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