Chapter 1

Principles of Accounting I
Lecturer’s information Course’s information

Name: MA. Thi Thuy Linh Le Code: BSA 2001
Phone: 0987519268 Credits: 03
Email: [email protected] Student Assessment
10% of participation;
20% of quizzes (2 quizzes: Week 4 & 10)
20% of midterm exam (Week 7)
50% final exam (Week 12)
Note: Assessment is also made over the whole
period through group discussion.
Instructor’s requirements
Normal
• Can eat and drink in class but have to clean after class. No
smoking!
• Absence: not more than 2 days even when asking for
absence acceptation
• Randomly check attendance at anytime in class
Extensive requirements for Online study
• Any problems about laptop, mobile, headphone, mic, etc.
should not be accepted
• Not only turn on the micro but also the camera when
checking attendance and answering questions
To understand a business, you have to understand the essential financial
components of businesses Accounting
Course’s description:
• This course provides a wide range of basic principles of accounting concepts
and application in a business environment.
• The course focuses on concepts such as theory of debits and credits, the
accounting cycle, receivables and payables, accruals and deferrals,
measurement and valuation of assets and liabilities,
• Preparing and analysing basic financial statements.
CHAPTER 1: INTRODUCTION TO ACCOUNTING
AND BUSINESS
Chapter 1 7
Chapter’s objectives
After studying this chapter, students should be able to:
1. Describe the nature of business and the role of accounting and ethics in
business
2. Summarize the development of accounting principles
3. State the accounting equation and define each elements of the equations
4. Describe the finance statements and explain how they interrelate
5. Describe the use of the ratio of liabilities and owner’s equity in evaluating
a company’s financial condition.
Chapter 1 8
1. Nature of business and accounting
A business is an organization in which basic resources (inputs), such as materials

and labor, are assembled and processed to provide goods or services (outputs) to
customers. Businesses come in all sizes with the main objective is to earn a profit.
 Same concepts of business can be applied to not-for-profit organizations
Chapter 1 9
 Types of business
Service business
Merchandising
business
Manufacturing business
Chapter 1 10
 Role of accounting in business
Accounting is an information system providing reports to users about the

economic activities and condition of a business
Internal External
users users
ACCOUNTING
Chapter 1 11
 Role of accounting in business
The process of providing information: two groups (internal users and external users)
Chapter 1 12
Financial accounting Managerial accounting
- Provides information for - Provides information for

external users internal users
- Need to follow accounting - Flexible based on nature of

rules companies
Chapter 1 13
 Role of ethics in accounting and business
Chapter 1 14
What went wrong for these managers and

companies?
The answer to the preceding question normally involved one or both of the
following two factors:
• Failure of individual character
• Culture of greed and ethical indifference
Chapter 1 15
Ethics are moral principles that guide the conducts of individuals.
Trustworthy information Fraud

Useful for decision making No one willing to invest or
loan money to the business
Chapter 1 16
The objective of accounting is to provide relevant, timely information for user
decision making
Chapter 1 17
Chapter 1 18
Guidelines for behaving ethically follow:
1. Identify an ethical decision by using your personal ethical standards of
honesty and fairness.
2. Identify the consequences of the decision and its effect on others.
3. Consider your obligations and responsibilities to those who will be affected
by your decision.
4. Make a decision that is ethical and fair to those affected by it.
Chapter 1 19
 Opportunities for accountants: Accountants are engaged in private accounting or
public accounting.
• Accountants employed by a business firm, government, or a not-for-profit
organization are said to be employed in private accounting.
• Public accountants who have met a state’s education, experience, and
examination requirements may become Certified Public Accountants (CPAs)
Chapter 1 20
 Opportunities for accountants:
Chapter 1 21
 International accounting certifications:
Chapter 1 22
2. Generally Accepted Accounting Principles (GAAP)
Financial accounting follow GAAP in preparing reports and make reports among
companies comparable
- Accounting principles and concepts develop from research, accepted accounting

