Topic 1-Unit 5-Accounting Principles

9/21/2021
Accountng principles
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Accounting Principles, Mai Nguyen

Banking Academy 1
9/21/2021
Introduction to accounting principles

⊹ The overall aim of this unit is to introduce fundamental
accounting principles that underpin financial operations
and support good and sustainable decision making in
any organisation.
⊹ Students will develop a theoretical and practical
understanding of a range of financial and management
accounting techniques.
Introduction to accounting principles

⊹ On successful completion of this unit, students will be able to
assist senior colleagues in producing and analysing budgets,
drawing up simple financial statements and using financial
ratios to interpret performance.
⊹ Students will also explore wider aspects of accountancy,
especially ethics, transparency and sustainability, and gain
fundamental knowledge and skills that will enable them to
progress to a higher level of study.
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Learning Outcomes – UNIT 5 (ap)
Prepare basic
financial statements
Examine the for unincorporated Interpret Prepare budgets
context and and small business for planning,
purpose of
financial
organisations in control and
accounting statements decision making
accordance with
accounting principles, using
conventions and spreadsheets.
standards
LO1
LO2 LO3 LO4
Assessment methods
LO 1, LO 4 LO 2, LO 3
10 minute video clip blog and Report Assignment:
memorandum presentation Letter
with speaker notes Financial Statements
Learning Transferable Skills & Learning Transferable Skills &

Competences developed Competences developed
outcomes Outcomes r
- Reasoning and Sames as Assignment 1 and:

analytical skills - Ability to use quantitative skills
- Examine the - Prepare basic financial
- Written to manipulate data, evaluate,
context and purpose statements in accordance
communication estimate and model business
of accounting with accounting
- Manipulation and problems
- Prepare budgets for principles, conventions
interpretation of data Application of accounting
planning, control and and standards
- Effective knowledge to consistently
decision making - Interpret financial
communication deliver high-quality, accurate
using spreadsheets. statements.
- Creation and data and information in a timely
interpretation of fashion.
information 6

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Study Tips Infographics

Textbook Weblinks HN Global
- Weetman, P. (2019). Financial and

Management Accounting: An Introduction.
In SoW In SoW
- Atrill (2018)Accounting and Finance for Non-
Specialists.
Topic 1:
Context and purpose of
accounting
Learning outcome 1

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1 Learning Outcomes
After studying this topic, you should be able to:
Accounting in Action
[1] Explain what accounting is.
[2] Identify the users and uses of accounting.
[3] Identify different branches of accounting
[4] Identify career opportunities in accounting
[5] Understand competencies and skills for accounting roles.
[6] Explain generally accepted accounting principles.
[7] Understand why ethics is a fundamental business concept.
[8] Understand interrelationship between the accounting and finance
functions. 9
What is Accounting?
Accounting consists of three basic activities—it
 identifies,
 records, and
 communicates
the economic events of an organization to interested users.
Big concept
LO 1 10

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What is Accounting?
Illustration 1-1
The activities of the
Three Activities accounting process
The accounting process includes

the bookkeeping function.
LO 1 11
The
Accounting
Process
Accounting links
decision makers
with economic Accounting
Economic activities  and Information
Activities
with the results of
their decisions.
Reported Results
of Actions
Decision (decisions)
Actions
(decisions) Makers

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1 Learning Outcomes
functions. 13
Who Uses Accounting Data
Internal
Users
Illustration 1-2
Questions that internal
users ask
LO 2 14

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Who Uses Accounting Data
External
Users
Illustration 1-3
Questions that external
users ask
LO 2 15
Owners
Typical
Simple
Board of
Directors
Organization
Chart
Chief Executive
Officer
(CEO)
Business V.P. V.P. Chief

V.P Unit Human Information Financial
Ethics Managers Resources Services Officer (CFO)
Plant Plant
Controller Treasurer
Managers Managers
Plant Plant
Accountants Accountants
1-16

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Users of Internal Accounting Information

⊹ Board of directors
⊹ Chief executive officer (CEO)
⊹ Chief financial officer (CFO)
⊹ Vice presidents
⊹ Business unit managers
⊹ Plant managers
⊹ Store managers
⊹ Line supervisors
External Users of Accounting Information
• Owners
• Creditors
• Potential investors
• Labor unions
• Governmental
agencies
• Suppliers
• Customers
• Trade associations
• General public

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The development of a
conceptual framework
A conceptual framework for accounting is a
statement of principles which provide
generally accepted guidance for the
development of new reporting practices
and for challenging and evaluating the
existing practices.
19
The development of a conceptual framework (Continued)
⊹ Who are the users of financial statements?

