Unit 1 T-Charts, GAAP vs IFRS, and Debits and Credits

Overview

In this unit, we will consider the important mathematical tools that great leaders possess. This knowledge will carry forward into the 6 units of this course, where we go through financial analysis.

This unit will study the basic concepts of Accounting. The next several units will use this knowledge to analyze financial statements, budgeting, and mutual funds. Your analysis will provide a leader with the details necessary to make appropriate organizational decisions

A leader faces many decisions within an organization. And in the context of this course, it is critical for a leader to understand the financial contributors and impact in decision making.

In this first section of the course, you will be introduced to some of the basic concepts in accounting. Comprehending accounting concepts can be quite a challenge for many leaders. This section is geared for additional video-based reinforcement to aid in this learning.

For some, this will be a refresher to their experience and this week’s reading. But for most, usually those with zero familiarity with accounting principles, these will greatly assist in absorbing the concepts by offering the same content from a different delivery.

Topics

This unit is divided into the following topics:

  1. Using Assets, Liabilities, and Equity
  2. Debits and Credits
  3. T-Charts
  4. GAAP and IFRS
  5. GAAP and IFRS Considerations

Learning Outcomes

When you have completed this unit, you should be able to:

  • Describe the basic terms and concepts of accounting.
  • Apply the foundational concepts of T-charts and how they work.
  • Apply how debits and credits function within the T-charts.
  • Describe the differences of GAAP and IFRS for international commerce.

Activity Checklist

Here is a checklist of learning activities you will benefit from in completing this unit. You may find it useful for planning your work.

Learning Activities

  • Read The Accounting Game (TAG), chapters 1-3 and Glossary (90 minutes)
  • Complete the Comparing GAAP and IFRS activity
  • Complete the Enron Analysis activity

Assessment

  • In this course you demonstrate your understanding of the course learning outcomes in different ways, including papers, projects, discussions and quizzes. Please see the Assessment section in Moodle for assignment details and due dates.

Resources

Here are the resources you will need to complete this unit.

  • Kline, G. and Dabney, A. ; (2013) The Cartoon Introduction to Statistics. New York: Hill and Wang
    • 978-0-8090-3359-1
    • (CIS)
  • Mullis, D. and Orloff, J.; (1998) The Accounting Game. Naperville, Ill: Sourcebooks.
    • 978-1-4022-1186-7
    • (TAG)
  • Other online resources will be provided in the unit.

Planning Ahead

Before you examine the topics in this unit, take a moment to watch this video that has been provided by the instructor. This video will introduce each topic and help support your learning. You are encouraged to re-watch this video if you are struggling with any of the concepts you will be learning about in this section.

Watch: FC_LDRS 220 Unit 1 Video

Activity: Read

To help you prepare for what you will be learning in this unit, read the following:

  • Chapters 1-3 and the Glossary from your The Accounting Game textbook

    • These chapters discuss the typical transactions that occur within the accounting processes. To understand financial documents, it is important to understand the flow of transactions within any accounting system and to have understanding of the key terms and their definitions. Modern accounting software does most transactions automatically, not allowing the user to see the impact on T-charts, including where the transactions fall (debits or debits columns of the T-charts).

1.1 Using Assets, Liabilities, and Equity

As far as accounting goes, it is critical to understand that every transaction MUST maintain ‘balance’ within the formula. (Consider the ‘equals’ sign as a balance fulcrum point.)

Critical to this ‘balance,’ is the basic financial equation:

Assets = Liabilities + Equity

For additional explanation on Assets, Liabilities, and Equity, please watch the video below:

Watch: The ACCOUNTING EQUATION For BEGINNERS

1.2 Debits and Credits

One of the most challenging accounting concepts for beginners is understanding Debits and Credits.

Again, it is critical that the balance of the accounting equation must be adhered to! In addition, it may be helpful to understand the existence of double-negatives (subtracting a negative number is the same as adding a positive number).

The following video helps explain how Debits and Credits flow during accounting transactions :

Watch: DEALER: The Number 1 HACK for Debits & Credits

Additionally, the following video will also help support your understanding of Debits and Credits:

Watch: ACCOUNTING BASICS: Debits and Credits Explained

1.3 T-Charts

Another important element of basic accounting functions is understanding T-Charts: an important part of ledger functions. It is important to note, however, that ledger functions using software are performed automatically and are rarely seen in the modern organization. Understanding how they operate, however, will aid in comprehending financial statements.

The following video provides some practical examples to help you better understand T-Charts:

Watch: T Accounts Explained SIMPLY (With 5 Examples)

1.4 GAAP and IFRS

Finally, we can turn our attention to understanding Reporting Standards as they relate to accounting. Reporting standards are designed to guide accountants into recording transactions, resulting in standardized financial reports. This is a critical process as it allows comparisons from one organization to another. The ultimate intent is for consistency and ethical reporting.

