Demonstrate How Transactions Affect the Accounting Equation

Demonstrate How Transactions Affect the Accounting Equation
Intermediate Cost Analysis and Management Show Slide #1: Demonstrate How Transactions Affect the Accounting Equation Title: Demonstrate How Transactions Affect the Accounting Equation References: Handouts, Excel Spreadsheets Facilitator’s Material and Student Material: Dry erase markers, white boards, access to Excel spreadsheets, case-studies Facilitator’s Material: Each primary Facilitator’s should possess a lesson plan, slide deck, course handouts, practical exercises, access to Excel spreadsheets, case-studies All required references and technical manuals will be provided by the local Command. Student Material: Students should possess course handouts, practical exercises, access to Excel spreadsheets, case-studies and standard classroom supplies. The 21st Century Soldier Competencies are essential to ensure Soldiers and leaders are fully prepared to prevail in complex, uncertain environments. This lesson reinforces the following 21st Century Soldier Competencies: Communication and Engagement (Oral, written, and negotiation) Critical thinking, intergovernmental, and multinational competence Tactical and Technical Competence Throughout the lesson discussion seek opportunities to link the competencies with the lesson content through the student’s experiences. 1.3

Questions to Consider Does “the Government” overspend its budget?
Who decides how much to spend? How do managers make sure they don’t overspend? Show Slide #2: Concrete Experience (Questions to consider) Facilitator’s Note: (Concrete Experience 10 minutes) Present students the slide statements Ask students what their thoughts are on “Government overspending, by who’s authority” Facilitator’s Note: (Publish and Process 10 minutes) The critical portion of this part of the ELM process is to force the students to reflect. Ask a series of thought influencing questions.

Terminal Learning Objective
Action: Demonstrate How Transactions Affect the Accounting Equation Under the Budgetary and Accrual Methods of Accounting Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors Standard: With at least 80% accuracy: Calculate Unobligated Balance Determine the difference between budgetary and accrual methods Analyze Transactions using the tabular format Enter relevant scenario data into Excel spreadsheet to prepare basic budgetary and accrual accounting reports Show Slide #3: TLO Action: Demonstrate How Transactions Affect the Accounting Equation Under the Budgetary and Accrual Methods of Accounting Conditions: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors Standard: With at least 80% accuracy: Calculate Unobligated Balance, determine the difference between budgetary and accrual methods, analyze Transactions using the tabular format, and enter relevant scenario data into Excel spreadsheet to prepare basic budgetary and accrual accounting reports Safety Requirements: In a training environment, leaders must perform a risk assessment in accordance with DA PAM , Risk Management. Leaders will complete a DD Form 2977 DELIBERATE RISK ASSESSMENT WORKSHEET during the planning and completion of each task and sub-task by assessing mission, enemy, terrain and weather, troops and support available-time available and civil considerations (METT-TC). Local policies and procedures must be followed during times of increased heat category in order to avoid heat related injury. Consider the work/rest cycles and water replacement guidelines IAW TRADOC Regulation Environmental Considerations: Environmental protection is not just the law but the right thing to do. It is a continual process and starts with deliberate planning. Always be alert to ways to protect our environment during training and missions. In doing so, you will contribute to the sustainment of our training resources while protecting people and the environment from harmful effects. Refer to FM Environmental Considerations and GTA ENVIRONMENTAL-RELATED RISK ASSESSMENT. INSTRUCTIONAL LEAD-IN. Good morning, There is a widespread misconception among the general public (although hopefully not among government employees) that the government overspends its budget. The Anti-Deficiency Act was passed in 1872 to prevent just such an occurrence. It is against federal law for a federal employee to exceed his or her budget authority, under penalty of fine, imprisonment, or both. In fact, no one has ever gone to jail for violating the Anti-Deficiency Act. It just doesn’t happen. Overspending begins with Congress. Congress approves the budget, which authorizes spending. When authorized spending exceeds the expected revenues, deficits occur. However, government managers don’t overspend their budgets. How do they make sure they don’t?

Financial Planning and Control
You have been hired as a budget consultant by the Simmons family Gomer, Madge, Bert, Lacy and Maddie Gomer’s monthly paycheck is Estimated to be $1000. How should they spend it? Show Slide #4: Describe steps in budgetary process 1. Learning Step/Activity #1 Describe steps in budgetary process Method of Instruction: DSL (large or small group discussion) Facilitator’s to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s’s Note: We will demonstrate the budgetary process using this family example. You have been hired as a budget consultant by the Simmons family, Gomer, Madge, Bert, Lacy and Maddie (stunt doubles for a popular cartoon family) Gomer’s monthly paycheck is Estimated to be $1000. How should they spend it? On a much larger scale, of course, the budget process that Congress undertakes is like this. Many entities propose budgets. Each member of the Simmons family may propose a budget that favors his or her wants and needs. Ultimately, through the democratic process, a budget is decided and enacted by Congress. Or, by Madge, in the case of the Simmons family 

The Envelope System Predetermines Amounts to be Spent for Various Needs Sets Money Aside for Specified Purpose Prohibits Spending for Other than Intended Purpose--Can’t Take Money from One Envelope and Put in Another Show Slide #5: Describe steps in budgetary process (Cont.) Facilitator’s Note: The budgetary process, although on a much larger scale, is very much like the envelope system that individuals sometimes use to manage their personal finances. The basic idea is to predetermine how much will be spend for each need or want. Examples: Rent, groceries, clothes, household needs, etc. Then, set that money aside in an envelope for that purpose. When the money in the grocery envelope is gone, we are done spending on groceries. When the money in the clothing envelope is gone, we are done spending on clothing. The cardinal rule is that you can’t take from one envelope and put into another.