⊹ What are the information needs of users?
⊹ What types of financial statements will best satisfy their needs?
⊹ What are the characteristics of financial statements which meet
these needs?
⊹ What are the principles for defining and recognising items in
financial statements?
⊹ What are the principles for measuring items in financial
statements? 20

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A conceptual framework is particularly important when
External practices are being developed for reporting to those

reporting who are not part of the day-to-day running of the
business.
This is called external reporting or financial accounting.
21
For those who are managing the business on a day-to-day

Internal basis, special techniques have been developed.
reporting
This is called internal reporting or management accounting.
22

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Internal users’ questions

‘Shall I invest in manufacturing more soap powder,
or do I switch resources into toothpaste?’
• Information required:
× Relative demand for each product.
× Actions of competitors.
× Costs of inputs (materials and labour).
× Availability of suitable labour.
Internal users’ questions (Continued)

‘Shall I continue offering a television repair service as
support for my sales of televisions?’
× Market research on demand.
× Sales with/without repair service.
× What competitors are doing.
× Cost of repairs.
× Profit margin.

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‘Is it cost-effective to have three separate locations
at which my tenants can pay their rent?’
– Cost of maintaining offices and staff.
– Cost of reducing staff.
– Rent payments may reduce cost of chasing.

‘Will this investment in a new factory pay for itself
over the next ten years?’
– Cost of investment.
– Cost of capital (borrowing/raising equity).
– Future cash flows.
– Discounted cash flow.
– Sensitivity analysis.

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1 Learning Outcomes
functions. 27
The main branches

of accounting
28

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Types of Accounting Information
Financial Tax
Management
29
Management accounting vs financial accounting: main differences
30

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Strategic management accounting
“ Identification, measurement
and communication of cost
data in situations where the
organisation is being judged
against the performance of
competitors.
31
Management functions
⊹ Planning
⊹ Decision making
⊹ Control
32

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Planning
⊹ Immediate future and longer term, for
example:
× Sales.
× Production.
× Capital expenditure.
Decision making
⊹ About resources.
⊹ About activities.
⊹ Financial matters, particularly cost.
⊹ Impact on employees.
⊹ Impact on competitors.
34

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Control
Is outcome in accordance with the initial plans and objectives?
• Plans include:
× Costs and profit.
× Timely, relevant and accurate information.
× Cost measurement.
× Effective communication.
× Organisational structure.
× Responsibility and authority.
Cascade down/flow upwards.
Organisation chart
Chair of the board of directors
Managing
director
Production Personnel Finance Sales

director director director director
Production Personnel Financial Sales

supervisor manager controller co-ordinator
Salaries and Financial accounting

wages
co-ordinator
Creditors Debtors Credit

ledger ledger controller
supervisor supervisor
Management accounting
Management Project Systems

accountant accountant accountant 36

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Interrelationships
Identify the objectives of the proposed shop
in terms of target sales, target profit and
target return on capital employed.
Locate suitable premises to rent or buy.

Planning
Collect data about expected customers,

similar shops in the area, complementary businesses,
access and expected demand.
Evaluate the options and make a decision,

Decision making
having regard to the objectives.
Implement the decision.
Control
Compare the actual outcome with the plan.
Decide how to deal with divergences from plan. 37
Role of management accounting

⊹ Directing attention
⊹ Keeping the score
⊹ Solving problems

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Directing attention
⊹ ‘Who should take action?’
⊹ ‘Whose responsibility is this loss?’
⊹ ‘Who is to be congratulated on this favourable result?’
⊹ Highlight those costs which have departed from expectations.
⊹ Fairness and timeliness.
⊹ Responsibility.
⊹ Recognise achievements.
⊹ Demonstrate accountability. 39
Keeping the score

