EDLDR579:

PROFESSOR: These notes, we'll talk about the types of accounts that school districts use in their accounting system and in their budgeting operations. There are two types of accounts. We're going to start with the what are called balance sheet accounts. These are assets, liabilities, and fund balance.

And these first ones are pretty much what I think you would expect them to be. The assets are resources that the district owns, that have some value to the district. They are owned and controlled by the district. One point to note is that the assets are valued at their time of acquisition. So when you, for example, the district might buy a piece of land and hold it for 20 years, and during that time the land might have appreciated substantially since the town grew up around it. If you bought the land for $1 million, and now it's worth, on the market, $3 million, the district carries the value of the asset at the original purchase price, which would be $1 million in this example.

Now similar to all other accounts, assets have a coding system. In each number, each asset has account code that is assigned to it, and you can find these in the accounting manual. This allows each asset to be individually identified, and recorded, and kept track of.

There are two types of assets. One are called current assets. These are assets that you expect to have turnover, or be sold, or could be sold within one year. And they are either cash or items that could be turned into cash readily quickly.

The second type of assets are called capital and infrastructure assets. These are long-term assets. They used to be called long-term assets. Their new name is capital and infrastructure assets. These are items that the district owns and expects to have for a long period of time. And they would be things like school buildings, long term equipment, things like that.

The accounting system classifies all current assets as a 100 code. And below that they are broken down into further divisions. Investments might be 110, taxes receivable 120, and so forth. Capital and infrastructure assets use the accounting code for assets of 200. Again, those are further broken down to 20 buildings and building improvements, for example. You can find all of those in the accounting manual, and see the various kinds of assets that the district has.

On the other side of the balance sheet, are the liabilities. This is opposite from assets in that these are the things, activities, items, that the district owes to other people. They're debts or things that might become debts, so the school district has to pay those off at some time. Again similar to assets, each liability has its own account code. These are laid out in the accounting manual. Again this allows each liability to be recorded and identified very promptly.

Similar to assets, liabilities have two general classifications. One current liabilities, with a code 400. These are items that are expected to be paid off within a year, items that the district owes. They might be things like a loan payable that's due within a year, things of that nature.

Long-term liabilities are the 500 codes. They have obligations-- due dates, that are some time beyond one year-- the things in the future. These might be long-term bonds, other kinds of lease obligations that the district might have. Again you can check those in the accounting manual, and see what kinds of things are covered under liabilities.

The third type of balance sheet account, and we'll see why they're balance sheet in just a minute. They're called fund balances. And very simply, a fund balance is the difference between the sum of the assets and the sum of liabilities. And if the assets are greater than liabilities, then the fund balance is positive. If the liabilities are greater than assets, then the fund balance is negative. Districts are not allowed to have a negative fund balance. In the private sector, that would be called bankruptcy.

Districts are not allowed to go bankrupt. So districts would take other actions to avoid that.

But in any event, there are the fund balance in order to show the difference between assets and liabilities. The larger the fund balance, the greater financial strength, or the better financial position the district is in. They are often used by districts to set money aside for particular purposes, or to act as a contingency fund to deal with various emergencies, types of expenditures that might come up during the year, that were not planned for. Things like a big storm that blows off your gym roof. You need to replace that quickly, before the whole building gets ruined. So you can dip into the fund balance and cover that, even though it's not in your budget.

Fund balance, the level of fund balance, is set by board policy with some restrictions. The legislation in Pennsylvania has established a maximum of 8% of total expenditures as the level of fund balance that's permitted for school districts. That is to prohibit districts from over-taxing, at least that's in the legislature's view, over-taxing and hoarding the money. So there's a maximum of 8%.

The school districts can maintain multiple kinds of fund balances to serve different purposes. There are at least five different kinds of fund balances with different kinds of restrictions on each. And we'll go through them very quickly, from the most restrictive, to the least restrictive.

There's a group called an 810 coding system, it's fund balances are 800's, called non-spendable fund balances. These are non-spendable monies, because they are legally or formally contracted out, and the district does not have access to those except for a particular purpose.

820's are restricted fund balance. These are constricted or restrained for a particular purpose, generally set aside with another contractual agreement with an outside party.

830 are committed fund balances. Funds in these accounts are committed by the school board for particular purposes. Since the school board committed them, they can also un-commit them with the same kind of board action. So they are set aside, though, to preserve those funds for particular purposes. As an example, might be currently, districts will have a retirement subsidy fund in which they set aside monies to help them pay the rapidly increasing retirement cost for school districts, so that they have money that they can soften the future increases for them. They committed to that particular fund, and when it comes time to use it, they bring it out on that fund and use it for those purposes.

The next least restricted, or the 840's, which are called a signed fund balance. These are monies that are identified to be used for particular purposes. They are not committed, so it's not that level of restriction. But the district has indicated its intent to use it all for particular purposes.

