Governmental Accounting and Reporting - CPE Store · Chapter 1 – Governmental Accounting: An Overview 2 Short Quiz Indicate whether each of the following is true or false. 1. Governmental

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GovernmentalAccounting andReporting 2nd Edition

Governmental Accounting and Reporting

2nd Edition

Copyright 2014 © by Delta Publishing. All rights reserved. CPE Edition published by The CPE Store, Inc., www.cpestore.com, 1-800-910-2755. Reprinted with permission. All Learning Objectives are written by The CPE Store, Inc., which owns the copyrights thereto. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permit-ted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permis-sion of the Publisher. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or complete-ness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Printed in the United States of America

Course Information

Course Title: Governmental Accounting and Reporting Learning Objectives:

Recognize how governmental accounting differs from corporate financial accounting Identify which pronouncements have the highest level of authority for state and local govern-

ments Discern which type of fund accounts for the external portion of investment pools reporting by the

sponsoring government Ascertain which two financial statements are required for governmental funds Identify the basis of accounting used by proprietary funds Recognize which step in the acquisition of goods and services occurs first Discern which basis of accounting is used by fiduciary funds Identify which type of bonds consist of debt typically issued for one or two years and are usually

secured by specific tax revenue, which must first be used to repay the debt Recognize the type of financial statements which are required for governmental funds Spot the correct accounting equation for the enterprise fund Recognize the basic criterion used by GASB 34 to determine the reporting entity for a govern-

mental unit Pinpoint which GASB Statement requires additional disclosures for defined benefit plans and dis-

closures by the employers Subject Area: Accounting (Governmental) Prerequisites: None Program Level: Overview Program Content: This course on accounting for governmental entities is intended to be used by anyone who would like to gain knowledge of accounting and financial reporting currently recommended for state and local governmental units. The course provides an overview of (1) the fundamental concepts underly-ing state and local governmental accounting and reporting, (2) the importance of budgetary accounting in government, and (3) the recognition rules and journal entries related to governmental financing. It also describes (1) the accounts and journal entries related to transactions specific to governmental entities, (2) the process of defining the governmental reporting entity, (3) the components of the comprehensive annual financial report (CAFR), (4) the reporting requirements for government-wide and fund-based financial statements, and (5) other required information in the CAFR. Advance Preparation: None Recommended CPE Credit: 7 hours

Table of Contents Chapter 1 – Governmental Accounting: An Introduction .................................................................... 1

Learning Objectives ............................................................................................................................. 1 Introduction.......................................................................................................................................... 1 Characteristics of Nonbusiness Entities................................................................................................ 1 Differences between Governmental and Private Sector Accounting ...................................................... 2 Background of Governmental Accounting ............................................................................................ 3 Major Concepts of Governmental Accounting ....................................................................................... 4

Elements of Financial Statements .................................................................................................... 4 Expendability of Resources versus Capital Maintenance Objectives ................................................. 5 Definitions and Types of Funds ........................................................................................................ 5

Financial Reporting of Governmental Entities ....................................................................................... 9 Fund-Based Financial Statements: Governmental Funds ............................................................... 10 Measurement Focus and Basis of Accounting ................................................................................ 13 Basis of Accounting—Governmental Funds ................................................................................... 14 Basis of Accounting—Proprietary Funds ........................................................................................ 19 Basis of Accounting—Fiduciary Funds ........................................................................................... 19

Budgetary Aspects of Governmental Operations ................................................................................ 19 Recording the Operating Budget .................................................................................................... 20

Accounting for Expenditures .............................................................................................................. 21 The Expenditure Process ............................................................................................................... 21 Classification of Expenditure Transactions and Accounts ............................................................... 23 Outstanding Encumbrances at the End of the Fiscal Period ............................................................ 24 Outstanding Encumbrances Are Nonlapsing at Year-End ............................................................... 26 Expenditures for Inventory ............................................................................................................. 27 Accounting for Fixed Assets ........................................................................................................... 29 Long-Term Debt and Capital Leases .............................................................................................. 30 Investments ................................................................................................................................... 30

Interfund Activities ............................................................................................................................. 31 (1) Interfund Loans......................................................................................................................... 31 (2) Interfund Services Provided and Used ...................................................................................... 32 (3) Interfund Transfers ................................................................................................................... 32 (4) Interfund Reimbursements ........................................................................................................ 33

Overview of Accounting and Financial Reporting for the General Fund ............................................... 34 Comprehensive Illustration of Accounting for the General Fund .......................................................... 35

Adoption of the Budget................................................................................................................... 35 Property Tax Levy and Collection ................................................................................................... 37 Other Revenue .............................................................................................................................. 38 Expenditures .................................................................................................................................. 38 Acquisition of Capital Asset ............................................................................................................ 39 Interfund Activities.......................................................................................................................... 40 Adjusting Entries ............................................................................................................................ 40 Closing Entries............................................................................................................................... 41 General Fund Financial Statement Information ............................................................................... 42

Chapter Summary.............................................................................................................................. 45 Review Questions .............................................................................................................................. 46 Review Answers ................................................................................................................................ 49

Chapter 2 – Special Funds and Financial Reporting .......................................................................... 53

Learning Objectives ........................................................................................................................... 53 Introduction........................................................................................................................................ 53 Governmental Funds Worksheets ...................................................................................................... 56 Special Revenue Funds ..................................................................................................................... 56 Capital Projects Funds ....................................................................................................................... 58

Why Capital Projects Funds Exist................................................................................................... 59

Table of Contents

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Illustrative Transactions ................................................................................................................. 59 Capital Projects Fund Expenditures ............................................................................................... 60 Financial Statement Information for the Capital Projects Fund ........................................................ 62

Debt Service Funds ........................................................................................................................... 62 Illustrative Transactions ................................................................................................................. 64 Financial Statement Information for the Debt Service Fund ............................................................ 66

Permanent Funds .............................................................................................................................. 66 Illustrative Transactions ................................................................................................................. 67

Governmental Funds Financial Statements ........................................................................................ 68 Proprietary Funds .............................................................................................................................. 71 Enterprise Funds ............................................................................................................................... 72

Illustrative Transactions ................................................................................................................. 73 Financial Statements for the Proprietary Funds .............................................................................. 75

Internal Service Funds ....................................................................................................................... 77 Establishment and Operation of Internal Service Funds.................................................................. 78 Illustrative Transactions ................................................................................................................. 78 Financial Statements for Internal Service Funds ............................................................................. 80

Fiduciary Funds ................................................................................................................................. 82 Trust Funds ....................................................................................................................................... 83

Illustration of Private-Purpose Trust Fund ....................................................................................... 83 Agency Funds.................................................................................................................................... 85

Agency funds for Revenue Collection ............................................................................................. 86 Illustrative Transactions in an Agency Fund ................................................................................... 86

The Government Reporting Model ..................................................................................................... 87 Four Major Issues .......................................................................................................................... 87 Government Financial Reports ....................................................................................................... 89 Government-Wide Financial Statements ........................................................................................ 89 Reconciliation Schedules ............................................................................................................... 93 Budgetary Comparison Schedule ................................................................................................... 95 Management’s Discussion and Analysis ......................................................................................... 96 Notes to the Government-Wide Financial Statements ..................................................................... 96 Other Financial Report Items ......................................................................................................... 97 Interim Reporting ........................................................................................................................... 97 Auditing Governmental Entities ...................................................................................................... 98

Additional Considerations .................................................................................................................. 98 Special-Purpose Governmental Entities ......................................................................................... 98 Financial Reporting for Pensions and Other Postemployment Benefits Plans ................................. 99

Chapter Summary............................................................................................................................ 101 Review Questions ............................................................................................................................ 103 Review Answers .............................................................................................................................. 106

Glossary ............................................................................................................................................. 111 Index .................................................................................................................................................. 129

Chapter 1

Governmental Accounting: An Overview Learning Objectives

Recognize how governmental accounting differs from corporate financial accounting Identify which pronouncements have the highest level of authority for state and local govern-

ments Discern which type of fund accounts for the external portion of investment pools reporting by the

sponsoring government Ascertain which two financial statements are required for governmental funds Identify the basis of accounting used by proprietary funds Recognize which step in the acquisition of goods and services occurs first

Introduction Nonbusiness organizations, the collective term used by the FASB to refer to governmental units as well as to colleges and universities, hospitals, voluntary health and welfare organizations, and all other non-profit organizations, account for at least 40 percent of the GDP of the U.S. Activities financed by ex-penditures of governmental and nonprofit entities affect the safety, health, and general well-being of everyone; almost everyone contributes a portion of the resources which finance the expenditures. Since each of us is vitally affected it is important that we be able to read intelligently the financial reports of governmental and nonprofit entities. Accounting and financial reporting principles which have been developed by authoritative bodies for use by governmental and nonprofit entities are explained in this course. Characteristics of Nonbusiness Entities The term nonbusiness itself, suggests to the reader that entities in this classification exist for reasons other than the attempt to earn net income for owners or investors. Indeed, a nonbusiness entity has no “owners” in the sense that businesses do. Persons and organizations who contribute resources to establish a non-business entity do so without the expectation of receiving a financial “return on investment,” or, even, a return of investment. The typical reason for the organization of a nonbusiness entity is to render services to a group of constituents. In the usual case, administrators of a nonbusiness organization attempt to determine in advance the outflows of resources needed to provide services during a given time period, then attempt to secure an inflow of resources needed to support the desired outflow. This approach of nonbusiness organ-izations is contrary to that of businesses which incur expenses in the expectation of generating revenues. Some entities in the nonbusiness category may operate under very detailed and specific legal re-strictions as to the sources of financial resources they may utilize, the amounts they may raise from each source, and the uses they may make of the proceeds from each source—this is particularly true of state and local governmental units. Other entities in the nonbusiness sector are about as free as business enter-prises from legal restriction as to the sources and uses of financial resources, but all entities are subject to some degree of regulation. In summary, three characteristics distinguish nonbusiness organizations. 1. Nonbusiness organizations have transactions that are infrequent in businesses, such as grants and

contributions. 2. Nonbusiness organizations have no single indicator of performance such as net income. 3. Nonbusiness organizations report net assets rather than equity.

Chapter 1 – Governmental Accounting: An Overview

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Short Quiz

Indicate whether each of the following is true or false. 1. Governmental entities and other types of nonprofit organizations are collectively referred to as

“nonbusiness organizations” by the FASB. 2. Nonbusiness organizations are relatively unimportant in the United States economy, as compared

with business organizations. 3. NFPOs, other than governmental units, may have owners or investors just as business organiza-

tions do. 4. The typical reason for the organization of a nonbusiness entity is to render services to a group of

constituents. 5. Governmental units are subject to a greater degree of legal constraint as to the sources of financial

resources they may utilize, and the uses they may make of the proceeds of each source, than is generally true of business organizations.

Answers 1. True. The phrase nonbusiness organizations was originated by the FASB as a collective phrase to

include all governmental units and all other types of NFPOs. 2. False. Nonbusiness organizations in the U.S. account for at least 40 percent of the GDP. 3. False. It is a characteristic of all nonbusiness organizations that they do not have owners in the

same sense that business organizations do. However, individuals, financial institutions, and mutu-al funds may invest in the bonds or other debt instruments of nonbusiness organizations just as they do in the debt, or equity, instruments of businesses.

4. True. Usually the services rendered to constituents are those no business organization exists to of-fer, or exists to offer as advantageously.

5. True. All entities are subject to some degree of regulation, but governmental units typically are subject to more detailed regulation as to sources and uses of financial resources than are business organizations or other types of nonprofit entities.

Differences between Governmental and Private Sector Accounting Governmental entities have operating objectives different from those of commercial entities; therefore, governmental accounting is different from accounting for commercial enterprises. Governmental accounting differs from corporate financial accounting primarily because governments lack a profit motive and must focus on accountability to the public. The major differences between gov-ernmental and for-profit entities are as follows: 1. Governmental accounting must recognize that governmental units collect resources and make

expenditures to fulfill societal needs. Society expects governmental units to develop and maintain an infrastructure of highways, streets, and sewer and sanitation systems, as well as to provide public protection, recreation, and cultural services.

2. Except for some proprietary activities such as utilities, governmental entities do not have a gen-eral profit motive. Police and fire departments do not have a profit motive; instead these units must be evaluated on their abilities to provide for society’s needs.

