ACCOUNTING PRINCIPLE

Chapter 1: ACCOUNTING IN ACTION

• WHAT IS ACCOUNTING?
•
• Accounting consists of 3 activities in the economic event of the organization
to interested users – it:
- I: Select economic events - Identifies the economic events relevant to its business.
(transactions) - Records systematic and chronological diary events.
- R: Record, classify, and summarize
- C: Prepare accounting reports - Communicates the collected information by financial reports.
• Analysis involves use of ratios, percentages, graphs, and charts to higlight
significant financial trends and relationships.
- Bookkeeping ussually
• Interpretation (diễn giải) involves explaining the uses, meaning, and
involves only the recording of limitations of reported data.
economic events An accounting process includes bookkeeping function.

WHO USES ACCOUNTING DATA?

• INTERNAL USERS:
- Internal users include - People inside the company who need detailed information on a timely basis.
maketing managers, Normally, Managerial accounting (kế toán quản trị) provides internal reports to help
production supervisors, users make decisions about their companies.
finance directors, and - Internal users include maketing managers, production supervisors, finance
company officers. directors, and company officers.
• EXTERNAL USERS:
- External users include - People outside the company who want financial information about the company.
investors, creditors, - Financial accounting provides economic and financial information for investors
customers, taxing (owners), creditors (supplies, bankers) and other external users.
authorities, regulary
+ Taxing authorities (Internal Revenue Service) want to know whether the company
agencies, union labors…
complies with tax laws.
+ Regulary agencies (the Securities and Exchange Commission and the Federal
Trade Commission) want to know whether the company is operating within
prescribed rules.

THE BUILDING BLOCKS OF ACCOUNTING

➢ ETHICS IN FINANCIAL REPORTING
 ➢ GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
- Standards that are generally accepted and universally practiced. These standards
indicate how to report economic events.
- Standard-setting bodies:
+ Financial Accounting Standards Board (FASB)
+ Securities and Exchange Commission (SEC)
+ International Accounting Standards Board (IASB)
- Measurement principles:
+ Historical cost principle (or cost principle) dictates that companies record assets
at their cost.
+ Fair value principle states that assets and liabilities should be reported at fair value
(the price received to sell an asset or settle a liability).
Selection of which principle to follow generally relates to trade-offs between
relevance and faithful representation.
- Assumptions provide a foundation for accounting process. Two main assumptions:
+ Monetary unit assumption (giả định đơn vị tiền tệ) requires that companies
include in the accounting records only transaction data that can be expressed in
terms of money.
+ Economic entity assumption (giả định về chủ thể kinh doanh) requires that
Economic entity assumption activities of the entity be kept separate and distinct from the activities of its owner
includes proprietorship, and all other economic entities.
partnership, corporation. - Forms of business ownership:
Proprietorship: Usually only + Proprietorship:
a relatively small amount of • Owned by one person.
money (capital) is necessary to • Owner is often manager/operator.
start in business as a • Owner receives any profits, suffers any losses, and is personally liable for all
proprietorship. The owner
(proprietor) receives any debts.
profits, suffers any losses, and + Partnership:
is personally liable for all debts • Owned by two or more persons
of the business • Often retail and service-type businesses.
Partnership: Like a
proprietorship, for accounting • Generally unlimited personal liability. Partnership agreement.
purposes the partnership + Corporation:
transactions must be kept separate • Ownership divided into shares of stock.
from the personal activities of the
partners.
• Separate legal entity organized under state corporation law.
Corporation: The holders of the • Limited liability.
shares (stockholders) enjoy THE BASIC ACCOUTING EQUATION:
limited liability; that is, they are
- Assets:
not personally liable for the
debts of the corporate entity. Resources a business owns.
Stockholders may transfer all or • Provide future services or benefits.
part of their ownership shares to • Cash, Supplies, Equipment, etc.
other investors at any time (i.e., - Liabilities:
sell their shares).
• Claims against assets (debts and obligations).
• Notes: • Creditors (party to whom money is owed).
- Account Receivable: They • Accounts Payable, Notes Payable, Salaries and Wages Payable, etc.
(outside) pay later >< Account - Owner’s Equity:
Payable: I (the company) pay
• Ownership claim on total assets.
later
- Liabilities also includes • Referred to as residual equity.
Taxes Payable, Salary and • Investment by owners and revenues (+)
Wages Payable, Unearned • Drawings and expenses (-).
Service Revenue,…
- Transactions are a business’s economic events recorded by accountants.
• May be external or internal.
• Not all activities represent transactions.
*Note: • Each transaction has a dual effect on the accounting equation.
- Internal Revenue Service - Four financial statements:
(IRS) + Income Statement: (NI=R-Ex) presents revenue and expenses -> net income or net
- , Federal Bureau of
Investigation (FBI)
loss
- Securities and Exchange + Owner’s Equity Statement: (OES= C - D + R - Ex = C - D + NI) summarize changes
Commission (SEC) in owner’s equity (Capital, Drawing, Revenue, Expense)
+ Balance Sheet: (A= L + E) reports Asset, Liabilities and Owner’s Equity at a
specific date
+ Statement of Cash Flow: Cash inflows (receipts) and cash outflows (payments)
 Chapter 2: THE ACCOUNTING PROCESS

• THE ACCOUNT
• An account is an accounting record of increases and decreases in a specific asset,
liability, or owner’s equity item.
DEBITS AND CREDITS
• Debit (Dr.): the left side of an account. → Debiting the account: the act of
entering an amount on the left side of an account
• Credit (Cr.): the right side of an account. → Crediting the account: the act of
entering an amount on the right side of an account
*Note: The terms Debit and Credit do not mean increase and decrease. They just
refer to the place where entries are made in accounts.
- When comparing the totals of the two sides, an account show:
+ Debit balance: if the totals of the debis > the credit.
+ Credit balance: if the totals of the credit > the debit.

