TITLE: How Business Activities Change the Accounting Equation
TASK DEVELOPER: Sherri Holt
GRADE AND CONTENT AREA: Grade 11 - Accounting I
TARGET TEACHING DATE: September 27, 2006
SCHOOL: Mergenthaler Vocational Technical Senior High School
STANDARDS:

Goal 1: Students will know the importance of accounting and various things to consider when starting a service based business by completing the Internet Activity for Chapter 1 which is to visit the Small Business Administration website to preview information on how to start a Proprietorship.

Expectation 1. The student will demonstrate an understanding of how to start a business.

Expectation 2. The student will demonstrate an understanding of the importance of accounting in the operation of an effective business.

Goal 2: Students will know how transactions change the accounting equation by reviewing the daily transactions of a newly formed business to help them to understand the interconnection of accounting and it's effect on business activities.

Expectation 1. The student will demonstrate an understanding of the accounting equation.

Expectation 2. The student will demonstrate an understanding of how business transactions affect the accounting equation.

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PERFORMANCES:
  1. The student will know several factors to consider such as the type of business to open (sole proprietorship, partnership, or corporation), legal aspects and the importance of accounting in starting a business.

  2. The student will demonstrate how business activities change the accounting equation by reviewing the daily transactions of Encore Music, owned by Barbara Trevino a sole proprietor to develop an understanding of how transactions such as cash received or supplies purchased will affect the assets, liabilities and owners equity of the business.

  3. Students will list their own assets and liabilities to demonstrate how changes on side of the accounting equation can affect the other side.

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SETTING:

Real World Setting: Starting A New Business

After several years of teaching Ms. Barbara Trevino decided to fulfill her dream and start her own business. The name of her business is Encore Music and Ms. Trevino is the sole proprietor of the business. Since Encore Music is a new business it was imperative that Ms. Trevino design an accounting system that will be used to keep an accurate account of Encore Music's records and to assure that her personal financial records are kept separate from those of the business.

Real World Setting: Learning - Starting A Business.
  1. Students will access the following to complete Chapter 1 Internet activity regarding factors to consider when starting a business:
    http://www.c21accounting.com/student/blue/mj_student_internet_frame.html

Real World Setting: Learning - How Business Transactions Affect the Accounting Equation.

  1. Students will complete activities together with the instructor and on their own to demonstrate how daily business transactions change the accounting equation.

  2. Students will create an accounting equation to demonstrate how transactions change the accounting equation.

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INSTRUCTIONAL ACTIVITIES:

Classroom and Computer Lab
Estimated Time: 20 minutes

PART I - FACTORS TO CONSIDER WHEN STARTING A BUSINESS

With the use of the LCD Projector and the Internet instructor will access http://www.c21accounting.com/student/blue/mj_student_internet_frame.html and review with students factors to consider when starting a business. Students will access the site from their computers and click on the Small Business Administration link to complete questions regarding starting a business and the importance of accounting in operating an effective business.

PART II - HOW BUSINESS TRANSACTIONS CHANGE THE ACCOUNTING EQUATION

Estimated Time: 60 minutes

Step 1. Instructor will discuss key terms relevant to starting a new business and how business transactions affect the accounting equation via PowerPoint and LCD presentation.

THE ACCOUNTING EQUATION = ASSETS = LIABILITIES + OWNERS EQUITY

SOLE PROPRIETORSHIP - A BUSINESS OWNED BY ONE PERSON.

SERVICE BUSINESS - A BUSINESS THAT PERFORMS AN ACTIVITY FOR A FEE.

ASSETS = ANYTHING OF VALUE THAT IS OWNED.

LIABILITIES = AN AMOUNT OWED BY A BUSINESS.

OWNERS EQUITY = THE AMOUNT REMAINING AFTER THE VALUE OF ALL LIABILITIES IS SUBTRACTED FROM THE VALUE OF ALL ASSETS. THE NET WORTH OF THE BUSINESS

ASSETS ARE LISTED ON THE LEFT OF THE EQUATION AND LIABILITIES AND OWNER'S EQUITY ARE LISTED ON THE RIGHT.

BOTH SIDES OF THE ACCOUNTING EQUATION MUST ALWAYS EQUAL

Step 2. Instructor Review - Instructor will post transactions via LCD screen and work out solutions with the class to demonstrate how business activities change the accounting equation.

(a) August 1, RECEIVED CASH FROM Barbara Trevino AS AN INVESTMENT IN THE AMOUNT OF $10,000.00.

Discussion: In this transaction, Barbara Trevino uses $10,000.00 of her own money to invest in her business, Encore Music. In the accounting equation, the asset account, CASH is increased by $10,000.00 which is the amount of cash received by the business. The increase is listed on the left side of the accounting equation. The OWNER'S EQUITY account, (Barbara Trevino, Capital) is increased by $10,000.00. This increase is on the right side of the accounting equation. The increase on the right side of the accounting equation equals the $10,000.00 increase on the left side of the accounting equation.
THE ACCOUNTING EQUATION IS IN BALANCE.
TRANSACTION: Assets = 10,000.00; Liabilities = 0; Owner's Equity = 10,000.00

(b) August 3, PAID CASH FOR SUPPLIES IN THE AMOUNT OF $1,577.00.

Discussion: In this transaction, two asset accounts are changed. One asset CASH has been exchanged for another asset SUPPLIES. The asset account CASH is decreased by $1,577.00 which was the amount that was paid out. This decrease would be listed on the left side of the accounting equation under assets. The asset account SUPPLIES is increased by $1,577.00 which is the amount of supplies bought. This increase is also listed on the left side of the accounting equation. Students will see from this transaction that two assets are changed. The two changes that took place are listed on the left side of the accounting equation. Instructor will emphasize that when changes are made on only one side of the accounting equation, the equation MUST still be in balance. Therefore, if one account is increased, another account on the same side of the equation must be decreased.

