Chapter 4
Accounting for
Governmental
Operating Activities
Dr. Chula King
The University of West Florida
Student Learning Outcomes
Recognize typical operating transactions for the
governmental activities and prepare appropriate
journal entries at both the government-wide and
fund levels
Account for expense recognition at the governmentwide level and expenditures at the fund level for
goods encumbered in the prior year
Explain the contents of interim balance sheets and
budgetary comparison schedules.
2
Student Learning Outcomes
Explain and make entries for internal exchange
transactions
Prepare a pre-closing trial balance for the General
Fund, closing journal entries and year-end General
Fund financial statements.
3
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Student Learning Outcomes
Account for operating grants and other financial
assistance using special revenue funds
Account for interfund transactions; distinguish
between intra- and inter-activity transactions; and
explain accounting for intra-entity transactions
Account for transactions of a permanent fund
Explain the difference between exchange and
nonexchange transactions, and the classifications of
nonexchange transactions.
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Governmental Funds
Focus: measure the flow of current financial
resources
• Current financial resources include cash, receivables,
marketable securities, prepaid items, and supplies
inventories
• Capital assets such as land, buildings, and equipment are
not accounted for in governmental funds, but rather in
governmental activities at the government-wide level
Basis: modified accrual accounting.
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Encumbrance Accounting
Before a department can order materials and
supplies or equipment, the finance department
ordinarily must verify that a sufficient unexpended
appropriation exists to cover the items being
ordered
This process is sometimes referred to as
“preauditing.”
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Appropriations, Encumbrances,
Expenditures and Expenses
Governmental Activities
Fund
Budget is Adopted
Revenues Sub. Ledger
Estimated Revenues (DR)
Budget Recorded
Appropriations (CR)
Appropriations Sub. Ledger
Encumbrances (DR)
Encumbrances Sub. Ledger
Funds are Encumbered
Reserve for Encumbrances (CR)
Reserve for Encumbrances
Encumbrances
Encumbrances Sub. Ledger
Funds are Expended
Expenditures
Vouchers Payable
Expenditures
Vouchers Payable
Vouchers Payable
Cash
Expenditures Sub. Ledger
Vouchers Payable
Cash
Vouchers are Paid
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Estimated Revenues and
Revenues
Governmental Activities
Fund
Budget is Adopted
Revenues Sub. Ledger
Estimated Revenues (DR)
Budget Recorded
Appropriations (CR)
Receivable
General Revenues
Cash
Receivable
Revenues Accrued
Receivable
Revenues
Receivable Collected
Cash
Receivable
Appropriations Sub. Ledger
Revenues Sub. Ledger
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Example
Assume that General Government, Public Safety
and Public Works order materials and supplies
amounting $80,000, $210,000 and $130,000
respectively for a total of $420,000:
GF General Journal
DR.
Encumbrances – 2005
420,000
Reserve for Encumbrances-2005
Encumbrances Subsidiary Ledger
General Government
80,000
Public Safety
210,000
Public Works
130,000
CR.
420,000
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Accounting for Expenditures
Expenditures were made for goods ordered as
follows: General Government - $78,000, Public
Safety - $220,000, and Public Works - $134,000.
GF General Journal
Dr.
Cr.
Reserve for Encumbrances 420,000
Encumbrances – 2005
420,000
Expenditures – 2005
Vouchers Payable
432,000
432,000
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Accounting for Expenditures
Governmental Activities
Expenses-General Government
Public Safety
Public Works
Vouchers Payable
Dr.
78,000
220,000
134,000
Cr.
432,000
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Accounting for Expenditures
Encumbrances Subsidiary Ledger:
General Government
Public Safety
Public Works
Expenditures Subsidiary Ledger:
General Government
Public Safety
Public Works
Dr.
Cr.
80,000
210,000
130,000
78,000
220,000
134,000
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Accounting for Payroll
Payroll accounting is similar for a governmental
fund and a for-profit entity, except Expenditures
rather than Expenses are recorded
• Debit Expenditures for full amount of payroll and credit
liabilities for withholdings from employees pay; credit
Cash for the amount paid to employees
• Record Expenditures for the employer’s payroll costs,
including employer’s share of FICA and credit a
liability to federal government
Encumbrances usually are not recorded for
recurring expenditures such as payroll.
