Chapter
18-1
18
Introduction to Accounting
For State and Local
Governmental Units
Advanced Accounting, Fourth Edition
Chapter
18-2
Governmental Accounting
GASB’s Statement No. 34, issued June 1999, requires:
Financial statements using government-wide approach.
Statements emphasizing major funds.
Management’s discussion and analysis (MD&A).
GASB Statement No. 34 requires “full accrual” accounting
for all government-wide statements (i.e., flow of economic
resources approach).
Chapter
18-3
Reporting Model: Minimum Information Required
Government-Wide
Statement of net assets
Statement of activities
Fund Financial Statements
Governmental funds:
Balance sheet
Statement of revenues, expenditures,
and changes in fund balances
Reconciliation to government-wide
statements
Proprietary funds:
Balance sheet or statement of net assets
Statement of revenues, expenses,
and changes in net assets
Statement of cash flows—direct format
Fiduciary funds:
Chapter
18-4
Statement net assets
Statement of changes in net assets
History of Governmental Accounting Standards
Hierarchy of Standards
The GASB and the FASB each has primary
responsibility for setting standards for entities
under its jurisdiction.
Pronouncements of one Board should not be mandatory
for entities under the jurisdiction of the other
Board.
Chapter
18-5
The Structure of Governmental Accounting
Eleven Categories of Fund Entities
Governmental Funds (expendable)—
Focus on sources, use, and balances of current resources.
1. General Fund
2. Special Revenue Funds
3. Capital Projects Funds
4. Debt Service Funds
5. Permanent Funds
Chapter
18-6
The Structure of Governmental Accounting
Eleven Categories of Fund Entities
Proprietary Funds (nonexpendable)—
Focus on determination of operating income, changes in
net assets, financial position, and cash flows.
6. Enterprise Funds
7. Internal Service Funds
Chapter
18-7
The Structure of Governmental Accounting
Eleven Categories of Fund Entities
Fiduciary Funds
Focus reports assets held in a trustee or agency capacity
for others.
8. Pension Trust Funds
9. Investment Trust Funds
10. Private-Purpose Trust Funds
11. Agency Funds
Chapter
18-8
Governmental Fund Entities
General Fund
All revenues and expenditures of a governmental
unit not accounted for in other governmental or
proprietary funds.
Special Revenue Fund
Proceeds of specific revenue sources that are to be
used to finance particular functions or activities of
the governmental unit.
Chapter
18-9
Governmental Fund Entities
In special revenue funds, as in the general fund, the
following steps are taken:
1. A budget is established.
2. Encumbrances are used.
3. Fixed assets are only reported on government-wide
statement.
4. Depreciation is not recorded.
5. Long-term debt is only reported on government-wide
statements.
Chapter
18-10
Governmental Fund Entities
Capital Projects Fund
Resources to acquire or construct major capital
facilities.
Resources for the acquisition include
1) proceeds of long-term debt issues,
2) grants or payments from other governmental
units,
3) funds from private sources,
4) transfers from other governmental funds,
5) special assessments, and
6) other sources.
Chapter
18-11
Governmental Fund Entities – Capital Projects
Exercise 18-12: The town of Aberdeen authorized a fire station to
be built at an estimated cost of $150,000. On January 1, 2008, 6%
bonds with a par value of $150,000 were authorized and issued. Any
difference between the par value of the bonds and the proceeds from
their sale is transferred to the Debt Service Fund. The following
transactions relating to the Capital Project Fund occurred during 2008.
1. Encumbrances were recorded in the amount of $150,000.
2. Proceeds from bond issue were received in amount of $155,000.
3. Premium on bond issue was transferred to the Debt Service Fund.
4. Contract billings of $150,000 were approved for payment on the
completion of the fire station.
5. Contractor was paid except for retention of 5% of the contract.
6. Final contract price was paid. The nominal accounts were closed.
Chapter
18-12
Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the
Capital Projects Fund to record the transactions and events.
1. Encumbrances were recorded in the amount of $150,000.
Encumbrance
150,000
Reserve for Encumbrances
150,000
2. Proceeds of $155,000 from bond issue were received.
Cash
Bond Issue Proceeds
Chapter
18-13
155,000
155,000
Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the
Capital Projects Fund to record the transactions and events.
3. Premium was transferred to the Debt Service Fund.
Transfer to Debt Service Fund
Cash
Chapter
18-14
5,000
5,000
Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the
Capital Projects Fund to record the transactions and events.
4. Contract billings of $150,000 were approved for payment on
the completion of the fire station.
Reserve for Encumbrances
150,000
Encumbrances
Expenditures
Contracts Payable
Chapter
18-15
150,000
150,000
150,000
Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the
Capital Projects Fund to record the transactions and events.
5. Contractor was paid except for retention of 5% of the
contract.
Contracts Payable
Contracts Payable - Retained
Cash
Chapter
18-16
150,000
7,500
142,500
Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the
Capital Projects Fund to record the transactions and events.
6. Final contract price was paid. The nominal accounts were
closed.
Contracts Payable - Retained
Cash
Chapter
18-17
7,500
7,500
Bond Issue Proceeds
Transfer to Debt Service Fund
Unreserved Fund Balance
155,000
Unreserved Fund Balance
Expenditures
150,000
5,000
150,000
150,000
Governmental Fund Entities
Debt Service Fund
Resources for, and the payment of, general longterm debt principal and interest.
Financed by the following sources
1)
2)
3)
4)
5)
Chapter
18-18
General property tax
Sales tax or other specified tax revenues
Transfers of other fund revenues
Special assessments
Revenue from investment of debt service fund
resources.
There is no interest payable accrual
on general obligation long-term debt.
Governmental Fund Entities
Permanent Fund
Two types of Nonexpendable Trust funds:
Principal must be retained intact but earnings may
be expended.
Principal and the earnings must be retained intact.
Established as a result of a gift, a bequest, or some
other action that requires the governmental unit to
act in a fiduciary capacity.
Chapter
18-19
Proprietary Funds
Proprietary fund reporting focuses on determination of
operating income, changes in net assets, financial
position, and cash flows.
Net Assets Approach: All changes in net assets are
included somewhere in the “statement of activities.”
Proprietary funds include:
Enterprise Funds.
Internal Service Funds.
Chapter
18-20
Proprietary Funds
Enterprise Funds
Activity for which a fee is charged to external users
for goods and services.
Common examples:
Public utilities (water or electricity)
Airports
Transportation systems
Parking lots and garages
Recreational facilities (swimming pools)
Chapter
18-21
Proprietary Funds
Enterprise Funds
Resources may come from contributions or from
the proceeds of long-term debt issues or both.
Contributions may be obtained from
 Other governmental units,
 Resources of the General Fund
 Property owners,
 Subdivision developers, or
 Customers.
Chapter
18-22
Proprietary Funds
Internal Service Funds
Activity that provides goods or services to other
funds, departments, or agencies of the primary
governmental unit and its component units, or to
other governments, on a cost reimbursement basis.
Common examples:
Central computer facilities,
Central garages and motor pools,
Central purchasing and stores departments, and
Central printing departments.
Chapter
18-23
Proprietary Funds
Internal Service Funds
Resources obtained from contributions from
Chapter
18-24

