What is equity for the federal government? Equity 101, federal government style.If you read the latest Department of Defense (DoD) financial statements for fiscal year (FY) 2005, you may have noted that the current net worth of the Department is negative $599 billion. That is a decrease of over $100 billion from FY 2004, but still a big number even in DoD circles. In the private sector, such results clearly would signal an organization in trouble; but what does it mean for the DoD? To appreciate the significance of this figure, one first needs to gain an understanding of what equity means for the federal government, and the place to start is by defining that term as it relates to the federal government. The accounting term equity is well recognized and readily understood when referring to a commercial enterprise. In simple terms, it means the investment that owners or investors make in the enterprise and the earnings that have been retained in the business. But this explanation does not make sense when discussing equity for the DoD and its components. Equity is more difficult to conceptualize con·cep·tu·al·ize v. con·cep·tu·al·ized, con·cep·tu·al·iz·ing, con·cep·tu·al·iz·es v.tr. To form a concept or concepts of, and especially to interpret in a conceptual way: in federal government operations This article aims to describe the financial expenditure associated with the operations and processes of world governments of all levels. Size of economic footprint
Why care about equity? Equity is a key concept in financial accounting, and anyone who wants to analyze the financial results of a federal entity must understand what equity means in the federal context. In the future, as we produce timelier, accurate financial information to use in managing our operations, people other than financial managers will need to understand equity and other accounting concepts and terms. This article explains the concept of equity in the federal government and what it represents. Ultimately, we can build on this understanding of equity to help us--indeed, help all good managers conduct productive analyses. What Is Equity? In the simplest terms, equity is the difference between assets and liabilities. It is one of the key components of the basic financial accounting equation: Assets = liabilities + owners' equity owners' equity The owners' interest in the assets of a business. Owners' equity includes the amount invested by the owners plus the profits (or minus the losses) in the enterprise. Owners' equity and liabilities are used to finance a firm's assets. Since the federal government's proprietary accounting is based on this basic equation, we need accounts similar to these. Assets (like computers or Hummers) and liabilities (like invoices) are easy to conceptualize. But we need to identify an equivalent to commercial equity accounts so that we may balance the equation and set the foundation for the proprietary accounting system. The federal government uses the term net position to represent equity. So in the federal context, the basic accounting equation typically is written like this: Assets = liabilities + net position Net position consists of two primary accounts: unexpended appropriations and cumulative results of operations. These accounts have similarities with (as well as differences from) the investment and retained earnings Retained Earnings The percentage of net earnings not paid out in dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders equity on the balance sheet. accounts of commercial enterprises. The following two subsections contain an explanation of these two accounts. Unexpended Appropriations The first element of equity, unexpended appropriations, is similar to the owners' investment in a commercial enterprise; however, a federal entity has no stockholders. Rather than receiving from stockholder investments, the investment comes in the form of appropriations from the Congress. The amount in the unexpended appropriations account reflects the agency's appropriations reduced by the amount the agency has received in goods and services In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility (unless the "good" is a "bad"). It is often used when referring to a Goods and Services Tax. procured using those appropriated funds. Viewed another way, the remainder in the account is the amount the agency has in undelivered undelivered adj → no entregado al destinatario; if undelivered return to sender → en caso de no llegar a su destino devolver al, remitente undelivered orders or funds not yet obligated ob·li·gate tr.v. ob·li·gat·ed, ob·li·gat·ing, ob·li·gates 1. To bind, compel, or constrain by a social, legal, or moral tie. See Synonyms at force. 