Fund Accounting
Accounting Equation
 Assets
= Liabilities + Net Assets (Fund
 Fund
balance is a residual just like owner’s
 Same
double-entry system is utilized
Reporting Entity
A reporting entity consists of:
 A primary
government and
 Component
Reporting Entity (Cont’d)
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
Reporting Entity (Cont’d)
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
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
Government-wide 2 financial statements
Fund financial statements
2 Governmental fund financial statements
3 Proprietary fund financial statements
2 Fiduciary fund financial statements
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
Accrual – recognition when substantive economic impact
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
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
 Modified accrual basis of accounting
 Revenues recognized when available and
measurable; expenditures when incurred
 Accrual basis of accounting
 Revenues when earned; expenses when
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
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
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
Similar to a sinking fund
Get money from other funds or
special taxes
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
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
 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
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
 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)
to account for activities in which
goods or services are provided to the
general public for a charge
include electric and water
utilities, airports, parking garages,
transportation systems, and liquor stores
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
Fiduciary Funds (Cont’d)
 Trust
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
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 !!!!!!!!
Basis of
Governmental fund
Proprietary fund
Fiduciary fund