2
Chapter
Fund Accounting
Accounting Equation
 Assets
= Liabilities + Net Assets (Fund
Balance)
 Fund
balance is a residual just like owner’s
equity
 Same
double-entry system is utilized
Reporting Entity
A reporting entity consists of:
 A primary
government and
 Component
units
Reporting Entity (Cont’d)
A
primary government is:

A state government,

General purpose local government (e.g., a city, town,
village, township, borough, county, etc.), or a

Special purpose government that has a separately
elected governing body, is legally separate, and is
fiscally independent of other state or local
governments
Reporting Entity (Cont’d)
A

component unit is
a legally separate organization for which the elected officials
of a primary government are financially accountable

may also include another organization for which the nature
and significance of its relationship with a primary
government or its component units is such that exclusion
would cause the reporting entity’s financial statements to be
misleading
Reporting Entity (Cont’d)
 The
financial information of a component unit can be
reported by:

Discrete presentation (i.e., in a separate column from the
primary government’s financial information), or by

Blending (combined with financial information of the
primary government)

Notes to financial statements should describe reporting entity
Required Financial Statements
 Two
sets of “basic” financial statements required (in
addition to MD&A and other required supplementary
information)


Government-wide 2 financial statements
Fund financial statements
2 Governmental fund financial statements
3 Proprietary fund financial statements
2 Fiduciary fund financial statements
See
previous days notes for specifics
Required Financial Statements
Government-wide financial statements:

Are prepared on the accrual basis and use the economic resources
measurement focus (i.e., similar to for-profit business entities)

Report the primary government’s financial information in two
columns (governmental activities and business-type activities)

Internal service fund information usually reported in the
governmental activities column; fiduciary activities not reported at
all in the government-wide financial statements
Basis of Accounting and Measurement


Basis of accounting: Determines when transactions and events are
recognized.

Accrual – recognition when substantive economic impact
completed

Cash – recognize only when it relates the transaction to cash
Measurement Focus – Determines what is being reported upon.

Accrual accounting reports on all assets and liabilities and
increases/decreases in net capital are recognized as revenues or
expenses

Governments often adopt a modified accrual basis of accounting
and a measurement focus on ST financial assets and liabilities
Basis of Accounting
When are revenues and expenses/expenditures
measured?
 Modified accrual basis of accounting
 Revenues recognized when available and
measurable; expenditures when incurred
 Accrual basis of accounting
 Revenues when earned; expenses when
incurred
Measurement Focus
What is measured?
 Economic
resources measurement focus
Report on the determination of net income, financial position,
and cash flows (i.e., capital maintenance)
 To measure operational accountability

 Current
financial resources measurement focus
Report on the inflows and outflows of current financial
resources (i.e., cash or other items expected to be converted
into cash during the current period)
 To measure fiscal accountability; meet the legal and
budgetary needs of government

Fund Accounting
 Fund
accounting reports financial
information for separate self-balancing sets
of accounts, segregated for separate
purposes or to account for resources
restricted as to use by donors or grantors.
 Funds
are separate accounting and fiscal
entities.
Definition of “Fund”
 In
other words, a fund is conceptually an entity with its
own set of books (i.e., chart of accounts, general journal,
general ledger, trial balances, and financial statements)
Major Funds
 Financial
statements for governmental funds must contain a
separate column for each major governmental fund.
 Financial
statements for proprietary funds must contain a
separate column for each major enterprise fund; financial
information for all internal service funds is reported in a
single column.
Types of Funds

Governmental Funds (5 types)
General Fund; Special Revenue Funds; Capital Projects Funds
Debt Service Funds; Permanent Funds

Proprietary Funds (2 types)
Internal Service Funds and Enterprise Funds

Fiduciary Funds (2 types)
Agency Funds and Trust Funds
Governmental Funds
 General
Fund (GF)
Only one per government
 Most of general government operating activities
are accounted for in the GF
 Accounts for all unrestricted resources
 Includes the following:





Police & fire
Sanitation
Administration
Street Maintenance
Governmental Funds (Cont’d)
 Special
Revenue Funds (SRF)
Used when required by law or by policy to account
for financial resources earmarked for a specified
operating purpose
 Accounting and budgeting usually identical to GF
 Includes the following




Gas tax for highway maintenance
Lottery fund for education
Donations to maintain
Parks & Cemeteries
Governmental Funds (Cont’d)
 Debt
Service Funds (DSF)

Used to account for financial resources segregated
to pay principal or interest on long-term general
liabilities

