Demonstrate How Transactions Affect the Accounting Equation Principles of Cost Analysis and Management Show Slide #1: Demonstrate How Transactions Affect the Accounting Equation References: FM 1-06, Slides, Handouts, Excel Spreadsheets Facilitator Material: Each primary facilitator should possess a lesson plan, slide deck, course handouts, and practical exercise, and FM 1-06."All required references and technical manuals will be provided by the “School House Learner Material: Learners should possess standard classroom supplies, course handouts, practical exercises, FM 1-06. All required references and technical manuals will be provided by the School House. Instructor Actions: Classroom Setup: 30 minutes

Remember… Revolving funds use the accrual basis of accounting Remember… Revolving funds use the accrual basis of accounting. Accrual accounting records an Asset and a Liability when the goods are received …and an Expense when goods are consumed. We will look at an almost identical set of transactions, but use a different method of measuring the activity. Show Slide #2: Concrete Experience (Motivational) Facilitator’s Note: (Concrete Experience 5 minutes) Present Learners the slide questions. Ask Learners what their thoughts are on “Transactions affecting the Accounting Equation” Facilitator’s Note: (Publish and Process 5 minutes) the critical portion of this part of the ELM process is to force the Learners to reflect. Ask a series of thought influencing questions, for example: Could the Battle of the bulge have been won if All Battle Maps of Ardennes Forest Looked like this?

Terminal Learning Objective Action: Demonstrate How Transactions Affect the Accounting Equation Condition: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international students) Explain accounting terminology Analyze transactions for effects on the accounting equation Enter transactions into the accounting equation Show Slide #3: TLO Action: Demonstrate How Transactions Affect the Accounting Equation Conditions: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international students) you must: , Explain accounting terminology, Analyze transactions for effects on the accounting equation, and Enter transactions into the accounting equation Safety Requirements: In a training environment, leaders must perform a risk assessment in accordance with DA PAM 385-30, 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 350-29. 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 3-34.5 Environmental Considerations and GTA 05-08-002 ENVIRONMENTAL-RELATED RISK ASSESSMENT. INSTRUCTIONAL LEAD-IN. The example on the previous slide is intended to provoke an “outside looking in” approach to identifying similarities between Battlefield Management and Cost Management.

Review: Financial Position The following equation represents financial position: Assets = Liabilities + Financial Position What is an asset? Something owned that represents future benefit What is a liability? Something owed or a creditor’s claim against assets Financial position can also be called equity, net assets, or fund balance Assets = Liabilities + Financial Position Something owned that represents future benefit Show Slide #4: Explain accounting terminology 1. Learning Step/Activity #1 Explain accounting terminology Method of Instruction: DSL (large or small group discussion) Facilitator to Learner Ratio: 2:25 Time of Instruction: 20 minutes Media: Power Point Presentation, Printed Reference Materials Facilitator's Note: Before facilitating this lesson, ask the students which of the 21st Century Soldier Competency do they think pertain to this lesson? Facilitate a discussion on the answers given and at the end of the lesson revisit it and see if the students still believe their choice are the same. Note: For this lesson these competencies should be talked about. (Delete those that do not apply) 1. Character and accountability 2. Communication and engagement (oral, written, and negotiation) 3. Critical thinking and problem solving 4. Tactical and technical competence (full spectrum capable) Facilitator’s Note: Before explaining the equation, Learners must first learn the definitions. E.g. What is an asset? (Facilitate discussion on answers given) Answer: Something owned that represents future benefit What is a liability? (Facilitate discussion on answers given) Answer: Something owed or a creditor’s claim against assets Financial position can also be called equity, net assets, or fund balance Something owed or a creditor’s claim against assets

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? Show Slide #5: Lacy’s Lemonade Stand Facilitator Read and facilitate discussion on the following scenario to the class; 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 and Uses Accrual Basis of Accounting. Question; How will this be recorded in the Family’s financial equation? A transfer will be recorded as Transfer Out from the family “General Fund”. This will reduce the general fund balance. It will be recorded as a Transfer in to the Revolving fund. Each fund is a separate accounting entity (self-balancing set of accounts.) The Transfer in to Lacy’s revolving fund is considered an “other financing source” on the statement of activities and increases financial position. How does this differ from the appropriation that she received in yesterday’s lesson 2.2, Budgetary Accounting? In 2.2, operating as an appropriation-funded entity, Lacy’s revenues were not 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.

