COURSE DESCRIPTION

This course presents an in-depth look at some of the basic principles of
governmental accounting.

Understanding these principles provides the means for interpreting the concepts
of governmental accounting and financial reporting.

You will leave with a better understanding of why you do some of the things you
do and a stronger knowledge base for handling financial transactions that come
through your office.
COURSE OBJECTIVES

Explain what GAAP is and how to comply with the standards.

Understand the basic accounting concepts and the nature of assets and
liabilities.

Discuss in detail and understand practical use of the fundamentals and types of
fund accounting.
CEU REQUIREMENTS

You must sign in at the beginning of class.

You must stay for the duration of the entire class (whether you want to or not).

You must sign out at the end of class.

Each participant will receive a certificate for completing the class.

Each participant is responsible for sending in necessary documentation for
earning the CEU.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

GAAP instructs the user how properly to account for transactions, balances, and
disclosures in the financial statements.

GAAP has developed from decades of common accounting practices.

The phrase “generally accepted” means that an accountant cannot find specific
accounting principles in any authoritative book.

Accounting rule makers issue accounting principles for treatment of
transactions.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

GAAP is a set of authoritative principles that does not account for every single
type of accounting situation government offices encounter.
*Sometimes there is more than one way to handle a transaction. (i.e. depreciation)

Legally governments are not required to follow GAAP-based financial statements.

Ultimately it is up to the user to make the best choice in applying GAAP
principles.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Another GAAP concept that resides within the gray area is materiality.

An item on the financial statements or a transaction is material “if its improper
recording would have an impact on an informed reader of the financial
statements”.

Materiality has qualitative and quantitative aspects.

Quantitative materiality refers to differences in numerical values, such as a 10
percent-unexpected difference in assets.

Qualitative materiality refers to situations non-numerical such as recording
expenses in the wrong fund that causes the fiscal year amount to be over or
under budget.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The private organization called GASB sets the GAAP rules for governments.

The organization established in 1984 composed of seven board members.

GASB determines the accounting principles, provides interpretations, and
guidance for implementation.

GASB Statement No. 55 “The Hierarchy of Generally Accepted Accounting
Principles for State and Local Governments” (GASBS 55) prioritizes the
pronouncements and documents for accounting principles as follows:
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Level A

•
GASB Statements
•
GASB Interpretations
Level B


GASB Technical Bulletins

American Institute of Certified Public Accountants (AICPA) Audit Guides and Statement of
Position
Level C


AICPA Practice Bulletins
Level D


Implementation Guides

Practices widely recognized and prevalent in state and local governments
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Legally governments are not required to follow GAAP-based financial statements;
however, many local or state charters and state comptrollers do.

To prepare financial statements any other way would require justification for
departure.
GOVERNMENTAL ACCOUNTING STANDARDS BOARD
The GASB is the independent, not-for-profit organization formed in 1984 that
establishes and improves financial accounting and reporting standards for state and
local governments.
Its seven members are drawn from the Board’s diverse constituency, including
preparers and auditors of government financial statements, users of those
statements, and members of the academic community.
More information about the GASB can be found at its website www.gasb.org.
GOVERNMENTAL ACCOUNTING STANDARDS BOARD

GASB distinguishes the difference between government environments and
governmental entities from other types of organizations

GASB Concepts Statement No. 1 (GASBCS 1) “Objectives of Financial Reporting”
describes the differences as follows:
GOVERNMENTAL ACCOUNTING STANDARDS BOARD

Governments derive their authority from the citizenry and on a separation of
power commonly based on three branches (i.e., the executive, legislative, and
judiciary).

Governments usually prepare a budget for all operating funds.

Users of governmental financial statements are accustomed to the
government reporting information about its funds, particularly the major (or
more important, larger) funds.

Dissimilarities between similarly designated governments, such as two
counties may vary substantially in obtaining resources.
GOVERNMENTAL ACCOUNTING STANDARDS BOARD

Governments have significant investments in non-revenue-producing capital
assets, such as buildings, equipment, vehicles, and infrastructures.

The nature of the political process inherently creates conflict in governments
between citizens’ demand for services and the citizens’ willingness to pay for
those services.

