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Fund Accounting and the Fundamental Accounting Equation

Analyze the following scenario: The Unified Path is an umbrella organization that solicits donations to support its many charitable suborganizations. One of these is the Millbridge Family Service (MFS). All transactions for MFS are handled through the MFS special purpose fund. For both the United Path general operating fund and MFS special purpose fund, show the impact of the fundamental equation of accounting of each of the following events. Unified Path transfers cash to the MFS bank account for $50,000 for the MFS family counseling program. This is a direct subsidy to MFS. No repayment is required.Unified Path has a bookkeeping department which assists the sub-organizations with their purchase of insurance, supplies, payroll, and other items. This centralized approach is less expensive than if each part of the larger organization had its own bookkeeping staff. Unified Path charges MFS $400 for bookkeeping services for the month. No payment is made at this time.MFS borrows $20,000 from Unified Path's general fund to meet a current operating shortfall. MFS will repay this loan from money received from charges to its clients within six months.

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There are three main transactions between the United Path General Operating Fund (GOF) and the MFS Special Purpose Fund (SPF). It is important to keep the following accounting equation in mind:

Assets = Equity + Liabilities
(Note: Equity can be said to represent the fund balance)

***Transaction 1
This transaction is an inter fund transfer, and is also a non-reciprocal transaction because no repayment is required from MFS.

a) For GOF, the journal entry would look like this:

Transfer to MFS SPF 50,000
Cash 50,000

Assets = Equity + Liabilities
-50,000 -50,000
(Transfer Out)

A transfer to MFS SPF lowers the GOF's equity by $50,000, as it directly affects the fund balance for the GOF (when equity decreases, it is recorded as a debit). By having funds transferred out of it, the GOF also loses $50,000 in cash from its assets (when assets decrease, that is recorded as a credit).

b) For SPF, the journal entry would look like this:

Cash 50,000
Transfer from GOF ...

Solution Summary

This solution looks at the fundamental accounting equation and how two funds- the general operating fund and a special purpose fund- interact with respect to three main transactions. These include transfers, services provided, and a loan given out. Both funds are affected as one transfers or infuses funds into the other, while that fund faces the responsibility of paying back. Subsidies are also looked at. A holistic view on the changes made to the equity, liabilities, and assets account, are considered in the interpretation of three inter-fund transactions.