copyright 2008 by thomson south-western, a part of the thomson corporation. all rights reserved....

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 10, Slide #1

CHAPTER

1010Governmental Accounting:The General Fund and the

Account Groups(including Other Governmental Funds, Proprietary Funds and

Fiduciary Funds) Fundamentals of Advanced Accounting

1st Edition

Fischer, Taylor, and Cheng


Accounting Standards

Separate standard setting boards for government and business enterprises

• Financial Accounting Standards Board (FASB) – Business enterprises

• Government Accounting Standards Board (GASB) – Government – Objectives of Financial Reporting Concept # 1

• Accountability• Interperiod equity


Measurement Focus and Basis of Accounting

• Measurement focus – what resources are measured

• Basis of Accounting – traditional measurement & financial resources– When transactions should be recognized for financial

reporting purposes

• Prepare two separate (related sets of financial statements– Fund financial statements– Government wide statements


Structure of Funds

• Variety of funds to record events• Small government might have 1 general fund• Larger government units use special funds

– Establish minimum number of funds for legal requirements

• Each fund is an accounting entity• Each fund has self balancing set of accounts


Fund Types and Account Groups

• 3 fund types– Governmental funds– Proprietary funds– Fiduciary funds

• 2 account groups – General capital assets account group - GCAAG– General long term debt account group - GLTCAG


Governmental Funds

• Accounts for activities that provide citizens with services

• Financed by taxes and inter-governmental grants• Working capital focus• Only include current assets and current liabilities


5 Governmental Funds

• General Fund– Resources have no specific restrictions

• Special Revenue Fund– Resources legally restricted to specific purpose

• Capital Projects Fund– Resources used for construction/acquisition of capital facilities

• Debt Service Fund– Resources used for payment of general long-term debt and

interest

• Permanent Fund– Resources legally restricted in that only earnings (not

principal) can be used for operations


Accounting for Transactions of Government Funds

• Modified accrual method• Revenue recorded when

– Measurable– Available to finance expenditures in current fiscal period

• Expenditures recognized where liabilities are– Measurable– incurred


Revenues

• Increase in resource from internal parties that are not repaid

• Non-exchange transactions– Government is paid but gives nothing directly in return

• Exchange transactions– Government provides goods/services for fees

• Modified accrual basis– Some revenues recognized on accrual basis– Some recognized on cash basis

• Generally amount not know before collection


Timing of Revenues Recognized

• Property taxes When levied• Taxes on Income When sales tax return filed• Licenses & permits When received• Charges for svcs. When billed• Investment income Accrued as earned• Grants & other intergovernmental revenues

– Restricted grants Expenditure driven– Unrestricted grants Upon award– Entitlements Upon award

• Fines When received• Donations When received


Other Financing Sources

• Other inflows of financial resources– Issue general long term debt (LTD)– Record present value of capital lease obligation– Sale of capital assets– Receipt of transfers from other government funds

• Other financing sources– This classification avoids duplication of recognizing

revenue


Expenditures

• Decrease in resources from transactions with external parties– Expenditure…NOT expenses

• Recognized– in period measurable and incurred– If related liability is paid from current year resources– Recorded simultaneously with cash payments

• Results from– Operating activities– Acquiring capital assets– Payment of debt: principal & interest

• Journal entryDR ExpenditureCR Cash


Expenditures – Employee Related Liabilities

• State and federal withholdings recorded at same time as expenditure for salaries– DR Expenditures– CR Cash– CR Liability for State & Federal Withholding

• Vacations & holidays tracked in account groups - GLTDAG– DR Amount to be provided in future periods– CR Liability for compensated absences


Expenditures – Employee Related LiabilitiesContinued

• Pension expenditures– Actuarial calculations required– Portion paid from current resources

• DR Expenditures• CR Current pension liability

– Portion paid from future resources – GLTDAG• DR Amount to be provided in future periods• CR Unfunded pension liability

• Post-retirement benefits– Similar accounting to pension


Expenditures - Prepayments

• Cash paid or liabilities recorded for purchase of goods/services before used– Examples: prepaid rent, supplies inventory