The users and uses of governmental financial reporting and financial
statements are different from those of commercial enterprises.
WHAT’S THE REASON FOR ALL OF THIS?
Measuring financial performance is important on many different levels. Users of
financial information have different needs for specific information and having
accurate, reliable information is crucial to their operation.
GAAP and GASB exist to help insure that users of financial information are looking at
information that is presented fairly, uniformly (for comparison between entities)
and accurately.
WHO USES THIS INFORMATION?
Inside Users
1. Management
2. Staff
Outside Users
1. Citizens
2. Lending
Institutions
The basis of accounting is the
determination of when the
financial statements require
recording of a transaction. There
are three different methods.
Cash
Accrual
Modified Accrual
BASIS OF ACCOUNTING
Cash Basis Accounting - Using this method, revenues are recognized/recorded when
they are received.
Expenses/expenditures are recorded/recognized when they are paid.
GASB does not accept the cash basis of accounting for the government-wide financial
statements.
But understanding this method may facilitate your understanding of the others.
CASH BASIS OF ACCOUNTING
GASB does not accept the cash basis of accounting for the
government financial statements, but explaining the concept assists in
understanding the other accounting bases.
When a business receives cash, they record revenue immediately
using the cash basis. When a business pays cash for a bill, they
immediately record an expense.
For example, a county levies a tax on June 10 (just before the end of
the current fiscal year) for the upcoming fiscal year, which begins July
1 and is due on July 15.
If the taxpayer pays their tax on June 20 in the current fiscal year, an
entity under the cash basis of accounting records the revenue in the
current fiscal year.
BASIS OF ACCOUNTING
Accrual Basis Accounting - Using this method, revenues are recognized/recorded
when they are earned regardless of when they are received.
Expenses/expenditures are recorded/recognized when they are incurred regardless
of when they are paid.
This is the basis used in the government-wide financial statements and by most
commercial entities in preparing their financial statements.
ACCRUAL BASIS OF ACCOUNTING
This is the basis of accounting used in the government-wide, certain
fund, and most commercial financial statements prepared in
accordance with GAAP.
Revenues under the accrual basis of accounting record after earning
the transaction or when the government is required.
These types of transactions considered proprietary funds, bare close
relationship to business-type activity.
ACCRUAL BASIS OF ACCOUNTING
Continuing with the previous example the tax transaction collected on
June 10 requires recognition next fiscal year since it is the actual year
the transaction relates.
Another example is a utility bill that covers June 15 to July 15.
Revenue splits between the two fiscal years for recognition because
earnings include both accounting periods.
BASIS OF ACCOUNTING
Modified Accrual Basis Accounting - Using this method, revenues and
expenses/expenditures are recognized/recorded when they occur but can be affected
by the timing of cash receipts or cash disbursements.
When the revenue is measurable and available, it is recognized.
Governmental funds my use this method for preparing fund financial statements but
never for government-wide financial statements.
MODIFIED ACCRUAL BASIS OF ACCOUNTING
Governmental funds use modified accrual basis of accounting in the
fund financial statements, but never used to prepare government-wide
financial statements.
Modified accrual basis of accounting generally recognizes (i.e.,
recorded in the financial statements as revenue) transactions when
they occur, but the timing of cash receipts or cash disbursements may
affect timing of the transaction recording.
MODIFIED ACCRUAL BASIS OF ACCOUNTING
When the revenue is measureable and available, recognition of the
transaction in the financial statements follows.
Arriving at the measurability involves obtaining a reasonable estimate
of the revenue.
Availability comprises of revenues collectable during the current
accounting period or soon after the fiscal year to pay for the liabilities
of the current fiscal year.
GAAP defines susceptibility of accrual as 60 days after the close of the
fiscal year.
MODIFIED ACCRUAL BASIS OF ACCOUNTING
Continuing with the previous tax transaction example, say the payment
happened on September 15.
Under the accrual basis of accounting, recognition of the revenue
applies to the current fiscal year.
Under the modified accrual basis of accounting it is not because the
payment arises more than 60 days past the end of the current fiscal
year, therefore the revenue recognized in the next fiscal year.
BUDGETARY BASIS OF ACCOUNTING
Preparation of the general and special revenue fund budgets
sometimes requires the use of the budgetary basis of accounting.
Local laws have the capability to allow the use of non-GAAP budgetary
basis of accounting.
Partially using the cash or modified accrual basis of accounting to
account for certain types of transactions is a form of budgetary basis
of accounting.
Typically, supplementary information in the financial statements makes
use of the budgetary basis of accounting.
Economic
Resources
Current Financial
Resources
MEASUREMENT FOCUS
Whereas the basis of accounting describes when recording of transactions
takes place, the measurement focus defines when recording of transactions
come about.
The two different styles of measurement focuses are:
 Economic resources
 Current financial resources.
Arrangement of the government-wide financial statements and in the fund
financial statements by proprietary funds that undertake business-type
activities uses economic resources measurement focus.
Governmental funds (general fund, special revenue, capital projects, and debt
services are examples) use the current financial resources measurement focus.
MEASUREMENT FOCUS
Economic Resources Measurement Focus - This focus determines whether an entity
is better or worse off resulting from transactions taking place during a fiscal year.
This means recording transactions that affect the entity economically much like the
commercial industry as a gain (revenue) or a loss (expenditure).
This includes both current and long-term assets (such as capital assets) and liabilities
(such as long-term bonds).
This is generally used in the proprietary funds and is required in the presentation of
the government-wide financial statements.
MEASUREMENT FOCUS
Current Financial Resources Measurement Focus - Any fund that is not a proprietary
fund uses this measurement focus.
This focus emulates resources available in the near future therefore “the operating
statements and balance sheets of governmental funds in the fund financial
statements reflect transactions and events that involved current financial
resources”.
An example is assets turned into cash to satisfy current liabilities. Long-term assets,
assets not used to pay current liabilities, and long-term liabilities are not on the
governmental fund financial statements.
MEASUREMENT FOCUS
Current Financial Resources Measurement Focus
An example of the two measurement focuses is a new computer purchase for $5,000
with an expected life of five years.
Under the economic resource measurement focus there is no change in the
statement of activities (like an income statement) during the cash and computer
exchange.
The next five years the entity is worse off as the computer gets older, accordingly
there is a depreciation charge of $1,000 reflected in the statement of activities.
MEASUREMENT FOCUS
Current Financial Resources Measurement Focus
Under the current financial resource measurement focus, the government spent
$5,000 at the purchase date and has the same amount less in current financial
resources.
Computers are not a current financial resource because the equipment cannot pay
for the resulting fund bill.
The operating statement (like an income statement) shows expenditure for $5,000
because it is that much worse in the current financial resources.
The governmental fund’s financial statements will not reflect the depreciation
expense or any other transaction related to the computer purchase.
NATURE OF ASSETS
Nature of Assets - GASB Concepts Statement No. 4 “Elements of Financial
Statements” (GASBCS 4) defines an asset as “resources with present service
capacity that the government presently controls” (GASB, n.d.).
Measurement of the assets at a point reflects the statement of net assets
(sometimes referred to as the balance sheet).
The statement of net assets lists the assets in order of liquidity, which means how
quickly the asset converts back into cash.
Typical assets listed on the government’s statement of financial position are:
NATURE OF ASSETS
Cash - These are the book value (not bank statement’s) funds in the government’s
bank accounts.
Cash on the statement of net assets does not include restricted (like a debt service
reserve account) or held (like a security deposit) cash.
NATURE OF ASSETS
Cash equivalents - GASB Statement No. 9, “Reporting Cash Flows of Proprietary and
Nonexpendable Trust Funds and Governmental Entities That Use Proprietary
Accounting” (GASBS 9) defines cash equivalents as “short-term, highly liquid
investments that are both readily convertible to known amounts of cash and must
