Chapter 15
Governmental
Accounting:
General Fund
and Account
Groups
C15
1
Comparison of Government and Notfor-Profits (GNPs) with Business
• Different mission - no profit motive
• Budget - legal document
– most significant financial document
– entered into accounting system
– budgets drive accounting
• Level of services - expenditures drive
revenues
• Need to assure interperiod equity
C15
2
Types of GNPs
• Governmental
– cities, towns,counties, school districts, special
tax districts, states, townships, etc.
• Not-for-Profits
– schools, universities, hospitals, social service
organizations, civic organizations, cultural
organizations, religious organizations,
foundations, etc.
C15
3
Purposes of Financial Reporting
• Assess financial condition
• Compare actual results with the budget
• Determine compliance with laws and
regulations
• Evaluate efficiency and effectiveness
C15
4
Users of Financial Reports
• Main users identified by GASB:
– citizens and taxpayers
– investors and creditors
– governing boards (legislators)
• Other users
– donors and grantors
– regulatory and oversight agencies
– employees and other constituents
C15
5
Objectives of Financial Reporting
• GASB objectives for state & local
governments
– accountability (interperiod equity, budgetary
and fiscal compliance, service efforts and
accomplishments)
– current standards - compliance reporting
– new reporting model – GASB 34
C15
6
GASB 34: New Reporting Model
• Requires both fund statements and
government-wide statements
• Effective in
– 2002 for large governments
– 2003 for mid-size governments
– 2004 for small governments
C15
7
New Reporting Model, continued
• New requirements include infrastructure
reporting and depreciation
• Full accrual and modified accrual
information will be reported
• New model requirements explained
throughout Chapters 15, 16, and 17
C15
8
What is a Fund?
• Fiscal and accounting entity with its own
self-balancing set of accounts from which
separate financial statements can be
generated
• Governments use funds to separate
resources that have restrictions
– many funds in each government
– assets - liabilities = fund balance
C15
9
Governmental Funds
•
•
•
•
•
C15
General Fund
Special Revenue Fund
Permanent Fund
Capital Projects Fund
Debt Service Fund
10
Governmental Funds, continued
• Use modified accrual basis of accounting
• Measurement focus is flow of financial
resources
• Therefore, just record inflows and outflows
of financial resources
• Use account groups to keep track of the
long-term debt and fixed assets
C15
11
Proprietary Funds
• Enterprise Funds
• Internal Service Funds
C15
12
Proprietary Funds, continued
• Use full accrual basis of accounting
• Measurement focus is flow of economic
resources
• Therefore, record all transactions
• All assets = all liabilities + fund equity
• Used for all business-type activities
C15
13
Fiduciary Funds
• Used to account for resources that are held
by the government for others (individuals,
organizations, corporations, other
governments)
–
–
–
–
C15
Private Purpose Trust Funds
Pension Trust Funds
Investment Trust Funds
Agency Funds
14
Account Groups
• No longer reported on the financial statements
• May still be used to keep track of general
capital assets and long-term debt
• Two types:
– General Fixed Asset Account Group (GFAAG)
– General Long-Term Debt Account Group
(GLTDAG)
C15
15
Overview of Governmental Fund
Accounting
• Recording
– the budget
• Accounting for
– encumbrances
– revenues
– expenditures
– other financing sources/uses
C15
16
Recording the Budgetary Entries
Estimated Revenues
+ Estimated Other Financing Sources
- Appropriations
- Estimated Other Financing Uses
= Fund Balance
Journal Entry:
Estimated Revenues
Estimated Other Financeing Sources
Appropriations
Estimated Other Financing Uses
Fund Balance (derived)
C15
xx
xx
xx
xx
xx
17
Comparison with Actual Results
Estimated Revenues (debit)
- Actual Revenues (credit)
Variance
Appropriations (credit)
- Actual Expenditures (debit)
Variance
C15
18
Revenue Recognition
•
•
Modified accrual basis
Recognize when susceptible to accrual, i.e.
