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

---

Assets Cash Accounts Receivable Inventory

LESS

Liabilities Accounts Payable Deferred Revenue

EQUALS

Fund Balance Beginning Fund Balance Revenues Expenses Fund Additions Fund Deductions

---

Assets	Items owned by the University, such as, cash, accounts receivables, inventory, equipment, stocks, bonds, etc.
Accounts Receivable	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.
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

---

Assets Cash Accounts Receivable Inventory

LESS

Liabilities Accounts Payable Deferred Revenue

EQUALS

Fund Balance Beginning Fund Balance Revenues Expenses Fund Additions Fund Deductions

---

Liabilities	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.
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)

---

Assets Cash Accounts Receivable Inventory

LESS

Liabilities Accounts Payable Deferred Revenue

EQUALS

Fund Balance Beginning Fund Balance Revenues Expenses Fund Additions Fund Deductions

Fund Balance

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)
Revenues	Money earned for goods or services provided. And at the University unearned money, such as, unrestricted gifts, are also recorded as revenue.
Expenses	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	Money received by the University that is not earned, for example, grants and contract money and restricted gifts.
Fund Deductions	Money paid by the University that is not considered an expense. For example, excess grant money or deposits held for another entity.