|Overview of Accounting
FAS is a double entry accounting system which ensures that the following accounting equation is always in balance, and is always equal to zero.
An asset is something owned—either cash or something that could be sold or collected to turn into cash, like equipment or a receivable.
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 the University’s year-end financial statements) is simply the difference between assets and liabilities—the "bottom line."
The signs are reversed, but the amounts on either side of the equation are the same. Therefore, the system is in balance, because the two numbers taken together equal zero. This is the primary rule of accounting: assets minus 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 equation
When the check is paid to the vender, cash is reduced; the liability goes away; and the equation then reads:
Again, the system is in balance.
Since the totals on either side of the equation must be equal, every debit that enters the system must have a corresponding credit. This keeps the system in balance, but it means that signs (+ and –) may sometimes be confusing to the non-accountant. To accountants, a "–" sign indicates a 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 increases an asset has no sign, while a transaction that decreases an asset has a "–" sign
Liabilities are expressed with a "–" sign. A transaction that increases a liability has a "–" sign, while a transaction that decreases a liability has no sign.
Fund balance (or net assets) is the difference between assets and liabilities. A positive fund balance is expressed with a "–" sign. A negative fund balance (overdraft) is expressed with no sign.
Therefore, summarizing the activity above:
The left side of the equation totals $8,000, the right side totals $8,000–, and the relationship is in balance.
Fund additions and deductions are entries that affect the fund balance of an account. Examples of fund additions are receipts of gifts, grants, contracts, or investment income. Examples of fund deductions are losses on investments or the return of funds to a granting agency. Fund additions are recorded in the 4000/4999 account control range, and they automatically update claim-on-cash and the appropriate fund balance account control. Fund deductions are recorded in the 5000/5999 account 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 that increases fund additions has a "–" sign, while a transaction that decreases fund additions has no sign.
Fund deductions are expressed without a sign. A transaction that
increases fund deductions has no sign, while a transaction that decreases
fund deductions has a "–" sign.
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