3. Governmental operations have legal authorization for their existence, conduct revenue-raising through the power of taxation, and have mandated expenditures they must make to provide their services. The governmental accounting system must make it possible to determine and demon-strate compliance with finance-related legal and contractual provisions. Governmental units are subject to extensive regulatory oversight through laws, grant restrictions, bond indentures, and a variety of other legal constraints.

4. Governmental entities use comprehensive budgetary accounting, which serves as a significant control mechanism and provides the basis for comparing actual operations against budgeted amounts. The budget is a legally established statutory control vehicle.


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5. The primary emphasis in governmental fund accounting is to measure and report on manage-ment’s stewardship of the financial resources committed to the objectives of the governmental unit. Accountability for the flow of financial resources is a chief objective of governmental ac-counting. The managers of the governmental unit must be able to show that they are in compli-ance with the many legal regulations governing its operations.

6. Governmental entities typically are required to establish separate funds to carry out their various missions. Each fund is an independent accounting and fiscal entity and is responsible for using its own resources to accomplish its specific responsibilities.

7. Many fund entities do not record fixed assets or long-term debt in their funds. These fund entities record the purchase of assets such as equipment and buildings as expenditures of the period. A separate record of the fixed assets and long-term debt is maintained within the governmental unit.

8. An important objective of governmental financial reporting is accountability. Governments must be able to explain and justify to citizens and to other governments the raising and using of public resources. A key element of accountability is interperiod equity in which it is determined if cur-rent-year revenues are sufficient to pay for services provided during that year, or if future taxpay-ers will be required to assume burdens for services previously provided or deficits created in prior years.

Background of Governmental Accounting Although the Financial Accounting Standards Board (FASB) is considered, in the United States, to be the one authoritative source of statements on financial accounting standards for business organizations, authoritative statements of accounting and financial reporting principles deemed appropriate for use by state and local governmental units are found in the American Institute of Certified Public Accountants (AICPA) audit guide, Audits of State and Local Governmental Units. The audit guide, originally pub-lished in 1974, has been amended from time to time by AICPA Statements of Position. The AICPA publications are based, with minor modifications, upon publications of the National Council on Govern-mental Accounting (NCGA). In 1984, the Financial Accounting Foundation (FAF), the fully independent panel that oversees the FASB, created the Governmental Accounting Standards Board (GASB) to establish GAAP for state and local governments in the U.S. On November 30, 1989, the trustees of the FAF reaffirmed the GASB as the standard setter for state and local governments. Thus, after November 30, 1989, FASB pronounce-ments are not effective for state and local governments unless adopted by the GASB. GASB Statements have the highest level of authority for state and local governments. In GASB Statement No. 1, Authoritative Status of NCGA Pronouncements and AICPA Industry Audit Guide (GASB 1), released in July 1984, the GASB stated that all NCGA statements and interpretations issued and in effect on that date were accepted as generally accepted accounting principles for govern-mental accounting. In 1985, the GASB published a codification of the existing GAAP for state and local governments entitled Codification of Governmental Accounting and Financial Reporting Standards. The first section of the codification is virtually identical to NCGA 1 as amended by subsequent NCGA state-ments. Section 2 presents the financial reporting issues for governmental entities. Sections 3 and 4 present specific balance sheet and operating statement topics. The GASB continues to publish updated codifica-tions periodically. The codification is an authoritative source for accounting and financial reporting principles for governmental units. The GASB has issued 59 Statements, 6 Interpretations, and 5 Concepts Statements as of October 30, 2010. The world of governmental accounting underwent a monumental change in 1999 with the release of GASB Statement No. 34. Previously, all state and local governments were required to report detailed fund-level information in their general-purpose financial statements. The typical governmental financial statement was thus a series of columns marching across the page, each containing obscure, specialized information for a certain group of funds. This format made it difficult for the average voter to get a com-prehensive picture of where the money was coming from and where it was going.


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Note: One of the awkward aspects of the old reporting regime was the use of account groups, so called because they did not exactly qualify as funds. They were simply areas where long-lived assets and long-term debt were parked in the absence of a conceptually sound place to put them in statements focused on current resources. This was obviously an extremely unsatisfying practice, which are long gone now. GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments (GASB 34), issued in 1999 brought a new level of clarity to state and local government reporting. Governments now produce two separate sets of financial statements, one containing detailed fund information and the other providing a high-level picture of the government as a whole. This standard also required several new footnote and schedule disclosures that increase the trans-parency of governmental reporting. Accounting for governmental entities is given the general name of fund accounting to distinguish it from accounting for commercial entities. This chapter first presents an overview of fund accounting, including accounting for typical transactions and providing required financial statements for a govern-mental entity. A comprehensive illustration is presented of accounting and financial reporting for the general fund, typically the most important fund of most governmental entities. Chapter 2 presents the accounting for the remaining funds of a governmental entity and the required financial statements for a governmental entity. The comprehensive illustration provides integrated examples of the governmental accounting and financial reporting concepts that are discussed in the first part of this chapter. Major Concepts of Governmental Accounting Governmental accounting is different from commercial accounting. Governmental entities use a fund-based accounting system in which some of the funds use a modified-accrual accounting method as op-posed to the accrual method used by commercial entities. Also, the financial statements of governmental entities have a foundation in the individual funds but aggregate to a government-wide level. The follow-ing section discusses the major concepts for governmental accounting. Elements of Financial Statements The GASB’s Concepts Statement No. 4, Elements of Financial Statements, published in 2007, defined each of the seven elements of financial statements of state and local governments. Each definition uses the central focus of a resource, which is an item having a present capacity to provide, directly or indirect-ly, services for the governmental entity. This present service capacity may be in the form of direct provi-sion of services as well as those items having the ability to affect cash flows in the future. The five elements of a statement of financial condition are 1. Assets are resources with present service capacity that the entity presently controls. 2. Liabilities are present obligations to sacrifice resources that the entity has little or no discretion to

avoid. 3. A deferred outflow of resources is a consumption of net assets that is applicable to a future

reporting period. 4. A deferred inflow of resources is an acquisition of net assets that is applicable to a future report-

ing period. 5. Net position is the residual of all other elements presented in a statement of financial condition. The two elements of the resource flows statements are 1. An outflow of resources is a consumption of net assets that is applicable to the current reporting

period. 2. An inflow of resources is an acquisition of net assets that is applicable to the current reporting

period.


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The central focus of present service capacity for defining the elements of governmental financial statements is different from the focus used by the FASB in its Statement of Financial Accounting Con-cepts No. 6, Elements of Financial Statements. The FASB developed its definitions of the elements of financial statements based on the usefulness of financial reporting information to investors and creditors in making economic decisions for allocating scarce resources among alternative uses. The GASB followed that its concepts statement provides a framework that will enhance consistency in setting future governmental accounting standards and serve as guidance for preparers and auditors when evaluating transactions that are not explicitly included in exist-ing governmental accounting standards. Expendability of Resources versus Capital Maintenance Objectives The major differences between commercial and governmental accounting and reporting stem from the objectives of the entities. In commercial, profit-seeking enterprises, the measurement focus is on the flow of all economic resources of the firm. The accrual method of accounting is used to match the revenues and expenses during a period, with the purpose of measuring profitability. The company’s balance sheet contains both current and noncurrent assets and liabilities, and the change in retained earnings reflects the company’s ability to maintain its capital investment. In contrast, the measurement focus for the governmental funds of a government entity is on changes in current financial resources available to provide services to the public in accordance with the govern-ment entity’s legally adopted budget. The modified accrual method of accounting is used to measure the revenues that are available to finance current expenditures and the expenditures made during the period. The balance sheet reports only current assets, current liabilities, and a fund balance. Operating authoriza-tion for a fiscal period’s transactions is initiated by the passage of a budget by the legislative governing body. Managers of governmental units must be fiscally accountable to show that resources are expended in compliance with the legal and financial restrictions placed on the governmental entity by its legislative body. Definitions and Types of Funds Because all governmental units (and almost all other not-for-profit organizations (NFPOs) receive finan-cial resources which may be used only in accord with restrictions established by law or by agreements with donors or grantors, their accounting systems must enable their officials to demonstrate compliance with the restrictions. This need led to the development of the fund accounting concept, which is so basic that the term fund accounting is often used to denote the kind of accounting recommended for state and local governmental units and by nonprofit entities. The word fund has a special technical meaning in the nonbusiness sector. The NCGA defines the term as follows:

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 re-sidual equities, or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with spe-cial regulations, restrictions, or limitations.

The dual meaning of fund should be noted. A fund is an accounting entity; it is also a fiscal entity created, in most instances, by operation of law. The term law is used in its most general sense. The ac-counting and financial reporting of state and local governmental units may be prescribed (or circum-scribed) by state constitutions, state statutes, bond indentures, agreements with employees, provisions of grants from federal or other governmental agencies, and agreements with individuals or private organiza-tions which have donated assets to be used for specified purposes. Local governmental units are also bound by administrative regulations of agencies of higher jurisdictions, and by ordinances and resolutions enacted by the legislative component of the local unit. Public schools, colleges and universities, hospitals, voluntary health and welfare organizations, and other nonprofit organizations generally have fewer cate-


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gories of legal restrictions than do governmental units, but do have grants and gifts restricted by donors, agreements with employees and creditors, and in some cases, governmental appropriations, which indi-cate the desirability of fund accounting. The operations of a governmental unit also must be broken down into periodic reporting intervals of fiscal years because the management of these public operations may change as a result of elections or new appointments. Thus, governmental accounting must recognize the many different purposes, the different sources of revenue, the mandated expenditures, and the fiscal periodicity of the governmental unit. To accomplish the objectives of the governmental unit, the unit establishes a variety of funds as fiscal and accounting entities of the governmental unit. A fund is a separate accounting group with accounts to record the transactions and prepare the financial statements of a defined part of the governmental entity that is responsible for specific activities or objectives. Each fund records those transactions affecting its assets, related liabilities, and residual fund balance. Different funds are established for the specific functions that a government must provide. Most funds obtain resources from taxes on property, income, or commercial sales; they also may obtain resources as grants from other governmental agencies, from fines or licenses, and from charges for services. Each fund must make its expenditures in accordance with its specified purposes. For example, a fund established for fire protection cannot be used to provide school buses for the local school. The fire department may make expenditures only as directly related to its function of providing fire protection. Each governmental fund has its own asset and liability accounts and its own revenue and expenditures accounts. The term expenditures refers to decreases in net financial resources available under the current financial resources measurement focus. Expenditures are made in accordance with the budget established by the government unit’s governing body, and the internal control structure of a vouchers payable system is generally used prior to payments to external vendors. Upon receipt and acceptance of the goods or services from the external vendor, the journal entry to recognize the approved expenditure is a debit to expenditures and a credit to vouchers payable. The increase in the payables decreases the net financial resources available. The payment of the vouchers payable must then be approved by the government’s governing body. Separate fund-based financial statements must be prepared for each fiscal period. In this manner, governing bodies or other interested parties may assess the fiscal and operating performance of each fund in fulfillment of the specific purposes for which each fund was established. Governmental accounting systems are established on a fund basis in three major categories: govern-mental, proprietary, and fiduciary. Exhibit 1 presents an overview of each of the funds and provides a brief description of the types of activities accounted for in each fund. Governmental Funds Five types of governmental funds are used to provide basic governmental services to the public. These are (1) general fund, (2) special revenue funds, (3) capital projects funds, (4) debt service funds, and (5) permanent funds (see Exhibit 1). The number of governmental funds maintained by the governmental entity is based on its legal and operating requirements. Each governmental entity creates only one general fund, but it may create more than one of each of the other types of governmental funds based on the entity’s specific needs. For example, some governmental entities establish a separate capital projects fund for each major capital project. Proprietary Funds Some activities of a governmental unit, such as the operation of a public swimming pool or a municipal water system, are similar to those of commercial enterprises. The objective of the governmental unit is to recover its costs in these operations through a system of user charges. The two types of proprietary funds typically used by governmental entities are enterprise funds and internal service funds (see Exhibit 1). Enterprise funds are used to account for operations similar to those of private businesses. This rendi-tion of services by the enterprise fund to the general fund is presumably at prices equivalent to external exchange values and is classified as an interfund service provided and used. The result is revenue to the seller and an expenditure to the buyer, a governmental fund. Unpaid amounts are interfund receivables or payables. The entry is to debit expenditures control and credit due to enterprise fund.


