Principle of accounting Nguyên lý kế toán FTU

Principle of accounting – FTU – Notes HHG PRINCIPLE OF ACCOUNTING Textbook Financial Accounting with IFRS (2019) CHAPTER 1 Accounting Activities and Users 3 activities Identification Select economic e.

Principle of accounting – FTU – Notes - HHG

 Identification: Select economic events (transaction)

 Recording: Record, classify, summarize

 Communication: Prepare accounting record, analyze + interpret for users

o Users

 Internal users: Finance, Marketing, HR Department/ Managers

 Managerial Accounting (internal report)

 External users: investors, governments, creditors => Taxing

authorities, regulation agencies, Labor union

 Financial Statements under IFRS

 Fields of accounting

- Accounting can be divided in 2 fields: financial accounting and managerial

accounting depending on users of information

- Managerial accounting is concerned with providing economic and financial information to managers and other internal users

- Financial accounting is concerned with communicating information about business to external users through financial statements

=> Comparing managerial accounting and financial accounting

Principle of accounting – FTU – Notes - HHG

 The building Blocks of Accounting

o Ethics in Financial Accounting

 Ethics is an important issue in effective financial reporting It helps

to develop investors’ faith in reliability of financial reports

 Recognize an ethical situation and the ethical issues involved

 Identify and analyze the principle elements in the situation

 Identify the alternatives and weigh the impact of each alternative on various stakeholders

 Accounting Standard

o Ensure high-quality financial reporting

 At global level: International Accounting Standards Board (IASB)

o IFRS

 At country level: Financial Accounting Standards Board (FASB) and other equivalent authorities

 Measurement Principles:

o Historical cost principle (cost principle): dictates that companies

record assets at their cost This is true not only at the time the asset is purchased, but also over the time the asset is held

 Ex: 2017: land: $1m | 2022: market price: $2m => The cost of theland is 1m b/c the cost of this land is remained over the time it isheld

o Fair value principle: states that assets and liabilities should be reported

at fair value (the price received to sell an asset or settle a liability)

 The land can be presented in $2m

 Selecting measurement principle: Selection of which principle to follow

generally relates to trade-offs between relevance and faithful representation

o Relevance: financial information is capable of making a difference in a decision

o Faithful representation: the numbers and descriptions match what really existed or happened—they are factual

o

 Assumption

o Monetary unit assumption: requires that companies include in the accounting records only transactions data that can be expressed in money terms

Principle of accounting – FTU – Notes - HHG

o Economic entity assumption: owner | entity: requires that the activities

of the entity be kept separate and distinct from the activities of its owner and all other economic entities Typical entity forms are proprietorship, partnership, corporation

 Easier to transfer ownership

 Easier to raise funds

- The basic Accounting Equation

=> Assets = Liabilities + Equity

- Assets: Obligation

o Resources a business owns

o Provide future services or benefits

o Ex: Cash, Suppliers, Equipments, etc

- Liabilities: n ph i trợ ả ả

o Claims against assets

o Ex: Accounts payable, notes payable, salaries and wages payable, taxes payable

- Equity: v n ch s h uố ủ ở ữ

o The ownership claim on a company’s total asset

Principle of accounting – FTU – Notes - HHG

o Ordinary share capital (common stock) => When a company issue share => investors invest money in the business

o Retained earning => The amount that remains and haven’t given to the shareholders

=> The retained earning is smaller than Ordinary share capital => Equity is negative

Principle of accounting – FTU – Notes - HHG

Principle of accounting – FTU – Notes - HHG

ANALYZE THE EFFECTS OF BUSINESS TRANSACTIONS ON THE ACCOUNTING EQUATION

Principle of accounting – FTU – Notes - HHG

 ANALYZING BUSINESS TRANSACTIONS

o Accounting information System: => collecting + processing

transaction data + communicating financial information to makers

decision- IDENTIFYING ACCOUNTING TRANSACTIONS:

 Expanding the Balance Sheet Equation for analysis

Principle of accounting – FTU – Notes - HHG

Accounting transaction => impact the financial statements of the company (assets, liabilities, equity,…)

Principle of accounting – FTU – Notes - HHG

 Analyzing Business Transactions:

Principle of accounting – FTU – Notes - HHG

Key Points

1 Each transaction must be analyzed in terms of its effect on:

a The three components of the basic accounting equation

b Specific types (kinds) of items within each component

2 The two sides of the equation must always be equal

3 The Share Capital—Ordinary and Retained Earnings columns indicate the causes of each change in the shareholders’ claim on assets

