Chapter Two
FUND ACCOUNTING
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Learning Objectives
After studying Chapter 2, you should understand:
 The nature of funds.
 The hierarchy classification of fund balances.
 The three basic fund types of a state or local
government:
-Governmental funds,
-Proprietary funds, and
-Fiduciary funds
 The main components of a CAFR.
 The primary F/S issued by governments.
 The difference between the “current” and the “old” accounting
models.
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Business
One company
 “Fund” used as an informal term (multiple meanings).
May refer to working capital (current net assets)
May refer to cash or investments available
May have other definitions
 The company is a single fiscal and accounting entity.
 A = L + E (“E” usually called “Owners’ Equity”)
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Governmental
Multiple “entities”
--“Fund” used as a formal term (single meaning)
“Fund is a fiscal and an accounting entity with a
self-balancing set of accounts.”
 Each fund is like its own “entity”
--In other words, a fund is an entity with its own
set of books (i.e., chart of accounts , general
journal, general ledger, trial balances, and
financial statements)
 Fund accounting uses the equation:
Assets = Liabilities + Fund balance (often
referred to as net assets)
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GASB Statement No. 54
In February 2009, the GASB issued Statement No. 54,
Fund Balance Reporting and Governmental Fund
Type Definitions, to improve the usefulness, and
understandability of governmental fund balance
information.
– The statement is effective for years beginning after June 15,
2010. (i.e. June 30, 2011 year ends)
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Brief Summary
• Fund balances of governmental type funds
are now to be reported based on a hierarchy in
five different classifications:
• Nonspendable
• Restricted
• Committed
• Assigned
• Unassigned
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GASB 54 -- Exhibit 1
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GASB 54—Exhibit 2
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GASB 54 -- Cont’d
Fund Balance should be identified between Nonspendable
resources and Spendable resources:
 Nonspendable resources include amounts that are not in spendable form or are
required to be maintained intact.
– Inventories and prepaids (also includes assets held for sale and long-term
receivables)
 Spendable resources is the remaining balance and is to be reported in a
hierarchy of classification (4 categories) based on the extent to which the
government is bound by restrictions/constraints on those funds:
--Restricted (most constraint)
--Committed
--Assigned
--Unassigned (no constraint)
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Spendable Resources
1- Restricted (most constraint) includes
amounts constrained to specific purposes by their
providers, through constitutional provisions, or by
enabling legislation.
Externally imposed constraints by :
--creditors, bondholders,
--grant providers, contributors, or
--imposed by law through constitution or enabling
legislation .
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2- Committed fund balance—here the constraints are imposed by
a formal action of the government’s highest level of decisionmaking authority.
--These funds cannot be used for any other purpose unless the
government removes or changes the specified use by taking the
same formal action that originally imposed the constraint.
--Committed funds include contractual obligations for which
existing resources in the fund have been specifically committed
for use.
Note: In contrast to fund balance that is restricted by enabling
legislation, amounts in the committed fund balance can be
redeployed for other purposes with appropriate due process.
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3- Assigned fund balance –Government’s intent to use the funds
for a specific purpose. Here INTENT is the key.
--Intent can be expressed by the governing body itself or another
body that has the delegated authority.
--Fund Balance in other governmental funds (except General
Fund) that is not restricted or committed is considered as
Assigned FB in those funds. In other words it is the residual
balance of these funds.
-- However, the general fund should be used to account for and
report all financial resources that are not accounted for or reported
in another fund.
Note: the authority for making an assignment does not have to be
made by the government’s highest level of decision-making
authority. Thus, constraints imposed on assigned amounts can be
more easily removed or modified than those that are classified as
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committed.
5- Unassigned fund balance –this is the residual
classification of the General Fund.
--includes amounts that are available for any purpose.
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Not-for-profit
• NFP may use fund accounting internally to ensure control of
funds, but they do not report these funds externally.
• Classifies Net Assets into 3 groups:
--Unrestricted
--Temporarily restricted – used for specific purpose.
--Permanently restricted -explained further on later slides.
• FASB regulates NFP reporting for nongovernmental
organizations and only requires 6 totals
–
–
–
–
–
–
Total assets
Total liabilities
Total net assets
Total unrestricted net assets
Total temporarily restricted net assets
Total permanently restricted net assets.
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BASIS OF ACCOUNTING AND
MEASUREMENT FOCUS
•Basis of accounting determines when transactions and
events are given accounting recognition.
• For instance, if an entity adopts the full accrual basis, a
transaction is recognized when it has its substantive
economic impact, irrespective of when cash is received or
paid.
•If, on the other hand, it adopts the cash basis, the
transaction is recognized only as the related cash is
received or paid.
•An entity’s measurement focus determines what is
being reported upon—which assets and liabilities are given
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accounting recognition and reported on the balance sheet.
•The two concepts are closely related; the selection of one
implies the selection of the other.