Spending Authority Allotment (HQDA) Apportionment (OMB) Appropriation
(Congress) Army Q1 Major Command Functional Area Funded Program Q2 Q3 Q4 Show Slide #6: Describe steps in budgetary process (Cont.) Facilitator’s Note: Congress gives very high level appropriations to major agencies in the federal government. DoD or DA might receive an actual appropriation. Apportionments are approved by OMB (Office of Management and Budget). In essence the funds are only released one quarter at a time. Most funds are probably spent evenly throughout the year, so this approach would make sense. However, in case of large purchases, such as weapons systems or equipment, the apportionment of one quarter at a time might not make sense. Allotments are made at the Agency head level (such as Army Headquarters.) Funds may be allotted to major commands or to Functional Areas or Funded Programs (GFEBS Master Data Elements.) Most Army managers/leaders deal with a small part of an allotment: a piece of the quarterly apportionment of the appropriation. In our example we will omit the apportionment and allotment steps. All three, appropriation, apportionment, and allotment put “money in the envelope” for the spending organization. The apportionment and allotment just divide the original appropriation among many smaller envelopes.

Controlling the Budget
Appropriations, Obligations  Expenditures Appropriations ensure that funds are spent as the Voting Body intends The Obligation process ensures that Appropriations are not overspent Estimated Revenues  Revenues Estimated Revenues give a basis of comparison for Actual Revenues Show Slide #7: Describe steps in budgetary process (Cont.) Facilitator’s Note: Appropriations and Obligations are designed to control expenditures. Appropriations are a legally binding expression of the will of the legislative body, authorizing the departments of the executive branch to make expenditures. The government agencies and departments cannot spend without an appropriation. Conversely, they cannot elect NOT to spend. The executive branch can’t “kill” a program authorized by Congress by refusing to spend the money. Appropriations also provide a means for measuring compliance with budget and performance in relation to budget. The Obligation process, which we will describe in the next few slides, is designed to ensure that Appropriations are not overspent. It is a formalized accounting mechanism to identify funds that are not available to be spent because of outstanding purchase orders. The Estimated Revenues also exist as a basis for comparing actual revenues to the estimate. The measure of performance in this case probably has more to do with the ability to accurately estimate the revenues to be collected. In other words, it’s less a measure of budgetary compliance and more a measure of the ability to estimate.

Spending Process Expenditure Obligation Commitment Liability Payment
Show Slide #8: Describe steps in budgetary process (Cont.) Facilitator’s Note: Authorized agency employees plan or reserve allotted budget authority as a commitment prior to the actual ordering. Once an order is placed, then the funds are considered obligated i.e. taken out of the envelope Once goods or services have been received, an expenditure is recorded. If the expenditure is not paid in cash immediately, then a liability must be recorded. The final step in the process is payment of the liability. In our exercise we will omit the commitment process

Budgetary Accounting Provides a Control Mechanism to Prevent Overspending Funds Does proper budgetary accounting prevent deficits? Why or why not? It DOES prevent overspending It does NOT prevent revenue shortfalls It does NOT prevent over-appropriating by the legislative body Show Slide #9: Describe steps in budgetary process (Cont.) Facilitator’s Note: Provides a Control Mechanism to Prevent Overspending Funds. Does proper budgetary accounting prevent deficits? Why or why not? It DOES prevent overspending It does NOT prevent revenue shortfalls It does NOT prevent over-appropriating by the legislative body

LSA #1 Check on Learning Q1. What mechanisms exist to control expenditures? A1. Appropriations & Obligations Q2. What is the step in the spending authorization process that releases funding quarter by quarter? A2. Apportionment Show Slide #10: LSA #1 Check on Learning Facilitator’s Note: Ask the following Questions. Facilitate the answers given. Q1. What mechanisms exist to control expenditures? A1. Appropriations & Obligations Q2. What is the step in the spending authorization process that releases funding quarter by quarter? A2. Apportionment

LSA #1 Summary During this lesson, we discussed the envelope system and the various organizations of spending authority. In addition, governmental expenditures are controlled by appropriations and obligations. Show Slide #11: LSA #1 Summary Facilitator’s Note: During this lesson, we discussed the envelope system and the various organizations of spending authority. In addition, governmental expenditures are controlled by appropriations and obligations.

Gomer Makes a Purchase Gomer’s appropriation is $100
Signs up for 3-month trial membership to the Doughnut of the Month Club, $60 Remove $60 from Gomer’s envelope Place in the “Obligated” envelope Key Point: Ordering triggers an Obligation Show Slide #12: Gomer Makes a Purchase 2. Learning Step/Activity #2 Calculate Unobligated Balance Method of Instruction: DSL (large or small group discussion) Facilitator’s to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s’s Note: Signs up for Donut of the Month Club, $60 (Three month trial). Remove $60 from Gomer’s envelope. Place in the “Obligated” envelope. Key Point: Ordering triggers an Obligation

Gomer Makes a Purchase Receives first month’s shipment of Doughnuts with invoice for $25: Remove $20 from the “Obligated” envelope and replace in Gomer’s envelope Remove $25 from Gomer’s envelope and place in “Expenditures” envelope Key Point: Receiving goods and services triggers an Expenditure Show Slide #13: Calculate Unobligated Balance (Cont.) Facilitator’s Note: Receives first month’s shipment of Doughnuts with invoice for $25: Remove $20 from the “Obligated” envelope. This is the amount estimated for one month’s worth of the three-month membership. Replace the $20 in Gomer’s envelope The obligation no longer exists once the goods have been received. However, the money won’t stay there for long. Remove $25 from Gomer’s envelope and place in “Expenditures” envelope. Key Point: Receiving goods and services triggers and Expenditure. Expenditures must be recorded at the actual amount.

