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Financial Accounting for Local and State School Systems, 2003 Edition

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Table of Contents
Uses of Information
Governmental  Accounting
Financial Accounting
Cost Accounting and Reporting for Educational Programs
Activity Fund Guidelines
Summary of Account Code Changes and other Appendices
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Frank Johnson
(202) 502-7362

Chapter 5: Financial Reporting

Historically, little attention has been given to accounting for activity funds in school districts. The nature of activity funds, however, makes them especially vulnerable to error, misuse, and fraud. In addition, activity funds often total to large sums of money, especially when capturing the amounts that flow through an educational organization in the form of school board funds, student-generated funds, receipts and disbursements related to athletics, and the myriad co-curricular and extracurricular events sponsored by school districts today. As a result, this revision of this handbook recommends policies and procedures1 for improving controls over these funds and promotes capturing all student activity-related monies in the district's financial records. Please note, however, that the guidelines in this chapter are minimum controls on which local school districts may expand. In addition, these guidelines are not generally viewed as mandated in any jurisdiction, so each state may have imposed greater or lesser controls than are suggested here.2

This chapter takes a total systems view that

  • defines and distinguishes types of activity funds and proper classification;
  • delineates controls for establishing and maintaining activity funds;
  • provides initial guidance on accounting for and reporting of activity funds, including new requirements emanating from GASB Statement No. 34; and
  • recommends policies and procedures based on current best practices for operating activity funds.

Types of Activity Funds and Proper Classification3

Activity funds are established to direct and account for monies used to support co-curricular and extra-curricular student activities. As a general rule, co-curricular activities are any kinds of school-related activities outside the regular classroom that directly add value to the formal or stated curriculum. Co-curricular activities involve a wide range of student clubs and organizations. Extra-curricular activities encompass a wide variety of other district-directed activities, typified by organized sports and other non-academic interscholastic competitions. The accounting structure should take into consideration that individual states may have their own classifications for co- and extra-curricular activities. For example, some states might choose to classify music and drama events, academic competitions such as debate, and so forth as co-curricular, whereas other states might classify these activities as extra-curricular. In either case, a system of classification for purposes of program cost accumulation and reporting is necessary.

Activity funds are unique to school districts. Two classifications are commonly recognized: Student activity funds, which belong to the students and are used to support student organizations and clubs, and District activity funds, which belong to the school district and are used to support district programs. The distinction is based on the purpose of the funds, that is, the programs supported by the funds. The test rests in the definitions of each:

  • Student activity funds support activities that are based in student organizations. Students not only participate in the activities of the organization, but also are involved in managing and directing the organization's activities. An important distinction is that disbursing monies from the student activity fund may be subject to approval by the student organization and its sponsor, rather than by the board of education (see table 13 for examples).

    Table 13. Examples of Authorized Student Activity Funds
    Art Club Drama Club
    Auto Club Foreign Language Club
    Cheerleaders Club Journalism Club
    Chorus Club Marching Band
    Class of 2xxx National Honor Society
    Class of 2xxx Pep Club
    Class of 2xxx Photography Club
    Debate Club Student Council

  • District activity funds belong to the district, are used to support its co-curricular and extra-curricular activities, and are administered by the school district. Approval for disbursing district activity fund monies, however, rests only with the school board. In other words, the district determines how district activity fund monies are spent and the district programs that receive support (see table 14).

    Table 14. Examples of Authorized District Activity Funds
    Athletics Music Concerts
    Band Uniforms School Plays
    Book Fair Special Field Trips
Although individual state laws may specify the accounting treatment for activity funds, distinguishing them in accordance with the definitions above suggests that student activity funds are fiduciary in nature whereas district activity funds represent district resources. Therefore, it is recommended that student activity funds be classified as agency (fiduciary) funds and district activity funds be classified as special revenue funds. Student activity funds remain under the control of the school principal and are accounted for at the school site. District activity funds, in contrast, should be included with all other district funds and deposited in the district's accounts. Again, these recommended fund classifications are appropriate within the definitions provided; individual state laws may dictate the use of other types of funds.

