Accounting Systems in Higher Education
Revenue and Assets, Expenditures
The objectives of colleges and universities differ from those of commercial enterprises for which profit is the primary motive in that colleges and universities seek to provide educational services within the existing levels of revenues available, although a slight level of excess revenue may be desired by some governing boards. A balanced budget where expenditures remain within available revenues is always expected of a financially responsible college or university. A major reduction in the net assets of an institution should be cause for concern and may be a sign of financial instability.
Revenue and Assets
The primary sources of revenue vary depending on whether an institution is public or private. Most private institutions depend heavily on student tuition as the major source of revenue, while public institutions receive a mixture of state appropriations and student tuition. The portion of the budget that comes from state appropriations may vary from state to state depending on the policy position of each state as to the percentage of the budget that tuition is expected to support.
According to 1996–1997 data from the National Center for Education Statistics, fund revenues for public institutions came from four primary sources: tuition and fees (19%), federal funds (11%), state funds (36%), and sales and services (22%). Private institutions also received the majority of total revenues from these four sources but had different percentages in each category: tuition and fees (43%), federal funds (14%), state funds (2%), and sales and services (21%). As noted, state appropriations are particularly important to public institutions and, in fact, represent the majority of revenues available to the overall higher education enterprise. In the academic year 1995–1996, direct general expenditures of state and local governments for postsecondary education totaled $100.7 billion. Of this total, $89.7 billion were appropriated for educational and general expenditures and $11.0 billion for capital outlay. Without the state funding of public institutions, private colleges and universities have greater reliance upon tuition and fee revenue. In 1999–2000, the total tuition, room, and board per private institution student was $20,277, while the same fees for public school students averaged $7,302. Public and private institutions are all facing an increased reliance upon those tuition and fees for any level of improvement funding. Even within the public sector with its government funding, revenues from tuition and fees increased 318 percent from 1980 to 1996 while revenues from government appropriations during that time only increased 125 percent. Little evidence exists that this trend will change between now and 2010. Other important sources of revenue include grants and contracts, private gifts, endowment income, investment income, and sales and services of auxiliary enterprises. Auxiliary enterprises include such operations as student housing and campus bookstores that are expected to be service components that finance their own operations. Some institutions also have teaching hospitals that are major financial component units. In addition to these revenue categories, higher education institutions must also account for sizable property holdings. The total value of higher education property in 1995–1996 was $220.4 billion. Of this amount, $11.4 billion was represented by land, $150.5 billion by buildings, and $58.5 billion by equipment inventory.
Higher education institutions are very labor intensive, with the major portion of expenditures being devoted to salaries and benefits. Other expenditure requirements include such items as utilities, travel, scholarships and fellowships, communication costs, debt service on capital assets, supplies, and contractual services. In 1999–2000, total expenditures in higher education were $257.8 billion. Of this total, public institutions accounted for $159.7 billion and private institutions for $98.1 billion.
As a foundation of the accounting system, most higher education institutions maintain expenditures by functional classification. These classifications include instruction, research, public service, academic support, student services, institutional support, operation and maintenance of plant, scholarships, and auxiliary enterprises. Current operating activities are further identified and separated depending on whether the source of revenue is unrestricted or restricted. Unrestricted revenues are presumed to be available for current operations without specific external restrictions being placed on the use of the revenues. Restricted revenues, which are available for current operations, must be used for the purpose designated by the donor or granting entity.
Colleges and universities also have other specialized accounts that are used for the unique functions of those institutions. Loan accounts are used to record loans to students, faculty, and staff. Specific reporting requirements may be imposed on loan funds (such as the Federal Perkins Loan Program) depending on the source of funding. These accounts function on a revolving basis accounting for principal, interest, and amounts available for new loans. Another special set of accounts are agency accounts that are used for resources held by the institution strictly in a custodial role.
Many institutions are the recipients of gifts and donations for which the donor stipulates that the principal be invested with the earnings available for designated purposes. Endowment accounts are used for these types of purposes. The account is deemed to be a true endowment if only the earnings can be spent with the principal remaining intact. A term endowment allows the principal to be used after some period of time or specified event. Governing boards may designate funds to function as endowments, but the board may rescind these decisions.
Three specialized types of accounts are used for plant activities. These types include accounts for the construction or acquisition of capital assets, resources set aside for the repair and replacement of capital assets, and resources set aside for the repayment of principal and interest (debt service) on capital assets.
The three financial statements required of higher education include the Statement of Net Assets, the Statement of Revenues, Expenses, and Changes in Net Assets, and the Statement of Cash Flows. Accounting standards are established for private institutions by the Financial Accounting Standards Board (FASB) and for public institutions by the Governmental Accounting Standards Board (GASB). Major new reporting requirements were established for public institutions effective with fiscal years beginning after June 15, 2001.
NATIONAL CENTER FOR EDUCATION STATISTICS. 2000. Digest of Education Statistics. Washington, DC: National Center for Education Statistics.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB). 2002. <www.fasb.org/main.html>.
GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB). 2002. <www.gasb.org/main.html>.
ROBERT H. ADAMS
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