practices, pronouncements of regulators
- Financial Accounting Standards Board (FASB): the U.S
- International Accounting Standards Board (IASB): outside U.S
- IFRS
Chapter 1 23
 Business entity concept
The business entity concept limits the economic data in an accounting system to
data related to the activities of the business.
Chapter 1 24
 Business entity concept
Example: David who owns a house that has a market value of $200,000. He has a
business named GoVietnam where he has invested $100,000 as on Jan 1st, 2020.
The assets of the business include plant & machinery worth $400, computer worth
$5,000. David has also done shopping worth $200.
Chapter 1 25
 Form of business entity
Chapter 1 26
 Cost concept
Accounting amounts are recorded at their cost or purchased price.
Example: Aaron Publishers purchased their building on Feb 20, 2012 for $150,000
with following information:
Recorded amount to accounting book?
Chapter 1 27
 Cost concept
Under the cost concept, Aaron Publishers records the purchase of the
building on February 20, 2014, at the purchase price of
$150,000.
The other amounts listed above have no effect on the accounting records.
Chapter 1 28
 Cost concept
The cost concept also involves the objectivity and unit of measure concepts
• The objectivity concept requires that the amounts recorded in the accounting
records be based on objective evidence (only the final agreed-upon amount is
objective enough to be recorded in the accounting records).
• The unit of measure concept requires that economic data be recorded in dollars.
Chapter 1 29
 Cost concept
Example: On August 25, Gallatin Repair Service extended an offer of $125,000 for
land that had been priced for sale at $150,000. On September 3, Gallatin Repair
Service accepted the seller’s counteroffer of $137,000. On October 20, the land
was assessed at a value of $98,000 for property tax purposes. On December 4,
Gallatin Repair Service was offered $160,000 for the land by a national retail chain.
At what value should the land be recorded in Gallatin Repair Service’s records?
Chapter 1 30
3. The accounting equation
Question:
If you have a chance to do a start-up, which business will you

choose?
Chapter 1 31
The elements of financial Statements
Financial Position Financial Performance
 Assets  Income
5
 Liability Accounting
 Expense
Elements
 Equity
Chapter 1 32
Assets
Asset = a present economic resource controlled by the entity as a result

of past events from which future economic benefits are expected to
flow to the entity
Current Asset Non-Current Asset
= some assets are held and used = some assets are held and used
for only a short time. for only a long time.
<12 months >12 months
Chapter 1 33
Assets
• Land and buildings: Factories, office buildings, storage and distribution

centers (warehouses)
• Motor vehicles
• Plant and machinery
• Equipment
• Cash: in a bank account or held as notes and coins
• Inventory: goods held in store awaiting sale to customers, and raw
materials and components held in sotre by a manufacturing business for
use in production
• Receivables (or debtors): amounts owed by customers and others to the
Chapter 1 34
entity
Liability
Liability = a present obligation of the entity to transfer an

economic resource as a result of past events
Current Liability Non-Current Liability
= Current liabilities are a company's = Current liabilities are a company's

debts or obligations that are due debts or obligations that does not
within one year or within a normal come due for payment within one
operating cycle year or more.
Chapter 1 35
Liability
• A bank loan or overdraft: The liability is the amount eventually
repaid to the bank
• Payables (or creditors): amount owed to suppliers for goods

purchased but not yet paid for (purchases ‘on credit’).
• Taxation owed to the government. A business pays tax on its profits

but there is a gap in time between when a business declares its
profits (and becomes liable to pay tax) and the payment date.
Chapter 1 36
Owners’ Equity
Owners’ Equity = the residual interest in the assets of the entity

after deducting all its liabilities
Owner’s Contributions Retained Earning
Note: The owner of a sole trader ship does not get paid a wage; they “draw
out” or appropriate some of their capital as withdrawals.
Withdrawals: Money and goods taken out of a business by its owner
Chapter 1 37
Owners’ Equity
Chapter 1 38
Expense vs Income
Expense Revenue
= decreases in assets or increases in = increases in assets or decreases in

