Accounting for the Non-Accountant

Accounting for theNon-Accountant Presented by: Sandra M. Motz, Assistant Superintendent of Business Services, Walled Lake Consolidated Schools and R. Michael Hubert, CPA, Assistant Superintendent, Livingston Educational Service Agency February 8, 2007

Introductions & Learning Objectives • Introductions of Presenters & Participants • Familiarization with the Learning Documents (slides, appendix, audit reports, budget book, 1022) • Learning Objective Exercise • Review Agenda • Groups to self-identify additional areas of interest & report

Mike

M Agenda

M is a system that information that is Importance of Accounting Accounting Identifies Records Relevant Communicates Reliable to help users make better decisions. Comparable

M Accounting Activities • Identifying Business Activities • Recording Business Activities • Communicating Business Activities

M Internal Users External Users • Banks • Bond Holders • Governments • Media • External Auditors • Grantors • Board Members • Administrators • Internal Auditors • Departments • Budget Officers • Controllers Users of Accounting Information

M Accounting Jobs by Area

M Accounting Salaries(www.AICPA.org, www.Abbott-Langer.com, www.Kforce.com )

S Ethics Ethics—A Key Concept Beliefs that distinguish right from wrong Accepted standards of good and bad behavior Good ethics are good business!

S Guidelines for Ethical Decision Making • Make ethical decision • Identify ethical concerns • Analyze options Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences.

S Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations. Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).

S Setting Accounting Principles Financial Accounting Standards Board is the private group that sets both broad and specific principles. The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public. The Governmental Accounting Standards Board is the independent agency established to set accounting and financial reporting standards for state and local governments.

M = + Accounting Equation Fund Balance (Equity) Assets Liabilities Liabilities & Equity Assets

M Assets Cash Accounts Receivable Notes Receivable Resources owned or controlled by a school Vehicles Land Buildings Store Supplies Equipment

M Liabilities Accounts Payable Notes Payable Creditors’ claims on assets Wages Payable Benefits Payable

M Fund Balance (Equity) Restricted or Unrestricted Fund Balance Designated or Undesignated Fund Balance School’s claims on assets Revenues Expenses

S Fund Balance Categories Fund balances (equity) of school district funds will be classified either as RESERVED or UNRESERVED. The unreserved portion may be further classified as DESIGNATED or UNDESIGNATED. • Reserved Fund Balances - Reservations of fund balance are established to identify legally restricted funds, third party claims against resources of the entity that have not materialized as liabilities at the balance sheet date, or the existence of assets that, because of their non-monetary nature or lack of liquidity, represent financial resources not available for current appropriation or expenditure • Examples, inventories, prepaid expenses, and non-current assets (usually receivables). Such reserves are not intended as valuation allowances, but merely demonstrate the current unavailability of the subject assets to pay current expenditures.

S Fund Balance Categories • Unreserved Fund Balances • Designated Designations of fund balance are established to identify tentative plans for or restrictions on the future use of financial resources. Such should be supported by definitive plans and approved by the Board of Education. Examples of such designations include the earmarking of financial resources for capital projects and contingent liabilities. • Undesignated The fund balance remaining after reduction for reserved and designated balances is identified as the unreserved and undesignated fund balance.

M = + Expanded Accounting Equation Fund Balance (Equity) Assets Liabilities _ Fund Balance + Revenues Expenses Caution! If this equation yields zero $, you have a… deficit fund balance.

M Deficit Fund Balance Section 102(1) of the State School Aid Act prohibits a district from adopting a deficit budget and incurring an operating deficit in a fund during a fiscal year. The Section also requires that a district with a deficit fund balance submit a plan to the Michigan Department of Education for the elimination of the deficit. The plan must project the elimination of the deficit not later than the end of the second school fiscal year after the deficit was incurred. The plan must be approved by MDE. • A district is considered to have a deficit fund balance if; 1) Its General Fund balance before reserves is negative, or 2) Other funds have negative balances that are greater than the General Fund balance before reserves.

A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. M Debits and Credits These abbreviations are remnants of the 18th-century recordkeeping practices where the terms debitor and creditor were used instead of debit and credit.

M = + Assets Liabilities Equity EQUITIES ASSETS LIABILITIES Debit Credit Debit Credit Debit Credit +- - + - + Double-Entry Accounting

M Double-Entry Accounting Double-entry accounting requires that each transaction affect, and be recorded in, at least two accounts. It also means the total amount debited must equal the total amount credited for each transaction. Thus, the sum of the debits for all entries must equal the sum of the credits for all entries.