DEBIT AND CREDIT PROCEDURE

Keeping in mind that both sides of the basic equation (Assets = Liabilities +
Owner’s Equity) must be equal. → When transactions are made, they affect two or
more accounts to keep the equation in balance. In other words, debits must equal
credits → Double-entry system.

*Note: The (+) side is the normal balance of an account.

STEPS IN THE RECORDING PROCESS
- Three basic steps in the recording process:
1. Analyze each transaction for its effects on the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the appropriate accounts in the ledger.
THE JOURNAL
- The journal: he book of original entry. For each transaction the journal shows the
debit and credit effects on specific accounts. → General journal: the most basic form
of journal.
 ⇒ Journalizing: entering transaction data in the journal.
• Advantages of the journal:
1. Disclose the complete effects of a transaction.
2. Provide a chronological record (time order).
3. Help to prevent and locate errors.

THE LEDGER
The ledger: the entire group of accounts maintained by a company. → General
ledger: contain all the assets, liabilities, and owner’s equity accounts.
⇒ Posting: transferring journal entries to the ledger accounts. Below is a posting
process:
THE RECORDING PROCESS ILLUSTRATED
The purpose of transaction analysis is first to identify the type of account
involved, and then to determine whether to make a debit or a credit to the account.
THE TRIAL BALANCE
A Trial Balance: is a list of accounts and their balances at a given time.
\
→ The trial balance (1) proves the mathematical equality of debits and credit after
posting, may also (2) uncover errors in journalizing and posting, (3) is useful in the
preparation of financial statements.
- Step for preparing a trial balance:
1. List the account titles and their balances in the appropriate debit or credit column.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.
Limitation of a Trial *Note: the order of presentation in the trial balance is: Assets, Liabilities, Owner’s
Balance: equity, Revenues, Expenses.
Mistakes may NOT be
identified with Trial Balance
if...
1. A transaction is not
journalized.
2. A correct journal entry is
not posted.
3. A journal entry is posted
twice.
4. Incorrect accounts are used
in journalizing or posting.
5. Offsetting errors are made
in recording the amount of a
transaction.
 Chapter 3: ADJUSTING THE ACCOUNTS

• TIMING ISSUES
•
Time Period Assumption = Periodicity Assumption: artificial time periods of a
business economic life. Generally a month, a quarter, or a year.
FISCAL AND CALENDAR YEARS
• Fiscal: accounting time period that is one year in length. Ex: maybe from 4th Dec,
Dec, 2018
• Calendar: 1st Jan, 2020 ฀ 31th Dec, 2020 Debit (Dr.): the left side of an account.
ACCRUAL- VS. CASH-BASIS ACCOUNTING
- - Cash – basis:
✓ Record revenue when they receive cash.
✓ Record expenses when they pay out cash.
✓ Not in accordance with GAAP.
- Accrual – basis:
✓ Recognize revenue when they perform service.
✓ Recognize expenses when incurred (rather than when paid).
✓ In accordance with GAAP.
RECOGNIZING REVENUES AND EXPENSES:
- Revenue recognition principle:
The revenue recognition principle dictates that companies recognize revenue in the
accounting period in which it is earned. In a service enterprise, revenue is considered
to be earned at the time the service is performed.
- Matching principle:
It dictates that efforts (expenses) be matched with accomplishments (revenues).
*GAAP relationships in revenue and expense recognition
• THE BASICS OF ADJUSTING ENTRIES
•
Adjusting entries ensure that the revenue recognition and matching principles
are followed. Adjusting entries make it possible to report correct amounts on the
A company must make balance sheet and on the income statement.
adjusting entries every time it
prepares financial statements. The trial balance—the first summarization of the transaction data—may not
contain up-to-date and complete data. This is true for several reasons:
1. Some events are not recorded daily because it is not efficient to do so. For example,
companies do not record the daily use of supplies or the earning of wages by
employees.
2. Some costs are not recorded during the accounting period because they expire with
the passage of time rather than as a result of daily transactions. Examples are rent,
insurance, and charges related to the use of equipment.
3. Some items may be unrecorded. An example is a utility bill that the company will
not receive until the next accounting period.

TYPES OF ADJUSTING ENTRIES

→ Adjusting entries ensure that the revenue recognition and expense recognition
principles are followed and complete the data of a trial balance (which may not
contain up-to-date data).