What’s the Difference? Consider the purchasing sequence: 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 #6: What’s the Difference? Facilitator’s Note: (Facilitate discussion using the slide) as a reminder, revolving funds use the accrual basis of accounting. Accrual accounting records an Asset and a Liability when the goods are received …and an Expense when goods are consumed. We will look at an almost identical set of transactions, but use a different method of measuring the activity.

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 What is a cost? Represent cash payments for goods and services received Decrease Assets and Decrease Financial Position Revenue – Cost = Change in Financial Position Represent earnings received in cash Increase assets and increase financial position Show Slide #7: Review: Financial Position (Cont.) Facilitator’s Note: (Facilitate discussion using the slide) the following equation represents Financial Activity: Revenue – Cost = Change in Financial Position Cash payments for goods & services received Decrease assets and decrease financial position

Review: Three Ways to Measure Cash Basis: Budgetary Basis: Accrual Basis: Plan Order Receive Pay Consume Plan Order Receive Pay Consume Show Slide #8: Explain accounting terminology (Cont.) Facilitator’s Note: (Facilitate discussion using the slide) under the cash basis of accounting, costs are counted when they are paid in cash Under the budgetary basis of accounting, the expenditure is counted when the goods or services are received. At this time a liability is recorded in the proprietary accounts of the fund. Under the Accrual basis of accounting, the expense is counted when the goods or services are consumed, or some benefit is received. Commitment  Obligation  Expenditure Plan Order Receive Pay Consume Asset & Liability  Remove Liability  Expense

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 #9: Explain accounting terminology (Cont.) Facilitator’s Note: (Facilitate discussion using the slide) 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 #10: Explain accounting terminology (Cont.) Facilitator’s Note: (Facilitate discussion using the slide) 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 INCURRED Resources Consumed Show Slide #11: Explain accounting terminology (Cont.) Facilitator’s Note: (Facilitate discussion using the slide) 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 #12: Explain 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 Generally Accepted Accounting Principles (GAAP) is essentially a proper noun.

Terminology 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 Show Slide #13: Explain accounting terminology (Cont.) Facilitator’s Note: 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. Under accrual accounting, the expense will be recorded in the period in which the employees worked, NOT when they are paid. Expense after cash: Insurance premium for one year is paid 30-Sept and benefits the next fiscal year. Under accrual accounting, the payment of the insurance premium will be recorded when the insurance is actually used up.

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 #14: Explain 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 #15: Explain 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 #16: Explain 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 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 record changes exchange resources External transactions involve exchanging resources with parties outside the organization Show Slide #17: Explain accounting terminology (Cont.) Facilitator’s Note: 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 Internal transactions involve exchanges within the organization Transactions are the common building block of all accounting information

LSA #1 Check on Learning Q1. Under the accrual basis of accounting, when is revenue recorded? Q2. Where does the term “Double Entry Accounting” originate? A1. When it is EARNED – when service is completed or product is sold Show Slide #18: LSA #1 Check on Learning Facilitator’s Note: Ask the following Questions; (Facilitate discussion on 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. A2. From the concept that a transaction is an exchange that affects two or more accounts.

LSA #1 Summary During this block we reviewed what Financial Position was. We identified and defined basic accounting terminology as well as discussed three ways to measure financial activity within an entity. Show Slide #19 LSA #1 Summary Facilitator’s Note: LSA Summary: During this block we reviewed what Financial Position was. We identified and defined basic accounting terminology as well as discussed three ways to measure financial activity within an entity.

