Demonstrate How Transactions Affect the Accounting Equation © Dale R. Geiger 20111

Questions to Consider Does “the Government” overspend its budget? Who decides how much to spend? How do managers make sure they don’t overspend? © Dale R. Geiger 20112

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 © Dale R. Geiger 20113

Financial Planning and Control Financial Planning and Control You have been hired as a budget consultant by the Simmons family Gomer, Madge, Bert, Lacy and Maddie Estimated Gomer’s monthly paycheck is Estimated to be $1000. How should they spend it? © Dale R. Geiger 20114

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 © Dale R. Geiger 20115

Spending Authority Allotment (HQDA) Apportionment (OMB) Appropriation (Congress) Army Q1Major CommandFunctional AreaFunded ProgramQ2Q3Q4 © Dale R. Geiger 20116

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 © Dale R. Geiger 20117

Spending Process ExpenditureObligationCommitmentLiabilityPayment © Dale R. Geiger 20118

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 © Dale R. Geiger 20119

Check on Learning What mechanisms exist to control expenditures? What is the step in the spending authorization process that releases funding quarter by quarter? © Dale R. Geiger

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 © Dale R. Geiger

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 © Dale R. Geiger

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 = © Dale R. Geiger

Tracking Gomer’s Unobligated Balance © Dale R. Geiger

Key Points Obligation Ordering Goods or Services Triggers an Obligation  Prevents Overexpending Funds Expenditure Receiving Goods or Services Triggers an Expenditure  Reverse Obligation  Record Expenditure Salaries, Wages and Other Recurring Expenditures are not Obligated, but may be Committed © Dale R. Geiger

Check on Learning What is the equation to calculate Unobligated Balance? What is the event that triggers and Expenditure? © Dale R. Geiger

What’s the Difference? Consider the purchasing sequence: When does the Accounting System “count” the cost? Plan Order Consume Receive Pay © Dale R. Geiger

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 © Dale R. Geiger

What’s the Difference? Plan Order Consume Receive Pay © Dale R. Geiger

What’s the Difference? Plan Order Consume Receive Pay Commitment  Obligation  Expenditure © Dale R. Geiger

What’s the Difference? Plan Order Consume Receive Pay Asset & Liability  Remove Liability  Expense © Dale R. Geiger

Check on Learning Which method of accounting records the cost when cash is paid? Which method of accounting records the cost when goods are received? © Dale R. Geiger

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? © 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 in which Resources are 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 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

Check on Learning 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

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

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? © Dale R. Geiger

Recording Adjustments Record the Use of Supplies in the Accounting Equation: Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = © Dale R. Geiger Lacy determines that $60 of supplies have been used

Recording Adjustments Record the Use of Supplies in the Accounting Equation: Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward = Supplies used+-60= New Balance130+80= © Dale R. Geiger Lacy determines that $60 of supplies have been used

Recording Adjustments Record Depreciation in the Accounting Equation: Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward130+80= © Dale R. Geiger Lacy paid $20 for Utensils and plans to use them for 20 months. One month’s benefit has already been received

Recording Adjustments Record Depreciation in the Accounting Equation: Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward130+80= Depreciation+=++-+1 New Balance130+79= © Dale R. Geiger Lacy paid $20 for Utensils and plans to use them for 20 months. One month’s benefit has already been received

Recording Adjustments Record Refrigerator use in the Accounting Equation: Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward130+79= © Dale R. Geiger Lacy agrees to reimburse Madge $3 for using the family refrigerator

Recording Adjustments Record Refrigerator use in the Accounting Equation: Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward130+79= Refrigerator use+=+3++- New Balance130+79= © Dale R. Geiger 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 Fund200 Change in Financial Position $206 Add: Beginning Financial Position -0- Ending Financial Position $206 © Dale R. Geiger

Lacy’s Statement of Financial Position Assets: Cash$130 Other Assets 79 Total:$209 Liabilities & Financial Position: Liabilities:$ 3 Financial Position:206 Total: $209 © Dale R. Geiger

Check on Learning Which adjusting transaction resulted in a liability? Which adjusting transaction(s) reduced assets? © Dale R. Geiger

Practical Exercise © Dale R. Geiger