Other funds,

Proceeds from sale of general obligation bonds,
or

Long-term advances from other funds.
Fiduciary Funds
Trust and Agency Funds
Fiduciary funds are used to report assets held in a
trustee or agency capacity and therefore cannot be
used to support the government’s own programs.
Fiduciary funds include:
Chapter
18-25

Pension trust funds,

Investment trust funds,

Private-purpose trust funds, and

Agency funds.
Capital Assets and Long-Term Debt
The purchase of capital assets are recorded as an
expenditure in the governmental fund statements.
Proceeds from the issuance of long-term debt is recorded
as Other Financing Sources in the governmental fund
statements.
Under GASB Statement No. 34, governments report all
capital assets, including infrastructure assets, and
unmatured general long-term debt on a government-wide
basis and report depreciation expense as a charge to
operations in each period.
Chapter
18-26
External Reporting Requirements (GASB No. 34)
The following statements and disclosures are required:
Governmental Fund Financial Statements
Proprietary Fund Financial Statements
Fiduciary Funds (and Similar Component Units)
Financial Statements
Government-wide Statements
Combining Statements for Major Component Units
Chapter
18-27
Government Fund-Based Reporting
Governments are required only to report the major funds
in separate columns, but have flexibility to report more
funds separately if desired.
Individual governmental funds and proprietary funds are
major funds if the total assets, liabilities, revenues, or
expenditure/expenses of that individual fund are at least
10% of the corresponding total for the relevant fund
category (governmental or enterprise funds) and at least
5% of the corresponding total for all governmental and
enterprise funds combined.
Chapter
18-28
Government-wide Reporting
Primary financial statements under GASB Statement No.
34 are prepared on a government-wide basis.
Statements are prepared on the accrual basis using the
flow of economic resources concept.
These primary statements include:
1. The statement of net assets.
2. The statement of activities.
Governmental-wide statement of cash flows is not
required.
Chapter
18-29
Government-Wide Reporting
Statement of Net Assets
Prepared using the accrual basis.
At a minimum, assets, liabilities, and net assets should
be disclosed for each of the following categories:
A. Primary Government
B.
Chapter
18-30
1.
Government activities
2.
Business-type activities
3.
Total primary government activities
Discretely Presented Component Units
Government-wide Reporting
Statement of Activities
Presented using a net cost format.
Separates revenues into program revenues and
general revenues.
Expenses are reduced by program revenues
resulting in “net (expense) revenue.”
General revenues, extraordinary items and special
items, and transfers are reported separately.
Chapter
18-31
Management’s Discussion and Analysis (MD&A)
Required by GASB Statement No. 34.
Discussion should provide objective and readable
analysis of the government’s financial activities.
Should present both a short-term and a long-term
analysis of the government’s activities.
Should discuss the current-year results in comparison
with the prior year.
Focus is on the primary government (i.e., should
distinguish between the primary government and
component units).
Chapter
18-32
Special Assessments
Service-type special assessments - Assessments
levied against the benefited property owners for
services
 Street lighting, street cleaning, and snow plowing.
Capital improvement special assessments Assessments levied against the benefited
property owners for capital improvements
 Paving or widening of residential streets or the
construction of sidewalks or storm sewers.
Chapter
18-33
Interfund Activity
Interfund activity within governmental, proprietary, and
fiduciary funds should be reported as follows:
A. Reciprocal interfund activity
1. Interfund loans
2. Interfund services provided and used
B. Nonreciprocal interfund activity
1. Interfund transfers
2. Interfund reimbursements
Chapter
18-34
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s). Designate the fund in which
each entry is recorded.
1.
Bond proceeds of $1,000,000 were received to be used in
constructing a firehouse. An equal amount is contributed
from general revenues.
Capital
Projects