Although a sharp distinction exists between student and district activity funds, accounting for all activity funds is the responsibility of the school district. All activity funds must be reported in the school district's financial statements and are subject to the district's audit(s).

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Controls for Establishing and Maintaining Activity Funds4

The dispersed nature of student activity funds and the multiple site collections for some district activity fund revenues dictate a need for orderly controls on all activity funds. These controls include establishing lines of authority and a set of policies to guide the operation of all activity funds.

Lines of Authority
Proper control begins with the appropriate recognition of lines of authority over all monies handled by the district. The local board of education should adopt a set of guidelines and regulations that includes the following minimum requirements (see figure 1):

  • Board of Education. The board of education should adopt policies to govern the establishment and operation of all activity funds. The district's auditors should review these policies for sound accounting and reporting principles.
  • Superintendent. The superintendent should be directly responsible to the board of education for administering all board policies.
  • Chief Financial Officer. The chief financial officer should have overall responsibility for accounting for and reporting all funds, including district and student activity funds, to the board. The chief financial officer is also responsible for implementing and enforcing appropriate internal control procedures.
  • Principal. The principal at each school site should be designated the activity fund supervisor for that school building. The activity fund supervisor has overall responsibility for the operation of all activity funds, including collecting and depositing activity fund monies; approving disbursements of student activity fund monies; and adequately supervising all bookkeeping responsibilities. The activity fund supervisor should be a signatory to all disbursements, including checks drawn on the activity fund.



General Policies for the Establishment and Operation of Activity Funds

Policies relating to student and district activity funds should be in writing and distributed to all activity fund supervisors, sponsors, and accounting personnel. A useful set of general policies includes at least the following:

  • Each activity fund should be established by specific board of education approval.
  • All activity funds should be subject to sound internal control procedures.
  • All activity funds should be accounted for on the same fiscal year basis as all other school district funds.
  • All activity funds must be audited and subject to well-defined procedures for internal and external auditing.
  • All employees responsible for handling and recording activity fund monies should be bonded by the district.
  • One or more activity fund supervisors should be formally designated by the board of education.
  • Each activity fund supervisor should maintain a checking account for the attendance center.
  • Depositories for student activity funds should be approved by the board of education and be further subject to the same security requirements as all other board funds.
  • All activity funds should operate on a cash basis, meaning that no commitments or indebtedness may be incurred unless the fund contains sufficient cash.
  • A system of purchase orders and vouchers should be applied to all activity funds that requires written authorization for payment and should be strictly enforced.
  • A system for receipting cash should be adopted that includes using pre-numbered receipt forms for recording cash and other negotiable instruments received.
  • All receipts should be deposited intact. That is, all receipts should be deposited in the form in which they are collected and should not be used for making change or disbursements of any kind.
  • All receipts should be deposited daily. Undeposited receipts should be well secured.
  • A system for disbursing funds that includes using pre-numbered checks and multiple original signatures (no signature stamps) should be adopted as the sole means for disbursing activity fund monies.
  • A perpetual inventory should be maintained on pre-numbered forms, receipts, and other documents to create an adequate audit trail.
  • Bank statements for activity funds should be reconciled as soon as they are received.
  • Using activity fund receipts to cash checks to accommodate individuals, to make any kind of loan, to pay any form of compensation directly to employees, or to extend credit should be strictly prohibited.
  • Monthly financial reports on all activity funds should be prepared and submitted to the administration and the board of education. A full reporting of activity funds should be included in the district's annual financial statements.
  • Student activity fund monies should benefit those students who have contributed to the accumulation of such monies.
  • A board-approved process should be specified for all fundraising activities, and any fundraising event should require advance approval.

Segregation of Duties Related to Activity Funds

The volume of activity fund transactions and the amounts on deposit are substantial in most school districts. Because significant amounts of activity fund cash receipts are collected as currency, not checks, internal control procedures designed to safeguard monies collected should be especially emphasized. Although the foregoing general principles are helpful in addressing concerns about safeguards, additional attention should be given to segregating the duties related to activity funds. Specifically, three critical duties should be segregated for internal control purposes: (1) signing checks, (2) maintaining fund accounting records, and (3) reconciling bank statements.