mature within three months of being bought by the organization”.
Determination of the classification of the asset is according to the asset purchase
date.
NATURE OF ASSETS
Investments - Recording of most stocks, bonds, and other debt instruments in the
statement of net assets are at their fair value.
The fair value changes from year to year and the stated earnings or losses from these
investments are in the government’s statement of activities.
NATURE OF ASSETS
Taxes receivable - These receivables (sometimes estimates) reported on the
statement of net assets are taxes owed to the government, such as “real estate
taxes, personal or corporate income taxes, sales taxes, or personal property taxes
due to the government on the date of its statement of net assets but that have
not been paid”
NATURE OF ASSETS
Accounts receivable - These are funds owed to the government due to services
rendered or goods sold to individuals or organizations.
An example is a utility bill sent to the customer but not paid yet.
The customer may not necessarily pay accounts receivable; therefore, GAAP requires
the establishment of an allowance for uncollectible receivables.
The government uses historical trends from the aging of receivables to estimate the
amount dedicated to this account.
The two accounts added together is the net realizable value, which is in accordance
to GAAP.
NATURE OF ASSETS
Grants and other receivables - This represents nonexchange monies owed to the
government other than revenues already mentioned, such as federal grants, fines
and penalties, and expense reimbursements
NATURE OF ASSETS
Inventories - Inventory includes items for sell like books and medical supplies.
Materials and supplies like those used in the office or the motor pool as commonly
used parts add to the inventory value.
Inventory valuation on the statement of net assets represents the lower of cost or
market value.
NATURE OF ASSETS
Capital assets - These fixed assets listed as property, plant, and equipment (PP&E) on
the statement of net assets are long-lived assets such as land, buildings,
equipment, office furnishings, computers, vehicles, leasehold improvements,
capitalized leases, and other similar assets.
In addition, GASBS 34 requires governments to report infrastructure like roads,
bridges, tunnels, and sidewalks as capital assets.
Determination of whether a purchased item is an asset or an expense depends on
the value and life of the purchase.
The life generally is three to five years.
NATURE OF ASSETS
Capital assets.
The set value threshold depends on the size of the government organization. The
government records PP&E at cost minus accumulated depreciation on the
statement of net assets.
There are two exceptions to this rule, and the first is a work-in-progress involving a
construction project lasting more than one fiscal year.
The second exception called the modified approach deems that the assets do not
depreciate in usefulness.
NATURE OF ASSETS
Capital assets.
Assets sometimes lose value and become impaired.
GASBS 42, “Accounting and Financial Reporting for Impairment of Capital Assets and
for Insurance Recoveries” instructs governments when and how governments
should revalue inventory in this manner.
NATURE OF ASSETS
Intangible assets - As the name implies these are assets not seen but are still
resources of the government like internally developed software.
GASBS 51, “Accounting and Financial Reporting for Intangible Assets” provides
guidance to governments in determining intangible values
NATURE OF ASSETS
Prepaid expenses - Services paid for early that cover future benefits in fiscal years
other than the current are assets called prepaid expenses.
GASBCS 4 defines a prepaid expense as a “deferred outflow of resources”.
Prepaid insurance, for example, of 1,000 dollars may cover a full calendar year
(January to December).
From January to June, the prepaid insurance expense asset reduces from 1,000
dollars to 500 dollars using the accrual basis of accounting.
NATURE OF LIABILITIES
Nature of Liabilities - GASBCS 4 defines liabilities as “present obligations to sacrifice
resources that the government has little or no discretion to avoid” (GASB, n.d.).
Present liabilities on the statement of net assets incurred as of the year-end and do
consist of an obligation to another party.
The more common liabilities listed on the statement of net assets are as follows:
NATURE OF LIABILITIES
Accounts payable and accrued expenses. Governments report these two liabilities
listed together or separate.
Accounts payable are bills for goods or services received before the end of the fiscal
year.
Accrued expenses are liabilities for goods or services for which the government has
not received an invoice for yet or when accounting for invoices covering two fiscal
years.
For example, the government has a telephone invoice covering June 15 through July
15.
The government accrues an expense liability for the portion that covers the next fiscal
year.
NATURE OF LIABILITIES
Debt - The financial statements list government debts in many forms.
Typically, governments deal in notes payable maturing five years or less. Repayment
of unique loans to governments called bond anticipation notes arrives from the
anticipation of grants and taxes revenues.
Most often governments purchase long-term loans to finance construction or
significant facilities.
The two types of bonds sell at either a premium or discount but the statement of net
assets reflects the actual face value of the bond.
NATURE OF LIABILITIES
Deferred income - GASBCS 4 refers to this special type of liability as “a deferred
inflow of resources”.
The concept here is matching the recording of income to the period earned and
sometimes the costs incurred to generate that revenue.
A frequent example is grant monies advanced to the government entity.
The entity cannot recognize the grant revenue until acquiring expenses and spending
for the purpose of this grant.
NATURE OF NET ASSETS
Nature of Net Assets - Net assets are the difference between total assets and total
liabilities. GASB 34 requires dividing the net assets up in the following three ways
(GASB, n.d.):
 Invested in capital assets, net of related debt
 Restricted net assets
 Unrestricted net assets
NATURE OF NET ASSETS
Invested in capital assets, net of related debt.
This is the difference between capital assets reduced by any accumulated
depreciation and outstanding balance of any debt used to purchase or constructs
those capital assets.
NATURE OF NET ASSETS
Restricted net assets - These assets have constraints tied to them.
Creditors or laws imposed upon the assets restrict them through debt covenants or
enabling legislation for example.
An example of this is the government’s debt service reserve funds.
The government agrees to place a certain amount of monies in a special account not
used for any purpose other than paying off the debt service in case there is a
default.
GASBS 46, “Net Assets Restricted by Enabling Legislation” clarifies that enabling
legislation mandates the funds for future purposes in honor of restrictions placed
upon the monies.
NATURE OF NET ASSETS
Unrestricted net assets.
Monies that do not fall into the previous two categories fall into unrestricted net
assets.
QUESTIONS
1. How does GAAP provide guidance for government financial statements?
2. What is the purpose of GASB?
3. When is accrual and modified accrual basis of accounting used?
QUESTIONS
4. What is the difference between economic and current financial resources
measurement focuses?
5. Describe how GASB defines an asset.
6. Describe how GASB defines a liability.
ACCOUNT TYPES
Understanding account types and how
debits/credits effect each
The different account types:
 Assets
 Liabilities
 Equities
 Revenues
 Expenditures
 Deferred Outflows
 Deferred Inflows
ACCOUNT TYPES
Assets
Assets are cash and cash equivalents
They include:
 Bank Accounts
 Savings/Investment Accounts
 Receivables
 Inventory
 “Due From” Other Funds
ACCOUNT TYPES
Liabilities
Liabilities are obligations and debts
They include:
 Payables
 Payroll Deductions
 Short Term Debt
 “Due To” Other Funds
ACCOUNT TYPES
Equities
Equities are the difference between assets and liabilities
They include:
 Reserves
 Fund Balance
ACCOUNT TYPES
Revenues
Revenues are monies brought into a government through
it’s activities
They include:
 Taxes
 Fees
 Fines
 Interest
 Grants
 Fund Transfers
 Sales
ACCOUNT TYPES
Expenditures
Expenditures are payments or the promise of future
payments
They include:
 Purchases
 Wages
 Payroll Taxes
 Insurance
ACCOUNT TYPES
Expenditures
Why are Expenditures the only account type that uses object
codes?
 Only account type that is segregated by department
 The Function defines the department
 The Object Code defines the type of expenditure
ACCOUNT TYPES – GASB63
Deferred Outflows
Deferred Outflows are consumptions of assets that apply to a
future reporting period
They include:
 Grants Paid in Advance
 Debt Refunds (debits)
 Cost to acquire rights to future revenues
 Deferred loss from sale-leaseback
ACCOUNT TYPES – GASB63
Deferred Inflows
Deferred Inflows are acquisitions of assets that apply to a future
reporting period
They include:
 Grants Received in Advance
 Taxes Received in Advance
 Debt refunds
 Deferred gain from sales-leaseback
BASIC ACCOUNTING EQUATION
Assets
=
Liabilities
+
Equities/Fund Balance
GASB63 ACCOUNTING EQUATION
Assets
Liabilities
+