liabilities resulting in decreases in liabilities resulting in increases in
equity, other than distributions to equity, other than contributions
equity holders from equity holders
Chapter 1 39
Assets = Liabilities + Owner’s equity
OR Extended Accounting Equation
Assets = Liabilities + Owner’s equity + Revenue - Expenses
Chapter 1 40
a. Owner’s equity = $800,000 - $350,000 = $450,000

b. Owner’s equity = ($800,000 + $130,000) – ($350,000 - $25,000) = $605,000
Chapter 1 41
Exercise: Group discussion
Indicate whether each of the following is identified with (1) an
asset, (2) a liability, or (3) owner’s equity:
a. accounts payable
b. Accounts receivable
c. Cash
d. Fees earned
e. Land
f. Supplies
g. Wages expense
h. Motor vehicles
i. Motor vehicle expense
Chapter 1 42
4. Business transactions and the accounting equation
Business transactions are economic events or condition that directly changes an

entity’s financial position or its results of operations
 All business transactions can be stated in terms of changes in the elements of

the accounting equation.
Chapter 1 43
• Revenue from providing services is recorded as fees earned.
• Revenue from the sale of merchandise is recorded as sales.
• Other examples of revenue include rent, which is recorded as rent revenue,
and interest, which is recorded as interest revenue.
• An account receivable is a claim against a customer, which is an asset.
• Assets used in earning revenue are called expenses
Chapter 1 44
Example: On November 1, 2013, Chris Clark begins a business called NetSolutions.
• Transaction A: Nov. 1, Chris Clark deposited $25,000 in a bank account in the
name of NetSolutions.
• Transaction B: Nov. 5, NetSolutions paid $20,000 for the purchase of land as a
future building site.
• Transaction C: Nov. 10, NetSolutions purchased supplies for $1,350 and agreed
to pay the supplier in the near future.
• Transaction D: Nov. 18, NetSolutions received cash of $7,500 for providing
services to customer.
• Transaction E: Nov. 30, 2013 NetSolutions paid the following expenses during
the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275
Chapter 1 45
• Transaction A: Nov. 1, Chris Clark deposited $25,000 in a bank account in the
name of NetSolutions.
Asset = Owner’s equity
Cash = Capital
25,000 25,000
Cash
DR CR
Nov 1 25,000
Owner’s equity
DR CR
Nov 1. 25,000
Chapter 1 46
• Transaction B: Nov. 5, NetSolutions paid $20,000 for the purchase of land as a
future building site.
Asset = Owner’s equity

Cash Land = Capital
5,000 20,000 25,000
Cash
DR CR
Nov 1 25,000 Nov 5 20,0000
Balance Nov 31 5000

Land
DR CR
Nov 5. 20,0000
Chapter 1 47
• Transaction C: Nov. 10, NetSolutions purchased supplies for $1,350 and agreed
to pay the supplier in the near future = on account
Asset = Liabilities + Owner’s equity

Cash Supplies Land = Accounts payable + Capital
5,000 1,350 20,000 1,350 25,000
Account payable
DR CR
Nov 10 1,350
Supplies
DR CR
Nov 10. 1,350
Chapter 1 48
• Transaction D: Nov. 18, NetSolutions received cash of $7,500 for providing
services to customer.

