Chapter 5
Recognizing Expenditures in
Governmental Funds
Chapter 5
Granof-5e
1
Thought to Ponder: Chapter 5
The same prudence which in private life would
forbid our paying our own money for
unexplained projects, forbids it in the
dispensation of public moneys.
President Thomas Jefferson
Chapter 5
Granof-5e
2
Learning Objectives
 Modified accrual basis
 Full accrual basis
 Accounting for different expenditures
 Types of interfund activities and how they are
reported
 Other Financing Sources and Uses
Chapter 5
Granof-5e
3
Financial Statements
Two types of financial statements:
Governmental Fund F.S.
 Basis of Accounting: Modified accrual basis
-Provides information relating to Inter-period equity
Government-wide F.S.
 Basis of Accounting: Full accrual basis
 Presents revenues and expenses from the
perspective of the entity as a whole and not
of the individual funds.
Chapter 5
Granof-5e
4
GAAP
 GASB Codification, paragraphs 1600.102
through 1600.105.
 The Codification asserts that the “accrual
basis is the superior method of accounting for
the economic resources of any organization,”
and states that the “use of the accrual basis
to the fullest extent practicable is
recommended.”
Chapter 5
Granof-5e
5
Governmental Fund Statements
 Required Financial Statements
 Balance sheet
-presents the fund’s resources at a particular point in
time.
 Operating statement
-presents the net change in resources during a
particular period of time.
 Basis of Accounting
 Modified accrual basis
 All measurements are in accordance with
GAAP.
Chapter 5
Granof-5e
6
Modified Accrual Accounting
Criteria : Measurable and Available
 Measurable : Government is able to
determine or reasonably estimate the
amount.
 Available : Collectible within the current
period or soon enough thereafter to be
used to pay liabilities of the current period.
Chapter 5
Granof-5e
7
Expenditures vs. Expenses
Expenditures
 Definition: “measure of fund liabilities liquidated with current
resources”
 Decreases net current financial resources (i.e.
Fund Net Assets)
 Used in Modified Accrual Basis
--i.e. Fund Financial Statements
Expenses
 Definition: “measure of costs expired or consumed during a
period”
 Reduction in net economic resources (overall net
assets)
 Used in Full Accrual Basis
--i.e. Government-wide Statements
Chapter 5
Granof-5e
8
Expenditures

Closely tied to cash flows and near-cash
flows

Governmental funds report only current
liabilities and not long-term liabilities.

Expenditures recognized when cash is
paid or fund liability accrued* for
goods/services received.
 * next slide . . .
Chapter 5
Granof-5e
9
. . . liability accrued*


“Revised” Expenditure Definition:
---Decreases in net current financial resources (i.e. Fund Net
Assets) NOT resulting from Transfers (and refunding
transactions)
NORM – Recognize when FUND Liability is incurred
* Exceptions include:
--Debt Service Expenditures on Government Long Term Debt
-Recognize when Legally Due
--Materials, Supplies, and Prepaid Items
-Recognize based on either Purchases or Consumption
Basis
--Pensions, Claims and Judgments, Compensated Absences
-Recognize when Payable from Available Expendable
Financial Resources
--Capital Leases
-Recognize based on Substance vs. Form Basis
Chapter 5
Granof-5e
10
Salaries and Wages
 May be earned in one fiscal year but
paid in the next
 Recognize the expenditure in the
period in which it is earned by the
employee (provided the government’s
obligation will be liquidated with
expendable available financial
resources.)
Chapter 5
Granof-5e
11
Example 1
Governmental fund vs. for-profit payroll accounting
--similar, except expenditures not expenses are recorded.
Example: Wages and related benefits of employees for the last pay
period in December 2010 were $40 million. Employees are to
be paid on January 6, 2011. The fiscal year ends December 31.
General Fund
Wages and benefits expenditures
Accrued wages payable
DR
$40M
CR
40M
Government-wide: same (except for “expense” label).
Remember, no entries are made under government-wide. There
is only a conversion done on the Working Papers at the end of
the year.