⊹ ‘How much?’
⊹ ‘How many?’
⊹ Record-keeping and monitoring accounting records
against physical quantities and measures.
⊹ Completeness and fairness.
⊹ Matching costs to a time period.
⊹ Matching costs to an item of output.
⊹ Matching costs against revenue of the period.
40

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Solving problems
⊹ ‘Why did that plan go well?’
⊹ ‘Why did that action fail?’
⊹ ‘Which of these three choices is the best to take?’
⊹ Relevance.
⊹ Choices.
⊹ Base for understanding the problem.
41
Cycle of profit planning and control

Measuring
performanc
e
Implementing Examining the
plans Keeping the score environment
Solving problems Directing attention
Translating into operating plans Developing objectives
Formulating a
strategy

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Language of management accounting

⊹ No standard set of wording.
⊹ CIMA guidance and definitions.
• Use:
× Quick checklist, Appendix 1.
× Index.
43
Management accounting: development
44

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Management accounting: main functions
45
The modern management accountant: a model diplomat
46

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Objectives of External Financial Reporting

The primary financial statements.
Balance Income
Sheet Statement
Statement
of Cash
Flows
47
Information System
Information Users Financial Decisions

Information Supported
 Investors Provided
 Creditors  Performance
 Managers  Profitability evaluations
 Owners  Financial  Stock
 Customers position investments
 Employees  Cash flows  Tax strategies
 Regulators  Labor relations
 Resource
allocations
 Lending
decisions
 Borrowing
48

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Objectives of Management Accounting Information

To help achieve
goals and
missions
To help evaluate
and reward
decision makers
Characteristics of Management Accounting Information

Timeliness
Identify
A Means to an Decision Maker
End
Measures of Oriented Toward

Efficiency and Future
Effectiveness

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Characteristics of Externally Reported Information

A Means to an
End
Usefulness Broader than
Enhanced via Financial
Explanation Statements
Based on General-
Purpose Historical in
Assumption Nature
Results from Inexact and

Approximate Measures
Objectives of External Financial Reporting
Provide specific information about

economic resources, claims to resources,
and changes in resources and claims.
Provide information useful in assessing

amount, timing and uncertainty of future
cash flows.
Provide general information useful in

making investment and credit decisions.
52

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Accounting Systems
⊹ An accounting system consists of the personnel,
procedures, technology, and records used by an
organization to develop accounting information
and to communicate this information to decision
makers.
53
Determining Information Needs

Although much accounting information
clearly is essential to business operations,
management still has many choices as to
the types and amount of accounting
information to be developed.
54

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Basic Functions of an
Accounting System
 Interpret  Classify
and record similar
business transactions
transactions. into useful
reports
 Summarize
and
communicate
information to
decision
makers.
Components of Internal Control

Control
Environment
Risk
Assessment
Control
Activities
Information and
Communication
Monitoring
56

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> DO IT!
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: 1. True 2. False 3. False 4. False 5. True
Organisation of the
UK accountancy profession
58

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Competence, Judgment and Ethical Behavior

 Certified Public Accountant (CPA)
 Certified Management Accountant (CMA)
 Certified Internal Auditor (CIA)
Ethical behavior is the

cornerstone of the
accounting
profession.
Institutional Features
 Generally Accepted Accounting Principles (GAAP)
 Financial Accounting Standards Board
 International Accounting Standards Board
 Securities and Exchange Commission
 Public Company Accounting Oversight Board
 Audits of Financial Statements
 Legislation

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Professional Organizations
 American Institute of Certified Public Accountants
 Institute of Management Accountants
 Institute of Internal Auditors
 American Accounting Association
 Committee of Sponsoring Organizations of the
Treadway Commission (COSO)
Public
&
private entities
62

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Careers in Accounting
 Public Accounting
 Management Accounting
 Governmental Accounting
 Accounting Education
What About Bookkeeping?

