Session 1
Introduction to Accounting
Lecture objectives
1. Purpose and scope of accounting
2. Accounting users
3. Qualitative characteristics of accounting
information
4. Accounting function in an organization
What is Accounting?
Accounting is a process of:
identifying,
recording, and
communicating
the economic events/transactions of an organization to
interested users.
What is Accounting?
Accounting – an information system for
business decision
Action
Decision
makers
Information Information
Business needs
Activities
Accounting
Data
Measuring Processing Communicating
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Purpose of accounting
Accounting is to identify and record transactions
so as to specify performance results for:
tax obligation / tax payments
making business decisions: managers can use
accounting information to make different
decisions (e.g. pricing, continue/discontinue
products/segments, accepting/rejecting orders,
insourcing/outsourcing activities, replacing
equipment)
forecasting: users look at the financial statements
of the business and can use the information to
forecast for the next years.
Who are users of accounting information?
Owners
Managers Customers
Lenders Competitors
Business
Suppliers Employees
Investment
analysts Government
Community
representatives
Who are users of accounting information?
Action Action
Business
Activities
Information Information
External Internal
Accounting
users users
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Ethical principles of accountants
(in Code of Ethics)
Integrity: accountants must be straightforward +
honest in professional + business relationship.
Objectivity: accountants must not compromise their
professional/business judgement because of bias,
conflict of interest or the undue influence of others
Professional Competence and Due Care:
Accountants must:
maintain professional knowledge +skills at the
level required
act diligently in accordance with professional
standards
Confidentiality: require accountants to refrain
from:
Disclosing outside the firm confidential information
acquired without proper authority
Using confidential information acquired to their
personal advantages or third-party advantages
Professional Behaviour: accountants must
comply to relevant law + regulation and avoid
actions that may bring discredit to the profession
Regulatory framework
Accounting law: stipulate the duties of
accountants in conducting the accounting works:
Identify transactions to record: accountants verify
if transactions are legal, real, and comply with
relevant regulations of authorities and of the entity
Record transactions + report: accountants comply
with accounting standards and rules
Code of ethics
Other relevant laws + regulations (about tax,
environment, labour, …)
Managerial Accounting & Financial Accounting
Managerial accounting Financial accounting
provides information provides information
for managers inside an to stockholders,
organization who creditors and others
direct and control who are outside
its operations. the organization.
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Management accounting Financial Accounting
Nature of the Tend to be general
Tend to be specific purpose
reports produced purpose
Level of detail Often very detailed Usually broad overview
Usually subject to
Regulations Unregulated
accounting regulation
As short as required by Usually annual or bi-
Reporting interval
managers annual
Often based on projected
Time orientation future information as well as Almost always historical
past information
Tend to contain financial and Focus on financial
Range and quality non-financial information, information, great
of information often use information that emphasis on objective,
cannot be verified verifiable evidence
Types of Business Entity
A business entity is a business that exists independently of
those who own the business.
Business entity
Sole trader Partnership Limited liability
company
a legal entity viewed
an unincorporated an unincorporated
under the law as an
business enterprise association of 2 or artificial person having
owned by a single more individuals many of the rights and
individual. conducting business obligations of a real
for a profit. person.
The public limited
The private limited
company (‘plc’):
company (‘Ltd’):
permitted to offer
prohibited from offering
shares to the public.
shares to the public.
Quality characteristics of accounting information
Fundamental RELEVANCE FAITHFUL REPRESENTATION
qualities
Ingredients of
Free
fundamental Predictive Confirmatory
Materiality Completeness Neutrality from
qualities value value
error
Enhancing
Comparability Verifiability Timeliness Understandability
qualities
Relevance
Accounting information should make a difference.
Help to predict future events
Help to confirm past events
Threshold of materiality:
An item of information is material if its omission of
misstatement could alter the decisions that users
make.
Faithful representation
Accounting information should present what it is
supposed to represent.
Completeness: reflect ALL of information needed
to understand what is being portrayed.
Neutrality: presented and selected without bias.
Freedom from error: no errors in the way in which
the estimates are prepared and described.
Further qualities
Comparability
Users can identify and understand similarities in, and differences
among items.
The accounting system uses the same methods for the same
items from period to period, from entity to entity.
Verifiability
Different knowledgeable and independent observers could reach
consensus.
Direct verification is carried out by auditors.
Timeliness
The older information is the less useful it is.
Understandability
Information is presented clearly and concisely.
Understood by users with a reasonable knowledge of business
and economic activities.
Cost constraint
Benefits derived from using information must
outweigh costs of providing it.
Accounting Assumptions
Economic Entity
• The business is accounted for separately from
other business entities, including its owner
Accounting Assumptions
Going-concern
• The business is assumed to continue
operating for the foreseeable future
Accounting Assumptions
Monetary unit
• Include in the accounting records only transactions
data that can be expressed in money terms.
Accounting Assumptions
Time period
• The economic life of business can be divided
into artificial time period for the purpose of
financial reporting
Accounting Assumptions
Accrual-Basis
• Transactions are recorded in the periods in
which the events occur even if cash receipts
and payments occur in a different period.
Accounting function in an organization
Stockholders
Board of
Directors
Chief Executive
Officer and
President
General Vice President Vice President
Counsel/ Vice President Finance/Chief Vice President Human
Secretary marketing Finance Officer Operations Resources
Treasurer Controller
Accounting career opportunities
Public accounting
Independent auditing
Taxation
Management consulting
Private (management) accounting
Cost accounting
Budgeting
Tax planning & preparation
Internal auditing
Forensic accounting
Investigations into theft and fraud.
Accounting career opportunities
Accounts clerk
Accounts assistant
Qualified accountant
Certified public accountant (CPA)
Certified management accountant (CMA)
Skills required for positions in accountancy
Numerical skills
Problem solving
Integrity
Negotiation
Customer service
The changing face of accounting
Fast-changing business environment
Sophistication of customers
Changes in technology
Global economy
More regulation and accountability
Harmonization of accounting rules across countries
Accounting softwares
earlier
primarily processed bookkeeping transactions earlier
today
processes transactions for multiple corporate divisions
customizes financial reports
provides sophisticated ratio analyses and
performs forecasting functions.
has evolved into a part of integrated enterprise software
E.g.
QuickBooks, SAP, Sage
MISA, Fast Accounting (Việt Nam)
References
Atrill & McLaney (2017), Accounting and Finance
for Non-specialists, Chapter 1.
Weetman (2019), Financial and Management
Accounting: An introduction, Chapter 1 & 4.