→ Adjusting entries ensure that the revenue recognition and expense recognition
principles are followed and complete the data of a trial balance (which may not
contain up-to-date data).
ADJUSTING ENTRIES FOR DEFERRALS
Example: Cash is received
today, Revenue & Expense are Deferrals: Expenses or revenues that are recognized at a date later than the point
recognized tomorrow. when cash was originally exchanged.

Deferrals are either prepaid 1. Prepaid Expense: is recorded as an asset.

expenses or unearned
- Prepaid expenses recorded in asset accounts have been used → need for
revenues. Companies make
adjustments for deferrals to adjustment.
record the portion of the - Entries: Dr. Assets (insurance, supplies, depreciation...) / Cr. Cash
deferral that represents the - Adjusting entries: Dr. Expenses / Cr. Assets or Contra Assets
expense incurred or the ➢ Supplies
revenue earned in the current
- Khi mua:
period
+ Dr Supplies
Prepaid expenses (chi phí trả + Cr Cash(đã trả tiền)/Account Payable (Chưa trả tiền, nợ phải trả)
trước) - Cuối kì làm bút toán điều chỉnh:
+ Prepayments often occur in + Dr Supplies expense
regard to: insurance, rent,
+ Cr Supplies
supplies, equipment,
advertising, buildings. Ex: Pioneer Advertising purchase supplies costing $2,500 on Oct 5. Pioneer recorded
the payment by debiting Supplies (and crediting Cash). This account shows a balance
 of $2,500 in the Oct 31 trial balance. An inventory count at the close of business on
Oct 31 reveals that $1,000 of supplies are still on hand. Prepare adjusting entries.

• Oct 31 Supplies Expense (Equity) $1,500

• Supplies (Asset) $1,500

➢ Insurance:
- Khi mua:
+ Dr Prepaid Insurance
+ Cr Cash (đã trả tiền)/Account Payable (Chưa trả tiền, nợ phải trả)
- Cuối kì làm bút toán điều chỉnh:
+ Dr Insurance Expense
+ Cr Prepaid Insurance
Ex: On Oct 4, Pioneer Advertising paid $600 for a one-year fire insurance policy.
Coverage began on Oct 1. Pioneer recorded the payment by increasing (debiting)
Prepaid Insurance. This account shows a balance of $600 in the Oct 31 trial balance.
Insurance of $50 ($600 ÷ 12) expires each month. Prepare adjusting entries on Oct 31.
Oct 31 Insurance Expense (E) $50
Prepaid Insurance (A) $50

➢ Depreciation:
*Depreciation: the process of allocating the cost of an asset to expense over its
useful life.
- Khi mua tài sản:
+ Dr Buildings, equipment, and motor vehicles
+ Cr Cash(đã trả tiền)/Account Payable (Chưa trả tiền, nợ phải trả)
- Cuối kì làm bút toán điều chỉnh:
+ Dr Depreciation expense
+ Cr Accumulated depreciation (Khấu hao lũy kế)
Ex: For Pioneer Advertising, assume that depreciation on the equipment is $480 a year,
or $40 per month.
Oct 31 Depreciation Expense (E) $40
Accumulated Depreciation (Equipment) (A) $40
*Accumulated Depreciation is a contra asset account.
*Book value = cost of asset - its accumulated depreciation.

2. Unearned revenues: : is recorded as a liability because the service has not

been performed.
• Entries: Dr. Cash / Cr. Unearned Revenue
• Adjusting entries: Dr. Unearned Revenue / Cr. Revenue
Ex: Pioneer Advertising received $1,200 on Oct 2 from R. Knox for advertising
services expected to be completed by Dec 31. Unearned Service Revenue shows a
 balance of $1,200 in the October 31 trial balance. Analysis reveals that the company
performed $400 of services in October.

Unearned service revenues Oct 31 Unearned Service Revenues (Liability account) $400
often occur in regard to: Service Revenue (Equity account) $400
Rent, Magazine subscritions,
airline tickets, customers
deposits.

ADJUSTING ENTRIES FOR ACCRUALS

Accruals: Record Revenues for 1. Accrued revenues:
services performed but not yet - Cuối kì làm bút toán điều chỉnh:
recorded (accrued revenues);
and Expenses incurred but not
+ Dr Accounts Receivable (khoản phải thu)
yet paid or recorded (accrued + Cr Revenue
expenses) - Sang kì mới khi nhận được tiền
For example :Cash is received + Dr Cash
tomorrow, Revenue & Expense + Cr Accounts Receivable
are recognized today.
Ex: In October Pioneer Advertising performed services worth $200 that were not billed
to clients on or before Oct 31.
Oct 31 Accounts Receivable (Asset) $200
A Service Revenue (Equity) $200

2. Accrued Expenses: Expenses incurred but not yet paid or recorded at the
statement date
- Cuối kì làm bút toán điều chỉnh:
+ Dr expense
+ Cr Accounts payable (khoản phải trả)
- Sang kì mới khi trả tiền
+ Dr Accounts payable
+ Cr Cash
➢ Accrued Interest
Ex: Pioneer Advertising Agency signed a $5,000, 3-month note payable on October
1. The note requires Pioneer to pay interest at an annual rate of 12%.
•
•