• Recorded as financial resources (assets)– DR Prepaid Item– CR Cash

• Expenditure recorded when resources are consumed– DR Expenditure– DR Prepaid Item


Expenditures – Other Financing Uses

• Inter-fund operating transfers to other government units

• Prevents duplication of reporting expenditures


Expenditures – Operating Debt

Government may issue short/long term debt to finance operating activities

• Short term– Not for capital assets acquisition– Accounts payable and tax anticipation notes

• Long term– Bonds– Long term vendor financing


Expenditure – Tax Anticipation Notes

• Cash borrowed using tax to be collected as security

• Short term financing• Recorded in general fund

– DR Cash– CR Tax anticipation note payable


Expenditures – Principle & Interest on Long Term Capital Debt

• General long term capital debt – financing for capital asset acquisitions

• Accounted for in capital project funds• Face amount of debt accounted for in GLTDAG• Principle and interest expenditures accounted for

in debt service funds


Expenditures – Special and Extraordinary Items

• Extraordinary – infrequent occurrence & unusual in nature– Example: natural disaster

• Special items – come from transactions within control of management– Infrequent and unusual– Example: sale of government asset as a result of civil

riot

• Must be reported separately– Inform citizens of unusual practices


Use of Budgetary Accounting

• Budgets are submitted to legislative body for authorization– Authorized expenditures are called appropriations

• Executive leader approves budget or returns to legislature

• Final approved budget is recorded in general ledger– Summarized in control accounts– Subsidiary ledger in detail


Use of Budgetary Accounting - continued

• Budgetary totals for the following are recorded in the general ledger– Appropriations– Estimated revenues– Other financing sources– Other financing uses


Accounting for the General Fund – Trial Balance

Trial balance includes• Assets (including allowances on receivables)• Liabilities• Fund balance = Assets less liabilities

– Reserved• Obligations or legal restrictions for resources• Committed & unavailable resources

– Unreserved• Not legally restricted• Designated: Intends to be used• Undesignated: Free for unrestricted use


Recording the Budget - Example

City Council & Mayor approve city’s budgetEstimated revenues $1,350,000Appropriations 1,300,000Estimated transfer to debt service fund30,000

Journal entry:Estimated revenues 1,350,000

Appropriations 1,300,000Estimated other financing uses 30,000Budgetary fund balance – unrestricted 20,000


Recording Revenues & Transfers - Example

• Detailed example in textbook• Includes 16 transactions


Recording Encumbrances and Actual Expenditures

• Government uses encumbrance system• Encumbrance is an expected expenditure

– Contra account to fund balance

• Recorded when purchase order is approved– DR Encumbrances– CR Fund balance – reserve for encumbrances

• Recorded when invoice is received– DR Fund balance – reserve for encumbrances– CR Encumbrances– DR Expenditure– CR Voucher payable

• Encumbrances closed to fund balance at year-end


Prior Period Encumbrances

• Prior year encumbrances– Closing entry is reversed– After reversal, accounted for in normal manner in the

next year


Encumbrances – Year 1

Commit to future expenditureEncumbrance xx

Fund Balance – Reserve for Encumbrances xx

When invoice is receivedFund Balance – Reserve for Encumbrances xx

Encumbrance xxExpenditures xx

Vouchers Payable xx

At year endFund Balance xx


Leave Reserve for Encumbrances open as an equity account on the balance sheet.


Encumbrances – Year 2

At beginning of the yearreinstate encumbrancesEncumbrances xx

Fund Balance xx

When invoice is receivedFund Balance – Reserve for Encumbrances xx

Encumbrances xxExpenditures xx

Vouchers payable xx

At year endFund Balance xx



Other transactions

• Correction of prior year errors made directly to Unreserved, Undesignated Fund Balance

• Reimbursement of expenditures credited to expenditures

• Investments – adjustment required at report date to fair value– Use account “Net Increase/Decrease in Fair Value of

Investment”


Year-end Closing Entries

• Reverse budgetary entriesClose the budget

Appropriations xxBudgetary Fund Balance xx

Estimated Revenues xx• Close revenue and expenditure amounts into “Fund

Balance – Unreserved, Undesignated”

