Slide
16-1
Chapter Sixteen
Accounting for
State and Local
Governments
(Part 1)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-2
Governmental Accounting



McGraw-Hill/Irwin
Focuses on financial
reporting for non-profit
governmental agencies.
Many concepts are
similar to financial
accounting, but
terminology and
procedures differ.
Governmental
Accounting Standards
Board (GASB) generates
standards.
© The McGraw-Hill Companies, Inc., 2004
Slide
16-3
Governmental Accounting
User Needs
In Concepts Statement #1,
GASB identified 3 basic
groups of users of
governmental
accounting information:
 Citizenry
 Legislative and oversight
bodies
 Investors and creditors
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-4
GASB Statement No. 34
Requires the production of two sets of
statements:
Fund-Based Financial
Statements
Government-wide
Financial Statements
Shows restrictions on
the use of resources
and measures, in the
short run, revenues and
expenses from certain
activities.
Reports all revenues
and all costs of
providing services each
year and all resources
available to the
governmental unit.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-5
Reporting Diverse Governmental
Activities - Fund Accounting



Governmental units
have many different
types of activities.
No common
motivation links
these activities.
Therefore, each
activity operates
quasi-independent,
self-balancing sets of
accounts called
funds.
McGraw-Hill/Irwin
Examples include:








Public Safety
Sanitation
Health & Welfare
Education
Parks & Recreation
Judicial System
Water and Sewer
Employee Pensions
© The McGraw-Hill Companies, Inc., 2004
Slide
16-6
Accountability and Governmental
Accounting
Governmental Accounting Statements
attempt to answer 3 questions related
to accountability:
Where did the
financial resources
come from?
Where did the
financial
resources go?
McGraw-Hill/Irwin
What amount of
financial resources
is presently held?
© The McGraw-Hill Companies, Inc., 2004
Slide
16-7
Fund Accounting Classification
All funds fall into one of three
broad classifications.
Governmental
Funds
Proprietary
Funds
Fiduciary
Funds
Accounting for
activities related
to serving the
public.
Accounting for
business-type
activities.
Accounting for
financial
resources held
for others in a
trustee capacity.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-8
Fund Accounting Classification
Governmental Funds
Governmental Funds
General
Fund
McGraw-Hill/Irwin
Special
Revenue
Fund
Capital
Projects
Fund
Debt
Service
Fund
Permanent
Fund
(Endowments)
© The McGraw-Hill Companies, Inc., 2004
Slide
16-9
Governmental Funds
General Fund
 Used to account for all
financial resources
except those
accounted for in other
funds.
 In 2001, 60% of
Baltimore’s
governmental funds
were accounted for in
the General Fund.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-10
Governmental Funds
Special Revenue Fund
 Expenditures are
legally restricted.
 Revenues that must be
spent for specific
purposes.
 St. Paul, MN, requires
that money received
for the sale of zoo
animals, must be
spent to acquire NEW
animals for the zoo.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-11
Governmental Funds
Capital Projects Fund
 Used to account for
costs to acquire or
build major
governmental
facilities.
 The asset is not
recorded in this
account, but the funds
to acquire or build it
are accounted for
here.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-12
Governmental Funds
Debt Service Fund
 Used to account for
financial resources
collected to pay longterm liabilities and
interest.
 In 2001, Birmingham
reported paying out
$11 million in principal
payments and $15
million in interest from
its debt service funds.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-13
Governmental Funds
Permanent Fund (Endowments)
 Used to account for
funds donated to the
government by
external donors.
 In 2001, Dallas
reported nearly $8
million in funds
donated to take care of
city parks.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-14
Fund Accounting Classification
Proprietary Funds
Proprietary Funds
Enterprise Fund
McGraw-Hill/Irwin
Internal Service
Fund
© The McGraw-Hill Companies, Inc., 2004
Slide
16-15
Proprietary Funds
Enterprise Fund

Used to account for any government activity that is
financed by user charges.