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Internal Service Funds differ from Enterprise Funds because Internal Service Funds provide goods and services primarily to other government agencies. Accounting and reporting for a proprietary fund are similar to accounting for a commercial operation. Both use the accrual basis of accounting like commer-cial businesses. The financial statements of proprietary funds focus on determination of operating income, changes in net assets (or cost recovery), financial position, and cash flows. A proprietary fund accounts for the business-type functions of a government. Users of the financial statements for proprietary funds may find profitability information to be valuable. The statement of net assets of each proprietary fund reports all assets, including long-term capital assets, and all liabilities, including long-term liabilities. Two types of funds are classified by the NCGA as proprietary funds: 1. Internal Service Funds. Internal service funds are established by governmental units as a means

of providing services to other funds or departments of the same unit, or to other governmental units, on a cost-reimbursement basis. Examples include centralized IT operations, central motor pools and garages, centralized risk-financing activities, and central stores.

2. Enterprise Funds. Enterprise funds are operated to provide electric, water, gas, or other services to the general public on a user-charge basis. Except for ownership, they bear a close resemblance to investor-owned utility or other service enterprises. Enterprise funds are also used to account for activities for which the governmental body desires periodic computation of revenues earned, costs incurred, or net income.

Fiduciary Funds Four types of fiduciary funds are provided for a governmental unit. Three are trust funds that account for financial resources maintained in trust by the government. These three are pension and other employee benefit trust funds, investment trust funds, and private-purpose trust funds. The fourth fiduciary fund, agency funds, is used to account for resources held by the government solely in a custodial capacity (see Exhibit 1). Note that the permanent fund, which is a governmental fund, includes resources that are legally restricted so that the governmental entity must maintain the principal and can use only the earn-ings from the fund’s resources to benefit the government’s programs for all of its citizens. The private-purpose trust funds include trusts under which the principal may or may not be expendable but for which the trust agreement specifies the principal, if expendable, and the earnings may be used only for the benefit of specific individuals, organizations, or other governments. Chapter 2 presents examples of fiduciary funds.

Short Quiz

Indicate whether each of the following statements is true or false. 1. Fund accounting is a term used to describe an accounting concept which is common throughout

all governmental and other nonprofit entities. 2. One of the principal characteristics which distinguishes accounting for state and local governmen-

tal units from accounting for business organizations is the use of fund accounting. 3. The word fund in the term fund accounting is used in the same sense as it is ordinarily used in

financial accounting for businesses. 4. A fund is an accounting entity; it is also a fiscal entity. 5. A fiscal entity is a group of assets, together with all related liabilities and residual equities, which

is set aside by special regulations, restrictions, or limitations for the purpose of carrying on spe-cific activities or attaining certain objectives.

6. An accounting entity is a self-balancing set of accounts. Answers 1. True. Fund accounting is often used to denote the kind of accounting recommended for govern-

mental and nonprofit entities. 2. True. Fund accounting was developed in recognition of the fact that governmental units operate

under many more legal constraints as to the sources and uses of financial resources than do busi-ness organizations.


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3. False. The word fund in financial accounting may have several different meanings, none of which are the same as the technical definition.

4. True. A fund must be both a fiscal entity and an accounting entity. 5. True. This definition is taken from the definition of fund. 6. True. This definition is taken from the definition of fund.

Exhibit 1

Fund Structure

Governmental Fund Types

1. General fund Accounts for all financial resources except for those accounted for in another fund. Includes transactions for general governmental services provided by the executive, legislative, and judicial opera-tions of the governmental entity.

2. Special revenue fund

Accounts for the proceeds of specific revenue sources that are restricted for specified purposes. Includes resources and expendi-tures for operations, such as public libraries, when a separate tax is levied for their support.

3. Capital projects fund

Accounts for financial resources for the acquisition or construction of major capital facilities that benefit many citizens, such as parks and municipal buildings. This fund is in existence only during the acquisition or construction of the facilities and is closed once the project is completed.

4. Debt service fund

Accounts for the accumulation of resources for, and the payment of, general long-term debt principal and interest. This fund is used for servicing the long-term debt of the government.

5. Permanent fund

Accounts for resources that are restricted such that only earnings, but not principal, may be used in support of governmental pro-grams that benefit the government or its citizenry.

Proprietary Fund Types

6. Enterprise fund

Accounts for operations of governmental units that charge for services provided to the general public. Includes those activities financed in a manner similar to private business enterprises where the intent of the governing body is to recover the costs of providing goods or services to the general public on a continuing basis through user charges. Also includes those operations that the governing body intends to operate at a profit. Examples include sports arenas, municipal electric utilities, and municipal bus com-panies.

7. Internal service fund

Accounts for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit. The services are usually provided on a cost-reimbursement basis and are offered only to other governmental agencies, not the general public. Examples are municipal motor vehicle pools, city print shops, and central purchasing operations.


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Fiduciary Fund Types and Similar Component Units

8. Pension (and other employ-ee benefit) trust fund

Accounts for resources required to be held in trust for the mem-bers and beneficiaries of pension plans, other post-employment benefit plans, or other employee benefit plans.

9. Investment trust fund Accounts for the external portion of investment pools reported by the sponsoring government.

10. Private-purpose trust fund Accounts for all other trust arrangements under which the fund’s resources are to be used to benefit specific individuals, private organizations, or other governments, as specified in the trust agreement.

11. Agency fund

Accounts for assets held by a governmental unit in an agency capacity for employees or for other governmental units. An exam-ple is the city employees’ payroll withholding for health insurance premiums.

Short Quiz

Indicate whether each of the following statements is true or false. 1. The seven types of funds recommended by the NCGA are classified as either governmental funds

or proprietary funds. 2. The general fixed assets group and the general long-term debt group are accounting entities, but

not fiscal entities; therefore, they are not funds. 3. General funds, special revenue funds, and permanent funds are the only NCGA fund types which

are classified as governmental funds. 4. Governmental funds focus upon the flow of resources, rather than upon income determination. 5. The proprietary fund designation indicates that the funds operate in a manner similar to investor-

owned enterprises. Answers 1. False. The eleven fund types are classified in three categories: governmental funds, proprietary

funds, and fiduciary funds. 2. True. A fund is both a fiscal entity and an accounting entity. 3. False. In addition to the three types listed, capital projects funds and debt service funds are also

classified as governmental funds. 4. True. Governmental funds focus upon the flow of revenues and expenditure not upon the match-

ing of revenues and expenses as a business does. 5. True. The proprietary fund designation indicates that the funds operate in a manner similar to

investor-owned enterprises.

Financial Reporting of Governmental Entities A governmental unit may have a variety of boards, commissions, authorities, or other component units under its control. The financial statements of a governmental entity are presented for the reporting entity, which consists of: 1. The primary government such as a state government, a general-purpose local government, or a

special-purpose local government that has a separately elected government body.


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2. Component units, which are legally separate organizations for which the primary unit has finan-cial accountability.

3. Other organizations that have a significant relationship with the primary government and need to be included in the primary government’s financial statements to avoid misleading or incomplete financial representations.

GASB Statement No. 14, The Financial Reporting Entity (GASB 14), states that financial accounta-bility exists for those component units if the primary government unit appoints a majority of an organiza-tion’s governing body and a. is able to impose its will on the organization, or b. possesses a financial benefit or assumes a financial burden for the organization. The governmental financial reporting model is specified in GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments (GASB 34). Exhibit 2 presents the names of the financial statements and the other major information specified by GASB 34. The reporting model has two integrated levels of financial statements. 1. The first level is the fund-based financial statements because governments continue to use fund-

based accounting to record transactions in accordance with the legal or budgetary requirements established by their governing body. These fund-based financial statements demonstrate fiscal ac-countability of the management of each of the funds.

2. The second level is the government-wide financial statements. After preparing the fund-based financial statements, the government prepares reconciliation schedules to go from the governmen-tal fund financial statements to the government-wide financial statements. In addition to the gov-ernmental funds, the reporting entity includes other funds in the government-wide financial statements. The government entity’s capital assets, such as buildings and equipment, and long-term debt also are included in the government-wide financial statements. The government-wide financial statements demonstrate the operational accountability of the management of the gov-ernmental unit as a whole. Government-wide financial statements exclude the fiduciary funds.

This chapter and the first part of Chapter 2 focus on the fund-based financial statements. After com-pleting our discussion of each fund type in the next chapter, the government-wide financial statements are presented. Fund-Based Financial Statements: Governmental Funds Two financial statements are required for the governmental funds: (1) balance sheet and (2) statement of revenues, expenditures, and changes in fund balance.

Exhibit 2 The Government Reporting Model

1. Independent auditors’ report 2. Management’s Discussion and Analysis (required supplementary information) 3. Government-wide financial statements

a. Statement of Net Assets b. Statement of Activities

4. Fund-based financial statements a. Governmental funds

(1) Balance Sheet (2) Statement of Revenues, Expenditures, and Changes in Fund Balances (3) Reconciliation Schedules (of each of the two governmental fund-based statements to their related

government-wide financial statements, either at the bottom of each of the two fund-based financial statements or in an accompanying schedule)


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b. Proprietary funds (1) Statement of Net Assets (2) Statement of Revenues, Expenses, and Changes in Fund Net Assets (3) Statement of Cash Flows

c. Fiduciary funds (1) Statement of Fiduciary Net Assets (2) Statement of Changes in Fiduciary Net Assets

5. Notes to the financial statements 6. Required Supplementary Information (RSI) (in addition to the MD&A)

a. Budgetary Comparison Schedules b. Information about Infrastructure Assets c. Information about Pensions

Balance Sheet for Governmental Funds The format of the balance sheet, with added parenthetical guidance for learning assistance, for each of the governmental funds, is given Exhibit 3.

Exhibit 3 Balance Sheet for Governmental Funds

Assets (financial resources available for current use; presented in order of liquidity) $X,XXX Total Assets $X,XXX Liabilities and Fund Balances

Liabilities (due and expected to be paid from current financial resources; presented in order of due date) XXX

Fund Balances Nonspendable $ XX Spendable: Restricted XX Limited XX Assigned XX Unassigned XX XX Total Liabilities and Fund Balances $X,XXX The five governmental funds use the current financial resources measurement focus. Under this method, the asset section of the balance sheet reports only financial assets such as cash or other assets that will convert into cash (e.g., receivables) in the normal course of operations over the near future. Some governments report inventories or other prepayments because these save the entity from the incurrence of future outflows of current financial resources. Long-term capital items such as equipment or buildings are not reported on the fund-based balance sheet because these amounts are no longer currently available for expenditure. However, the long-term capital assets of the governmental entity are scheduled and reported in the government-wide financial statements, as illustrated in Chapter 2. The liability section of the balance sheet reports only those liabilities that have become due and that will require current financial resources to liquidate, such as vouchers payable or the current portion of long-term debt. Funds recognize expenditures for principal and interest on general long-term debt only when these amounts are due. A short-term debt often used in governmental funds is tax-anticipation notes. These notes represent loans obtained using future taxes as collateral for the notes. Most states restrict these borrowings to those taxes that have been levied but not yet collected. These notes payable are paid from the first tax collections of the tax levy to which the notes are related. The principal of long-term debt not due within the next year is not reported on the balance sheet because it will not be settled in the near term with current financial resources. However, the governmental unit’s long-term debt is sched-uled and is reported in the government-wide financial statements.


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The third section of the balance sheet for the five governmental funds reports the net fund balance, which is the amount of the difference between reported assets and reported liabilities. GASB 54 specifies that the fund balances for the governmental funds should be segregated into two categories: 1. Nonspendable fund balances represent amounts that are (a) not in spendable form, such as

amounts related to inventories and prepaid items, or (b) required by legal or contractual provi-sions to be maintained intact, such as the principal of a permanent fund.

2. Spendable fund balances represent amounts that are available for spending. Amounts in this portion of the fund balance would be further classified as (a) restricted, (b) limited, (c) assigned, or (d) unassigned. The classification would be based on an examination of requirements imposed by legal or contractual provisions and then of any constraints established by the governing body of the government entity.