Cash Supplies Land = Accounts payable + Capital Fees earned
5,000 1,350 20,000 1,350 25,000 7,500
7,500
• Revenue from providing services is recorded as fees earned. Revenue

from the sale of merchandise is recorded as sales. Instead of receiving cash at
the time services are provided or goods are sold, a business may accept
payment at a later date. Such revenues are described as fees earned on
account or sales on account. Chapter 1 49
• Transaction E: Nov. 30, 2013 NetSolutions paid the following expenses during
the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275

Cash Supplies Land = Accounts payable + Capital Fees earned Expenses
5,000 1,350 20,000 1,350 25,000 7,500 - 2,125
7,500 - 800
- 3,650 - 450
- 275
• Like fees earned, the expenses are recorded in columns to

the right of Chris Clark, Capital.
Chapter 1 50
• Transaction A: Nov. 1, Chris Clark deposited $25,000 in a bank account in the name of NetSolutions.  Cash at bank (assets)
increase, Contribution (equity) increase
Asset (25,000) = Liability (0) + Equity (25,000)
• Transaction B: Nov. 5, NetSolutions paid $20,000 for the purchase of land as a future building site, paid by cash at bank.  land
(assets) increase, cash at bank (assets) decrease
Asset (25,000+20,000-20,000) = Liability (0) + Equity (25,000)
• Transaction C: Nov. 10, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.  payables
(Liability) increase, purchases (asset) increase
Asset (25,000+1350) = Liability (0+1350) + Equity (25,000)
• Transaction D: Nov. 18, NetSolutions received cash of $7,500 for providing services to customer.  cash at bank (asset) increase,
sales (equity) increase
Asset (26,350+7500) = Liability (1350) + Equity (25,000+7,500)
• Transaction E: Nov. 30, 2013 NetSolutions paid the following expenses during the month: wages, $2,125; rent,
$800; utilities, $450; and miscellaneous, $275 Cash at bank (asset) decrease, Expenses (equity) increase
Asset (33,850-3,650) = Liability (1,350) + Equity (32,500-3,650)
Chapter 1 51
5. Financial statement in proprietorship companies
The accounting reports providing information for users are called financial
statements.
 A proprietorship has four primary financial statements
Chapter 1 52
5. Financial statement proprietorship companies
 Income statement (Statement of performance)
The income statement reports the revenues and expenses for a period of time,
based on the matching concept.
Revenue - Expenses = Net Income/Net profit/ Earnings
• Expenses > Revenue Negative earnings Net loss
Chapter 1 53
Chapter 1 54
Chapter 1 55
 Statement of owner’s equity (The U.S’ system)
The statement of owner’s equity reports the changes in owner’s equity for a
period of time.
• It is prepared after the income statement because the net income or net loss
for the period must be reported in this statement.
• It is prepared before the balance sheet, since the amount of owner’s equity at
the end of the period must be reported on the balance sheet.
Chapter 1 56
 Statement of owner’s equity
Chapter 1 57
 Balance sheet (Statement of financial position)
The balance sheet reports the amount of assets, liabilities, and owner’s equity
for a period of time.
Assets = Liabilities + Owner’s equity
• The asset and liability amounts are taken from the last line of income statement
• The equity is taken from the last line of the statement of owner’s equity
• Form of balance sheet: account form => Basic format of the accounting equation
ASSETS LIABILITIES
OWNER’S EQUITY
Chapter 1 58
Chapter 1 59
Chapter 1 60
 Statement of cash flows
The statement of cash flow reports the changes of cash in operating activities,
investing activities, and financing activities.
Cash flow from operating activities: summary of cash receipts and cash
payments from operations.
Cash flow from investing activities: reports the cash transactions for the
acquisition and sale of relatively permanent assets.
Cash flow from financing activities: reports the cash transactions related to to
cash investments by the owner, borrowings, and withdrawals by the owner.
Chapter 1 61
Example: A summary of cash flows for Chickadee Travel Service for the year
ended April 30, 2016, follows:
The cash balance as of May 1, 2015, was $72,050