An activity MUST be accounting for here if, any one of
the conditions below are met . . .
Net revenues
provide the
security for the
activity’s debts.
The the law
requires costs to
be recovered
from user fees.
Fees are set high enough to
recover costs..
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-16
Proprietary Funds
Internal Service Fund
 Used for any unit that
provides services to
the OTHER
governmental
departments.
 Inter-departmental
fees are charged.
 Tennessee Tech
University charges the
departments for the
use of University
vehicles.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-17
Fund Accounting Classification
Fiduciary Funds
Fiduciary Funds
(Only used for funds
held for external parties)
McGraw-Hill/Irwin
Investment
Trust Funds
Private Purpose
Trust Funds
Pension
Trust Funds
Agency
Funds
© The McGraw-Hill Companies, Inc., 2004
Slide
16-18
Coverage of Fund Accounting
Procedures
Governmental
Funds
Proprietary
Funds
Fiduciary
Funds
McGraw-Hill/Irwin
Fund-Based Financial
Statements
Use the current financial
resources measurement focus
and modified accrual
accounting for the timing of
revenue and expenditure
recognition.
Use the economic resources
measurement focus and
accrual accounting for the
timing of revenue and expense
recognition.
Use the economic resources
measurement focus and
accrual for the timing of
revenue and expense
recognition.
Government-Wide
Financial Statements
Use the economic resources
measurement focus and
accrual accounting for the
timing of revenue and expense
recognition.
Use the economic resources
measurement focus and
accrual accounting for the
timing of revenue and expense
recognition.
Not applicable
© The McGraw-Hill Companies, Inc., 2004
Slide
16-19
Let’s look at
an overview of
the
GovernmentWide
Statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-20
Government-Wide Financial
Statements
Two separate
statements are
required:
Statement of Net
Assets
&
Statement of
Activities
McGraw-Hill/Irwin
The economic
resources
measurement focus
requires reporting of
ALL assets and
liabilities.
© The McGraw-Hill Companies, Inc., 2004
Slide
16-21
Exh.
16-1
Statement of Net Assets
Governmental Business-Type
Activities
Activities
ASSETS:
Cash
Other Current Assets
Capital Assets
Total Assets
LIABILITIES:
Note
that we
A/P
Noncurrent
keep
theLiabilities
- Due within one year
Governmental
- Due in more than one year
Total Liabilities
Activities
NET ASSETS:
separate
Invested in from
Capital Assets, Net of Debt
Restricted for:
the BusinessCapital Projects
Debt Service
TypeUnrestricted
Activities.
Total Net Assets
McGraw-Hill/Irwin
$
130
430
2,750
3,310
Total
$
100 $
1,580
2,950
4,630 $
$
230
$ 2,010
$ 5,700
$ 7,940
$
750 $
$
400
1,800
2,950 $
180 $
580
700 $ 2,500
1,110 $ 4,060
$
1,410 $
2,110 $ 3,520
$
50
140
80
1,680 $
60
30
2,200
230 $
980
$
50
$
200
$
110
$ 3,880
© The McGraw-Hill Companies, Inc., 2004
Slide
16-22
Exh.
16-1
Statement of Net Assets
Governmental Business-Type
Activities
Activities
Total
ASSETS:
Cash
Other Current Assets
Capital Assets
Total Assets
$
100 $
130 $
230
Also note that
1,580
430 $ 2,010
2,950
2,750 $ 5,700
this statement
$
4,630 $
3,310 $ 7,940
does not
give
LIABILITIES:
A/P
$
750 $
230 $
980
information
Noncurrent Liabilities
- Due within one year
400
180 $
580
about
- Due in more than one year This is consistent
1,800
700 $ the
2,500
with
Fiduciary
Total Liabilities
$
2,950 $
1,110 $ 4,060
economic resources
NET ASSETS:
Funds
management focus which only
Invested in Capital Assets, Net of Debt $
Restricted for:
Capital Projects
Debt Service
Unrestricted
Total Net Assets
$
1,410 $
2,110 $ 3,520
includes assets and liabilities
50
- $
50
that are available
to
use
for
140
60 $
200
80
30 $
110
governmental
purposes.