Note: In March 2009, the GASB published a new standard, GASB 54, entitled Fund Balance Reporting and Govern-mental Fund Type Definitions. This statement modifies the definitions of some of the governmental funds to make the definitions consistent across all government units. Furthermore, the standard establishes a fund balance classification system for the governmental fund types. Note that this statement applies only to the governmental fund types, not to proprietary or fiduciary fund types. The governmental fund balance classification system uses a hierarchy based on the extent to which a government is required to comply with constraints placed upon the use of resources reported in governmental funds. The hierarchy separates the fund balance between nonspendable and spendable resources. Note that the accounting is not changed by the proposed statement, only the presenta-tion of the fund balances for the governmental funds. Statement of Revenues, Expenditures, and Changes in Fund Balance for Governmental Funds This is often called the operating statement of the governmental funds, but the financial statements for the governmental funds use the full title. The statement of revenues, expenditures, and changes in fund bal-ance has four major sections: 1. Operating section. The top section includes the revenues less expenditures for the period, with

the difference shown as the excess (or deficiency) of revenues over expenditures. 2. Other financing sources or uses. This section includes nonrevenue items such as bond issue

proceeds and interfund transfers. (Note that issuance of bonds and debt refundings of governmen-tal long-term debt are shown in this section although the long-term debt is not shown on the fund’s balance sheet.)

3. Special and extraordinary items. This section presents extraordinary items that are both unusual and infrequent, such as losses due to a hurricane. Special items are transactions or events within the control of management that are either unusual or infrequent in occurrence. An example of a special item would be the one-time sale of county park land.

4. Fund balance. The bottom portion presents both the beginning and the ending fund balance. The format of the statement of revenues, expenditures, and changes in fund balance, with added parenthetical guidance, is shown Exhibit 4.


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Exhibit 4 Statement of Revenues, Expenditures, and Changes in Fund Balance

Revenues (recognized when both measurable and available; presented by source of revenue) $XX,XXX

Expenditures (approved decreases in net financial resources; presented by function and character) X,XXX Excess of Revenues over Expenditures $ XXX Other Financing Sources or Uses (other increases or decreases in net financial resources available, such as bond issue proceeds and interfund transfers) XX Special Items and Extraordinary Items (X) Net Change in Fund Balance XX Fund Balance—Beginning XXX Fund Balance—Ending (reconciles to total fund balance on balance sheet) $ XXX Under the current financial resources measurement focus and the modified accrual basis of account-ing, revenues are recognized when they become both measurable and available to finance expenditures of the fiscal period. Profit-seeking businesses measure revenue by the accrual basis as it is earned, but the current financial resources measurement focus requires that the expected timing of the revenue-related inflow be evaluated. Availability means that the transaction will result in financial resources collectible within the current period or soon thereafter in order to be used to pay liabilities of the current period. The expenditure portion of the operating statement reports reductions in available current financial assets. Expenditures are recognized when approved services or goods are received by the governmental entity. Expenditures are usually measurable and should be recognized when the related liability is in-curred. Vouchers Payable or some other payable is credited when the expenditure is recognized. The increase in liabilities decreases the net financial resources still available for spending to meet the public purposes established by the governing body. Expenditures also include amounts to purchase capital assets such as trucks or buildings. These are expenditures because they result in a net outflow of current finan-cial assets. Note that once the expenditure has been made for a capital asset, that amount is no longer currently available to spend. Thus, although expenditure is recognized for the purchase of a capital asset, the capital asset (e.g., truck) is not reported on the governmental fund’s balance sheet. Other financing sources and uses, the second section of the operating statement under the current financial resources measurement focus, reports changes in current financial resources from nonrevenue items, such as sales of bonds or interfund transfers with other funds of the governmental entity. Note that under the current financial resources focus, the proceeds from a sale of bonds are reported in the operating statement, but the long-term bond payable is not reported in the liabilities on the governmental fund’s balance sheet. Interfund transfers are discussed in depth later in this chapter. The special items section presents unusual or infrequent items that affect the fund balance but are not revenue or expenditure items. Finally, the fund balance section presents the change in the fund balance to obtain the ending fund balance. The ending fund balance amount should reconcile to the total fund bal-ance shown on the balance sheet. After each governmental fund prepares its financial statements, it prepares a combined balance sheet and a combined operating statement. These combined statements include all the governmental funds. The format for the combined government funds statements is multicolumnar, with a separate column for each of the major governmental funds and a separate column for the aggregated nonmajor (small) governmen-tal funds. The columns are then added together horizontally and a total column for each line item in the governmental funds is presented. We will illustrate combined governmental financial statements in Chap-ter 2. Measurement Focus and Basis of Accounting Because the concepts of measurement focus and basis of accounting are so important in understanding accounting for the various funds of state and local governments, a brief review of these two concepts is


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presented first. Then, coverage is provided of the accounting measurement and recognition requirements applicable to revenues and expenditures in the governmental funds. The basis of accounting refers to the timing of recognizing a transaction for financial reporting pur-poses. For example, the cash basis recognizes revenue or expenditures when cash is received or paid. The accrual basis recognizes revenue or expenditures when the transaction or event takes place. The modified accrual basis is a hybrid system that includes some aspects of accrual accounting and some aspects of cash basis accounting. The modified accrual basis is used in funds that have a flow of current financial resources measurement focus. This measurement focus is on the flow of current financial resources and the proper expendability of the resources for designated purposes and determination of the available resources remaining to be expended. Expenditures recognized under the modified accrual basis are the amounts that would normally be liquidated with expendable available financial resources. The five gov-ernmental funds have this focus. The accrual basis is used in funds that have a flow of economic resources measurement focus. This measurement focus is concerned with all economic resources available to a fund during a particular time period, thereby allowing for a comparison of revenues and expenses and a focus on maintenance of capital. The proprietary funds and fiduciary funds have this focus. In addition, as is presented in Chapter 2, the government-wide financial statements are based on the accrual basis. This necessitates a reconciliation schedule for those items accounted for under the modified accrual basis for governmental fund accounting to obtain the accrual basis amount that is reported on the government-wide financials. The reconciliation schedule is discussed in depth in Chapter 2. Basis of Accounting—Governmental Funds The current financial resources measurement focus and the modified accrual basis of accounting are used for the governmental funds financial statements. The modified accrual basis is applied as follows: 1. Revenue is recorded in the accounting period in which it is both measurable and available to

finance expenditures made during the current fiscal period. They are increases in (sources of) fund financial resources other than from interfund transfers, debt issue proceeds, and redemptions of demand bonds. The major source classifications are taxes, licenses and permits, intergovern-mental revenues, charges for services, fines and forfeits, and miscellaneous revenues.

2. Expenditures are recognized in the period in which the liabilities are both measurable and in-curred and are payable out of current financial resources.

Note: Measurable means that the amount of the revenue or expenditure can be objectively determined. Available means due or past due and receivable within the current period and collected within the current period or ex-pected to be collected soon enough thereafter to be used to pay current-period liabilities. The definition of “soon enough thereafter” has been stated for property taxes as a period of not more than 60 days after the end of the current fiscal period. Recognition of Revenue The accrual method of accounting recognizes revenues from exchange transactions (sales of goods or services) and from nonexchange transactions in which the government gives or receives value without directly receiving or giving equal value in exchange. In GASB Statement 33, Accounting and Financial Reporting for Nonexchange Transactions (GASB 33), issued in 1998, the GASB classified nonexchange transactions into four categories. GASB 33 was written from the viewpoint of the accrual basis, and modifications are required to this statement when using the modified accrual basis of accounting. How revenues are recognized depends on the category. The four categories are discussed next. 1. Derived tax revenues, resulting from assessments on exchange transactions. Examples are income

taxes and sales taxes. a. The asset (cash or receivable) is recognized when the underlying transaction occurs or resources

are received, whichever comes first.


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b. Revenue recognition depends on the accounting basis used to measure the transaction. Under accrual accounting (proprietary and fiduciary funds), revenue is recognized when the underlying exchange transaction occurs. Under modified accrual accounting (governmental funds), revenue is recognized when the underlying exchange has occurred and the resources are available.

Resources received prior to the exchange transaction would be reported as deferred revenue

(reported as a liability) until the revenue recognition requirement is met for the fund receiving the re-sources.

2. Imposed nonexchange revenues, resulting from assessments on nongovernmental entities, including

individuals. Examples include property taxes and fines. a. The asset (cash or receivable) is recognized when the government has an enforceable legal claim

to the resources or the resources are received, whichever comes first. b. 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 resources exists.

Resources received or recorded as receivables prior to the period in which they can be recognized

as revenue should be reported as deferred revenues. The next two categories have additional eligibility requirements that the providers of financial re-sources often impose. These eligibility requirements must be met before the transaction can be completed, that is, before the receiving governmental unit can recognize an asset and the associated revenue. The four types of eligibility requirements are typically (1) required characteristics of the recipient as specified by the provider of the financial resources (e.g., the receiving entity must be a school district), (2) time re-quirements for expending the resources (e.g., the resources must all be expended within a specific fiscal period), (3) reimbursements for only those costs determined to be allowable and incurred in conformity with a program’s requirements, and (4) contingencies in which the recipient has met all actions required by the provider. If the recipient has met all of the eligibility requirements imposed by the provider, then the provider should recognize the liability (or decrease in assets) and expense, and the recipient should recognize the receivable (or increase in assets) and revenue at the time the eligibility requirements have been met. The two categories are as follows: 3. Government-mandated nonexchange transactions, resulting from one governmental unit’s provi-

sion of resources to a governmental unit at another level and the requirement that the recipient use the resources for a specific purpose. An example of this type is federal programs that state or local gov-ernments are required to perform.

4. Voluntary nonexchange transactions, resulting from legislative or contractual agreements, other than

exchanges. Examples include certain grants and private donations. To aid in understanding the appropriate timing of revenue recognition, Exhibit 5 outlines the criteria for each classification of nonexchangee transactions.


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Exhibit 5 Classes and Timing of Recognition of Nonexchange Transactions

Class Recognition Derived tax revenues Examples: sales taxes, personal and corporate income taxes, motor fuel taxes, and similar taxes on earnings or consumption

Assets* Period when underlying exchange has occurred or when resources are received, whichever is first. Revenues Period when underlying exchange has occurred. (Report advance re-ceipts as deferred revenues.) When modified accrual accounting is used, resources also should be “available.”

Imposed nonexchange revenues Examples: property taxes, most fines and forfeitures

Assets* Period when an enforceable legal claim has arisen or when resources are received, whichever is first. Revenues Period when resources are required to be used or first period that use is permitted (for example, for property taxes, the period for which levied). When modified accrual accounting is used, resources also should be “available.” (For property taxes, apply NCGA Interpretation 3, as amended.)

Government-mandated nonex-change transactions Examples: federal government mandates on state and local governments Voluntary nonexchange transactions Examples: certain grants and entitle-ments, most donations

Assets* and liabilities Period when all eligibility requirements have been met or (for asset recognition) when resources are received, whichever is first. Revenues and expenses or expenditures Period when all eligibility requirements have been met. (Report advance receipts or payments for use in the following period as deferred reve-nues or advances, respectively. However, when a provider precludes the sale, disbursement, or consumption of resources for a specified number of years, until a specified event has occurred, or permanently [for example, permanent and term endowments, report revenues and expenses or expenditures when the resources are, respectively, re-ceived or paid and report resulting net assets, equity, or fund balance as restricted.] When modified accrual accounting is used for revenue recognition, resources also should be “available.”

*If there are purpose restrictions, report restricted net assets (or equity or fund balance) or, for governmental funds, a reserva-tion of Fund Balance. Note: Governmental fund revenues are increases in fund financial resources other than from interfund transfers, debt issue proceeds, and redemptions of demand bonds. Thus, revenues of a capital projects fund include grants. Under GASB 33, the grant (a voluntary nonexchange transaction) is recognized when all eligibility requirements, including time requirements, have been met. When modified accrual accounting is used, as in a capital projects fund, the grant must also be “available.” Other financing sources include proceeds from bonds and interfund transfers in. GASB Statement No. 36, Recipient Reporting for Certain Shared Nonexchange Revenues (GASB 36), issued in 2000, amended GASB 33 for government-mandated and voluntary nonexchange situations in which a providing government provides part of its own derived tax units to recipients. Typically, the providing government provides the recipients with a periodic report of the amount of shared revenues the recipients should anticipate. GASB 36 states that if the notification from the providing government is not available in a timely manner, the recipient governments should use a reasonable estimate of the amount to be accrued and not wait until the actual receipt of the cash resources. The following examples present the accounting, under the modified accrual basis of accounting, as used in preparing the governmental funds financial statements.