+
Deferred Outflows
=
Deferred Inflows
+
Equities/Fund Balance
This is the basis for what we call “double entry accounting.” If you increase an
account on the left you must increase an account on the right in order to stay in
balance.
DOUBLE ENTRY ACCOUNTING
 Double entry accounting is a standard accounting
method that requires each transaction to be recorded
in at least two accounts.
 Every debit balance must have an equal and offsetting credit balance for each transaction.
 It provides for quick accuracy checking .
ACCOUNT TYPES
Assets
Normal Balance – Debit (positive)
Debits = Increase
Credits = Decrease
The Balance Sheet
All Asset
Function
number
s begin
with 1
(one)
Assets
- Bank Accounts
- Investment Accounts
- Receivables
- Inventory/Supplies
-“Due From” other
funds
- Pre-paid Expenses
Asset Accounts
- Normally carry a
positive (debit)
balance
- Debits increase
ending balance
- Credits decrease
ending balance
ACCOUNT TYPES
Liabilities
Normal Balance – Credit (negative)
Debits = Decrease
Credits = Increase
The Balance Sheet
All Liability
Function
numbers
begin with
2 (two)
Liabilities
- Payroll deductions
- Due To other funds
- Payables
- Short term debt
Liability Accounts
- Normally carry a
negative (credit)
balance
- Credits increase
ending balance
- Debits decrease
ending balance
ACCOUNT TYPES
Equities
Normal Balance – Credit (negative)
Debits = Decrease
Credits = Increase
The Balance Sheet
All Equity
Function
numbers
begin with
3 (three)
Equities
City Equity Accounts are
included with Liabilities
- Reserves
- Fund Balance
Accounts
Equity Accounts
- Normally carry a
negative (credit)
balance
- Credits increase
ending balance
- Debits decrease
ending balance
ACCOUNT TYPES
Revenues
Normal Balance – Credit (negative)
Debits = Decrease
Credits = Increase
*Budget entries are reversed
ACCOUNT TYPES
Expenditures
Normal Balance – Debit (positive)
Debits = Increase
Credits = Decrease
Only account type that uses object codes
*Budget entries are reversed
REVENUES/EXPENDITURE ACCOUNTS
Notice on the balance sheet that we didn’t include the revenues and expenditures.
The balance sheet uses a summary line at the bottom to show the net activity of the
revenue and expenditure account groups.
REVENUES/EXPENDITURE ACCOUNTS
Revenues and Expenditures are listed on the Trial Balance
What’s wrong with this Trial Balance?
All Revenue
Function
numbers
begin with 3
(three)
All Expenditure
Function
numbers begin
with 4 (four) or
above
ACCOUNT TYPES– GASB63
Deferred Outflows
Normal Balance – Debit (credit)
Debits = Increase
Credits = Decrease
ACCOUNT TYPES– GASB63
Deferred Inflows
Normal Balance – Credit (negative)
Debits = Decrease
Credits = Increase
QUESTIONS
1. What account type would a short term debt be? What about a grant
received in advance?
2. What is the normal balance for an asset? What about an expenditure?
3. Are individual revenue/expenditure accounts displayed on the Balance
Sheet? If no, what report are they shown on?
WHAT IS A FUND?
The general purpose for developing fund accounting is so that each government is
responsible for the collection and application of public monies.
Each fund balance is much like a financial statement whereas the assets equal the
liabilities.
WHAT IS A FUND?
The National Council on Governmental Accounting (NCGAS 1) defines a fund as :
“A fund is defined as 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 in accordance with special regulations, restrictions, or limitations. “
WHAT IS A FUND?
Statutes and management decisions establish each fund.
Management to accomplish government objectives and specific programs in
relation to regulations, restrictions, or limitations separates each activity and
contractual agreement.
FUND TYPES
A. Governmental Funds - Generally, any fund that accounts for activities not
businesslike is a governmental fund.
Governmental funds are the general activities of a government.
1. General Fund
2. Special Revenue Funds
3. Capital Projects Funds
4. Debt Service Funds
5. Permanent Funds
FUND TYPES
B. Proprietary Funds - The two different types of proprietary funds use the accrual
basis of accounting and the economic resources measurement focus.
1. Enterprise Funds
2. Internal Service Funds
FUND TYPES
C. Fiduciary Funds - Fiduciary funds account for monies that belong to other people
and are not included in the government-wide financial statements.
The fiduciary funds are included in the basic financial statements within the fund
financial statements.
1. Pension Trust Funds
2. Investment Trust Funds
3. Private Purpose Trust Funds
4. Agency Funds
GOVERNMENTAL FUND
A. Governmental Funds - Generally, any fund that accounts for activities not
businesslike is a governmental fund.
Governmental funds are the general activities of a government.
1. General Fund
2. Special Revenue Funds
3. Capital Projects Funds
4. Debt Service Funds
5. Permanent Funds
GOVERNMENTAL FUND
General Fund. To account for all financial resources except those required to be
accounted for in another fund.
This is the main fund for the government, which accounts for all current activities
other than those in another fund.
It is the “chief operating fund” and each government can have only one according to
GAAP rules
The asset side of the general fund balance sheets generally consists of cash,
investments, receivables, and inventories.
GOVERNMENTAL FUND
General Fund.
The two acceptable means for the accounting of inventories are:
 Purchase - The purchase method means expensing purchased inventory
immediately.
 Consumption method - The consumption method means expensing inventory
after consumption.
GOVERNMENTAL FUND
General Fund.
The liabilities are generally accounts payable and accrued expenditures, deferred
revenues, and revenue or tax anticipation notes.
Liabilities received before the end of the fiscal year are accounts payable.
Receiving a bill for this fiscal year rendered service or goods after the end of the fiscal
year are an accrued expense.
GOVERNMENTAL FUND
General Fund
There are exceptions to the asset and liability recognition as incurred, such as
reserved for inventories, compensated absences, judgments and claims,
unfunded pension and other postemployment benefit contributions, special
termination benefits, landfill closure and post closure costs, debt service, and
operating leases with scheduled rent increases.
Recording of these types of liabilities incurs when using current financial resources.
For example, current fiscal year benefits owed to employees not paid until after the
end of the fiscal year record as a liability.
GOVERNMENTAL FUND
General Fund
Anticipated notes are another special type of liability.
When the government needs to even out the cash flow during the fiscal year, they can
purchase short-term notes using future tax and revenue collections as collateral.
GOVERNMENTAL FUND
A. Governmental Funds - Generally, any fund that accounts for activities not
businesslike is a governmental fund.
Governmental funds are the general activities of a government.
1. General Fund
2. Special Revenue Funds
3. Capital Projects Funds
4. Debt Service Funds
5. Permanent Funds
GOVERNMENTAL FUND
Special Revenue Funds. Account for the proceeds of specific revenue sources (other
than expendable trusts or for major capital projects) that are legally restricted to
expenditures for specified purposes
Special revenue funds are used to account for the proceeds of specific revenue
sources that are restricted or committed to be expended for specific purposes
other than capital projects and debt service.
Special revenue funds are either optional or required legally by law.
Funds needing special consideration to improve accountability for the fund assume
special revenue status by the government.
GOVERNMENTAL FUND
Special Revenue Funds
Grant monies restricted by the federal or state government for special purposes are
one example.
After paying the bills from the grant monies, the government closes the special
revenue fund.
Another example is state imposed gasoline taxes restricted for construction and
maintenance of highway roads.
GOVERNMENTAL FUND
A. Governmental Funds - Generally, any fund that accounts for activities not
businesslike is a governmental fund.
Governmental funds are the general activities of a government.
1. General Fund
2. Special Revenue Funds
3. Capital Projects Funds
4. Debt Service Funds
5. Permanent Funds
GOVERNMENTAL FUND
Capital Projects Funds - to account for financial resources to be used for the
acquisition or construction of major capital facilities (other than those financed by
proprietary funds and trust funds)
The government sometimes restricts, commits, or assigns capital project funds for
capital outlay expenditures.
Examples include the “acquisition or construction of capital facilities and other capital
assets”.
Capital activities of proprietary funds or trust funds are not included in the capital
projects funds.
GOVERNMENTAL FUND
Capital Projects Funds
Once a capital project fund is established, the government determines how many
capital project funds needed.
Proceeds from long-term debt, reported as other financing source, are typically the
main resource for capital project funds.
The capital projects fund uses the modified accrual accounting basis and the current
financial resources measurement focus, so the long-term assets and long-term
liabilities appear on the government-wide statement of net assets.
GOVERNMENTAL FUND
Capital Projects Funds
