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 (e.g. pricing,
continue/discontinue products/segments,
accepting/rejecting orders, insourcing/outsourcing
activities, replacing equipment)
Who are users of accounting information?

Owners

Managers Customers

Lenders Competitors

Business

Suppliers Employees

Investment
Government
analysts

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

Limited liability
Sole trader Partnership
company

a legal entity viewed

an unincorporated
an unincorporated under the law as an
association of 2 or
business enterprise artificial person having
more individuals
owned by a single many of the rights and
conducting business
individual. 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

Vice President Vice President
Counsel/ Finance/Chief Human
marketing Operations
Secretary Finance Officer 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.