Tracking Gomer’s Unobligated Balance
How much does Gomer have left to spend? Assume his original appropriation was $100 Appropriations - Open Obligations Expenditures Unobligated Balance = Show Slide #14: Calculate Unobligated Balance (Cont.) Facilitator’s Note: The most important question to answer, from a budget control standpoint, is “How much does Gomer have left to spend?” Assume his original appropriation was $100 The “unobligated balance” of the appropriation or, the amount remaining in the envelope, is equal to Appropriations – open obligations - Expenditures

Tracking Gomer’s Unobligated Balance
Description Obligations (-) Expenditures Unobligated Balance Gomer’s appropriation +100 Balance 100 Orders donuts +60 -60 60 40 Receives donuts -20 +20 Invoice for donuts +25 -25 25 35 Show Slide #15: Calculate Unobligated Balance (Cont.) Facilitator’s Note: Think of the appropriation as putting money into an envelope or into an account to be spent for a particular purpose. There are two things that can reduce the remaining unobligated balance: Outstanding obligations (orders placed but not yet received) Expenditures (goods or services received). Note that commitments don’t officially reduce the remaining balance, although should be considered for management purposes. Unobligated balance less outstanding commitments equals uncommitted balance. When Gomer orders donuts, the money in his envelope (unobligated balance) decreases. When he receives donuts, the money momentarily goes back into his envelope because the obligation is reversed. But then the expenditure is increased, which reduces the balance in his envelope (unobligated balance).

Key Points Ordering Goods or Services Triggers an Obligation
Prevents Over-Expending Funds Receiving Goods or Services Triggers an Expenditure Reverse Obligation Record Expenditure Salaries, Wages and Other Recurring Expenditures are not Obligated, but may be Committed Show Slide #16: Calculate Unobligated Balance (Cont.) Facilitator’s Note: Review of key points: Ordering Goods or Services Triggers an Obligation Prevents Over-expending Funds Receiving Goods or Services Triggers an Expenditure Reverse Obligation Record Expenditure Salaries, Wages and Other Recurring Expenditures are not Obligated, but may be Committed

LSA #2 Check on Learning Q1. What is the equation to calculate Unobligated Balance? A1. Appropriation – Open Obligations – Expenditures = Unobligated Balance Q2. What is the event that triggers and Expenditure? A2. Receiving goods or services Show Slide #17: LSA #2 Check on Learning Facilitator’s Note: Ask the following Questions. Facilitate the answers given. Q1. What is the equation to calculate Unobligated Balance? A1. Appropriation – Open Obligations – Expenditures = Unobligated Balance Q2. What is the event that triggers and Expenditure? A2. Receiving goods or services

LSA #2 Summary During this discussion, we introduced the formula that covers calculating an unobligated balance, We then applied this formula to the “Gomer’s Donuts” scenario to enhance the understanding. Show Slide #18: LSA #2 Summary Facilitator’s Note: During this discussion, we introduced the formula that covers calculating an unobligated balance, We then applied this formula to the “Gomer’s Donuts” scenario to enhance the understanding.

What’s the Difference? Consider the purchasing sequence:
When does the Accounting System “count” the cost? Plan Order Receive Pay Consume Show Slide #19: Describe timing differences between cash-based, budgetary and accrual accounting methods Learning Step/Activity #3 Describe timing differences between cash-based, budgetary and accrual accounting methods Method of Instruction: DSL (large or small group discussion) Facilitator’s to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s’s Note: In general the purchase of goods and services follows this sequence. When should the accounting system count the cost? When the goods are ordered? Received? When they are paid for? When they are actually used in the course of operations?

Why a Different Method of Accounting?
Different entities have different external reporting requirements Individuals report income on a cash basis Governmental entities report activities on a budgetary basis Businesses, revolving funds and the proprietary governmental accounts report activities on an accrual basis Show Slide #20: Describe timing differences between cash-based, budgetary and accrual accounting methods (Cont.) Facilitator’s Note: The reporting objective is different in each case, therefore the measurement rules differ. The external reporting objective for individuals is to measure taxable income for purposes of tax assessment. The external reporting objective for government entities is accountability for funds. Therefore they use a budgetary basis which focuses on the inflow and outflow of resources in the current period. Assets are only recorded when the benefit will be received in the current period. Liabilities are only recorded when they must be paid during the current period. The external reporting objective for business, revolving fund entities and the proprietary governmental accounts is a longer term view of income and financial position. This is known as the accrual basis. All liabilities, whether due in the short term or long term, must be reported. All assets, whether they benefit the short term or the long term, will be recorded.

Cash based accounting records a Cost at the time it is paid Plan Order Receive Pay Consume Show Slide #21: Describe timing differences between cash-based, budgetary and accrual accounting methods (Cont.) Facilitator’s Note: In general the purchase of goods and services follows this sequence (there may be some exceptions, but the criteria for counting remains the same). In cash accounting the cost is counted when the cash is paid, even if the cash is paid BEFORE the goods are received. Under this measurement criteria, any payment of cash would constitute an expense, even a down payment on a house. Of course, not all cash payments are deductible for tax purposes. But those items that are deductible must be paid in cash in order to be counted.