And finally the 850's are the unassigned fund balance. There are just monies that the district has to be able to use. This is more of the contingency fund, where that they can use it when they are necessary.

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.

PROFESSOR: Revenues and Expenditures. In this section, we're going to talk about two additional kinds of accounts, revenues and expenditures, which are important to the annual operation of the district. Revenues reflect the income received by the district, and expenditures are the expenses or costs incurred by the district.

The technical definition of revenues are accounts where you have a corresponding increase in assets without an increase in liabilities. So assets go up, liabilities don't correspond to that. And as a result, if you remember the accounting equation, the fund balance has to go up.

So revenues cause the fund balance to increase because you get something coming in without a corresponding something going out, or a liability that will have to go out later. And the net of this is that the school district is worth more after receiving a revenue than it was before.

Revenues are recognized in the books of account. That means that they can be put in the books when they meet two criteria. One is when they're measurable. That means when you know how much it is. You can't speculate. For example, we estimate we're going to receive $1.6 million from the state in basic ed funding next year. You can't put that in the books. What you can put in the books of account is the actual dispersion that the state puts out to you when it actually happens.

So it's measurable, meaning it's known, and when it's available-- the second criteria. And that is the district will receive it within 60 days of the close of the fiscal year. The purpose of that is to try to match the revenues with the fiscal year in which they are incurred, which they are received. And we'll do the same with expenditures when we get there.

Let me give you an example of a difference between when revenues are accrued and when you actually get cash, which may be different. The example is given in the lesson. But taxes are a good example. When the school district levies its taxes, that means they pass a formal resolution that puts a requirement on property owners to pay the amount of tax that's been levied. So that is a legal requirement. The district can recognize those revenues, because they have a legal right to those. But generally they don't receive the money at that time. The taxes are levied at the end of June and the tax notices go out. The taxpayers have up to 30, 60, 90 days to pay the taxes.

For revenue accounts, there are two different dimensions. Revenues are treated and accounted for by first funds. We've already talked about the fund. That's which set of accounts that's the transactions are going to be recorded in. Mostly they'll be the general fund, but there may be cases where there will be other funds that are to be used.

And the most important dimension for revenues is the source. This identifies where the revenues come from. Who provided the revenues to the school district? And there are four types of sources, four general types of sources-- local, state, federal, and other. Each of those has its own accounting code or grouping. The 6,000 accounts for revenues are local revenue, 7,000, state, and so forth.

Now, each of these main sources, like local revenues, has a whole bunch of sub-sources that break the general one down into particular types of, in this case, local revenues. And each of these types of local revenues has its own account code assigned to it so that you can recognize that and identify it and keep track of it. These are all again specified in the manual of accounting. And you can see the full listing of the revenues in the Chart of Accounts Section I. It's toward the end.

And in the revenue codes, often you will find revenues sub-sub-sub-accounts, meaning you go down to the fourth digit. And one of the most important revenue accounts for school districts is one that does do that. It's the current real estate taxes, where districts get the bulk of their income from local sources. And it's a local source, so it starts with an account code 6,000. And you can track it and the accounting manual. But the actual code for that is 6111, meaning it's current real estate taxes.

State sources have the 7,000 code. Again, the important ones there you'll find in the Accounting Manual. But one in particular-- the basic education funding. This is where the bulk of the state aid to districts comes from, and its accounted under Code 7120. And you can follow the rest of the codes, as well.

Let's continue to talk about expenditures. We're going to spend more time on expenditures than any other account in this lesson, because expenditures are the most single important type of account for most administrators. If you're a principal or a district office administrator, unless you're the business manager, you're going to be dealing more with expenditures than anything else. So you need to become familiar with expenditures. Know what they are, how they're organized, what different kinds of expenditures mean, how to recognize the codes, and so forth.

So you use expenditures more than anything else in planning for your budget for next year by seeing what you spent last year, planning what you're going to spend next year, and even looking at how your expenditures are going to go in future years. You also use the expenditure accounts to analyze what's been going on. Are things out of control? Are the trends like you want? And so forth. It just gives you a lot of information.

Now, this information comes at a price because the expenditure classification system is the most complex of any of the types of accounts. Assets had two different kinds of accounts, revenues had two different kinds of accounts. Fund balances have multiple, but they are pretty easy to discern. Revenues have two. Expenditures have up to nine different kinds of dimensions that you need to be aware of.

Also, every expenditure has at least five or six accounting codes-- meaning different dimensions-- that are attached to it. It's not a single code, like a revenue source would be. There are multiple expenditure codes attached, representing the different dimensions of the expenditures. We'll talk about those next.

The primary expenditure dimension-- the one we'll spend most time on-- are the fund, which we've already talked about, the function, the object of the expenditure, the funding source, meaning where the funds come from, instructional organization, what level in the organization is incurred. And those first five are generally required-- they're certainly required in the Pennsylvania reporting system. And one that is not required but is optional that is used by most school districts is called operational unit, and this is largely a cost center where you can collect costs by particular location. We'll talk about that when we get to it.