– measurable and
– available defined as:
•
•
C15
collected during the period or soon enough
thereafter to be used to pay current period
liabilities (60 day cutoff is common) AND
legally available to finance current period
expenditures (usable)
19
Establish Legal Claims
•
•
•
•
C15
For property taxes --- levy of taxes
For charges for services --- performing
services
For sales taxes --- taxable sale by
business
For income taxes --- taxpayer earning
taxable income
20
Deferred Revenues
•
•
A liability
Recorded if
–
–
C15
unearned or
not legally available
21
Common Revenue Sources
•
•
•
•
•
•
Taxes
Licenses and permits
Intergovernmental revenues
Charges for services
Fines and forfeits
Miscellaneous
–
–
C15
interest, rents, sales of fixed assets
other financing sources (OFS)
22
Revenue: Property Taxes
•
•
Local governments derive most of revenue
from property taxes - based on value (ad
valorem taxes)
Recognize as revenue when levied
–
–
–
C15
to be collected in the current period or soon
enough thereafter…
allowance for uncollectible
deferred revenue if not “available”
23
Revenue: Sales Taxes
•
Recognize when merchant files sales tax
return
–
–
C15
measurable
available
24
Revenue: Licenses and Permits
•
•
C15
Difficult to predict accurate amounts
Normally recognize revenue when cash is
received
25
Grants & Other
Intergovernmental Revenues
•
Restricted grants - expenditure driven
–
•
•
C15
food stamps, pass-through grants (if
administered), on-behalf payments
Unrestricted grants - recognize upon award
Entitlements - recognize upon award
26
Revenue: Charges for Services
•
C15
Recognize revenue when billing for services
rendered
27
Revenue: Fines
•
Options:
–
–
–
•
C15
when tickets are issued
date fine is due
actual payment date
Common practice - when cash is received
28
Revenue: Investment Income
•
Record all investments at fair value
–
–
•
C15
“mark-to-market”
unrealized gains/losses are recognized as
revenue in period
Interest and dividends accrued as earned
29
Revenue: Donations
•
Treatment based on type of asset
–
–
–
C15
Current assets: in funds at FMV
Fixed assets that will be used: in account
groups at FMV
Fixed assets that will be sold: in funds as shortterm investments at FMV
30
Revenue: Tax Anticipation Notes
• Recorded as a liability in the fund
• Always short-term
• Will not be converted into long-term so
never in the account group
C15
31
Other Financing Sources
•
•
•
•
C15
Not a revenue
Proceeds from issue of long-term debt
Sale of a fixed asset up to original cost
Transfer of resources from another fund
32
Accounting for Expenditures
• Recognize the expenditure when the fund
liability is both measurable and incurred
• Current liabilities in the fund
–
–
–
•
C15
funded by current taxpayers
using available financial resources
what is a current liability
Long-term liability in the account group
33
Types of Expenditures
• Wages and Salaries
• Compensated Absences
– vacations
– sick leave
• Pensions
• Claims and Judgments
• Supplies
C15
•
•
•
•
Prepayments
Fixed Assets
Leases
Debt Service
– principal
– interest
34
Wages and Salaries
• Accrued at year-end
• Natural (object) classification allocated to
function/program
Entry:
Expenditures - payroll
Accrued wages and salaries
C15
xx
xx
35
Compensated Absences: Vacations
Recognize if vested and probable that the benefit
will be paid out
Expenditure in fund if paid this period
Entry in fund:
Expenditures - vacation pay
Accrued wages and salaries
xx
xx
If long-term liability, record in account group
Entry in account group:
Amount to be provided...
Long-term liability for vacation pay
C15
xx
xx
36
Compensated Absences:
Sick Leave
Recognize if pay-out is probable at termination
Expenditure in fund if paid this period
If long-term liability, record in account group
Entry in account group:
Amount to be provided...
Long-term liability for sick leave benefits
C15
xx
xx
37
Pensions
ARC - Actuarial Required Contribution
Entry in fund (portion of ARC that will be paid
from current resources)
Expenditures - pension benefits
Accrued wages and salaries
xx
xx
Entry in account group (portion of ARC that
will be paid in future)
Amount to be provided...
Long-term liability for pension benefits
C15
xx
xx
38
Claims and Judgements
Follow FASB 5: Accrue if probable and reasonably
estimable
Entry in fund (amount that will be paid from current
resources)
Expenditures - Claims/Judgments
Accrued Claims and Judgments
xx
xx
Entry in account group (amount that will be paid in
future)
Amount to be Provided...
Long-term liability for claims and judgments
C15
xx
xx
39
Supplies Expenditure
Purchase Method
Record expenditure upon acquisition:
Expenditure - supplies
Vouchers payable
Inventory - supplies
Fund Balance - reserve for supplies
C15
xx
xx
xx
xx
40
Supplies Expenditure
Consumption Method
Acquisition:
Inventory - supplies
Vouchers payable
xx
xx
Record expenditure upon consumption:
C15
Expenditures - supplies
Inventory - supplies
xx
Fund Balance - unreserved
Fund Balance - reserve for supplies
xx
xx
xx
41
Prepayments
Purchases Method:
Expenditure - insurance
Vouchers payable
xx
xx
Consumption Method:
C15
Prepaid insurance
Vouchers payable
xx
Expenditure - insurance
Prepaid insurance
xx
xx
xx
42
Fixed Asset Acquisition
Acquisition:
Expenditure - Fixed Assets
xx
Vouchers Payable (Cash)
xx
(the fixed asset is recorded in account group)
If borrow to acquire the asset:
Cash
xx
Other Financing Sources
xx
(the long-term debt is recorded in account group)
C15
43
Other Financing Uses
• Not an expenditure
• Operating transfers of resources to other
funds
• Not classified as expenditures in remitting
fund to avoid double counting
C15
44
Encumbrances - Year 1
Commit to future expenditure
Encumbrance
xx
F.B. Reserve for Encumbrances xx
When invoice is received
F.B. Reserve for Encumbrances xx
Encumbrance
xx
Expenditures
xx
Vouchers Payable
xx
C15
At Year-End
F.B.
