ACCOUNTING PRINCIPLES
DOAN THUY DUONG
SAA
1-1
Assessment
Learning Content
1-2
1
Attendance and Homework: 10%
2
Progress test 1: 20%
3
Progress test 2: 20%
4
Final exam: 50%
Chapter 1: Introduction to Accounting
Learning Content
1-3
1
Accounting process
2
The regulations of accounting and ethical considerations
3
Accounting equation
4
Main financial statements
LEARNING
CONTENT
1
Accounting process
Accounting consists of three basic activities—it

identifies,

records, and

communicates
the economic events of an organization to interested users.
1-4
LO 1
Three Activities
Illustration 1-1
The activities of the accounting process
The accounting process includes
the bookkeeping function.
1-5
LO 1
Who Uses Accounting Data
INTERNAL
USERS
Illustration 1-2
Questions that internal
users ask
1-6
LO 1
Who Uses Accounting Data
EXTERNAL
USERS
Illustration 1-3
Questions that external
users ask
1-7
LO 1
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:
1-8
1. True
2. False
3. False
4. False
5. True
LO 1
LEARNING
CONTENT
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,
►

1-9
Congress passed Sarbanes-Oxley Act (SOX).
Effective financial reporting depends on sound ethical
behavior.
LO 2
Generally Accepted Accounting Principles
Various users
need financial
information
Financial Statements





The accounting profession
has developed standards
that are generally accepted
and universally practiced.
1-10
Balance Sheet
Income Statement
Statement of Owner's Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting Principles
(GAAP)
LO 2
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:
1-11
►
Financial Accounting Standards
Board (FASB)
►
Securities and Exchange
Commission (SEC)
►
International Accounting Standards
Board (IASB)
LO 2
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).
Selection of which principle to follow
generally relates to trade-offs
between relevance and faithful
representation.
1-12
LO 2
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.
1-13

Sole Trader

Partnership

Company
Forms of Business
Ownership
LO 2
Forms of Business Ownership
Sole Trader

Owned by one
person

Owner is often
manager/operator

1-14
Owner receives
any profits, suffers
any losses, and is
personally liable
for all debts
Partnership

Owned by two or
more persons

Often retail and
service-type
businesses


Generally
unlimited
personal liability
Company

Ownership
divided into
shares of stock

Separate legal
entity organized
under state
corporation law

Limited liability
Partnership
agreement
LO 2
LEARNING
CONTENT
3
Assets
Accounting Equation
=
Liabilities
+
Owner's Equity
Basic Accounting Equation
1-15

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.
LO 3
Basic Accounting Equation
Assets
=
Liabilities
+
Owner's Equity
Assets
1-16

Resources a business owns.

Provide future services or benefits.

Cash, Supplies, Equipment, etc.
LO 3
Basic Accounting Equation
Assets
=
Liabilities
+
Owner's Equity
Liabilities
1-17

Claims against assets (debts and obligations).

Creditors (party to whom money is owed).

Accounts Payable, Notes Payable, Salaries and Wages
Payable, etc.
LO 3
Basic Accounting Equation
Assets
=
Liabilities
+
Owner's Equity
Owner's Equity
1-18

Ownership claim on total assets.

Referred to as residual equity.

Investment by owners and revenues (+)

Drawings and expenses (-).
LO 3
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.
1-19
LO 3
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.
1-20
LO 3
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
Expense
Decrease
4. Salaries and Wages
Expense
1-21
LO 3
LEARNING
CONTENT
4
The main financial statement
Companies prepare four financial statements :
Statement
of profit
and loss
1-22
Statement
of change
in Equity
Statement
of Financial
Position
Statement
of Cash
Flows
LO 5
ASSETS –
STATEMENT OF FINANCIAL POSITION
1-23
CAPITAL – EQUITY
STATEMENT OF FINANCIAL POSITION
Capital (sole trader):
Equity (company)
1-24
LiabilitiesSTATEMENT OF FINANCIAL POSITION
1-25
Income/Expense
STATEMENT OF PROFIT AND LOSS




1-26
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
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