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Accounting for Payroll
Payroll was recognized for the most recent two week pay
period for employees in General Government-$178,000,
Public Safety-$480,000, Public Works-$290,000:
GF General Journal
Dr.
Cr.
Expenditures—2005
948,000
Due to Federal Gov’t
86,000
Due to State Gov’t
49,000
Cash
713,000
Expenditures Subsidiary Ledger:
General Government
178,000
Public Safety
480,000
Public Works
290,000
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Accounting for Payroll
Governmental Activities
Expenses-General Government
Expenses-Public Safety
Expenses-Public Works
Due to Federal Gov’t
Due to State Gov’t
Cash
Dr.
178,000
480,000
290,000
Cr.
86,000
49,000
713,000
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5
Accounting for Payroll
The employer’s share of FICA is recorded.
GF General Journal
Dr.
Expenditures—2005
86,000
Due to Federal Gov’t
Expenditures Subsidiary Ledger:
Contributions for Retirement 86,000
Governmental Activities
Expenses-General Government 16,148
Expenses-Public Safety
43,544
Expenses-Public Works
26,308
Due to Federal Gov’t
Cr.
86,000
86,000
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Accounting for Property Tax
Revenue
The tax levy is the amount billed to taxpayers.
Calculation of levy: Levy =
[Statutory or legislatively approved tax rate x
assessed valuation of taxable property (either real
property or personal property)]
An additional calculation of levy:
Levy = Revenues required ÷ Estimated collectible
proportion
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Accounting for Property Tax
Revenue
The tax rate is the measure that is actually set by
legislative action, after the required size of the
levy is determined
Required tax rate (per $100 or per $1,000 of
assessed valuation) = tax levy ÷ assessed
valuation.
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6
Accounting for Property Tax
Revenue
Assessed valuation is determined by an elected
“Tax Assessor”
Calculation: Assessed valuation =
Estimated True Value x Assessment Ratio
In some jurisdictions the assessment ratio is 1.00
(i.e., full estimated market value), other
jurisdictions it might be .30 or some other fraction
of full value.
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Accounting for Property Tax
Revenue
Assume Revenues of $495,000 are required and it is
estimated that 1% will be uncollectible:
GF General Journal
Taxes Receivable-Current
Est. Uncollectible Current Taxes
Revenues
Revenues Subsidiary Ledger
Property Taxes
Governmental Activities
Taxes Receivable-Current
Est. Uncollectible Current Taxes
General Revenues-Property Taxes
Dr.
500,000
Cr.
5,000
495,000
495,000
500,000
5,000
495,000
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Accounting for Property Taxes
Assume by end of year $450,000 of current taxes
have been collected, the entry is:
GF General Journal
Dr.
Cr.
Cash
450,000
Taxes Receivable—Current
450,000
Governmental Activities: Same Entry
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7
Accounting for Property Tax
Revenue
The entries to reclassify uncollected current taxes
to delinquent status at year-end:
GF General Journal
Dr.
Taxes Receivable—Delinquent
50,000
Taxes Receivable—Current
Estimated Uncollectible Current Taxes 5,000
Estimated Uncollectible Delinquent
Taxes
Governmental Activities: Same Entries
Cr.
50,000
5,000
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Accounting for Property Tax
Revenue
Interest and penalties of $500 were accrued on delinquent taxes, of which
10% was estimated to be uncollectible.
GF General Journal
Dr.
Cr.
Interest & Penalties Receivable on Taxes
500
Est. Uncollectible Interest & Penalties
50
Revenues
4 50
Revenues Subsidiary Ledger
Revenues
450
Governmental Activities
Interest & Penalties Receivable on Taxes
500
Est. Uncollectible Interest & Penalties
50
General Revenues-Interest & Penalties
450
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Accounting for Property Tax
Revenues
Write-off of uncollectible taxes. Assume property
taxes of $500 were written off, on which there was
accumulated interest and penalties of $80. The
required journal entries are:
GF General Journal
Dr.
Estimated Uncollectible Delinquent Taxes 500
Taxes Receivable—Delinquent
Estimated Uncollectible Interest & Penalties 80
Interest and Penalties Receivable on Taxes
Governmental Activities: Same Entries
Cr.