Budgetary accounting records a Commitment when the plan is made …an Obligation when an order is placed …and an Expenditure when goods are received Plan Order Receive Pay Consume Commitment  Obligation  Expenditure Show Slide #22: Describe timing differences between cash-based, budgetary and accrual accounting methods (Cont.) Facilitator’s Note: Budgetary accounting records a Commitment when the plan is made …an Obligation when an order is placed …and an Expenditure when goods are received Budgetary accounting “counts the cost” at the point of the expenditure. That is, when goods are received, the authorization to spend has been used up. Up until that point it would theoretically be possible to cancel the order and undo the spending process. In the Federal budgetary accounts, the accounting essentially ends here. The payment of the bill is recorded separately in the proprietary accounts.

Accrual accounting records an Asset and a Liability when the goods are received …and an Expense when goods are consumed Plan Order Receive Pay Consume Asset & Liability  Remove Liability  Expense Show Slide #23: Describe timing differences between cash-based, budgetary and accrual accounting methods (Cont.) Facilitator’s Note: Accrual accounting records an Asset and a Liability when the goods are received …and an Expense when goods are consumed The liability is removed when the bill is paid. We will cover this in more detail in day 3.

LSA #3 Check on Learning Q1. Which method of accounting records the cost when cash is paid? A1. Cash Basis Q2. Which method of accounting records the cost when goods are received? A2. Budgetary Basis Show Slide #24: LSA #3 Check on Learning Facilitator’s Note: Ask the Following Questions. Facilitate the answers given. Q1. Which method of accounting records the cost when cash is paid? A1. Cash Basis Q2. Which method of accounting records the cost when goods are received? A2. Budgetary Basis

LSA #3 Summary During this lesson, we discussed the timing differences between the cash-based, budgetary, and accrual accounting methods. Show Slide #25: LSA #3 Summary Facilitator’s Note: During this lesson, we discussed the timing differences between the cash-based, budgetary, and accrual accounting methods.

Lacy’s Lemonade Stand Lacy Simmons receives a $200 transfer from the family to start a lemonade stand. The lemonade stand will run as a Revolving Fund User Fees must cover costs Uses Accrual Basis of Accounting How does this differ from an appropriation? Show Slide #26: Explain accrual accounting terminology 4. Learning Step/Activity #4 Explain accrual accounting terminology Method of Instruction: DSL (large or small group discussion) Facilitator’s to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s’s Note: Lacy Simmons receives a $200 transfer from the family to start a lemonade stand. The lemonade stand will run as a Revolving Fund User Fees must cover costs Uses Accrual Basis of Accounting How does this differ from the appropriation ? If Lacy were operating as an appropriation-funded entity, Lacy’s revenues would not be expected to offset all of her expenditures. In contrast, revolving funds are expected to charge user fees that will cover operating expenses. The transfer is just startup capital.

The Accrual Basis of Accounting
Focuses on exchange of Economic Resources Records Revenues in the period in which they are EARNED Providing a service Selling a product Show Slide #27: Explain accrual accounting terminology (Cont.) Facilitator’s Note: The accrual basis of accounting focuses on the exchange of Economic Resources. If resources have been exchanged – that is, value given for value received – activity will be recorded. This Records Revenues in the period in which they are EARNED Providing a service Selling a product The sequence might go like this: The organization PLANS for revenues – this includes hiring employees and acquiring the resources necessary to produce the products or services they will sell. Then, the organization may TAKE ORDERS for goods or services. Next, the services are completed or the products are shipped. Then, they would receive payment. Under the accrual basis of accounting, the revenues are counted at the time they are earned, when the service is completed or the product is shipped. Plan Take Orders Complete Service or Ship Product Collect Cash Revenue & Non-Cash Asset

Revenue Comparison Cash Basis: Accrual Basis: Plan Take Orders
Complete Service or Ship Product Collect Cash Show Slide #28: Explain accrual accounting terminology (Cont.) Facilitator’s Note: Under the Cash basis, revenue is counted when the cash is collected. Under the budgetary basis (not pictured here) the spending authority is increased when cash is collected. The timing is the same. Under the Accrual basis, it is counted when the service is completed or the product is shipped. Plan Take Orders Complete Service or Ship Product Collect Cash Revenue & Non-Cash Asset

The Accrual Basis of Accounting
“Matches” Revenues with Expenses It take money to make money Records Expenses in period in which Resources are CONSUMED Show Slide #29: Explain accrual accounting terminology (Cont.) Facilitator’s Note: Matches Revenues with Expenses . You’ve heard the expression “It takes money to make money”. Expenses represent the money that you spend to make money. For example, you can’t sell products if you don’t first either buy or manufacture products to sell. You can’t provide services if you don’t have facilities, employees, or the necessary supplies and equipment. In order to give a true picture of the organization’s financial activities, these costs must be recorded in the same period as the revenues they helped to generate. This is known as “matching” expenses and revenue. Records Expenses in period INCURRED. Resources Consumed. Plan Order Receive Pay Consume Asset & Liability  Remove Liability  Expense

Terminology How do Expenses differ from Costs?
Costs can be measured in various ways, according to management’s use of the information Expenses are measured according to Generally Accepted Accounting Principles Show Slide #30: Explain accrual accounting terminology (Cont.) Facilitator’s Note: How do Expenses differ from Costs? Costs can be measured in various ways, according to management’s use of the information. In day 4 we will begin looking at some of the different ways of measuring costs. Expenses are measured according to Generally Accepted Accounting Principles

Terminology How do Expenses differ from Expenditures?
Expenditures represent the using up of an Appropriation, and are recorded in the period goods or services are received Expenses are recorded in the period resources are consumed Show Slide #31: Explain accrual accounting terminology (Cont.) Facilitator’s Note: How do Expenses differ from Expenditures? Expenditures represent the using up of an Appropriation, and are recorded in the period goods or services are received. Expenses are recorded in the period resources are consumed.