➢ Accrued Salaries
Ex: Companies pay for some types of expenses after the services have been
performed. Examples are employee salaries and commissions. Pioneer last paid
salaries on October 26; the next payday is November 9. As the calendar in
Illustration 3-19 shows, three working days remain in October (October 29–31)

At October 31, the salaries for the last three days of the month represent an
accrued expense and a related liability. The employees receive total salaries of
$2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October
31 are $1,200 ($400 x 3). Pioneer makes the following adjusting entry:

Pioneer Advertising pays salaries every two weeks. The next payday is November
9, when the company will again pay total salaries of $4,000. The payment will
consist of $1,200 of salaries payable at October 31 plus $2,800 of salaries expense
for November (7 working days as shown in the November calendar x $400).
Therefore, Pioneer makes the following entry on November 9.
• THE ADJUSTED TRIAL BALANCE AND FINANCIAL STATEMENTS
• Preparing the Adjusted Trial Balance
• The same as Trial Balance, but is prepared after all adjusting entries are journalized.
• Is the primary basis for the preparation of financial statements. Notes: + Pay
attention to the time period (usually a month). + Use the fair value only (not the original
value).

Preparing Financial Statements

•
•
 Chapter 4: COMPLETING THE ACCOUNTING CYCLE

• USING A WORKSHEET
•

a
service enterprise, revenue is considered to be earned at the time the service is
performed.
CLOSING THE BOOKS
At the end of the accounting period, the company makes the accounts ready for the
next period.

Preparing Closing Entries

- Closing entries formally recognize in the ledger the transfer of net income (or net
loss) and owner’s drawing to owner’s capital.
. - Closing entries also produce a zero balance in each temporary account
- Companies record closing entries in the general journal.
- Companies generally prepare closing entries directly from the adjusted balances in
the ledger. They could prepare separate closing entries for each nominal account, but
the following four entries accomplish the desired result more efficiently:
1. Debit each revenue account for its balance, and credit Income Summary for total
revenues.
2. Debit Income Summary for total expenses, and credit each expense account for its
balance
3. Debit Income Summary and credit Owner’s Capital for the amount of net income.
4. Debit Owner’s Capital for the balance in the Owner’s Drawing account, and credit
Owner’s Drawing for the same amoun

CLOSING ENTRIES ILLUSTRATED

Note that the amounts for Income Summary in entries (1) and (2) are the totals of
the income statement credit and debit columns, respectively, in the worksheet.
A couple of cautions in preparing closing entries: (1) Avoid unintentionally
doubling the revenue and expense balances rather than zeroing them. (2) Do not close
Owner’s Drawing through the Income Summary account. Owner’s Drawing is not an
expense, and it is not a factor in determining net income.
Closing entries Temporary -> R.E.D -> R (Revenue). E (Expense). D (Drawing)
-> closed
4 steps:
1/ Debit Revenue, Credit Income Summary
2/ Debit Income Summary, Credit Expenses
3/ Debit Income Summary, Credit Capital
4/ Debit Capital, Credit Drawing
•
•

SUMMARY OF THE ACCOUNTING CYCLE

.
THE CLASSIFIED BALANCE SHEET
Current Assets
- Cash
- Investments (short-term)
- Receivables (Notes Receivables, Accounts Receivables, Interest Receivables)
- Inventories
- Prepaid Expense (Supplies, Insurance)
Long-term Investments
- Investments for stocks and bonds of other companies
- Long-term assets (land or building that the company don’t currently use)
- Long-term Note Receivable
Property, Plant and Equipment
- Land
- Building
- Machines
- Equipment
- Furniture
- Accumulated Depreciation
Intangible Assets
- Goodwill
- Patents
- Copyrights
- Trade mark (Trade names)
Current Liabilities
- Account Payable
- Salary and Wages Payable
- Notes Payable
- Interest Payable
- Income taxes Payable
- Current maturities of long-term obligations
Long-term Liabilities
- Bonds Payable
- Mortgages Payable
- Long-term Notes Payable
- Lease Liabilities
- Pension Liabilities
Owner’s Equity
- Stockholders’ equity
SUMMARY OF STUDY OBJECTIVES
1 Prepare a worksheet. The steps in preparing a worksheet are:
(a) Prepare a trial balance on the worksheet.
(b) Enter the adjustments in the adjustments columns.
(c) Enter adjusted balances in the adjusted trial balance columns.
(d) Extend adjusted trial balance amounts to appropriate financial statement columns.
(e) Total the statement columns, compute net income (or net loss), and complete the
worksheet.
2 Explain the process of closing the books. Closing the books occurs at the end of
an accounting period. The process is to journalize and post closing entries and then
rule and balance all accounts. In closing the books, companies make separate entries
to close revenues and expenses to Income Summary, Income Summary to Owner’s
 Capital, and Owner’s Drawings to Owner’s Capital. Only temporary accounts are
closed.
3 Describe the content and purpose of a post-closing trial balance. A post-closing
trial balance contains the balances in permanent accounts that are carried forward to
the next accounting period. The purpose of this trial balance is to prove the equality of
these balances
• 4 State the required steps in the accounting cycle. The required steps in the
• accounting cycle are:
(1) analyze business transactions,
(2) journalize the transactions,
(3) post to ledger accounts,
(4) prepare a trial balance,
(5) journalize and post adjusting entries,
(6) prepare an adjusted trial balance,
(7) prepare financial statements,
(8) journalize and post closing entries,
(9) prepare a post-closing trial balance.
5 Explain the approaches to preparing correcting entries. One way to
determine the correcting entry is to compare the incorrect entry with the correct
entry. After comparison, the company makes a correcting entry to correct the
accounts. An alternative to a correcting entry is to reverse the incorrect entry and
then prepare the correct entry.
6 Identify the sections of a classified balance sheet. A classified balance sheet
categorizes assets as current assets; long-term investments; property, plant, and
equipment; and intangibles. Liabilities are classified as either current or long-term.
There is also an owner’s (owners’) equity section, which varies with the form of
business organization.