Fund
Cash
General
Fund
Transfer to Capital Projects
Chapter
18-35
2,000,000
Bond issue proceeds
1,000,000
Transfer from General Fund
1,000,000
Cash
1,000,000
1,000,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s). Designate the fund in which
each entry is recorded.
2. $800,000 of serial bonds matured. Interest of $120,000
was paid on these and other serial bonds outstanding.
Debt
Service
Fund
Chapter
18-36
Expenditures
Cash
920,000
920,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s). Designate the fund in which
each entry is recorded.
3. $8,000 was received as insurance proceeds from the
accidental destruction of a police car costing $24,000.
General
Fund
Chapter
18-37
Cash
Revenue
8,000
8,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s). Designate the fund in which
each entry is recorded.
4. $120,000 in expendable funds was transferred from the
City Parks Endowment Fund to the City Parks Special
Revenue Fund.
Trust
Fund
Special
Revenue
Fund
Chapter
18-38
Transfer to Special Revenue
120,000
Cash
Cash
Transfer from Trust Fund
120,000
120,000
120,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s). Designate the fund in which
each entry is recorded.
5. Equipment purchased from general revenues at a cost of
$200,000 was sold for $40,000.
General
Fund
Chapter
18-39
Cash
Revenue
40,000
40,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s). Designate the fund in which
each entry is recorded.
6. The City Water Company (an enterprise fund) issued a bill
for $800 for water provided to the street department’s
street cleaner.
Enterprise
Fund
General
Fund
Chapter
18-40
Due from General Fund
800
Revenue
Expenditures
Due to Enterprise Fund
800
800
800
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s). Designate the fund in which
each entry is recorded.
7. The City Water Company transferred $400,000 in excess
funds to the General Fund.
Enterprise
Fund
General
Fund
Chapter
18-41
Transfer to General Fund
400,000
Cash
Cash
400,000
400,000
Transfer from Enterprise Fund
400,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s).
8. A central motor pool was established by a contribution of
$120,000 from the General Fund, a long-term loan of
$80,000 from the City Parks Special Revenue Fund, and
general obligation bond issue proceeds of $200,000.
Internal
Service
Fund
Cash
Contributions from General Fund
Due to Special Revenue Fund
Contributions from bonds
Chapter
18-42
400,000
120,000
80,000
200,000
Continued
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s).
8. A central motor pool was established by a contribution of
$120,000 from the General Fund, a long-term loan of
$80,000 from the City Parks Special Revenue Fund, and
general obligation bond issue proceeds of $200,000.
General
Fund
Transfer to Internal Service
Special
Revenue
Fund
Due from Internal Service fund
Chapter
18-43
120,000
Cash
Cash
120,000
80,000
80,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s).
9. The Motor Pool Fund billed the General Fund $10,000 and
the City Parks Fund $4,000 for the use of motor vehicles.
Internal
Servcie
Fund
Due from General Fund
General
Fund
Expenditures
Chapter
18-44
Due from Special Revenue
10,000
4,000
Revenue
Due to Internal Service
14,000
10,000
10,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s).
10. Special Assessment Bonds in the amount of $400,000
were retired. The city has indicated a willingness to
guarantee the payment of principal.
Debt
Servcie
Fund
Chapter
18-45
Expenditures
Cash
400,000
400,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s).
11.
Customers’ deposits of $8,000 for water meters were
received by the City Water Company during the year. The
monies are to be held in trust until the customers request
that their services be disconnected and the final bills are
collected.
Agency
Fund
Chapter
18-46
Cash
Customer Deposit Agency Fund
8,000
8,000
Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following
transactions in the proper fund(s).
12. It is determined that the Service Fund will require an
annual contribution of $60,000 and earnings of $6,000 in
the current year to accumulate the amounts necessary to
retire general obligation term bonds.
Debt
Service
Fund
Chapter
18-47
Required additions
Retained earnings
Unreserved fund balance
60,000
6,000
66,000
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Chapter
18-48