There are other dimensions that are available that some districts do use. The most common one would be subject matter. For example, in a high school, you can track your expenditures down to mathematics, English language, world languages or type of world language, and so forth. So the accounting system gives you the flexibility to do that.

Now, again, it's a two-edged sword, because you can track information down to, let's say, French or Spanish. At the high school, you also have to spend the time and effort to set up those accounts and to record the information in those accounts. So it doesn't come free, but if the district puts the time and effort into it, they can provide additional information to make the comparison or to analyze the trends. The various dimensions of expenditure accounts are shown in the Chart of Accounts in the Accounting Manual in Sections E through H. And you'll be able to track those exactly where they are accounted from.

Now, before I go into the detail on expenditures, I want to take a slight step back and look at the accounting equation again-- only this time, I want to expand it to include the expenditures and the revenues that we've just talked about. The expanded equation-- you can is assets equals liabilities plus the fund balance plus the revenues minus the expenditures. Just as we said before, revenues are items that add to the fund balance, expenditures are items that decrease the fund balance. So you would add revenues and subtract the expenditures.

Now, at the end of the year-- although you're not accountants-- what does happen is that the revenue and expenditure accounts are closed out to the fund balance, meaning you add all of the revenue accounts to fund balance. You subtract all the expenditure accounts for the fund balance, reset those accounts-- revenues and expenditures-- to zero, and start the new fiscal year at zero amounts for both of those so you can keep track of the amounts for revenues and expenditure during the fiscal year. So when you close those revenue expenditures accounts out tot he fund balance, you either increase or decrease the fund balance depending on what happens during the year.

So now let me shift back to talk about the expenditure accounts. Now I want move into the different expenditure dimensions, the kinds of accounts, that are used to record expenditures. We've talked about funds. So again, we have to include a fund with the expenditure so you know where to record the expenditure, whether it's a general fund or some other fund.

The first major dimension beyond fund is called function. And the function is the why for the expenditure. It's the purpose of the expenditure, what you're doing it for. And it's the activity that you are spending the money for. It's the reason for it. I'm using a lot of different words here, because I want to differentiate-- and sometimes this is confusing-- between what you actually spend the money for. The function is the purpose of the expenditure. The object, which we'll come to next, is what you actually spend the money for.

And you can see these in the separate sub-functions of the functional accounts. There are five major functions. The first-- and these are all four-digit codes. The first, the 1,000s, are the instructions. So any expenditure for instruction would fall under the 1,000 function. Support services are 2,000. Any expenditure for support services falls under 2,000 and will have a 2,000 code, and the same for 3,000 and so forth.

Now, each of these functions has a variety of sub-functions. So depending on how detailed the manual is set up, you can account for the purpose of these expenditures in greater detail. The ones that you'll be using quite frequently will logically be under the instructional function. And within that, you can separate regular education from special education, because they each have different sub-function codes, and so forth.

In the support side, the 2,000 function codes, you have a variety of things going there. Even more people, personnel services, administration, business services-- a whole variety of things here. And again, you can see in the accounting manual and the function drawing in Section E and Chart of Accounts where and what these things are, and what the definitions are for them.

Let me give you a quick definition to help you read through this. The example is given in the lesson. But the four-digit function for, in this case, deaf and hard of hearing programs. This is one you can take down and actually record expenditures by deaf and hard of hearing programs. It's instructional programs, so the first digit's going to be a 1. It's a special program, so the second digit's going to be a 2. The third digit, as you see in the Accounting Manual, will be something called sensory support, which covers several different kinds of disabilities. And the last digit, the fourth digit, is for deaf and hard of hearing.

So you'll be able to take that down to a final code that is associated with an expenditure for deaf and hard of hearing services-- so 1 for instruction, 2 for special programs, 3 for sensory project, and 1 for deaf and hard of hearing. So 1221 is the functional code for that particular expenditure.

Now, for those of you aspiring to be principals, and I expect many of you are, we'll do the same example for the office of the principal. That's a support service. It's not instruction. And read the difference between instruction and support services in the Accounting Manual very close. Instruction are things that have to do with providing instruction. Support services are those activities that will support those activities, but are not instruction themselves.

So it's a support service, so it's a 2 for the first digit. If you look through the sub-functions there, you'll find one of the sub-functions called 2300, which is support services administration, which covers all of the administrative activities. And then if you look further within that, you'll find a third-level function, called office of the principal. And that gives you where you would record any office of principal expenditures. So 2380 would be the function there. You can follow that more closely or review it back in the lesson.

Now, one of the features that's important with the particular function dimension is that it is very useful for budgeting and for management because the functional structure aligns with the typical district organizational chart. When you look at instruction, there are-- and you would combine instruction with several other functions that we'll get to-- you're able to look at the expenditures and collect the expenditures by a particular school or by a particular program in a school, or by all of the different activities, like the office of the principal and custodial service all happening within that school.

