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 the understanding of 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, you will be introduced to various career opportunities related to the concepts of this course. Consider this information as an exploration of the viability of accounting as a career possibility and a way of reinforcing how significant these concepts are to the success of business operations.
Completing this unit should take you approximately 11 hours.
Upon successful completion of this unit, you will be able to:
- demonstrate an understanding of the foundational principles and objectives of accounting;
- apply the accounting equation to illustrate the impact of business transactions and to transform business transactions (data) into usable information; and
- identify the foundational accounting concepts, assumptions, or principles through the analysis of specific business situations.
1.1: The Accounting Environment
Read and take notes on Chapter 1 on pages 14-29.
This will be the primary textbook used within this course. The beginning of every chapter provides chapter-specific learning objectives. Do not confuse these learning objectives with the learning outcomes you see in the course syllabus and at the outset of each unit. You should use the chapter-specific learning objectives as a guide as you read and understand the information presented in the textbook. The learning outcomes indicate what you should know and be able to do at the end of a particular unit of this course.
- Section 1.2 discusses how to define accounting and what the end result of accounting (accounting information) may be used for.
- Section 1.3 looks at potential employment opportunities associated with accounting for business. Note Exhibit 1 on page 18, which reviews the functions performed by accountants.
- Section 1.4, discusses the difference between financial and managerial accounting. If you think you might be interested pursuing financial accounting further, you may want to take BUS105: Managerial Accounting.
- Section 1.5 introduces the Generally Accepted Accounting Principles, or GAAP, and the various organizations that have a major 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).
- Section 1.6 explains how important it is to be ethical in your application of accounting principles and discusses the importance of managing your reputation. Be mindful of this, especially if you are considering a career in accounting.
- The final section is optional but might help you get more from the textbook.
1.1.1: Financial Accounting vs. Managerial Accounting
Read the introduction and section 1.1. This chapter will introduce you to the principles of managerial accounting and points out the differences between managerial accounting and financial accounting. Managerial accounting is not used by outside parties; it is primarily used internally by management to make decisions that affect the efficiency of the organization.
1.1.2: The Development of Financial Accounting Standards
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 that comparisons can be made among companies by outside parties. Investors, creditors, even employees count on the consistency of financial reporting in order to evaluate operations. Be sure you have accomplished the learning outcome in each section before you move on to the next section.
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Take this brief quiz to check your understanding of the standards and rules of accounting. It is crucial to this course that you have a firm understanding of GAAP rules. Take your time and make sure that understand what is being asked.
1.2: Foundational Business and Accounting Concepts and Transaction Analysis
1.2.1: Basic Accounting Concepts
This video introduces basic accounting principles. Pay attention to the various accounting entries and how transactions affect businesses. This short video is only an introduction; further reading will be necessary to get a good understanding of GAAP.
1.2.2: Introducing 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. Financials should be internally scrutinized to catch and correct any errors before they are released. If the organization has an outstanding load, generally there are restrictions regarding the ratios that are calculated from the financials. The accountants of the organization should know these ratios as well.
1.3: Accounting and Its Use in Business Decisions
Read and take notes on Sections 2.1 through 2.12 of Chapter 2 on pages 30-53.
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.
- In Section 2.1, you are provided with chapter-specific learning objectives.
- In Section 2.2, you will get another look at a potential employment opportunity for someone interested in the business discipline of accounting.
- In Section 2.3, there is some discussion of the concept identified as "the entity concept". Be sure you understand the meaning of this concept, and the differences between a single (sole) proprietorship, a partnership, and a corporation.
- Section 2.4 explains that a business entity can be distinguished by the type of activity it performs – that is, service company, merchandising company, or manufacturing company – as opposed to being identified by the type of business ownership.
- Section 2.5 discusses the four financial statements and provides illustrations to support the discussion. There is also a discussion on revenues and expenses, as they impact net income or net loss.
- Section 2.6 discusses 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.
- Section 2.7 introduces a number of concepts of business transactions and how they affect the accounting equation.