Bookkeeping is the clerical side of accounting—
the recording of routine transactions and day-to-
day record keeping.
Professional accountants are involved more with

the interpretation and use of accounting
information than with its actual preparation.
64

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I’m Not An Accounting Major

Accounting is the language of business,
and trying to run a business without
understanding accounting information is
analogous to trying to play sports without
understanding the rules.
An accounting background is invaluable for

Accounting as a key positions in management or
Stepping-Stone administration, as well as helpful in many
aspects of your personal lives, including
personal budgeting, retirement decisions, and
avoiding investment fraud.
66

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Ethics, Fraud & Corporate Governance

Corporate governance entails corporate
structures and processes for overseeing
the company’s affairs to ensure that the
company is being managed with the best
interests of shareholders in mind.
Dennis Kozlowski, the former CEO of Tyco,

was sentenced to 8 1/3 to 25 years in prison for
his conviction for conspiracy, securities fraud,
and falsifying records.
The Building Blocks of Accounting

Learning
Objective Ethics in Financial Reporting
Understand
why ethics is a Standards of conduct by which one’s actions
fundamental
business are judged as right or wrong, honest or
concept. dishonest, fair or not fair, are ethics.
 Recent financial scandals include: Enron (USA),

Parmalat (ITA), Satyam Computer Services (IND),
AIG (USA), and others.
 Effective financial reporting depends on sound ethical

behavior.
68

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Ethics in Financial Reporting
Steps in analyzing ethics

cases and situations
Ethics Insight Dewey & LeBoeuf (USA)
I Felt the Pressure—Would You?

“I felt the pressure.” That’s what some of the employees of the now-
defunct law firm of Dewey & LeBoeuf LLP (USA) indicated when they
helped to overstate revenue and use accounting tricks to hide losses
and cover up cash shortages. These employees worked for the former
finance director and former chief financial officer (CFO) of the firm.
Here are some of their comments:
• “I was instructed by the CFO to create invoices, knowing they would
not be sent to clients. When I created these invoices, I knew that it
was inappropriate.”
• “I intentionally gave the auditors incorrect information in the course
of the audit.”
(continued)

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Ethics Insight Dewey & LeBoeuf (USA)
I Felt the Pressure—Would You?

What happened here is that a small group of lower-level employees
over a period of years carried out the instructions of their bosses.
Their bosses, however, seemed to have no concern as evidenced by
various e-mails with one another in which they referred to their
financial manipulations as accounting tricks, cooking the books, and
fake income.
Source: Ashby Jones, “Guilty Pleas of Dewey Staff Detail the
Alleged Fraud,” Wall Street Journal (March 28, 2014).
The
basic accounting rules
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The entity rule: separation of business and private affairs
The matching rule

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Sources of authority
75
The main users of financial statements
Source: Statement of Principles for Financial Reporting, ASB 1999.

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Measurement Principles
HISTORICAL COST PRINCIPLE (or cost principle)

dictates that companies record assets at their cost.
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).
Global Insight The Korean Discount

If you think that accounting standards don’t matter, consider recent events in
South Korea. International investors expressed concerns that the financial
reports of some South Korean companies were inaccurate. Accounting
practices sometimes resulted in differences between stated revenues and
actual revenues. Because investors did not have complete faith in the
accuracy of the numbers, they were unwilling to pay as much for the shares of
these companies relative to shares of comparable companies in different
countries. This difference in share price was referred to as the “Korean
discount.” In response, Korean regulators decided to require companies to
comply with international accounting standards. This change was motivated
by a desire to “make the country’s businesses more transparent” in order to
build investor confidence and spur economic growth. Many other Asian
countries, including China, India, Japan, and Hong Kong, have also decided
either to adopt international standards or to create standards that are based
on the international standards.
Source: Evan Ramstad, “End to ’Korea Discount’?” Wall Street Journal (March 16,
2007).

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Assumptions
Learning
MONETARY UNIT ASSUMPTION Objective 5
Explain the
requires that companies include in the monetary unit
assumption and
accounting records only transaction data that the economic
entity assumption.
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.
 Proprietorship
Forms of Business
 Partnership
Ownership
 Corporation
79
Forms of Business Ownership
Proprietorship Partnership Corporation
 Owned by one  Owned by two or  Ownership

person more persons divided into
Owner is often shares
  Often retail and
manager/operator service-type  Separate legal
 Owner receives businesses entity organized
any profits, under
 Generally
suffers any corporation law
unlimited
losses, and is personal liability  Limited liability
personally liable
 Partnership
for all debts
agreement