The accounting equation must remain in balance after each transaction. M = + Assets Liabilities Equity Transaction Analysis Equation

S = + Assets Liabilities Equity Step 1: Analyze transactions and source documents. Step 2: Apply double-entry accounting Step 4: Post entry to ledger Step 3: Record journal entry Journalizing and Posting Transactions

S Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Sold obsolete school bus receiving $3,000 cash.

S Transaction Analysis Sold obsolete school bus receiving $3,000 cash.

S Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Paid salaries of $800 to employees. Remember that the balance in the salaries expense account actually increases. But, equity actually decreases because expenses reduce equity.

S Transaction Analysis Paid salaries of $800 to employees. Remember that expenses decrease equity.

S • Titles of Affected Accounts • Transaction Date • Transaction explanation • Dollar amount of debits and credits Journalizing Transactions

Break #1 (Jokes) How do you drive an accountant completely insane? • Tie him to a chair, stand in front of him and fold up a road map the wrong way. What's an extroverted accountant? • One who looks at your shoes while he's talking to you instead of his own. There are three kinds of accountants in the world. • Those who can count and those who can't. What is the definition of an accountant? • Someone who solves a problem you did not know you had in a way you don't understand. What do you call an accountant seen talking to someone? • Popular.

M Fund Financial Statements • Primary Financial Statements for a School District & ISD/ESA/RESA • Balance Sheet: • Discloses the assets, liabilities, and fund balance at a point in time • Statement of Revenues, Expenditures and Changes in Fund Balances • Discloses a School’s revenues and expenditures over a period of time

S Fund Financial Statements • Primary Financial Statements for a School District • Balance Sheet • See Page #15 of Walled Lake “CAFR” • Statement of Revenue, Expenditures, & Changes in Fund Balances • See Page #17 of Walled Lake “CAFR”

M School Accounting Rules • Basis of Accounting – • Generally Accepted Accounting Principles (GAAP) • Cash basis of accounting • Revenue is recorded as soon as it is received. • Expenditures are recorded when paid. • Accrual basis of accounting • Revenue is recorded when earned. • Expenditures are recorded as soon as they result in liabilities for benefits received.

M School Accounting Rules • Basis of Accounting – • Generally Accepted Accounting Principles (GAAP) • Modified accrual basis of accounting • Revenue is recorded as soon as it is both measurable and available. It is considered available if it is collected within the current period or soon enough thereafter to pay liabilities of the current period (generally 60 days after fiscal year end) • Expenditures generally are recorded when a liability is incurred Schools use this!

S School Accounting Rules Michigan Public Schools Accounting Manual (Bulletin 1022) History, Purpose & Usage • Bulletin 1022 serves as a mandatory guide to the uniform classification and recording of accounting transactions for Michigan school districts. The Bulletin was adopted in 1963. The manual changes to conform with changes in generally accepted accounting principles (GAAP). • Bulletin 1022 is intended for use by both intermediate and local school districts. It is equally applicable to both except that the Vocational Education Fund, Special Education, and Cooperative Education fund are for intermediate school district use only (with limited exceptions.) • The Bulletin’s primary purpose is to develop systems which make possible combinations of data to provide necessary financial information for decision making. It is intended that Bulletin 1022 be usable as a working manual in the design of the entire financial system of a school district. It is important in the use of this manual to recognize that the standardization of definitions and classifications is critical to the data gathering process.

S Purpose of Funds • A school district accounting system should be organized and operated on a fund basis. • A fund is a fiscal and accounting entity with a self-balancing set of accounts. • Legal reporting requirements and the varied nature of school district’s operations make it necessary for the school district to account for its activities through the use of separate funds. • Each fund will account for designated assets, liabilities, fund equity, revenues, and expenditures based upon the purpose of the fund. • District-wide account groups should also be used by the school district to account for and to control its long-term debt and capital assets.

M Types of Funds School districts are allowed to maintain the following seven types of funds. The first four funds are used principally to account for the ongoing activities of the school district financed with general school district revenues in the form of taxes, state aid, grants and other entitlements. They are also used to record the acquisition of capital assets. • General Fund • Debt Service Fund • Capital Projects Fund • Special Revenue Fund • Trust Fund • Agency Fund • Proprietary Funds

M 1. General Fund Purpose and Definition • All transactions related to the operation of the school district, except those transactions required by law to be entered in other funds, are recorded in the General Fund. • Local taxes and all other operating revenues or assets received or due from local, state and Federal sources are recorded in this fund. Expenditures financed by these revenues are also recorded in the General Fund. • Many districts may have grants and other programs that they consider special revenue funds. However, if those programs or grants are used for the primary purpose of educating the district’s K-12 pupils they are to be reported in the General Fund. The district may maintain them internally in separate funds, but for state reporting they should be combined to the General Fund.

