Revenues and Expenditures

Revenues

Revenue is income received by a district.

Revenues are transactions in which assets are increased and

• Do not involve a corresponding increase in liabilities
• Do not involve incurring an expenditure reimbursement obligation
• Do not represent the recovery of an expenditure
• Do not represent the cancellation of certain liabilities without a corresponding decrease in other liabilities or decrease in asset

A school district is worth more as a result of a revenue transaction.

Districts use a modified accrual basis for revenues. (See MAFR: Chapter 3, page 33 for a more extensive definition of the modified accrual basis)

Revenues are recognized as received by the district when they are

• Measurable
  • Amount known
• Available
  • Available within 60 days of close of fiscal year

There may be a difference between when revenues are accrued and when the actual cash is received.

Taxes example: Taxes are recognized as revenue when they are levied by the board, not when taxpayers pay their tax bill.

1. Taxes levied (June)
   • Revenue is recognized because the taxpayer has an obligation to pay a known amount by a certain date.
     • Taxes receivable account increases (new asset, no corresponding liability).
2. Taxes paid (August)
   • Cash received later, but revenue already recognized
     • Cash increases and taxes receivable decreases.
     • This is a shift between two assets with no change in fund balance.

Expenditures

Expenditures are the cost of doing business for a district. In other words, expenditures involve paying for goods and services used or consumed.

Expenditures are incurred when

• assets are decreased without a corresponding decrease in liabilities, and
• liabilities are increased without a corresponding increase in assets.

Ultimately, expenditures are transactions that decrease fund balance. The school district is worth less as a result.

Districts also use a modified accrual basis for expenditures. (See MAFR: Chapter 3, page 33 for a more extensive definition.of the modified accrual basis.)

Expenditures are recognized in the fiscal year the liability is incurred, not when they are paid.

• In other words, they are recognized when they become an obligation of the district.

There may be a difference between when expenditure is accrued and when actual cash is paid out

Utility Bill example: The expenditure is recognized when the invoice is received, not when it is paid.

1. Utility bill arrives
   • Recognize expenditure when invoice is received, since amount is known and the obligation to pay has been incurred.
     • A corresponding liability (accounts payable) is increased to identify the obligation (but no cash is paid out).
2. Utility invoice paid
   • Expenditure already recognized
   • Reduce both cash and accounts payable with no change in fund balance.

Accounting Equation - Expanded

With the addition of revenue and expenditure accounts, the simple accounting equation must be expanded to include these financial transactions as well. The full equation is the following:

• Assets = Liabilities + Fund Balance + Revenues - Expenditures

At the end of the year, the Revenue and Expenditure accounts are closed out and transferred into the Fund Balance account.

• Revenues increase fund balance.
• Expenditures decrease fund balance.

Start each new year with zero balances in revenue and expenditure accounts.

• They are annual accounts and start fresh each year.
• Districts are able to measure the amounts in each account during the year.
• Note: Asset, liability, and FB accounts are cumulative accounts and maintain their values from year to year.

Summary