Prepare a statement of cash flows for Chickadee Travel Service for the year ended
April 30, 2016.
Chapter 1 62
Example: A summary of cash flows for Chickadee Travel Service for the year
ended April 30, 2016, follows:
Chapter 1 63
 Interrelationships Among Financial Statements
Chapter 1 64
 Interrelationships among financial statements
The preceding interrelationships are important in analyzing financial statements
and the impact of transactions on a business. In addition, these interrelationships
serve as a check on whether the financial statements are prepared correctly.
For example: if the ending cash on the statement of cash flows does not agree
with the balance sheet cash, then an error has occurred.
Chapter 1 65
Net income is carried to the

statement of owner’s equity.
Chapter 1 66
From the income statement
To the balance sheet
Chapter 1 67
This amount is
compared to the net From the statement of
cash flow on the owner’s equity
statement of cash
flows.
Chapter 1 68
This amount should match

Cash on the balance sheet.
Chapter 1 69
5. Financial analysis and interpretation ratio of liabilities to owner’s equity
• The ratio is used in analyzing the ability of a business to pay its creditors. The
lower the ratio of liabilities to owner’s equity, the better able the company is
to withstand poor business conditions and to pay its obligations to creditors.
Chapter 1 70
Example: The following data were taken from Hawthorne Company’s balance
sheet:
a. Compute the ratio of liabilities to owner’s equity.

b. Has the creditors’ risk increased or decreased from December 31, 2015, to
December 31, 2016?
Chapter 1 71
Example: The following data were taken from Hawthorne Company’s balance
sheet:
Chapter 1 72
Key terms of chapter 1
Chapter 1 73
Group
Discussion:
Problem
P25
(Instruction 1)
Chapter 1 74
Solution
Chapter 1 75
Homework:
1. Draw a mind map indicating the definitions of 5 accounting elements
2. Memorize key terms in Chapter 1
3. Do Problem Series 1-1 A (Page 38 in textbook)
Chapter 1 76
Chapter 1 77

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Principles of Accounting I

Lecturer’s information Course’s information

A business is an organization in which basic resources (inputs), such as materials

 Same concepts of business can be applied to not-for-profit organizations

Accounting is an information system providing reports to users about the

Financial accounting Managerial accounting

- Provides information for - Provides information for

- Need to follow accounting - Flexible based on nature of

What went wrong for these managers and

Ethics are moral principles that guide the conducts of individuals.

Trustworthy information Fraud

- Accounting principles and concepts develop from research, accepted accounting

Accounting amounts are recorded at their cost or purchased price.

Recorded amount to accounting book?

If you have a chance to do a start-up, which business will you

Financial Position Financial Performance

Asset = a present economic resource controlled by the entity as a result

Current Asset Non-Current Asset

• Land and buildings: Factories, office buildings, storage and distribution

Liability = a present obligation of the entity to transfer an

Current Liability Non-Current Liability

= Current liabilities are a company's = Current liabilities are a company's

• Payables (or creditors): amount owed to suppliers for goods

• Taxation owed to the government. A business pays tax on its profits

Owners’ Equity = the residual interest in the assets of the entity

Owner’s Contributions Retained Earning

= decreases in assets or increases in = increases in assets or decreases in

Assets = Liabilities + Owner’s equity

OR Extended Accounting Equation

Assets = Liabilities + Owner’s equity + Revenue - Expenses

a. Owner’s equity = $800,000 - $350,000 = $450,000

Business transactions are economic events or condition that directly changes an

 All business transactions can be stated in terms of changes in the elements of

Asset = Owner’s equity

Balance Nov 31 5000

Asset = Liabilities + Owner’s equity

Asset = Liabilities + Owner’s equity

• Revenue from providing services is recorded as fees earned. Revenue

Asset = Liabilities + Owner’s equity

• Like fees earned, the expenses are recorded in columns to

 A proprietorship has four primary financial statements

Revenue - Expenses = Net Income/Net profit/ Earnings

• Expenses > Revenue Negative earnings Net loss

Assets = Liabilities + Owner’s equity

The cash balance as of May 1, 2015, was $72,050

Net income is carried to the

From the income statement

To the balance sheet

This amount should match

a. Compute the ratio of liabilities to owner’s equity.

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