Abstract Typically, the concept and structure of the statement of sources and applications of funds is introduced to accounting students in the latter part of an elementary course or perhaps not until the student has reached the intermediate level. Typically, also, students are mystified and confused by this concept and statement simply because the statement is not produced by taking balances from the general ledger and portraying them in some significant form. Students must first be made aware of two things. First, that funds are not cash but working capital, and second, that the funds statement is used to show how, and, moreover, why changes have occurred in the working capital position of an organization since the last balance sheet date. The model of the balance sheet explained in this article, has been found to be useful in instructing students how to analyze transactions to determine whether or not they should be shown on the statement of sources and applications of funds and whether the transaction results in a source or an application of funds.