500
80
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8
Issuance of Tax Anticipation
Notes (TANs)
Revenues from property taxes are often collected
during one or two months of the year
Expenditure demands may occur more or less
uniformly during the year
A local bank may extend a line of credit in the
form of TANs to meet short-term cash needs
since it will have the power of lien over taxable
properties.
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Tax Anticipation Notes - TANs
Assume that a 60-day $300,000 tax anticipation note, discounted at 6
percent per annum was signed.
GF General Journal
Dr.
Cr.
Cash
297,000
Expenditures—2005*
3,000
Tax Anticipation Notes Payable
300,000
* .06 X 60/360 X $300,000 = $3,000
Expenditures Subsidiary Ledger:
Interest
3,000
Governmental Activities
Cash
297,000
Expenses-Interest on TAN
3,000
Tax Anticipation Note Payable
300,000
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Tax Anticipation Notes
The 60-day $300,000 tax anticipation note was
repaid on the due date.
GF General Journal
Dr.
Cr.
Tax Anticipation Notes Payable 300,000
Cash
300,000
Governmental Activities: Same Entry
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9
Interim Balance Sheet (Ill. 4-2)
Balance sheet equation at an interim point during
the year (e.g., end of first quarter):
Assets + Budgetary Resources
=
Liabilities + Fund Equity
Fund Equity = Available Appropriations +
Reserved Fund Balance + Unreserved Fund
Balance
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Interim Balance Sheet
“Budgetary Resources” is the amount of
unrealized estimated revenues to date
(estimated revenues minus actual revenues)
“Available Appropriations” is the amount of
appropriations that has not yet been expended
or encumbered. It is one component of Fund
Equity at an interim point during the year.
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Revision of Budgets
Q: Why might a government need to revise its
legally adopted budget during the year?
A: An error may have been made in estimating
revenues or expenditures, or changed conditions
may have altered estimated revenues or caused
unforeseen expenditure needs
Because the budget is legally binding on managers,
it is important that the budget be revised to reflect
changed conditions.
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Revision of Budgets
Q: How are budget revisions accounted for?
A: If estimated revenues is increased, debit
Estimated Revenues and credit Fund Balance.
• If appropriations are increased, debit Fund
Balance and credit Appropriations.
• A decrease in either item would result in the reverse of
the above entry.
• Subsidiary ledger detail accounts would be adjusted
accordingly.
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Closing Journal Entries
Alternative methods, any of which is acceptable
• Close Estimated Revenues and Revenues in one entry and
Appropriations, Encumbrances, and Expenditures in a second
entry, debiting or crediting Fund Balance as necessary in each
entry
• Close budgetary accounts (Estimated Revenues,
Appropriations, and Encumbrances) in one entry and
Proprietary accounts (Revenues and Expenditures) in a second
entry, debiting or crediting Fund Balance as necessary, in each
entry.
• Close all temporary accounts in one entry, debiting or
crediting Fund Balance as necessary
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Year End Financial Statements
General Fund
Balance Sheet – Illustration 4-5
Statement of Revenues, Expenditures and Changes
in Fund Balance – Illustration 4-6
Budgetary Comparison schedule – Illustration 4-7
Notes to the financial statements.
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Special Revenue Funds
Created when revenues are received that are earmarked
for a specific operating purpose.
Examples
• motor fuel taxes earmarked for streets, roads, and bridges
• federal grant to operate a counseling program for troubled
youths
• a gift received under a trust agreement that can be used only
to purchase works of art for a public building
Accounting, budgeting, and financial reporting are
essentially the same as for the General Fund.
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Accounting for Operating Grants
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. Until the grant has been
“earned” by meeting eligibility requirements
related to service recipients, it is reported as
“Deferred Revenue” – a liability. The entry in
the special revenue fund is:
Cash
Deferred Revenue
Dr.
100,000
Cr.
100,000
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Accounting for Operating Grants
Assume that during the year the Counseling
Program expended $75,000 for costs related to
youth counseling, while meeting eligibility
requirements, the entries would be:
Expenditures
Vouchers Payable
Deferred Revenues
Revenues
Dr.