Chapter 5
Granof-5e
12
Example 2
Dr. Expenditures (for the full amount of payroll)
Cr. Liabilities (for withholdings from employees pay)
Cr. Cash for the amount paid to employees
Timbaktu City recognized its payroll for the most recent two week pay
period for employees paid from the General Fund.
GF General Journal
Expenditures--2010
Due to Federal Gov’t
Due to State Gov’t
Cash
Dr.
948,000
Cr.
86,000
49,000
713,000
The Subsidiary Ledger provides the details of the total expenditure as follows:
General Government
178,000
Public Safety
480,000
Public Works
290,000
Chapter 5
Granof-5e
13
Salaries and Wages (cont’d.)
Dr. expenditures for the employer’s payroll costs
(including employer’s share of FICA)
Cr. Liability to federal government.
GF General Journal
Expenditures--2010
Due to Federal Gov’t.
Dr.
$188,000
188,000
Expenditures Subsidiary Ledger:
Contributions for Retirement

Cr.
188,000
Encumbrances usually are not recorded for recurring
expenditures such as payroll.
Chapter 5
Granof-5e
14
Governments Vs. Business
7 Major differences
1) Compensated absences (Chs. 5 & 8)
2) Pension accounting (Ch. 10)
3) Claims and Judgments (Ch. 8)
4) Inventory accounting
5) Prepayments
6) Accounting for capital assets (Chs. 6 & 7)
7) Accounting for interest and principal
(Chs. 6 & 8)
Chapter 5
Granof-5e
15
(1) Compensated Absences (CA)
Overview
 Earned in one period but often not paid until
several periods later (i.e. It’s not current.)
 Amount to be paid is often uncertain.
--Compensation is based on the salary/wage rate in
effect when the time off is taken.
 GASB standard:
--Vacation leave and compensated absences
should be accrued as a liability as the benefits are
earned if BOTH the following conditions are met:
-Attributable to services already rendered
and
-Probable that compensation will occur
(paid time off or other means)
Chapter 5
Granof-5e
16
(1) Vacation Leave
Vacation pay expenditures and related
fund liabilities should be recognized in
the periods in which they are due.
 Until those periods, those liabilities are reported
ONLY in the schedule of long-term obligations.
Chapter 5
Granof-5e
17
Example 1-a
 Example: City employees earned $300,000 in vacation
leave they did not take in 2010. The leave vests and
can be taken at any time up to retirement.
No entry in the governmental funds
Government-wide: (no real entry here either)
But this will be the conversion at year end.
DR
CR
Vacation pay expense
$300,000
Accrued vacation payable
300,000
Chapter 5
Granof-5e
18
Example 1-b
 Example: City employees earn $8 million in vacation leave. Of
this amount, they are paid $6 million in 2010 and defer the
balance until future years.
Governmental fund
Vacation pay expenditure
Cash (or Wages Payable)
DR
$6M
CR
$6M
The $2 million deferred until future periods should be reported in a
schedule of long-term obligations.
Government-wide statements (no real entry here either)
But this will be the conversion at year end.
DR
CR
Vacation Pay expense
$8M
Cash (or Wages Payable)
$6M
Accrued Vacation Pay
2M
Chapter 5
Granof-5e
19
(2) Sick Leave
 Beyond the control of both the employee and
the employer.
 GASB states that sick leave is recognized as
a liability only if it is probable that the
employer will compensate the employees for
the benefits through cash payments
conditioned on the employees’ termination or
retirement.
 It should be recorded ONLY when expected
to be paid to employees upon their
resignation or retirement.
Chapter 5
Granof-5e
20
Example 2-a
Example: City employees earned $170,000 in sick leave but were
only paid for $140,000. The leave accumulates but does not vest.
Governmental fund
DR
CR
Sick leave expenditure
$140,000
Cash
$140,000
The city will not have to compensate employees for leave not taken
as a termination benefit. It should charge as an expenditure only
the amount that was liquidated with expendable financial
resources. It need not report a liability even in the schedule of
long-term obligations.
Government-wide*: Same rules apply. Only the $140,000 paid
needs to be charged as an expense.
