| PublicationDate: 7/1/95 ChapterNumber: ChapterTitle: Appendix F: Basic Accounting for Non-Title IV Specialists SectionNumber: SectionTitle: Basic Accounting for Non-Title IV Specialists PageNumbers: F1-F16 This appendix provides a brief overview of general accounting and fund accounting basics for fiscal officers new to Title IV. Additional information can be found in the Financial Accounting and Reporting Manual for Higher Education (FARM), produced by the National Association of College and University Business Officers (NACUBO). NACUBO and its regional associations sponsor workshops on "Basic Fund Accounting" and "Intermediate Fund Accounting" for new school business officers and other interested individuals. For information on the FARM manual and workshops, contact: National Association of College and University Business Officers One Dupont Circle Washington, DC 20036 OR 202-861-2500 Management and Information System (MIS) and Accounting Information System (AIS) Most institutions have a Management Information System (MIS), an electronic system that generally consists of an integrated set of computer-based and manual components. A school's MIS is established to facilitate operational functions and support management decision-making. The MIS provides information that managers can use in planning and providing financial oversight for the institution. Most institutions also have an Accounting Information System (AIS). An AIS is a specialized subsystem of a MIS that collects, processes, and reports information related to financial transactions. An AIS must meet both internal and external information needs. The basis of an AIS is the chart of accounts. Chart of Accounts Institutions need to consider their fund accounting needs, particularly with respect to restricted funds, when designing a chart of accounts. The chart of accounts should accurately reflect current organization and programs and should have the flexibility to accommodate future changes. A chart of accounts has two components: (1) an account number that usually follows a standard structure and (2) a definition, by name, of the account code. The account code structure is used for all accounts in the AIS. This structure is usually composed of several segments, each segment denoting a specific classification. An example of an account code structure follows: [[The example of an account code structure on page F-2 is currently unavailable for viewing. Please reference your paper document for additional information.]] Each segment of an account code has a meaning in the AIS: - The first segment identifies the major fund group, such as current funds, endowment funds, or physical plant funds. - The second segment identifies the specific organizational unit, such as administration and finance department, academic department, and so on. - The third segment identifies the type of program, such as remedial studies or a specific research project. - The fourth segment is the object code, which identifies specific account classifications, such as asset, liability, revenue, or expenditure. When this code structure is developed and all relevant combinations of segments are compiled, the result is a complete chart of accounts. In addition to the account code number, specific accounts have names that help define their meanings. Once the chart of accounts is developed, the AIS can be used to record financial transactions. All financial transactions should be classified by transaction type and reported with similar transactions. The usual types are: - journal entries, - cash receipts, - cash disbursements, and - payroll transactions. For each of these transaction types, a "journal" should exist that records and maintains it. Each recorded transaction should include the date of entry, transaction amount, and description of the transaction, and each entry should be self-balancing. Every transaction entered into the system should be supported by source documentation identifying the origin of the transaction. For example, common source documents for a cash receipt entry are a copy of the check and the corresponding deposit slip. All source documentation should include reference to the accounting entry and should be maintained in the files. Record-retention requirements for financial aid transactions are addressed in Chapter 2 of this book. Each transaction that occurs in the AIS has its own processing procedures. For example, a cash receipt is processed differently from a cash disbursement. A cash receipt transaction requires recording the receipt, preparing the deposit, and posting to the cash receipts journal; a cash disbursement transaction requires writing the check, recording the check in the check register, and posting to the cash disbursement journal. Regardless of the processing procedure, the final step is always to record the transaction in the appropriate ledger. All of these transactions are eventually recorded in the general ledger, usually in summary fashion, on a regular basis (typically weekly or monthly, depending on the transaction volume and whether the accounting system is automated or manual). Subsidiary ledgers are used to maintain detailed information about transactions. They provide a level of detail that is not included in the general ledger. The most common subsidiary ledgers are: - accounts payable -- to record accrued expenses, - accounts receivable -- to record accrued receivables, and - purchasing -- to record purchases and encumbrances. Subsidiary ledgers are posted to the general ledger in summary fashion on a regular basis. When all posting is complete for an accounting period, the cumulative debit and credit entries in the general ledger must be equal. This process is known as preparing a trial balance. Once a trial balance has been prepared, reports can be generated using the information recorded in the general ledger and its related subsidiary ledgers. The general chart of accounts and their normal balance is indicated by a "+" in the following chart. ("DR" stands for debit, and "CR" stands for credit. See page F-4.) [[The chart on page F-3 is currently unavailable for viewing. Please reference your paper document for additional information.]] Fund Accounting The fund accounting concepts described in this section are based on the historical methods used by all institutions of higher education. However, starting with fiscal years beginning after December 15, 1994, private nonprofit and for-profit educational institutions' accounting will be changing to comply with Statement 117 of the Financial Accounting Standards Board (FASB). At the time this book was written, public nonprofit institutions governed by the Governmental Accounting Standards Board (GASB) continue to use the concepts described in this section. A fund is defined as a fiscal and accounting entity, composed of a self-balancing set of accounts that records cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein. Funds are segregated to carry on specific activities or attain certain objectives in accordance with special regulations or limitations. Fund accounting is defined as a method of segregating assets into categories according to the restrictions placed on their use by the funding source. To ensure observance of individual limitations and restrictions placed on the use of the funds, a separate account must be maintained for each of the many different funds, but the funds are generally combined into six groups for reporting purposes. The six fund groups widely used in fund accounting are: - endowment and similar funds, - annuity and life income funds, - current funds (unrestricted and restricted), - agency funds, - loan funds, and - physical plant funds. An institution's Federal Pell Grant, Federal Direct Loan, Federal Supplemental Educational Opportunity Grant, and Federal Work- Study accounts would be listed in the "Current Funds, Restricted" category on the balance sheet. The loan programs would be listed in the loan funds category on the balance sheet. Refer to Chapter 5 of this book for a copy of a balance sheet. The other two financial statements commonly used by colleges and universities, other than the balance sheet, are the "Statement of Changes in Fund Balances" and the "Statement of Current Funds Revenues, Expenditures, and Other Changes." Normal Rules for Debiting and Crediting Accounts Debit (DR) means left in accounting and credit (CR) means right. The left side of an account is called the debit side; the right side is called the credit side. A debit entry (or simply "debit") would be recorded on the left side of an account; a credit entry (or "credit") would be recorded on the right side. The diagram that follows illustrates the normal rules for debiting and crediting accounts. [[The chart on page F-5, entitled, Normal rules for debiting and crediting accounts, is currently unavailable on the SFA BBS. Please reference your paper document for additional information.]] The fund balance is the value of excess assets over liabilities in any fund group or subgroup. This is a quick review of basic accounting and does not provide a complete guide to all required rules and regulations that impact financial aid fund accounting for postsecondary schools, colleges, and universities. The information presented here, in tandem with the information in Chapter 5 of this book, provides a general background for most of the basics. However, as mentioned in the beginning of this appendix, those responsible for financial aid accounting should become familiar with the FARM and consider attending NACUBO fund accounting workshops. Fiscal officers handling Title IV accounts can also request assistance from the chief financial officer or the controller at their institutions, an auditing firm, or even other institutions. The following pages provide sample journal entries constructed on the basis of the chart of accounts listed in Chapter 5 of this book. [[Pages F-6 through F-15 (Sample Journal Entries) are currently unavailable for viewing. Please reference your paper document for additional information.]] |