1. Transaction Analysis © Dale R. Geiger 20111

2. 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

3. 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

4. What’s the Difference? Plan Order Consume Receive Pay Asset & Liability  Remove Liability  Expense © Dale R. Geiger 20114

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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 201110

11. 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 201111

12. 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 201112

13. Review: Three Ways to Measure Cash Basis: Budgetary Basis: Accrual Basis: Plan Order Consume Receive Pay © Dale R. Geiger 201113

14. 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 201114

15. 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 2011 15

16. 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 201116

17. 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 201117

18. 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 201118

19. 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 201119

20. 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 201120

21. 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 201121

22. 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 201122

23. It’s ok, we bought this paper last year! © Dale R. Geiger 201123

24. 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 201124

25. 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 201125

26. 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 201126

27. 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 201127

28. Learning Check Under the accrual basis of accounting, when is revenue recorded? Where does the term “Double Entry Accounting” originate? © Dale R. Geiger 201128

29. 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 201129

30. Transactions and Financial Position Other Assets Liab Fin.Position + Rev – Expense Cash © Dale R. Geiger 201130

31. 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 201131

32. 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 201132

33. 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 201133

34. 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 201134

35. 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 $20 -20++20=++– New Balance180+20=0+200+0–0 © Dale R. Geiger 201135

36. 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 201136

37. Lacy’s Transactions Has flyers printed for $10 Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward180+20=0+200+0–0 Has flyers printed $10 -10+=++–+10 New Balance170+20=0+200+0–10 © Dale R. Geiger 201137

38. Lacy’s Transactions Has flyers printed for $10 Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward180+20=0+200+0–0 Has flyers printed $10 -10+=++– New Balance170+20=0+200+0–10 190 © Dale R. Geiger 201138

39. Lacy’s Transactions Pays Bert $5 to pass out flyers Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward170+20=0+200+0–10 © Dale R. Geiger 201139

40. Lacy’s Transactions Pays Bert $5 to pass out flyers Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward170+20=0+200+0–10 Pays Bert $5 to pass out flyers -5+=++–+5 New Balance165+20=0+200+0–15 © Dale R. Geiger 201140

41. 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=0+200+0–15 © Dale R. Geiger 201141

42. 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=0+200+0–15 Purchases Supplies $65 -65++65=++– New Balance100+85=0+200+0–15 © Dale R. Geiger 201142

43. 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=0+200+0–15 © Dale R. Geiger 201143

44. 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=0+200+0–15 Sales $15 cash and $20 IOUs +15++20=+++35– New Balance115+105=0+200+35–15 © Dale R. Geiger 201144

45. 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=0+200+0–15 Sales $15 cash and $20 IOUs +15++20=+++35– New Balance115+105=0+200+35–15 © Dale R. Geiger 201145

46. 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 201146

47. Additional Transactions Receives $5 cash toward the IOUs Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward115+105=0+200+35–15 © Dale R. Geiger 201147

48. Additional Transactions Receives $5 cash toward the IOUs Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward115+105=0+200+35–15 Receives $5 toward IOUs +5+-5=++- New Balance120+100=0+200+35-15 © Dale R. Geiger 201148

49. 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 201149

50. Additional Transactions Purchases $40 in supplies on account at the grocery store Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward120+100=0+200+35-15 © Dale R. Geiger 201150

51. Additional Transactions Purchases $40 in supplies on account at the grocery store Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward120+100=0+200+35-15 Buy Supplies on Account $40 ++40= ++- New Balance120+140=40+200+35-15 © Dale R. Geiger 201151

52. Additional Transactions Makes cash sales of $50 Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward120+140=40+200+35-15 © Dale R. Geiger 201152

53. Additional Transactions Makes cash sales of $50 Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward120+140=40+200+35-15 Cash Sales $50+50+=++ - New Balance170+140=40+200+85-15 © Dale R. Geiger 201153

54. Additional Transactions Pays the grocery bill in full Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward170+140=40+200+85-15 © Dale R. Geiger 201154

55. Additional Transactions Pays the grocery bill in full Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward170+140=40+200+85-15 Pays Grocery Bill-40+= + New Balance130+140=0+200+85-15 © Dale R. Geiger 201155

56. Additional Transactions Pays the grocery bill in full Transaction Description Cash+ Other Assets =Liab+ Financial Position +Rev–Exp Balance Forward170+140=40+200+85-15 Pays Grocery Bill-40+= + New Balance130+140=0+200+85-15 270 © Dale R. Geiger 201156

57. 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 201157

58. Practical Exercise © Dale R. Geiger 201158

59. 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 201159

60. Transaction Worksheet Out of Balance notification will appear if transaction does not balance © Dale R. Geiger 201160

61. Practical Exercise © Dale R. Geiger 201161