TOPIC 1(CONT.

)
INTRODUCTION TO
ACCOUNTING
English for Accounting
ACCOUNTING CONCEPTS
ASSUMPTIONS PRINCIPLES
Accountants are required to some
rules showing how to financial
transactions and including proper
d in financial statements.
Companies must have broad-scale
u in their records and the
information must stay consistent.
 GAAP
IASB

Concepts:
 Accounting concepts
Definition:
Accounting concepts are those assumptions and
principles underlying preparation of financial
statements.
◦ is something that is generally accepted
as being true.
◦ are general rules and guidelines that
govern the field of accounting.
ACCOUNTING ASSUMPTIONS

Separate entity / business entity assumption

Time-period / periodicity assumption
Continuity / going concern assumption
Unit of measure / monetary unit assumption
 ACCOUNTING PRINCIPLES
 Accrual basis principle
 Conservatism (or prudence)
principle
 Consistency principle
 Full-disclosure principle
 Historical cost principle
 Matching principle
 Materiality principle
 Objectivity principle
 Revenue recognition
principle
 Accounting assumptions
1.
A business is an accounting unit separate from its
owners, creditors and managers, and their assets.
Ex: the owner bought himself a yacht and serves his
demand only, then it could not be the business’ asset.
C financial statements of a group of
companies are prepared on the basis of single
economic entity concept.
FYI
are the financial statements of a group in which the
assets, liabilities, equity, income, expenses and cash
flows of the (company) and its
are presented as those of a single economic entity.
A is a company that is partly or
completely owned by another company that holds a
controlling interest in it.
 Accounting assumptions (cont.)
2.
The economic life of the business can be divided
into (artificial) time periods (time intervals) such
as the year, a quarter, or a month of
it.
Ex: The five months ended May 31,2016
It is imperative that the time interval be shown in
the of all financial statements.
Accounting assumptions (cont.)
3.
A business will continue into the future to carry out its
objectives and commitments, and will not liquidate in the
foreseeable future.
Allows the company to some of its prepaid
expenses until future accounting periods.
Ex: The bonus for the year 2016 will be paid in Jan 2017 must be
recorded as the in the year 2016 statements and the
amount unpaid as at 31 Dec 2016 is recorded as .
Accounting assumptions (cont.)
4.
All financial transactions are in a single monetary unit
or currency.
Ex: a company should use (VND)
as the monetary unit when operating in Vietnam.
Parent company and its in other countries
have to their results into one currency in the
financial statements for the whole
group of companies.
 Exercise 1
a. This assumption prevents showing a profit
divided into USD, euros, Swiss francs, etc.

b. This assumption prevents publishing FS for

a 15-month period, because this will show a
better profit.

e. This assumption prevents listing the

owners’ personal assets in a company’s FS
Exercise 2
1. A company’s does not
have to begin on 1 Jan, like the
calendar year.
2. If an American company owns a
company in Britain, this is a .
3. Multinationals with companies in lots
of different countries, combine all
their results in one set of
.
 Accounting principles
1.
An asset, liability, or equity investment should be
recorded as at its original cost which is
the amount spent (cash or the cash equivalent) when
the item was originally obtained or occurred.
Related to principle. If the business
is in liquidated condition, it is required to restate the
value of those assets as .
 Accounting principles (cont.)
2.
Economic and financial transactions of the business involved
in assets, liabilities, owner’s equity, revenue or expenses must
be recorded as the date they are occurred not the date the
amount was c or p .
Ex: In Jan 1, the company paid the rental fee which amounted to
$120,000 per annum. This fee should not be wholly recorded as
expense in Jan, it would be spread throughout the year (12 months),
which means $ will be recorded as rental fee each month.
 Accounting principles (cont.)
3.
Revenue is recognized in the accounting period in which it is
earned. That means revenue is recognized as soon as goods are
d or a service is p regardless of when
the money is actually received.
In case of sale of goods, revenue must be recognized when the
seller transfers the and associated with the
ownership of the goods to the buyer.
In case of rendering of services, revenue is recognized on the
basis of of of the services specified in the
contract.
 Accounting principles (cont.)
4.
Each cost or expense related to revenue earned must be
recorded in the same accounting period as the revenue it
helped to earn.
Related to basis and principle.
Ex: A company sold $35,000 of its merchandise goods and
received the payment by cash. The cost of the goods were
$30,000. The company should record its sales revenue along with
the cost to generate the goods at the same time. .
 Accounting principles (cont.)
5.
To examine, consider and provide essential judgment in
order to make in uncertain
circumstances.
Where different accounting methods are possible, you
choose the one that is least likely overstate or over-
estimate assets or income.
Ex: potential losses from lawsuits will be reported on the
financial statements or in the notes.
 expenses & lia revenue & assets provisions
overstate understate

C requires:
to only recognize when they are assured
of being received.
to recognize when it is likely to incur.
not to value of assets and incomes.
not to value of liabilities and expenses.
to make (e.g. bad debts, loss in inventory
value) but not too much.
 Test your understanding
Contractors PLC entered into a contract in June 2016 for the
construction of a bridge for $10 million. The total costs to
complete the project are estimated to be $6 million of which $3
million has been incurred up to 31st December 2016.
Contractors PLC received $2 million mobilization advance at
the commencement of the project. No further payments have
been received.
How much revenue should Contractors PLC recognize in the
income statement for the year ended 31st December 2016?
A. $2 million
B. $3 million
C. $5 million
 Exercise 1 (cont.)
◦This principle prevents waiting until customers pay
before recording revenue.

