Though the objectives of educational institutions differ from those of for-profit businesses, a balanced budget (one in which revenues are equal to expenditures) is always required of any public or private school.
If accounting vernacular gives you vertigo, don't run away just yet.Below, we break the accounting process for schools down into the simplest terms possible (and we're including a glossary!).
What Is Accounting?
First thing's first: what is accounting? According to the Accounting Coach, accounting is "the recording of financial transactions along with storing, sorting, retrieving, summarizing, and presenting the results in various reports and analyses. Accounting is also a field of study and profession dedicated to carrying out those tasks." Accounting is vital to the business operations of any educational institution.
There are several differences in accounting standards between private businesses and school districts. For example, public school districts utilize fund accounting that classifies spending into three fund categories:
- Governmental: Governmental funds represent those activities typical of district operations such as instruction and special revenues (e.g., grants).
- Proprietary: Proprietary funds include those activities that are similar to private enterprises, such as food service and transportation funds.
- Fiduciary: Fiduciary funds are utilized when the district is acting directly for a third party, including private trusts, like scholarships, pension trusts, etc.
Private and independent school funding comes from tuition/board, donations, and private grants. In the 2018-19 school year, around$67 billion was spent by private elementary and secondary schools in the United States.
Is Accounting the Same Thing as Bookkeeping?
Bookkeeping is defined as “the work or skill of keeping account books or systematic records of money transactions.”Essentially, bookkeeping is recording and organizing financial data. So, is accounting bookkeeping? Not exactly. Although they may seem similar, there are many differences between bookkeeping and accounting.
Generally Accepted Accounting Principles (GAAP)
Accountants, unfortunately, can't just make up accounting and bookkeeping processes as they go along. Enter the generally accepted accounting principles (GAAP), a common set of accounting principles, standards, and procedures that combine the authoritative standards set by policy boards and the commonly accepted ways of recording and reporting accounting information.
The FinancialAccounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting practices. Public enterprises in the United States must follow GAAP. GAAP adherence ensures the clarity and consistency of the communication and reporting of financial information.
- Principle of regularity: strictly adhering toGAAP rules and regulations as a standard.
- Principle of consistency: applying the same standards throughout the reporting process.
- Principle of sincerity: providing an accurate and impartial depiction of the organization's (in this case, the school's)financial situation.
- Principle of permanence of methods: consistent procedures are used in the preparation of all financial reports.
- Principle of non-compensation: both negatives and positives should be reported with full transparency.
- Principle of prudence: speculation does not influence the reporting of financial data (emphasizing fact-based financial data representation).
- Principle of continuity: while valuing assets, it should be assumed the organization will continue operations.
- Principle of periodicity: revenue reports should be distributed across the appropriate periods of time (i.e., accounting periods, fiscal years.
- Principle of materiality: fully disclosing all financial data and accounting information in financial reports.
- Principle of utmost good faith: derived from theLatin phrase “uberrimae fidei”, it assumes that all parties act honestly.
It's important to note that it is not required for non-publicly traded companies to adhere to GAAP standards. However, since adherence is viewed favorably by lenders and creditors and the fact that most financial institutions require annual GAAP compliant financial statements as a part of their debt covenants when issuing business loans, most US companies, whether public or private, do follow GAAP guidelines.
Why Is Accounting Important?
To ensure smooth business operations for educational institutions, your school's financial information and data need to be effectively reported(and utilized). Extensive, accurate, and well-organized financial data is extremely valuable for educational institutions if not just because of the sheer size and volume of expenditures for education at the state and local levels. A comprehensive education information system can provide benefits such as the following:
· Informed decision-making
· Identification of areas in need of improvement
· Examination of wide-ranging goals
· Timely program evaluation
· Better budgetary control
· Improved administrative efficiency and mandated reporting
Accurate and comprehensive financial information must be widely available in order for school administrators to make cost-effective and advantageous business decisions. Holistic financial reporting provides a complete, accurate, and timely representation of the distribution and use of resources in schools.
Education finance has implications on the students and families attending the school, the community surrounding the school, and local, state, and national government. This fact alone is enough to motivate educational institutions to utilize a uniform financial data system.
Types of Accounting
Financial accounting keeps track of an organization's financial transactions. Transactions are recorded, summarized, and submitted in a financial report or statement. All businesses, including public and private educational institutions, issue external financial statements on a regular schedule.
Managerial or management accounting aims to provide an organization's management team with the information they need to keep the business financially sound. Southern New Hampshire University sums up management accounting as the analysis and explanation of the "why"behind reporting the numbers.
Cost accounting is a form of managerial accounting that assesses the variable costs of each step of production as well as fixed costs in order to capture the total cost of production. In schools accounting, cost accounting is usually just program cost accounting.
