Fund Accounting

1
Fund Accounting

• Jim Corkill
• Sandra Featherson
• Accounting Services Controls
• November 2007

2
Agenda

• Goals/Objectives
• Definitions
• Fund Groups
• Budgeting
• Profit vs. Non-Profit Organizations
• Financial Statements

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Goals

• Concepts of fund accounting
• Understanding the various fund groups
• How are we different than a profit organization?

4
What is Fund Accounting?

• A method of segregating resources into categories
  (i.e., funds), to identify both the source of
  funds and the use of funds.

5
Objectives of Fund Accounting

• Demonstrating accountability and stewardship
• Determining financial condition
• Planning and budgeting

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Objectives of Fund Accounting

• Evaluating organizational and managerial
  performance
• Determining/forecasting cash flow
• Communication

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Definitions

• Fund A fund is a segregation of resources
  established to control and monitor resources and
  to help ensure and demonstrate compliance with
  legal/administrative requirements.

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Definitions

• Fund Balance Equity within a fund.
• Assets Liabilities Fund Equity
• Fund Assets Fund Liabilities Fund Balance
• Assets Claims Against Assets Fund Balance
• The fund balance may also be known as Net Assets,
  Capital, or Net Worth.

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Chart of Accounts

• How do we track the sources and uses of funds?

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Definitions

• Fund Group A separate entity with a
  self-balancing set of accounts consisting of
  assets, liabilities, fund balance, and, where
  appropriate, revenue and expenditure accounts.

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Fund Groups

• Six basic fund groups
• Current Fund
• Plant Fund
• Endowment Similar Funds Group
• Annuity Life Income Group
• Loan Fund
• Agency Fund

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Current Fund

• Group of funds expendable for operating purposes
  in support of the institutions mission expected
  to be expended in the near term.
• Unrestricted
• Restricted
• Designated Funds

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Current Fund

• Unrestricted Funds Includes all funds received
  in which a donor or other external agency has not
  specified the purpose(s) for which the funds
  should be expended.
• Examples
• General funds
• Reg. Fee funds
• Unrestricted gifts

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Current Fund

• Restricted Current Funds Includes funds
  available for financing operations, but that are
  limited to specific purposes, programs, or
  departments specified by donors or external
  agencies.
• Examples
• Federal funds for contracts grants
• Work Study funds
• Endowment income

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Current Fund

• Designated Current Funds Unrestricted funds the
  governing body designated for a special purpose.
• Examples
• Special State Appropriations
• Tobacco Research
• Breast Cancer Research

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Scenario 1

• For each of the fund numbers and titles
  listed, mark the fund either
• a) Restricted
• b) Unrestricted
• c) Designated
• For each transaction, assign the
  appropriate fund number.

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Plant Fund

• The plant fund group is used to record
  acquisition of assets, replacement of assets, pay
  off debt, and record the investment in assets
  (equity). There are four subgroups of plant
  funds
• Unexpended Plant Funds
• Renewal and Replacement
• Retirement of Indebtedness
• Investment in Plant

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Plant Fund

• Unexpended Plant Fund Used for recording
  construction or acquisition of long-lived assets.
  This includes items such as
• Land and building acquisition
• Construction of new facilities
• Renovation
• Remodeling

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Plant Fund

• Renewal and Replacement Used for extraordinary
  repairs and maintenance or equipment replacement.
• Retirement of Indebtedness Used to record the
  accumulation of funds and disbursement for
  repayment of long term debt for assets.

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Plant Fund

• Investment in Plant Used to record the equity of
  campus assets. This subgroup in plant should
  reflect the total amount of resources expended
  for additions to assets.

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Discussion 1

• For each transaction or situation, name the
  correct fund (Current or Plant) where it should
  be recorded.

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Endowment Similar Funds

• This fund group is used to record donations to
  the University which require that the principal
  is invested and only the interest income is
  expendable. Interest income earned on these
  funds is returned to the campus and expended in
  the current funds group.

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Endowment Similar Funds

• There are four types of endowments
• 1)True Endowments (or Permanent Endowments)
• Donors have stipulated that the principal of the
  gift is to remain in perpetuity and is to be
  invested for the purpose of producing present and
  future income.

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Endowment Similar Funds

• Four types of endowments, contd
• 2)Funds Functioning as Endowments
• The governing board of the institution, rather
  than the donor or other external agency, has
  determined that funds (usually a gift) are to be
  retained and invested as an endowment.
• Large amounts - usually 50,000.

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Endowment Similar Funds

• Four types of endowments contd
• 3)Funds Held in Trust by Others
• These are funds derived from private gifts and
  bequests that are held in trust for investment by
  outside trustees, and the University is
  designated as the income beneficiary.