Consider Office Supplies
Under Budgetary Accounting: Under Accrual Accounting Plan Order Receive Pay Consume Commitment  Obligation  Expenditure Show Slide #32: Explain accrual accounting terminology (Cont.) Facilitator’s Note: Under budgetary accounting, the supplies are counted as an expenditure when they are received. Even if they are ordered and received at the very end of the year, they are recorded as an expenditure in the year they are received. Under accrual accounting, supplies are not recorded as an expense until they are used up. Plan Order Receive Pay Consume Asset & Liability  Remove Liability  Expense

It’s ok, we bought this paper last year!
Show Slide #33: Explain accrual accounting terminology (Cont.) Facilitator’s Note: Everyone is familiar with the end of year process of using up the part of the budget that you’ve been saving all year in case of an emergency. The goods purchased at the end of one year will undoubtedly be used in the next. However, they may be seen as “free goods” because they don’t have any impact on the budget of the current year.

Terminology An Account is a of the in a particular Asset, Liability, Revenue, Expense or element of Financial Position A Transaction represents an of that affects two or more accounts External transactions involve exchanging resources with parties outside the organization Internal transactions involve exchanges within the organization Transactions are the common building block of all accounting information Record Changes Exchange Resources Show Slide #34: Explain accrual accounting terminology (Cont.) Facilitator’s Note: External transactions involve exchanging resources with parties outside the organization Examples of external transactions are: purchasing supplies from a vendor or transferring funds to another governmental entity. Internal transactions involve exchanges within the organization An example of an internal transaction is when raw materials are moved from the warehouse to the production floor. They are no longer “raw materials” but are now “work in process”, and the exchange will be recorded in the accounting system. Transactions are the common building block of all accounting information. Transactions are recorded under the budgetary basis, the cash basis, and the accrual basis. The timing might be different, but the basic concept of a transaction is the same.

LSA #4 Check on Learning Q1 . Under the accrual basis of accounting, when is revenue recorded? A1. When it is EARNED – when service is completed or product is sold. Q2. Where does the term “Double Entry Accounting” originate? A2. From the concept that a transaction is an exchange that affects two or more accounts. Show Slide #35: LSA #4 Check on Learning Facilitator’s Note: Ask the following Questions. Facilitate the answers given. Q1 . Under the accrual basis of accounting, when is revenue recorded? A1. When it is EARNED – when service is completed or product is sold. Q2. Where does the term “Double Entry Accounting” originate? A2. From the concept that a transaction is an exchange that affects two or more accounts.

LSA #4 Summary During this discussion, we covered accounting terminology such as cash vs. accrual basis and budget accounting, as well as expenses and expenditures. Show Slide #36: LSA #4 Summary Facilitator’s Note: During this discussion, we covered accounting terminology such as cash vs. accrual basis and budget accounting, as well as expenses and expenditures.

The Accounting Equation Expanded
Assets = Liabilities + Fin.Position ± Net Change Net Change = Revenue – Expense Therefore: Assets = Liab + Fin.Position + Rev – Expense Assets may be Cash or Other Assets, so: Cash + Other Assets = Liab + Fin.Position + Rev – Expense Show Slide #37: Demonstrate how transactions affects the accounting equation 5. Learning Step/Activity #5 Demonstrate how transactions affects the accounting equation Method of Instruction: DSL (large or small group discussion) Facilitator’s to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s Note: Here’s some theory that will help us to understand how transactions are recorded. Everything is based on the original accounting equation from lesson 1.3. Assets = Liabilities and financial position. Financial position will increase or decrease with changes. So, the equation could be stated as: Assets = Liabilities + Financial Position ± Net Change Net change is stated as: Net Change = Revenue – Expense Therefore: Assets = Liabilities + Financial Position + Rev – Expense Assets may be Cash or Other Assets, so: Cash + Other Assets = Liabilities + Financial Position + Rev – Expense

Transactions and Financial Position
Liab Cash Fin.Position Show Slide #38: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: This picture just illustrates how the scale or the equation must always be kept in balance. If there is an increase in the total assets on the left side, there must be a corresponding increase on the right side of the scale. When revenue is earned, assets increase and revenue increases. When liabilities are repaid, assets decrease on the left side and liabilities decrease on the right side. Or, exchanges can be made on only one side of the scale. For example, paying cash to purchase supplies or equipment would decrease cash but increase other assets. Other Assets + Rev – Expense

Transaction Description
Lacy’s Transactions Receives $200 equity transfer Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Beginning Balances Show Slide #39: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: The instructor should feel free to work through the transactions on the board rather than using the slides. Lacy receives $200 equity transfer

Lacy’s Transactions (Cont.)
Receives $200 equity transfer Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Beginning Balances Receives $200 Equity Transfer +200 New Balance 200 Show Slide #40: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Lacy’s business starts with zero balances in every column. When she receives the transfer from the family’s general fund, it increases her cash balance and her financial position. As a result, the ending equation is in balance: Cash other assets 0 = Liabilities 0 + Financial position Revenue 0 – Expenses 0

Buys a pitcher, a juicer, and a table at a yard sale for $20 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 200 Show Slide #41: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Students will have the blank slide. Lacy buys a pitcher, a juicer, and a table at a yard sale for $20

