Chapter 2:
The nature of the three major activities of a state or local government
 Governmental activities- activities that are not business-type or fiduciary activities. Core
governmental services like police and fire protection and general administrative support
like personnel and data processing. Receives its financing from taxes, intergovernmental
grants and long-term borrowings
 Business-type activities- business activities that are largely self-supported like public
utilities (electric, water etc), transportation systems, toll roads. Financed by user
fees/charges that cover both operating and capital costs
 Fiduciary activities – if the government is acting on behalf of others, it’s a fiduciary
activity and if they are acting on behalf of the government, it’s a governmental activity.
Activities where they are holding segregated resources on behalf of other like
(government collecting taxes for other governments, holding pension resources, and
holding escheat properties)
Fund reporting
 A fund is made of any sources of financial resources and any transactions related to that
fund must be recorded as part of fund accounting. Some examples of funds include a
fund dedicated to the receipt of fuel taxes and their related expenditures
The components of the governmental financial reporting model including elements and
measurement approaches
Two types of basic financial statements:
 Government-wide financial statements- report everything about the government in a
summarized view
 Fund financial statements – reports more detailed financial info about the govt.
Fund- a fiscal and accounting entity with a self-balancing set of accounts recording cash and
other financial resources, together with all related liabilities and residual equities or balances
and changes therein, which are segregated for the purpose of carrying on specific activities or
attaining certain objectives
Three categories of funds:
 Governmental funds- used to account for most basic and day-to-day public services
provided by state and local governments. Include public safety and are funded by tax
dollars
o General fund- used to account for all financial resources not accounted for in
other funds
o Special revenue fund- used to account for revenue sources that are restricted by
a government’s operating purpose
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o Debt service fund- to account for the financial resources segregated for making
principal and interest payments on long-term debt (e.g. property taxes to pay
debt service on long-term debt sold to acquire capital assets)
o Capital projects fund- to account for services like highways
o Permanent fund- donations from people and the principal must be preserved but
the earning from the excess can be used to support government programs. If the
fund is not being used for a government program, it should not be reported for a
permanent fund.
Proprietary funds- (for business-type activities) Two types of proprietary funds:(no need
to study much)
o Internal service funds- goods and services to the govt. itself and other
governments
o Enterprise funds- main difference is the type of customers. Goods & services to
the public.
Fiduciary funds – accounting for resources that governments hold or manages as a
custodian or trustee for others. Because they are held for others, the resources can’t be
used for the govt’s own programs (no need to study much). Two types of fiduciary
funds:
o Custodial funds- when the govt receives funds on behalf other govts and will
later transfer it to them
o Trust funds- can be pension trust funds, investment trust funds, or privatepurpose trust funds
Three points that differentiate Government-wide financial statements & Fund financial
statements
 Accountability focuso Government-wide financial statements- fiscal accountability refers to the
government’s responsibility of raising and using financial resources withing one
year. Operational accountability- refers to the govt’s responsivity to demonstrate
the extent to which it meets its objectives
o Fund financial statements Measurement focuso Government-wide financial statements- which resources are being measured in
reporting an organization’s financial performance and position. All assets and
liabilities are measured but current assets and liabilities are focused on to see
whether the financial resources obtained during the period are enough to cover
all claims made against the fund during the period
o Fund financial statements Accounting basis
o Government-wide financial statements- under accrual basis, revenue is
recognized when it is earned while under modified accrual basis, revenue is
recognized when it is measurable and available for paying current period
obligations. Under accrual basis, expenses are recognized when they are
incurred while under modified accrual basis, expenditures are recognized when
they create an obligation to be paid from current financial resources
o Fund financial statementsThere are no expenses under the modified accrual basis
Difference between expenses and expenditures:
 Expenses- expensed once used. For current operations, usually the two are the same.
Include depreciation and only the interest is included.
 Expenditures- are payments/disbursements. Include capital outlays. Include principal
and interest
Government-wide financial statements:
 Operational accountability
 Statement of net position aka balance sheet
 Statement of activities aka report of revenues and expenses
Fund financial statements:
 Governmental funds must report balance sheet & statement of revenues, expenditures
Info is useful if it is understandable, reliable, relevant,
Fund financial statement focus:
 Government funds- fiscal accountability, flow of current assets, and modified accrual
basis
 Proprietary funds- operational accountability, flow of economic resources, and accrual
basis
 Fiduciary funds- operational accountability, flow of economic resources, and accrual
basis
Elements of financial statements:
 Inflow of resources- the acquisition of net assets by the govt. in the current period
(revenues and other resources)
 Outflow of resources- the consumption of net assets by the govt. in the current period
(expenses and other
As long as the two major fund criteria are met for any of the financial statement elements, it is
a major fund
Chapter 3:
Budgetary accounts:
 Estimated revenues (debit)
 Appropriations (credit)
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Estimated other financing sources (debit)
Estimated other financing uses (credit)
The previous four are closed to the budgetary fund balance
Encumbrances are not closed to encumbrances outstanding at year-end
Encumbrances are used when issuing purchase orders and contracts and receiving
goods and services
If there are any revisions to be made to the estimated rev or appropriations, they must pass
through budgetary fund balance
Enterprise funds- transactions related to govt’s business type transactions
Chapter 4:
Accounting for governmental operating activities
Types of transactions:
 Exchange transactions- two or more parties receive/give out things of economic value
 Non-exchange transactions- taxes, fines or other transactions where one party gives or
receives without giving or receiving something of equal value from the other party
o Derived tax revenues (e.g. sales taxes, motor fuel taxes)- assets are recorded
once the sale happens and revenues are recognized when income is earned for
income taxes and when sales have occurred for sales taxes
o Imposed nonexchange revenues (e.g. property taxes, fines)- assets are
recognized when there is an enforceable legal claim or when cash is received,
whichever is first.