The segregation of duties demands that more than one person be involved in satisfying accounting procedures. As a rule, although the school principal is appointed as activity fund supervisor, other people normally carry out the actual work. It is particularly important to identify, describe, and monitor the duties of the activity fund bookkeeper in relation to the segregation of duties.

The activity fund bookkeeper is typically assigned the task of collecting activity fund monies. Associated tasks include preparing the deposit slip and depositing monies. In addition, maintaining the activity fund accounting records generally falls to this same person, as does preparing checks for disbursements. These tasks demand adequate training and require the bookkeeper to have a thorough knowledge of fund structure; the differences between district and student activity funds; and the process of accounting, auditing, and reporting. As described earlier, the activity fund bookkeeper should be bonded.

The work of any person handling money should be subject to appropriate checks and balances. Signature controls are an important aspect of accounting procedures. Two signatures should be required on all checks that result in a disbursement from the activity fund. Recommended signatures are the principal of the attendance center and someone other than the activity fund bookkeeper.

Reconciling accounting records for the activity fund is an additional important aspect of a system of checks and balances. A third person (someone other than the bookkeeper or activity fund supervisor) should be responsible for reconciling bank statements and verifying receipts and expenditures. Essential to this process are internal accounting controls over the activity fund cash collections. Adequate procedures should be established for completing an audit trail that creates sufficient documentary (physical) evidence for each step in the flow of transactions within the activity fund. These procedures include using pre-numbered forms and receipts, purchase orders and vouchers, and a perpetual inventory of pre-numbered forms and receipts and tickets; depositing receipts intact; and making timely deposits. State-specific statutory controls on disbursing student and district activity funds should be strictly observed.

Preparation and Review of Monthly Activity Fund Reports

A monthly report of cash receipts and disbursements to the activity fund should be prepared and reviewed by the activity fund supervisor and submitted to the school district office. Column headings should include the following:

  • Beginning cash balance, which should agree with the ending cash balance on the prior month's report
  • Cash receipts
  • Cash disbursements
  • Ending cash balance
  • Unpaid purchase orders
  • Unencumbered cash

The activity fund bookkeeper also should prepare a monthly financial report for each student organization, showing the organization's cash receipts and disbursements. These reports should be reviewed by the activity fund supervisor and submitted to the student organization's sponsor. Each sponsor should then compare the report prepared by the activity fund bookkeeper with the sponsor's records. Any discrepancies should be resolved immediately. Additionally, the school finance office should periodically perform internal audits of the reports and supporting records.

Application of GASB Statement 34 to Activity Funds

GASB Statement 34 made significant changes in financial reporting for all governments, including school districts. Chapters 4 and 5 discuss fully the new reporting structure established by this accounting standard and the specific requirements, including the presentation of governmentwide financial statements, fund financial statements, and the required supplementary information. The purpose of the governmentwide statements is to provide a broad overview of the entity as a whole. Because fiduciary fund resources are not available for use by the government, fiduciary activities are excluded from the entity-wide financial statements. In accordance with the new reporting model, fiduciary activities, including student activity funds, are reported only in the fund financial statements. The impact of Statement 34 on district and student activity funds is summarized below:

  • If student activity funds are classified as fiduciary (agency) funds as recommended, they are not reported in the governmentwide financial statements. Instead, these balances are reported only in the fund financial statements.
  • District activity funds that are classified as governmental (special revenue) funds are consolidated with all governmental activities in the governmentwide financial statements. District activity funds will also be presented in the governmental fund financial statements.
  • Fiduciary funds are presented in the fund financial statements by fund type. Student activity funds, as agency funds, report no operating activity and are, therefore, presented only in the statement of fiduciary fund net assets.