McGraw-Hill/Irwin
1,680 $
2,200 $ 3,880
© The McGraw-Hill Companies, Inc., 2004
Slide
16-23
Exh.
16-2
Statement of Activities
Function
Governmental Activities:
- General Government
- Public Safety
- Public Works
- Education
Total Gov't Activities
Net (Expense) Revenue
Program Governmental Business-Type
Expenses Revenues
Activities
Activities
Total
$
3,200 $ 1,400 $
9,700
880
2,600
600
8,400
300
$ 23,900 $ 3,180 $
Business-Type Activities:
- Water
3,600
4,030
- Sewer
4,920
5,610
- Airport
2,300
3,120
Total Business-Type
Activities
$ 10,820 $ 12,760 $
Total Government
$ 34,720 $ 15,940 $
McGraw-Hill/Irwin
(1,800)
(8,820)
(2,000)
(8,100)
(20,720) $
$
(1,800)
(8,820)
(2,000)
(8,100)
- $ (20,720)
The net for a given
430
430
function is determined
690
690
horizontally, 820
while the
820
totals for expenses
- $revenues
1,940 $are
1,940
and
(20,720) $
$ (18,780)
determined1,940
vertically.
© The McGraw-Hill Companies, Inc., 2004
Slide
16-24
Exh.
16-2
Statement of Activities
Continued
Function
Total Government
General Revenues:
- Property Taxes
- Investment Earnings
- Transfers
Total Gen'l Revenues
Change in Net Assets
Beginning Net Assets
Ending Net Assets
McGraw-Hill/Irwin
Net (Expense) Revenue
Program Governmental Business-Type
Expenses Revenues
Activities
Activities
Total
$ 34,720 $ 15,940 $
(20,720) $
1,940 $ (18,780)
$
20,400
420
600
21,420 $
$ 20,400
70
490
(600)
(530) $ 20,890
700 $
980
1,680 $
1,410 $ 2,110
790
1,770
2,200 $ 3,880
The general
revenues are
shown
separately at
the bottom of
the
statement.
$
$
$
© The McGraw-Hill Companies, Inc., 2004
Slide
16-25
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-26
Fund-Based Financial Statements
Two separate
statements are required:
Balance Sheet
&
Statement of Revenues,
Expenditures, and
Changes in Fund
Balance
McGraw-Hill/Irwin
Fund-Based
statements
include
information on
fiduciary funds.
© The McGraw-Hill Companies, Inc., 2004
Slide
16-27
Fund-Based Financial Statements
These
statements will
differ from the
GovernmentWide financial
statements for
three reasons.
3
McGraw-Hill/Irwin
 The proprietary funds
are reported in a
separate statement.
 The current financial
resources
measurement basis is
used.
 The modified accrual
accounting approach
is used.
© The McGraw-Hill Companies, Inc., 2004
Slide
16-28
Exh.
16-3
Fund Accounting Balance
Sheet Example
General Fund
ASSETS:
Cash
Investments
Receivables
Supplies & Materials
Total Assets
LIABILITIES:
A/P
Notes Payable
Total Liabilities
FUND BALANCES
Reserved for:
Supplies
Encumbrances
Debt Service
Unreserved:
General Fund
Special Revenue Fund
Capital Projects Fund
Total Fund Balances
Total Liabilities and Fund Balances
McGraw-Hill/Irwin
$
$
$
$
$
$
$
Library
Program
Other Gov't
Funds
Total Gov't
Funds
40 $
580
120
10
750 $
10 $
120
200
10
340 $
50 $
200
210
10
470 $
100
900
530
30
1,560
230 $
300
530 $
170 $
170 $
110 $
100
210 $
510
400
910
10 $
120
-
10 $
30
-
10 $
40
110
90
220 $
750 $
130
170 $
340 $
20
80
260 $
470 $
30
190
110
90
150
80
650
1,560
© The McGraw-Hill Companies, Inc., 2004
Slide
16-29
Exh.
