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 PRINCIPLE OF ACCOUNTING Textbook: Financial Accounting with IFRS (2019) CHAPTER 1: Accounting Activities and Users o activities 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 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 The building Blocks of Accounting o Ethics in Financial Accounting Principle of accounting – FTU – Notes - HHG 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 the land is 1m b/c the cost of this land is remained over the time it is held 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 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 o Principle of accounting – FTU – Notes - HHG Forms of Business Organization o Sole proprietorship Easy to establish Owner controlled Tax advantage => Unlimited liability for all debts o Corporation Easier to transfer ownership Easier to raise funds No personal liability => Limited liability o Partnership Simple to establish Shared control Broader skills and resources Tax advantage Accounting Equation - 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: nợ phải trả o Claims against assets o Ex: Accounts payable, notes payable, salaries and wages payable, taxes payable Equity: vốn chủ sở hữu o The ownership claim on a company’s total asset 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 Example: Principle of accounting – FTU – Notes - HHG - Contribute 60m in cash => Cash increases by 60m => Assets increase by 60m, liabilities remain => Equity increase by 60m => Cash( +60) = SC(+ 60) - Purchased some clothes for VND 50m by bank transfer: => Cash (60-40=20) + Inventory (+ 40 ) => SC(=60) - Borrowed VND 20m from some friends => Cash: (+ 20 = 40) + Inventory (40) = Loan(20) + Share Capital (60) - Purchased VND 15m in equipment, such as hangers, wardrobes, etc in cash => Cash (-15 = 25) + Inventory (40) + Equipment (+ 15) = Loan (20) + SC (60) - Pay VND 5m => Cash (-5 = 20) + Inventory (40) + E (15) = Loan (-5=15) + SC(60) 720.000 = 480.000 + equity Revenue: 1.200.000 Expenses: 680.000 Dividents: 120.000 => 720.000 + 1.200.000 = 680.000 + 120.000 +480.000 + equity => equity = 640.000 EX 5: Assets: - Equipment: 25.000 - Cash: 9.000 -Suppliers: 3.000 - A/R: 5.000 Liabilities: - Note payable: 10.500 - Account payable 8.000 Equity Principle of accounting – FTU – Notes - HHG - dividends: (2000) => negative number - Share capital: 26.000 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 decisionmakers 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 Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG CLOSING ENTRIES CLASSIFIED STATEMENT OF FINANCIAL POSITION Principle of accounting – FTU – Notes - HHG INCOME STATEMENT Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG ... equity,…) Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting. .. accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes... Equity Principle of accounting – FTU – Notes - HHG - dividends: (2000) => negative number - Share capital: 26.000 Principle of accounting – FTU – Notes - HHG Principle of accounting – FTU – Notes