Accounting Terminology

Prerequisites

Prior to reading the instructions on the Accounting Fundamentals - Accounting Terminology section, it is beneficial to review the below sections to gain foundational information:

  1. Roles and Responsibilities

Preface

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 accounting terms glossary.

Accounting Terminology

Double-Entry Accounting

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:

  1. 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)
Office Supplies 4100 $500
Cash 8000 $500


  1. 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.
Object_Code To/From Debit_DR Credit_CR
4100 To $500
4100 From $500
8000 Off-set $500
8000 Off-set $500


T-Account

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.

Illustration of a T-Account

Debit

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 Balance 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.

Illustration of the effects of a debit to Accounts Receivable

Credit

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 Foundation – Normal Balance 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.

Illustration of a credit entry to Accounts Receivable

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.

Illustration of the fund balance equation

Journal Entry

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.

Illustration of a journal entry

General Ledger

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. The general ledger detail report can be found in both KFS and IUIE.

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 and General Ledger Section.

Financial Statements

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

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:

Object_Code Debit_DR Credit_CR
4520 $1,000
9000 $1,000


Accounting Principles

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 on the accounting principles.

Fund Accounting

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:

Illustration of the different fund groups
For more information on IU specific fund accounts, please refer to the Chart of Accounts & General Ledger. 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 as 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.

FS_Line_Item_Description Fund_Group_Code Object_Code Debit_DR Credit_CR
Revenue AE 1500 $5,000
Asset AE 8000 $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

This section outlines requirements related to accounting terminology, as well as best practices (if applicable). 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 organization to identify, errors, mistakes and pitfalls can be remedied quickly and prevent larger issues down the road.

  1. Review all the fundamental accounting terminology 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 uars@iu.edu.