Ex., if an entity adopts a cash basis of accounting, its
measurement focus is upon cash. Only cash is reported on
its balance sheet. Correspondingly, measurement focus
also determines whether the entity reports net profit (the
net increase in all economic resources) OR merely the net
change in selected resource flows (current financial
resources, e.g., cash, short-term receivables, and short-term
investments).
•If an entity adopts a full accrual basis of accounting, its
measurement focus is automatically upon all economic
resources, and its balance sheet reports on all assets and
liabilities, both current and noncurrent.
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•Because GNPs may be primarily concerned with the assets
needed to satisfy current-year obligations, they may adopt a
modified accrual basis of accounting and a measurement
focus will be on short-term financial assets and liabilities
for many of their funds.
• Under the modified accrual used by governments,
revenues are recognized on a cash or near-cash basis;
expenditures are recognized on a full accrual basis.
•Under the modified accrual basis, because the measurement
focus is on current financial resources, capital assets and
long-term liabilities are excluded from the balance sheet, and
net changes in short-term financial assets and liabilities are
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recognized as revenues or expenditures.
Summary
 Full Accrual: Revenues recognized
when earned; expenses recognized
when incurred.
 Cash: Revenues recognized when
available; expenses/expenditures
recognized when paid.
 Modified Accrual: revenues are
recognized when measurable and
available; expenditures when incurred.
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Measurement Focus
 Economic resources measurement focus
-Report on the determination of net income, financial
position, and cash flows (i.e. capital maintenance).
 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).
-
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Activities of Government
Most general purpose governments engage in three broad
categories of activities:
1) Governmental activities are those financed
predominantly through taxes and intergovernmental
grants.
2) Business-type activities are those financed
predominantly through user charges.
3) Fiduciary activities are those for which the
government acts as a trustee or agent for individuals,
external organizations, or other governments.
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Types of Funds
Governments classify funds into three broad categories:
1) Governmental Funds (5)





General Fund
Special Revenue Funds
Capital Projects Funds
Debt Service Funds
Permanent Funds
2) Proprietary Funds (2)
 Internal Service Funds
 Enterprise Funds
3) Fiduciary Funds (2)
 Agency Funds
 Trust Funds
• Pension (and other employee benefit)
• Investment Trust Funds
• Private purpose Trust Funds
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Definition of Fund Types
 Governmental Funds
 A generic classification used by GASB to refer to all funds
other than proprietary or fiduciary.
 No guarantee that the funds will be reimbursed for services
rendered.
 Proprietary Funds
 Government generally makes initial contribution but
thereafter the fund is expected to “pay its own way” through
fees for services rendered. Also referred to as business-like
or commercial-type funds.
 Fiduciary Funds
 Any fund held by a government in a fiduciary capacity.
 Simply, the gov’t. holds someone else’s money
in trust and acts as a custodian. Since it is not the
government’s money, it is not expendable for the
government’s own programs.
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Governmental Funds
 Basis of Accounting:
--Modified Accrual
 Measurement Focus:
--Current Financial Resources
 Other names: “financial flow” focus or spending focus.
 Only current assets and liabilities are generally included on their
balance sheet (i.e. Capital assets and long-term liabilities are not
included).
 Reports expenditures (not expenses) of appropriations.
 Fund Balance (net current assets) measures “available spendable
resources”




Fund Balance = Current Assets – Current Liabilities.
Increased by revenues and other financing sources.
Decreased by expenditures and other financing uses.
Governmental fund operating statements present these increases and
decreases in net current assets.
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(1) - General Fund (GF)
 The general fund should be used to account for and report all
financial resources that are not accounted for or reported in
another fund.
 in essence, it accounts for all unassigned resources.
 Only one per government and is the most significant single
fund.
General Activities of city government (ex. Fire, police, street maintenance,
sanitation, and administration)
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(2) - Special Revenue Funds (SRF)
 To account for and report the proceeds of specific revenue
sources that are restricted or committed for specified purposes
other than debt service or capital projects (e.g., gas tax revenues
required to be used for road repairs, private donations that must
be used to maintain parks).
Ex. City of Houston maintains over 17 SRF
-Examples include





Public Safety Special Fund (9-1-1 Emergency Network)
Public Works Special Fund
Health and Housing Special Fund
Parks and Recreation Special Fund
Other Special Revenue Fund (Cable Television)
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(3) - Capital Projects Funds (CPF)
 Accounts for financial resources that are
restricted, committed, or assigned to expenditure
for capital outlays, including the acquisition or
construction of capital facilities and other capital
assets, such as buildings, highways, and
equipment.
 Governments often issue bonds to finance a
specific project. The resources received must be
placed in a capital projects fund and expended
for that project.
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(4) - Debt Service Funds (DSF)
Accounts for financial resources that are
restricted, committed, or assigned for the
payment of interest and principal on longterm debt.
