Learning Objective 5
Understand and explain the
basic differences in the
measurement focus and basis
of accounting between
governmental and private sector
accounting.
12-1
Measurement Focus And Basis Of Accounting
(MFBA)
 Measurement Focus

What flows to measure for operations.
 Basis of Accounting

When should transactions and events be recognized
in the financial statements.
12-2
Measurement Focus And Basis Of Accounting
(MFBA)
12-3
Measurement Focus And Basis Of Accounting
(MFBA)
12-4
MFBA: Governmental Activities
 Measure flow:
Current financial resources

 Basis of Accounting:
Modified accrual basis of accounting

•
Present a Statement of Revenues and
Expenditures and Changes in Fund Balance
- shows financial resources received and spent.
- shows change in net financial resources
available for spending in the near future.
12-5
MFBA: Current Financial Resources
 Current financial resources:

Cash, property tax receivables, prepaids, and
supplies inventories.
 Claims against current financial resources:

Wages, payroll taxes, payables to vendors, and
liabilities expected to be paid in the near future
(typically within 60 days after the year-end).
12-6
MFBA: Proprietary and Fiduciary Activities
 Measure flow:

All economic resources
 Basis of Accounting:

Accrual basis of accounting
• Present a Statement of Revenues and Expenses
- shows the change in the economic condition
• Also present a Statement of Cash Flows
12-7
Measurement Focus and Basis of Accounting
 The modified accrual basis is used in funds
that have a flow of current financial
resources measurement focus

The five governmental funds have this focus
 The accrual basis is used in funds that have a
flow of economic resources measurement
focus

Proprietary funds and fiduciary funds have this
focus
 The government-wide financial statements
are based on the accrual basis
12-8
Measurement Focus and Basis of Accounting
 Modified Accrual Basis

Revenues: Recognize in period in which they
become available and measurable.


Available means: Collectible within the current
period or soon enough thereafter to be used to pay
current period liabilities.
Expenditures: Recognize in the accounting
period in which the liabilities are both
measurable and incurred and are payable out of
current financial resources.

One exception exists for interest on general longterm liabilities.
12-9
Measurement Focus and Basis of Accounting
 Recognition of revenue: how revenues are recognized
depends on the category
1.
Derived tax revenues, resulting from assessments on exchange
transactions )‫االيرادات الضريبية المتأتية (ضرائب الدخل – ضرائب المبيعات‬


2.
The asset is recognized when the underlying transaction occurs or
resources are received, whichever comes first.
Revenue recognition depends on the accounting basis used to measure
the transaction.
Imposed nonexchange revenues, resulting from assessments on
nongovernmental entities, including individuals – ‫ضرائب عقارية‬
‫غرامات‬


The asset is recognized when the government has an enforceable legal
claim to the resources or the resources are received, whichever comes
first.
Revenue recognition is made in the period when use of the resources
for current expenditures is first permitted or required, or at the time
the asset is recorded if no time restriction on the fund’s use of the
12-10
resources exists.
Measurement Focus and Basis of Accounting
 Recognition of revenue: how revenues are recognized
depends on the category
3.
Government-mandated nonexchange transactions, resulting from
one governmental unit’s provision of resources to a governmental
unit at another level and the requirement that the recipient use the
resources for a specific purpose
‫التعامالت الحكومية غير التبادلية مثل التحويالت من جهة حكومية لجهة حكومية أخري‬
‫لمساعدتها في تغطية تكاليف برنامج حكومي الزامي‬
4.
Voluntary nonexchange transactions, resulting from legislative or
contractual agreements, other than exchanges
‫التعامالت غير التبادلية التطوعية مثل تحويل مبالغ من األفراد او جهات حكومية لتحقيق‬
‫هدف اجتماعي معين غير الزامي‬
12-11
Practice Quiz Question #4
The modified accrual basis of accounting:
a. recognizes revenues when earned and
expenditures when incurred.
b. recognizes revenues when they become
available and measureable and expenditures
when liabilities become measurable and
incurred.
c. recognizes revenues when earned and
expenses when incurred
d. recognizes revenues when they become
available and measureable and expenditures
when they become available and spendable.
12-12
Practice Quiz Question #4
The modified accrual basis of accounting:
a. recognizes revenues when earned and
expenditures when incurred.
b. recognizes revenues when they become
available and measureable and expenditures
when liabilities become measurable and
incurred.
c. recognizes revenues when earned and
expenses when incurred
d. recognizes revenues when they become
available and measureable and expenditures
when they become available and spendable.
12-13
Learning Objective 6
Understand and explain basic
budgeting concepts in
governmental accounting.
12-14
Budgetary Aspects of Governmental Operations
 Budgets