The two prominent standards are Generally Accepted Accounting Practices (GAAP) and the International Financial Reporting Standards (IFRS) methods. Many international organizations use BOTH, so proper comparisons can be made; but in these cases, they have two sets of financial reports, or sub-reports - both being clearly denoted.

Additional explanation of the difference between GAAP and IFRS can be found by watching the following video:

Watch: The Difference between GAAP and IFRS

Note:

America uses Generally Accepted Accounting Practices (GAAP) as rules-based accounting guidelines. There is limited room for interpretation (what transaction goes to what T-chart, for example) and is therefore rather conservative in its results. Only the USA uses GAAP. It is harder to find a ‘loophole’ with GAAP methods.

The International Financial Reporting Standards (IFRS) are principles-based and are used by all other countries of the world.

1.5 GAAP vs IFRS Considerations

This topic considers the global economy and how the IFRS principles of accounting differ from the rules-based GAAP guidelines. These two systems of accounting are nearly identical, but the differences can prove to allow for radically different results.

GAAP is considered by most to be more conservative, resulting in profits being reported at a lower level.

Holding to IFRS principles usually allows any country to ‘do business’ with other countries with IFRS accounting. But, if one of the organizations is USA-based, then the GAAP rules must be considered. Many multi-national organizations will potentially use both methods, providing 2 sets of financial reports to stakeholders.

Deceiving GAAP and IFRS

Both systems of accounting, GAAP and IFRS, have experienced unethical reporting. To make these occurrences worse, they have been ’overseen’ by supposedly trusted/unbiased accounting firms. Revisions to both are ongoing to prevent future occurrences, but this does not eliminate that future unethical reporting will take place.

One of the best ways to prevent future unethical reporting is to keep track of what has been caught in the past. Usually for most infractions, there is an understatement or overstatement of cash – depending on the goals of the unethical leadership of the organization(s).

An infamous example, is the collapse of the ENRON Corporation in the USA. This corporate collapse provides numerous examples of bad decisions that resulted in the loss of billions - resulting in a negative global market affect.

Activity: Comparing GAAP and IFRS

This activity will help support your understanding of both GAAP and IFRS reporting standards.

To begin, conduct a web search (or use an AI system) to research how revenue recognition is affected in IFRS and GAAP (Hint: this likely leads to a lower statement of profits with GAAP).

Next, complete another web search for “cultural differences of GAAP vs. IFRS.” You are looking for particular examples that can denote the challenges and successes that the differences can bring. For example, America’s culture has a common occurrence of litigation, which can be avoided if there are clear rules that can be followed. Conversely, in many cultures across the globe, this exhibits a lack of trust, which can be offensive.

Once you have completed your search and analysis, consider the following question:

  1. What factors are keeping us from a single global Accounting standard?

You should consider the challenges you have discovered if someone were to try to combine GAAP and IFRS reporting results – if we were to be able to do so, we COULD have a single global accounting set of guidelines.

Be prepared to defend your conclusions and share your thoughts with other members of the class.

Note: Learning activities in this course are ungraded, unless specified. They are designed to help you succeed in your assessments in this course, so you are strongly encouraged to complete them.

Activity: Enron Analysis

This activity provides you with an opportunity to apply what you have learned in Unit 1 to examine the case of the Enron Corporation.

To begin this activity, read the article below:

After reading the article, create a list of the fraudulent actions that ENRON and Arthur Anderson (the auditors) took. Use what you have learned in this section to help identify the fraudulent actions.

Next, complete an AI or web search on “how did ENRON ‘cook’ their books.” As you perform your web search, use what you have learned in this unit, as well as the information contained article above, to consider the following:

  • GAAP is considered by most to be more conservative than IFRS.
  • Enron lived under GAAP rules. - yet, Enron successfully manipulated accounting rules interpretations for years

Consider the following questions:

  1. Could IFRS prevented the Enron scam?
  2. Is there anything that could have been done to prevent the fraud?

Be prepared to defend your conclusions and share your thoughts with other members of the class.

Note: Learning activities in this course are ungraded, unless specified. They are designed to help you succeed in your assessments in this course, so you are strongly encouraged to complete them.

Assessment

Refer to the course schedule for graded assignments you are responsible for submitting. All graded assignments, and their due dates, can be found on the “Assessment” tab.

In addition to any graded assignments you are responsible for submitting, be sure to complete all the Learning Activities that have been provided throughout the content - these are intended to support your understanding of the content.

Checking your Learning

Before you move on to the next unit, you may want to check to make sure that you are able to:

  • Describe the basic terms and concepts of accounting.
  • Apply the foundational concepts of T-charts and how they work.
  • Apply how debits and credits function within the T-charts
  • Describe the differences of GAAP and IFRS for international commerce.