shared by Elisabeth Mahas
This is how I taught my children to understand tithing.  I'm not sure where I got the idea from.
First, I put on the table 10 potatoes and then said, "You are a potato farmer.  You want to grow potatoes, so you planted the seeds.  Heavenly Father gave you a strong and healthy body, air to breathe, and the beautiful earth to plant the seed in.  He gave you soil, sunshine, and rain to help the potatoes to grow.  Now you have grown 10 potatoes.  With all that Heavenly Father has given you, do think you could give one of those potatoes to Heavenly Father to help feed poor and hungry children?" 
When they answer yes, I then say, "Heavenly Father promised that if we would give one 10th of our increase to help people in His church, he will open up the windows of heaven and shower blessings upon you. Now, because of Heavenly Father's blessings the next year you will grow 100 potatoes!"
I then repeat the same thing with another ten items, like for example, 10 strawberries. 
After that I put 10 dollars on the table and say, "Now let's pretend that you have a job and you earned 10 dollars.  Heavenly Father gave you a strong and healthy body so that you could work hard at your job.  He gave you air to breathe and clothes to wear and a beautiful world to enjoy.  Do you think that with all that Heavenly Father gave to you that you could give Heavenly Father one of your dollars to help people in His church all over the world? If you choose right, Heavenly Father will open up the windows of heaven and shower you with wonderful blessings-so many you won't have room to receive them.  Isn't that a wonderful promise?
I explain that we pay tithing to the Bishop because he is called by Heavenly Father to lead our ward.  Everyone in the church gives their tithing to their bishop and he sends it into President Hinckley to help people all over the world in many ways. Like for example, building temples and ward houses, and helping poor people. 
This way of teaching tithing really seemed to help my children understand why they pay tithing, and they are really excited to give their tithing to the Bishop.