Unit 1: Accounting Environment, Decision-Making, and Theory
In this introductory unit, you will learn about a variety of the foundational elements of accounting that are crucial to understanding the material in this course. To understand financial accounting, you will need to know the purpose of each of the four basic financial statements, how data is captured and transformed into information, and how the accounting equation seeks to ensure that you are properly recording the data. Throughout this course, we will introduce you to several career opportunities. Consider this information as you explore the viability of accounting as a career and use it to reinforce how significant these concepts are to the success of business operations.
Completing this unit should take you approximately 10 hours.
Upon successful completion of this unit, you will be able to:
- define the basic accounting equation;
- apply the accounting equation to illustrate the impact of business transactions;
- compare and contrast the basic forms of business organizations;
- explain GAAP rules and their importance in the study of accounting;
- explain the difference between financial and managerial accounting;
- summarize the foundational principles of accounting used in analyzing transactions;
- explain how to detect fraud risk in the accounting function; and
- discuss management responsibilities for monitoring the effectiveness of internal control systems in an organization.
1.1: The Accounting Environment
Read this chapter, which discusses how to define accounting and what the result of accounting (accounting information) is used for. It also considers potential employment opportunities associated with accounting for business and the difference between financial and managerial accounting.
This chapter also introduces the Generally Accepted Accounting Principles, or GAAP, and the various organizations that have a significant impact on how GAAP is administered, including the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the American Accounting Association (AAA).
It is essential to be ethical in applying accounting principles and managing your reputation. Be mindful of this, especially if you are considering a career in accounting.This chapter introduces the principles of managerial accounting and points out the differences between managerial accounting and financial accounting. Outside parties do not use managerial accounting; it is primarily used internally by management to make decisions that affect the organization's efficiency.
In this article, you will learn about the rules that govern accounting. GAAP sets the rules that accounts follow when making journal entries and standardizes accounting so outside parties can make comparisons between companies. Investors, creditors, even employees count on the consistency of financial reporting to evaluate operations.
This video introduces basic accounting principles. Pay attention to the various accounting entries and how transactions affect businesses.
1.2: Accounting and Its Use in Business Decisions
In this chapter, you will learn why accounting is important to the business community. You will learn the different types of businesses and how daily transactions are posted and how they affect the financial statements. This chapter also demonstrates how to prepare the income statement, balance sheet, and statement of stockholders' equity. Pay close attention to the steps involved in the accounting cycle from beginning to end. This chapter will introduce you to the framework of the entire accounting process, which may also be called the accounting equation. The fundamental accounting equation is the basic equation that accountants use to record business transactions. The equation states "assets = liabilities + owners' equity". This section gives the direct and alternative identifications of these elements to help you speak the language of accounting. Assets are things that expect to have future value to the company. For example, if the company buys a new car, this car has future value to the company. Liabilities are promises to pay. Some companies may not have all of the money to pay cash for the car, so they will typically finance, or obtain credit for, and borrow the difference between the down payment and the final price of the car. If approved, the company now promises to pay back the bank or business entity who gave the company money. Owners' equity is the owners' claims on assets. This basically means that, as an owner of the company, you have a claim on the asset that is now identified as the new car the company owns.
This short introduction explains the complete accounting cycle in theory, from journal entries to financial statements. Some of this is a repeat, but this short refresher can help you understand a bit better now that you've had a little hands-on work.
1.3: Financial Statements
This video demonstrates how transactions lead to the creation of financial statements. Vendors, creditors, and investors are only a few of the people who look at and analyze the company's financials. A company's financial statements distill all the economic activities of a company into summarized documents. Learning how to read and analyze financial statements can help you when choosing a company to work for, assessing the long-term prospects of your own company, choosing a company to invest in, and understanding the financial health of companies that play a big role in the community you live in.
Read this article, which walks through the foundational elements of basic accounting and reading financial statements. Some terms have not been covered fully yet, but will be further explained later.
Read each section in this chapter, which explains the purpose of the balance sheet, income statement, and the cash flow statement. It also is a guide to where you will find financials on publicly traded companies. You should get as much practice working on these statements as you can, since they are the fundamental information on any organization. Make the connections between each financial statement. The more you understand the connectivity of these statements, the better understanding you will have of how the entire accounting system works, which is important if you want to understand the overall operations of any company.
1.4: Accounting Theory
This chapter will introduce you to the fundamental theories and rules that guide the system of accounting. The key tenets of accounting are explained, including: double entry, substance over form, the matching principle, the revenue recognition principle, cost-benefit, materiality, and conservatism, as is their impact on the overall application of GAAP (Generally Accepted Accounting Principles). The underlying intent behind creating financial reports is for the information in the reports to be reliable enough to support sound business decision-making. By the time you finish this chapter, you should have a better understanding of the overall structure of accounting rules and guiding principles.
1.5: Internal Controls
This reading provides an overview of fraud risk and internal control systems to mitigate them in the corporate world. Barely a day goes by when the news does not include a story about embezzelement or other fraud at companies throughout the US. Part of the role of the accounting system is to help prevent and detect fraud. This information is extremely important for non-accountants to understand as well. If your company does not have strong internal controls, fraud could impact your bottom line or even get you involved in an investigation into criminal behavior.
This video will help you understand the internal control systems that companies put in place in order to prevent fraud and ensure that corporate policies are being followed.
Watch this overview video which explains the fraud triangle and how large companies have abused accounting systems to create large frauds in the past.
Read this article that explains the basic principles of the Sarbanes Oxley Act, which was passed in response to a series of large accounting scandals. This will help you understand some of the rules which govern public companies you may work for or invest in.
Unit 1 Assessment
- Receive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.