Understanding Fund Balance
In the previous articles in our Accounting 101 series, we explored the accounting formula and the first two components of the accounting equation: assets and liabilities. Assets are the resources available to support the university's mission, while liabilities are the obligations the university must fulfill. Together, they help explain the third component of the equation: fund balance.
Assets = Liabilities + Fund Balance,
or stated another way:
Assets – Liabilities = Fund Balance
Understanding assets and liabilities sets the stage for the third part of the equation. In public-sector accounting, fund balance helps show how resources have been accumulated, used, and preserved to support the university's mission over time.
What Is Fund Balance?
At first glance, fund balance may seem like a simple calculation: assets minus liabilities. While that is technically true, fund balance tells a deeper story. It provides insight into the university's financial position and the resources that may support future needs, depending on timing, purpose, restrictions, and commitments.
For colleges and universities, fund balance is an important measure of financial stewardship. It helps stakeholders understand the resources available to support the institution's mission, the restrictions placed on those resources, and the university's capacity to meet future needs.
Fund Balance Is Not Cash
One of the most common misconceptions about fund balance is that it represents cash available to spend. In reality, fund balance and cash are two very different concepts.
A fund can have a positive fund balance while still having relatively little cash available for immediate use. This can happen when resources are tied up in buildings, equipment, inventory, receivables, investments, or other assets that are not immediately available to spend. It can also happen when resources are restricted for a specific purpose.
Fund balance represents the net financial position of a fund: the difference between its assets and liabilities. It provides insight into the resources available to support the university's mission, as well as any restrictions or commitments associated with those resources. While fund balance is an important indicator of financial health, it should not be viewed as a measure of available cash or spending authority.
Why Fund Balance Exists in Public Accounting
Public universities use fund accounting to separate resources by purpose. This helps the university show that resources are being managed responsibly and used in accordance with legal, donor, grant, or other requirements.
This system helps the university demonstrate accountability, follow legal, donor, grant, and other requirements, and provide transparency in financial reporting. Fund balance also helps show whether resources have been added responsibly, used as intended, and preserved for future needs.
What Makes Up Fund Balance?
Fund balance changes over time as resources flow into and out of the university. It increases when revenues exceed expenses within a fund, decreases when expenses exceed revenues, and can also be affected by transfers and reclassifications between funds.
Resources are added to fund balance when revenues exceed expenses within a fund. Examples may include state appropriations, tuition and fees, grants and contracts, and gifts or donations.
Fund balance is reduced when expenses exceed revenues within a fund. Examples may include salaries and benefits, instructional costs, research expenses, and facilities and maintenance.
Transfers and reclassifications may occur when public universities move resources between funds to comply with restrictions, account for capital projects, or align resources with their designated purposes.
These movements affect fund balance but do not necessarily reflect operational performance.
Understanding Restrictions on Financial Resources
Not all of the university's financial resources can be used in the same way. Some resources are restricted by donors, grant agreements, laws, governing board actions, internal commitments, or other requirements. For that reason, understanding fund balance requires looking not only at the total amount, but also at the purpose and limitations attached to the resources.
A positive fund balance does not necessarily mean the university can freely spend those resources. Restrictions and commitments matter because they explain how resources may be used and why purpose is as important as the total amount.
These distinctions are important because a university's financial position is not determined solely by the amount of resources it has, but also by how those resources may be used.
Why Fund Balance Matters
Fund balance helps governing boards oversee financial stewardship, supports budget planning and resource allocation, helps auditors verify compliance with laws, regulations, and restrictions, and helps the public understand how resources are managed.
Trends in fund balance can help tell the story of an institution's financial position, but they must be understood in context. Increases may affect the institution's overall financial position, while decreases may reflect the planned use of resources for purposes such as capital needs, one-time commitments, or other uses consistent with restrictions, commitments, and institutional approvals.
The Key Idea to Remember
Fund balance represents the net resources within a fund after liabilities have been considered. It is not profit, cash, or ownership. It is a measure of financial stewardship and accountability.
What Comes Next
Together, assets, liabilities, fund balance, revenues, and expenses form the foundation of financial reporting. In future articles, we'll examine how revenues and expenses affect the university's financial position and support its mission.