9.a. Overview of Accounting (2024)

Overview of Accounting

FAS is a double entry accounting system which ensures that the followingaccounting equation is always in balance, and is always equal to zero.

Assets minus Liabilities equals Fund Balance (also called Net Assets).

An asset is something owned—either cash or something thatcould be sold or collected to turn into cash, like equipment or a receivable.

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A liability is something owed—such as a payment to a vendor(an account payable) or a mortgage on a building.

The fund balance (which is called "Net Assets" in theUniversity’s year-end financial statements) is simply the difference betweenassets and liabilities—the "bottom line."

For example, tuition payments of $50,000 might be credited to a Ledger1 account for the Department of Botany,and a Ledger 4 expenditure account mightbe established for the department with a $50,000 budget. The two accountsmap to the same generalledger account. After receipt of tuition payments of $50,000, theaccounting equation in the general ledger account would be:

Assets	minus	Liabilities	equals	Fund Balance
$50,000	-	0	=	$50,000–

The signs are reversed, but the amounts on either side of the equationare the same. Therefore, the system is in balance, because the two numberstaken together equal zero. This is the primary rule of accounting: assetsminus liabilities equal fund balance.

If the department approved a $5,000 invoice for payment in 30 days,this $5,000 would represent a liability and would be entered into the equationas follows:

Assets	minus	Liabilities	equals	Fund Balance
$50,000	-	$5,000–	=	$45,000–

When the check is paid to the vender, cash is reduced; the liabilitygoes away; and the equation then reads:

Assets	minus	Liabilities	equals	Fund Balance
$45,000	-	0	=	$45,000–

Again, the system is in balance.

Since the totals on either side of the equation must be equal, everydebit that enters the system must have a corresponding credit. This keepsthe system in balance, but it means that signs (+ and –) may sometimesbe confusing to the non-accountant. To accountants, a "–" sign indicatesa credit, and an entry without a sign indicates a debit.

FAS uses signs in the following manner:

Assets are expressed without a sign. A transaction that increasesan asset has no sign, while a transaction that decreases an asset has a"–" sign

Cash Balance		New Cash		New Cash Balance
$10,000	+	$5,000	=	$15,000

Liabilities are expressed with a "–" sign. A transaction thatincreases a liability has a "–" sign, while a transaction that decreasesa liability has no sign.

Accounts Payable		New Payable		New Payable Balance
$6,000–	+	$1,000–	=	$7,000–

Fund balance (or net assets) is the difference between assets and liabilities.A positive fund balance is expressed with a "–" sign. A negative fundbalance (overdraft) is expressed with no sign.

Therefore, summarizing the activity above:

Assets	minus	Liabilities	equals	Fund Balance
(Cash)		(Accounts Payable)		(Net Assets)
$15,000	-	$7,000–	=	$8,000–

The left side of the equation totals $8,000, the right side totals$8,000–, and the relationship is in balance.

Fund additions and deductionsare entries that affect the fund balance of an account. Examples of fundadditions are receipts of gifts, grants, contracts, or investment income.Examples of fund deductions are losses on investments or the return offunds to a granting agency. Fund additions are recorded in the 4000/4999account control range, and they automaticallyupdate claim-on-cashand the appropriate fund balance account control. Fund deductions are recordedin the 5000/5999account control range and automatically reduce cash and the fund balance.FAS uses signs for fund additions and deductions as follows:

Fund additions are expressed with a "–" sign. A transaction thatincreases fund additions has a "–" sign, while a transaction that decreasesfund additions has no sign.

Fund deductions are expressed without a sign. A transaction thatincreases fund deductions has no sign, while a transaction that decreasesfund deductions has a "–" sign.

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