So the accounting system, starting with the function, gives you the ability to track expenditures to a particular person who is responsible for those expenditures within the organizational structure. So putting those two together is a very, very helpful and insightful use of the accounting structure.

The second most important accounting code for expenditures is the object of expenditure, often shortened to just object. These are shown in the Chart of Accounts in Section F. This is the what-- what are you actually buying with this money? What are you spending this money? What is it that shows up as the item that is purchased?

Now, within the object, there are nine major objects. And each of those are specified and defined within the chart of accounts. Most of these are fairly self-explanatory, at least at the major object level. Objects have three digits in their code. Salaries are all the 100s. They show up there. Benefits are 200s. 300, 400, and 500 are different kinds of purchase services, and we'll talk about those in a moment-- supplies, some property, and you see the others. So there are a whole variety of places to go. Again, if you're not sure of what something is, look for it in the Chart of Accounts under where you think it might be.

Let me give you an example of a difference between when revenues are accrued and when you actually get cash, which may be different. The example is given in the lesson. But taxes are a good example. When the school district levies its taxes, that means they pass a formal resolution that puts a requirement on property owners to pay the amount of tax that's been levied. So that is a legal requirement. The district can recognize those revenues, because they have a legal right to those. But generally they don't receive the money at that time. The taxes are levied at the end of June and the tax notices go out. The taxpayers have up to 30, 60, 90 days to pay the taxes.

After revenues, there are expenditures. And expenditures are the cost of doing business. It's what the district has to pay to carry out its operations. So it pays for the goods and services that it receives from others. Now, expenditures are the reverse of revenues in that-- after an expenditure, excuse me-- after an expenditure, then the district is worth less as a result. That the fund balance actually would go down if you tracked it against that single expenditure. So you have revenues that increase the fund balance, expenditures that decrease the fund balance. And you hope that during the year you have more revenues than you have expenditures, so your fund balance will continue to go up.

Districts also have criteria for when they recognize expenditures. These two next accounts are important accounts for the district operation during the year. These two accounts represent the monies that come into the district, which are the revenues, and the cost that the district has for operating its services during the year. Those are the expenditures.

We'll start first with revenues. Revenues are basically the monies received by the district, or the income that it gets from various sources. When a district receives a revenue, the net result is that the fund balance is increased because of that revenue. And that happens because the definition of a revenue is when an asset increases, like cash, when they get a payment, and there's no corresponding increase in liability. So with the accounting equation, the fund balance has to go up. The school district, then, is worth more as a result of a revenue transaction.

Now, revenues for school districts need to meet two criteria to be recognized, meaning to be incorporated into the books of account officially. First they have to be measurable. That means that the amount has to be known. So you have to be able to identify the amount that you're going to get to account revenue. You can't put a number in that you estimate or that you speculate. It has to be an actual number that you received.

And secondly, it has to be available, meaning that the monies have to be received within 60 days of the close of the fiscal year. That means that you are able to try to track the revenues with the fiscal year in which they are associated. Now, some of the revenues will actually be received a little bit later, but there's a 60-day period that allows that to be connected with the previous year.

For revenue accounts, there are two different dimensions. Revenues are treated and accounted for by first funds. We've already talked about the fund. That's which set of accounts that's the transactions are going to be recorded in. Mostly they'll be the general fund, but there may be cases where there will be other funds that are to be used.

And the most important dimension for revenues is the source. This identifies where the revenues come from. Who provided the revenues to the school district? And there are four types of sources, four general types of sources-- local, state, federal, and other. Each of those has its own accounting code or grouping. The 6,000 accounts for revenues are local revenue, 7,000, state, and so forth.

Now, each of these main sources, like local revenues, has a whole bunch of sub-sources that break the general one down into particular types of, in this case, local revenues. And each of these types of local revenues has its own account code assigned to it so that you can recognize that and identify it and keep track of it. These are all again specified in the manual of accounting. And you can see the full listing of the revenues in the Chart of Accounts Section I. It's toward the end.

And in the revenue codes, often you will find revenues sub-sub-sub-accounts, meaning you go down to the fourth digit. And one of the most important revenue accounts for school districts is one that does do that. It's the current real estate taxes, where districts get the bulk of their income from local sources. And it's a local source, so it starts with an account code 6,000. And you can track it and the accounting manual. But the actual code for that is 6111, meaning it's current real estate taxes.

State sources have the 7,000 code. Again, the important ones there you'll find in the Accounting Manual. But one in particular-- the basic education funding. This is where the bulk of the state aid to districts comes from, and its accounted under Code 7120. And you can follow the rest of the codes, as well.

The other major account type in this area are expenditures. That's what it costs the district to do business. These are the output or outlays the district makes for various goods and services. And in contrast to revenues, and opposite to revenues, actually, expenditures are incurred when liabilities are increased without a corresponding increase in assets. So the district, as a net of this-- again, with the accounting equation-- is worth less as result.