*No actual journal entry is made. But this will be the conversion at year
end.
Chapter 5
Granof-5e
21
Example 2-b
• Example: A city pays for its employees’ unused sick leave up
to thirty days only if they terminate at least after 10 years of
service. In 2010, the city had the following estimates:
-Sick leave earned = $12 mil;
-Payments in the future to employees = $8 mil
-Payments to 10-year employees upon termination = $1mil
-Amount that will not be paid = $3 mil
Governmental fund:
No entry is required. The city recognizes a liability only for the
$1 million to be paid in termination benefits. Assuming that
those termination benefits are not paid in the current year, it is
recognized in the schedule of long-term obligations
Government-wide: (again no actual journal entry is made)
Sick leave termination benefit expense
Accrued Sick Leave
Chapter 5
Granof-5e
DR
$1M
CR
1M
22
(3) Sabbatical Leave
 After a specified term of service, employees
may be granted a paid leave.
 They are offered to benefit both the employee
and the employer in the future, not the past.
 The employees are required to perform other
activities that will enhance their job-related
abilities during their time off.
 GASB standard:
--Accounting depends on the purpose of the leave
 Activities to enhance their job-related skills
--Account for in the period the leave is taken
 “Compensated unrestricted time off”
--Liability is accrued during the period the leave is earned.
Chapter 5
Granof-5e
23
Example 3-a
A Private not-for-profit university faculty are entitled to
sabbatical leaves of six months every 7 years for
research and renewal. The 2010 share of leave
costs to be taken in the future was $300,000.
Governmental Fund:


Sabbatical leave needs to be recognized as a liability if it
is a reward for past service (i.e. it is for unrestricted time
off).
It need not be accrued if it constitutes merely a change in
assigned duties (e.g. research instead of teaching).
Government-wide:

Chapter 5
Same.
Granof-5e
24
Pensions Overview (Ch 10)
 Definition: Amount of money paid to
retired or disabled employees.
 If the Government makes the required
contribution to the pensions in full
--amount recorded = amount of contribution.
 GASB Standard:
The expenditure should be the amount that
will be liquidated with expendable available
financial resources.
Chapter 5
Granof-5e
25
Claims and Judgments (CJ)
Overview (Ch 8)
 GASB Std. #10, Claims and Judgements, para. 53.
(also FASB Std. # 5)
 Liability accrued if:
-Probable that Asset Impaired/Liability Incurred by Balance
Sheet date
-Loss can be reasonably estimated
 Expenditure amount:
 Recognize in the governmental fund only the portion of liability
that is normally to be Liquidated with Available Expendable
Financial Resources
 Liability recorded at “face value.”
 Balance of liability is in the Schedule of LT Obligations –
 No expenditure recognized
 Expense is recognized in the government-wide
statements at the time the loss liability first satisfies the
FASB No. 5 criteria. (probable and estimatable)
Chapter 5
Granof-5e
26
(4) Materials and Supplies:Overview
Are not expendable available financial resources


Unlike businesses, governments do not acquire
inventories with the intention to resell them.
Instead, they use it to carry out day-to-day
operations.
Two Primary issues pertaining to governmental funds
are:
Timing of the expenditure
Reporting of the assets
Chapter 5
Granof-5e
27
Overview (cont’d)
Accounting for Inventory
 Two methods of accounting available
Consumption Method
Purchases Method
 Each method assumes periodic rather than
perpetual inventory accounting
 All purchases are debited to Expenditures
 The Inventory of Supplies account is
updated at year-end as an adjusting entry
Chapter 5
Granof-5e
28
Example 1 – Consumption Method
Consumption Method. Assume the following
data:
Beginning inventory
Purchases during year
Available for use
Ending inventory
Amount consumed
$ 20,000
150,000
170,000
(15,000)
$155,000
Adjusting Journal Entries:
Dr.
Expenditures--2010
$5,000
Inventory of Supplies
Fund Balance - Reserved for Inventories 5,000
Fund Balance – nonspendable
Chapter 5
Granof-5e
Cr.