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1. Property taxes. Property taxes involve a series of steps that guide the recognition of the property tax asset and the property tax revenue. A typical process is as follows:

Year 1 • Step 1: Levy filed for enforceable claims to property taxes for year 1. • Step 2: Assessment notice presenting assessed value as of levy date is mailed to each property

owner and any appeals are heard. • Step 3: Property tax bills for year 1 mailed to each property owner. (Property tax on each property

based on assessed value multiplied by the tax rate. The tax rate is determined based on the re-quirements specified in the levy request filed by each unit of government within the taxing dis-trict.)

Year 2: • Step 4: First installment of property taxes for year 1 are due. • Step 5: Second (and last) installment of property taxes for year 1 are due.

The levy creates an enforceable claim to the future collection of property taxes and a property tax

receivable should be recorded at that date along with a deferred property tax revenue credit. As pre-sented above, the property tax bill is mailed to each property owner in one fiscal period and the prop-erty taxes applicable to that fiscal period are then collected in the next fiscal period. There normally is a legally imposed time restriction on the use of the property tax resources until, in this example, year 2, at which time the resources become available for expenditure. In this example, property tax reve-nue would not be recognized until year 2 when the time restriction is extinguished. The year 2 entry would include a debit to deferred property tax revenue and a credit to property tax revenue. While this example presents the levy date in year 1 and the collection in year 2, some governmental entities do make the levy and the collection within the same fiscal period. The key to the timing of recognizing revenue from property taxes is to determine the fiscal period in which the use of the resources for cur-rent expenditures is permitted, not necessarily when the property taxes are levied or collected (Exhibit 6).

Exhibit 6

Timing of Revenue Recognition of Property Taxes

NCGA Interpretation No. 3, Revenue Recognition—Property Taxes (NCGA 3), specifies that

property taxes must be collectible within a maximum of 60 days after the end of the current fiscal pe-riod in order to be recognized as revenue in the current period. Taxes collectible 60 days or more after the current period ends are recorded as deferred revenue for the current period and then accounted for as next period’s revenue.

Revenue from another governmental unit or tax-exempt entity in lieu of taxes, such as a payment by a university to a city for police and fire protection, should be accrued and recorded as revenue when it becomes billable.

Revenue from property taxes should be recorded net of any uncollectibles or abatements. The Property Taxes Receivable account is debited for the full amount of the taxes levied, with estimated uncollectibles recorded separately in an allowance account reported as a contra account to the receiv-able.


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2. Interest on investments and delinquent taxes. Interest on investments or delinquent property taxes is accrued in the period in which the interest is earned and available to finance expenditures in the pe-riod. The governmental funds may temporarily invest available cash in interest-generating financial instruments such as certificates of deposit and federal or state securities. Governmental entities should carefully determine the credit risks and market risks of possible investments to minimize their poten-tial loss. Governmental funds report their own current and long-term financial investments and any accrued interest receivable as assets of the funds.

3. Income taxes and sales taxes. These derived tax revenues are recognized as assets under the modi-fied accrual basis of accounting in the period in which the tax is imposed or when the resources are received, whichever comes first. These taxes must be available to finance expenditures made during the current fiscal period before recognition as revenue for the period. Income tax revenue should be reported net of any anticipated refunds to taxpayers. Sales taxes collected by another governmental unit (e.g., the state government) but not yet distributed should be accrued prior to receipt by the gov-ernmental unit to which they will be distributed (e.g., a city) if the taxes are both measurable and available for expenditure. Measurability in this case is based on an estimate of the sales taxes to be received, and availability is based on the ability of the governing entity (the city) to obtain current re-sources through credit by using future sales tax collections as collateral for the loan.

4. Miscellaneous revenue. Miscellaneous revenues such as license fees, fines, parking meter revenue, and charges for services are generally recorded when the cash is received because these cannot be predicted accurately. Often states take custody of private property when its legal owner cannot be found, as with unclaimed estates or abandoned bank accounts. The property is said to escheat (or re-vert) to the state government. The government should record the property as revenue at its fair market value less a liability for any anticipated claims from possible heirs or other claimants. States generally record the net revenue in the general fund, but some states prefer to account for these resources in a separate, private-purpose trust fund.

5. Grants, entitlements, and shared revenue. These are resources received from other governmental units. Grants are contributions from another governmental unit to be used for a specified purpose, ac-tivity, or facility. Entitlements are payments local governments are entitled to receive as determined by the federal government. Shared revenue is levied by one governmental unit but shared with others on some predetermined basis (e.g., revenue from taxes on the retail sale of gasoline collected by the state). Grants are recognized as revenue in the period in which all eligibility requirements have been met. This may be at the point the grant is authorized, but, in practice, some governmental units wait until the cash is received because the grant may be withdrawn by the grantor. Some grants are made to reimburse a governmental unit for expenditures made in accordance with legal requirements. The revenue from such grants should be recognized only when the expenditure is made and all other eligi-bility requirements have been met. For example, a state government might agree to provide a grant for a local government’s purchase of fire-fighting vehicles. Typically, the local government must meet all the requirements of the grant before it receives the monies from the state government. In the-se cases, the local government would record the grant revenue at the time it is received. In a few cas-es, such as a state grant of reimbursement for the purchase of the firefighting vehicles, the local gov-ernment may receive grant monies before all the steps of the required expenditure are completed. In those few cases, the local government may be required to record the receipt of the grant monies as an unearned revenue (liability) until all the requirements have been met and the grant is expendable—at which time the unearned revenue is reclassified as earned revenue.

Proceeds from the sale of bonds are not revenue! These proceeds are reported as other financing

sources on the statement of revenues, expenditures, and changes in fund balance. Although bond sales do increase the resources available for expenditure, bonds must be repaid, whereas revenue of the govern-mental unit does not need to be repaid. Recognition of Expenditures Under the modified accrual basis of accounting, expenditures are recorded in the period in which the related liability is both measurable and incurred. Specific examples are as follows:


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1. Costs for personal services, such as wages and salaries, are generally recorded in the period paid because they are normal, recurring expenditures of a governmental unit.

2. Goods and services obtained from outside the governmental entity are recorded as expenditures in the period in which they are received.

3. Capital outlays for equipment, buildings, and other long-term facilities are recorded as expendi-tures in the period of acquisition.

4. Interest on long-term debt is recorded in the period in which it is legally payable. Basis of Accounting—Proprietary Funds The two major proprietary funds are the internal service fund and the enterprise fund. Proprietary funds are established for governmental operations that have a management focus of income determination and capital maintenance; therefore, the accrual method as used by profit–seeking corporate entities is used to account for these funds. Proprietary funds record their own long-term assets, and depreciation is recog-nized on these assets. Long-term debt is recorded and interest is accrued as it is for commercial opera-tions. The accrual basis of accounting is used for all proprietary funds. Basis of Accounting—Fiduciary Funds The accrual basis of accounting is used for all fiduciary funds. Agency funds are for those resources for which the governing unit is the temporary custodian. Agency funds have only assets and liabilities; no fund equity, revenue, or expenditures are used. An example of an agency fund is a county’s billing and collecting taxes on behalf of other governmental entities, such as a city and a school district. After collec-tion is completed on the “tax roll,” the county properly distributes the taxes in accordance with each governmental entity’s approved levy. These funds ordinarily account only for the receipt, temporary investment, and payment of resources to individuals, private organizations, or other governments. Thus, tax agency funds are used when a governmental entity is the collection agent of taxes for disbursement to other governmental units, e.g., school districts, city governments, or special taxing districts. For fiduciary trust funds, the economic resources measurement focus and the accrual basis of ac-counting are used. Note that the fiduciary trust funds include those funds in which both the principal and income may be used for the benefit of specific individuals, organizations, or other governments, in ac-cordance with the terms under which the trust fund was established. Agency and trust funds are discussed in depth in Chapter 2. Budgetary Aspects of Governmental Operations Budgets are 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. Budgets establish the objectives and priorities of governing units. For state governments, budgets are proposed by governors and debated by the legislative bodies. After passage, the budget usually becomes part of the fiscal period’s state law. For local governments, the mayor or the major administrator may propose the budget. Public hearings and discussions of the budget are then held by governing boards such as the city council, county board, or township board prior to the adoption of the final budget. A governmental unit may have several types of budgets, including the following: 1. Operating budgets. Operating budgets specify expected revenue from the various sources pro-

vided by law. The operating budget includes expected expenditures for various line items, such as payrolls of employees, supplies, and goods and services to be obtained from outside the govern-ing unit. Operating budgets are used in the general fund, special revenue funds, and sometimes the debt service funds.

2. Capital budgets. A capital budget is prepared to provide information about proposed construction projects such as new buildings or street projects. Capital budgets are used in the capital projects funds.


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Although budgets may be prepared for proprietary funds, these budgets do not serve as a primary control vehicle. Budgets in the proprietary funds are advisory in much the same way budgets are used in commercial entities. Recording the Operating Budget Budgets are such an important control vehicle that those governmental funds with legally adopted annual operating budgets should enter their budgets into the formal accounting records, although capital budgets are not normally entered. Recording the operating budgets permits better management control and facili-tates a year-end comparison of budgeted and actual amounts. This comparison is part of the required supplementary information for the government reporting model for the funds that must have operating budgets. A budget-to-actual comparison provides an assessment of management’s stewardship of the governmental entity and allows citizens and others to determine whether the governmental entity re-mained within its operating budgetary limits. To help understand the process of accounting for operating budgets, this course uses the technique illustrated in Governmental Accounting, Auditing, and Financial Reporting (GAAFR), in which the budgetary accounts are identified with all capital letters. Note: Governmental Accounting, Auditing, and Financial Reporting is updated periodically by the Government Finance Officers Association (Chicago). Capitalization of the budgetary accounts clearly separates the budgetary nominal accounts from the operating accounts of the governmental unit. The recording of the operating budget for the general fund is shown with the following example. Assume that at January 1, 2014, the first day of the new fiscal period, the city council of Bancroft 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 term appropriation is the legal description of the authority to expend resources. The entry made in the general fund’s accounting records on this date is as follows: January 1, 2014 (1) Estimated Revenues Control 900,000 Appropriations Control 850,000 Budgetary Fund Balance—Unassigned 50,000 Record general fund budget for year. Note the word control used as part of the account titles. In governmental accounting, control accounts often are used in the major journals, with subsidiary accounts recording the detail behind each control account. This method is similar to a commercial entity’s using a control account for its accounts receiva-ble and then using subsidiary ledgers for the specific customer transactions. Throughout this chapter, the control account level is illustrated to focus on the major issues. In practice, detailed accounting is main-tained for each separate classification of revenue and appropriation, either in the major journal or in a subsidiary ledger. The Estimated Revenues Control account is an anticipatory asset; that is, the governmental unit anticipates receiving resources from the revenue sources listed in the budget. The estimated revenues control account is created when revenues are both measurable and available to finance expenditures of the fiscal period. The Appropriations Control account is an anticipatory liability; that is, the governmental unit anticipates incurring expenditures and liabilities for the budgeted amount. The excess of estimated revenues over anticipated expenditures is the budget surplus and is recorded to Budgetary Fund Bal-ance—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. Recording the budget in the governmental entity’s books makes the budget a formal accounting control mechanism for the fiscal period. In addition, having the budget in the accounting records provides the necessary information for the budgetary comparison schedules that are part of the required supple-


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mentary information (RSI) footnotes required by the government reporting model in GASB 34. At the end of the year, after the appropriate financial statements have been prepared, all the budgetary accounts are closed. Accounting for Expenditures The governmental funds use a variety of controls over expenditures to ensure that each expenditure is made in accordance with any legal restrictions on the fund. The Expenditure Process The expenditure process in governmental accounting comprises the following sequential steps: appropria-tion, encumbrance, expenditure, and disbursement. Step 1. Appropriation The budget provides the appropriating authority to make future expenditures. Operating budgets are prepared for the general, special revenue, and often the debt service funds. The capital projects fund prepares capital budgets. The appropriation was recorded in the budget entry made previously in entry (1) for the general fund of Bancroft City. Recall that a total of $850,000 in anticipated expenditures was approved in the budget. Step 2. Encumbrance An encumbrance is a reservation of part of the budgetary appropriation and is recognized at the time an order is placed for goods or services. Encumbrances are a unique element of governmental accounting. Their purpose is to ensure that the expenditures within a period do not exceed the budgeted appropria-tions. The appropriation level was established by the approved budget and sets the legal maximum that may be expended for each budgeted item. The managers of the governmental unit must be sure that they do not exceed this budgetary authority. Thus, encumbrances provide a control system and safeguard for governmental unit administrators. When an order is placed for goods or services to be received from outside the governmental unit, the budgeted appropriation is encumbered for the estimated cost of the order. Encumbrances are of greatest use when an order is placed and a period of time expires before deliv-ery. Payroll costs, immaterial costs, and costs for goods acquired from within the governmental entity typically are not encumbered because these are normal and recurring and the managers of the governmen-tal unit are able to predict these costs based on past experiences and other administrative controls, such as employment agreements. A sensible approach should be used with an encumbrance system. For example, it is not necessary to establish an individual encumbrance when an employee orders a pad of paper. Rather, a blanket purchase order with a maximum dollar amount, for example, a total of $500, should be prepared and encumbered, and then it can serve as the control for small, routine supply purchases. Encumbrances provide the unit administrators an important accounting control to fulfill their responsibilities to manage within an ap-proved budget. To illustrate encumbrance accounting, assume that on August 1, 2013, Bancroft City completed a purchase order (PO) from an outside vendor for goods that are estimated to cost $15,000. The entry to record this application of part of the budgeted appropriation authority for the period is as follows: August 1, 2013 (2) Encumbrances 15,000 Budgetary Fund Balance—Assigned for Encumbrances 15,000 Record order for goods estimated to cost $15,000. Note that the Encumbrances account is a budgetary account that is reserving part of the appropriation authority of the budget. For detailed accounting, governmental entities often maintain a subsidiary ledger