o Government-mandated nonexchange transactions (e.g. fed govt mandates on
local govt)
o Voluntary nonexchange transactions (e.g. grants and donations)
Dual -track accounting approach
General fund and government-wide level:
 Purchases are recorded on a government-wide level when they are received and if they
have not been received, there is no entry on the government-wide level
Payment of liabilities:
 The entry is the same for general funds and at the government-wide level (Debit to the
payable account and credit to cash)
Payrolls and payroll taxes
 At the fund level, expenditures are debited and vouchers payable are credited (for the
amount net of the tax) and due to the fed and state govt are credited
Property tax revenue- receivable is debited when there is an enforceable claim (property tax
levy) and revenue is credited for the year the tax is levied
Property tax levy:
 Taxes receivable – current
 We assume all property tax revenues will be received in the current year. If we know it
won’t be received in the current year (after 60 days after fiscal year-end), record that
amount as a deferred inflow of resources – unavailable revenues
Accrual of interest and penalties on delinquent taxes
Review property taxes for test 1
Chapter 4:
Tax anticipation notes- Notes that are anticipated to be paid back via notes receivables. It is a
short-term loan. The amount of the note = (budget expenditures + current liabilities payable) –
cash available
Initial entry:
Entry (fund-level)
Debit Cash
Credit Tax anticipation notes payable
Entry (government-wide level)
Debit Cash
Credit Tax anticipation notes payable
Repayment of tax anticipation notes:
Entry (fund-level)
Debit Tax anticipation notes payable
Debit Expenditures
Credit Cash
Entry (government-wide level)
Debit Tax anticipation notes payable
Debit Expenditures – General Government
Credit Cash
There is no journal entry for an operating grant if the eligibility requirements have not been
met
Grants are not to be classified as non-spendable and if the grant has no eligibility requirements
there should be no entry.
Chapter 5:
General capital assets- long-live assets used by activities financed by the general fund or other
govt funds. Different from cap assets associated with activities financed by proprietary and
fiduciary funds
Accounting for gen cap assets:
 Purchase/construction- invoice price + ancillary costs (freight, transportation charges,
set-up costs)
 Cost of a capital asset is not recorded- estimated cost. Frequent problem for
governments with poor inventory records
 Gifts-
(correcting financial statements for net of accumulated
depreciation is important for the final exam)
Classification of gen capital assets:
 Land- inexhaustible asset so no depreciation.
 Buildings and improvements other than buildings
 Machinery and equipment
 Construction work in progress
 Infrastructure assets- stationary and maintained so a long useful life (e.g. highways,
streets, sidewalks, storm drainage systems, and lighting systems). They are depreciated
unless the government adopts the modified approach. The main condition of the
approach is that the govt must maintain the asset at a certain level and every 3 years
the asset must be renewed, or the asset must be depreciated.
 Works of art & historical treasures (collections)- in most cases the items are priceless, so
it is difficult to value. If the work of art is capitalized, it must be noted in the notes
disclosure. The solution is the govt won’t have to capitalize if 3 conditions are met:
o Collection is held
o It is protected
o It is subject to policy
No need to calculate PV for the final
Don’t put the years beside the accounts when doing journal
entries for funds other than the special revenue fund or the
general fund
Learn how to distinguish between the governmental funds
If the bond is sold at par value it goes into the capital projects fund
Bond premium- difference between par value and the price we are selling (when the selling
price > par value). Can only be recorded in a debt service fund. Recorded at the fund level as:
Capital projects fund
Dr cash
Cr Other financing source – proceeds of bonds (only the par value)
Debt service fund
Dr Cash
Cr Other financing source – premium on bond (only the premium)
Losses from claims and judgements are recognized as an expense and liability at the govt-wide
lvl when they are measurable and probable
Remember when expenses are involved at the govt-wide lvl there is an expenditure at the
fund lvl
Remember when construction expenditures are involved at the fund lvl, there is a
construction work in progress at the govt-wide lvl
Unless the question says that the lawsuit will be paid from current year’s resources, there is
only the entry at the govt-wide lvl to record the lawsuit claim
Dr Expenses – function/program
Cr Claims and Judgements payable
Permanent funds have no expenditures
Interest expenses are indirect
Case will have multiple funds so get to know each better
Permanent fund = non-spendable
Capital projects fund = restricted
Chapter 9:
The CAFR will definitely be on the final
May have to prep a reconciliation on the final
Practice writing journal entries when doing reconciliations
Changes in fair value are done at year end each year in the permanent fund
Case 1
The asset was originally financed by the special revenue fund so the proceeds would go back to
the special revenue fund since it is restricted.
Case 2
Use bond financing and account for the construction of the arena using a capital projects fund
and a debt service fund if bond financing is used