VG demonstrate how trans affect acct equation1

Review: Financial Position• The following equation represents financial • Something owed or a creditor’s claim against assets • Financial position can also be called equity, net assets,

Transaction Analysis

Terminal Learning Objective

• Action: Demonstrate How Transactions Affect the

Accounting Equation

• Condition: You are a cost advisor technician with

access to all regulations/course handouts, and

awareness of Operational Environment

(OE)/Contemporary Operational Environment (COE)

variables and actors.

• Standard: With at least 80% accuracy:

• Explain accounting terminology

• Analyze transactions for effects on the accounting

equation

• Enter transactions into the accounting equation

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 will this be recorded in the Family’s financial

equation?

What’s the Difference?

Asset & Liability  Remove Liability  Expense

Review: Financial Position

• The following equation represents financial

• Something owed or a creditor’s claim against assets

• Financial position can also be called equity, net assets, or fund balance

Review: Financial Position

• The following equation represents financial

• Something owed or a creditor’s claim against assets

• Financial position can also be called equity, net assets, or fund balance

Review: Financial Position

• The following equation represents financial

• Something owed or a creditor’s claim against assets

• Financial position can also be called equity, net assets, or fund balance

Review: Financial Position

• The following equation represents financial

• Something owed or a creditor’s claim against assets

• Financial position can also be called equity, net assets, or fund balance

Review: Financial Activity

• The following equation represents financial

activity:

Revenue – Cost = Change in Financial Position

• What is a revenue?

•Represent earnings received in cash

•Increase Assets and Increase Financial Position

Review: Financial Activity

• The following equation represents financial

activity:

Revenue – Cost = Change in Financial Position

• What is a revenue?

•Represent earnings received in cash

•Increase Assets and Increase Financial Position

Review: Financial Activity

• The following equation represents financial

activity:

Revenue – Cost = Change in Financial Position

• What is a revenue?

•Represent earnings received in cash

•Increase assets and increase financial position

Review: Financial Activity

• The following equation represents financial

activity:

Revenue – Cost = Change in Financial Position

• What is a revenue?

•Represent earnings received in cash

•Increase assets and increase financial position

Review: Three Ways to Measure

Review: Three Ways to Measure

• Cash Basis:

• Budgetary Basis:

• Accrual Basis:

Commitment  Obligation  Expenditure

Review: Three Ways to Measure

• Cash Basis:

• Budgetary Basis:

• Accrual Basis:

Commitment  Obligation  Expenditure

Asset & Liability  Remove Liability  Expense 15

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

Plan OrdersTake 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 INCURRED

• Resources Consumed

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

• Expenses may be recorded before cash is paid, when cash is paid, or after cash is paid

• Expense before cash:

• Employees work two weeks at the end of

September but will be paid in October

• Expense after cash:

• Insurance premium for one year is paid 30-Sept and benefits the next fiscal year

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

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!

Terminology

• An account is a RECORD of the CHANGES in a

particular asset, liability, revenue, expense or

element of financial position

• A transaction represents an EXCHANGE of

RESOURCES that affects two or more accounts

• External transactions involve exchanging

resources with parties outside the organization

• Internal transactions involve exchanges within the organization

Terminology

• An account is a RECORD of the CHANGES in a

particular asset, liability, revenue, expense or

element of financial position

• A transaction represents an EXCHANGE of

RESOURCES that affects two or more accounts

• External transactions involve exchanging

resources with parties outside the organization

• Internal transactions involve exchanges within the organization

Terminology

• An account is a RECORD of the CHANGES in a

particular asset, liability, revenue, expense or

element of financial position

• A transaction represents an EXCHANGE of

RESOURCES that affects two or more accounts

• External transactions involve exchanging

resources with parties outside the organization

• Internal transactions involve exchanges within the organization

Terminology

• An account is a RECORD of the CHANGES in a

particular asset, liability, revenue, expense or

element of financial position

• A transaction represents an EXCHANGE of

• 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

The Accounting Equation Expanded

Assets = Liabilities + Fin.Position ± Net Change

Net Change = Revenue – Expense

Transactions and Financial Position

Other Assets

Liab Fin.Position + Rev – Expense Cash

juicer & table at

Lacy’s Transactions

• Has flyers printed for $10

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 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

Learning Check

• How does borrowing money from the bank to

purchase equipment affect the accounting equation?

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

Practical Exercise

Transaction Worksheet

Enter transaction data into the columns

Balances will calculate automatically

Transaction Worksheet

Out of Balance notification will appear

if transaction does not balance

Practical Exercise