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Access: sole trader vs limited liability company
81
Structure and operation of companies
82

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Types of shares
83
Disclosure of information
84

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Assumptions
Review Question
The historical cost principle states that:
a. assets should be initially recorded at cost and
adjusted when the fair value changes.
b. activities of an entity are to be kept separate and
distinct from its owner.
c. assets should be recorded at their cost.
d. only transaction data capable of being expressed
in terms of money be included in the accounting
records.
Accounting Across the Organization

Spinning the Career Wheel
One question that students frequently ask is, “How will the study of
accounting help me?” A working knowledge of accounting is desirable
for virtually every field of endeavor. Some examples of how
accounting is used in other careers include:
General management: Imagine running Volkswagen (DEU), Saudi
Telecom (SAU), a Subway (USA) franchise, or a Fuji (JPN) bike shop.
All general managers need to understand where the company’s cash
comes from and where it goes in order to make wise business
decisions.
Marketing: Marketing specialists at a company like Hyundai Motor
(KOR) develop strategies to help the sales force be successful. But
making a sale is meaningless unless it is profitable. Marketing people
must be sensitive to costs and benefits, which accounting helps them
quantify and understand.
(continued)

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Accounting Across the Organization

Spinning the Career Wheel
Finance: Do you want to be a banker for Société Générale (FRA) or a
financial analyst for ICBC (CHN)? These fields rely heavily on
accounting. In all of them, you will regularly examine and analyze
financial statements. In fact, it is difficult to get a good finance job
without two or three courses in accounting.
Real estate: Are you interested in being a real estate broker for
Sotheby’s International Realty (GBR)? Because a third party—the
bank—is almost always involved in financing a real estate transaction,
brokers must understand the numbers involved: Can the buyer afford
to make the payments to the bank? Does the cash flow from an
industrial property justify the purchase price? What are the tax
benefits of the purchase?
> DO IT!
Indicate whether each of the following statements presented

below is true or false.
1. Convergence refers to efforts to reduce

differences between IFRS and U.S. GAAP.
2. The primary accounting standard-setting body

headquartered in London is the International
Accounting Standards Board (IASB).
3. The historical cost principle dictates that

companies record assets at their cost. In later
periods, however, the fair value of the asset
must be used if fair value is higher than its cost.

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> DO IT!
Indicate whether each of the following statements presented

below is true or false.
4. Relevance means that financial information

matches what really happened; the information is
factual.
5. A business owner’s personal expenses must be

separated from expenses of the business to
comply with accounting’s economic entity
assumption.
APPENDIX 1A Accounting Career Opportunities
“Show Me the Money”

Salary estimates for jobs in public and corporate accounting Illustration 1A-
1
Upper-level management salaries in corporate accounting Illustration 1A-

2
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HARMONIZATION & CONVERGENCE OF ACCOUNTING
our office
91
The development of accounting rules
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Key Points
 International standards are referred to as International

Financial Reporting Standards (IFRS), developed by the
International Accounting Standards Board (IASB).
 Much of the world has voted for the standards issued by the
IASB. Over 115 countries require or permit use of IFRS.
 The fact that there are differences between what is in this
textbook (which is based on U.S. standards) and IFRS should
not be surprising because the FASB and IASB have
responded to different user needs.
93
Key Points
 Debate about international companies (non-U.S.) adopting