.
 Chapter 5: ACCOUNTING FOR MERCHANDISING OPERATIONS

• MERCHANDISING OPERATIONS
•
- Merchandising companies that purchase and sell directly to consumers are called
retailers (consumer target).
- Merchandising companies that sell to retailers are known as wholesalers (retailer
target).
- The primary source of revenues for merchandising companies is the sale of
merchandise, often referred to simply as sales revenue or sales.
- A merchandising company has two categories of expenses: cost of goods sold and
operating expenses. Cost of goods sold is the total cost of merchandise sold during
the period.

OPERATING CYCLES of a merchandising company is longer than that of a

service
. FLOW OF COSTS
➢ Perpetual system
Operating Cycles:
Manufactoring company >
- In a perpetual inventory system, companies keep detailed records of the cost
Merchandising company > of each inventory purchase and sale.These records continuously—perpetually—show
service company the inventory that should be on hand for every item.
Flow of Costs: Có 2 phương
pháp kế toán
- Perpetual inventory system:
Kê khai thường xuyên (Ghi
chép hàng nhập(mua),
xuất(bán) hàng ngày)
– Periodic inventory system:
Kiểm kê định kì (cuối kì) (Ghi
chép hàng nhập(mua), không
ghi hàng xuất(bán)) Tính
hàng xuất (Cost of goods sold)
= Số dư đầu kì(Beginning) +
hàng nhập trong kì – kiểm kê
cuối kì (Ending)

- Under a perpetual inventory system, a company determines the cost of goods

sold each time a sale occurs. The advantage of this system is the better control over
inventories, because it shows the quantity and cost of the inventory left on hand.
➢ Periodic system
- Periodic inventory system: determines the cost of goods sold only at the end
of the accounting period. Cost of goods sold = goods on hand at the beginning + cost
of goods purchased - goods on hand at the end of the period.
- To determine the cost of goods sold under a periodic inventory system, the
following steps are necessary:
1. Determine the cost of goods on hand at the beginning of the accounting period.
2. Add to it the cost of goods purchased.
3. Subtract the cost of goods on hand at the end of the accounting period

RECORDING PURCHASES OF MERCHANDISE

- A purchase invoice should support each credit purchase. This invoice
indicates the total purchase price and other relevant information.
- The purchaser uses the copy of the sales invoice sent by the seller as a purchase
invoice.
• - Terms 2/10: Nếu trả trong
10 ngày đầu sẽ được chiết
khấu 2%
• - n/30: nợ trong 30 ngày
•
•

FREIGHT COSTS
- The letters FOB mean free on board
- FOB shipping point - FOB shipping point (buyers pay cost and ownership passes to buyer when the
(FOB điểm đi): Người goods are on the carrier) and FOB destination (sellers pay cost and ownership
mua chịu chi phí -> Làm belongs to seller until the goods reach the buyer).
tăng tiền hàng (Inventory) • Freight costs incurred by buyer: record as Inventory
lên • Freight costs incurred by seller: record as Freight-out (operating expenses)
+ Kế toán bên mua ghi:
Dr Inventory
Cr Accounts Payable
(mua nợ)/ Cr cash (trả
tiền luôn)
- FOB destination (FOB
điểm đến): Người bán
chịu chi phí
+ Kế toán bên bán ghi:
Dr Freight Costs
- Purchase returns and allowances: debit for Accounts Payables and credit for
(Delivery Exps)
Inventory
Cr Accounts Payable
• Purchase return (hàng trả lại): buyer returns merchandise to seller for credit or
(mua nợ)/ Cr cash (trả
cash refund
tiền luôn)
• Purchase allowance (chiết khấu mua hàng: giảm giá): buyer still keeps the
* Mua (Có invoice purchase)
Dr Inventory merchandise and receives allowance grant (deduction) from seller.
Cr Accounts Payable (mua nợ)/ - Purchase discounts (chiết khấu thanh toán) (credit terms): permits buyers to
Cr cash (trả tiền luôn) claim a cash discount for prompt payment.
• Ex: The term 2/10 implies that the buyers will receive a 2% cash discount if he/she
pays the seller within 10 days of the invoice date. In this case, the buyers will record
as

Ex: On September 5, De La Hoya Company buys merchandise on account from

Junot Diaz Company. The selling price of the goods is $1,500, and the cost to Diaz
Company was $800. On September 8, De La Hoya returns defective goods with a
selling price of $200 and a scrap value of $80. Record the transactions on the books
of De La Hoya Company.