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 #20: Analyze transactions for effects on the accounting equation 2. Learning Step/Activity #2 Analyze transactions for effects on the accounting equation Method of Instruction: DSL (large or small group discussion) Facilitator to Learner Ratio: 2:25 Time of Instruction: 15 minutes 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 #21: Analyze transactions for effects on the accounting equation (Cont.) Facilitator’s Note: This picture 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

LSA #2 Check on Learning Q1. What activity causes assets and financial position to increase? Q2. What is the effect on the accounting equation when the rent for the month is paid in cash? A1. Revenues Show Slide #22: LSA #2 Check on Learning Facilitator’s Note: Ask the following Questions; (Facilitate discussion on answers given) Q1. What activity causes assets and financial position to increase? A1. Revenues Q2. What is the effect on the accounting equation when the rent for the month is paid in cash? A2. Cash decreases and financial position decreases. A2. Cash decreases and financial position decreases.

LSA #2 Summary During this block we discussed the accounting equation and expanded the equation to include both revenues and expenses. We also discussed how this equation must balance at all times represented by a scale. Show Slide #23 LSA #2 Summary Facilitator’s Note: LSA Summary: During this block we discussed the accounting equation and expanded the equation to include both revenues and expenses. We also discussed how this equation must balance at all times represented by a scale.

Transaction Description Lacy’s Transactions Receives $200 equity transfer Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Beginning Balances Show Slide #24: Lacy’s Transactions 3. Learning Step/Activity #3 Enter transactions into the accounting equation Method of Instruction: DSL (large or small group discussion) Facilitator to Learner Ratio: 2:25 Time of Instruction: 15 minutes Media: Power Point Presentation, Printed Reference Materials Facilitator’s Note: Learners will have the blank slide. The facilitator should feel free to work through the transactions on the board rather than using the slides. Facilitate discussion each time you advance slide and totals enter on the board. Lacy receives $200 equity transfer

Transaction Description Lacy’s Transactions 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 #25: Lacy’s Transactions 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 200 + other assets 0 = Liabilities 0 + Financial position 200 + Revenue 0 – Expenses 0

Transaction Description Lacy’s Transactions 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 #26: Lacy’s Transactions Facilitator’s Note: Lacy buys a pitcher, a juicer, and a table at a yard sale for $20

Transaction Description Lacy’s Transactions 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 #27: Lacy’s Transactions Facilitator’s Note: Beginning balance Cash 200 + other assets 0 = Liabilities 0 + Financial position 200 + 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 180 + other assets 20 = Liabilities 0 + Financial position 200 + Revenue 0 – Expenses 0

Transaction Description Lacy’s Transactions Has flyers printed for $10 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Balance Forward 180 20 200 Show Slide #28: Lacy’s Transactions Facilitator’s Note: Lacy has flyers printed for $10

Transaction Description Lacy’s Transactions 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 #29: Lacy’s Transactions Facilitator’s Note: Balance forward Cash 180 + other assets 20 = Liabilities 0 + Financial position 200 + 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 170 + other assets 20 = Liabilities 0 + Financial position 200 + 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.

Transaction Description Lacy’s Transactions 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 #30: Lacy’s Transactions 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

Transaction Description Lacy’s Transactions 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 #31: Lacy’s Transactions Facilitator’s Note: Lacy pays Bert $5 to pass out flyers

Transaction Description Lacy’s Transactions 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 #32: Lacy’s Transactions Facilitator’s Note: Balance forward: Cash 170 + other assets 20 = Liabilities 0 + Financial position 200 + Revenue 0 – Expenses 10 Bert passes out flyers, the resource is consumed immediately and the payment is recorded as an expense New balance: Cash 165 + other assets 20 = Liabilities 0 + Financial position 200 + Revenue 0 – Expenses 15

Transaction Description Lacy’s Transactions 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 #33: Lacy’s Transactions Facilitator’s Note: Lacy purchases supplies: cups, $15; napkins $5; lemons, $25; sugar, $10 and ice, $10 .