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including accounts for specific types of encumbrances to correspond to each specific type of appropria-tion. For purposes of this illustration, the single title Encumbrances is used to indicate a control-level account to focus attention on the major aspects of governmental accounting. In practice, very detailed account titles and classification numbers are used to fully account for each type of transaction. Note: The Budgetary Fund Balance—Assigned for Encumbrances is a reservation (or restriction) of the budgetary fund balance, not an actual liability. Step 3. Expenditure An expenditure and a corresponding liability are recorded when the governmental entity receives the goods or services ordered in Step 2. When the goods are received, the encumbrance entry is reversed for the amount encumbered and the expenditure is recorded for the actual cost to the governmental entity. Although the actual cost is typically very close to the encumbered amount, some differences may exist because of partially completed orders, less expensive replacements, or unforeseen costs. Assume that the goods are received on September 20, 2013, at an actual cost of $14,000 The entries to reverse the encum-brance for the goods and to record the actual expenditures are as follows: September 20, 2013 (3) Budgetary Fund Balance—Assigned for Encumbrances 15,000

Encumbrances 15,000 Reverse encumbrances for goods received. (4) Expenditures 14,000 Vouchers Payable 14,000 Receive goods at cost of $14,000. At any time, the remaining appropriating authority available to the fund managers can be determined by the following equation:

Appropriating authority remaining available

= Appropriations – (Encumbrances + Expenditures) If performance of an executory contract is complete or virtually complete, e.g., because wages and salaries have been earned by employees, an expenditure and a liability should be recognized, not an encumbrance. An encumbrance is recorded for budgetary control purposes only when a commitment has been made related to an unperformed contract for goods or services. An expenditure is recorded when a current liability is to be liquidated with expendable available current resources. Step 4. Disbursement A disbursement is the payment of cash for expenditures. Disbursements usually must be approved by the governing board or council as an additional level of control over expenditures. Virtually all governmental entities use a comprehensive voucher system to control cash outflows. The governing board receives a schedule of vouchers to be approved for payment by vote of the board. This is usually one of the early agenda items in any board or council meeting as a vote is taken to “pay all bills.” Checks are then written and delivered to the supplier of the goods. If the Bancroft City council approved the voucher at its October 8 meeting and a check was prepared in the amount of $14,000 and mailed on October 15, 2013, the following entry records the disbursement: October 15, 2013 (5) Vouchers Payable 14,000 Cash 14,000 Payment of voucher for goods received.


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Classification of Expenditure Transactions and Accounts Governmental accounting places many controls over expenditures, and much of the financial reporting focuses on the various aspects of an expenditure. Expenditures should be classified by fund, character, function (or program), organizational unit, activity, and principal classes of objects. Exhibit 7 describes the major expenditure classifications.

Exhibit 7 Major Expenditure Classifications for Governmental Funds

Classification Description

Fund The fund is identified to show the specific source of the expenditure. For example, the general fund would be noted for expenditures from that fund.

Character Character classifications are based primarily on the period the expenditures are anticipated to benefit. Four major character classifications are current, capital outlay, debt service, and intergovernmental.

Function (or program) Functions are group-related activities directed at accomplishing a major service or regulatory responsibility. Standard classifications of function include general govern-mental; public safety; highway and streets; sanitation; health and welfare; culture and recreation; and education.

Organizational unit Classifying by organizational unit maintains accountability by each unit director. The organizational unit is determined by the governmental unit’s organization chart. For example, public safety could be broken down into police, fire, corrections, protective inspection (such as plumbing and electrical code inspections), and other protection (such as flood control, traffic engineering, and examination of licensed occupations).

Activity Activities within a function are recorded to maintain a record of the efficiency of each activity. For example, the police function could be broken down into the following activities: police administration, crime control and investigation, traffic control, police training, support service (such as communication services and ambulance services), special detail services, and police station and building maintenance. Each of these activities could be broken down further, if desired.

Object class Object class is a grouping of types of items purchased or services obtained. For exam-ple, operating expenditures include personal services, purchased and contractual services, and commodities. Each of these objects could be further broken down, depending on the information needs of the governing entity. For example, purchased services could include utility services, cleaning services (such as custodial, lawn care, and snow plowing), repair and maintenance services, rentals, construction services, and other purchased services, such as insurance or printing.

Many governmental units have a comprehensive chart of accounts with specific coding digits that provide the basis for classifying each expenditure. For example, an expenditure journal entry might specify the expenditure account to be charged as number 3100.23-101. The chart of accounts shows that the 3100.23 account is for public safety: police—crime control and investigation—patrol, as follows: 3100. Public safety

3100. Police 3100.2 Crime control and investigation

3100.23 Patrol


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The –101 suffix indicates that this expenditure is for personal services in the form of salaries and wages for regular employees. The level of specificity in the chart of accounts depends on the particular governing entity’s information needs. Classifying information with such specificity allows the governing entity to maintain complete database control over the expenditure information, which it can use at any time in aggregate or relational analysis. For the examples in this chapter, only the expenditure control level is presented; in practice, a complete specification of the expenditure is made. Outstanding Encumbrances at the End of the Fiscal Period In the previous Bancroft City example, the goods were received within the same fiscal period in which they were ordered. What happens if the goods are ordered in one fiscal year and received in the next year? In this case, the encumbrance is not reversed before the end of the fiscal period. Accounting for these outstanding encumbrances depends on the governmental unit’s policy. The government may allow outstanding encumbrances to lapse; that is, the governmental unit is not required to honor these encumbrances carried over to the new year, and the new year’s budget must rebudget them. In virtually all cases, the encumbrances will be rebudgeted and honored; however, this policy specifically recognizes the legal authority of the new governing board to determine its own expenditures. A second method is to carry over the encumbrances as nonlapsing spending authority. This method recognizes practical aspects of encumbrances outstanding at the end of a fiscal period. Either method may be used in governmental accounting. To illustrate the differences between the lapsing and nonlapsing methods of accounting for encum-brances, assume the following: 1. On August 1, 2013, $15,000 of goods are ordered and an appropriate entry is made to record the

encumbrance. 2. The goods have not been received on December 31, 2013, the end of the fiscal period. 3. The goods are received on February 1, 2014, at an actual cost of $14,000. Exhibit 8 presents a comparison of the journal entries that would be required under each of the two methods of accounting for unfilled encumbrances at year-end.

Exhibit 8 Comparison of Accounting for Lapsing and

Nonlapsing Encumbrances at Year-End

Item Outstanding Encumbrances Lapsing at Year-End

Outstanding Encumbrances Non-Lapsing at Year-End

December 31, 2013 Close remaining budget-

ary encumbrances

Budgetary Fund Balance—

Assigned For Encum-brances

Encumbrances

15,000

15,000


Assigned For Encum-brances

Encumbrances

15,000

15,000

Reserve actual fund balance for outstanding encumbrances at end of 2013 expected to be honored in 2014

Fund Balance—Unassigned Fund Balance—Assigned

for Encumbrances

15,000 15,000

Fund Balance—Unassigned Fund Balance—Assigned

for Encumbrances

15,000 15,000

January 1, 2014 Reverse prior year

encumbrance reserve

Fund Balance—Assigned for

Encumbrances Fund Balance—

Unassigned

15,000

15,000


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Establish budgetary control over encum-brances renewed from prior period

Encumbrances Budgetary Fund Bal-

ance—Assigned For Encumbrances

15,000 15,000

Reclassify reserve from prior year

Fund Balance—Assigned for Encumbrances

Fund Balance—Assigned for En-cumbrances

15,000

15,000

February 1, 2014 Receive goods and

remove budgetary reserve for encum-brances


Assigned for Encum-brances

Encumbrances

14,000

14,000

Expenditures

Vouchers Payable 14,000

14,000

December 31, 2014 Close expenditures

account

Fund Balance—Unassigned

Expenditures 14,000

14,000

Fund Balance—Assigned

for Encumbrances Expenditures Fund Balance—

Unassigned

15,000

14,000 1,000

Outstanding Encumbrances Lapse at Year-End The closing entries on December 31, 2013, close the remaining budgetary encumbrances and establish a reserve of the actual fund balance on the December 31, 2013, balance sheet. Although the GAAFR rec-ommends that a reserve for lapsing encumbrances be reported on the balance sheet, the GASB’s codifica-tion allows the alternative of only footnote disclosure of lapsing orders at year-end that are expected to be honored in the next fiscal period. If only footnote disclosure is used, the governmental entity would have only the first closing entry on December 31, 2013, to close out the budgetary accounts related to the encumbrance. No balance sheet reserve is established if the footnote disclosure alternative is used. Normal procedure for many governmental entities is that the next year’s governing board meets after elections or appointments for the next year take place and this meeting is generally held shortly before the beginning of the next fiscal year so that the budget is effective beginning on January 1 of the next year. Thus, the incoming governing board will typically make a decision during the budget process as to whether or not year-end outstanding encumbrances will be honored in the next fiscal period. If the new governing board decides not to honor the 2013 year-end outstanding encumbrances, then only the closing entry to close the remaining budgetary encumbrances would be made on December 31, 2013. If the governmental entity uses the footnote disclosure alternative, no footnote disclosure in the 2013 financial statements would be made for those outstanding encumbrances not expected to be renewed in the next fiscal year. If the new governing board decides to honor the outstanding encumbrances from 2013, then the outstanding encumbrances must be included in the 2014 budgeted appropriations. An entry is made as of January 1, 2014, to establish budgetary control over the expected expenditure. A “fresh start,” new spend-ing authority is established, and the sequence of entries continues as if this is a new purchase order effec-tive for 2014. In the unusual case that the new governing board makes a decision as of January 1, 2014, not to honor the outstanding encumbrances, and the December 31, 2013, entry had already been recorded, then the following entry would be made as of January 1, 2014, to record the cancellation of the outstanding en-cumbrance from 2013: January 1, 2014 (6) Fund Balance—Assigned for Encumbrances 15,000 Fund Balance—Unassigned 15,000 Eliminate reserve for outstanding encumbrances not being renewed.


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If the January 1, 2014, entries had already been made, and the governing board later decides not to honor the outstanding encumbrance from 2013, reversing entries would be made to eliminate the actual fund balance reserve and the budgetary fund balance reserve that had been created on January 1, 2014. If the governmental entity used only footnote disclosure in its 2013 financial statements for the year-end outstanding encumbrances expected to be honored, then only a reversing entry would be required to reverse the January 1, 2014 entry that had established the budgetary encumbrances and budgetary fund balance reserve. The governmental entity then simply cancels the order with the external vendor. Outstanding Encumbrances Are Nonlapsing at Year-End Some governing entities carry over the prior year appropriations authority as nonlapsing encumbrances. In this case, the budget for the second fiscal period does not show these carryovers because they arose from the appropriations authority of the prior year. The nonlapsing encumbrances are dated for the prior year to indicate they arose from that year’s appropriating authority. Some governmental accountants believe this method is realistic for many situations in which orders placed with outside vendors cannot easily be canceled. The 2013 year-end closing entries presented in Exhibit 4 show the required reservation of the actual fund balance. Note that these are the same two entries made under the lapsing method with balance sheet recognition of the reserve of the fund balance. The differences between the two methods become apparent during the second fiscal period. Under the nonlapsing method, it is important to identify separately ex-penditures made from spending authority carried over from prior periods. Typically this is done in a reclassification entry on the first day of the second fiscal period, which dates the Fund Balance—Assigned for Encumbrances. No budgetary entry is made in the second year because the appropriation authority comes from the first year’s budget. When the goods are received, the expenditures account is also dated to indicate that the expenditure authority emanated from 2013. At the end of 2014, the Expenditures-2013 account is closed directly to the Fund Balance—Assigned for Encumbrances-2013. Note that the $1,000 difference between the actual $14,000 cost and the $15,000 assigned amount is closed to Fund Balance—Unassigned because the actual cost is less than the amount encumbered from the prior year’s appropriation authority. If the actual cost is more than the reserve, the difference must be approved as part of the appropriation authority for 2014.