2. To cause to be grateful or indebted; oblige. . It represents the appropriations or "investments" that the agency has received, and for which it still expects to receive goods and services. As an example, assume that an agency receives an appropriation The designation by the government or an individual of the use to which a fund of money is to be applied. The selection and setting apart of privately owned land by the government for public use, such as a military reservation or public building. for $1,000. At that time, the agency records $1,000 in unexpended appropriation. This is equity for the agency since it expects to receive $1,000 in goods and services from this "investment" by the Congress. Further, assume that, at the end of the year, the agency has the following obligations: $300 in undelivered orders $200 in delivered orders, unpaid $500 in delivered orders, paid Its unexpended appropriations would be $300 (appropriations less delivered orders). This "equity" represents the $300 (also the amount of undelivered orders) in goods and services that the agency expects to receive in later periods. An agency accumulates the total of the unexpended amounts for all its unexpired appropriations to determine its unexpended appropriations. When accounts are closed after the expired stage ends, the total is reduced since the agency no longer expects to receive goods or services from those closed accounts. Cumulative Results of Operations The second element of equity, the cumulative results of operations account, is similar to retained earnings in a commercial enterprise. It is the accumulation of the annual differences between the agency's revenues and expenses. For this to make sense as applied to a government entity, one needs to understand the sources of revenue in federal agencies since they do not operate with a profit motive. While a federal agency can receive revenue from reimbursable re·im·burse tr.v. re·im·bursed, re·im·burs·ing, re·im·burs·es 1. To repay (money spent); refund. 2. To pay back or compensate (another party) for money spent or losses incurred. operations, most of the financing typically results from appropriations. Accordingly, federal "revenue" includes these "financing sources," which are recorded as revenues when the agency spends funds (for example, receives the goods or services that have been ordered) using appropriated funds. To illustrate this, if an agency receives goods or services of $100, it records an expense in the proprietary accounting system. It then records revenue (financing source) of $100 since it used its appropriation to fund the purchase. Since, in this situation, the revenues are $100 and the expenses are $100, the net impact on cumulative results of operations is zero. As this example illustrates, the cumulative results of operations account will trend toward a zero balance; however, several things may upset this balance. One of these is the purchase of an asset. When goods are received that will be recorded as assets, revenue will be recorded to reflect the financing from the appropriation; however, in this transaction, expenses are not recorded. The transaction will show an asset balance of $100 and a revenue of $100, resulting in a positive balance in the cumulative results of operations account equal to the cost of the assets ($100). This balance will be reduced as the assets are used (possibly in depreciation charges in future years). To continue the preceding example, if the total delivered orders ($700) consisted of $600 in expense items and $100 in assets, the agency revenue for the year would be $700 (the amount of financing recognized for delivered orders), and expenses would be $600. The resulting balance in the cumulative results of operation account would be $100. This represents the amounts of the appropriation that have not been expensed, but instead have been invested in assets that have potential benefits in future years. Other events may upset the equilibrium of the cumulative results of operations account, some of which have a negative impact. Such occurs when an agency records a liability not covered not covered Health care adjective Referring to a procedure, test or other health service to which a policy holder or insurance beneficiary is not entitled under the terms of the policy or payment system–eg, Medicare. Cf Covered. by budgetary resources, such as when the agency incurs a liability prior to receipt of an appropriation. This, for example, may occur with the year-end accrual accrual, n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest. of the leave balances of an agency's employees. Leave is paid for when used; consequently, we do not make obligations at the end of the year to cover employee leave balances. Therefore, these are liabilities for which the agency will have to obtain resources in order to make payments in the future. Another example of this type of liability is the recognition of an environmental liability prior to receiving funding from the Congress to remediate re·me·di·a·tion n. The act or process of correcting a fault or deficiency: remediation of a learning disability. re·me the problem For such events, the agency will recognize expenses without any offsetting financing from an appropriation. The impact is to decrease the balance of the cumulative results of operations. Let's return to the leave example. If, at year-end, the employees' leave balance accrual is $50, the