Balance Sheet

Prerequisite

Prior to reading the instructions on the balance sheet, it is beneficial to review the below IU Accounting Standards sections to gain foundational information:

  1. Accounting Fundamentals
  2. Chart of Accounts and General Ledger

Preface

The following information within is related to Indiana University functions solely and is not applicable for the Indiana University Foundation.

This section discusses what makes up the balance sheet and how it is used internally within Indiana University. Information presented below will walk through a general understanding of the balance sheet along with presentation specifically related to IU reporting and lastly will specify requirements and best practices for users of the financial statements. For further information on how to pull the balance sheet or any of the referenced reports in the requirement and best practices, refer to the Financial Statements Reporting Instructions. Commonly used terminology referred to throughout the instructions are defined within the Accounting Fundamentals Section.

Introduction

What is a Balance Sheet?

A Balance Sheet, also known as the Statement of Financial Position, is a financial statement that reflects the overall financial position of an organization at a specific period in time. It represents the resources of the entity as of a specified date – think of it like taking a picture, it is fixed once it is taken.

A balance sheet is one of the three main financial statements, along with the Income Statement and Cash Flow Statement. It summarizes an entity’s assets (what it owns), liabilities (what it owes) and fund balance (its overall net worth).

How is the Balance Sheet Organized?

The Balance Sheet is made up multiple aggregations of transactions, referred to as balances. These balances are then presented as assets, liabilities and fund balances and presented in order of liquidity (how quickly it can be converted to cash). The Balance Sheet is based on the equation; Assets = Liabilities + Fund Balance. This is commonly referred to as the accounting equation.

At Indiana University, balance sheet object codes range of 8000 – 9999 and are used to record transactions relating to assets and liabilities. Not all object codes are available for organizations to use. Certain balance sheet object codes are system generated and others are limited to use by either the Campus or other University Administrative offices (i.e., Treasury, Office of the University Controller). If a user has questions related to balances, associated with system generated or limited use object codes, on the balance sheet, please contact the (RC) fiscal officer or campus office.

Assets

Assets are defined as any resource of value that can be used to generate future economic value. An organization’s assets are listed first on the balance sheet. All asset object codes, except for contra-asset object codes, have a debit balance. A contra asset object code is an offset to another asset code (i.e. accounts receivable or capital assets) and typically acts as a reserve to reduce the associated asset code. Allowance object codes, such as 8950 – Allowance for Doubtful Accounts have a credit balance.

The assets section of the balance sheet is split into current and non-current classifications.

A current asset is an asset that is expected to be sold or consumed within twelve months. While each organization may have different types of current assets, common examples include:

  • Cash – Currency/legal tender (i.e., paper currency or coins) that can be used in the exchange of goods or services.
  • Accounts Receivable – The amount of money owed to an organization for providing a good or service. It is often shown on the financial statements net of the allowance for doubtful accounts. An allowance for doubtful accounts debts is an estimate of total accounts receivable which is not expected to be collected.
  • Inventory – The products or items that an organization has on hand that are intended for resale.
  • Prepaid Expenses – A payment of cash for goods or services that will be received or used at a future date. As the organization consumes the good or service or as time passes, the actual expense is recognized and the prepaid expense is reduced. For further information on recording and recognition of prepayments refer to the Payments Section.

Non-current assets are long-term assets that the organization expects to hold for longer than twelve months and cannot be readily converted into cash. Each organization may hold different types of non-current assets. Common examples of non-current assets include:

  • Capital Assets (Property, Plant and Equipment) – Assets that are expected to have a useful life of more than one year and meet a certain dollar threshold. Common examples include equipment, land and buildings, vehicles etc.
  • Intangible Assets - Assets that lack physical substance but have monetary or other value to the organization. These often include: patents, trademarks, copyrights, computer software, logos and easements.

Both current and non-current assets are listed in order of liquidity. As a result, cash is always listed first.