5,000
5,000
29
Example 2 – Purchases Method
Purchases Method. Assuming the same data:
Beginning inventory
Purchases during year
Available for use
Ending inventory
Amount consumed
$ 20,000
150,000
170,000
(15,000)
$155,000
Adjusting Journal Entries:
Dr.
Cr.
Fund Balance-nonspendable
$5,000
Inventory of Supplies
5,000
(Note that the Expenditures account is not affected by the
adjusting entry)
Chapter 5
Granof-5e
30
Materials and Supplies (cont’d)
Government-wide statements:
 Should be reported on a consumption
basis.
 Supplies expense (not expenditure) would
be debited.
 No need for inventory reserve.
Chapter 5
Granof-5e
31
Example 3
In 2010 the City ordered supplies that cost $4
million, received supplies that cost $3.5 million,
paid for supplies that cost $3 million and used
supplies that cost $3.3 million.
Common Entries*:
Dr.
Cr.
Encumbrances
Reserve for encumbrances
Reserve for encumbrances
Encumbrances
Accounts Payable
Cash
$4
$4
$3.5
$3.5
$3
$3
* Common under both Consumption and Purchases method
Chapter 5
Granof-5e
32
Example 3 (cont’d)
Purchases method:
DR
CR
Supplies expenditure
$3.5
Accounts Payable
$3.5
Supplies inventory
$0.2
Fund balance-nonspendable
$0.2
Consumption method:
Supplies Inventory
$3.5
Accounts payable
$3.5
Supplies expense
$3.3
Supplies Inventory
$3.3
Fund balance (unassigned)
$0.2
Fund balance -nonspendable
$0.2
Government-wide: Must use consumption method.
Chapter 5
Granof-5e
33
(5) Prepayments: Overview
GASB standards
 Fund Statements:
 Either purchases or consumption method can be
used
 Government-wide statements:
 Only consumption method must be used
 If services extend over more than one
accounting period
 Need not be allocated between or among
accounting periods
 GASB does not distinguish between current and
long-term prepayments.
--i.e. the unused portion of insurance policy for two or more years
would be reported as an asset – the same as a one-year policy
Chapter 5
Granof-5e
34
Example 1
On June 15, 2010 the city acquired and paid for an insurance
policy that cost $300,000. The policy covers the two-year period
beginning July 1.
Purchases method:
Insurance expenditure
Cash
Consumption method:
Prepaid insurance
Cash
DR
$300
CR
$300
$300
$300
Government-wide: Must use consumption method.
Chapter 5
Granof-5e
35
Capital Assets Overview (Ch 6)
 Provide services in periods beyond those in which they
are acquired.
 GASB standards:
 General capital assets – are not specifically related to activities
that are reported in proprietary or fiduciary funds.
 General capital assets are neither reported on governmental
fund balance sheets nor depreciated on governmental fund
statements of revenues, expenditures, and changes in fund
balance.
 Governments reports general capital assets in the period
requiring the outflow of expendable available financial
resources.
 Accounting for capital assets
 Fund Statements
--Expenditure as purchased
 Government-wide statements
--Capitalize and Depreciate (like business)
Chapter 5
Granof-5e
36
Example 1
The city acquired a computer system for all its departments at a cost
of $3 million, and paid in cash. It has a useful life of three years.
General Fund:
Expenditure-acquisition of capital assets
Cash
DR
$3
CR
$3
Government-wide*: Would capitalize and depreciate
*This is not a real entry but conversion is made at the end of the year.
Chapter 5
Granof-5e
37
(7) Interest and Principal on Longterm Debt: Overview
Principle:
 Recorded in schedule of long-term obligations.
 If a principal repayment extends beyond a fiscal
year, expenditures are recognized entirely in the
year the payments are due.
Interest:
 Major expenditure for many governments.
 Source of payments are either general revenues
or revenues dedicated for debt service revenues.
 The government transfers cash from general fund
as payments are made.