TRANSACTION: Sum of Assets = $10,000.00(Cash = $8,423.00; Supplies = $1,577.00); Liabilities = 0; Owner's Equity = 10,000.00
THE ACCOUNTING EQUATION IS IN BALANCE. ASSETS = LIABILITIES + OWNER'S EQUITY.

(c) August 4, PAID CASH FOR INSURANCE IN THE AMOUNT OF $1,200.00.

Discussion: Encore Music pays $1,200.00 for insurance premiums for future insurance coverage. Insurance premiums must be paid in advance. In return for this payment, Encore Music is entitled to insurance coverage for the length of the policy. The insurance coverage is something of value owned by Encore Music, therefore it is listed as an asset.

In this transaction, two assets are changed. One asset CASH has been exchanged for another asset, PREPAID INSURANCE. The asset account CASH is decreased by $1,200.00 which is the amount of cash paid out. The asset account, PREPAID INSURANCE is increased by $1,200.00 which is the amount of insurance bought. After this transaction, the new account balance of CASH is $7,223.00. The new account balance of PREPAID INSURANCE is $1,200.00. The sum of ASSETS listed on the left side is $10,000.00 (Cash = $7,223.00 + Supplies = $1,577.00 + Prepaid Insurance = $1,200.00). The amount on the right side is also $10,000.00 (Liabilities = 0; Owners Equity = 10,000.00).
THE ACCOUNTING EQUATION IS IN BALANCE. ASSETS = LIABILITIES + OWNER'S EQUITY.

(d) August 7, BOUGHT SUPPLIES ON ACCOUNT FROM LING MUSIC SUPPLIES IN THE AMOUNT OF $2,720.00.

Discussion: Encore Music needs to purchase additional supplies. The supplies are obtained from Ling Music Supplies which is located in a different city. In most businesses it is common practice to buy items and pay for them at a later date. In other words, the music supplies were purchased on credit.

In this transaction, one asset and one liability are changed. The asset account SUPPLIES is increased by $2,720.00. Ling Music Supplies will have a claim against some of Encore Music assets until Encore Music pays off the balance for the supplies bought. Therefore, Accounts Payable - Ling Music Supplies is a liability account. Ling Music Supplies is increased by $2,720.00 which is the amount owed for the supplies. After this transaction, the new account balance of SUPPLIES is $4,297.00. The new account balance of ACCOUNTS PAYABLE - LING MUSIC SUPPLIES is $2,720.00. The sum of the amounts on the left side is $12,720.00 (Cash = $7,223.00 + Supplies = $4,297.00 + Prepaid Insurance - $1,200.00). The sum of the amounts on the right side is also $12,720.00 (Accounts Payable - Ling Music Supplies = $2,720.00 + Barbara Trevino, Capital = $10,000.00.

THE ACCOUNTING EQUATION IS IN BALANCE. ASSETS = LIABILITIES + OWNER'S EQUITY.

Step 3. Two students will come to the board. One will list assets they own. The other will list liabilities that they owe. The accounting equation will also be posted on the board. The entire class will participate to demonstrate how changes on side can affect the other side.

Step 4. Students will work independently to complete transactions in the workbook. Assignment sheets will be turned into instructor at the end of the period.

Hardware: Computer, LCD Projector
Technology: Internet
Software: PowerPoint
Reinforcement: Click here for a PowerPoint presentation on the Accounting Equation
Scoring Tool: Grading Rubric

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SCORING:
RUBRIC - How Business Activities Change the Accounting Equation
4 = MASTERED
(90-100)		 Student presents a clear, specific understanding of accounting terms related to starting a business; classifying and analyzing accounts as assets, liabilities or owner's equity and is able to demonstrate how transactions affect the accounting equation.
3 = EXCEEDED
(80-89)		 Student present an above average understanding of accounting terms related to starting a business; classifying and analyzing accounts as assets, liabilities or owner's equity and is able to demonstrate how transactions affect the accounting equation.
2 - ATTAINED
(70-79)		 Student meets assignment expectations. The student demonstrates some knowledge of accounting terms related to starting a business; classifying and analyzing accounts as assets, liabilities or owner's equity and how transactions affect the accounting equation.
1 - APPROACHING ATTAINMENT
(60-69)		 Student knowledge of the topic is understood, but at minimum level of competency. The assignment is incomplete and does not show a clear understanding of accounting terms related to starting a business; classifying and analyzing accounts as assets, liabilities or owner's equity or how transactions affect the accounting equation.
0 - UNATTAINED (Less than 60) Students knowledge of the subject is not shown. Steps in the process were not followed. Work is poorly done and does not demonstrate knowledge of accounting terms related to starting a business; classifying and analyzing accounts as assets, liabilities or owner's equity or how transactions affect the accounting equation. Overall, student has failed to grasp new concepts covered in lesson.

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RESULTS:

Results: 95% of students performed in the 80-100% range of the scoring outlined on the rubric. 5% of students performed in the 70-79%. No student performed below 69% in this lesson.

Analyze: Students enjoyed the lesson. The Internet Activity in which students were able to visit the Small Business Administration online was an excellent resource for students to gain hands on knowledge on how to start a business.

Reflection: Reviewing transactions via the LCD and students writing their assets and debits on the board was also an excellent tool for students to demonstrate and observe first hand how transactions affect the accounting equation. Students demonstrated an outstanding understanding of the concepts outlined in the lesson.

Concepts in this lesson will be used throughout the course. The accounting equation is basic to the mastery of accounting. Therefore, it is pertinent that students understand this concept in order to be successful in the course.