You can also have an expenditure when assets are decreased without a corresponding decrease in liabilities. Just assets go down like you pay out cash, and you don't have a decrease in liabilities to offset that. So with the accounting equation, you end up with a lower fund balance, and the district is worth less as a result of that.

Districts account for expenditures on what's called a modified accrual basis. They do the same for revenues. For expenditures, that means that the expenditures are recognized in the books of account when the liability is incurred, when the district takes on the publication of paying that amount-- not necessarily when the actual payment is made. And it could well be a difference between when the expenditure becomes an obligation of the district and recognized by the district as a obligation to pay it and when they actually write the check for it.

A quick example-- a utility bill comes in. You have an invoice for that in the district. You know how much it is. And so you can book that in your accounts. And you'd book it as a liability, probably called an account payable, because it is an account that you have to pay off. And you show that as an increase in liability. Nothing has happened on the asset side, so you have an actual expenditure that would be the result.

When you, a month later, pay off that bill, you've already recognized expenditure when you got the invoice. Now you simply pay the bill and you write a check, so your cash goes down. And you, since you no longer owe it, you can reduce that liability for accounts payable. An asset goes down, liability goes down, no change in fund balance-- so you don't have, in this case, an expenditure. You've already taken care of that previously.

Let's continue to talk about expenditures. We're going to spend more time on expenditures than any other account in this lesson, because expenditures are the most single important type of account for most administrators. If you're a principal or a district office administrator, unless you're the business manager, you're going to be dealing more with expenditures than anything else. So you need to become familiar with expenditures. Know what they are, how they're organized, what different kinds of expenditures mean, how to recognize the codes, and so forth.

So you use expenditures more than anything else in planning for your budget for next year by seeing what you spent last year, planning what you're going to spend next year, and even looking at how your expenditures are going to go in future years. You also use the expenditure accounts to analyze what's been going on. Are things out of control? Are the trends like you want? And so forth. It just gives you a lot of information.

Now, this information comes at a price because the expenditure classification system is the most complex of any of the types of accounts. Assets had two different kinds of accounts, revenues had two different kinds of accounts. Fund balances have multiple, but they are pretty easy to discern. Revenues have two. Expenditures have up to nine different kinds of dimensions that you need to be aware of.

Also, every expenditure has at least five or six accounting codes-- meaning different dimensions-- that are attached to it. It's not a single code, like a revenue source would be. There are multiple expenditure codes attached, representing the different dimensions of the expenditures. We'll talk about those next.

The primary expenditure dimension-- the one we'll spend most time on-- are the fund, which we've already talked about, the function, the object of the expenditure, the funding source, meaning where the funds come from, instructional organization, what level in the organization is incurred. And those first five are generally required-- they're certainly required in the Pennsylvania reporting system. And one that is not required but is optional that is used by most school districts is called operational unit, and this is largely a cost center where you can collect costs by particular location. We'll talk about that when we get to it.

There are other dimensions that are available that some districts do use. The most common one would be subject matter. For example, in a high school, you can track your expenditures down to mathematics, English language, world languages or type of world language, and so forth. So the accounting system gives you the flexibility to do that.

Now, again, it's a two-edged sword, because you can track information down to, let's say, French or Spanish. At the high school, you also have to spend the time and effort to set up those accounts and to record the information in those accounts. So it doesn't come free, but if the district puts the time and effort into it, they can provide additional information to make the comparison or to analyze the trends. The various dimensions of expenditure accounts are shown in the Chart of Accounts in the Accounting Manual in Sections E through H. And you'll be able to track those exactly where they are accounted from.

Now, before I go into the detail on expenditures, I want to take a slight step back and look at the accounting equation again-- only this time, I want to expand it to include the expenditures and the revenues that we've just talked about. The expanded equation-- you can is assets equals liabilities plus the fund balance plus the revenues minus the expenditures. Just as we said before, revenues are items that add to the fund balance, expenditures are items that decrease the fund balance. So you would add revenues and subtract the expenditures.

Now, at the end of the year-- although you're not accountants-- what does happen is that the revenue and expenditure accounts are closed out to the fund balance, meaning you add all of the revenue accounts to fund balance. You subtract all the expenditure accounts for the fund balance, reset those accounts-- revenues and expenditures-- to zero, and start the new fiscal year at zero amounts for both of those so you can keep track of the amounts for revenues and expenditure during the fiscal year. So when you close those revenue expenditures accounts out tot he fund balance, you either increase or decrease the fund balance depending on what happens during the year.

So now let me shift back to talk about the expenditure accounts. Now I want move into the different expenditure dimensions, the kinds of accounts, that are used to record expenditures. We've talked about funds. So again, we have to include a fund with the expenditure so you know where to record the expenditure, whether it's a general fund or some other fund.