*Bán: ghi 2 bút toán

- Bút toán 1: ghi doanh thu RECORDING SALES OF MERCHANDISE
Dr Cash (Nhận tiền)/ - Sales revenue is recorded when the goods are transferred from the seller to the buyer.
Accounting Receivable - A business document: supports every transactions, provides written evidence of
(chưa nhận tiền) sale
Cr Sale revenue - Cash register document: provides evidence of cash sale
- Bút toán 2: ghi giá vốn - The seller makes 2 entries for each transaction: the first entry records the sale and
(chi phí nhập/ mua hàng) the second records cost of goods sold.
Dr Cost of goods sold
Cr Inventory

*Sale returns (Hàng bị trả

lại) and Allowances
(Chiết khấu bán hàng)/
Sales Discount: Chiết - Sales returns and allowances
khấu thanh toán • Sales returns:
- Giảm doanh thu:
Dr Sales Returns and
Allowances/ Sales
Discount
Cr Cash (nhận tiền)/
Accounts receivable
(chưa nhận tiền)

- Giảm giá vốn (Nhập lại

kho) (Chỉ ghi trong trường
(In case the goods returned is defective, the entry for Inventory and Cost of goods
hợp Sales Returns) –
solds should be the fair value of the returned goods, rather than their costs)
Ngược bút toán 2
Dr Inventory • Sales allowances: debit for Sales Returns and Allowances, credit for Accounts
Cr Cost of goods sold Receivable for the amount of the allowance.
 • Sales Revenue account is not reduced (debited) because that would obscure the
importance of sales returns and allowances as a percentage of sales, and could distort
comparisons.
- Sales Discounts is offered to promote prompt payment of the balance due. Debit for
Sales Discount for the amount of discount

• Ex: Assume information similar to that in the Do It! on page 207. That is: On
September 5, De La Hoya Company buys merchandise on account from Junot Diaz
Company. The selling price of the goods is $1,500, and the cost to Diaz Company was
$800. On September 8, De La Hoya returns defective goods with a selling price of
$200 and a scrap value of $80. Record the transactions on the books of Junot Diaz
Company.

COMPLETING THE ACCOUNTING CYCLE

ADJUSTING ENTRIES: debit for cost of goods sold and credit for inventory
Ex: Suppose that PW Audio Supply has an unadjusted balance of $40,500 in
Merchandise Inventory.Through a physical count, PW Audio determines that its
actual merchandise inventory at year-end is $40,000. The company would make an
adjusting entry as follows.

CLOSING ENTRIES A merchandising company, like a service company,

closes to Income Summary all accounts that affect net income. In journalizing, the
company credits all temporary accounts with debit balances, and debits all temporary
accounts with credit balances
•

Ex: The trial balance of Celine’s Sports Wear Shop at December 31 shows
Merchandise Inventory $25,000, Sales $162,400, Sales Returns and Allowances
$4,800, Sales Discounts $3,600, Cost of Goods Sold $110,000, Rental Revenue
$6,000, Freight-out $1,800, Rent Expense $8,800, and Salaries and Wages Expense
$22,000. Prepare the closing entries for the above accounts.

FORMS OF FINANCIAL STATEMENTS

MULTIPLE-STEP INCOME STATEMENT
- A multiple-step statement also distinguishes between operating and non
operating activities. Finally, the statement also highlights intermediate components of
income and shows subgroupings of expenses.
 INCOME STATEMENT PRESENTATION OF SALES

GROSS PROFIT
The gross profit rate to be more
useful than the gross profit
amount.
Gross profit represents the
merchandising profit of a
company.

OPERATING EXPENSES AND NET INCOME

- Operating expenses are the next component in measuring net income for a
The net income amount is the merchandising company.
so-called “bottom line” of a
company’s income statement.
- They are the expenses incurred in the process of earning sales revenue. These
expenses are similar in merchandising and service enterprises.
NONOPERATING ACTIVITIES
- Nonoperating activities consist of various revenues and expenses and gains and
losses that are unrelated to the company’s main line of operations.
- The results of nonoperating activities are shown in the categories “Other revenues
and gains” and “Other expenses and losses.”
 SINGLE -STEP INCOME STATEMENT
In a single-step statement, all data are classified into two categories:
(1) revenues, which include both operating revenues and other revenues and gains;
reasons for using the single-
and
step format:
(1) A company does not realize (2) expenses, which include cost of goods sold, operating expenses, and other
any type of profit or income expenses and losses.
until total revenues exceed
total expenses, so it makes
sense to divide the statement
into these two categories.
(2) The format is simpler and
easier to read. For homework
problems, however, you
should use the single-step
format only when specifically
instructed to do so.

CLASSIFIED BALANCE SHEET

 - In the balance sheet, merchandising companies report merchandise inventory as a
current asset immediately below accounts receivable.