Close the actual accountsRevenues xx

Expenditures xx Encumbrances xx Fund Balance xx


Account Groups

• Government used account groups to keep control of– Capital assets – General Fixed Asset Account Group

• GFAAG

– Long term debt – General Long Term Debt Account Group

• GLTDAG

• Account groups are not reported on financial statements

• Account groups information disclosed in notes to financial statements


GFAAG

• Accounts for general capital assets not related to specific fiduciary/proprietary fund

• Tracks fixed assets and assigns responsibility for– Custody– Proper use

• Categories– Land– Buildings– Other improvements– Machinery & equipment– Construction in progress– Major infrastructure assets


Accounting for CFAAG

• Purchased asset is recorded at cost• Donated asset recorded at FMV at time of receipt• Expenditure for capital asset is recorded in the

fund making the purchase• An entry is also recorded in GFAAG

– DR Specific asset account– CR Original funding source of capital


Accounting for CFAAG - Example

City purchases building for $200,000

Gen Fun Expenditure 200,000

Voucher payable200,000

GFAAG Building 200,000

Investment in General Fixed

Assets – General Fund

Revenues200,000


Capital Assets – Subsequent Expenditures

• Maintenance expenditures accounted for separately

• Does not increase book value of capital asset


Capital Assets – Depreciation

• No depreciation recorded in the general fund– This would mix the two difference concepts of expense

and expenditure

• Depreciation is reported in government-wide statements

• Accumulated depreciation is recorded in GFAAG– DR Investment in GFA – General Fund Revenue– CR Accumulated depreciation


Capital Assets - Disposal

• Original cost minus accumulated depreciation is removed from the GFAAG– DR Investment in GFA – General fund revenue– CR Specific asset

• If sold – proceeds recorded in general fund– DR Cash– DR Other financing sources

• If traded– Additional expenditure is recorded in general fund– New asset is recorded in GFAA


General Long Term Debt Group

• Accounts for general long term debt– Not related to specific fiduciary/proprietary funds

• Record of all general LT obligations of the governmental unit

• “General” means principle and interest paid by levied taxes

• This group does not account for interest– Principle only


GLTD Examples

• General government bond issue• General government special assessment debt• General government long-term notes• General government claims and judgments• General government compensated absences• General government capital lease liabilities• General government unfunded pension contributions• General government unfunded landfill closure and

postclosure care


GLTDAG Accounting Equation

3 phases:When incurred

Amount to be provided = long-term obligationWhile debt is outstanding

Amount available+ Amount to be provided= Long-term obligation

When debt maturesReverse accounts from the account group


Record General LTD

DR Amount to be provided for payment of specific liabilityCR Liability accountExample: Government issues $1,000,000 of term bondsAmount to be provided for payment of term bonds 1,000,000

Term bonds payable 1,000,000(discount/premium is ignored)Amount available in Debt Service Funds- Term bonds 80,000

Amount to be provided for payment of term bonds 80,000(debt service fund receives annual appropriation for eventual retirement)Term bonds payable 1,000,000

Amount available in debt service fund – term bonds 1,000,000(bonds are paid at maturity)


Purchase of Capital Asset (Leased Machine) with LTD - Example

GF Expenditures 50,000

Other financing sources 50,000(record present value of capital lease in general fund)

GFAAG Leased machine 50,000

Investment in GFA –

General Funds 50,000(record present value of capital lease in GFAAG)

GLTDAG Amount to be provided 50,000

Lease Obligations 50,000


Other Governmental Funds

• Special revenue fund– Revenue collected for special purpose

• Permanent fund– Trust set up for specific public use– Principle is not expended

• Capital projects fund– Major capital asset acquired

• Debt service fund– Accounts for debt recorded in GLTDAG


Special Revenue Fund

• Revenue from specific sources is restricted by law or donor and used for– Specific operating purpose– Acquisition of minor fixed asset

• Governmental unit may have one, many or none• Uses modified accrual basis of accounting


