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Vũ Quốc Thông (PhD.) 10/10/2020 Chapter Introduction to Accounting and Business Vũ Quốc Thơng (PhD.) Objectives • • • • Describe the nature of a business Explain the role of accounting in business Describe the profession of accounting Summarise the development of accounting principles and relate them to practice • State the accounting equation and define each element of the equation • Apply accounting equation in recording for business transactions and events Vũ Quốc Thông (PhD.) 10/10/2020 Content • • • • • • Nature of a business What is accounting? Profession of accounting GAAP Accounting equation Financial statement Nature of a business • In general, a business is an organisation in which basic resources (inputs) are assembled and processed to provide goods or services (outputs) to customers • Each business has its own objective!!! Vũ Quốc Thông (PhD.) 10/10/2020 Nature of a business • Types of businesses: Manufacturing Trading Service Manufacturing Vũ Quốc Thông (PhD.) 10/10/2020 Trading Service Vũ Quốc Thông (PhD.) 10/10/2020 Types of Business Organisation • Sole proprietorship • Partnership • Company What is accounting? • Accounting provides information for stakeholders • Accounting = Gathering, Processing and Communicating 10 Vũ Quốc Thông (PhD.) 10/10/2020 Providing Information to Stakeholders Identify stakeholders Internal/External Stakeholders Assess their information needs Record economic data about business activities Accounting Information System Design the AIS 11 Stakeholder • Internal: – Manager – Employee • External: – Bank / Creditor – Tax authority 12 Vũ Quốc Thơng (PhD.) 10/10/2020 Stakeholders’ information needs • • • • Managers? Cash flow / costing… Investors? Revenue… Creditors (such as Bank)? Liability… Government? Tax… 13 Profession of accounting Accountant Private accountant Public accountant Accounting Fields Financial Accounting Managerial Accounting 14 Vũ Quốc Thông (PhD.) 10/10/2020 GAAP GAAP (Generally Accepted Accounting Principles) US GAAP UK GAAP * Accountants follow GAAP in preparing reports By this, these reports could be compared from one business to another 15 GAAP Accounting concepts developed from GAAP Business Entity Concept Historical Cost Accounting Period Going Concern Consistency 16 Vũ Quốc Thông (PhD.) 10/10/2020 Business entity • Means that the owner and the business are treated as separate entities An entity is an organisation or a system E.g.? 17 Historical cost • Means that transactions are recorded using the cost at the point of transaction occurrence This cost is called the historical cost or original cost E.g.? 18 Vũ Quốc Thông (PhD.) 10/10/2020 Accounting Period • Means that financial statements of the business are prepared for a period of time, either a month, a quarter or a year E.g.? 19 Going concern • Means when we record the transactions of a business, we assume that the business will continue to operate for the foreseeable future E.g.? 20 10 Vũ Quốc Thơng (PhD.) 10/10/2020 Consistency • Means that accountant tries to prepare the financial statement of the business on the same basis every year E.g.? 21 Materiality • Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements (IASB Framework) Materiality is relative to the size and particular circumstances of individual companies E.g.? 22 11 Vũ Quốc Thông (PhD.) 10/10/2020 Money measurement (unit) assumption • With points: records should be stated in terms of money & currency is stable or constant and that any insignificant effect of inflation is ignored E.g.? 23 Accounting equation Assets = Liabilities + Owner’s Equity * All business transactions can be stated in terms of changes in the elements of the accounting equation 24 12 Vũ Quốc Thơng (PhD.) 10/10/2020 Assets • Resources controlled by the business 25 • • • • • • Cash Money in bank account Property, Plant and Equipment Stock (Inventory) Patent right Land usage right Tangible assets intangible assets 26 13 Vũ Quốc Thơng (PhD.) 10/10/2020 Liabilities • Debts owed to outsiders (creditors) 27 • • • • • Loans Advance payment from customer Payable to supplier Tax payable Employee payable 28 14 Vũ Quốc Thơng (PhD.) 10/10/2020 Owner’s Equity • Owner’s right to the asset of the business 29 • Contributed capital investment (owner’s capital) • Owner’s withdrawals (drawing) • Retained earnings 30 15 Vũ Quốc Thông (PhD.) Assets + Owner’s Capital 10/10/2020 = Liabilities + – + Owner's Withdrawals Revenues Equity – Expenses 31 Business Transactions and the Accounting Equation • Deposit in bank account for initial capital investment • Purchase a machine by cash • Borrow money from your family • Sell goods to customer and receive cash 32 16 Vũ Quốc Thông (PhD.) 10/10/2020 Business Transactions and the Accounting Equation ASSET = LIABILITY + OWNER’S EQUITY 33 Classify items by Asset, Liability or Owner’s Equity? • • • • • • • • • Salaries Payable Account Receivable Buildings Common Shares Owner’s Withdrawals Patents Cash Tax Payable Dividends • • • • • • • • • Property & Equipment Long Term Liabilities Retained Earnings Common Shares Owner’s Equity Money in Bank Office Supplies Account Payable Temporary Investments 34 17 Vũ Quốc Thông (PhD.) 10/10/2020 Financial Statement (FS) • • • • • Profit and loss statement Statement of owner’s equity Balance sheet Statement of cash flows Notes of FS 35 Profit and loss statement Revenues Expenses 36 18 Vũ Quốc Thông (PhD.) 10/10/2020 Statement of owner’s equity Summary of the changes in the owner’s equity 37 Balance sheet A list of assets, liabilities and owner’s equity 38 19 Vũ Quốc Thông (PhD.) 10/10/2020 Statement of cash flows A summary of the cash receipts and cash payment 39 Notes of FS • List of note to accommodate user of FS with additional information Accounting policies Detailed information Contingency liabilities Events after reporting date Transactions with related parties 40 20 Vũ Quốc Thông (PhD.) 10/10/2020 How they linked together? Profit and loss statement Statement of owner’s equity Notes of FS Balance sheet Statement of cash flows 41 Homework for Ch.1 • Multiple choice (p.23) 42 21
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