Short Quiz

Indicate whether each of the following statements is true or false. 1. The three budgetary accounts which should be incorporated in the accounting system of a general

fund or a special revenue fund are Estimated Revenues Control, Revenues, and Appropriations Control.

2. An encumbrance of an appropriation should be recorded when goods or services are ordered. 3. Encumbrances, in addition to expenditures, must be deducted from each legally approved appro-

priation in order to determine the amount of the available appropriation. Answers 1. False. The three budgetary accounts are Estimated Revenues Control, Appropriations Control,

and Encumbrances. 2. True. Ordering goods or services will, in the normal course of events, result in their receipt and,

consequently, an expenditure of an appropriation. 3. True. It is contrary to law to over expend appropriations, therefore it is important to know the

estimated amount of open encumbrances as well as the total of expenditures to date.

Key Observations from the Illustrations As a practical matter, almost all outstanding encumbrances at year-end are honored and completed in the next fiscal period. The method of accounting for open encumbrances at year-end is based on the govern-mental unit’s budgetary policy, which may be affected by legal statutes controlling carryover of appropri-


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ating ability from one fiscal period to the next. Both methods are used in practice. It is important to note that, in this example, the 2013 statement of revenues, expenditures, and changes in fund balance will report no expenditures relating to this item. In 2014, $14,000 of expenditures will be recognized. Under the nonlapsing method, expenditures made in 2014 but carried over from 2013 encumbrances are dated to note they arose from 2013’s appropriations. The comprehensive illustration presented later in this chapter uses the lapsing method because of its widespread use. Reporting of Encumbrances under the New Standard on Fund Balance Reporting GASB 54 does not report any reserves of fund balance on the balance sheet. Rather, the amount of en-cumbrances is included as part of the spendable fund balance, usually in the assigned category. Only footnote disclosure is now used to report the aggregate amount of encumbrances, along with the required disclosures about other significant commitments. Since governments will continue to use encumbrance accounting because of the control and management information an encumbrance system provides, we continue to show encumbrance accounting even though encumbrances are no longer reported in the balance sheet. GASB 54 does not restrict the accounting systems used by governments. Expenditures for Inventory If purchasing is centralized, the supply activities of a governmental unit are usually accounted for in an internal service fund. However, an internal service fund is a proprietary fund for which net assets, not a fund balance, is reported. Moreover, smaller entities often record the purchases of supplies inventory in the general fund. In accounting for supplies, the entire expenditure may be recognized in the period of purchase (the purchases method). An alternative is the consumption method; it recognizes expenditures for only the amount of inventory used in the period. In the former case, a significant inventory must be recognized as an asset at the end of the period, with a corresponding reservation of fund balance. In the latter case, fund balance is reserved for inventory only if amounts must be maintained and are therefore not available for expenditure. The specific method to follow depends on the governing unit’s policy and how inventory expenditures are included in the budget. A second issue is whether to show inventory as an asset on the balance sheet of the governmental funds. Inventory is not an expendable asset; that is, it may not be spent as the governing entity wishes. NCGA 1 states that inventory should be shown on the balance sheets for governmental funds if the amount of inventory is material. Immaterial inventories need not be shown on the balance sheet. If the inventory is material, it is presented as an asset on the balance sheet; an amount equal to the inventory also should be shown as a reservation of the fund balance, indicating that that amount is no longer ex-pendable. Note: Exhibit 9 presents the entries to account for inventories under both the purchase method and the consump-tion method. The illustration assumes that Bancroft City acquires $2,000 of inventory on November 1, 2013, having held no inventory previously. On December 31, 2013, the end of Bancroft City’s fiscal year, a physical count shows $1,400 still in stock. During 2014, $900 of this inventory is used, resulting in a $500 remaining balance of supplies on December 31, 2014.


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Exhibit 9 Comparison of Accounting for Inventories—

Purchase versus Consumption Method

Item Purchase Method of Accounting

Consumption Method of Accounting

November 1, 2013 Record acquisition of

$2,000 of inventory

Expenditures


2,000

Expenditures


2,000

December 31, 2013 Recognize ending invento-

ry of $1,400

Inventory of Supplies

Fund Balance—Nonspendable

1,400

1,400

Inventory of Supplies

Expenditures Fund Balance—

Unassigned Fund Balance—

Nonspendable

1,400

1,400

1,400

1,400

December 31, 2014 Record remaining inven-

tory of $500, with $900 of supplies having been consumed during 2014

Fund Balance—

Nonspendable Inventory of Supplies

900

900

Expenditures

Inventory of Supplies Fund Balance—

Nonspendable Fund Balance—

Unassigned

900

900

900

900

Purchase Method of Accounting for Inventories Under the purchase method, the entire amount of inventory acquired is charged to Expenditures in the period acquired. On December 31, 2013, the end of the fiscal year, an adjusting entry is made to recog-nize the $1,400 remaining inventory as an asset and to restrict the fund balance for the nonexpendable portion applicable to inventories. The expenditure of $2,000 is closed into Fund Balance—Unassigned for 2013 in a closing entry made at the end of the fiscal year. The December 31, 2013, balance sheet includes the inventory of supplies as an asset in the amount of $1,400, and Fund Balance—Assigned for Inventories is shown as a fund balance reserve for $1,400. The 2013 operating statement shows a $2,000 expenditure for supplies. At the end of 2014, an adjusting entry is made to recognize the use of the $900 of supplies of the $1,400 remaining from the 2013 purchase. This entry reduces the reservation of the fund balance and decreases inventory. At the end of 2014, Inventory of Supplies is $500, and Fund Balance—Assigned for Inventories is $500, for the remaining unused supplies. In summary, the $2,000 expenditure is recognized in the period in which the supplies are purchased. No expenditures are recognized in subsequent periods although some of the supplies are used in those periods. Consumption Method of Accounting for Inventories Under the consumption method, expenditures for a period are reported only for the amount consumed. In this case, the budget for the period should be based on the expected amount of use so that the budgeted and actual amounts compared at the end of the year are on the same basis. A net expenditure of $600 ($2,000 - $1,400) for supplies used is reported in 2013, the year the sup-plies were acquired. With $500 of inventory remaining at the end of 2014, an expenditure of $900 is reported in the 2014 operating statement to show the amount of supplies consumed during 2014. The consumption method relates the expenditures with the use of the inventory. A comparison of selected account balances under the purchase method and consumption method shows the different amounts reported under these two methods:


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Purchase Method Consumption Method 2013

Expenditures $2,000 $ 600 Inventory of Supplies 1,400 1,400

2014 Expenditures –0– 900 Inventory of Supplies 500 500

Note that the choice of methods has no effect on the balance sheet amounts; the only effect is on the period in which the expenditures for inventory are reported. Note: Both inventory methods are used in practice. The method used by a specific governmental unit depends on its budgeting policy. If the governmental unit includes all inventory acquisitions in its appropriations for the period, the purchase method should be used. If the governmental unit includes only the expected amount of inventory to be used during a period in that period’s appropriations, the consumption method should be used. Reporting of Inventory under the New Standard on Fund Balance Reporting Inventories, if they are material in amount, are reported as an asset on the balance sheet. Under the pro-posed standard, reserves of fund balance are not reported on the face of the balance sheet. But the fund balance associated with inventories is reported in the non-spendable fund balance category. Accounting for Fixed Assets Governmental entities may acquire equipment that has an economic life of more than one year. Account-ing for this acquisition depends on which fund expends the resources for the acquisition. The governmen-tal funds are concerned with the expendability and control over available resources and account for the acquisitions of equipment as expenditures. In the governmental funds, the entire amount of the cost of the acquisition of equipment and other capital assets is recognized as an expenditure in the year the asset is acquired. No capital assets are recorded in the general fund; they are treated as expenditures of the period. The proprietary funds are concerned with capital maintenance and account for acquisitions of capital assets in the same manner as commercial entities. Thus, the accounting for the purchase of a capital asset differs in the five governmental funds from the accounting used in the proprietary funds. For example, assume that Bancroft City acquires a truck. The acquisition is made from the resources of, and is accounted for in, the general fund. The encumbrance is $12,000, but the actual cost is $12,500 because of minor modifications required by the city.

The general fund makes the following entries to account for the acquisition of the truck: (7) Encumbrances 12,000 Budgetary Fund Balance—Assigned for Encumbrances 12,000 Order truck at estimated cost of $12,000. (8) Budgetary Fund Balance—Assigned For Encumbrances 12,000 Encumbrances 12,000 Cancel reserve for truck received. (9) Expenditures 12,500 Vouchers Payable 12,500 Receive truck at actual cost of $12,500. The truck is not recorded as an asset in the general fund; it is an expenditure in this fund. Sales of capital assets are recorded as a debit to Cash (or receivable) and a credit to Other Financing Sources—


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Sales of General Capital Assets for the amount received from the sale. If the amount from the sale is immaterial, the government entity may elect to record the credit to other revenues. A schedule of the acquisition or sale of capital assets by any governmental fund should be maintained, but that record is only for the government-wide financial statements, which do report the assets of a government unit. Works of Art and Historical Treasures For the purposes of government-wide financial statements, governments should capitalize works of art, historical treasures, and similar types of assets at their historical costs at acquisition or at their fair values at the date of the contribution. For example, if the general fund expended $10,000 for a work of art, it reports an expenditure for that amount. However, when preparing the government-wide financial state-ments, the cost of the work of art is reported as an asset of the government. If the assets are donated, contribution revenue is recognized in the government-wide financial statements. The GASB provided practical guidance to the general rule of capitalizing works of art and historical treasures. For example, many collections have a very large number of items collected over long periods of time, and it is virtually impossible to determine the cost or fair value at the times of acquisition. A provi-sion in GASB 34 states that the government is not required but is still encouraged to capitalize a collec-tion of art or historical treasures if the government meets all three of the following provisions: (1) holds the collection for public exhibition, education, or research; (2) protects and preserves the collection; and (3) has an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections. If contributed items are not capitalized, the government-wide financial statements report both a program expense and a contribution revenue for the fair market value of the item at the time of its donation. Capitalized collections that are exhaustible, such as displays of works whose useful lives are reduced due to display, or used for education or research, should be depreciated over their estimated useful lives. Collections or individual items whose lives are inexhaustible are not depreciated. Long-Term Debt and Capital Leases Commercial, profit-seeking businesses recognize long-term debt and capital leases as noncurrent liabili-ties. The debt or capital lease is entered into to earn income, and the liability is recognized under the flow of economic resources measurement focus model. However, accounting for long-term liabilities in gov-ernmental funds is directly affected by the flow of current financial resources measurement focus model. The governmental funds, which include the general fund, record the proceeds from a bond issue as a debit to Cash and a credit to Bond Issue Proceeds, an other-financing source. Bond issue proceeds are not revenue because the bonds must be repaid. Other financing sources are shown in the middle section of the statement of revenues, expenditures, and other changes in fund balances. Bonds are not reported on the governmental funds’ balance sheets but only on the government-wide financial statements. Capital leases are accounted for in a manner similar to long-term debt. If a proprietary fund (e.g., internal service or enterprise fund) enters into a capital lease, the lease is accounted for using methods similar to those used by commercial, profit-seeking entities, with the recording of an asset and a lease liability. However, if a governmental fund (e.g., general fund) enters into a capital lease, the capital lease is accounted for in a manner similar to a bond’s accounting. Investments Some governmental entities maintain investments in stock or bond securities. The purpose of these in-vestments typically is to obtain an investment return on available resources. GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (GASB 31), established a general rule of fair market valuation for investments held by a government entity. The following investments are to be valued at fair value, if determinable, in the asset section of the balance sheet for the governmental entity: (1) investments in debt securities; (2) investments in equity securities (other than those accounted for under the equity method as provided for in APB 18), including option contracts, stock warrants, and stock rights; (3) investments in open-end mutual funds; (4) investment


