Governmental Accounting
Basics
GFOAZ Quarterly Training
May 17, 2012
What’s a Government?

A group of people who have the power
to make and enforce laws for a country,
area, territory, or specific purpose.

Can be elected or appointed
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Different levels of enforcement power
Accounting Standards

Types of Governmental Entities
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Cities, Towns, Townships,
Counties
School Districts
Universities
States
Fire Districts
Retirement Systems
Cooperatives
Councils, Commissions
Boards, Agencies, Authorities
Public Utilities
Accounting Standards

Accounting standards result in
consistent, timely and useful
information for the users of financial
reports.

Generally accepted accounting
principles (GAAP) are the
conventions, rules, and procedures
that serve as the norm for the fair
presentation of financial statements.
Accounting Standards

State Level –
Arizona Revised Statute (A.R.S.) section 9-481 – “Audits of Cities
and Towns” – Requires each city or town to produce financial
statements that are in conformity with generally accepted accounting
principles (GAAP).

National Level –
Governmental Accounting Standards Board (GASB) –
Independent organization that establishes standards of accounting and
financial reporting. Recognized as the official source on generally
accepted accounting principles (GAAP) for state and local
governments.
Accounting Standards
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Accounting for Business and Industry
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Focus on profitability
Legal business entity varies
Information to shareholders and investors
Unprofitable lines of business may be eliminated
Efficiency increases profits
Payments to officers based on profitability
Budgets are a management tool
Profits are distributed to shareholders
Subsidiaries and consolidations
International Accounting Standards (IFRS)
Management decisions driven by profitability
Accounting Standards
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Accounting for Governments
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Focus is on sources and uses of money
Funding is restricted for certain purpose or activity
Highly regulated
Information prepared for the public
Partial or complete subsidy of activities
Budgets are a legal requirement
Efficiency improves services or reduces taxes
No distribution of profits or payments to officers
Component governments
Inter-fund transfers
Management of funding are political!
Unique Characteristics of
Governmental Accounting
1.
Use of Fund Accounting
2.
Measurement Focus and Basis of
Accounting (or MFBA)
Full Accrual AND Modified Accrual
What’s a Fund?
Fund: A self contained accounting entity
with its own self-balancing set of
accounts.
Similar to business accounting entity
Business entity captures all reported
attributes for the entire business
 Fund captures all reported attributes of a
specific portion of the government’s activities
Fund Accounting

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Fund accounting helps
governments
demonstrate
compliance with
restrictions on the use
of public resources.
Fund accounting is the
most distinctive feature
of governmental
accounting.
Fund Types
GOVERNMENTAL FUNDS
1.
2.
3.
4.
5.
General Fund
Special Revenue Fund
Capital Project Fund
Debt Service Fund
Permanent Fund
PROPRIETARY FUNDS
1.
2.
Enterprise Funds
Internal Service Funds
FIDUCIARY FUNDS
1.
2.
3.
4.
Agency Funds
Pension Funds
Investment Trust Funds
Private Purpose Trust
Funds
Measurement Focus & Basis
of Accounting (MFBA)

