Transaction Analysis © Dale R. Geiger 20111
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 © Dale R. Geiger 20112
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? © Dale R. Geiger 20113
What’s the Difference? Plan Order Consume Receive Pay Asset & Liability Remove Liability Expense © Dale R. Geiger 20114
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 © Dale R. Geiger 20115
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 © Dale R. Geiger 20116
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 © Dale R. Geiger 20117
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 © Dale R. Geiger 20118
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 © Dale R. Geiger 20119
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 © Dale R. Geiger
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 © Dale R. Geiger
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 © Dale R. Geiger
Review: Three Ways to Measure Cash Basis: Budgetary Basis: Accrual Basis: Plan Order Consume Receive Pay © Dale R. Geiger
Review: Three Ways to Measure Cash Basis: Budgetary Basis: Accrual Basis: Plan Order Consume Receive Pay Plan Order Consume Receive Pay Commitment Obligation Expenditure © Dale R. Geiger
Review: Three Ways to Measure Cash Basis: Budgetary Basis: Accrual Basis: Plan Order Consume Receive Pay Plan Order Consume Receive Pay Commitment Obligation Expenditure Plan Order Consume Receive Pay Asset & Liability Remove Liability Expense © Dale R. Geiger
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 Take Orders Take Orders Complete Service or Ship Product Collect Cash Collect Cash Revenue & Non-Cash Asset © Dale R. Geiger
Revenue Comparison Cash Basis: Accrual Basis: Plan Take Orders Take Orders Complete Service or Ship Product Collect Cash Collect Cash Plan Take Orders Take Orders Complete Service or Ship Product Collect Cash Collect Cash Revenue & Non-Cash Asset © Dale R. Geiger
The Accrual Basis of Accounting “Matches” Revenues with Expenses It take money to make money Records Expenses in period INCURRED Resources Consumed Plan Order Consume Receive Pay Asset & Liability Remove Liability Expense © Dale R. Geiger
Terminology expenses costs 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 © Dale R. Geiger
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 © Dale R. Geiger
Terminology expenses expenditures 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 © Dale R. Geiger
Consider Office Supplies Under Budgetary Accounting: Under Accrual Accounting: Plan Order Consume Receive Pay Commitment Obligation Expenditure Plan Order Consume Receive Pay Asset & Liability Remove Liability Expense © Dale R. Geiger
It’s ok, we bought this paper last year! © Dale R. Geiger
Terminology account An account is a RECORD of the CHANGES in a particular asset, liability, revenue, expense or element of financial position transaction 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 © Dale R. Geiger
Terminology account An account is a RECORD of the CHANGES in a particular asset, liability, revenue, expense or element of financial position transaction 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 © Dale R. Geiger
Terminology account An account is a RECORD of the CHANGES in a particular asset, liability, revenue, expense or element of financial position transaction 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 © Dale R. Geiger
Terminology account An account is a RECORD of the CHANGES in a particular asset, liability, revenue, expense or element of financial position transaction 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 Transactions are the common building block of all accounting information © Dale R. Geiger
Learning Check Under the accrual basis of accounting, when is revenue recorded? Where does the term “Double Entry Accounting” originate? © Dale R. Geiger
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 © Dale R. Geiger
Transactions and Financial Position Other Assets Liab Fin.Position + Rev – Expense Cash © Dale R. Geiger
Learning Check What activity causes assets and financial position to increase? What is the effect on the accounting equation when the rent for the month is paid in cash? © Dale R. Geiger
Lacy’s Transactions Receives $200 equity transfer Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Beginning Balances 0+0=0+0+0–0 © Dale R. Geiger
Lacy’s Transactions Receives $200 equity transfer Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Beginning Balances 0+0=0+0+0–0 Receives $200 Equity Transfer +200+=+ +– New Balance200+0=0+ +0–0 © Dale R. Geiger
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 Forward200+0=0+ +0–0 © Dale R. Geiger
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 Forward200+0=0+ +0–0 Buys pitcher, juicer & table at yard sale for $ =++– New Balance180+20= –0 © Dale R. Geiger
Lacy’s Transactions Has flyers printed for $10 Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward200+0=0+ +0–0 © Dale R. Geiger
Lacy’s Transactions Has flyers printed for $10 Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward180+20= –0 Has flyers printed $ =++–+10 New Balance170+20= –10 © Dale R. Geiger
Lacy’s Transactions Has flyers printed for $10 Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward180+20= –0 Has flyers printed $ =++– New Balance170+20= – © Dale R. Geiger
Lacy’s Transactions Pays Bert $5 to pass out flyers Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward170+20= –10 © Dale R. Geiger
Lacy’s Transactions Pays Bert $5 to pass out flyers Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward170+20= –10 Pays Bert $5 to pass out flyers -5+=++–+5 New Balance165+20= –15 © Dale R. Geiger
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 Forward165+20= –15 © Dale R. Geiger
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 Forward165+20= –15 Purchases Supplies $ =++– New Balance100+85= –15 © Dale R. Geiger
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 Forward100+85= –15 © Dale R. Geiger
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 Forward100+85= –15 Sales $15 cash and $20 IOUs =+++35– New Balance = –15 © Dale R. Geiger
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 Forward100+85= –15 Sales $15 cash and $20 IOUs =+++35– New Balance = –15 © Dale R. Geiger
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? © Dale R. Geiger
Additional Transactions Receives $5 cash toward the IOUs Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = –15 © Dale R. Geiger
Additional Transactions Receives $5 cash toward the IOUs Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = –15 Receives $5 toward IOUs +5+-5=++- New Balance = © Dale R. Geiger
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 © Dale R. Geiger
Additional Transactions Purchases $40 in supplies on account at the grocery store Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = © Dale R. Geiger
Additional Transactions Purchases $40 in supplies on account at the grocery store Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = Buy Supplies on Account $ = ++- New Balance = © Dale R. Geiger
Additional Transactions Makes cash sales of $50 Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = © Dale R. Geiger
Additional Transactions Makes cash sales of $50 Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = Cash Sales $50+50+=++ - New Balance = © Dale R. Geiger
Additional Transactions Pays the grocery bill in full Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = © Dale R. Geiger
Additional Transactions Pays the grocery bill in full Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = Pays Grocery Bill-40+= + New Balance = © Dale R. Geiger
Additional Transactions Pays the grocery bill in full Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = Pays Grocery Bill-40+= + New Balance = © Dale R. Geiger
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? © Dale R. Geiger
Practical Exercise © Dale R. Geiger
Transaction Worksheet Enter transaction data into the columns Balances will calculate automatically Enter transaction data into the columns Balances will calculate automatically © Dale R. Geiger
Transaction Worksheet Out of Balance notification will appear if transaction does not balance © Dale R. Geiger
Practical Exercise © Dale R. Geiger