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  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

  3. 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

  6. Objectives of Fund Accounting • Evaluating organizational and managerial performance • Determining/forecasting cash flow • Communication

  7. 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.

  8. 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.

  9. Chart of Accounts • How do we track the sources and uses of funds?

  10. 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.

  11. Fund Groups Six basic fund groups: • Current Fund • Plant Fund • Endowment & Similar Funds Group • Annuity & Life Income Group • Loan Fund • Agency Fund

  12. Current Fund Group of funds expendable for operating purposes in support of the institution’s mission; expected to be expended in the near term. • Unrestricted • Restricted • Designated Funds

  13. 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

  14. 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

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

  16. 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.

  17. 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

  18. 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

  19. 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.

  20. 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.

  21. Discussion #1 For each transaction or situation, name the correct fund (Current or Plant) where it should be recorded.

  22. 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.

  23. 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.

  24. Endowment & Similar Funds Four types of endowments, cont’d: 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.

  25. Endowment & Similar Funds Four types of endowments cont’d: 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.

  26. Endowment & Similar Funds Four types of endowments cont’d: 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 beneficiary’s life. At the end of the specified payment period, income from these funds reverts to the University.

  27. Annuity & Life Income Funds Annuity: Institution is obligated to pay stipulated amounts periodically to the donor’s beneficiary. When the agreement terminates, the remaining funds become property of the institution.

  28. 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.

  29. 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?

  30. 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

  31. 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.

  32. Agency Fund Examples: • Scholarship funds • Fraternities and sororities • The UCSB Foundation • UCSB Alumni Association

  33. 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.

  34. 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.

  35. Financial Transfers Between Fund Groups • Mandatory • Non-Mandatory • Temporary • Permanent

  36. 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.

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

  38. 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.

  39. 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.

  40. 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.

  41. 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. Profit vs. Non-Profit Organizations (Historically)

  42. 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 Profit vs. Non-Profit Organizations

  43. 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 Financial Statements Purpose: To communicate financial condition and operating results.

  44. 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?

  45. Questions