Buys a pitcher, a juicer, and a table at a yard sale for $20 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 200 Buys pitcher, juicer & table at yard sale for $20 -20 +20 New Balance 180 20 Show Slide #42: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Beginning balance; Cash other assets 0 = Liabilities 0 + Financial position Revenue 0 – Expenses 0 When Lacy purchases the pitcher, juicer and table, Cash decreases and other assets increase. Why aren’t the pitcher, juicer and table considered to be expenses? After all, they were considered expenditures under budgetary accounting criteria (goods received). They are considered assets because they have FUTURE BENEFIT and that benefit has yet to be received. The benefit will be received as Lacy uses these items in her lemonade stand business. This is an example of exchanging asset for asset. Notice that the total assets are still 200, they have just been re-arranged between cash and other assets. There has been no change on the right side of the equation. New balance; Cash other assets 20 = Liabilities 0 + Financial position Revenue 0 – Expenses 0

Has flyers printed for $10 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 180 20 200 Show Slide #43: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Students will have the blank slide Lacy has flyers printed for $10

Has flyers printed for $10 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 180 20 200 Has flyers printed $10 -10 +10 New Balance 170 10 Show Slide #44: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Balance forward Cash other assets 20 = Liabilities 0 + Financial position Revenue 0 – Expenses 0 The flyers are an expense (they will be used right away.) So, cash decreases and expenses increase. That leaves the new balance of the equation as: New balance Cash other assets 20 = Liabilities 0 + Financial position Revenue 0 – Expenses 10 Notice that there was no transaction recorded when Lacy ordered the flyers. That is because, as a revolving fund, Lacy does not use the budgetary basis of accounting. There is no need to record obligations.

Has flyers printed for $10 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 180 20 200 Has flyers printed $10 -10 +10 New Balance 170 10 Show Slide #45: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Note that even while expenses INCREASE, since they represent a decrease in financial position the scale still remains in balance. Both sides equal 190. 190 190

Pays Bert $5 to pass out flyers Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 170 20 200 10 Show Slide #46: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Students will have blank slide. Lacy pays Bert $5 to pass out flyers

Pays Bert $5 to pass out flyers Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 170 20 200 10 Pays Bert $5 to pass out flyers -5 +5 New Balance 165 15 Show Slide #47: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Balance forward: Cash other assets 20 = Liabilities 0 + Financial position Revenue 0 – Expenses 10 Bert passes out flyers, the resource is consumed immediately and the payment is recorded as an expense New balance: Cash other assets 20 = Liabilities 0 + Financial position Revenue 0 – Expenses 15

Purchases supplies: cups, $15; napkins $5; lemons, $25; sugar, $10 and ice, $10 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 165 20 200 15 Show Slide #48: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Lacy purchases supplies: cups, $15; napkins $5; lemons, $25; sugar, $10 and ice, $10 .

Purchases supplies: cups, $15; napkins $5; lemons, $25; sugar, $10 and ice, $10 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 165 20 200 15 Purchases Supplies $65 -65 +65 New Balance 100 85 Show Slide #49: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Balance forward: Cash other assets 20 = Liabilities 0 + Financial position Revenue 0 – Expenses 15 The supplies are assets because they have future benefit. They will be converted to lemonade at some point and sold. Cash decreases. This is another example of exchanging asset for asset. There was no change on the right side of the equation. Cash other assets 85 = Liabilities 0 + Financial position Revenue 0 – Expenses 15

First day’s sales: $15 in cash and $20 in IOUs Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 100 85 200 15 Show Slide #50: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Students will have the blank slide. First day’s sales are $15 in cash and $20 in IOUs

First day’s sales: $15 in cash and $20 in IOUs Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 100 85 200 15 Sales $15 cash and $20 IOUs +15 +20 +35 New Balance 115 105 35 Show Slide #51: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Cash other assets 85 = Liabilities 0 + Financial position Revenue 0 – Expenses 15 The revenue is counted even though cash is not received, because Lacy sold the product. The measurement criteria for revenues, under the accrual basis of accounting, is when revenues are EARNED by selling a product or providing a service. Revenues increase on the right side of the equation, and total assets increase on the left side. The IOUs are considered an asset becase they have future benefit to Lacy: she has the right to collect from the individuals who gave them. Cash other assets 105 = Liabilities 0 + Financial position Revenue 35 – Expenses 15

First day’s sales: $15 in cash and $20 in IOUs IOUs are known as “Accounts Receivable” Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 100 85 200 15 Sales $15 cash and $20 IOUs +15 +20 +35 New Balance 115 105 35 Show Slide #52: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: In business terminology IOUs are known as Accounts Receivable. They represent a right to collect cash from the customer at some point in the future.

Key Points Each transaction must keep the equation in balance
Each transaction affects at least two accounts Which accounts are being affected? What type of accounts are they? (Asset, Liability, Financial Position, Revenue, Expense) Are the accounts increasing or decreasing? Show Slide #53: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: The key points are that: Each transaction must keep the equation in balance Each transaction affects at least two accounts Students should ask themselves: Which accounts are being affected? What type of accounts are they? (Asset, Liability, Financial position, Revenue, Expense) Are the accounts increasing or decreasing?