Revenue From Enterprise and Alternative Sources

Many school districts and individual school sites derive significant revenue from enterprise activities and alternative sources: vending machines, school stores, soft drink machines, class ring sales, and a wide variety of fundraising activities such as magazine sales, candy sales, and school pictures. In addition, large sums of money are generated through interscholastic sports in the form of gate receipts and other contributions. These revenues are typically associated with activities conducted at the school level that generate revenues to be used for the benefit of the school. In many instances, particular student organizations are in charge of one or more such enterprise activities. In other instances, the district administers the revenues for its own programs. If a student organization is in charge of an enterprise activity, the money should be accounted for through that organization's activity fund. If the district determines the use of the funds, the money should be accounted for with other district funds in the district's accounts. However, in all instances, the funds should be recorded on the district's books.

School districts and student groups are also increasingly benefited by affiliated organizations that support curricular, co-curricular, and extra-curricular activities. Affiliated organizations include groups such as Parent-Teacher Associations (PTAs), Parent-Teacher Organizations (PTOs), school foundations, athletic booster clubs, and so on. Contributions by these groups often include supplies, materials, equipment, and even school facilities, such as weight training rooms.

Specific board of education policies are needed to address these issues. In the case of activity funds derived from enterprise activities, board authorization to operate the activity is needed, and all funds should be accounted for in the district's books. In the case of revenue from affiliated organizations, board authorization to receive such funds is needed. In some cases, owing to the requirements of GASB Statement 39 determining whether certain organizations are component units, these affiliated organizations may be reflected in the financial statements of the school district as discretely presented component units. (See chapter 5 for a discussion of Statement 39.) Whether or not the organizations are included as component units, decisions regarding allocation of the donations should be made on the basis of whether the curricular or co-curricular program is the primary beneficiary, as well as on the basis of fundamental fairness in resource allocation.

The following examples are illustrative of issues discussed in this section.

  • A high school chess club holds a fundraiser and raises $500, which is accounted for in an agency fund. The club uses $400 to buy supplies and club T-shirts. When the $500 in cash is deposited by the club sponsor or school administration, the district should debit the asset account, Cash in Bank, and credit a liability account, Due to Student Organizations, for $500 within the designated agency fund (for student activity funds). When the club spends $400 for supplies, an entry should be recorded to credit cash and debit the liability account. At year's end, the district would reflect a $100 balance for the club in its agency fund.
  • A school district enters into a multiyear agreement with a soft drink company for vending machine services at all of its schools. Under the contract terms, the district will receive 10 percent of sales. In the current fiscal year, the district receives $10,000 for its portion of sales. If this payment represents an advance, a portion of it should be deferred on a prorated basis. Using the estimated proceeds from the contract, the district should budget the revenues within a special revenue fund during its normal budgeting process. The $10,000 payment should be recorded as Revenue from Enterprise Activities within the special revenue fund.


There are two classifications of activity funds: district and student. It is recommended that district activity funds be classified as special revenue funds and student activity funds as agency (fiduciary) funds.

As governments increasingly respond to the demands for fiscal and operational accountability, best practice dictates the creation of strong controls surrounding activity funds, including assurance that all transactions are recorded and reported in district financial records. Additionally, at a minimum, proper lines of authority combined with strong control practices, such as segregation of duties, multiple checks and balances, requirements for annual audits, and regular financial reporting, are the elements to protect against error and abuse.

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1 For an example of a well-constructed student activity funds operating manual, go to Sections in this chapter relating to general policies and controls are indebted to and follow closely from the Kansas State Department of Education's guidelines found at

2 Consequently, see each state's statutory requirements for accounting for activity fund monies. More generally, useful references related to activity fund accounting are Everett, Lows, and Johnson (1996) Financial and Managerial Accounting for School Administrators; Governmental Accounting Standards Board (2000) Guide to Implementation of GASB Statement 34 on Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments; Association of School Business Officials International (2000) GASB Statement 34: Implementation Recommendations for School Districts; Deloitte and Touche (2001) Twelve White Papers on Issues in Education Finance.

3 Detailed account code structure/classification/definition, including new or revised codes, are found in chapter 4.

4 These are minimum broad controls. Each state should construct a set of specific guidelines in accordance with statutory require