Encumbrance
Expenditures
xx
xx
xx
Leave Reserve for Encumbrances
open as an equity account on the
balance sheet
45
Encumbrances - Year 2
At beginning of the year
reinstate encumbrances:
Encumbrances
Fund Bal
xx
xx
When invoice is received
F.B. Reserve for Enc. xx
Encumbrances
Expenditures
xx
Vouchers payable
C15
xx
At year-end
xx
Fund Bal
Expenditures
xx
xx
46
Year End Closing Entries
Close the Budget:
Appropriations
Budgetary Fund Balance
Estimated Revenues
Close the Actual Accounts:
Revenues
Expenditures
Encumbrances
Fund Balance
C15
xx
xx
xx
xx
xx
xx
xx
47
Statement of Revenues, Expenditures,
and Changes in Fund Balance
Revenues
- Expenditures
Excess of revenues over expenditures
 Other financing sources (uses)
Excess of revenues and other financing sources
over expenditures and other financing uses
+ Beginning Fund Balance
 Residual Equity Transfers
Ending Fund Balance
C15
48
Accounting for Investments
• Marketable Securities
– stocks, bonds, notes, other financial instruments
– recent controversies
• Orange County, Texas, Ohio, Pennsylvania
• more risky investment, more return
• more sophisticated instruments
C15
49
Sophisticated Instruments
•
•
•
•
Repurchase agreements
Reverse repurchase agreements
Securities lending transactions
Derivatives (only value is some underlying
asset, interest rate, or index)
• Hedging on a changing economy
C15
50
GASB #3
(1986)
• Requires extensive disclosure of risk
– 3 categories
•
•
•
C15
insured or collateralized with securities held by
government
collateralized with securities held by pledging
financial institution
uncollateralized
51
GASB Technical Bulletin 94-1
(1994)
• reaffirmed GASB #3
– plus, disclose any violation of legal, regulatory,
or contractual provisions by investing in
derivatives
– explain nature of derivative transactions
•
C15
reasons, exposure to credit risk, market risk legal
risk
52
GASB #31
(1997)
• All investments are to be shown on the
balance sheet at fair value
• Adjustments up or down to fair value are
included on operating statement as
adjustments to current-period revenue
C15
53
Account Groups
General Fixed Assets - GFAAG
General Long-Term Debt - GLTDAG
Common Features of Account Groups:
• Focus on general government as whole
• Accounting procedures
– list and offset accounting entries
– primarily just add to/remove from “list”
C15
54
GFAAG
• Definition
– tracks all fixed assets other than those accounted for in
proprietary or trust funds
• Accounting equation for GFAAG
Fixed Asset = Investment in GFA-source of funding
C15
55
GFAAG - continued
Acquisition and initial valuation
–
–
–
–
cost
estimated cost
gifts: fair market value
foreclosure: lower of FMV or amount due for
taxes
– eminent domain: compensation to owner
– escheat: FMV
C15
56
Classification of Fixed Assets
• Land
• Building (or Building and Improvements)
• Infrastructure (or Improvements other than
Buildings)
• Machinery and Equipment
• Construction in Progress (no capitalized
interest)
C15
57
Classification of Investment in
GFA by Financing Source
• Capital Projects Funds
–
–
–
–
long-term borrowing
special assessments
intergovernmental grants-in-aid
interfund transfers
• General Fund and Special Revenue Funds
–
–
C15
general revenues
special revenues
58
GFA Options
• Infrastructure
– immovable in nature and of value only to state
or local government
– optional capitalization
– disclosure policy
• Capitalization Policy - legal/materiality
• Recording of Depreciation - optional
C15
59
GLTDAG
•Definition - all unmatured debt except that
of proprietary funds
–unmatured principal
–secured (typically) by SLG full faith & credit
–not a liability of any fund
C15
60
GLTD Examples
• general government bond issue
• general government special assessment debt
• general government long-term notes
• general government claims and judgments
• general government compensated absences
• general government capital lease liabilities
• general government unfunded pension contributions
• general government unfunded landfill closure and
postclosure care
C15
61
GLTDAG Accounting Equation
• 3 phases:
– when incurred:
Amount to be provided = Long-term obligation
– while debt is outstanding:
(Amount available + Amount to be provided) = Longterm obligation
– when debt matures:
reverse accounts from the account group
C15
62