Ex: You are presented with the following list of accounts from the adjusted trial
balance for merchandiser Gorman Company. Indicate in which financial statement
and under what classification each of the following would be reported.
Accounts Payable Interest Expense
Accounts Receivable Interest Payable
Accumul Land
ated Depreciation—Office Building Merchandise Inventory
Accumulated Depreciation—Store Notes Payable (due in 3 years)
Equipment Office Building
Advertising Expense Property Tax Payable
Depreciation Expense Salaries Expense
reasons for using the single-
step format: B. Gorman, Capital B. Gorman, Salaries Payable
(1) A company does not realize Drawing Sales Returns and Allowances
any type of profit or income Cash Store Equipment
until total revenues exceed total Freight-out Sales Revenue
expenses, so it makes sense to Gain on Sale of Equipment Utilities Expense
divide the statement into these
two categories. Insurance Expense
(2) The format is simpler and
easier to read. For homework
problems, however, you should
use the single-step format only
when specifically instructed to
do so.
 SINGLE-STEP INCOME STATEMENT
In a single-step statement, all data are classified into two categories:
(1) revenues, which include both operating revenues and other revenues and gains;
and
(2) expenses, which include cost of goods sold, operating expenses, and other
expenses and losses.
 Chapter 6: INVENTORIES

• CLASSIFYING INVENTORY
•
• Merchandising company: 1 classification - Merchandise Inventory to describe
the many different items that make up the total inventory.
• Manufacturing company: 3 classifications - Raw Materials, Work in Process and
Finished Goods.
*Note: Regardless of the classification, companies report all inventories under
Current Assets on the balance sheet.
- Many companies have significantly lowered inventory levels and costs using just-in-
time (JIT) inventory methods. Under a just-in-time method, companies manufacture
or purchase goods just in time for use.
DETERMINING INVENTORY QUANTITIES
- Purposes:
o Perpetual System:
1. To check the accuracy of inventory records.
2. To determine the amount of inventory lost due to wasted raw materials, shoplifting,
or employee theft.
o Periodic System:
1. To determine the inventory on hand.
2. To determine the cost of goods sold for the period.
→ Determining inventory quantities involves two steps:
✓ Taking a physical inventory:
o Involves actually counting, weighing, or measuring each kind of inventory on hand at
the end of the accounting period.
o Companies often- ”take inventory” when: (1) the business is closed or slow, or (2) at
the end of the accounting period.
✓ Determining ownership of goods:
GOODS IN TRANSIT (Hàng đi o Goods in transit: Purchased goods that have not yet been received, or Sold goods
đường) that have not yet been delivered.
- FOB shipping point (FOB → Goods in transit should be included in the inventory of the company that has legal
điểm đi): Thuộc Inventory của title to the goods. Legal title is determined by the terms of sale.
buyer
- FOB Destination (FOB điểm
đến): Thuộc Inventory của
seller
CONSIGNED GOODS (Hàng
gửi bán)
- Hàng của cty nhưng gửi đi
nơi khác bán -> Vẫn tính vào
Inventory của Cty
- Hàng của cty khác được gửi
tại kho của cty -> Không tính
vào Inventory của Cty

o o Consigned goods: to hold the goods of other parties and try to sell the goods for
them for a fee, but without taking ownership of the goods. ⇒ Many car, boat, and
antique dealers sell goods on consignment to keep their inventory costs down and to
avoid the risk of purchasing an item that they will not be able to sell.
INVENTORY COSTING
- Inventory is accounted for at cost.
• Cost includes all expenditures necessary to acquire goods and place them in a
condition ready for sale.
• Unit costs are applied to quantities to compute the total cost of the inventory and the
cost of goods sold using the following costing methods: (1) Specific Identification or
(2) Cost Flow Assumptions.
SPECIFIC IDENTIFICATION
Actual physical flow costing method in which items still in inventory are
specifically cost to arrive at the total cost of the ending inventory => Not practical
In a single-step statement, all data are classified into two categories:
(1) revenues, which include both operating revenues and other revenues and gains;
and
(2) expenses, which include cost of goods sold, operating expenses, and other
expenses and losses.
COST FLOW ASSUMPTIONS
There is no requirement that the cost flow assumptions be consistent with the
physical movement of the goods
➔ There are three assumed cost flow methods: (1) First-in, first-out (FIFO); (2)
Last in, first-out (LIFO); (3) Average-cost.

➢ FIRST-IN, FIRST-OUT (FIFO)

- Costs of the earliest goods purchased are the first to be recognized in determining
the cost of goods sold.
- Often parallels actual physical flow of merchandise.
- Companies determine the cost of the ending inventory by taking the unit cost of the
most recent purchase and working backward until all units of inventory have been
cost.
 ➢ LAST-IN, FIRST-OUT (LIFO)
- Costs of the latest goods purchased are the first to be recognized in determining the
cost of goods sold.
- Seldom coincides with actual physical flow of merchandise, except goods stored in
piles, such as coal or hay.
- Companies determine the cost of the ending inventory by taking the unit cost of the
earliest goods available for sale and working forward until all units of inventory
have been cost.