SOX-type standards centers on whether the benefits exceed
the costs. The concern is that the higher costs of SOX
compliance are making the U.S. securities markets less
competitive.
 The textbook mentions a number of ethics violations, such as
Enron, WorldCom, and AIG. These problems have also
occurred internationally, for example, at Satyam Computer
Services (India), Parmalat (Italy), and Royal Ahold (the
Netherlands).
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Key Points
 IFRS tends to be simpler in its accounting and disclosure
requirements; some people say more “principles-based.” GAAP
is more detailed; some people say it is more “rules-based.”
 U.S. regulators have recently eliminated the need for foreign
companies that trade shares in U.S. markets to reconcile their
accounting with GAAP.
 Because the choice of business organization is influenced by
factors such as legal environment, tax rates and regulations,
and degree of entrepreneurism, the relative use of each form
will vary across countries.
 The conceptual framework that underlies IFRS is very similar to
that used to develop GAAP. 95
Key Points
 The more substantive definitions, using the IASB definitional structure,
are as follows.
► Assets. A resource controlled by the entity as a result of past
events and from which future economic benefits are expected to
flow to the entity.
► Liabilities. A present obligation 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. Liabilities may be legally enforceable via a contract or
law, but need not be, i.e., they can arise due to normal business
practice or customs.
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Key Points
 The more substantive definitions, using the IASB definitional structure,
are as follows.
► Equity. A residual interest in the assets of the entity after
deducting all its liabilities.
► Income. Increases in economic benefits that result in increases
in equity (other than those related to contributions from
shareholders). Income includes both revenues (resulting from
ordinary activities) and gains.
► Expenses. Decreases in economic benefits that result in
decreases in equity (other than those related to distributions to
shareholders). Expenses includes losses that are not the result
of ordinary activities. 97
Looking to the Future

Both the IASB and the FASB are hard at work developing standards
that will lead to the elimination of major differences in the way certain
transactions are accounted for and reported. In fact, at one time the
IASB stated that no new major standards would become effective until
2011. The major reason for this policy was to provide companies the
time to translate and implement IFRS into practice, as much has
happened in a very short period of time.
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A Look at IFRS
IFRS Practice
Which of the following is not a reason why a single set of high-
quality international accounting standards would be beneficial?
a) Mergers and acquisition activity.
b) Financial markets.
c) Multinational corporations.
d) GAAP is widely considered to be a superior reporting

system.
99
A Look at IFRS
IFRS Practice
The Sarbanes-Oxley Act determines:
a) international tax regulations.
b) internal control standards as enforced by the IASB.
c) internal control standards of U.S. publicly traded

companies.
d) U.S. tax regulations.
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A Look at IFRS
IFRS Practice
IFRS is considered to be more:
a) principles-based and less rules-based than GAAP.
b) rules-based and less principles-based than GAAP.
c) detailed than GAAP.
d) None of the above.
101
Thanks!
1 Any questions?

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9/21/2021

Hello! I am Thanh Mai

Accounting Principles, Mai Nguyen

Introduction to accounting principles

Introduction to accounting principles

Accounting Principles, Mai Nguyen

Learning Outcomes – UNIT 5 (ap)

Learning Transferable Skills & Learning Transferable Skills &

- Reasoning and Sames as Assignment 1 and:

Accounting Principles, Mai Nguyen

Study Tips Infographics

- Weetman, P. (2019). Financial and

Accounting Principles, Mai Nguyen

Accounting consists of three basic activities—it

the economic events of an organization to interested users.

Accounting Principles, Mai Nguyen

Three Activities accounting process

The accounting process includes

Accounting Principles, Mai Nguyen

Who Uses Accounting Data

Accounting Principles, Mai Nguyen

Who Uses Accounting Data

Business V.P. V.P. Chief

Accounting Principles, Mai Nguyen

Users of Internal Accounting Information

⊹ Chief executive officer (CEO)

⊹ Chief financial officer (CFO)

⊹ Business unit managers

External Users of Accounting Information

Accounting Principles, Mai Nguyen

The development of a conceptual framework (Continued)

⊹ Who are the users of financial statements?

Accounting Principles, Mai Nguyen

A conceptual framework is particularly important when

External practices are being developed for reporting to those

For those who are managing the business on a day-to-day

Accounting Principles, Mai Nguyen

Internal users’ questions

Internal users’ questions (Continued)

Accounting Principles, Mai Nguyen

Internal users’ questions (Continued)

Internal users’ questions (Continued)

Accounting Principles, Mai Nguyen

The main branches

Accounting Principles, Mai Nguyen

Types of Accounting Information

Management accounting vs financial accounting: main differences

Accounting Principles, Mai Nguyen

Strategic management accounting

Accounting Principles, Mai Nguyen

Accounting Principles, Mai Nguyen

Production Personnel Finance Sales

Production Personnel Financial Sales

Salaries and Financial accounting

Creditors Debtors Credit

Management Project Systems

Accounting Principles, Mai Nguyen

Locate suitable premises to rent or buy.

Collect data about expected customers,

Evaluate the options and make a decision,