Prior to reading the standard on Accounting Fundamentals - Accounting Terminology, it is beneficial to review the below section to gain foundational information:
Accounting is an area with many unfamiliar terms. These terms can be confusing and misleading when you do not know their meaning, understand how they relate to your entity as a whole, or why they are relevant to your day-to-day work.
This section of the IU Accounting Standards Book is a compilation of common accounting terms that are the basis of how and why users record financial transactions the way they do at Indiana University. Additional accounting terms can be found in the Glossary section.
Double-entry accounting is a method used to balance an entity’s accounts by ensuring that transactions are recorded in at least two object codes on an entity’s books. Each transaction entry must have a corresponding entry and the two must equal one another often called double entry or balancing. This accounting method ensures that the entity’s assets = liabilities + stockholders equity. Examples of double entry accounting are shown below:
- Office supplies were purchased for $500 in cash. In this example our office supplies expense increased by $500 and our cash decreased by $500.
|Account Name||Object Code||Debit (Dr)||Credit (Cr)|
- An office supply expense for $500 was incorrectly recorded to the wrong account. An adjusting entry is required to move the expense to the correct account. A Distribution of Income and Expense (DI) or General Accounting Adjustment (GEC) document is created to move the expense, and in the process an offset to cash is automatically created.
This is a tool used to help identify the ending balance of a given asset, liability, revenue or expense. The T-account helps organize and summarize the total transactions in an individual account. Shown most commonly as one horizontal line and a vertical line intersecting, the left side is for debits and the right side is for credits.
One part of double-entry accounting, a debit is the left side of a T-account. In accounting terms, to debit an account means to place the dollar amount assigned to a transaction on the left side of the T-account. It can either increase or decrease an object code balance, depending on the financial transaction being recorded. See the Accounting Fundamentals – Normal Balances section for further detail on how debits increase/decrease different object codes. An example of debiting a T-account is shown below.
A student enrolled in a summer class for $200 creates a new bursar receivable balance. The bursar accounts receivable balance will be debited by $200, showing an increase in the asset balance.
One part of double-entry accounting, a credit is the right side of a T-account. In accounting terms, to credit an account means to place the dollar amount assigned to a transaction on the right side of the T-account. It can either increase or decrease an object code balance, depending on the financial transaction being recorded. See the Accounting Fundamentals – Normal Balances section for further detail on how debits increase/decrease different object codes. Using the T-account, an example of a crediting an account is shown below.
A $50 outstanding bursar receivable balance was collected; the bursar accounts receivable balance will be credited by $50, showing a decrease in the asset balance.
The Accounting Equation
Considered the foundation of double-entry accounting, the accounting equation states that the entity’s balance sheet must balance. This is calculated using the equation below.
Assets= Liabilities + Equity*
*Note: At IU, equity is the equivalent of fund balance
See the below example for visual representation of the accounting equation, which shows how the balance sheet should balance.
Journal entries are records of business transactions. A business transaction is the exchange of goods or services for a form of payment. A journal entry is used to record each transaction and include more information about the transaction such as date, amount, description of the entry, and a unique reference number, often called a journal entry number. An example journal entry recorded in IU's KFS is included below.
The general ledger (GL) is a master document that records all transactions generated at IU. With each transaction, account values on the general ledger are increased or decreased depending on the transaction. The general ledger is organized into accounts: assets, liabilities, fund balance, revenues, and expenses. Every financial transaction or journal entry created by a unit generates an accounting transaction which is then recorded in the general ledger. Overall, the general ledger helps management prepare accurate and organized financial statements. Further information about the general ledger can be found in the General Ledger section. Refer to the Fiscal Officer Reporting Tools section for the general ledger detail report.
Chart of Accounts
An organizational structure for the entire university for all accounting, reporting and budgeting. The structure is built using chart codes, responsibility centers, organizations, accounts, object codes and other chart of account components. Within IU, chart of accounts is commonly referred to as COA. Further information on the chart of accounts structure and its components can be found in the Chart of Accounts section.
The financial statements are a collection of reports that summarize IU’s financial activity, position and cash flow for the year. The financial statements help users determine IU’s ability to generate cash, how much debt the university holds and how profitable IU is both currently and historically. At IU, the financial statements include: the Balance Sheet, Income Statement and Statement of Cash Flows, along with any accompanying notes. For further information on the financial statements, refer to the Financial Statements section.
Accrual accounting is a method that records revenue when it is earned and records expenses when they are incurred, not when the cash is received. Different than cash accounting, this method provides a more realistic understanding of income and expenses and helps with long term projections. An example of accrual accounting is presented below.
An invoice for $1,000 was received for work performed in May 20XX is received by IU in July 20XX, after fiscal year end. An accrual for the total amount of the invoice should be recorded prior to fiscal year end close as the service was provided in the current fiscal year. The entry for this accrual would be:
Accounting principles are general rules and guidelines that entities must follow to accurately report their financial statements. There are five key principles that all accountants and entities must follow to accurately record their financials: revenue recognition, historical cost, objectivity, matching and full disclosure. These are requirements set by the Accounting Governing Board in the United States and are critical concepts to understand prior to recording entries and creating financial statements. Refer to the Accounting Principles section for further detail.
Specific to federal, state or local government and those organizations that are funded by a government, fund accounting segregates resources based on restrictions and/or specifications from the funding organization. At IU, these segregations are called fund groups. Fund accounting and presentation on the financial statements is an important concept that has an impact on external financial statement presentation and internally for decision-making by IU’s top executives. Indiana University is a proprietary fund of the State of Indiana, but within the university’s accounting, fund groups are broken out as follows:
For more information on IU specific fund accounts, please refer to the Chart of Accounts - Fund and Sub-Fund Groups section. To show the impact of fund accounting at IU, the below example walks through a typical entry for an auxiliary unit.
An incoming undergraduate student has signed up to live in a residence hall on campus the fall semester. Prior to the student’s arrival, they pay their residence hall fee of $5,000. To record this transaction to the auxiliary fund and correct object codes, the IU employee processing the account activity would create the below entry.
|Residency Hall Revenue||Revenue||AE||1500||$5,000|
US Generally Accepted Accounting Principles (US GAAP)
US GAAP is the combination of authoritative standards (requirements) and the commonly accepted ways of recording and reporting accounting information. US GAAP is issued by the Financial Accounting Standards Board (FASB), the organization responsible for establishing accounting and financial reporting standards for companies and nonprofit organizations in the United States.
Government Accounting Standards Board (GASB)
GASB is similar to the FASB, but issues generally accepted accounting principles for state and local governments and those entities that are funded by state and local government. Indiana University is a component of the State of Indiana, meaning IU falls under the umbrella of the state and is a government funded organization. As such, IU is required to follow all GASB standards along with US GAAP.
Requirements and Best Practices
This section outlines general requirements and best practices related to Accounting Fundamentals – Accounting Terminology. While not required, the best practices outlined below allows users to gain a better picture of the entity’s financial health and help identify potential issues on a more frequent basis. This allows organizations to identify errors, mistakes and pitfalls which can be remedied quickly and prevent larger issues in the future.
- Review all the Accounting Terminology standard listed within the document and the accounting Glossary to gain pertinent knowledge of accounting at IU. After reviewing, if users have questions, reach out to the campus office or the Accounting and Reporting Services team at firstname.lastname@example.org.