➢ AVERAGE-COST
- The average-cost method allocates the cost of goods available for sale on the
basis of the weighted average unit cost incurred. The average-cost method assumes
that goods are similar in nature
- Applies weighted-average unit cost to the units on hand to determine cost of
the ending inventory.
+ Doanh thu, Tồn đầu kì, mua
trong kì, hàng sẵn bán (đầu
kì+mua trong kì): ko đổi
+ Hàng tồn cuối kì, giá vốn
(cost of goods sold), lợi nhuận
thay đổi, thuế: Thay đổi
TH1: Giá mỗi đơn vị đang tăng
(Inflation-Lạm phát) => Cost
of goods sold theo FIFO <
Average-cost Gross Profit
FIFO > Average-cost >LIFO -
> FIFO tốt nhất
TH2: Giá mỗi đơn vị đang
giảm (Deflation-Giảm phát): -
>LIFO tốt nhất TH3: Giá ko
theo quy tắc: Thì phải tính cụ
thể 3 phương pháp rồi so sánh
VD: Perpetual inventory
system (Kê khai thường xuyên)

Ex: The accounting records of Shumway Ag Implement show the following data.
Beginning inventory 4,000 units at $ 3 Purchases 6,000 units at $ 4 Sales 7,000 units
at $12 Determine the cost of goods sold during the period under a periodic inventory
system using (a) the FIFO method, (b) the LIFO method, and (c) the average-cost
method.
 FINANCIAL STATEMENT AND TAX EFFECTS OF COST FLOW
METHODS
The reasons companies adopt
different inventory cost flow
INCOME STATEMENT EFFECTS
methods are varied, but they
usually involve one of three
factors: (1) income statement
effects, (2) balance sheet
effects, or (3) tax effects.

1. In a period of inflation, FIFO produces a higher net income because lower unit
costs of the first units purchased are matched against revenue.
2. In a period of inflation, LIFO produces a lower net income because higher unit
costs of the last goods purchased are matched against revenue.
3. If prices are falling, the results from the use of FIFO and LIFO are reversed. FIFO
will report the lowest net income and LIFO the highest.
4. Regardless of whether prices are rising or falling, average-cost produces net income
between FIFO and LIFO.
BALANCE SHEET EFFECTS
- A major advantage of the FIFO method is that in a period of inflation, the
costs allocated to ending inventory will approximate their current cost.
- A major shortcoming of the LIFO method is that in a period of inflation, the
costs allocated to ending inventory may be significantly understated in terms of
current cost.
TAX EFFECTS
- Both inventory and net income are higher when companies use FIFO in
aperiod of inflation.
- LIFO results in the lowest income taxes (because of lower net income) during
times of rising prices.
*Note: A tax rule, often referred to as the LIFO conformity rule, requires that if
companies use LIFO for tax purposes they must also use it for financial reporting
purposes. This means that if a company chooses the LIFO method to reduce its tax
bills, it will also have to report lower net income in its financial statements.

USING INVENTORY COST FLOW METHODS CONSISTENTLY

• Method should be used consistently, enhancing comparability.
• Although consistency is preferred, a company may change its inventory costing
method.

LOWER-OF-COST-OR-MARKET (LCM)
When the value of inventory is lower than its cost:
✓ Companies must ―write down‖ the inventory to its net realizable value.
✓ Net realizable value: Amount that a company expects to realize (receive from
the sale of inventory).
 ✓ Example of conservatism - means that the approach adopted among accounting
alternatives is the method that is least likely to overstate assets and net income.

INVENTORY ERRORS
Common Cause:
➢ Failure to count or price inventory correctly.
➢ Not properly recognizing the transfer of legal title to goods in transit.
➢ Errors affect both the income statement and balance sheet.

BALANCE SHEET EFFECTS

➢ Effect of inventory errors on the balance sheet is determined by using the basic
accounting equation: Assets = Liabilities + Stockholders’ Equity.
➢ Errors in the ending inventory have the following effects Errors

INCOME STATEMENT EFFECTS

The effects on cost of goods sold can be computed by entering incorrect data:

Inventory errors affect the computation of cost of goods sold and net income in
two periods.
✓ An error in the ending inventory of the current period will have a reverse
effect on net income of the next accounting period.
✓ Over the two years, the total net income is correct because the errors offset
each other.
✓ Ending inventory depends entirely on the accuracy of taking and costing the
inventory.
STATEMENT PRESENTATION AND ANALYSIS
PRESENTATION
- Balance Sheet - Inventory classified as current asset.
- Income Statement - Cost of goods sold is subtracted from sales.
- There also should be disclosure of the
1. major inventory classifications,
2. basis of accounting (cost or LCM), and
3. costing method (FIFO, LIFO, or average-cost).
ANALYSIS
✓ Inventory management is a double-edged sword
1. High Inventory Levels - may incur high carrying costs (e.g., investment, storage,
insurance, obsolescence, and damage).
2. Low Inventory Levels – may lead to stock-outs and lost sales.
✓ Inventory turnover measures the number of times on average the inventory
is sold during the period.

✓ Days in inventory measures the average number of days inventory is held.