Liabilities

The second section of the balance sheet lists liabilities. A liability is a debt or obligation that arises from past events. All liability object codes, except for allowance object codes, have a credit balance. Liability allowance object codes have a debit balance. The liabilities section is also split into current and non-current classifications.

A current liability is an obligation that is expected to be settled within twelve months. Common examples include:

  • Salary & Wages Payable - An obligation to employees for time worked that has not been paid.
  • Accounts Payable - An obligation to a supplier/vendor when an organization has received a good or service but has not yet paid for them. Accounts payable are usually recorded at their face value since the time between purchase and payment is usually short.
  • Deferred Revenue - An obligation to a customer when an organization receives cash for goods or services that have not yet been provided (i.e., revenue received for a future semester’s tuition). Balances will not be recognized during the current year will be shown as a non-current liability.

A long-term liability is an obligation resulting from a previous event that is not due within one year. Long-term liabilities are also known as non-current liabilities. Common examples include:

  • Bonds Payable – A promise to pay, related to principal and interest, over a specified period. It is often shown on the financial statements net of the discount on bonds payable. A discount on bonds payable occurs when bonds are issued for less than the amount that it was originally issued.
  • Notes Payable - A promises to pay a specific amount of money at a future date. In other words, a note payable is a loan between two entities.
Fund Balance

Fund balance is essentially the difference between assets and liabilities. In general, it is the balance remaining after the assets have been used to satisfy the outstanding liabilities. Very little activity occurs directly within the fund balance accounts and is comprised of the prior existing fund balance and the period’s net income. Different than other parts of the balance sheet, no activity occurs within each fund balance classification and is primarily comprised of income statement activity (net income) and any transfers. The change in fund balance follows the general formula below and is presented as the final line item on the statement of the balance sheet.

The fund balance is made up of three classifications:

Net Investment in Capital Assets - Consists of the University’s investment in capital assets, such as equipment, buildings, land, infrastructure, and improvements, net of accumulated depreciation. Assets held for debt service are offset by the related debt. If there are unspent bond proceeds it should be netted against net investment in capital investment.

Restricted Funds - consists of amounts subject to externally imposed restrictions governing the use. There are two types of restricted funds:

  • Restricted non-expendable funds - Subject to externally imposed stipulations that they be retained in perpetuity. These balances represent the historical value (corpus) of the University’s permanent endowment funds.
  • Restricted expendable funds - Expenditures by the university must be spent according to restrictions imposed by external parties.

Unrestricted Funds - Expenditures without restrictions and may be spent on operational needs or a University specified project.

In general, no entries should be posted directly to fund balance accounts. If you believe there should be an adjustment or entry to a fund balance, contact the Office of the University Controller.  

Balance Sheet Presentation

Since the Balance Sheet reflects financial information at the end of a specified date, users can use this information to assess the overall financial health of the organization. It is often times presented as of multiple points in time. For example, the balance sheet may reflect year-end data for two (or more) years. This allows the reader to see variances and trends. This is referred to as a comparative balance sheet. Below is an example comparative balance sheet which can be pulled from IU’s internal reporting site, Controllers Toolkit. For further information on how to pull a balance sheet, see the Financial Statement Report Instructions.

Requirements & Best Practices

The above sections gave users a better understanding of the purpose of the balance sheet along with what is included and how the balance sheet if formatted for IU internal reporting. This section will discuss how to interpret the balance sheet and procedures all users need to follow when pulling the balance sheet report. By pulling the balance sheet on a regular basis, users are able to ensure an entity’s financial health. It is important that each entity monitors and analyzes their balance sheet on, at least, a quarterly basis.

This section outlines requirements related to balance sheet review, as well as best practices. 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.

Requirements

The (RC) fiscal officer is responsible for the accuracy, reliability, and completeness of the balance sheet.