Short-term liabilities use current financial resources for payment, so they appear on
the capital projects fund balance sheet.
Three types of short-term liabilities used for financing capital projects are:
 Bond anticipation notes
 Demand bonds
 Special assessment debt
GOVERNMENTAL FUND
Capital Projects Funds
Bond anticipation notes. Repayment for this type of short-term note derives from the
proceeds of long-term debt released after the issuance of the bond anticipation
notes.
If a government cannot provide enough assurance for obtaining the long-term debt,
the bond anticipation note appears on the capital project funds balance sheet as
a liability.
GOVERNMENTAL FUND
Capital Projects Funds
Demand bonds. Demand bonds “creates a potential call on a government’s current
financial resources”.
The bondholder has the right to demand (a put provision) the government issuer to
redeem the bond within a specified period.
This provision allows the investor the option to redeem the bond when the market
bond interest rate is higher.
This provision allows governments to issue bonds at a lower interest rate, therefore
less liability.
GOVERNMENTAL FUND
Capital Projects Funds
Demand bonds.
Governments establish lines of credit or takeout agreements to provide means to pay
for redeemed bonds.
A takeout agreement is a contractual agreement with a financial institution to convert
the demand bonds into installment loans.
GOVERNMENTAL FUND
Capital Projects Funds
Demand bonds.
GASB Interpretation No. 1, “Demand Bonds Issued by State and Local Governments”
(GASBI 1) determines the accountability of the demand bonds as long-term or
short-term.
The demand bond usually appears on the capital projects fund balance sheet unless
meeting all of the following conditions:
GOVERNMENTAL FUND
Capital Projects Funds
Demand bonds.
The government has takeout agreement with an unrelated third party to convert the
demand bonds to long-term obligations.
The takeout agreement does not expire within one year of the current balance sheet.
The takeout agreement loan obligation is not callable or cancelable by the lender.
GOVERNMENTAL FUND
Capital Projects Funds
Demand bonds.
The third party lender is capable of meeting the financial needs of the takeout
agreement.
This means that if a government does not have substantial means or loopholes to
cover the demand loan, it appears on the governmental fund and governmentwide statement of net assets.
GOVERNMENTAL FUND
Capital Projects Funds
Special assessment debt. Special assessment debt is typically a capital projects fund
debt providing improvements to sidewalks, streets, parking facilities, and curbs
and gutters.
For example, the government provides improvements to a community, and charges a
special assessment to the homeowners.
The government issues long-term loans to the homeowners to fund the project and
typically places a lien on their property.
GOVERNMENTAL FUND
Capital Projects Funds
Special assessment debt.
GASB Statement No. 6, “Accounting and Reporting for Special Assessments” (GASBS
6) discusses the accounting treatment for special assessment debt, which
depends on whether the government is obligated for the debt.
If the government is obligated to assume the debt related to the special assessment
debt due to homeowner default, the proceeds record in the other financing
source on the capital projects fund balance sheet.
The government records an accounts receivable and a deferred revenue account to
maintain the payments made by the homeowner.
GOVERNMENTAL FUND
Capital Projects Funds
Special assessment debt.
If the government is not obligated to the homeowner debt, recognize the expenditures
in the capital project funds.
The identification of the source of the funds in the capital project fund is something
other than the words “bond proceeds” such as “contribution from property
owners”
GOVERNMENTAL FUND
A. Governmental Funds - Generally, any fund that accounts for activities not
businesslike is a governmental fund.
Governmental funds are the general activities of a government.
1. General Fund
2. Special Revenue Funds
3. Capital Projects Funds
4. Debt Service Funds
5. Permanent Funds
GOVERNMENTAL FUND
Debt Service Funds - to account for the accumulation of resources for, and
the payment of, general long-term debt principal and interest.
Debt service funds are “a type of governmental fund that is used to account for
resources that are restricted, committed, or assigned for debt service”.
This is essentially the government making payments on debt principle and interest
payments.
The resources collected in this fund cover the long-term debts, such as bonds, due to
mature in the future.
Using modified accrual basis of accounting and the current financial resources
measurement focus, the debt service fund has three accounting issues.
GOVERNMENTAL FUND
Debt service funds.
1. Whether and when tax revenues should be recorded directly in a debt service
fund.
Tax revenue restricted for debt service funds go one of two places.
Either they record directly to the debt service fund or they first go to the general fund
and transfer later into the debt service fund.
Legal restrictions and budgets sometimes cause the tax revenues to record first in
the general fund to make it easier for the reader of a financial statement see the
entire monies collected in one place before splitting between two funds.
GOVERNMENTAL FUND
Debt service funds.
2. Expenditure recognition for debt service payments.
Generally, the unmatured long-term debt principle and interest payments do not
record in liabilities and expenditures.
A government uses the cash basis to record the payments as they happen even if for
the previous six months.
The exception to this rule occurs when the government is late on payments or if the
government chooses to transfer resources into the debt service fund before the
payments are due.
GOVERNMENTAL FUND
Debt service funds.
3. Advance refunding of debt issues.
A unique transaction of debt service funds explained in GASBS 7, “Advance
Refundings Resulting in Defeasance of Debt” references advance refunding of
debt issues.
A government places a sufficient amount of proceeds from newly issued debt into a
trust for eventual payment of the existing debt as the payments and interest
become due.
GOVERNMENTAL FUND
Debt service funds.
Advance refunding of debt issues.
The escrow agent in charge of the trust satisfies the schedule principle and interest
payment requirements.
Legal defeasance occurs when the debt is legally satisfied based on the trust
provisions.
In-substance defeasance “occurs when the debt is considered defeased for
accounting purposes even though a legal defeasance has not occurred”
GOVERNMENTAL FUND
Debt service funds.
Advance refunding of debt issues.
GASBS 7 states the rules for the removal of the debt from the statement of net assets
because of the in-substance defeasement.
The denominated currency of the monies in the trust is the same currency used to
pay for the debt.
Debts denominated in U.S. dollars are limited to direct U.S. government obligations,
such as U.S. Treasury issues.
GOVERNMENTAL FUND
Debt service funds.
Advance refunding of debt issues.
The proceeds from new debt, reports in the government-wide statement of net assets
as “other financing source – proceeds from refunding bonds”.
Payments to the escrows, report as “other financing use – payment to the refunded
bond escrow agent”
GOVERNMENTAL FUND
A. Governmental Funds - Generally, any fund that accounts for activities not
businesslike is a governmental fund.
Governmental funds are the general activities of a government.
1. General Fund
2. Special Revenue Funds
3. Capital Projects Funds
4. Debt Service Funds
5. Permanent Funds
GOVERNMENTAL FUND
Permanent funds. Permanent funds report restricted resources coming from interest
earnings applied to programs and activities benefitting the government and its
citizens.
The principal is not spent. An example of programs and activities is a cemetery
perpetual-care fund.
PROPRIETARY FUND
B. Proprietary Funds - The two different types of proprietary funds use the accrual
basis of accounting and the economic resources measurement focus.
1. Enterprise Funds
2. Internal Service Funds
PROPRIETARY FUND
Proprietary Funds
The GASB Statement No. 20, “Accounting and Financial Reporting for Proprietary
Funds and Other Governmental Entities That Use Proprietary Fund Accounting”
sets the accounting rules for this fund (GASB, n.d.).
The two different types of proprietary funds called enterprise funds and internal
service funds use the accrual basis of accounting and the economic resources
measurement focus.
The balance sheets show the current and non-current assets and liabilities.
Recognition of the revenues and expenses, unlike governmental funds, uses the
accrual basis of accounting as well.
PROPRIETARY FUND
B. Proprietary Funds - The two different types of proprietary funds use the accrual
basis of accounting and the economic resources measurement focus.
1. Enterprise Funds
2. Internal Service Funds
PROPRIETARY FUND
Enterprise funds. Enterprise funds account for operating and financing activities
intended to finance or recover costs of providing goods or services to the public
through user charges.
An example is a Water and/or Sewer Fund operated by the government.
GASBS 34 requires the establishment of an enterprise fund if one or more of the
following criteria happen:
PROPRIETARY FUND
Enterprise funds.