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(5) - Permanent Funds
Accounts for resources provided that are legally
restricted, so that only earnings, not principal,
may be used to support the government’s
programs.
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Proprietary Funds
 Basis of Accounting:
 Full Accrual
 Operated like a “normal for-profit” business.
--ex. City of Houston operates its Airports under a Proprietary fund.
 Measurement Focus:
Economic Resources
 All assets and liabilities (both current and noncurrent) are included in the
balance sheet
 Accounts for expenses (not expenditures)
--Depreciation expense is reported.
 Fund Equity (Total Net Assets)
 Net Assets = Assets – Liabilities.
 Increased by revenues and other financing sources.
 Decreased by expenses and other financing sources.
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Required Financial Statements
Similar to those of for-profit entities
 Statement of Net Assets
 Statement of Revenues, Expenses,
and Changes in Net Assets (i.e.
operating statement)
 Statement of Cash Flows
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(1) - Internal Service Funds (ISF)
• Internal service funds account for the provision of goods or
services to other departments within the same government
(or, occasionally, to other governments).
• They bill the receiving departments at rates intended to cover
the cost of the goods or services. The following are
examples:
• A maintenance and repair service for the cars and trucks of
the police department, fire department, sanitation department,
etc.
• A store that sells office supplies to the other government
departments.
• A print shop that provides government-wide printing
services.
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(2) - Enterprise Funds (EF)
 Accounts for activities in which
goods or services are provided to
the general public for a charge.
 Reported as business-type
activities in the government-wide
financial statements.
 Examples include electric and
water utilities, airports, parking
garages, transportation systems.
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Fiduciary Funds - Agency Funds
 Accounts for financial resources in which the
government is acting in an “agency” capacity
 Agent - Government holds assets on behalf of another
government
 Accounting is simple: assets = liabilities.
 No revenue and expense to accrue
 Examples are tax agency funds, certain special
assessment funds, and pass-through agency
funds.
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 Both Trust funds and Agency funds account for
assets held by the City in a trustee capacity or as
an agent for individuals, private organizations,
other governments.
 Therefore, the government cannot include these
funds in the government-wide statements.
 Basis of Accounting:
 Full Accrual
 Measurement Focus:
 Economic Resources
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Required Financial Statements
 Statement of Fiduciary net assets
 Statement of Changes in Fiduciary net
assets
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Trust Funds
 Each trust is classified for accounting measurement
purposes as either a governmental fund or a
proprietary fund (ex. Houston Firefighters Relief and
Retirement and Police Officers’ Funds).
 Funds can be either expendable or nonexpendable.
 Three types of trust funds:
 (i) Pension (and other employee benefits)
Trust Funds (one or more)
 (ii) Investment Trust Funds
 (iii) Private Purpose Trust Funds
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(i) Pension (and other employee benefits) Trust Fund
 Accounts for financial resources in which the
government (or other designated trustee) is
acting in a trustee capacity for the employees
of the government to provide retirement
benefits.
 Uses business-type accounting practices.
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(ii) Investment Trust Funds
 Accounts for external investment pools in
which the assets are held for other
(external) governments, along with funds of
the sponsoring government.
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(iii) Private-purpose Trust Funds
 Includes all trust funds other than pension
and investment trust funds.
 To account for and report resources held for
individuals or external organizations (e.g., a
scholarship fund for employees’ children,
funded by a donation from a citizen).
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Measurement Focus and Basis of Accounting
Measurement
Focus
Basis of
Accounting
Government-wide
statements (GASB 34)
Economic
resources
Accrual
Governmental fund
statements
Modified
accrual
Proprietary fund
statements
Current
financial
resources
Economic
resources
Fiduciary fund
statements
Economic
resources
Accrual
Accrual
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GASB Statement No. 34
Government-wide Statements
1)Statement of Net Assets
2)Statement of Activities
 Address questions that have not been easily answered
by fund accounting
 “What do government services really cost, e.g., public
safety or recreation?”
 “How much debt for current services are we shifting to
the next generation?”
 “ How much of the cost of government is borne by
citizens in the form of general revenues?”
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Comprehensive Annual Financial Report - CAFR
Review from Ch. 1
The CAFR is the recommended annual report of
a governmental unit. It has 3 sections.
 Introduction section
 Financial section
 Statistical section
The minimum requirements for general purpose
external reporting include:
 MD&A
 Basic financial statements
 RSI other than MD&A
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Summary
 Fund financial statements for governmental funds utilize
the modified accrual basis of accounting and a current
financial resources measurement focus.
 GASB Std. # 34 requires both government-wide
financial statements and fund financial statements.
 Government-wide financial statements and fund
financial statements for proprietary and fiduciary funds
follow the full accrual basis of accounting and the
economic resources measurement focus (similar to
commercial accounting).
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