The first major dimension beyond fund is called function. And the function is the why for the expenditure. It's the purpose of the expenditure, what you're doing it for. And it's the activity that you are spending the money for. It's the reason for it. I'm using a lot of different words here, because I want to differentiate-- and sometimes this is confusing-- between what you actually spend the money for. The function is the purpose of the expenditure. The object, which we'll come to next, is what you actually spend the money for.

And you can see these in the separate sub-functions of the functional accounts. There are five major functions. The first-- and these are all four-digit codes. The first, the 1,000s, are the instructions. So any expenditure for instruction would fall under the 1,000 function. Support services are 2,000. Any expenditure for support services falls under 2,000 and will have a 2,000 code, and the same for 3,000 and so forth.

Now, each of these functions has a variety of sub-functions. So depending on how detailed the manual is set up, you can account for the purpose of these expenditures in greater detail. The ones that you'll be using quite frequently will logically be under the instructional function. And within that, you can separate regular education from special education, because they each have different sub-function codes, and so forth.

In the support side, the 2,000 function codes, you have a variety of things going there. Even more people, personnel services, administration, business services-- a whole variety of things here. And again, you can see in the accounting manual and the function drawing in Section E and Chart of Accounts where and what these things are, and what the definitions are for them.

Let me give you a quick definition to help you read through this. The example is given in the lesson. But the four-digit function for, in this case, deaf and hard of hearing programs. This is one you can take down and actually record expenditures by deaf and hard of hearing programs. It's instructional programs, so the first digit's going to be a 1. It's a special program, so the second digit's going to be a 2. The third digit, as you see in the Accounting Manual, will be something called sensory support, which covers several different kinds of disabilities. And the last digit, the fourth digit, is for deaf and hard of hearing.

So you'll be able to take that down to a final code that is associated with an expenditure for deaf and hard of hearing services-- so 1 for instruction, 2 for special programs, 3 for sensory project, and 1 for deaf and hard of hearing. So 1221 is the functional code for that particular expenditure.

Now, for those of you aspiring to be principals, and I expect many of you are, we'll do the same example for the office of the principal. That's a support service. It's not instruction. And read the difference between instruction and support services in the Accounting Manual very close. Instruction are things that have to do with providing instruction. Support services are those activities that will support those activities, but are not instruction themselves.

So it's a support service, so it's a 2 for the first digit. If you look through the sub-functions there, you'll find one of the sub-functions called 2300, which is support services administration, which covers all of the administrative activities. And then if you look further within that, you'll find a third-level function, called office of the principal. And that gives you where you would record any office of principal expenditures. So 2380 would be the function there. You can follow that more closely or review it back in the lesson.

Now, one of the features that's important with the particular function dimension is that it is very useful for budgeting and for management because the functional structure aligns with the typical district organizational chart. When you look at instruction, there are-- and you would combine instruction with several other functions that we'll get to-- you're able to look at the expenditures and collect the expenditures by a particular school or by a particular program in a school, or by all of the different activities, like the office of the principal and custodial service all happening within that school.

So the accounting system, starting with the function, gives you the ability to track expenditures to a particular person who is responsible for those expenditures within the organizational structure. So putting those two together is a very, very helpful and insightful use of the accounting structure.

The second most important accounting code for expenditures is the object of expenditure, often shortened to just object. These are shown in the Chart of Accounts in Section F. This is the what-- what are you actually buying with this money? What are you spending this money? What is it that shows up as the item that is purchased?

Now, within the object, there are nine major objects. And each of those are specified and defined within the chart of accounts. Most of these are fairly self-explanatory, at least at the major object level. Objects have three digits in their code. Salaries are all the 100s. They show up there. Benefits are 200s. 300, 400, and 500 are different kinds of purchase services, and we'll talk about those in a moment-- supplies, some property, and you see the others. So there are a whole variety of places to go. Again, if you're not sure of what something is, look for it in the Chart of Accounts under where you think it might be.

Now, each of these main objects is subdivided into various kinds of sub-expenditures as you get further and further down. With the three digit, the first digit represents the major object and then the sub-object and then the third object. So you can track that down.

Now, a couple points I want to make that sometimes are confusing. At the second level for salaries, there are different kinds of positions that show up there. So you can see that-- and we look at the accounting code. The second digit, like the 110-- the 1 and the second digit, 10-- refers to administrative salaries. The second digit for 2 refers to teachers' salaries. So 120 are all different kinds of teacher salaries.

And there's a third digit in each of those that refers to the kind of salary. So if you're looking at teachers, 121 would be the regular salaries. Again, you can follow the sub-objects in the accounting manual. 1-2-2 would be temporary salaries. If you have a sub for a day for the teacher, you would record it there as 1-2-3, because it's a temporary teacher salary, and so forth. So you are able to separate the kinds of salaries by teachers, or other kinds of positions by the second digit in the object code. If you are unsure about how to code a position, you should reference the accounting manual for guidance. And remember that different positions are coded differently.