16-3
Fund Accounting Balance
Sheet Example
General Fund
ASSETS:
Cash
Investments
Receivables
Supplies & Materials
Total Assets
LIABILITIES:
A/P
Notes Payable
Total Liabilities
FUND BALANCES
Reserved for:
Supplies
Encumbrances
Debt Service
Unreserved:
General Fund
Special Revenue Fund
Capital Projects Fund
Total Fund Balances
Total Liabilities and Fund Balances
McGraw-Hill/Irwin
$
40 $
580
120
10
750 $
Library
Program
Other Gov't
Funds
10 $
120
200
10
340 $
50 $
200
210
10
470 $
100
900
530
30
1,560
100
210 $
510
400
910
Internal Service Funds
are included in separate
$
statements for
$
230 $
170 Funds.
$
110 $
Proprietary
$
300
530 $
170 $
The “current financial
resources”
$
10 $
10 $
10 $
120
30 is used.
40
measurement
-
$
$
-
110
90
Modified
accrual
130
20
-is used.
80
accounting
220 $
750 $
170 $
340 $
Total Gov't
Funds
260 $
470 $
30
190
110
90
150
80
650
1,560
© The McGraw-Hill Companies, Inc., 2004
Slide
16-30
Exh.
16-3
Fund Accounting Balance
Sheet Example
General Fund
ASSETS:
Cash
Investments
Receivables
Supplies & Materials
Total Assets
Note that the
LIABILITIES:
statement has a
A/P
separate
Notes Payable column
Total Liabilities
for the General
FUND BALANCES
Fund
and for each
Reserved for:
Supplies
fund
identified as
Encumbrances
Debt
Service
a “major”
fund.
Unreserved:
General Fund
Special Revenue Fund
Capital Projects Fund
Total Fund Balances
Total Liabilities and Fund Balances
McGraw-Hill/Irwin
$
$
$
$
$
$
$
Library
Program
Other Gov't
Funds
Total Gov't
Funds
Two criteria determine whether
40 $
10 $
50 $
100
as900
580 a fund
120 is classified
200
120
200
210
530
“major”:
10
10
10
30
$
340
$
470 $
1,560
1.750 Total
assets,
liabilities,
revenues,
or expenditures
230 $
170 $
110 $
510
10%
300 are at least
100 of the
400
530 $
170 $
210 $
corresponding
total for 910
all
funds of the same category.
10 $
10 $
10 $
30
2.120
Total assets,
liabilities,
30
40
190
- or expenditures
110
110
revenues,
90 are at - least 5%
- of the 90
130
20
150
corresponding
for
all
other
80
80
220 $
170 $ combined.
260 $
650
funds
750 $
340 $
470 $
1,560
© The McGraw-Hill Companies, Inc., 2004
Slide
16-31
Statement of Revenues, Expenditures, &
Changes in Fund Balances - Example
General Fund
REVENUES
- Property Taxes
- Investment Earnings
- Program Revenues
Total Revenues
EXPENDITURES:
Current:
General Government
Public Safety
Education
Debt Service:
Principal
Interest
Capital Outlay
Total Expenditures
$
$
$
$
Library
Program
Other Gov't
Funds
Exh.
16-4
Total Gov't
Funds
17,200 $
100
500
17,800 $
900 $
200
100
1,200 $
2,300 $
180
2,500
4,980 $
20,400
480
3,100
23,980
3,400 $
5,100
6,700
- $
800
100 $
400
-
1,100
16,300 $
300
1,100 $
1,000
600
3,300
5,400 $
3,500
5,500
7,500
1,000
600
4,700
22,800
Continue
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-32
Exh.