◦This principle prevents waiting until customers pay

before recording expenses.

◦This principle prevents valuing assets and estimating

future revenue at the highest possible figures.
◦
 Accounting principles (cont.)
6.
Accountants are expected to be consistent when applying
accounting , procedures, and practices in future
accounting periods.
Only change an accounting principle or method if the new version
in some way improves reported financial results. If such a change
is made, fully document its effects and include this documentation
in the accompanying the financial statements.
Ex: the straight-line method is used for calculating depreciation
expenses of fixed assets should be disclosed. For the next periods if
there is a change to accelerated depreciation , it must be disclosed
and clearly explained.
 Accounting principles (cont.)
7.
The accountants are allowed to ignore an accounting
standard if the net impact of doing so has such a small
impact on the financial statements that a reader of the
financial statements would not be .
Information is if its omission or misstatement
could the economic decisions of users taken
on the basis of the financial statements.
P judgment is required to decide whether the
amount is insignificant or immaterial.
 Accounting principles (cont.)
8.
Accounts should be based on facts and not on personal opinions or
feelings. Accounts, therefore, should be : it should be
possible for internal and external auditors to show that they are true.
Notice: documents generated by parties (e.g. customers,
suppliers, valuation experts, and banks) are considered to be of higher
value as evidence rather than those created .
Ex:
 Accounting principles (cont.)
9.
An entity's financial statements should include all available
information that would affect a reader's understanding of those
statements. It is customary to only disclose information about
events that are likely to have a impact on the
entity's financial position or financial results.
Always report accounting policies, as well as any
changes to those policies (such as changing an asset valuation
method) from the policies stated in the financials for a prior
period.
 Accounting principles (cont.)
Ex:
The nature and justification of a change in accounting
principle
The nature of a non-monetary transaction
The nature of a relationship with a related party with
which the business has significant transaction volume
The amount of encumbered assets (collaterals)
Exercise 2 & 3 (cont.)
1. Every entry in a company’s
accounts must be :
there must be a document
available showing that it is true.
2. Both the internal and external
auditors have to the
accounts.
Exercise 2 & 3
2. Companies have to all
relevant financial information in their
annual reports.
3. Despite the principle,
accountants have to make some
subjective judgments.
4. Even if a company is going through a
bad period, for accounting purposes
we it’s a going concern.
 REVIEW
Accounting
Assumptions &
Principles
 Exercise: which principle do
these sentences refer to?
1. All transactions and other items to be accounted
for must be in a single, supposedly stable
monetary unit.
2. This requires multinationals companies to convert
their consolidated FS into a single currency.
A. The separate entity
B. Going concern
C. Full disclosure
D. Unit-of-measure
 Exercise: which principle do
these sentences refer to?
1. An enterprise is an accounting unit separate
from its owners, creditors, etc.
2. This accords with a company’s legal status as
an artificial person.
A. The separate entity
B. Going concern
C.Full disclosure
D. Unit-of-measure
 Exercise: which principle do
these sentences refer to?
1. Financial data must be reported for particular
periods, which makes accrual and deferral
necessary.
2. This means that each company has its own
financial year (fiscal year).
A. Time-period
B. Going concern
C.Historical cost
D. Unit-of-measure
 Exercise: which principle do
these sentences refer to?
1. The business will continue indefinitely into the
future.
2. This implies that the current market value of
fixed assets is irrelevant as they are not for
sale.
A. Time-period
B. Going concern
C.Historical cost
D. Unit-of-measure
 Exercise: which principle do
these sentences refer to?
1. The initial price paid for the acquisition of assets
is the one that is recorded in accounts.
2. This makes it unnecessary to estimate current
market values every year.
A. Accrual
B. Historical cost
C. Going concern
D. Revenue recognition
 Exercise: which principle do
these sentences refer to?
1. Revenue is recognised at the moment when
goods are sold or when services are rendered.
2. This is why balance sheets often contain an entry
for debtors: goods that have been sold but not
yet paid for.
A. Accrual
B. Revenue recognition (realization)
C. Going concern
D. Matching
 Exercise: which principle do
these sentences refer to?
1. All data recorded should be verifiable and free
from bias.
2. This is one of the justifications for historical cost
accounting, which requires no subjective
assessments of replacement values.
A. Matching
B. Objectivity
C. Consistency
D. Conservatism
 Exercise: which principle do
these sentences refer to?
1. The revenues generated in an accounting
period are identified with related costs
whenever they were incurred.
2. This leads to accrual (accumulation) and
deferral (postponement) of costs.
A. Matching
B. Objectivity
C. Consistency
D. Conservatism
 Exercise: which principle do
these sentences refer to?
1. Where alternative accounting methods are
possible, one understates rather than
overstates profits.
2. This is the contrary of recording ‘below-the-
line’ items.
A. Matching
B. Objectivity
C. Consistency
D. Conservatism
 Exercise: which principle do
these sentences refer to?
1. Financial reporting must include all significant
information.
2. This means that insignificant trivial expenses, like
each pencil or typewriter ribbon, need not be
accounted for separately, but are exempted by
the materiality principle.
A. Materiality
B. Objectivity
C. Full disclosure
D. Accrual
 Exercise: which principle do
these sentences refer to?
1. The same methods (of inventory valuation,
depreciation, etc.) must be used from one
period to the next.
2. This prevents companies selecting methods
according to the inflation rate, etc.
A. Materiality
B. Conservatism
C.Consistency
D. Objectivity