S 2. Debt Service Fund Purpose and Definition • The receipt of funds for the payment of interest, principal, and other expenditures on long-term bonded debt are recorded in the Debt Service Fund. • Primary sources of revenue for this fund are debt retirement tax levies and earned interest.

M 3. Capital Project Fund Purpose and Definition • The purpose of the Capital Project Fund is to account for receipt and disbursement of monies used for the acquisition of capital assets, including equipment. • Principal sources of revenues are from the sale of bonds, tax levies, and earned interest. • Unexpended resources no longer needed on projects for which the bonds were originally approved generally must be transferred to the Debt Service Fund.

S 3. Capital Project Fund (continued) A Capital Projects Fund may have the following sources of revenue: • Proceeds of Bond Issues - such proceeds may be deposited in a capital projects fund. The funds are then used as needed for the purposes specified in the bond issue approved by the voters. • Sinking Fund Millage - As described in section 308.1212 of the School Code, local school districts may levy up to five mills, the proceeds to be used for purchase of real estate for sites for, the construction or repair of school buildings. • Transfers From the General Fund - Section 18.2 of the State School Aid act provides that up to 20 percent of the funds provided to a district under Article 2 of the State School Aid Act may be transferred to a Capital Projects Fund. • Sale of School Property (Net of proceeds required to be deposited in Debt Retirement Fund).

S 3. Capital Project Fund (continued) GENERAL RESTRICTIONS • The concept of a capital projects fund is that such funds are to be used for non-routine capital items. For example, construction of new buildings, major remodeling of buildings, and acquisition of equipment to equip newly constructed or remodeled buildings. Routine operation, maintenance and repair are to be accounted for in the district’s General Fund. • Additionally, the language in section 380.1212 of the School Code requires that the district’s independent auditor examine the use of sinking fund monies to ascertain that the district has expended the funds in an acceptable manner. • Bond Issue Funds deposited in the Capital Projects Fund must be used in accordance with the ballot language as approved by the district’s voters.

S 3. Capital Project Fund (continued) SPECIFIC RESTRICTIONS • For any given capital project there will most likely be restrictions that will be unique to the project. It is important that the school district maintain adequate documentation to enable auditors and other monitors to verity that funds are spent in accord with the project’s parameters. For example, language in the School code requires that bonds for technology be paid off within the “usable life” of the equipment. “Usable life” for the given items needs to be clearly defined somewhere in the bond issue documentation, and the bond payment schedule must reflect that repayment was made in accord with this code.

M 4. Special Revenue Fund Purpose and Definition • Special Revenue Funds are used to account for activities where there is a need to determine the results of operations, such as food service, bookstore, community service, inter-scholastic athletic funds, and private purpose trust funds. • Intermediate School Districts and Local School Districts who operate a Center Program as specified in Section 6 of the State School Aid Act may also keep a Special Education Fund. Intermediate School Districts may maintain Vocational Education and Cooperative Education Funds.

S 5. Trust Funds Purpose and Definition • Trust Funds are used for assets under the administrative control of the school district functioning in a trustee capacity. • The school district typically exercises discretionary authority over the investment of the trust fund assets, and as trustee, must take responsibility for the expenditure of assets for their intended purpose. • Examples include situations where a school district typically agrees to function in a trustee capacity include endowments, gifts and bequests and, under certain circumstances, foundations. Trust funds involve the measurement of revenue, expenditures and changes in fund balance.

M 6. Agency Funds Purpose and Definition • Agency Funds are custodial in nature. They are used to report assets received and disbursed for student groups and other school groups. The school district acts as the receiving and paying agent for these groups. • Agency funds are typically limited to student activity funds and other school organizations such as parent booster clubs. • Agency funds do not generate revenue and expenditure transactions since they do not conduct operations. Funds held in an agency capacity are liabilities. Consequently, agency funds report assets and liabilities; they do not report equity, but rather recognize a liability “due to student and other school groups.” Since agency funds do not conduct operations, they do not formally report revenues and expenditures.

Accounting for the Non-Accountant