Additional Transactions
Receives $5 cash toward the IOUs Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 115 105 200 35 15 Show Slide #54: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Students will have the blank slide Lacy receives $5 cash toward the IOUs

Additional Transactions (Cont.)
Receives $5 cash toward the IOUs Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 115 105 200 35 15 Receives $5 toward IOUs +5 -5 - New Balance 120 100 Show Slide #55: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Cash other assets 105 = Liabilities 0 + Financial position Revenue 35 – Expenses 15 When Lacy receives the cash payment toward the IOUs, notice that there is NO INCREASE in revenues, because Lacy didn’t sell any more lemonade. She is just being paid for what she already did in the past. Instead, cash increases and other assets decrease. Cash 120+ other assets 100 = Liabilities 0 + Financial position Revenue 35 – Expenses 15

Opens a charge at the grocery store with a $50 limit This has no effect on the equation because no exchange of resources has yet taken place Show Slide #56: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Lacy opens a charge at the grocery store with a $50 limit This has no effect on the equation because no exchange of resources has yet taken place

Additional Transactions
Purchases $40 in supplies on account at the grocery store Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 120 100 200 35 - 15 Show Slide #57: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Students will have the blank slide Purchases $40 in supplies on account at the grocery store

Purchases $40 in supplies on account at the grocery store Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 120 100 200 35 - 15 Buy Supplies on Account $40 +40 New Balance 140 40 Show Slide #58: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Cash 120+ other assets 100 = Liabilities 0 + Financial position Revenue 35 – Expenses 15 Supplies (Other assets) increase. Liabilities also increase since Lacy used her line of credit at the grocery store. Cash 120+ other assets 140 = Liabilities 40 + Financial position Revenue 35 – Expenses 15

Makes cash sales of $50 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 120 140 40 200 35 - 15 Show Slide #59: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Students will have the blank slide Lacy makes cash sales of $50

Makes cash sales of $50 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 120 140 40 200 35 - 15 Cash Sales $50 +50 New Balance 170 85 Show Slide #60: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Cash 120+ other assets 140 = Liabilities 40 + Financial position Revenue 35 – Expenses 15 Product has been sold, so revenue is earned. Revenue increases. Assets, in this case cash, also increase. Cash 170+ other assets 140 = Liabilities 40 + Financial position Revenue 85 – Expenses 15

Pays the grocery bill in full Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 170 140 40 200 85 - 15 Show Slide #61: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Students will have the blank slide. Lacy pays the grocery bill in full

Pays the grocery bill in full Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 170 140 40 200 85 - 15 Pays Grocery Bill -40 New Balance 130 Show Slide #62: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Cash 170+ other assets 140 = Liabilities 40 + Financial position Revenue 85 – Expenses 15 Cash decreases and so does the liability. Cash 130+ other assets 140 = Liabilities 0 + Financial position Revenue 85 – Expenses 15

Pays the grocery bill in full Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 170 140 40 200 85 - 15 Pays Grocery Bill -40 New Balance 130 Show Slide #63: Demonstrate how transactions affects the accounting equation (Cont.) Facilitator’s Note: Notice that the equation is still in balance after all of the activity. 270 270

LSA #5 Check on Learning Q1. How does borrowing money from the bank to purchase equipment affect the accounting equation? A1. Increases other assets, increases liabilities Q2. How does providing services on account affect the accounting equation? A2. Increases revenues, increases other assets (IOUs, otherwise known as accounts receivable) Show Slide #64: LSA #5 Check on Learning Facilitator’s Note: Ask the Following Questions. Facilitate the answers given. Q1. How does borrowing money from the bank to purchase equipment affect the accounting equation? A1. Increases other assets, increases liabilities Q2. How does providing services on account affect the accounting equation? A2. Increases revenues, increases other assets (IOUs, otherwise known as accounts receivable)

LSA #5 Summary During this lesson, we discussed how the scale or the equation must always be kept in balance. When there’s an increase in the total assets on the left side, there must be a corresponding increase on the right side of the scale. When revenue is earned, assets increase and revenue increases. When liabilities are repaid, assets decrease on the left side and liabilities decrease on the right side. Show Slide #65: LSA #5 Summary Facilitator’s Note: During this lesson, we discussed how the scale or the equation must always be kept in balance. When there’s an increase in the total assets on the left side, there must be a corresponding increase on the right side of the scale. When revenue is earned, assets increase and revenue increases. When liabilities are repaid, assets decrease on the left side and liabilities decrease on the right side.

Recording Adjustments
Record the Use of Supplies in the Accounting Equation: Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 140 200 85 - 15 Show Slide #66: Record adjusting transactions in tabular format 6. Learning Step/Activity #6 Record adjusting transactions in tabular format Method of Instruction: DSL (large or small group discussion) Facilitator’s to Student Ratio: Time of Instruction: 2.0 (Total) Media: Power Point Presentation, Printed Reference Materials Facilitator’s Note: Students will have the blank slide The purpose of adjusting entries is to reflect the actual consumption of resources under the accrual basis of accounting. Currently our Other Assets account contains the following: Utensils $20 Supplies $105 IOUs $15 Lacy determines that $60 of supplies have been used. Remember that assets are supposed to reflect future benefit. If the supplies have been consumed, no future benefit remains. Record the Use of Supplies in the Accounting Equation: Lacy determines that $60 of supplies have been used

Recording Adjustments (Cont.)
Record the Use of Supplies in the Accounting Equation: Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 140 200 85 - 15 Supplies used -60 +60 New Balance 80 75 Show Slide #67: Record adjusting transactions in tabular format (Cont.) Facilitator’s Note: The use of supplies decreases Other assets and increases Expenses. Expenses reflect CONSUMPTION of resources. New Balance = Cash Other assets 80 = Liabilities 0 + Financial Position Revenue 85 – Expenses 75 Lacy determines that $60 of supplies have been used

