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Lesson 3: Accounting: The Language of Budgeting
Accounting Equation
The accounting equation is the means of linking financial accounts together.
For balance sheet accounts, the equation is simply the following:
Assets = Liabilities + Fund Balance
These three types of accounts together show the financial condition of the district.
- Done through a financial statement called the balance sheet
- Presents the assets, liabilities, and fund balance in a single report
- Lists each type of account with the amount at the time of the statement
- A snapshot of the financial condition of the district on one day
Example Balance Sheet
| Assets | Liabilities | ||
|---|---|---|---|
| Cash | $17,000 | Accounts Payable | $15,000 |
| Investments | $5,000 | Loans Payable | $12,000 |
| Taxes Receivable | $45,000 | Total Liabilities | $27,000 |
| Fund Balance | $40,000 | ||
| Total Assets | $67,000 | Total L & FB | $67,000 |
Example balances since Assets = Liabilities + Fund Equity.
Changes in assets and/or liabilities do not necessarily change fund balance.
- A variety of changes in assets and liabilities possible
- Changes in assets: one asset increases, another decreases
- Taxes receivable decrease as a taxpayer pays his or her tax bill
- Cash increases as district receives and deposits the funds
- No change in fund balance as accounting equation still balances
- Changes in liabilities: one liability increases, another decreases
- No change in fund balance as accounting equation still balances
- Assets and liabilities jointly increase
- Loans payable increase as a greater amount is borrowed
- Cash increase as funds are deposited in district account
- No change in fund balance as accounting equation still balances
- Assets and liabilities jointly decrease
- Account payable decreases as part of account is paid
- Cash decreases as funds used to make payment
- No change in fund balance as accounting equation still balances
Even after the changes, the balance sheet shows current financial condition of district at a fixed point in time. The balance sheet gives no indication of how the district got there.
Next we will look at different types of transactions, revenues, and expenditures, which do affect fund balance.
Summary
Now with these three types of accounts, assets, liabilities, and fund balance, we're ready to put together the balance sheet. And the balance sheet is an expression of the basic accounting equation. The accounting equation simply says that assets equal liabilities plus fund balance.
So these three accounts together show how well the district is doing financially. And you want the fund balance, as we said earlier, to be positive. Now it's important to know about the balance sheet, that it is a snapshot of the district. It's a picture on one day. Things can change dramatically the next day. But it is a picture of one day. Generally, the districts prepare balance sheets at the end of the year. Some of them might prepare interim balance sheets every six months, or every three months to give an ongoing picture of district.
The balance sheet itself, and you can see examples of those, has the assets listed from the most current, to the least under current, and on the long-term assets, and list the liabilities. Again, current to long-term, and the fund balance of different kinds.
So you can see all together what the fiscal condition of the district is. At that point, you have the status of what the district is.