Principle of accounting – FTU – Notes - HHG

Describe the five financial statements and how they are prepared

Principle of accounting – FTU – Notes - HHG

• Revenues > expenses => net income

• Revenues < expenses => net loss

• Does not include investment + dividend transactions

2. Retained earnings statement: summarizes the changes in retained earningsfor a specific period of time

o Indicates => reasons why retained earnings increased /decreased during the period A net loss => deducted with dividends in the

retained earnings statement

o Structure:

• The first => the beginning retained earnings amount

• + net income (or - net loss) and - dividends

• The retained earnings ending balance = final amount on the

statement

3. Statement of financial position: reports the assets, liabilities, and equity of acompany at a specific date (Sometimes referred to as a balance sheet.)

o like a snapshot of the company’s financial condition at a specific

moment in time (usually the month-end/year-end)

o Structure:

- assets at the top => equity => liabilities

- Total assets = total equity + liabilities.

4. Statement of cash flows: summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time

 Structure:

(1) the cash effects of a company’s operations during a period,

(2) investing activities,

(3) financing activities,

(4) net increase/decrease in cash during the period

(5) cash amount at the end of the period.

5. Comprehensive income statement: presents other comprehensive income items that are not included in the determination of net income in

 Other comprehensive income items => not part of net income but considered important enough to be reported separately

 This statement immediately follows the income statement

Principle of accounting – FTU – Notes - HHG

 IFRS Alternative:

IFRS allows an alternative statement format = the information contained in income statement + comprehensive income statement => combined in a single

statement => statement of comprehensive income.

CAREER OPP IN ACCOUNTING

Principle of accounting – FTU – Notes - HHG

 DEBITS AND CREDITS

- We use the terms debit and credit repeatedly in the recording process to describe

where entries are made in accounts

- When comparing the totals of the two sides,

o An account shows a debit balance  the total of the debit amounts > the

credits

o An account shows a credit balance  the credit amounts > the debits.

- Every positive item in the tabular summary represents a receipt of cash Every negative

amount represents a payment of cash

- In the account form, we record the increases in cash as debits and the

decreases in cash as credits.

 DEBIT AND CREDIT PROCEDURE

Principle of accounting – FTU – Notes - HHG

 Dr./Cr Procedures for Assets and Liabilities

- Increases in liabilities are entered on the right or credit side

- Decreases in liabilities are entered on the left or debit side

- Asset accounts normally show debit balances  Debits to a specific asset

account should exceed credits to that account

- Liability accounts normally show credit balances  Credits to a liability

account should exceed debits to that account

 Dr./Cr Procedures for Equity

Share Capital—Ordinary:

- Companies issue share capital—ordinary in exchange for the owners’ investment

paid in to the company

- For ex, when an owner invests cash in the business in exchange for ordinary shares => the company debits (increases) Cash & credits (increases) Share Capital—Ordinary

Retained Earnings:

Principle of accounting – FTU – Notes - HHG

- Retained earnings = net income that is kept (retained) in the business => represents

the portion of equity that the company has accumulated through the profitable

operation of the business.

- Retained Earnings account is increased by Credits (net income) and decreased by debits (dividends or net losses)

Dividends.

- A dividend is a company’s distribution to its shareholders ( cash dividend)

- Dividends reduce the shareholders’ claims on retained earnings

-> Dividends account is increa sed by debit and decreased by credit

Revenues and Expenses:

 Summary of Debit/Credit Rules

Principle of accounting – FTU – Notes - HHG

1. The date of the transaction

2. Debit account title

3. Credit account title

4. Brief explanation of the transaction

5. Reference column, which is left blank when the journal entry is made This column is used later when the journal entries are transferred to the individualaccounts

 Simple and Compound Entries

- Simple entry: Involves 1 debit & 1 credit account

Principle of accounting – FTU – Notes - HHG

- Compound entry:

 The Ledger and Posting

- Ledger: The entire group of accounts maintained by a company

- Provides the balance in each of the accounts as well as keeps track of changes in these balances

- Every company has a general ledger.