- Section 2.8 illustrates how some business transactions affect the balance sheet. Write out the examples in this section on pages 41-44. As you read, follow along with these examples and take notes.
- Section 2.9 illustrates how some business transactions affect the income statement and/or balance sheet. Write the examples on pages 46-48, follow along with them, and take notes.
- Section 2.10 is a summary of balance sheets and income statement transactions.
- Section 2.11 explains what happens when a stockholder receives a dividend (a return on their investment in a company).
- Section 2.12 explains the significance of creditors and stockholders as the basic sources of a company's equity. The equity ratio is introduced and examples are provided to support your understanding of this information.
1.3.1: Financial Statements
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 pursue a career in auditing.
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Take this quiz to check your understanding of the material from this chapter.
1.3.2: Understanding the Accounting Equation
This video demonstrates how transactions lead to the creation of financial statements, which are a great source of reference. The video demonstrates how transactions are directly connected to financial statements and how the individual events of the accounting cycle are connected.
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.
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This short quiz will test your knowledge of the accounting equation and transactions.
1.3.3: Principles of Accounting Transactions
This video will take you through the various accounting transactions and explain the posting process. Take note of how each transaction affects accounts on the balance sheet and income statement. Though the steps might seem dull and uninteresting, it is important that you be very detailed when journalizing and posting. If you slip up, you will be out of balance and you will have to go back and retrace your steps.
This video takes you through journal entries and posting to T accounts, and is a continuation of the accounting cycle. Sometimes, it's easier to "see" accounting in action rather than just read about it.
This video takes you deeper into the accounting cycle and walks through how to post transactions to the journal at T accounts.
This article will give you an introduction to the principles of accounting transactions. Accounting transactions record the amount of money spent and received by a given entity. Take notes while you read.
1.3.4: Transactions Affecting the Income Statement and/or Balance Sheet
This video discusses adjusting entries, which you will need to do to get your worksheet ready for the preparation of the financial statements.
This page explains the importance of using an accounting system, which will be especially important if you are interested in becoming an auditor.
These discussion questions cover a variety of accounting topics, such as the chart of accounts, double book entries, budget preparation, and information given to the public. Two questions that rely on concepts that you really have not yet touched upon yet, but don't worry; we'll get there. Try to answer the questions in all of the bullet points except for the last three. Consider posting your answers on the discussion forum.
1.4: Accounting Theory
Read and take notes on Sections 6.1 through 6.16 of Chapter 6 on pages 253-283.
- Section 6.2 looks at potential employment opportunities in accounting.
- Sections 6.3 and 6.4 introduce the foundational assumptions and concepts associated with accounting, providing a detailed definition of each.
- Section 6.5 introduces other key elements of accounting: double entry, substance over form, and general-purpose financial statements.
- Section 6.6 discusses assigning the effects of business activity (the transactions) within a specified time frame (accounting period).
- Section 6.7 discusses the major principles supporting the field of accounting, such as the matching principle or the revenue recognition principle, and their impact on the overall application of GAAP (Generally Accepted Accounting Principles).
- Section 6.8 explains why a business entity would not be applying the principles of accounting within the business. These instances are identified as cost-benefit, materiality, and conservatism. Pay attention to Exhibit 29.
- Section 6.9 gives an overview of the dispute and some key points to consider.
- Section 6.10 introduces financial reporting and the details of each of its objectives.
- Section 6.11 addresses the characteristics that make the information relevant. Pay attention to the hierarchy of accounting quality in Exhibit 31 on page 273. The underlying intent behind creating financial reports is for the information in the reports to be reliable enough to support sound business decision-making.
- Section 6.12 develops a conceptual framework for understanding accounting.
- Sections 6.13 and 6.14 teach that most companies will include a copy of their accounting policies when they submit their annual report.
- Section 6.15 covers significant policies associated with accounting.
- Section 6.16 reviews the chapter, and lists key terms, offers self-test questions. The answers to the self-test are on pages 300 and 301.
- Section 6.2 looks at potential employment opportunities in accounting.
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.