Record Depreciation in the Accounting Equation: Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 80 200 85 - 75 Show Slide #68: Record adjusting transactions in tabular format (Cont.) Facilitator’s Note: Lacy paid $20 for Utensils and plans to use them for 20 months. One month’s benefit has already been received. Depreciation reflects that a portion of the Asset’s benefit has been consumed. It is not a reflection of actual market value of the asset. It just recognizes the fact that owning and using the utensils was part of the cost of doing business in the current month. This follows the Matching Principle. $20/ 20 months = $1/month. We have used up $1 of the value of the utensils. Remember that when we purchased the utensils we recorded them as an “Other Asset”. Therefore we will deduct the $1 from Other Assets. Record Depreciation in the Accounting Equation: Lacy paid $20 for Utensils and plans to use them for 20 months. One month’s benefit has already been received

Record Depreciation in the Accounting Equation: Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 80 200 85 - 75 Depreciation -1 +1 New Balance 79 76 Show Slide #69: Record adjusting transactions in tabular format (Cont.) Facilitator’s Note: Record Depreciation in the Accounting Equation: Balance = Cash Other assets 80 = Liabilities 0 + Financial Position Revenue 85 – Expenses 75 Other assets decrease by 1, expenses increase by 1 New Balance = Cash Other assets 79 = Liabilities 0 + Financial Position Revenue 85 – Expenses 76 Lacy paid $20 for Utensils and plans to use them for 20 months. One month’s benefit has already been received

Record Refrigerator use in the Accounting Equation: Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 79 200 85 - 76 Show Slide #70: Record adjusting transactions in tabular format (Cont.) Facilitator’s Note: Lacy has received a benefit (use of the refrigerator) for which she has not yet paid. She has consumed resources and now has an obligation to pay in the future. Record Refrigerator use in the Accounting Equation: Lacy agrees to reimburse Madge $3 for using the family refrigerator

Record Refrigerator use in the Accounting Equation: Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 130 79 200 85 - 76 Refrigerator use +3 New Balance 3 Show Slide #71: Record adjusting transactions in tabular format (Cont.) Facilitator’s Note: Students will have the blank slide. Balance = Cash Other assets 79 = Liabilities 0 + Financial Position Revenue 85 – Expenses 76 Refrigerator use increases liabilities and also increases expenses. New Balance = Cash Other assets 79 = Liabilities 3 + Financial Position Revenue 85 – Expenses 79 Lacy agrees to reimburse Madge $3 for using the family refrigerator

Lacy’s Statement of Activities
Revenues: $85 Expenses: 79 Excess of revenues over expenses: $6 Other Financing Source – Equity Transfer from General Fund 200 Change in Financial Position $206 Add: Beginning Financial Position -0- Ending Financial Position $206 Show Slide #72: Record adjusting transactions in tabular format (Cont.) Facilitator’s Note: Now that the adjusting entries have been completed, the financial statements can be prepared and are assured to be correct. The revenues less the newly adjusted expenses results in an excess of revenues over expenses of $6. This represents Lacy’s profit for the period. The transfer from the family’s general fund is reported here as an other financing source, yielding a net change in financial position of 206. Recall that Lacy’s beginning financial position was zero, so her ending financial position is 206.

Lacy’s Statement of Financial Position
Assets: Liabilities & Financial Position: Cash $130 Other Assets 79 Total: $209 Liabilities: $ 3 Financial Position: 206 Total: $209 Show Slide #73: Record adjusting transactions in tabular format (Cont.) Facilitator’s Note: The statement of financial position proves that Assets are equal to liabilities plus financial position.

LSA #6 Check on Learning Q1. Which adjusting transaction resulted in a liability? A1. Receiving a benefit (refrigerator use) without yet paying for it. Q2. Which adjusting transaction(s) reduced assets? A2. Consuming resources that were purchased and paid for previously: supplies and equipment. Show Slide #74: LSA #6 Check on Learning Facilitator’s Note: Ask the Following Questions; Q1. Which adjusting transaction resulted in a liability? A1. Receiving a benefit (refrigerator use) without yet paying for it. Q2. Which adjusting transaction(s) reduced assets? A2. Consuming resources that were purchased and paid for previously: supplies and equipment.

LSA #6 Summary During this lesson, we recorded the adjusting transactions of Lacy’s supplies by using the accounting equation. This in turn will produce accurate financial statements. Show Slide #75: LSA #6 Check on Learning Facilitator’s Note: During this lesson, we recorded the adjusting transactions of Lacy’s supplies by using the accounting equation. This in turn will produce accurate financial statements.

Conduct Practical Exercise
Show Slide #76: Conduct Practical Exercise Facilitator’s Note: Administer the Practical Exercise.

TLO Summary Action: Demonstrate How Transactions Affect the Accounting Equation Under the Budgetary and Accrual Methods of Accounting Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors Standard: With at least 80% accuracy: Calculate Unobligated Balance Determine the difference between budgetary and accrual methods Analyze Transactions using the tabular format Enter relevant scenario data into Excel spreadsheet to prepare basic budgetary and accrual accounting reports Show Slide #77: TLO Summary Action: Demonstrate How Transactions Affect the Accounting Equation Under the Budgetary and Accrual Methods of Accounting Conditions: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors Standard: With at least 80% accuracy: Calculate Unobligated Balance, determine the difference between budgetary and accrual methods, analyze Transactions using the tabular format, and enter relevant scenario data into Excel spreadsheet to prepare basic budgetary and accrual accounting reports “Or” Facilitator's at this time, have one learner from each group to explain the most important take away to them from this lesson. Facilitate a discussion on each answer.

Demonstrate How Transactions Affect the Accounting Equation

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Demonstrate How Transactions Affect the Accounting Equation

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