A governmental activity secured by the pledged fees and charges of the activity,
finances its own debt. Pledged proprietary fund revenue, such as water and
sewer charges, provide for the annual debt service on revenue bonds used to
finance the capital activities.

Laws or regulations require the government activity to recover costs through
activity fees and charges.

A government designs the activity to cover costs through fees and charges,
including depreciation or debt service.
PROPRIETARY FUND
Enterprise funds.
Two features of enterprise funds involve capital contributions and recording
defeasances of debt.
1. Contributed capital.
The concept of capital is “how the funds obtain their resources for operations”.
The proprietary fund accounts for net assets as 1) invested in capital assets, net of
related debt, 2) restricted, 3) unrestricted.
The capital contributions flow through the statement of revenues, expenses, and
changes in net assets.
PROPRIETARY FUND
Enterprise funds
2. Refundings of debt.
Recording of proprietary fund refunded debt is different from advanced refunding of
debt mentioned previously in debt service funds.
GASB Statement No. 23, “Accounting and Financial Reporting for Refundings of Debt
Reported by Proprietary Activities” (GASBS 23), sets the complex rules.
A government recognizes an amortized gain or a loss for the exchange of old debt for
new debt through an escrow.
The gain or loss treated as an adjustment to interest expense each year amortizes for
the life of the new or old debt, depending on which one is shorter.
PROPRIETARY FUND
B. Proprietary Funds - The two different types of proprietary funds use the accrual
basis of accounting and the economic resources measurement focus.
1. Enterprise Funds
2. Internal Service Funds
PROPRIETARY FUND
Internal service funds. These funds account for financing of goods or services
provided predominantly between departments and agencies within the same
government unit.
Full costs of goods or services charge to the receiving department or agency.
All internal service activity costs do not have to be recorded, but typically duplicating
and printing services, motor pools, central garages, information processing,
purchasing, and central stores and warehousing are allocated using separate
funds.
When the funds of both departments record expenditures and revenues, reversing
journal entries correct the “doubling up” effect of internal service activities.
PROPRIETARY FUND
Internal service funds.
The goal of internal service funds is to break even without a profit or a loss.
If there is a profit or a loss, it records in the government-wide statement of net assets
instead of the business-type activities because it is a governmental type activity.
An exception occurs when the enterprise fund is predominant, then the residual
assets or liabilities records in the business-type activities column in the statement
of net assets.
FIDUCIARY FUND
C. Fiduciary Funds - Fiduciary funds account for monies that belong to other people
and are not included in the government-wide financial statements.
The fiduciary funds are included in the basic financial statements within the fund
financial statements.
1. Pension Trust Funds
2. Investment Trust Funds
3. Private Purpose Trust Funds
4. Agency Funds
FIDUCIARY FUND
Pension (and other employee benefit) trust funds. Pensions record in the pension
trust funds if the government administers the pension plan or it is a component
unit of the government.
Separate pend trusts should be used for each pension plan.
Pension trust funds use the accrual basis of accounting and the economic resources
measurement focus.
FIDUCIARY FUND
Pension (and other employee benefit) trust funds.
Supplement pension benefits, deferred compensation plans if they meet the Internal
Revenue Code Section 457 pension administrative requirements, and a trust fund
set up to accumulate resources to pay for postemployment benefits other than
pensions are examples of other types of employee benefit and pension plans.
FIDUCIARY FUND
Investment trust funds. GASB Statement No. 31, “Accounting and Financial Reporting
for Certain Investments and for External Investment Pools” (GASBS 31) governs
establishment of investment trust funds.
The government sponsors external investment pools and provides “individual
investment accounts to other legally separate entities that are not part of the
same financial reporting entity”.
FIDUCIARY FUND
Investment trust funds.
The government invests in a portfolio of investments on behalf of the other legally
separate entities in comingled funds.
The external portion of each pool has its own investment trust fund. A government
can provide individual investment accounts to other legally separate entities.
The income from and changes in fair value of the investment affect the entity from
which they were acquired.
For example, a state pools the investment assets of a local government and invests in
its behalf.
FIDUCIARY FUND
Private-purpose trust funds. Private-purpose trust funds are a fiduciary fund that
reports all trust agreements whereas it benefits individual, private entities, or
other governments.
A government designs the trust for a non-public activity and uses the accrual basis of
accounting and the economic resources measurement focus.
FIDUCIARY FUND
Agency funds. Agency funds account for assets held in a custodial capacity.
The assets of the agency funds are always equal to the liabilities.
School districts use this fund often to account for student activity funds, which legally
belong to the students.
Another example is one government collects the taxes of another government and
then remitted to the other government on whose behalf one collected the taxes.
FIDUCIARY FUND
Agency funds
GASB Statement No. 24, “Accounting and Financial Reporting for Certain Grants and
Other Financial Assistance” (GASBS 24) requires use of an agency fund when a
government “receives a grant and acts solely as a cash conduit to pass the funds
along to others”.
GASBS 24 requires an agency fund for collection of special assessment monies and
passing it along to the agency that will make the principal and interest payments
to the holders of the special assessment debt.
QUESTIONS
1. Why did GAAP develop fund accounting for governments?
2. What is the chief operating fund of a government?
3. What basis of accounting and measurement focus do proprietary funds use?
4. What do fiduciary funds account for?
TENNESSEE STATE CHART OF ACCOUNTS
110-42100-320-GRANT1-FED
Fund
Function
Object Cost Center Sub Object
 TN State COA follows this format:
 Fund - 3 digit
 Function – 5 digit
 Object Code – 3 digit
 Cost Center – 5 digit
 Sub Object – 3 digit
 Object Codes are only used on Expenditures
 Cost Centers and Sub Objects are:
