Chapter 1: Introduction to accounting

I. Purpose of accounting
1. Accounting

- The accounting process is correctly sequenced as recording, analyzing, and summarizing.

2. Types of business entity

- Sole traders: work for themselves; refer to ownership of business.

- Partnership: 2 or more people share the risks and rewards of business.

- Limited liability companies: only responsible for amount to be paid for their shares.

3. Objective of financial statements

- To provide information about the reporting entity that is useful to existing and potential investors,
lenders, and other creditors in making decisions relating to providing resource to the entity.

- The primary users need to assess

+ economic resources of an entity, claims against the entity and changes in them

+ how efficiently and effectively the entity’s management have discharged their responsibilities relating
to the management of the entity’s resources

4. Customers

- External users: the public, gov agencies, trade contracts, financial analysist and advisors, finance
providers, regulatory bodies, HMRC…

- Internal users: owners, managers/ directors, employees…

5. Accounting systems

- Management accounting for internal makers

- Financial accounting for external users

II. Regulation of accounting

1. GAAP

- Cover all rules, which govern accounting in various jurisdictions

2. Legislation

3. Accounting standard

- Developed at an international level

 4. International financial reporting standards (IFRS Standards)

- Stem from the concepts of Conceptual Framework

5. True and fair view/ faithful presentation

- The Conceptual Framework: F information must be relevant and faithfully represent what it purports
to represent

- The Companies Act 2006: should give a true and fair view of the F position of the entity at a particular
point in time

- IAS 1: should present fairly F position and performance, and the cash flow of the entity

III. Main financial statements

1. Objectives of F statement

- Provide information in making economic decisions

- Show result of management’s stewardship

- Predict the entity’s future cash flow

2. Main F statements

- Statement of Profit or Loss

- Statement of Financial Positions (SOFP)

- Statement of Cash Flows

- Statement of Changes in Equity

IV. Capital and revenue items

1. Capital and revenue expenditure

- Revenue expenditure:

+ for trade purposes: raw materials or items for resale, expenditure on wages and salaries…

+ to maintain the existing earning capacity of non-current assets

-> eg: property depreciation, repair and maintenance costs…

- Capital expenditure:

+ the acquisition of long-term assets

+ an improvement earning capacity

 -> eg: purchase of a property, solicitor’s fees in connection with the purchase, customs duty, delivery
costs of transporting the property, cost of installing -> cost of a property include related expense; cost of
adding extra memory to a computer…

2. Capital income and revenue income

- Revenue income:

+ from sale of trading assets, such as goods held in inventory

+ the provision of services

+ interest and dividends from business investment

-> eg: revenue from sales…

- Capital income: proceeds from the sale of non-current assets

-> eg: profit on the sale of an office building…

3. Capital transactions

- additional funds from the owners of the business or raising and repaying loans

V. Qualitative characteristics of useful accounting information

The Conceptual Framework identifies the Fundamental qualities to be Relevance and Faithful
representation

* Relevance – phù hợp

- Predictive value

- Confirmatory value

- Materiality threshold – trọng yếu

* Faithful representation

+ Completeness – đầy đủ

+ Neutrality (unbiased) – khách quan

+ Freedom from error – không sai sót nghiêm trọng

-> Enhancing qualitative characteristic

_ Comparability – so sánh được

_ Verifiability – có thể kiểm chứng

_ Timeliness – kịp thời

_ Understandability – dễ hiểu