Transaction Description Lacy’s Transactions 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 #34: Lacy’s Transactions Facilitator’s Note: Cash 165 + other assets 20 = Liabilities 0 + Financial position 200 + 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 100 + other assets 85 = Liabilities 0 + Financial position 200 + Revenue 0 – Expenses 15

Transaction Description Lacy’s Transactions 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 #35: Lacy’s Transactions Facilitator’s Note: First day’s sales are $15 in cash and $20 in IOUs

Transaction Description Lacy’s Transactions 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 #36: Lacy’s Transactions Facilitator’s Note: Cash 100 + other assets 85 = Liabilities 0 + Financial position 200 + 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 115 + other assets 105 = Liabilities 0 + Financial position 200 + Revenue 35 – Expenses 15

Transaction Description Lacy’s Transactions 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 #37: Lacy’s Transactions 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 #38: Demonstration (Key Points) Facilitator’s Note: The key points are that: Each transaction must keep the equation in balance Each transaction affects at least two accounts Learners 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 #39: Demonstration (Additional Transactions) Facilitator’s Note: Lacy receives $5 cash toward the IOUs, Cover the following; Cash 115 + other assets 105 = Liabilities 0 + Financial position 200 + Revenue 35 – Expenses 15

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 Receives $5 toward IOUs +5 -5 - New Balance 120 100 Show Slide #40: Demonstration (Additional Transactions) Facilitator’s Note: Cash 115 + other assets 105 = Liabilities 0 + Financial position 200 + 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 200 + Revenue 35 – Expenses 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 Show Slide #41: Demonstration (Additional Transactions) Facilitator’s Note: Learners will have the blank slide Demonstration 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 #42: Demonstration (Additional Transactions) Facilitator’s Note: Learners will have the blank slide Demonstration Purchases $40 in supplies on account at the grocery store

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 Buy Supplies on Account $40 +40 New Balance 140 40 Show Slide #43: Demonstration (Additional Transactions) Facilitator’s Note: Learners will have the blank slide Demonstration Cash 120+ other assets 100 = Liabilities 0 + Financial position 200 + 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 200 + Revenue 35 – Expenses 15

Additional Transactions 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 #44: Demonstration (Additional Transactions) Facilitator’s Note: Learners will have the blank slide Demonstration Lacy makes cash sales of $50

Additional Transactions 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 #45: Demonstration (Additional Transactions) Facilitator’s Note: Learners will have the blank slide Demonstration Cash 120+ other assets 140 = Liabilities 40 + Financial position 200 + 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 200 + Revenue 85 – Expenses 15

Additional Transactions 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 #46: Demonstration (Additional Transactions) Facilitator’s Note: Learners will have the blank slide Demonstration Lacy pays the grocery bill in full

Additional Transactions 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 #47: Demonstration (Additional Transactions) Facilitator’s Note: Learners will have the blank slide Demonstration Cash 170+ other assets 140 = Liabilities 40 + Financial position 200 + Revenue 85 – Expenses 15 Cash decreases and so does the liability. Cash 130+ other assets 140 = Liabilities 0 + Financial position 200 + Revenue 85 – Expenses 15

Additional Transactions 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 #48: Demonstration (Additional Transactions) Facilitator’s Note: Notice that the equation is still in balance after all of the activity. 270 270

LSA #3 Check on Learning Q1. How does borrowing money from the bank to purchase equipment affect the accounting equation? Q2. How does providing services on account affect the accounting equation? A1. Increases other assets, increases liabilities Show Slide #49: LSA #3 Check on Learning Facilitator’s Note: Ask the following Questions; (Facilitate discussion on 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) A2. Increases revenues, increases other assets (IOUs, otherwise known as accounts receivable)

LSA #3 Summary During this discussion, we covered the terminology and formulas associated with the “accounting equation” and “financial activity”. We then put in the “scenario information” in the excel spreadsheet for the practical application. Show Slide #50: LSA #3 Summary Facilitator’s Note: During this discussion, we covered the terminology and formulas associated with the “accounting equation” and “financial activity”. We then put in the “scenario information” in the excel spreadsheet for the practical application.

Practical Exercise Show Slide #51: Practical Exercise

TLO Summary Action: Demonstrate How Transactions Affect the Accounting Equation Condition: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy: Explain accounting terminology Analyze transactions for effects on the accounting equation Enter transactions into the accounting equation Show Slide #52: TLO Summary Facilitator’s Note: Restate the TLO Action: Demonstrate How Transactions Affect the Accounting Equation Conditions: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international students) you must: , Explain accounting terminology, Analyze transactions for effects on the accounting equation, and Enter transactions into the accounting equation “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.