Examples Of Special Revenue Funds

• Nonexchange transactions• Fed & state grant proceeds restricted fro

community development expenditures• Gasoline tax revenue for highway maintenance• Fed/State funds for education• Resources for food stamp programs• Expendable public trust fund


Permanent Fund

• Accounts for public purpose fund• Earnings of trusts are for specific purpose• Principle cannot be used• Often referred to as endowment• Example: earnings of resource received will be

use for maintenance of government parks


Capital Projects Fund (CPF)

• The acquisition of major general fixed assets through:– Purchase– Construction– Capital lease

• Same basic accounting and reporting model as general fund or special revenue funds


CPF: Funding Sources

• Interfund operating transfers (credit OFS)• Long-term borrowing (credit OFS)

– General obligation term or serial bonds

• Intergovernmental grants (credit revenue)• Special assessments (credit revenue)

– Levied against property owners or other beneficiaries


Resources From Bond Issue

• Record face amount of bond issue– Premium/discount recorded separately

• Bond issue costs recorded as expenditures• Bond issued at premium

– Premium and payment received for interest is transferred to DSF

• Bond issue at discount– Project authorization is reduced by bond discount

unless additional resources are transferred in

• Proceeds temporarily invested until needed– Interest recorded as revenue and transferred to DSF


CPF – Annual Budgets

• Expenditures continue through project completion by authority of annual budgets

• Closing entries recorded at year-end even if project is incomplete– Credit to expenditures is recorded as construction in

progress in GFAAG


CPF: Year End

Project Complete• Close revenues and

expenditures to Fund Balance and transfer any residual fund equity to source(s)

Project Incomplete• Close revenues & OFS,

expenditures, and OFU to the Fund Balance

• Close open encumbrances against Fund Balance; leave Fund Balance – Reserve for Encumbrance

• Reestablish at beginning of next year:

Encumbrance xxFund Balance xx


Capital Project Cost – Actual Vs. Estimate

• Actual cost may be different that estimated cost• Actual > estimate

– Usually covered by transfer from general fund

• Actual < estimate– May be returned to general fund– May be transferred to DSF


Capital Project Completion

• Customary to withhold part of payment until final inspection and approval– Liability recorded in “contracts payable – retained

percentage”


Debt Service Fund - DSF

• Accounts for financial resources accumulated to cover principle and interest payments on general government obligations– Term bonds– Serial bonds– Notes that mature in more than one year– Periodic payments on capital leases

• Uses modified accrual basis


DSF: Expenditure Recognition

• Modified accrual– Report principal and interest expenditures when

legally payable (i.e., do not accrue unmatured principal or interest)

• Accrual permitted, but not required, if:– Resources for debt service accumulated in fund by

year end and payment due early next year– Accrual option is used; must accrue entire debt

service payment due early next year


DSF – Serial Bonds As Resource

• Most popular form of financing• Redeemed in series of installments• No large cash amounts in sinking funds• Annual budget provides for interest and principle

reductions


DSF - Resources

• Credit to revenues– Portion of property tax levied– Net amount of taxes estimated to be collected

• Credit to other financing sources– Transfers from other funds


DSF: Refunding Defined

• Issuance of new debt to finance payment of interest and principal of existing debt– Current refunding – Use refunding proceeds

to retire debt immediately– Advance refunding – Place proceeds in

escrow and use to pay interest and principal in future (in-substance defeasance)


DFS: Reporting Refunding and Defeasances

• DSF entry:Cash xx

OFS – Proceeds of Refunding Bonds xx

• Refunding issue is reported in GLTDAG• Defeased (retired) debt is removed from

GLTDAG


Special Assessments

• Capital improvements/services for benefit of specific group of property owners

• Paid partially/totally by property owners• Service type and capital improvements


Special Assessment – Service Type

• Covers operational activities• No increases to fixed assets• Usually single charge added to property tax bill• Accounted for in fund type that best reflects nature

of transaction


Special Assessment – Capital Improvements

• Additions/improvements to fixed assets• Accounted for in

– Enterprise fund OR– GFAAG


Proprietary Funds

• Accounts for business type activity• Focus in capital maintenance• Measures whether revenues are sufficient to

cover expenses of fiscal period• Types

– Enterprise – goods or services provided to the general public

– Internal service – goods or services provided inter- or intra-governmental unit


Proprietary Funds: Accounting Principles

• Similar to for-profit enterprises• Apply GAAP except where it has been specifically

overridden by a GASB pronouncement• GASB #20 (Sept ‘93):

– Must apply all pertinent GAAP (ARBs, APBs, SFASs, etc.) through SFAS 102 unless conflict

– May apply GAAP from SFAS 103 to present• Apply ALL, unless conflict or• Apply NONE, unless adopted by GASB

...continued...