 The general ledger

 Standard form of Account

Principle of accounting – FTU – Notes - HHG

POSTING

CHART OF ACCOUNTS

Assets, Liabilities, Equity => Balance Sheet/ Financial Position Statement

Revenues, Expenses => Income statement accounts

Lists the accounts and the account numbers that identify their location in the ledger

Principle of accounting – FTU – Notes - HHG

- Numbering system: Usually starts with the statement of financial position accountsand follows with the income statement accounts

- Number of accounts: Depends on the amount of detail management desires

- Companies leave gaps to permit the insertion of new accounts as needed during the life of the business

Principle of accounting – FTU – Notes - HHG

The recording process illustrated

Date Account Title and Explanation Ref Debit Credit

Principle of accounting – FTU – Notes - HHG

(Purchase office equipment)

(Perform Expected

advertising service)

(Pay office rent for October -

current accounting period)

(Pay one-year insurance

- Revenue and Expense are only related to current accounting period

- Declare but not paid => record credit as account payable

Principle of accounting – FTU – Notes - HHG

 THE TRIAL BALANCE

1 Analyze -> 2 Journalize -> 3 Post -> 4 Trial balance

Principle of accounting – FTU – Notes - HHG

CHAPTER 3: ADJUSTING THE ACCOUNTS

 Accrual-Basis Accounting and Adjusting Entries

- Time period (or periodicity) assumption: accountants divide the

economic life of a business into artificial time periods

- Fiscal and Calendar Years

o Accounting time periods are generally a month, a quarter, or a year

Principle of accounting – FTU – Notes - HHG

o Monthly and quarterly time periods are called interim periods

- Most large companies must prepare both quarterly and annual financial statement

o Fiscal year – accounting time period that is one year in length

o Calendar year – January 1 to December 21

o Sometimes a company’s year-end will vary from year to year

- Accrual- versus Cash-Basis Accounting

o Accrual – Basis Accounting

 Transactions are recorded in the periods in which the events occur

 Companies recognize revenue when they perform services (rather than when they receive money)

 recognizing expenses when incurred

o Cash-Basis Accounting

 Revenue are recorded when cash is received

 Expenses are recorded at the time they paid out cash

- Recognizing Revenues and Expenses

o Revenue Recognition Principle

o Expense Recognition Principle

- The Need for Adjusting Entries

Principle of accounting – FTU – Notes - HHG

o Adjusting entries ensure that the revenue recognition and expense recognition principles are followed

o required every time a company prepares financial statements

o Every adjusting entry will include one income statement account and one statement of financial position account

=> Reason:

1 Some events are not recorded daily because it is not efficient to do so Examples

are the use of supplies and the earning of wages by employees

2 Some costs are not recorded during the accounting period because these costs

expire with the passage of time rather than as a result of recurring daily

transactions Examples are charges related to the use of buildings and equipment, rent, and insurance

3 Some items may be unrecorded An example is a utility service bill that will not be

received until the next accounting period

- Types of Adjusting Entries

- Trial Balance: Each account is analyzed to determine whether it is complete and up-to-date for financial statement purpose

Principle of accounting – FTU – Notes - HHG

 Adjusting entries for deferrals

o Deferrals are expenses or revenues that are recognized at a date later

than the point when cash was originally exchanged

o Two types of deferrals: prepaid expenses , unearned revenues.

 Prepaid Expenses (asset): => Internal job made by an

accountant

ﻣ Payments of expenses that will benefit more than one

accounting period => Paid but have not used fully yet so that

it will be recorded as expenses of other accounting periods

of a company

ﻣ Cash payment=> before => Expense Recorded

ﻣ Prepayment often occur in regard to:

o Insurance, supplies, advertising, rent, equipment, buildings

Ex:

1 Jan 2020 paid $12,00 for insurance expense

ﻣ Dr: Prepaid insurance : increase (asset) 12,00

ﻣ Cr: Cash : decrease 12,00

31, Jan 2020

ﻣ Dr: Insurance expense: increase 1,00

ﻣ Cr: Prepaid insurance: decrease 1,00

31 / 1 / 2020:

ﻣ Prepaid insurance: 11,00

ﻣ Dr: Ins exp: increase 1,00

ﻣ Cr: prepaid insurance: decrease 1,00

 Adjusting entries for deferrals:

o Prepaid expenses/Prepayments

 Prepaid expenses are costs that expire either with the passage of

time (e.g., rent and insurance) or through use (e.g., supplies)

Principle of accounting – FTU – Notes - HHG

 an adjusting entry for prepaid expenses results in an increase (a

debit) to an expense account and a decrease (a credit) to an asset account.

o Insurance

o Companies purchase insurance => protect themselves from losses due to fire/

theft/unforeseen events

Principle of accounting – FTU – Notes - HHG

o Insurance must be paid in advance, often for multiple months

o Recorded = an increase (debit) in the asset account Prepaid Insurance

o At the financial statement date, companies increase (debit) Insurance

Expense + decrease (credit) Prepaid Insurance for the cost of insurance that has expired during the period

o Depreciation