The second is an item that often causes some confusion-- benefits. Benefits are coded by the type of benefit, not by the type of person. So you might calculate the type of benefits by medical insurance or retirement for teachers, retirement for instructional aides and so forth, all within an instructional function. But you don't show them up in benefits. You add all of the same kinds of benefits together so you can add up all the medical insurance benefits, all the retirement benefits together, all the social security benefits and show them as those kind of benefits. Because those are how the sub-objects under benefits are shown.

Now the last item the objects that sometimes causes confusion is the difference between purchase services and other kinds of expenditures. Purchase services basically mean you buy something from someone or some operation outside the district. You do not do it yourself. For example, you might do psychological evaluations for students who are suspected of needing special service. If you send those kids out to an outside psychologist and they do an evaluation and you pay that psychologist an amount of money, that goes under a purchase services-- probably purchase professional service. And you can see the kinds of different purchase services that are in the Accounting Manual.

But the point is that by paying an outside person, company, agency, it goes under purchase service. Now, if you do the same thing, carry out the same action with your own staff psychologist, you have someone on staff, the cost of doing that doesn't show up on outside. It shows up under a salary and a benefit for that particular person. So those costs are a bit more hidden under objects. You would pick them up under functions more. And so you'd have those.

And then the point I would make here, and would probably make again, is that within each expenditure, you will have these multiple different codings. So within each function, you have all the objects that refer to that function, and then all the other kinds of accounts that refer to that function. So it can be quite complex when you put it all together. That's why we use computers to organize and sort and print the reports.

The next kind of account is called funding source. This funding source specifies where the monies for this particular expenditure came from, what supported this expenditure. You may wonder, why is it done here and why doesn't it come in a different fund, like a special revenue fund? Where's that money come from?

Well, the reason is that one of the principles in setting up funds is to minimize the number of funds that you have. So if you had to set up a separate fund for every special revenue source that you had, you'd end up with dozens and dozens of funds. So rather than doing that, the accounting system creates another dimension within the expenditure set of accounts to record where those categorical funds come from.

So if you have categorical funds for special education coming from the federal government, you would record those expenditures that are supported by those funds in the funding source with its particular code. So you would be able to track those within your expenditure system without setting up a separate fund.

There's a three-digit code for the funding source, and you can see that in the Accounting Manual. Most of them are going to be non-categorical, meaning they don't have a particular source. They're coming out of general fund sources. And those would be the triple zero to show non-earmarked or non-categorical funds.

The next and important dimension in expenditure accounting is called instructional organization. And this is a pretty simple dimension. It simply indicates-- it's a separate dimension. It's a two-digit code that indicates what level of the organization the expenditure is incurred at. Is it district-wide, which is 00-- again, meaning across the whole district, not specific to any one. Elementary, middle, junior, high school, secondary, or post-secondary.

So in addition to any of the other codes, you have an instructional organization. So if you see an expenditure with a code 10 in this particular field for the expenditure, you will know it's an elementary school expenditure. And that's all you know about it. But you will know that it is incurred at the elementary school. It's a very useful dimension, though, for summing up all the expenditures across elementary schools and being able to total what you're spending for elementary schools across the district. If you wanted to go down further by grade, you can do that, because sub-levels of the instructional organization area give that information.

The next dimension that is optional, but most districts use it, is called operational unit or school-level. This object code, which is a three-digit code, allows districts to record where a particular expenditure is made. This is really used as a cost center dimension. It shows and allows you to identify and collect all of the expenditures at a particular location.

So if you want to collect expenditures by school, then you simply, in this particular field for this dimension, you put in the school number. And then when the accounts are sorted and organized and printed out, you simply will first identify sort by school code, whatever it is, and all those expenditures come out. And then you can continue to organize it by other dimensions if you want.

But this allows, basically, a cost center to be set up. This is also very useful and matches with the organizational structure because you can set up a cost center or a school-level or operational unit, more generally, for each individual that is responsible for a particular operation. So every principal could be a cost center, or every school with a principal in charge, every central office operation, such as business services or other kinds of activities, could be set up as a separate cost center, and cost collected by those areas, and then totaled and maintained and monitored that way.

It provides for not only instructional cost centers, but non-instructional, as well. Now, this dimension is not specified by the state, except for the very general levels of 200 for elementary, 500 for middle, and 800 for senior. But within that, districts are free to set up their own identification. So, for example, if you have several middle schools, they would be a 500 number. And so you could set up a 500 by east middle school, 501. 502 might be west middle school. 503 might be north middle school, and so forth. So there you'd be able to have all those pulled together.

And if you wanted to do the middle school all together, you could either sum up the 500s or you could even go back to the instructional organization and pull out the codes there. So there's a lot of ways of doing that.