Unlike financial accounting, which provides information to external financial statement users, cost accounting is not required to adhere to set standards and can be flexible to meet the needs of management. Cost accounting is used internally by management to make fully informed business decisions.
Rather than public financial statements, tax accounting focuses on taxes owed and paid by a school. Tax accounting is regulated by the Internal Revenue Code, which determines the specific processes and rules that organizations and individuals must adhere to when submitting their tax documents.
Accounting ratios are a group of metrics used to measure the efficiency and profitability of a company based on its financial reports. Accounting ratios provide quick ways to evaluate an organization's financial well-being. The most common types of accounting ratios include the following:
Liquidity ratios are an important class of financial metrics used to measure the ability of a company to meet its short-term debt obligations. The higher the liquidity ratios are, the higher the margin of safety that the company possesses to meet its current liabilities. Liquidity ratios greater than 1 indicate that the company is in good financial health and is less likely to encounter financial trouble.
Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time.They show how well a company utilizes its assets to produce profit and value to shareholders.
Leverage ratios are used to determine the relative level of a debt load that a business has incurred. These ratios compare the total debt obligation to either the assets or equity of a business.A high ratio indicates that a business may have incurred a higher level of debt than it can be reasonably expected to serve with ongoing cash flows. The two main leverage ratios are:
- Debt ratio: this ratio compares assets to debt and is calculated as total debt divided by total assets. A high ratio indicates that the bulk of asset purchases are being funded with debt.
- Debt to equity ratio: this ratio compares equity to debt and is calculated as total debt divided by total equity. A high ratio indicates that the business owners may not be providing sufficient equity to fund a business.
Turnover ratios are the financial ratios in which an annual income statement amount is divided by an average asset amount for the same year. Generally, the larger the turnover, the better.The turnover ratios indicate the efficiency or effectiveness of a company's management.
A business uses its accounting records to compile financial reports called Accounting Reports. Reports can be as brief or comprehensive as needed for custom-made reports intended for specific purposes such as profitability of a product line or sales by region. Accounting reports are equivalent to financial statements.
Income Statement/Profit and Loss
Income statements, or profit and loss (P&L) statements, show the revenues earned during a period (subtracting any expenses) to arrive at a profit or loss. Profit and loss statements for schools show the institution's ability to generate revenue, manage expenses, and create profit.
A balance sheet for schools shows the ending asset, liability, and equity balances as of the balance sheet date. This report is used to judge the liquidity and financial reserves of a business.
Account Receivable Aging
An accounts receivable aging report shows the unpaid invoice balances (and how long they've been outstanding). This report helps businesses identify invoices that are open or overdue.
Revenue by Customer
The primary sources of revenue vary depending on whether an institution is public or private. Private schools rely on student tuition as their main source of revenue; public schools receive a mixture of state appropriations and tuition. For more accounting information specific to private schools, read up on these 8 Must-Know Accounting & Financial Reporting Issues for Private Schools.
Accounts Payable Aging
Accounts payable aging reports show the balances your school owes to others. The debts consist of inventory, supplies, and services you buy to operate your business. The aging of accounts payable tracks who your creditors are, how much you owe, and how long you’ve owed debts.
Statement of Cash Flows
A cash flow statement is a regular financial statement that displays how much cash your school has on hand in a designated period.
Statement of Owner’s Equity
A statement of owner's equity (SOE), or statement of changes in owner's equity, shows three things:
- The organization's capital at the start of a given accounting period
- The changes that affect capital (owner contributions and income add to capital; withdrawals and expenses subtract from it)
- The capital at the end of the period
Glossary of Additional Terms
Account: a record that is kept for each asset, liability, equity, revenue, expense, and dividend component of a school
Account Payable: amount owed to a creditor for delivered goods or completed services.
Accruals: an expense or revenue that has occurred but has not yet been recorded.
Asset: assets are everything that your school owns, including property, equipment, etc.
Audit: a professional examination of a company’s financial statement by a professional accountant or group to determine that the statement has been presented fairly and prepared using GAAP
Bottom line: the line in a financial statement that shows net income or loss
Budget: the financial plan that serves as an estimate of future cost and/or revenues
Capital: refers to the money you have to invest or spend to grow or improve your school
Expense: cost(s) incurred in producing revenues
Fiscal year: a fiscal year is the time period an educational institution uses for accounting, determined by your school district
Liability: liabilities are everything that your school owes, whether in the short or long term, such as payroll and taxes
Liquidity: the ability of a school to meet its financial obligations as they come due
Revenue: compensation received in exchange for the providing of goods and services
Tying It All Together
A school's accounting system becomes the method by which they evaluate and build upon the effectiveness of their financial plan. In other words, accounting is the foundation of high-performing schools—and consistent, thorough data collection and reporting is essential to a successful accounting system.
Whether you're handling billing and invoicing or donation collection, your entire administrative team should be kept abreast of accounting best practices. The financial health of your school depends on it.