Proprietary Funds: Financial Statements

• Balance sheet– Fund balance = Net assets

• Statement of revenues, expenses, and changes in net assets

• Statement of cash flows

• Plus:– Combining statements– Segment information


Enterprise Fund

• Operating efficiency may be monitored by the fund’s net income or loss


Enterprise Fund: Funding Sources

• Issue of LTD• Interfund transfer in• Loans/advances from government unit• Revenues

– Internal (other gov’t. funds)– External (customers, other gov’ts.

• Non-operating revenues


Enterprise Funds: Nonoperating Revenues

• Capital contributions• Operating transfers• Loans• Others

– Grants– Tap fees– Impact fees– Internal and external subsidies– Debt forgiveness from general government


Enterprise Funds

•Use is optional as long as fee is charged to external users•Use is mandatory (including capital assets) if:

– Activity is financed only with revenues from specific activity

– Laws/regulations require activity cost of providing services to be financed by fees rather than general tax

– Pricing policy of activity establishes fees to cover its own costs


Enterprise Fund – Restricted Cash

• Cash and cash equivalents available only for designated purposes– Customer deposits subject to refund– Proceeds of LTD for construction– Cash set aside for bond interest/principle reductions

• Common when fund is used to account for a utility


Enterprise Fund – Cash Flow Statement

• GASB Statement No. 9 requires Statement of Cash Flows to show movement of restricted and unrestricted cash in four categories– Cash flow from operating activities– Cash flow from non-capital financing activities– Cash flow from capital and related financing activities– Cash flow from investing activities


Government Units Operate More Than One Enterprise Fund

• Combined statements required• Different, identifiable activities presented

separately– Different – product, program or service generated by

different activities– Identifiable – specific revenue stream and related

expenses

• Example – natural gas, water and electricity service accounted for as one utility enterprise fund


Internal Service Fund

• Services to other departments/governments

• Self sustaining

• Cost-reimbursement basis


Internal Service Fund – Continued

• No restricted assets• Must recover costs (including depreciation) or be

subsidized• Maintain record of capital assets• Use accrual basis of accounting• Budgetary accounts not used


Internal Service Fund – Net Income

• Sufficient to allow for– Replacement of capital assets– Payment of risk-related losses

• Should not be too large– Allow balance to stay in other funds– Billing rates impact expenditures of other funds


Trust And Agency Funds

• Used to account for assets received and held by government acting as trustee or custodian for individuals, organizations, businesses, or other governments

• Difference – Duration of the fiduciary responsibility– Agency fund: short-term fiduciary responsibility– Trust funds: long-term fiduciary responsibility


Types Of Trust Funds

• Private purpose trust• Investment trust• Pension trust


Private Purpose Trust Fund

• Holds – performance deposits of licenses– Scholarship funds to external individuals– Endowments to benefit needy employees– IRS Section 457 deferred compensation plan– Funds used to account for escheat property

• Accounted for just as proprietary fund


Investment Trust Funds

• Used to account for – assets, – liabilities, – net assets and – changes in net assets

of external participants in an investment pool managed by government for other governments and not-for-profit organizations


Pension Trust Funds

• Accounts for public employees’ retirement system funds

• Actuaries estimate required funding• Use full accrual basis of accounting


Agency Funds

• Used when cash collected or withheld from gov’t employees must be forwarded to a proper destination– Example: deductions from gov’t employee salaries for

social security


Government Accounting –Interactions Among Funds

• Each fund is a separate accounting entity– Records only limited phase of event

• Complete recording involves more than one fund• Transactions among funds are frequent

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