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Demonstrate How Transactions Affect the Accounting Equation... Terminal Learning Objective• Task: Demonstrate How Transactions Affect the Accounting Equation Under the Budgetary and Acc

Demonstrate How Transactions Affect the Accounting Equation

Questions to Consider

• Does “the Government” overspend its budget?

• Who decides how much to spend?

• How do managers make sure they don’t overspend?

Terminal Learning Objective

• Task: 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

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 Estimated to be

$1000

• How should they spend it?

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

Spending Authority

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

Spending 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

Check on Learning

• What mechanisms exist to control expenditures?

• What is the step in the spending authorization process that releases funding quarter by quarter?

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

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

Tracking Gomer’s Unobligated Balance

• How much does Gomer have left to spend?

• Assume his original appropriation was $100

Tracking Gomer’s Unobligated Balance

Key Points

 Prevents Overexpending Funds

Check on Learning

• What is the equation to calculate Unobligated Balance?

• What is the event that triggers and Expenditure?

What’s the Difference?

• Consider the purchasing sequence:

When does the Accounting System “count” the cost?

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

What’s the Difference?

What’s the Difference?

Commitment  Obligation  Expenditure

What’s the Difference?

Asset & Liability  Remove Liability  Expense

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?

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

Take Complete Service Collect

Revenue Comparison

• Cash Basis:

• Accrual Basis:

Plan OrdersTake Complete Service or Ship Product CollectCash

Plan OrdersTake Complete Service or Ship Product CollectCash

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

• How do Expenses Expenses differ from Costs 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

• How do Expenses Expenses differ from Expenditures 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

Commitment  Obligation  Expenditure

Asset & Liability  Remove Liability  Expense

It’s ok, we bought this paper last year!

Liability, Revenue, Expense or element of Financial Position

affects two or more accounts

• External transactions involve exchanging

resources with parties outside the organization

• Internal transactions involve exchanges within the organization

Liability, Revenue, Expense or element of Financial Position

affects two or more accounts

• External transactions involve exchanging

resources with parties outside the organization

• Internal transactions involve exchanges within the organization

Liability, Revenue, Expense or element of Financial Position

affects two or more accounts

• External transactions involve exchanging

resources with parties outside the organization

• Internal transactions involve exchanges within the organization

Liability, Revenue, Expense or element of Financial Position

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

The Accounting Equation Expanded

Assets = Liabilities + Fin.Position ± Net Change

Net Change = Revenue – Expense

Therefore:

Assets = Liab + Fin.Position + Rev – ExpenseAssets may be Cash or Other Assets, so:

Transactions and Financial Position

Other Assets

LiabFin.Position+ Rev – Expense Cash

juicer & table at

New Balance 170 + 20 = 0 + 200 + 0 – 10

Lacy’s Transactions

• Has flyers printed for $10

New Balance 165 + 20 = 0 + 200 + 0 – 15

Lacy’s Transactions

• Purchases supplies: cups, $15; napkins $5; lemons, $25;

sugar, $10 and ice, $10

Transaction

Balance Forward 165 + 20 = 0 + 200 + 0 – 15

Lacy’s Transactions

• Purchases supplies: cups, $15; napkins $5; lemons, $25;

sugar, $10 and ice, $10

Transaction

Balance Forward 165 + 20 = 0 + 200 + 0 – 15 Purchases

New Balance 100 + 85 = 0 + 200 + 0 – 15

New Balance 115 + 105 = 0 + 200 + 35 – 15

Lacy’s Transactions

• First day’s sales: $15 in cash and $20 in IOUs

• IOUs are known as “Accounts Receivable”

Transaction

Balance Forward 100 + 85 = 0 + 200 + 0 – 15 Sales $15 cash

New Balance 115 + 105 = 0 + 200 + 35 – 15

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?

-New Balance 120 + 100 = 0 + 200 + 35 - 15

Additional Transactions

• 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

-New Balance 120 + 140 = 40 + 200 + 35 - 15

New Balance 130 + 140 = 0 + 200 + 85 - 15

New Balance 130 + 140 = 0 + 200 + 85 - 15

Check on Learning

• How does borrowing money from the bank to purchase

equipment affect the accounting equation?

• How does providing services on account affect the accounting equation?

Lacy’s Statement of Activities

Other Financing Source –

Lacy’s Statement of Financial Position

Check on Learning

• Which adjusting transaction resulted in a liability?

• Which adjusting transaction(s) reduced assets?

Practical Exercise