 Optional
 Completely user defined
TRANSACTION TYPES
Understanding transaction types
The different transaction types:
 AP – Accounts Payable (Accrual Only)
 BB – Beginning Balance
 CD – Cash Disbursements
 CR – Cash Receipts
 DP – Deposits
 EC – Encumbrances*
 IV – Invoice Entries (Accrual Only)
 JE – Journal Entries
 PA – Payroll
 PO – PO Liquidations *
 BG – Budget
 BA – Budget Amendment
TRANSACTION TYPES - NEXTGEN
Manual Transactions are
entered exactly the same
way regardless of
Transaction Type.
Transaction Types are
simply selected from the
drop down.
TRANSACTION TYPES
Understanding transaction types and how they effect
reporting
 The transaction types do not control how the balances are reflected on the ledger
 They do determine how the transaction is reported
 The transaction type determines the Journal the transaction will be listed on
CD/AP Journal
General Journal
Cash Disbursement Journal
Cash Receipts Journal
Deposit Journal
Encumbrance Journal
Payroll Journal
PO Journal
Budget Journal
T - Accounts
 The simplest of account structures
 Shaped like the letter T
 Account title and account number appear above the T
 Debits always go on the left side of the T
 Credit always go on the right side of the T
T - Accounts
Record the Receipt of a Tax Payment (Cash Basis)
Cash
1000.00
Current Property Tax Revenue
1000.00
There are a couple of ways these transactions get recorded in your ledger.
1. Some of you are using manual daily cash reports to make manual CR (cash
receipt entries to your ledger.
2. Some of you are using the automated features in the software to keep your
ledger updated. This can be set up through utility billing, miscellaneous
receipts, property tax, and business license.
NEXTGEN TRANSACTION PROCESS
To make manual transaction entries, from the Financial Management
Menu select Transactions. Then select the sub menu option
Transactions. Next, select New in the ribbon bar at the top.
NEXTGEN TRANSACTION PROCESS
Click the ellipsis to Add New Transaction Batch. The Batch ID field will be
filled in with a default batch ID. Enter the Date for the batch. Enter any
internal notes in the Internal Notes field if desired. Click “Save and Close”
If the Post this transaction box is checked, the transaction does not have to
be placed in a batch and will be automatically posted at the end of the
transaction entry process.
NEXTGEN TRANSACTION PROCESS
 Enter the Transaction Date and Period to post your entries to
 Select the Transaction Type from the drop down
Enter the Description associated with the transaction
Click the “Next” button
NEXTGEN TRANSACTION PROCESS
 Cash is entered as a debit on the left side
 Property Tax revenue is entered as a credit on the right side
 When all entries are entered and correct click on the “Next”
button. This will open up the Transaction Summary Screen.
NEXTGEN TRANSACTION PROCESS
 Verify the summary
information is correct on both
the Transaction and Entries
tabs of the Transaction
Summary Screen
Click the "Finish" button to
complete the transaction
NEXTGEN BATCH POSTING PROCESS
From the Financial Management menu select Transactions. Then select
the sub menu option Transaction Batches
Click the Find button to display the unprocessed Transaction Batches
Select the batch by double clicking on the batch
NEXTGEN BATCH POSTING PROCESS
Select Print Batch to print a report of the entries in the batch before posting
Select Close Batch (only closed batches can be posted to the NextGen GL)
Select Post Batch
Click on the “Next” button. (Summary screen will show the batch details)
Click the “Finish” button to post
T - Accounts
Record Tax Payment is Due (Accrual Basis)
Property Tax Receivable
1000.00
Current Property Tax Revenue
1000.00
There are a couple of ways these transactions get recorded in your ledger.
1. Create manual entries (JE) in your ledger to record these transactions.
2. Use the automated features in the software to keep your ledger updated. A
common use of this would be in the Utility Billing system.
NEXTGEN TRANSACTION PROCESS
To make manual transaction entries, from the Financial Management
Menu select Transactions. Then select the sub menu option
Transactions. Next, select New in the ribbon bar at the top.
NEXTGEN TRANSACTION PROCESS
Place a check in the Post this transaction box
Enter the Transaction Date and Period to post your entries to
 Select the Transaction Type from the drop down
Enter the Description associated with the transaction
Click the “Next” button
NEXTGEN TRANSACTION PROCESS
 Property Tax Receivable is entered as a debit on the left side
 Property Tax revenue is entered as a credit on the right side
 When all entries are entered and correct click on the “Next”
button. This will open up the Transaction Summary Screen.
NEXTGEN TRANSACTION PROCESS
 Verify the summary
information is correct on both the
Transaction and Entries tabs of
the Transaction Summary Screen
Click the "Finish" button to
complete the transaction
Once you click “Finish” the
transaction will be automatically
posted
T - Accounts
Record the Payment of an Invoice for Gasoline (Cash Basis)
Cash
1000.00
Gas, Oil, Etc. Expense
1000.00
There are a couple of ways these transactions get recorded in your ledger.
1. When you create invoices in the AP/Purchasing system and let the system
generate the vendor checks, the system creates the CD entries for the
ledger.
2. When you write manual checks and then enter them in the AP/Purchasing
system, the system creates the CD entries for the ledger.
CASH DISBURSEMENT JOUNAL
T - Accounts
Record an Invoice for Gasoline (Accrual Basis)
Accounts Payable
1000.00
Gas, Oil, Etc. Expense
1000.00
There are a couple of ways these transactions get recorded in your ledger.
1. When you create invoices in the AP/Purchasing system, the system will
generate the accrual entries (AP or IV) for the ledger. This requires some
additional set up. Be sure to contact LGC support or your field rep for
assistance in setting this up.
2. You can also create manual entries to set up the accrual.
CD / AP JOUNAL
T - Accounts
Record Transactions for Employee Payroll (Cash Basis)
Cash
Federal Tax Payable
848.50
Salary Expense
1000.00
75.00
FICA Payable
76.50
FICA Matching Expense
76.50
There are a couple of ways these transactions get recorded in your ledger.
1. When you run a payroll or create a manual payroll check in the system, the
system can create these entries for you. This requires some additional set up.
2. You can also create manual entries.
PAYROLL JOURNAL
A contingent liability, contract, purchase order,
payroll commitment, tax payable, or legal
penalty that is chargeable to an account. It
ceases to be an encumbrance when paid-out or
when the actual amount is determined and
recorded as an expense.
THE IN’S & OUT’S OF ENCUMBRANCES