Measurement Focus tells you WHAT to
recognize

Basis of Accounting tells you WHEN to
recognize it
Two Types of MFBA’s in
Governmental Accounting #1
Current Financial Resources
Measurement Focus and Modified
Accrual Basis of Accounting
WHAT: Current financial resource
measurement focus only considers
SHORT-TERM or CURRENT inflows,
outflows and balances of expendable
financial resources.
Two Types of MFBA’s in
Governmental Accounting #1
Modified Basis Cont.
WHEN:
Modified accrual basis of accounting in which:
- Revenues are recognized in the accounting
period in which they become available and
measurable.
- Expenditures are recognized in the
accounting period in which the fund liability
is incurred, if measurable.
Two Types of MFBA’s in
Governmental Accounting #2
Economic Resources Measurement
Focus and Accrual Basis of
Accounting
WHAT: Economic resource measurement
focus considers ALL inflows, outflows
and balances affecting or reflecting on
an entity’s net assets.
Two Types of MFBA’s in
Governmental Accounting #2
Full Accrual Basis Cont.
WHEN: Accrual basis of accounting
recognizes the financial effect of
transactions, events, and interfund
activities when they occur, regardless
of the timing of related cash flows.
Fund Types
GOVERNMENTAL FUNDS
PROPRIETARY FUNDS
(Current Resources/Modified
Accrual)
(Economic Resources/Full Accrual)
1.
1.
2.
3.
4.
5.
General Fund
Special Revenue Fund
Capital Project Fund
Debt Service Fund
Permanent Fund
2.
Enterprise Funds
Internal Service Funds
FIDUCIARY FUNDS
(Economic Resources/Full Accrual)
1.
2.
3.
4.
Agency Funds
Pension Funds
Investment Trust Funds
Private Purpose Trust Funds
Fund Types

Governmental Funds –
Used to account for activities which are primarily supported by
taxes and intergovernmental revenues.
Governmental Funds
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General Fund- day to day operations;
can only have ONE General Fund
Special Revenue Funds- accounts for
proceeds of specific revenue sources
that should be used for specific purposes
(i.e.: HURF, federal grants)
Capital Project Funds- accounts for
financial resources used for acquisition
or construction of major assets
Governmental Funds Cont.

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Debt Service Fund- to account for
accumulation of resources that will be used to
pay general long-term debt
Permanent Fund- used to report resources
that are legally restricted to the extent that
only earnings, not principal, can be spent.
Program must benefit the government or its
citizenry, not a specific group or organization.
(i.e.: perpetual care endowment of a
municipal cemetery)
Governmental Fund
Financial Statements
Current Resources; Modified Accrual

Balance Sheet
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Statement of Revenues, Expenditures and
Changes in Fund Balance
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**See City of Phoenix handout/example
How can you tell MFBA by
looking at a financial statement?
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Modified Accrual
Expenditures (Capital
Outlay and Debt Service
Principal Payments)
Assets-Liabilities=Fund
Balance
Only Current Assets and
Current Liabilities Shown
Myopic (narrow) View
No Long-term Assets
means no Depreciation
Expense
Governmental Funds - Journal
Entry Example

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Assume that a government borrows
$20,000 to acquire equipment with a
useful life of 10 years (no salvage value).
Debt repayment of $5,000 principal at
end of each next 4 years, and interest of
5% per year.
What are the appropriate journal entries
at the end of year 1??
Governmental Funds - Journal
Entry Example – cont’d
DR
Cash
CR
20,000
Other financing Source
(To record the receipt of the bond proceeds)
20,000
Expenditure - Capital Outlay
Cash
(To record the purchase of equipment)
20,000
Expenditure - Debt Service Principal
Expenditure - Debt Service Interest
Cash
(To record the payment of principal and
interest on the bonds)
5,000
1,000
20,000
6,000
Questions…..


The Police Chief calls and tells you the
Police Dept. has been awarded a new
federal operating grant and they need a
new fund. What type of fund would you
set up?
Correct answer – a Special Revenue
Fund
Questions…..

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You are reviewing a preliminary draft of
the General Fund statements prepared
by a co-worker. The statement of
Revenues, Expenditures and Changes in
Fund Balance has a line item titled
“Depreciation Expense”. Is this correct?
Correct answer – NO. Governmental
funds expense the entire cost of a capital
item in “Capital Outlay”.
Questions…..