75,000
Cr.
75,000
75,000
75,000
(This amount would also be recorded in the Revenue detail account
in the Revenue subsidiary ledger.)
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SRF-Required Financial
Statements
Report special revenue fund activity in the
governmental activities section of the
government-wide financial statements.
Provide a column in the governmental funds
balance sheet and statement of revenues,
expenditures, and changes in fund balances, if
SRF meets the definition of a major fund (see Ill.
1-7)
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Internal Exchange Transactions
Transactions between two funds that are similar to
those involving the government and an external
entity
• Example: Billing from a City’s water utility fund (an
enterprise fund) to the City’s General Fund for the Fire
Department
Funds recognize a revenue and expenditure, rather
than operating transfers in and out
These transactions are eliminated prior to preparing
the government-wide financial statements.
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Interfund Activity
Interfund loans
• Loans made from one fund to another with the intent
that they are to be repaid
• Classified as “Interfund Loans Receivable – Current (or
Payable-Current)”, if the intent is to repay during the
current year; otherwise “Noncurrent”.
Interfund transfers
• Nonreciprocal activity in which other financing sources
and uses are transferred between funds with no
intention of repayment.
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Intra- versus Inter-Activity
Transactions
Intra-activity transaction: A transaction between two
governmental funds (including an internal service fund) or
between two enterprise funds. Neither governmental
activities nor business-type activities is affected at the
government-wide level.
Inter-activity transaction: Interfund loans or transfers
between a governmental fund (including internal service
fund) and an enterprise fund. Report these as “Internal
Balances” on the government-wide Statement of Net Assets
and “Transfers” in the Statement of Activities.
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Intra-Entity Transactions
Exchange or nonexchange transactions between
the primary government and its blended or
discretely presented component units
A/R and A/P from these transactions are reported
on a separate line in the Statement of Net Assets.
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Permanent Funds
To account for contributions received under trust
agreements in which the principal amount is not
expendable, but the earnings are
Specifically intended to meet a public-purpose
i.e., to benefit a government program or function,
or the citizenry, rather than an external individual,
organization, or government.
A new classification under GASBS 34; formerly
classified as nonexpendable Fiduciary Funds.
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Exchange Transactions
Transactions in which each party receives value
essentially equal to the value given
• e.g., one party sells goods or services and the other
buys
Recognize the revenue when it is earned, and the
expense/expenditure when it is incurred
Exchange-like transactions are those in which the
values exchanged may be related but not quite
equal.
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Nonexchange Transactions
External events in which a government gives/
receives value without directly receiving/giving
equal value in exchange
Revenue recognition depends on time
requirements - the period in which the resources
are required (or may be) used
In some cases, revenue recognition may be
delayed until program eligibility requirements are
met
Purpose restrictions reported as restricted net
assets or reserved fund balance.
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Classes of Nonexchange
Transactions
Derived tax revenues, e.g., income and sales taxes
Imposed nonexchange revenues, e.g., property
taxes and fines and penalties
Government-mandated nonexchange transactions,
e.g., certain services funded by a higher level of
government
Voluntary nonexchange transactions, e.g., grants
and entitlements from higher levels of government
and certain private donations.
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Revenue Recognition Criteria for
Nonexchange Transactions
Derived tax revenues: in the period in which the
underlying exchange occurs
Imposed nonexchange revenues: when there is an
enforceable legal claim or the period for which
levied in the case of property taxes
Government-mandated and Voluntary
nonexchange transactions: when all eligibility
requirements have been met. If cash is received
before eligibility requirements have been met,
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Deferred Revenues would be credited.
Concluding Comments
Mastery of the revenue and expenditure
accounting principles covered in Chapter 4 is
essential to a sound understanding of
governmental fund accounting, as well as
understanding accounting and financial
reporting for the other governmental funds
discussed in the following chapters.
The General Fund and special revenue funds
encompass most of the operating activities of
the typical government.
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The Next Step
Chapter 4 – City of Smithville simulation. Due no
later than midnight, CDT, June 12
Chapter 4 – CAFR assignment. Due no later than
midnight, CDT, June 12
Problem 4-2, 4-6, 4-7, 4-8.
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