Accounting Concepts

The Accounting Equation

The following equation is the cornerstone of accounting. In the next couple of slides we'll define each part of this equation.

Assets - Liabilities = Fund Balance OR Assets = Liabilities + Fund Balance

The Accounting Equation-Assets

Fund Balance Beginning Fund Balance Assets Liabilities Cash Revenues LESS Accounts Payable EQUALS Accounts Receivable Expenses Deferred Revenue Inventory Fund Additions Fund Deductions Items owned by the University, such as, cash, accounts receivables, inventory, equipment, stocks, bonds, etc. Money owed to the University for goods or services that have been provided by the University. Example: The Student Union caters an event before payment is received. The money owed to the Student Union is an Accounts Receivable.

Assets Accounts Receivable

Inventory

Equipment owned by the University or goods available for resale. Example 1:You purchase a computer for your department. The computer is capitalized (coded with a capital object code) and becomes part of the University's inventory. Example 2:The Bookstore buys books to

sell. The books are inventory purchased for resale. The Accounting Equation-Liabilities

Fund Balance Beginning Fund Balance Assets Liabilities Cash Revenues LESS Accounts Payable EQUALS Accounts Receivable Expenses Deferred Revenue Inventory Fund Additions Fund Deductions Money or services owed to someone who has provided the University a good or service. Examples of liabilities at the University are Accounts Payable and Deferred Revenue.

Liabilities

Accounts Payable

Money owed to someone who has provided the University with a good or service. Example: Your department buys a computer from Gateway. Gateway will ship the computer to your department and send an invoice to Accounts Payable (the department in FSO who processes invoices and cuts checks). An invoice is a request for payment, i.e. a liability, an Accounts Payable.

Deferred Revenue

Services owed for monies received. Example: Someone gives you $1,000 to dig a ditch, you agree and take the money. You now owe that person a ditch, i.e., you haven't earned the $1,000. Revenue that hasn't been earned yet is called Deferred Revenue and because you owe someone something, in this case, a ditch, deferred revenue is a liability. When you dig the ditch, you will have earned the revenue and can record the $1,000 as revenue.

The Accounting Equation-Fund Balance (Net Worth)

Fund Balance Beginning Fund Balance Assets Liabilities Cash Revenues LESS Accounts Payable EQUALS Accounts Receivable Expenses Deferred Revenue Inventory Fund Additions Fund Deductions Also known as Net Worth, Retained Earnings or Net Assets, is the difference between what you own (Assets) and what you owe (Liabilities). In other words, if you took everything that you own and turned it to cash and paid off all your debts (liabilities) whatever you had leftover would be your net worth, fund balance or net assets. Fund Balance at the University is increased and decreased by Revenues, Expenses, Fund Additions and Fund Deductions. Revenues and Fund Additions increase Fund Balance. Expenses and Fund Deductions decrease Fund Balance. Intuitively this should make sense. If you make or get money (increase revenue or fund additions), you are worth more. If you spend or lose money (increase expenses or fund deductions), you are worth less. Ending Fund Balance EQUALS Beginning Fund Balance(GL) PLUS Revenues (SL) LESS Expenses (SL) PLUS Fund Additions (GL) LESS Fund Deductions (GL)

Fund Balance

Revenues Expenses

Money earned for goods or services provided. And at the University unearned money, such as, unrestricted gifts, are also recorded as revenue. Money spent for things that benefit or help the university operate, for example, salaries, wages, E.R.E., operational supplies, travel, capital and student support.

Fund Additions Fund Deductions

Money received by the University that is not earned, for example, grants and contract money and restricted gifts. Money paid by the University that is not considered an expense. For example, excess grant money or deposits held for another entity.

Accounting Equation Worksheet After you have answered the questions, press the ANSWERS button at the bottom. Your responses will be checked and you will be provided with feedback. Fill in the blanks 1. 2. minus equal increase Fund Balance.

3. decrease Fund Balance. 4. Indicate if the following item is an asset or liability. Bill due to Tucson Electric Power Savings Account McDonald's Stock Mortgage VISA Asset Asset Asset Asset Asset Liability Liability Liability Liability Liability

5. Indicate if the following statement is true or false. True False Assets are things you own, liabilities are things you owe and Fund Balance is the difference between the two.