The final one that school districts can use and can find very helpful is called the subject matter. And the specific subject matters are specified in the Chart of Accounts in Section H, and they are fairly detailed. It identifies what particular subject areas the expenditures are made for. And I gave examples earlier. But if you want to track expenditures-- and this is particularly useful for supplies, [INAUDIBLE] equipment, and at the school level, particularly high school and middle school-- you simply give that expenditure a subject matter code. It's another dimension. You have to put in more information to do that. But it then allows you to collect, record, organize, analyze all that information by subject matter.

And these are three-digit codes, and you can just look in the manual to find the variety of codes that are available. And it is a very large set of subject matter that you can do. Now, you could also have some sub-breakdowns that you can break it down even further, should you wish to do that. There are two other dimensions, just to mention. One is job classification, which you can classify jobs, or special call center, which is set up to allow for almost one-of-a-kind ways to collect costs for things that don't fall within the regular accounting system.

Now, let's take a minute and put all of this information together. As I said, each expenditure has an account code assigned to it for every accounting dimension that is required by the state. Those are the first five, and generally would be an instructional unit, which would be a school or a call center, and possibly a subject matter. So you've got a long string of potential account codes. You can think of this as a field of codes, that each code has its own sub-field within that. If you put this into a computer description of the expenditure, then you're able to identify and then organize and so forth all of these.

So if you look at an expenditure-- and you'll have an opportunity later on to look at an expenditure report for a school-- you will see these kinds of expenditure codes on them that allow the identification of the various expenditures. And by the time we get to that, these codes will be fairly familiar to you and you'll be able to read them fairly easily.

So, each expenditure will have five or six or even seven of these codes assigned to them. And the example that's given in the lesson, I'll just review briefly, because that's the simplest way to do it. It would be a fund. And we're going to try to identify the code for the regular salary for a math teacher at the high school. So you can break down your expenditure code for the salary for that individual down to that level.

So first, it's a general fund, because there's no reason for it to be anything else. It's a primary activity, providing instruction. Since it's regular instruction, there's no indication that it's anything else besides regular instructions-- not special ed or adult ed or vocational ed-- there will be regular instruction, and that account is 1100. Follow along in the Manual.

It's a regular teacher salary. So in the object code, it's a salary, which is the 100. It's a teacher, which makes 120. And it's a regular salary, which makes it 121. So you use all three of the digits for objects in this case, and that's not uncommon. It's not a categorical in that there's no reason to put it in any other place. It's at the secondary level, so the instructional organization is 30. It's at the high school. In this case, it's Lincoln High School.

And we don't have this information, but we'll assume that this district has identified Lincoln High School as 801. It's 800 because it has to be a high school, and 1 because that's the first one they had. And subject matter, mathematics. Can you find 170 is the subject matter in the Accounting Manual?

Now, this is how you would go about following or identifying codes for particular expenditures. The assignment that you have that goes along with this lesson asks you to do something like this for a group of expenditure transactions, and then a different group for revenue transactions. And we'll talk about that in just a moment. But this is what the activity looked like. It will not be as extensive as this. I'm only asking you to do the first three expenditures and two of the objects.

PROFESSOR: There are two activities for this assignment, as I mentioned just previously. The first is to identify a series of expenditure codes. And the second, do a similar exercise with revenue codes. And the school district budgeting textbook problem 3.1 gives you a series of transactions for different expenditures.

What you are to do for that assignment is similar to the example in the previous page. To identify the fund, the function, and object for all the information that you have for each of those expenditure transactions. And I would request that you use the format that's given in the book, fund, function, object, in separate columns. And it helps you and me identify what they are and get them correct.

Use the information that you have in the transaction to the lowest level that you have it. It is not complete, so you will not know everything about every piece of the assignment. But most of it will be there. And again, only the first three account codes, fund, function, object. You do not need to do the remaining five or six for expenditures, because you simply don't have enough information to do that.

Assignment 3.2 is the second half of this. This is to provide the fund and the revenue source for a series of revenue transactions. Again, fund and function. If you have questions on what those mean, check them out in the accounting manual. It provides you definition for those. And if you can't decide, look at the definitions of the ones that you are trying to decide between and find the one that fits best.

And just to reduce your frustration, there are several of the items, both in expenditures and in revenues, that could have different answers. There's no necessary single right answer, depending on the interpretation that you make of that particular assignment. It doesn't mean that there are no wrong answers, because there are numbers that are obviously not right. But there are, in several cases, there's some in which either of several answers could be right.

Now, a final note. If you are using a spreadsheet-- and I would recommend that if you're comfortable in doing it. To complete these assignments, you could submit these as a single file.

Put the expenditure assignment 3.1 on one tab, label that tab 3.1. Put the revenue assignment 3.2 on a second tab and label that tab. And then deposit that single spreadsheet into the Dropbox.

I've set up two assignments, 3.1 and 3.2. If you have both in a single spreadsheet, that's fine. And I will be able to recover them from the assignment and evaluate them from that. That's it. Thank you, and good luck.