agency will record an expense of $50 and a liability of $50. Since there is no revenue to offset the expense, the cumulative results of operations will be decreased by the $50, which represents the amount of future resource requirements The components of a system that are required by software or hardware. It refers to resources that have finite limits such as memory and disk. In a PC, it may also refer to the resources required to install a new peripheral device, namely IRQs, DMA channels, I/O addresses and memory that already have been expensed. When the agency receives appropriations to pay for these liabilities, it will record the offsetting revenue, which will reduce the negative cumulative results of operations balance. While more complex events may occur in federal accounting, the examples used in this article illustrate the concept of equity in the federal government. An examination of the accounts will reveal that the unexpended appropriation account should maintain a positive (credit) balance. This account would be negative only if an agency overspent the total amount of all its unexpired appropriation balances. The cumulative results of operations, however, can be positive or negative. This account in effect represents the balance of future expenses that already have been funded, reduced by expenses that have been incurred but have not yet been funded. If the account has a debit A monetary amount that is subtracted from an account balance. A debit from one account is a credit to another. See credit. (or negative) balance, it means funding will need to be obtained in the future to pay for the expenses. This could be important in budget requests. With this knowledge, we may be surprised--but not shocked--when we look at the DoD financial statements and see a large negative equity. A little analysis shows that the figure is related to a liability of $1.7 trillion One thousand times one billion, which is 1, followed by 12 zeros, or 10 to the 12th power. See space/time. (mathematics) trillion - In Britain, France, and Germany, 10^18 or a million cubed. In the USA and Canada, 10^12. that is mostly unfunded. What is this liability? That answer is in the financial statements. For information on the Performance and Accountability Report (PAR), go to the Office of the Under Secretary of Defense (Comptroller) Web site at www.defenselink.mil/comptroller/par/index.html. Did You Know ... 439 billion dollars Cost of Global War on Terrorism Terrorist acts and the threat of Terrorism have occupied the various law enforcement agencies in the U.S. government for many years. The Anti-Terrorism and Effective Death Penalty Act of 1996, as amended by the usa patriot act including supplemental as proposed by DoD, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the Congressional Research Service The Congressional Research Service (CRS) is a branch of the Library of Congress that provides objective, nonpartisan research, analysis, and information to assist Congress in its legislative, oversight, and representative functions. U.S. (CRS CRS Course CRS Certified Residential Specialist (real estate certification) CRS Central Reservation System CRS Can't Remember Stuff (polite form) CRS Cost Reduction Strategy CRS Consumer Relations Specialist ) 650 billion dollars Cost of Vietnam War Vietnam War, conflict in Southeast Asia, primarily fought in South Vietnam between government forces aided by the United States and guerrilla forces aided by North Vietnam. in today's dollars, from the CRS as quoted in Defense News 81 billion dollars Cost of Civil War in today's dollars, from the CRS as quoted in Defense News 2.8 billion Gallons of fuel supplied by Defense Logistics Agency Noun 1. Defense Logistics Agency - a logistics combat support agency in the Department of Defense; provides worldwide support for military missions Defense Department, Department of Defense, DoD, United States Department of Defense, Defense - the federal department (DLA DLA dog leukocyte antigen. ) for Iraq War Iraq War: see under Persian Gulf Wars. Iraq War or Second Persian Gulf War Brief conflict in 2003 between Iraq and a combined force of troops largely from the U.S. and Great Britain; and a subsequent U.S. as of March 2006 177 million Field meals supplied by DLA during Iraq War, as of March 2006 30 million Meals supplied by DoD in response to Hurricane Katrina  Editing of this page by unregistered or newly registered users is currently disabled due to vandalism.
10,000 truckloads Ice and water supplied by DoD after Katrina Ken Boerum, CDFM CDFM Certified Defense Financial Manager CDFM Computational Dynamic Fracture Mechanics (Dept of Aerospace Eng, Indian Institute of Science, Bangalore, India) , is a senior trainer and consultant with Management Concepts in Vienna, Virginia Vienna is a town in Fairfax County, Virginia, United States. The population was 14,453 at the 2000 census and it has grown by about 3% since[1]. In July of 2005, CNN/Money and Money . He is a member of ASMC's Washington Chapter. |
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