Used in governmental accounting to assist in
management control and to provide the legal
authority to levy taxes, collect revenue, and
make expenditures in accordance with the
budget
Types of budgets:

Operating budgets

Capital budgets
12-15
Budgetary Aspects of Governmental Operations
 Appropriation: The statutory authorization for spending a
budgeted amount during a coming year. ‫تخصيص‬
 Annual Budgets for the General Fund and the Special
Revenue Funds are always recorded in the general ledger
for control purposes.

Also done for Capital Projects Funds and Debt Service Funds if
useful.
 Encumbrances: Commitments related to unperformed
(executory) contracts for goods or services. ‫االرتباط‬
 Special general ledger accounts are used to record
encumbrances—the purpose is to prevent spending more
than has been appropriated.
 Budget entries have no effect on reported operations.
12-16
Introduction: Budget / Expenditure Process
1. Budget—Recorded in the books

CAPITAL LETTERS (legally binding)
2. Expenditures


Appropriation (authorization of the expenditure)
Encumbrance (set aside or reserve part of the
budgetary appropriation)

Expenditure

Disbursement
12-17
Budgetary Aspects of Governmental Operations
 Recording the Operating Budget
Assume that at January 1, 20X1, the first day of the new fiscal period,
the city council of Barb City approves the operating budget for the
general fund, providing for $900,000 in revenue and $850,000 in
expenditures. Approval of the budget provides the legal authority to
levy the local property taxes and to appropriate resources for the
expenditures. The entry made in the general fund’s accounting records
on this date is as follows:
January 1, 20X1
(1) ESTIMATED REVENUES CONTROL
APPROPRIATIONS CONTROL
BUDGETARY FUND BALANCE—UNASSIGNED
900,000
850,000
50,000
Record general fund budget for year.
12-18
Budgetary Aspects of Governmental Operations
 The ESTIMATED REVENUES CONTROL account is an
anticipatory asset.
 The APPROPRIATIONS CONTROL account is an
anticipatory liability.
 The excess of estimated revenues over anticipated
expenditures is the budget surplus and is recorded to
BUDGETARY FUND BALANCE—UNASSIGNED.
 Some approved budgets have budget deficits in which
expected expenditures exceed anticipated revenue.

These budgets are recorded with a debit to BUDGETARY
FUND BALANCE—UNASSIGNED.
12-19
Example: Budget / Expenditure Process
Assume a municipality approves the following budged:
 $900,000 in Revenues
 $850,000 in Appropriations
An appropriation of $15,000 is approved, but the final voucher
is paid for only $14,000.
12-20
Example: Budget / Expenditure Process
1. Budget
ESTIMATED REVENUES CONTROL
APPROPRIATIONS CONTROL
BUDGETARY FUND BALANCE—UNASSIGNED
900,000
850,000
50,000
2. Expenditures

Appropriation



Authorization of the expenditure (Annual Budget)
Person with authority (each expenditure authorized)
Encumbrance
ENCUMBRANCES
BUDGETARY FUND BALANCE—ASSIGNED FOR ENC.
15,000
15,000
12-21
Example: Budget / Expenditure Process
2. Expenditures

Expenditure
BUDGETARY FUND BALANCE—ASSIGNED FOR ENC.
15,000
ENCUMBRANCES

15,000
Disbursement
Expenditures
14,000
Vouchers Payable
Vouchers Payable
Cash
14,000
14,000
14,000
12-22
Text Page 837
12-23
Practice Quiz Question #4
Why to state and local governments record
encumbrances?
a. To ensure that the entity earns sufficient
revenues to achieve profitability.
b. To ensure that the entity does not spend more
than has been appropriated.
c. To ensure that all sub-entities within the
organization are not encumbered.
d. To ensure that the entity spends at least as
much as has been appropriated.
12-24
Practice Quiz Question #4
Why to state and local governments record
encumbrances?
a. To ensure that the entity earns sufficient
revenues to achieve profitability.
b. To ensure that the entity does not spend more
than has been appropriated.
c. To ensure that all sub-entities within the
organization are not encumbered.
d. To ensure that the entity spends at least as
much as has been appropriated.
12-25
Learning Objective 7
Make calculations and record
journal entries for the general
fund.
12-26