities = closing
capital
b) Assets – liabilities – drawings = opening capital +
profit
c) Assets – liabilities – opening capital + drawings =
profit
d) Assets – profit – drawings = closing capital –
liabilities
 Question 2
The profit earned by a business in 20X7 was
$72,500. The proprietor injected new capital of
$8,000 during the year and withdrew goods for
his private use which had cost $2,200. If net
assets at the beginning of 20X7 were $101,700,
what were the closing net assets?
a) $35,000
b) $39,400
c) $168,400
d) $180,000
 Question 3
• A sole trade borows $10,000 from a bank.
Which elements of the accounting equation
will change due to this transaction?
a) Assets and liabilities
b) Assets and capital
c) Capital and liabilities
d) Assets only