Chapter 5
Granof-5e
38
Nonexchange Expenditures: Overview
GASB Standards (applicable to both modified and full
accrual statements):
 Nonexchange expenditures
 Should generally be recognized with their revenue
counterparts
--(i.e.) when the recipient of the grant has satisfied all eligibility
requirements.
 Nonexchange expenses
 Grants would be recognized as expenses in the same
period in the government-wide as in the fund statements.
 Modified accrual statements
 Revenues must be available for expenditure before they
can be recognized.
Chapter 5
Granof-5e
39
Example 1
Example: In December 2010, the city approves a
$300,000 grant to a not-for profit health clinic. The
funds are to be paid in 2011 out of funds budgeted
for that year and are intended to support the clinic’s
activities in 2011.
General Fund: In as much as the clinic cannot use
the funds until 2011, the grant is subject to a time
requirement. The clinic need not recognize either a
liability or an expenditure until 2011, when the time
requirement is satisfied.
Government-wide: Same.
Chapter 5
Granof-5e
40
Example 2
Example: In Dec. 2010 the city awards a not-for profit clinic $400,000
for the acquisition of emergency communications equipment.
Payment is made at the time the award is announced. The clinic is
permitted to use the funds upon receipt, but intends to use them in
2011.
---Purpose restrictions have no impact on the timing of either
expenditure or revenue recognition. The state must recognize
an expenditure as soon as it expends the funds and the county is
eligible to spend them:
Governmental Fund:
Grant expenditure
$400,000
Cash
$400,000
Government-wide*: Same, but expense instead of expenditure.
* This is not a real entry but conversion is made at the end of the year.
Chapter 5
Granof-5e
41
Example 3
Example: In Dec. 2010, the city awards a not-for profit $200,000 for
the acquisition of emergency communications equipment. The
grant is to be paid as the organization incurs and documents
allowable costs. In 2011 the organization submits claims for
$150,000 of which the city pays $125,000. The city expects to pay
the $25,000 balance of claims submitted in Jan 2012 and the
$50,000 balance of the grant by June 2012.
--- The not-for- profit is eligible for the award only as it incurs and
documents allowable costs. In 2011, the city became eligible for
$150,000 of the grant—the amount that the state should recognize
as an expenditure.
General Fund:
Grant expenditure
$150,000
Cash
$125,000
Grants payable
25,000
Government-wide*: Same, but expense instead of expenditure.
* This is not a real entry but conversion is made at the end of the
year.
Chapter 5
*
Granof-5e
42
Example 4
Assume a grant of $100,000 is received at the
beginning of the fiscal year from the federal
government to operate a counseling program for
troubled youths.
The entry in the special revenue fund is:
Dr.
Cr.
Cash
$100,000
Deferred Revenue
100,000
Explanation: Until eligibility requirements for the grant
have been met by incurring expenditures for the
intended purpose, an “exchange transaction” it is
reported as “Deferred Revenue” (a liability).
Chapter 5
Granof-5e
43
Example 4 (cont’d)
Assume that during the year the Counseling Program
expended $75,000 for costs related to youth
counseling, thus meeting the eligibility requirement to
expend grant resources. The entries would be:
Dr.
Cr.
Expenditures
$75,000
Vouchers Payable
75,000
Deferred Revenues
$75,000
Revenues
75,000
(This amount would also be recorded in the Revenue
detail account in the Revenue subsidiary ledger).
Chapter 5
Granof-5e
44
Interfund Transfers (Ch. 6-9)
Two types of interfund activity:
(a) Reciprocal: Equivalent of exchange
transactions
(b) Nonreciprocal: Equivalent of
nonexchange transactions.
Chapter 5
Granof-5e
45
Summary
 Accrual basis recommended to the fullest extent
practicable.
 2 criteria must be met before revenues are recognized in
governmental funds:
-Resources must be Measurable and Available
 Governmental fund expenditures are defined as
decreases in net financial resources.
 Expenses are outflows or consumption of overall net
assets.
 Nonexchange transactions in the governmental fund are
accounted for symmetrically to nonexchange revenues.
 Grants are recognized as expenditures when all the
requirements are met.
Chapter 5
Granof-5e
46