02-Chapter 1-The Role of Accounting

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Accounting principles

and concepts

Lectured by HONG Duong Son

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Chapter 1

The role of accounting

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Learning objectives

1. Define the need for accounting information for a wide variety of users

2. Identify the users of financial information and their information needs

3. Define and explain the purpose and scope of financial reporting

4. Explain the need for financial accounting systems that enable entities to

record and report financial transactions

5. Describe the main types of systems used in an organisation to provide

information to users

6. Identify and explain how financial accounting systems can assist in providing

information to users

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The purpose of

accounting information

1. What is accounting?

2. The need for accounts

3. What is financial reporting?

4. What is a business?

5. Types of business entity

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Identifying

Measuring

Recording

Communicating

What is

Accounting

Examples ?

The purpose of accounting information

Economic information

Users

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Factors

which affect

the

accounting

system

Size

Organisation

structure

Type of

organisation

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The need for accounts

Luca Pacioli (1494) , John Gouge (1543)

Every transaction has a dual effect

that balances to zero. Double-entry

bookkeeping involves entering

every transaction as a debit in one

account and a corresponding

credit in another account, and

ensuring that they 'balance'

The purpose of accounting

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Examples ?

Financial reporting (sometimes called financial accounting) is the process of

classifying, recording and presenting financial data in accordance with generally

established concepts and principles.

Financial reporting

Financial data is the name given to the actual transactions carried out by a

business e.g. sales of goods, purchases of goods, payment of expenses.

Financial data

The purpose of accounting

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The purpose of accounting

Business

A business is an integrated set of activities

and assets that is capable of being conducted

and managed for the purpose of providing a

return in the form of dividends, lower costs or

other economic benefits directly to investors

or other owners, members or participants.

Businesses of whatever size or nature exist

to make a profit.

Profit

Profit is the excess of revenue (income) over

expenses. When expenses exceed revenue,

the business is running at a loss.

Types of business entity

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Sole traders/Proprietorship

Partnerships

Limited liability companies

Non-commercial undertakings

Charity

Club

Government organisations

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Nature, principles and scope

of financial reporting

1. Financial accounting?

2. Management accounting?

3. General purpose financial reporting?

4. What is a business?

5. Limitations of financial reporting

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report the results and financial position of a business.

mainly satisfy the information needs of persons not involved in running the

business, in particular shareholders.

mainly provide historical information

mainly provide financial data

Financial vs Management accounting

Financial accounting

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provide much more detailed information.

mainly satisfy the information needs of management:

o to plan and control resources of the business

o to make decisions about the direction of the business in the long term and

on a day-to-day basis.

o to plan the future (e.g budget, forecast)

mainly provide historical and future information

Provide financial and non-financial data

Financial vs Management accounting

Management accounting

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At least annually, accounts must normally be presented.

Detail regulations on what they must contain and the content and the form

they must take. E.g, in Australia, the form and content of company financial statements is regulated by the

Corporations Act 2001 and by AASB, which are equivalent to IFRS issued by IASB.

E.g, in Vietnam, the form and content of company financial statements is regulated by the

Decision 15 and by VAS, which have been converging with IFRS issued by MOF

For a listed company, published annual accounts are general purpose

financial reports

General purpose financial reporting

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General purpose financial reports

General purpose financial reporting

Special purpose financial reports

Financial

AccountingManagement

Accounting

Management informationresults and financial position information

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General purpose financial reporting

Accounting policies and explanatory notes

Statement of financial position

Statement of profit or loss and other

comprehensive income

Statement of changes in equity

Statement of cash flows

for a

rep

ortin

g e

ntity

A c

om

ple

te s

et

of

fin

an

cia

l

sta

tem

en

ts

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General purpose financial reporting

What is a reporting entity?

An entity whose general purpose financial statements are relied upon by

other parties, or by users of the accounts for the purpose of making

resource allocation decisions

Financial statements DO NOT include directors reports, statements by the chairman,

management commentaries or environmental and social reports (SCR)

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General purpose financial reporting

Limitation of financial reporting?

Lack of information

Estimates and judgements

Do not reflect future events or transactions

Do not reflect intangible assets like expertise of the workforce

Do not include nonfinancial information such as discussion of the

risks and uncertainties that a business faces, or a description of its

effect on the natural environment

Users' and stakeholders' needs

1. The need for financial statements

2. Users of financial statements and

accounting information

3. Needs of different users

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The need for financial statements

To make economic decisions; and

To assess the stewardship of management.

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The need for financial statements

Make economic decisions

Decisions to buy, hold or sell equity investments

Assessment of management stewardship and accountability

Assessment of the entity's ability to pay employees

Assessment of the security of amounts lent to the entity

Determination of taxation policies

Determination of distributable profits and dividends

Inclusion in national income statistics

Regulation of the activities of entities.

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The need for financial statements

Stewardship

Managements performance

Efficient and Effective

Owners assess the stewardship of

management.

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Trade contacts Finance providers

ShareholdersManagers of the company

Employees

The taxation authorities

Financial analysts and advisersGovernment and their agencies

Public

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What is the need of different users

Trade contacts Finance providers

ShareholdersManagers of the company

Employees

The taxation authorities

Financial analysts and advisersGovernment and their agencies

Public

The need for

financial accounting system

1. Introduction

2. Recording, classifying and

summarising transactions

3. Internal control

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What is financial

accounting system? Data

Records

Pro-

-cedures

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Tra

nsacti

on

s

Recording ClassifyingSummarising

Financial accounting system

Give examples?

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Internal control Controls that an entity establishes in order to provide reasonable assurance of the

safeguarding of assets against unauthorised

use or disposal, the maintenance of proper

accouting records and the reliability of

financial information used within the

business or for publication

Financial accounting system provide internal control

Control over business

transactions

1. Introduction about functions

2. Policies

3. Business transactions

4. Control over transactions

5. Financial control procedures

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Primary functions

Support functions

Distribution Marketing

ServicingProduction

Research

Design

Financing

Legal

services

Information

system

Human

resources

Purchasing

Accounting

General

administration

FuntionsP

olic

ies

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Business transactions

Contro

l ove

r transa

ctio

ns

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Flows of funds, documentation and information of a

manufacture of goods

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Financial control procedures

1. Financial transactions are properly carried out

2. The assets of the business are safeguarded

3. Accurate and timely management information is produced

Financial control procedures exist specifically to ensure that:

Examples?

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Financial control procedures

1. Financial transactions are properly carried out

2. The assets of the business are safeguarded

3. Accurate and timely management information is produced

Financial control procedures exist specifically to ensure that:

Examples?

Manual and computerised

accounting systems

1. Accounting packages

2. Manual systems versus computerised

systems

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Accounting packages

Accounting packages

also name Computerised accounting

include several accounting modules, e.g. receivables ledger, general ledger

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Manual systems versus computerised systems

Cost savings

Understanding the business

Technical problems

Productivity

Slower

Risk of errors

Less accessible

Alterations

Quality of output

Bulk

Manual system

Computerised system

Advantage

Disadvantage

Disadvantage

Advantage

The information provided by financial

accounting systems

1. Information for management

2. The general ledger

3. Information for external users

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Financial accounting system should be useful to both

management and users external to the business

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Which information does

management need

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Information for management

Which information does

management need?

Monthly or quarterly accounts for the business as a whole

Reports that show the performance of each part of the business (e.g. by division,

product type, profit centre, geographical location)

Budgets and forecasts

Costing reports

Information about the profitability of individual products.

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General ledger

Code assigned to each account

Chart of accounts include the lists of named and

numbered individual accounts

Accounts should be coded according to management purpose

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