Essentials of Accounting for
Governmental and
Not-for-Profit Organizations
Chapter 4
Accounting for the General and
Special Revenue Funds
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Overview of Chapter 4




Accounting for Nonexchange Transactions
Modified Accrual Basis
Common Entries during the year
The closing process
4-2
Exchange vs Nonexchange
Transactions
GASB Statement No. 33 indicates the timing
will be different for

Exchange and exchange-like transactions


These are like commercial sales — you pay a
certain amount and receive equivalent value in
return
Nonexchange transactions

For taxes and certain other transactions you pay
more or less than the value of services received
4-3
Exchange Transactions

Revenue resulting
from exchange
transactions is
recognized in the
period(s) that it is
earned

For example, revenue
from the rental of
government property
would be recognized
over the term of the
lease
4-4
Types of Nonexchange Transactions
1.
Imposed nonexchange revenues
property tax, special assessments, fines/forfeits
2.
Derived tax revenues
sales, income, motor fuel taxes
3.
Government mandated transactions
federal government requires lower level
expenditures
4.
Voluntary nonexchange transactions
grants, donations
4-5
Imposed Nonexchange Revenue

Taxes and other assessments that do not result
from an underlying transaction.


Examples include property taxes and special assessments
imposed on property owners.
Also includes fines and forfeits.
4-6
Imposed Nonexchange Revenue
Modified Accrual
Basis Recognition
Record the receivable (and an allowance for
uncollectibles) when an enforceable claim exits.
Revenues should be recognized in the period for
which the taxes are levied (i.e. budgeted), but
are also subject to the 60 day rule. Revenues
expected to be collected > 60 days after yearend are deferred.
1. Property taxes levied
1. Taxes Receivable ………Dr
Estimated Uncollectible Taxes ….…..Cr
Revenues Control ……………….…Cr
2. Revenues Control ………Dr
Deferred Revenues – Property Taxes Cr
2. Deferral of portion
expected to be collected >
60 days after year end
4-7
Derived Tax Revenues

These are taxes assessed on exchange
transactions conducted by businesses or
citizens.

Examples include sales, income, and excise
taxes.
4-8
Derived Tax Revenue
Revenue Recognition –
Modified Accrual
Record the receivable when the taxpayer’s underlying
transaction takes place.
Revenues should be recognized when available and
measurable. Revenues not expected to be collected in
time to settle current liabilities are deferred (i.e.
available and measurable criteria).
1. Income tax withholdings 1. Cash …………………….Dr
Revenues Control ……………………Cr
are received.
2. Additional income taxes 2. Taxes Receivable ……….Dr
Revenues Control ……………………Cr
expected to be received
Deferred Revenues – Income Taxes ……Cr
after year end. Part of this
will not be received in time
to be avail-able for current
liabilities.
4-9
Government Mandated
Nonexchange Transactions

These are commonly grants from higher levels of
government (federal or state) given to support a
program.

Since the program is required, the lower-level government
has no choice but to accept.

For example, a state may require schools to mainstream
certain students and provide funds to carry out this mandate.
4-10
Voluntary Nonexchange
Transactions

These include donations and grants given
to support a program.

Since the program is not required, the receiving
government voluntarily agrees to participate.
4-11
Government-Mandated and Voluntary
Nonexchange Revenues
Revenue
Recognition –
Modified Accrual
Record the receivable and the revenue when all
eligibility requirements have been met.
Many of these are reimbursement grants. In this
case, revenue is recognized only when qualified
expenditures have been incurred.
Reimbursement type
grants
1. Expenditures Control …..Dr
Accounts Payable/Cash ……………..Cr
2. Due from grantor ……… Dr
Revenues Control ……………………Cr
4-12
Government-Mandated and Voluntary
Nonexchange Revenues
Revenue
Recognition –
Modified Accrual
Advance receipts are deferred until expenditures
are incurred. Revenue recognition is subject to
the available and measurable criteria.
Advance funded
grant:
1.
1. Receipt of advance
funding.
2. Incur qualified
expenditures and
recognize revenue.
Cash ……………………Dr
Deferred Revenues – Grants ………..Cr
2a. Expenditures Control …...Dr
Accounts Payable/Cash ……………..Cr
2b. Deferred Revenues –
Grants .. ……… Dr
Revenues Control ……………………Cr
4-13
Review: Modified Accrual vs. Accrual

Accrual



Recognize revenues when earned
Match expenses against the revenues as assets and services are used
up.
Modified Accrual

Recognize revenues when measurable and available


(available to pay this year’s bills— for example, property taxes received within 60 days of
year end)
Recognize expenditures when the liability is incurred — no attempt to
match to revenues, match to period of occurrence only

Exception — recognize interest and principal payments as expenditures
when DUE
4-14
Modified Accrual Revenue Cycle

Assume





Property tax for 2009 levied = $1,000,000;
$800,000 is collected in calendar year 2009
$120,000 is collected in January and February 2010
$80,000 in collected in March and April 2010
ENTRIES DURING 2009:

Record levy:
Taxes receivable
1,000,000
Revenue (tentative)

2009 collections
Cash
1,000,000
800,000
Taxes Receivable

Year end adjustment: Revenue
80,000
Deferred Revenue

800,000
80,000
(Property taxes expected to be collected more than 60 days after year end will be a 2010 revenue)
4-15
Modified Accrual Expenditure Cycle

Supplies are ordered at an estimated cost of $ 3,000
Supplies are received with an actual cost of $ 3,000 plus shipping of $ 250
Invoice from the supplies is paid

Journal Entries



Place Order
Receive Goods
Payment
Encumbrances
3,000
Budgetary Fund Balance
Reserve for Encumbrances 3,000
Expenditures
3,250
Accounts Payable
3,250
Budgetary Fund Balance
Reserve for Encumbrances 3,000
Encumbrances
3,000
Accounts Payable
Cash
3,250
3,250
4-16
Quasi-External Transactions

These are between funds but they are exchangelike transactions with an objective basis for
determining the amount

They are treated as revenue and expense or expenditure



Example, sale of electricity by the Electricity Enterprise fund
to the General Fund
The sale would be treated as revenue for Enterprise Fund
and expenditure for General Fund
GASB 34 calls these “Interfund Services Provided &
Used” instead of quasi-external
4-17
Reimbursements

Reimbursements
do not show up
separately on the
Activity or Budget
statement, but are
internal balance
corrections

When the reimbursement is made, the
expense or expenditure
is recorded in the correct
fund and the incorrect
expense or expenditure
is reversed
4-18
Reimbursements

Assume the government receives a bill for
engineering services in the amount of $10,000; and it
is initially recorded in the General Fund as follows:
GF: Expenditures
Accounts Payable

$10,000
$10,000
Later, it is discovered that $2,000 of these services
were for the Electricity Enterprise fund. The following
would be recorded:
GF: Due from Electricity $2,000
Expenditures
EF: Expenditures
$2,000
Due to General Fund
$2,000
$2000
4-19
Transfers

Any shifting of resources from one fund to
another where there is no expectation that
the amounts will be repaid.


Transfers In are considered Other Financing
Sources
Transfers Out are considered Other Financing Uses

Recurring Transfers such as for debt service may be
built into the budget
4-20
The Closing Process

Closing process for government type
funds needs to accomplish the
following:

Close budgetary accounts

Close Revenues, expenditures,
encumbrances, and related other financing
sources or uses to Fund Balance
4-21