16-4
Statement of Revenues, Expenditures, &
Changes in Fund Balances - Example
Continued
OTHER FINANCING SOURCES:
Bond Proceeds
Transfers In
Transfers Out
Total Other Financing Sources and
Uses
General Fund
Change in Fund Balance
Fund Balances - Beginning
Fund Balances - Ending
McGraw-Hill/Irwin
Library
Program
Other Gov't
Funds
Total Gov't
Funds
$
- $
(1,300)
20
-
$
1,000 $
580
(1,000)
$
(1,300) $
20
$
580
$
(700)
$
200
20
750
120
50
170
$
160
100
260
$
480
170
650
$
$
$
$
$
1,000
600
(2,300)
© The McGraw-Hill Companies, Inc., 2004
Slide
16-33
Let’s look at the
accounting
procedures for the
Governmental
Accounts for both
the Fund-Based and
Government-Wide
Statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-34
Recording Budgetary Entries
Purposes of the budget,
per the GASB:
Expresses public policy.
2. Serves as an expression
of financial intent.
3. Provides control by
establishing spending
limits.
4. Offers a means of
evaluating performance.
1.
McGraw-Hill/Irwin
Budget
information
for the
General Fund
and for each
of the major
Special Funds
must be
presented.
© The McGraw-Hill Companies, Inc., 2004
Slide
16-35
Recording Budgetary Entries
For example, assume a town enacts a motel excise tax to
promote tourism and conventions. For 2004, the tax is
expected to generate $490,000 in Special Revenues. Of
the total, $200,000 is designated for salaries, $30,000 for
utilities, $80,000 for advertising, and $90,000 for supplies.
Date
Description
Estimated Revenues - Tax Levy
Appropriations - Salaries
Appropriations - Utilities
Appropriations - Advertising
Appropriations - Supplies
Fund Balance
Debit
490,000
Prepare the journal entry to
record the Special Revenue
Fund budget.
McGraw-Hill/Irwin
Credit
200,000
30,000
80,000
90,000
90,000
© The McGraw-Hill Companies, Inc., 2004
Slide
16-36
Encumbrances

In a governmental unit, purchase
commitments and contracts are
recorded, even though they may not
yet represent liabilities.
 A recorded commitment or contract is
called an “encumbrance”.
Budget
McGraw-Hill/Irwin
Encumbrance
Actual
© The McGraw-Hill Companies, Inc., 2004
Slide
16-37
Encumbrances

For Fund-Based Financial
Statements:
 An entry is required to record the
encumbrance.
 An entry is required when the bill is
received.

For Government-Wide Financial
Statements:
 No entry is required to record the
encumbrance.
 An entry is required when the bill is
received.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Encumbrances – Example
Fund-Based Statements
Slide
16-38
Drye Township has budgeted office supplies
for $180,000 for 2004. On May 15, Drye
Township places an order for $16,000 office
supplies with Ye Olde Office Supplies.
General Fund - Drye Township
Date
Description
15-May Encumbrances Control
Fund Balance - Reserve
For Encumbrances
Debit
Credit
16,000
16,000
Remember, this entry is only recorded for Fund-Based
Record the order
in Drye Township’s books.
Financial Statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-39
Encumbrances – Example
Fund-Based Statements
On May 17, the supplies are received with a bill for
$15,680 (some of the items went on sale on May 16,
and the city was given the sale price).
General Fund - Drye Township
Date
Description
17-May Supplies Inventory
Vouchers
Payable
Record
the receipt
of
Debit
15,680
Credit
the supplies in 15,680
Drye Township’s
books
for the
FundThis
is
the
account
title
typically
Fund Balance - Reserve
Based
Statements. accounting
used in governmental
in
For Encumbrances
16,000
placeControl
of Accounts Payable. 16,000
Encumbrance
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-40
Encumbrances – Example
Government-Wide Statements
On May 17, the supplies are received with a bill for
$15,680 (some of the items went on sale on May 16,
and the city was given the sale price).