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Endowment Similar Funds

• Four types of endowments contd
• 4)Living Trusts, Annuity Trusts, and Unitrusts
• These are donations where the terms stipulate
  that income must be paid to a designated
  beneficiary for a specified period, which in most
  cases is the duration of the beneficiarys life.
  At the end of the specified payment period,
  income from these funds reverts to the University.

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Annuity Life Income Funds

• Annuity Institution is obligated to pay
  stipulated amounts periodically to the donors
  beneficiary. When the agreement terminates, the
  remaining funds become property of the
  institution.

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Annuity Life Income Funds

• Life Income Established when a college/
  university is the trustee and remainder for a
  charitable remainder trust. Income and expenses
  are paid to beneficiary for life. Principal
  returns to the institution when beneficiary dies.

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Scenario 2

• Your department has received a 150,000 gift to
  be used for operating expenses for the Biology
  department. The chair asks you to make a
  recommendation about turning it into an
  endowment. What do you need to consider to make
  the recommendation?

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Loan Fund

• Used to record activity on funds available for
  loans to students, faculty, and staff.
• Examples include
• Student Financial Aid Loan Fund
• Faculty Home Mortgage Loan
• Staff Emergency Loan Fund

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Agency Fund

• Used to record funds held by the University for
  outside groups who have a close relationship with
  the University.
• Funds in the Agency Fund group do not belong
  to the Regents and are not reported in the UC
  Financial Statements.

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Agency Fund

• Examples
• Scholarship funds
• Fraternities and sororities
• The UCSB Foundation
• UCSB Alumni Association

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Agency Fund

• Accounting for Agency Accounts
• Transactions are recorded as a balance sheet
  item, not as income and expense.
• To keep their accounting activity separate, a
  special account series is used.

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Agency Fund

• Accounting for Agency Accounts
• During fiscal closing, any balances in these
  agency accounts are transferred to a balance
  sheet payable account.
• Agency accounts affect the campus STIP earnings.
  Therefore, the accounts should have a positive
  or zero balance at all times.

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Financial Transfers Between Fund Groups

• Mandatory
• Non-Mandatory
• Temporary
• Permanent

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Budgeting

• Budgets are the most widely used method for
  control in colleges universities.
• Fund accounting assists in budget control by
  providing information to enable
• Managers to keep expenditures within
  allocations.
• Demonstration of compliance with funding
  sources.

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Budgeting

• Budget entries are the reverse of financial
  entries
• Revenue entries are budgetary debits.
• Appropriations to expenditure accounts are
  budgetary credits.

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Encumbrances

• In managing available resources in a non-profit
  organization, we need to recognize future
  commitments of resources prior to an actual
  expenditure.
• Encumbrances (or liens) are used to reflect these
  commitments in the accounting system and attempt
  to prevent overspending.

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Encumbrances

• When the order/services are received and the
  University is invoiced, the original encumbrance
  entry is cancelled, and the expense and related
  cash payment is recorded.

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Profit vs. Non-Profit Organizations

• Profit Organizations Accounting emphasis is on
  profit determination.
• Non-Profit Organizations Accounting emphasis is
  on controlling funds and showing the sources and
  uses of funds.

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Profit vs. Non-Profit Organizations (Historically)

• Profit Organization
• Generally have only one accounting/business
  entity.
• Encumbrances are not used.
• Accounting information on costs and revenues can
  usually be readily aggregated.

• Non-Profit Organization
• Have a multitude of accounting/business entities
  (various funds).
• Encumbrances are used.
• Accounting information is segregated and can be
  difficult to aggregate.
• Budgeting.

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Profit vs. Non-Profit Organizations

• Profit Organization
• Basic Financial Statements
• Balance Sheet
• Income Statement
• Statement of Cash Flows
• Statement of Stockholders Equity

• Non-Profit Organization
• Basic Financial Statements
• Statement of Net Assets
• Statement of Revenues, Expenses, and Changes in
  Net Assets
• Statement of Cash Flows

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Financial Statements
Purpose To communicate financial condition and
operating results.

• Internal Users
• Managers
• Analysts/Internal Auditors
• Executive Campus Mgmt.
• Office of the President
• Regents

• External Users
• External Auditors
• Creditors/Lenders
• State Government
• Other Colleges
• Granting Agencies

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Financial Statements

• What do users want to know?
• Is the institution financially healthy?
• Is the institution financially better off or not
  at the end of the year than it was at the
  beginning?
• How does the institution compare with others?
• Can the institution repay debt it may be taking
  on?

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Questions