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The City of Kirbyville is selling G.O.
Bonds to build a new park. They will
need to set up 2 new funds. What are
the 2 new fund types?
Correct answer – Capital Project Fund
(to account for the construction of the
park) and a Debt Service Fund (to
account for the debt service payments).
Fund Types

Proprietary Funds –
Used to account for activities that are financed and operated in
manner similar to private business. The intent is that the total costs
are recovered primarily through user charges.
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Fiduciary Funds –
Report assets held in a trustee or agency capacity for others (including
employees and retirees), and which cannot be used to support the
government’s own programs.
Not included in the Government-Wide statements, as they are not
assets of the government.
Proprietary Funds
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Enterprise Funds- may be used to report any
activity for which a fee is charged to EXTERNAL
users for goods and services. Must be used if:
1. Debt is secured solely by a pledge of net
revenues
2. Laws or regulations require fees to cover full
cost of providing the service
3. Pricing policies require full cost recovery
(i.e.: utilities, airports, convention center, or
stadiums)
Proprietary Funds Cont.

Internal Service Fund- accounts for the
financing of goods and services provided by
one department or agency to other
INTERNAL departments or agencies of a
governmental unit. Fees are charged with
the intent to BREAK EVEN.
(i.e.: motor pool or printing services)
Fiduciary Funds
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Pension Fund- to account for resources that
are required to be held in trust for the
members and beneficiaries of pension and/or
benefit plans.
Private Purpose Trust Funds- to account
for all other trust arrangements under which
principal and income benefit individuals
Fiduciary Funds Cont.
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Investment Trust Funds- to account for
the external portion of investment pools
reported by a sponsoring government.
Agency Funds- used to report
resources held by the reporting
government in a purely custodial
capacity. Assets = Liabilities
Proprietary Funds
Financial Statements
Economic Resources; Full Accrual
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Statement of Net Assets or Balance
Sheet
Statement of Revenues, EXPENSES,
and Changes in Fund Net Assets
Statement of Cash Flows
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**see City of Peoria handout/example
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Fiduciary Funds
Financial Statements
Economic Resources; Full Accrual
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Statement of Fiduciary Net Assets
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Statement of Changes in Fiduciary Net
Assets
How can you tell MFBA by
looking at a financial statement?

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Full Accrual
Expenses
Assets-Liabilities=Net
Assets
Current AND LongTerm Assets and
Liabilities Shown
Long-term View
Depreciation Expense
Included in Operating
Proprietary Funds - Journal
Entry Example


Assume that a government borrows
$20,000 to acquire equipment with a
useful life of 10 years (no salvage value).
Debt repayment of $5,000 principal at
end of each next 4 years, and interest of
5% per year.
What are the appropriate journal entries
at the end of year 1??
Proprietary Funds - Journal
Entry Example – cont’d
DR
Cash
20,000
Bonds Payable
(To record the receipt of the bond proceeds)
Capital Assets - Equipment
Cash
(To record the purchase of equipment)
CR
20,000
20,000
20,000
Bonds Payable
Interest Expense
Cash
(To record the payment of principal and
interest on the bonds)
5,000
1,000
Depreciation Expense
Accumulated depreciation
(To record depreciation on equipment)
2,000
6,000
2,000
Questions…..


The Community Services Department
Director calls and tells you they need a
new enterprise fund for program they are
starting to provide after school care for a
fee. What questions would you ask to
determine what type of fund is needed?
Correct answer – Intent of program? Full
recovery of cost? Other funding
sources? Any assets (facilities) or debt?
Questions…..

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The City of Tres Rios Water Department
is set up as an enterprise fund. They
purchase a new vehicle for their
operations and they charge the expense
to an account called “Operating
Equipment”. Is this okay?
Correct answer – Equipment needs to be
capitalized and depreciation should be
recorded.
Questions…..

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You are reviewing a preliminary draft of
the Enterprise Fund Financial
statements. The statement of Statement
of Revenues, Expenses and Changes in
Net Assets has a line item titled
“Depreciation and Amortization”. Is this
correct?
Correct answer – Yes. Enterprise Funds
show depreciation expense.
Thank you!!

Vicki Rios, Deputy Finance Director
City of Phoenix
vicki.rios@phoenix.gov

Michelle Kirby, Deputy Finance Director
City of Phoenix
michelle.kirby@phoenix.gov