General Fund - Drye Township
Date
Description
17-May Supplies Inventory
Vouchers Payable
Debit
15,680
Credit
15,680
Record the receipt of the supplies in
Note
that with the
Government-Wide
Drye
Township’s
books
for the
Financial Statements, no entry is
Government-Wide
Statements.
necessary for the encumbrances used
with the Fund-Based Statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-41
Fund-Based Statements
Fixed Assets
While the expenditure for a
fixed asset is usually recorded
in the General Fund . . .
. . . the fixed asset itself is
recorded in the General Fixed
Assets Account Group.
Depreciation is not recorded in
the governmental fund, since
net income is not a concept
relevant to governmental
units.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-42
Government-Wide Statements
Fixed Assets
Historically, recording of fixed assets
in the General Fixed Assets Account
Group was optional.
GASB Statement No. 34 requires a
record of ALL capital assets in the
Statement of Net Assets in the
government-wide statements.
 Depreciation expense is recorded.
 Governments have 4 years to
capitalize previously acquired
assets.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-43
Recognition of Revenues
Nonexchange Transactions
Classifications
Derived Tax Revenues
 Imposed Nonexchange
Revenues
 Government-mandated
Nonexchange
Transactions
 Voluntary Nonexchange
Transactions

McGraw-Hill/Irwin
For GovernmentWide Statements,
record the revenues
at the “time of
eligibility”.
For Fund-Based
Statements, record
the revenues when
they become
“available for
recognition”.
© The McGraw-Hill Companies, Inc., 2004
Slide
16-44
Issuance of Bonds
Government-Wide
Financial Statements
Increase the Cash and
the Debt.
Fund-Based Financial
Statements
Increase Cash and Other
Financing Sources.
Drye Township issues $50,000 in bonds for new
sidewalks.
Date
Description
Cash
Prepare
journal
Bondsthe
Payable
Debit
Credit
50,000
entry to record the 50,000
bonds for government-wide statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-45
Issuance of Bonds
Government-Wide
Financial Statements
Increase the Cash and
the Debt.
Fund-Based Financial
Statements
Increase Cash and Other
Financing Sources.
Drye Township issues $50,000 in bonds for new
sidewalks.
Date
Description
Debit
Credit
Cash
50,000
Prepare
the journal entry to record the
Other Financing
bonds
for fund-based statements. 50,000
Sources
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-46
Payment of Long-Term Liabilities
Government-Wide
Financial Statements
Record principle and
interest as with GAAP.
Fund-Based Financial
Statements
Record expenditures in
the Debt Service Fund.
Drye Township makes a $10,000 payment on a loan that
includes $1,000 in interest.
Date
Description
Debit
Credit
Note Payable
9,000
Prepare
the
journal entry to record
Interest
Expense
1,000the loan
Cashfor government-wide statements.
10,000
payment
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
16-47
Payment of Long-Term Liabilities
Government-Wide
Financial Statements
Record principle and
interest as with GAAP.
Fund-Based Financial
Statements
Record expenditures in
the Debt Service Fund.
Drye Township makes a $10,000 payment on a loan that
includes $1,000 in interest.
Date
Description
Expenditure - N/P
Prepare
the journal
entry to
Expenditure
- Interest
Cash
payment
for fund-based
McGraw-Hill/Irwin
Debit
Credit
9,000
record
1,000the
loan
statements. 10,000
© The McGraw-Hill Companies, Inc., 2004
Slide
16-48
End of Chapter 16
Ms. Chairperson,
what fund should
we charge your
Paris trip to?
McGraw-Hill/Irwin
Since I voted for a
balanced budget,
let’s charge it to
the Debt Service
Fund.
© The McGraw-Hill Companies, Inc., 2004