An encumbrance is a special type of accounting transaction that anticipates a
future expenditure

Amounts are encumbered, or set aside, in a particular expenditure account for a
specific future purchase

The document used to record an encumbrance is a Purchase Order

Recording encumbrances is usually a part of an encumbrance approval system
that includes approval of Requisitions for purchase before a purchase order is
issued
THE IN’S & OUT’S OF ENCUMBRANCING

When you create a purchase order in the system, an EC entry is made to the
expenditure account(s).

If you make a change to the purchase order, additional EC entries are made to
the expenditure account(s).

When the purchase order is liquidated either through payment or through
liquidation without payment, a PO entry is made to the expenditure account(s).
This removes the encumbered amount (releases it.)

The system can be set up to print purchase orders out of the system without
actually making encumbrance entries to the ledger
The Statement of Expenditures & Encumbrances will show the total encumbrances
for each account. See the excerpt below.
The Purchase Order Listing by GL Account will show you a detailed analysis of the
total shown on the Statement of Expenditures & Encumbrances. In our example, the
total is made up from one purchase order.
It is important that you reconcile these
amounts periodically to be sure they agree.
We recommend a monthly reconciliation.
QUESTIONS
1. What is the major difference between cash basis and accrual basis
accounting?
2. In the software, does the transaction type selected have a direct impact
on the balances on the ledger? If no, what do they control?
3. What type of transaction would you use to record daily cash revenues?
What about a payment that is automatically withdrawn from your bank
account?
4. Are there any transaction types that are one-sided (don’t require a
balanced debit and credit?)
BASICS OF GOVERNMENTAL
FINANCIAL STATEMENTS
The financial statements prepared under GAAP specifications includes:
 Management’s discussion and analysis (MD&A)
 Government-wide financial statements
 Fund financial statements
 Required supplementary information (RSI)
 Comprehensive annual financial report (CAFR)
MD&A
MD&A is an introduction to the financial statements assisting the readers by
summarizing the objective, analysis of the financial performance, and financial
position at the end of the fiscal year.
The MD&A analysis is based on currently known facts, decisions, or conditions.
The currently known facts must be events or decisions that have already occurred, or
have been enacted, adopted, agreed upon, or contracted.
MD&A
The minimum requirements for MD&A are as follows:
The MD&A provides a description of the basic financial statements and explanations
to the reader about the differences in measurements and results of the
government-wide and fund financial statements.
GASBS 34 provides specific requirements for inclusion of condensed financial
statement information for comparison of this year to the prior.
Analyze the overall government financial position and explain significant differences
between this year and the prior.
Analyze the transaction and balance activities in each fund.
MD&A
Explain and analyze why there are variations between the beginning and the ending
budget amounts.
Describe significant capital assets and long-term debt activities.
If a government does not record, depreciation (modified approach), then GASB
requires descriptions of significant changes, comparison to established levels,
and actual versus estimated preservation in the condition of infrastructure
assets.
Explain the significant effects on the financial position or results of operations
resulting from currently known facts, decisions, or conditions.
MD&A
Explain and analyze why there are variations between the beginning and the ending
budget amounts.
Describe significant capital assets and long-term debt activities.
If a government does not record, depreciation (modified approach), then GASB
requires descriptions of significant changes, comparison to established levels,
and actual versus estimated preservation in the condition of infrastructure
assets.
Explain the significant effects on the financial position or results of operations
resulting from currently known facts, decisions, or conditions.
The primary financial essentials of
the general-purpose financial
statements are:
Government-wide
financial
statements
Fund financial
statements
Notes to the
financial
statements
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
The government-wide financial statements include the financial governmental
activities accounted for in the governmental funds and the business-like activities
in the enterprise funds.
The primary government is comprised of the governmental activities and business-like
activities.
Fiduciary funds are not included in the government-wide financials.
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Component units
Legally separated entities, are included in the government-wide financial statements
and the primary government because of their relationship.
Similar to commercial businesses, component units are as subsidiaries reported in
the commercial consolidated statements.
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
The government-wide financial statement presents using the accrual system and the
economic resources measurement.
The presentation of the governmental fund financial information convert to these
same principles in the government-wide financials, thus the seemingly “two sets
of books” appearance.
The enterprise funds use the accrual basis and economic resources measurement
focus, so they do not need converting.
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
The two sets of financial statements in the government-wide financials are
 Statement of net assets
 Statement of activities
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Statement of net assets
This fiscal year-end statement of net assets (balance statement) presents the assets
and liabilities.
The net assets are the difference between the assets and the liabilities.
The statement of net assets divides into three required categories
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Statement of net assets
Invested in capital assets, net of related debt.
This is the amount representing the “capital assets net of accumulated depreciation,
and reduced by the outstanding bonds, mortgages, notes or other borrowings that
are attributable to the acquisition, construction or improvement of those assets”.
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Statement of net assets
Restricted net assets.
This is the amount representing net assets that have external “creditor, grantors,
contributors, or laws or regulations of other governments” and internal
“constitutional provisions or enabling legislation” constraints placed upon them.
Permanent endowments or fund principle amounts divide into expendable and
nonexpendable components according to required perpetuity (continuance).
Unrestricted net assets.
These net assets do not meet the requirements of the previous two.
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Sample Statement of Net Assets
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Sample Statement of Net Assets
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Statement of activities.
The statement of activities is much like the income statement.
It is a summary of the activities taking a person from the beginning net asset number
to the ending asset number reported in the statement of net assets.
The statement of activities uses the net (expense) revenue format, which reveals the
“financial burden of each of the reporting government’s functions on its
taxpayers”.
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Statement of activities.
The statement of activities presents the governmental activity by functions and
business-type activities by segment.
Segments are defined as “identifiable activities reported as or within an enterprise
fund or another standalone entity for which one or more revenue bonds or other
revenue-backed debt instrument are outstanding”.
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Statement of activities.
Revenue presentation.
Revenue presentation divides into:
 Program revenues
 General revenues
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Statement of activities.
Program revenues
Program revenues derive from the program itself or parties outside of government
taxpayers.
Program revenues reduce the cost of the program financed by the government’s
general revenues.
Exchange or exchange-like transactions, such as water use charges, classify as
charges for services.
Another example is a capital asset renovation grant associated with a specific
program that reports separately from the other grants.
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Statement of activities.
General revenues
Taxes such as real estate taxes, sales tax, income taxes, and franchise taxes record
as general revenues.
Grants considered general revenue are different from program revenues because the
government decides how the grant amounts are used using allocation tables.
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Sample Statement of Activities
GOVERNMENTAL-WIDE FINANCIAL STATEMENTS
Sample Statement of Activities
FUND FINANCIAL STATEMENTS
Another section of the basic financial statements is the fund financial statements.
The fund financial statements divide into:
 Governmental funds
 Proprietary funds
 Fiduciary funds
FUND FINANCIAL STATEMENTS
The governmental and proprietary funds also report in the government-wide financial
statements but the fiduciary funds do not.
GASBS 34 lists funds as either major or combined together into one column since
some governments have a large number of funds to report.
The general fund is always a major fund and other funds qualify as a major fund if
meeting the following criteria:
Total assets, liabilities, revenues, or expenditures of the fund are at least 10% for all
funds in that category (i.e., either governmental or proprietary).
Total assets, liabilities, revenues, or expenditures of the fund are at least 5% of the
total for all governmental and enterprise funds combined
FUND FINANCIAL STATEMENTS
Governmental funds.
The funds listed in the governmental funds are general fund, special revenue funds,
capital projects funds, debt service funds, and permanent funds.
A balance sheet and a statement of revenues, expenditures, and changes in fund
balances are the two required governmental fund financial statements.
Both statements have major funds listed, a single column for the nonmajor funds,
and a total for all governmental funds.
FUND FINANCIAL STATEMENTS
Governmental funds.
Balance sheet.
The governmental fund balance sheet presents assets equaling the liabilities and the
fund balances.
The governmental funds use the modified accrual basis of accounting and current
financial resources measurement focus, so the balance sheet does not show
long-term assets or long-term liabilities.
The fund balances record as either nonspendable, restricted, committed, assigned, or
unassigned.
FUND FINANCIAL STATEMENTS
Governmental funds.
Balance sheet.
 Nonspendable is the portion of the fund balance “legally or contractually required
to be maintained intact”.
 Restricted funds balances are listed as restricted because the funds have an
imposed restriction from “creditors, grantors, contributors, or laws or regulations
of other governments”.
FUND FINANCIAL STATEMENTS
Governmental funds.
Balance sheet.
 Committed fund balances form from legislation, resolutions, or ordinances.
 Assigned fund balances are specific purpose amounts (e.g., a finance committee
delegates assigned amounts for specific purposes).
 Unassigned fund balances are the remaining amounts of the general fund.
BALANCE SHEET
Balance Sheet
displays ending
balances for all
asset and liability
accounts
(including fund
balance/reserve
accounts)
Individual
revenue and
expenditure
accounts are not
listed. The total
net difference
between
revenues and
expenditures is
displayed
BALANCE SHEET
Assets = Liabilities + Net Revenue/Expenditure
$137,405.33 = $135,016.49 + $2,388.84
The main
objective of
the balance
sheet is to
show the
assets
balanced to
the sum of
liabilities and
net revenues
and
expenditures
TRIAL BALANCE
The trial
balance
displays the
same basic
structure as
the balance
sheet, but
includes
beginning
balances and
YTD
debits/credits
as well as
ending
balances
STATEMENT OF REVENUE
Total
Budget
Month
YTD
Remain
%
Statement of
Revenue lists
the current
revenue for
the selected
month. It also
compares the
YTD revenue
to the budget
along with a
percentage of
the budget
that has been
realized and
how much is
left to realize
STATEMENT OF EXPENDITURES
Total
Budget
YTD
Remain %
Statement of
Expenditures
Month and
Encumbrance
s has the
same basic
layout as the
Statement of
Revenue, but
includes
encumbrance
information (if
encumbrance
accounting is
utilized)
SUMMARY FINANCIAL STATEMENT
This is an excellent report for commission/council
Summary
Financial
Statement
compares
revenues to
summarized
expenditures
and displays
the difference
from the budget
and ledger
standpoints
MONITORING FINANCIAL REPORTS
 Your basic financial reports need to be reviewed frequently
At least monthly (before month end close)
 This ensures your monthly and yearly financial reports are as
accurate as possible
 It is much easier to find and correct mistakes as they occur
rather than months later
 Just because it’s in the computer does not mean that it is
correct
RECOGNIZING PROBLEM ACCOUNTS
 Things to look for:
Over expenditures that need budget amendments
Posting errors that need correcting
Payables and/or receivables that need adjusting
“Due to” and/or “Due from” accounts
 Some “Red Flags” are:
Liability accounts with debit balances
Asset accounts with credit balances
Expenditure accounts greater than 100% of budget
Liability accounts with left over pennies
Recognizing Problem Accounts
Odd debit balances
Leftover pennies
Major Problem
A PROBLEM BALANCE SHEET
Recognizing Problem Accounts
OVER EXPENDITURE?
Recognizing Problem Accounts
POSTING ERROR?
QUESTIONS
1. Can you name two Government-Wide Financial Statements?
2. What are the basic Fund Financial Statements?
3. Is there a report in the software that compares revenues vs.
expenditures on the same report?
QUESTION #4 – THE TRIAL BALANCE
There are two accounts in the asset group below that stand out.
Which two? And why?
These two accounts warrant investigation
Assets normally have a debit balance
CONCLUSION
This concludes today’s presentation on
Basic Governmental Accounting
Any Questions?