12 Basic Concepts Accounting Graduates Need to Know
by Stephen F. McCarthy, CPA, MBA, CGMA, The Presidents Forum |
August 31, 2020
As business becomes more global and regulated, the amount and complexity of knowledge required of accountants continues to increase. A growing emphasis is being placed on advisory and assurance services, which represents yet another level of complexity involving critical thinking, analytics and problem solving. It’s helpful for accounting students to become aware of the essentials in our profession so they can see that there is a method to this madness of detail. In academia, the notion of “threshold concepts” has gained popularity. These are the key ideas central to mastery of any subject, the understanding essential to all further growth.
Here are the threshold concepts for accounting:
- Balance Sheet. Liabilities + equity = assets.The balance sheet must always be “in balance” — if assets increase, then either liabilities or equity must also increase. This is an amazingly simple idea. Yet, insight into any business often starts here.
- We Are a Rules-Driven Profession. Accountants are governed by laws, rules, policies and procedures established by both government and industry organizations. There are three main organizations in the U.S. that establish and coordinate these rules and standards: the Financial Accounting Standards Board (FASB), the Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC).
- Financial Statements. A complete set of financial statements includes an income statement, a statement of changes in equity, a balance sheet, a statement of cash flows and the notes to financial statements. The graduate accountant need not be an expert but should be conversant with each of these.
- The Accounting Cycle. Financial information is prepared in a process called the accounting cycle.Various best practices, information systems and rules are employed in managing this process to identify key data, report and analyze documents, record accounting transactions and prepare financial statements.
- Proper Measurement of Assets and Liabilities. Accounting for the true value of assets and liabilities involves judgment. Assets and liabilities are originally listed at the price paid (i.e., historical cost) and this value is often adjusted over time. These modifications are especially important for intangible assets like goodwill, exchange rate fluctuations if priced in foreign currency, or depreciation, the periodic write-off of fixed assets.
- Other Essential Financial and Non-Financial Information. A sustainable business creates stakeholder value through the prudent management of interrelated forms of capital(financial, manufacturing, intellectual, human, social and natural). Some of this value is quantifiable, while for others it is intangible.
- Legal Entities. Businesses must choose a legal structure to define the rights and responsibilities of business ownership, degree of control, legal liability and tax treatment. The four basic organizational legal structures are sole proprietorship, partnership, corporation and limited liability company.
- Governance, Risk and Compliance (GRC). Accounting graduates need at least basic knowledge of governance, risk management, compliance and internal controls. These interrelated areas of focus involve conformance to ethical and other established standards with a special focus on effective management of risks. The Committee of Sponsoring Organizations (COSO) developed a framework for risk management that is widely used in business.
- Raising Money. Growing a business requires investment. There are three ways to finance a business (debt, equity and retained earnings) and each have pros and cons.
- Information Systems. For accounting graduates, there is a need for a digital and data-driven mindset along with the use of analytics and data visualization to effectively convey information. This requires a solid knowledge of technology, data analytics and automation.
- Setting Strategy. The purpose of a strategy is to help organizations set goals and plan for contingencies that could affect goal achievement. A sound strategy should be a living document that accounts for current market conditions, competitive environment, regulatory environment, and financial constraints and resources.
- Ethics, Integrity and Professionalism. We cannot legislate ethics. In a healthy accounting culture, accounting professionals foster trust. In business, trust is the cornerstone of all relationships with customers, suppliers, employees, shareholders and the community.
If accounting graduates develop a firm foundation in the above concepts, they have a great chance to succeed in that first job. And once that critical threshold is crossed, mastery is just a matter of time.
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