Similar to a sinking fund
Get money from other funds or
special taxes

I.O.U.
Governmental Funds (Cont’d)
 Capital
Projects Funds (CPF)
Used to account for financial resources segregated to
pay for construction or acquisition of long-lived
capital assets
 Typically get resources from bond issuance

Governmental Funds (Cont’d)
 Permanent
Funds
Used to account for resources provided by trust in
which the earnings but not the principal must be used
for public purposes
 Example someone dies and gives
money to maintain a park

Governmental Funds
Common Characteristics

Current financial resources measurement focus (cash,
receivables, inventories)

Modified accrual basis of accounting used – (We will look
at details in the next few chapters)

Account for expenditures of appropriations (not expenses)

Capital assets (land, building, equipment) and long-term
liabilities are not accounted for within governmental funds
Governmental Funds
Required financial statements
 Balance
Sheet
 Statement
of Revenues, Expenditures, and
Changes in Fund Balances
 Also
must have a reconciliation of the Statement
of Revenues, Expenditures, and Changes in Fund
Balances of Governmental Funds to the
Statement of Activities at the government-wide
level.
Proprietary Funds
 Internal
service funds (ISF)
Used to account for activities in which goods or
services are provided to other departments of the
same government or to other governments for a
charge
 Examples include central stores, central
computing, motor pools, and printing
 ISF are reported as governmental activities in the
government-wide statements because they
primarily benefit the government.
(Page 42)

Proprietary Funds (Cont’d)
Enterprise
Funds
Used
to account for activities in which
goods or services are provided to the
general public for a charge
Examples
include electric and water
utilities, airports, parking garages,
transportation systems, and liquor stores
EF
are reported as business-type
activities in the government-wide
financial statements (page 42)
Proprietary Funds
Common Characteristics
 Accounting
and reporting are essentially the
same as those of for-profit entities, including
full accrual accounting
 Capital
assets and long-term liabilities are
accounted for in the funds
 Depreciation
 Reports
expense is reported in the funds
expenses not expenditures
Proprietary Funds (Cont’d)
Required Financial Statements
 Similar
to those of for-profit entities
 Statement of Net Assets
 Statement of Revenues, Expenses, and
Changes in Net Assets
 Statement of Cash Flows
Fiduciary Funds
 Agency
Funds (often several)
To account for financial resources that the govt.
holds temporarily for another party
 Accounting is simple; assets = liabilities.
 No revenue and expense accounts used, nor is
there a fund/equity account
 Examples are tax agency funds, special
assessment debt service funds, and passthrough agency funds
 Not consolidated into government-wide
statements

Fiduciary Funds (Cont’d)
 Trust
Funds
Fund held by one person for the benefit
of another – intended to benefit parties
other than the government.
 3 Types




Pension Trust – benefit government
employees (retirement, disability)
Investment Trust – (like mutual fund)
Private Purpose Trust – benefit people not
associated with the government (escheated
fund or historical society)
Reporting Capital Assets
 General
capital assets should be distinguished from capital
assets of proprietary and fiduciary funds

General capital assets are reported in the government-wide financial
statements but not in fund financial statements

Proprietary capital assets are reported in both the government-wide and fund
financial statements

Fiduciary capital assets are reported only in the statement of fiduciary net
assets, a fund financial statement.
Valuation of Capital Assets
 Capital
assets should be accounted
for at historical cost, or estimated
cost if actual cost is unknown.

Donated assets should be
accounted for at estimated fair
value at time of gift.
Depreciation of Capital Assets

Capital assets should be depreciated over their estimated useful lives,
except inexhaustible assets such as land

A “modified approach” may be used for certain infrastructure assets
instead of depreciation

Depreciation expense for general capital assets is reported only in the
government-wide financial statements; for other capital assets it is
also reported in the fund financial statements.
Reporting Long-term Liabilities

General long-term liabilities should be reported in the
government-wide statements but not in the fund financial
statements.

Long-term liabilities to be repaid from proprietary funds
should be reported in the proprietary fund statements.

Long-term liabilities to be repaid from fiduciary funds should
be reported in the fiduciary fund statements.
Measurement Focus and Basis of
Accounting Summary !!!!!!!!
Measurement
Focus
Basis of
Accounting
Government-wide
statements
Economic
resources
Accrual
Governmental fund
statements
Modified
accrual
Proprietary fund
statements
Current
financial
resources
Economic
resources
Fiduciary fund
statements
Economic
resources
Accrual
Accrual