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Demonstrate How Transactions Affect the Accounting Equation © Dale R Geiger 2011 Questions to Consider • Does “the Government” overspend its budget? • Who decides how much to spend? • How managers make sure they don’t overspend? © Dale R Geiger 2011 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 2011 Financial Planning and Control • You have been hired as a budget consultant by the Simmons family • Gomer, Madge, Bert, Lacy and Maddie • Gomer’s monthly paycheck is Estimated to be $1000 • How should they spend it? © Dale R Geiger 2011 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 2011 Spending Authority © Dale R Geiger 2011 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 2011 Spending Process © Dale R Geiger 2011 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 2011 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 2011 10 Additional Transactions • Makes cash sales of $50 Transaction Description Cash + Other Assets = Liab + Financial + Position Rev – Balance Forward 120 + 140 = 40 + 200 + 35 - Cash Sales $50 +50 + = + + +50 - New Balance 170 + 140 = 40 + 200 + 85 - © Dale R Geiger 2011 Exp 15 15 59 Additional Transactions • Pays the grocery bill in full Transaction Description Balance Forward Cash + Other Assets 170 + = 140 = Liab + Financial + Position 40 + © Dale R Geiger 2011 200 + Rev – 85 - Exp 15 60 Additional Transactions • Pays the grocery bill in full Transaction Description Cash + Other Assets = + Financial + Position Liab Balance Forward 170 + 140 = 40 + Pays Grocery Bill -40 + = -40 + New Balance 130 + 140 = + © Dale R Geiger 2011 Rev – Exp 200 + 85 - 15 200 + 85 - 15 61 Additional Transactions • Pays the grocery bill in full Transaction Description Cash + Other Assets = + Financial + Position Liab Balance Forward 170 + 140 = 40 + Pays Grocery Bill -40 + = -40 + New Balance 130 + 140 = + 270 Rev – Exp 200 + 85 - 15 200 + 85 - 15 270 © Dale R Geiger 2011 62 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 2011 63 Recording Adjustments • Record the Use of Supplies in the Accounting Equation: Transaction Description Balance Forward Cash + 130 + Other Assets = 140 = + Financial + Position + 200 + Liab Rev – 85 - Exp 15 Lacy determines that $60 of supplies have been used © Dale R Geiger 2011 64 Recording Adjustments • Record the Use of Supplies in the Accounting Equation: Transaction Description Balance Forward Cash + Other Assets = Liab + Financial + Position Rev – Exp 130 + 140 = + 200 + 85 - 15 Supplies used + -60 = + + - +60 New Balance 130 + 80 = + 200 + 85 - 75 Lacy determines that $60 of supplies have been used © Dale R Geiger 2011 65 Recording Adjustments • Record Depreciation in the Accounting Equation: Transaction Description Cash Balance Forward + 130 + Other Assets = 80 = + Financial + Position + 200 + Liab Rev – 85 - Exp 75 Lacy paid $20 for Utensils and plans to use them for 20 months One month’s benefit has already been received © Dale R Geiger 2011 66 Recording Adjustments • Record Depreciation in the Accounting Equation: Transaction Description Cash Balance Forward + Other Assets = Liab + Financial + Position Rev – Exp 130 + 80 = + 200 + 85 - 75 Depreciation + -1 = + + - +1 New Balance 130 + 79 = + 200 + 85 - 76 Lacy paid $20 for Utensils and plans to use them for 20 months One month’s benefit has already been received © Dale R Geiger 2011 67 Recording Adjustments • Record Refrigerator use in the Accounting Equation: Transaction Description Balance Forward Cash + 130 + Other Assets = 79 = + Financial + Position + 200 + Liab Rev – 85 - Exp 76 Lacy agrees to reimburse Madge $3 for using the family refrigerator © Dale R Geiger 2011 68 Recording Adjustments • Record Refrigerator use in the Accounting Equation: Transaction Description Cash + Other Assets = Liab + Financial + Position Rev – Exp Balance Forward 130 + 79 = + 200 + 85 - 76 Refrigerator use + = +3 + + - +3 130 + 79 = + 200 + 85 - 79 New Balance Lacy agrees to reimburse Madge $3 for using the family refrigerator © Dale R Geiger 2011 69 Lacy’s Statement of Activities Revenues: Expenses: Excess of revenues over expenses: Other Financing Source – Equity Transfer from General Fund Change in Financial Position Add: Beginning Financial Position Ending Financial Position © Dale R Geiger 2011 $85 79 $6 200 $206 -0$206 70 Lacy’s Statement of Financial Position Assets: Cash Other Assets Total: Liabilities & Financial Position: $130 79 $209 Liabilities: Financial Position: Total: © Dale R Geiger 2011 $ 206 $209 71 Check on Learning • Which adjusting transaction resulted in a liability? Which adjusting transaction(s) reduced assets? â Dale R Geiger 2011 72 Practical Exercise © Dale R Geiger 2011 73 ... Does the Government” overspend its budget? • Who decides how much to spend? • How managers make sure they don’t overspend? © Dale R Geiger 2011 Terminal Learning Objective • Task: Demonstrate How. .. 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... What’s the Difference? • Consider the purchasing sequence: Plan Order Receive Pay Consume When does the Accounting System “count” the cost? © Dale R Geiger 2011 17 Why a Different Method of Accounting?