Quaterly Activities:

  1. Run the balance sheet at least quarterly with comparative balances. Please refer to Financial Statement Report Instructions for more information on how to pull the financial statement report.
  2. Complete a variance analysis for all operating accounts on a quarterly basis. As part of this process, organizational units need to be able to provide explanations of material variances to FMS, upon request only. Please check with your campus and/or RC, as they may require variance analysis submission on a quarterly or annual basis. Please see the Closing Procedures Section - Variance Analysis for more information on Variance Analysis.

Semi-Annual Activities:

  1. Provide substantiation for any non-system generated asset and liability balances on their balance sheet. For more information on non-system generated balances and information on how to substantiate your balances, see the Closing Procedures Section - Balance Sheet Substantiation.

Annual Activities:

  1. Run the balance sheet as of year-end and review for the below information:

    • Stale balances are asset or liability balances within the balance sheet, which have not changed for a period of time. In order to ensure your balances are accurate, reliable and complete, organizations are required to review the balance sheet for any stale balances. Stale balances can be identified through the following ways.
      • The Office of the Controller has created a Multi-Year Stale Balance report to identify balances that have the not changed for three years. Please refer to the Multi-Year Stale Balance Report Instructions for more information. 
      • Stale balances can also be identified by comparing your balance sheet substantiation for the current year to the prior year. Please see the Closing Procedures Section for more information on the impact of stale balances in the balance sheet substantiation section.
    • In general, an asset or liability balance is presented as a positive amount within financial statements. To ensure balances are accurate, reliable and complete, organizations are required to review the balance sheet for any negative balances. The Office of the Controller has created an Account Negative Balances report to help identify account balances that are negative. Please refer to the Account Negative Balances Report for more information.
    • In the event that a balance or transaction is deemed stale, an adjusting/correcting entry needs to be made to adjust the balance. Please see Closing Procedures Section for more information on how to make the adjustments.
  2. Determine that there are no negative cash balances at year-end through review of balance sheet at account and consolidated object code. If there are negative balances, are there other accounts with a cash surplus to offset the negative balance?  

Best Practices

  1. Review the balance sheet at year-end and consider the below checklist of questions. The (RC) fiscal officer is responsible for reviewing and analyzing the operational needs of the RC/organization. Analyzing the Balance Sheet allows the fiscal officer to determine if the current financial position is going to meet the organizations operational needs. The questions that need to be asked will vary depending on the needs; however, the following questions are some common examples:
    • Is there enough cash to support overall cash flow and operations? Are assets greater than liabilities? In general, an entity should try to keep their current assets higher than their current liabilities to ensure enough cash flow for future operational needs.
    • Are accounts receivable being collected in a timely manner? In general, an organization should attempt to make timely collections on all outstanding receivable to ensure strong cash flow and maintain actual revenue to budgeted amounts for the fiscal year.
    • Are ending receivable balances being reviewed to ensure no negative or stale balances? Balances > 1 year (stale) can artificially inflate the ending receivable balance if the balance is not expected to be received.
    • Is inventory too high or too low? When inventory is too high, an entity runs the risk of the inventory becoming obsolete. When inventory is too low, you may not be able to meet the demands of your customer resulting in potential loss of sales.
    • Are capital assets fully depreciated? Is a replacement needed? When a capital asset is fully depreciated, it will remain on your balance sheet until the asset is disposed. However, if a capital asset is expensive and required for a given entity to function, a plan for replacement is important. Fiscal Officers should monitor their balance sheet and the useful lives of their assets for planning purposes. For further information regarding the difference between capitalization versus expensing of assets, see capital assets & leases section.
  2. Evaluate the organization’s financial trends for 3-10 years and determine if there are any predictable patterns that may impact future periods. Business operations are often. It is difficult to evaluate overall performance by comparing current activity to the prior year only, so performing trend analysis will be a beneficial to determine potential issues that could impact the future.
  3. Analyze the balance sheet and review any discrepancies or errors and consider some big picture questions which may impact your organization’s fiscal health.