31

pools in which a governmental entity combines with other investors; and (5) interest-earning investment contracts in which the value is affected by market (interest rate) changes. GASB Statement No. 52, Land and Other Real Estate Held as Investments by Endowments (GASB 52), extended the general rule of using fair value to real estate investments by endowments. The periodic changes in the fair value of all the types of investments included in GASB 31 and GASB 52 should be recognized as an element of invest-ment income in the operating statement (or statement of activities) of each fund making the investment. In the case of an internal investment pool that combines the resources of several of the governmental entity’s funds, for financial reporting purposes the pool’s assets and its income are allocated to each individual fund based on its percentage of the total invested. Many state and local governments have deposits and make investments that are open to a variety of risks. GASB Statement No. 40, Deposit and Investment Risk Disclosures (GASB 40), established detailed note disclosure requirements related to the following types of investment risks: credit risk (including concentrations of credit risk), interest rate risk, and foreign currency risk, as well as for deposit risks of custodial credit risk and foreign currency risk. The main objective of GASB 40 is to require footnote disclosures of the policies and the profiles of the government’s investment portfolios, such as the credit quality ratings debt securities and other fixed-income securities, and the terms of investments whose fair value is highly sensitive to changes in the interest rate. Interfund Activities A basic concept in governmental accounting is that each fund is a separate entity and has separate sources of resources, sometimes including the power to levy and collect taxes. The revenues of each fund must then be expended in accordance with the budget and restrictions established by law. Because a single governmental entity has a number of separate funds, it sometimes becomes necessary to transfer resources from one fund to another. Interfund activities are resource flows between fund entities. In a consolidated financial statement for a commercial entity, intercompany transactions are eliminated to report only the effect of transactions with external entities. Governmental accounting, on the other hand, requires the separate maintenance and reporting of interfund items. The governing body must approve any interfund transfers and transactions to provide a public record and to prevent distortion of fund uses. Many gov-ernmental entities include interfund activities anticipated during a fiscal year in the operating budgets for the year. Budgetary entries for interfund activities are illustrated in the comprehensive example of Haas City presented later in this chapter. Interfund transfers must be accounted for carefully to ensure that the legal and budgetary restrictions are followed and that resources intended for one fund are not used in another. GASB 34 establishes four types of interfund activities, as follows: (1) interfund loans, (2) interfund services provided and used, (3) interfund transfers, and (4) interfund reimbursements. A discussion of the four interfund items follows; they are illustrated in Exhibit 10. (1) Interfund Loans State law may allow lending or borrowing activities between funds. The loans must be repaid, usually within one year or before the end of the fiscal period. Loans and advances are not shown on a fund’s statement of revenues, expenditures, and changes in fund balance; however, all outstanding loans or advances must be shown on the balance sheet as payables or receivables. Interest usually is not charged on interfund financing arrangements. If interest is charged, it is accounted for in the funds in the same manner as for other interest income or expense. Some governmental entities distinguish between short-term and long-term financing arrangements by using the term Advances to (or from) to denote a long-term agreement and Due to (or from) for a short-term agreement. The illustration of an interfund financing transaction in Exhibit 10 assumes that Bancroft City’s general fund loans the internal service fund $4,000 for two months. The general fund reports a receivable for the amount of the loan until the loan is repaid.


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Exhibit 10 Interfund Transactions and Transfers

Item Entry in General Fund Entry in Other Fund

1. Interfund loan

Due from Internal Service

Fund Cash

Cash Due from Internal Ser-

vice Fund

4,000

4,000

4,000

4,000

Internal Service Fund: Cash

Due to General Fund Due to General Fund

Cash

4,000

4,000

4,000

4,000

2. Interfund service

provided and used

Expenditures

Due to Internal Service Due to Internal Service

Fund Cash

100

100

100

100

Internal Service Fund: Due from General Fund

Charge for Services Cash

Due from General Fund

100

100

100

100

3. Interfund transfer

Other Financing Uses—

Transfer Out to Capital Projects Fund

Cash

10,000

10,000

Capital Projects Fund: Cash

Other Financing Sources—Transfer In from General Fund

10,000

10,000

4. Interfund reimburse-

ment

Cash

Encumbrances 3,000

3,000

Capital Projects Fund: Expenditures

Cash 3,000

3,000

(2) Interfund Services Provided and Used These interfund activities are transactions that would be treated as revenue, expenditures, or expenses if they involved parties external to the governmental unit. These interfund activities are still reported as revenue, expenditures, or expenses but are different because they are entirely within the governmental unit. These interfund activities are often normal and recurring items, usually involving at least one propri-etary fund. Three examples are as follows: 1. The general fund purchases goods or services from an internal service or enterprise fund. 2. Payments are made to the general fund from the enterprise fund for fire and police protection. 3. A transfer of resources from the general fund to the pension trust fund is made to pay for the

city’s cost of pension benefits for its employees. This is a cost associated with employee services provided to the city and is therefore an expenditure of the general fund.

Usually these transfers involve the recognition of a receivable or payable because of the time lag between the purchase of the services and the disbursement of funds. A “Due to (or from)” account is used for short-term interfund receivables and payables rather than a formal Vouchers Payable account. The illustration of this type of interfund activity in Exhibit 10 assumes that Bancroft City’s general fund uses an auto from the city motor pool. The motor pool operates as an internal service fund. The general fund is billed $100 based on mileage and pays the bill 30 days later. (3) Interfund Transfers The general fund often transfers resources into another fund to be used by the receiving fund for its own operations; occasionally, the general fund receives resources from other funds. These interfund transfers are not expected to be repaid. Such transfers are not fund revenues or expenditures but are instead called “interfund transfers.” These transfers are classified under “Other Financing Sources or Uses” in the operating financial statements of the funds. The reason that the receiving fund does not recognize these


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transfers as revenue is that the issuing fund has already properly recognized these resources as revenue. Thus, the recording of these transfers as other financing sources eliminates the possibility of double counting the same resources as revenue in two different funds of the combined governmental entity. Examples include the following: 1. A transfer of resources, such as cash or other assets, is made from the general fund to an enter-

prise fund or internal service fund that has an operating deficit that must be eliminated. 2. A transfer of resources from the general fund to a capital projects fund is made to help finance

new construction. 3. A transfer of resources from the general fund to the debt service fund is made to pay principal and

interest. The illustration of an interfund transfer in Exhibit 10 assumes that the general fund of Bancroft City agrees to provide $10,000 to the capital projects fund toward the construction of a new library. The Trans-fer Out account in the general fund is closed to its Unassigned Fund Balance at the end of the fiscal period. The capital projects fund also closes its Transfer In account at the end of the fiscal period to its Unassigned Fund Balance. These interfund transfers are not expected to be repaid. Interfund Transfers and Financial Reporting The reporting of transfers is different in the government-wide and fund financial statements (see Exhibit 11). 1. Transfers within the governmental activities section are not reported in the government-wide

statements. These transfers result in no overall change in governmental activities. 2. Transfers between governmental activities and business-type activities are reported in both the

government-wide statements and the fund statements.

Exhibit 11 Interfund Transfers and Financial Reporting

(4) Interfund Reimbursements A reimbursement transaction is for the reimbursement of a fund’s expenditure or expense that was initial-ly made from the fund but that is properly chargeable to another fund. These initial payments are some-times made either because of improper classification to the wrong fund or for expediency within the governmental entity. The reimbursement from one fund to another is recorded as a reduction of the ex-penditure in the fund initially recording the expenditure and a recording of the expenditure in the proper fund for the appropriate amount. Two examples are as follows: 1. An expenditure properly chargeable to the special revenue fund is initially recorded and paid by

the general fund, and the general fund subsequently is reimbursed by the special revenue fund. 2. The general fund records and pays for an expenditure to provide preliminary architectural work

on the planning for a new sports arena. The sports arena enterprise fund later reimburses the gen-eral fund.


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The illustration of an interfund reimbursement in Exhibit 11 assumes that the general fund of Ban-croft City recorded a $3,000 expenditure for a bill from outside consultants that is later discovered to be properly chargeable to the capital projects fund. Upon notification, the capital projects fund reimbursed the general fund and properly recorded the expenditure in its fund.

Short Quiz

Indicate whether each of the following is true or false. 1. Interfund loans or advances, operating transfers, and residual equity transfers are examples of

interfund transactions which should not affect Revenue or Expenditures accounts. 2. Interfund transactions which constitute reimbursements of one fund for expenditures initially

recognized by it, but which are properly applicable to another fund, should be recognized as ex-penditures by the reimbursing fund and as a reduction of expenditures by the fund which is reim-bursed.

3. Interfund transactions, which would result in the recognition of revenues, expenditures, or ex-penses, if one of the parties were external to the governmental unit, properly are reported as re-sulting in fund revenues, expenditures, or expenses.

4. Transfers within the governmental activities section are not reported in the government-wide statements.

Answers 1. True. The listed transactions are reported in the manner described previously. 2. This is a specific provision of the NCGA. 3. True. These transactions should be reported as if one of the parties were external to the govern-

mental unit. 4. True. These transfers result in no overall change in governmental activities.

Overview of Accounting and Financial Reporting for the General Fund Exhibit 12 presents an overview of the accounting for the general fund, including accounting for the interfund activities on the general fund’s operating statement, the statement of revenues, expenditures, and changes in fund balance. Note that the interfund loans are reported only on the fund’s balance sheet.

Exhibit 12 Overview of General Fund

Item Description Measurement focus Flow of current financial resources—expendability. Accounting basis Modified accrual. Budgetary basis Operating budget. Financial statements 1. Balance sheet. 2. Statement of revenues, expenditures, and changes in fund balance.

Balance Sheet Current assets Includes current financial resources such as cash, certificates of deposit, accrued

property taxes receivable, and estimated allowance for uncollectible taxes. Interfund loans receivable are Included as assets. Material inventories reported.

Long-term productive assets (buildings, etc.)

Fixed assets not reported in general fund.

Current liabilities Vouchers payable is primary current liability. Interfund loans payable also included as liabilities.

Long-term debt Governmental unit long-term debt not reported in general fund. Fund balance Unassigned fund balance and reservations of fund balance (e.g., encumbrances

and inventories).


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Statement of Revenues, Expenditures, and Changes in Fund Balance Revenue Recorded when measurable and available under the modified accrual basis of

accounting. Interfund services provided and used also included in revenues for expenditures).

Expenditures Recognized in period when measurable and fund liability arises. Other financing sources

and uses Includes bond issue proceeds and interfund transfers.

Changes in fund balance Reconciles changes in fund balance during period, including changes in reserva-tions of fund balance.

The illustration uses the financial reporting requirements under GASB 34. The highlights of the proposed statement for fund balance reporting are covered in the additional considerations section of this chapter. Chapter 2 presents an example of the fund balance reporting for the governmental fund types under the proposed statement. Comprehensive Illustration of Accounting for the General Fund The following example illustrates the accounting for the general fund of Haas City for the January 1, 2014, to December 31, 2014, fiscal year. The entries are presented by topic, not necessarily in chronolog-ical order. The balance sheet for the general fund as of December 31, 2013, presented in Exhibit 13, represents the opening balances for fiscal 2014.

Exhibit 13 General Fund Balance Sheet at the Beginning of 2014

HAAS CITY General Fund Balance

December 31, 2013 Assets:

Cash $ 50,000 Property Taxes Receivable—Delinquent $100,000 Less: Allowance for Uncollectibles—Delinquent

(5,000) 95,000 Inventory of Supplies 14,000

Total Assets $159,000 Liabilities and Fund Balance: Vouchers Payable $30,000 Fund Balance: Nonspendable: Supplies inventory $14,000 Spendable: Assigned to: General Government Services 11,000 Unassigned 104,000 129,000

Total Liabilities and Fund Balance $159,000 Adoption of the Budget Haas City’s budget summarizes the four major functions of the city: general government, streets and highways, public safety (fire and police), and sanitation (see Exhibit 14). In the complete budget used by the city council, the expenditures in each of the four functions are broken down into the following catego-


36

ries: personal services, supplies, other services and charges, and capital outlay. The public safety budget includes a budgeted capital outlay of $50,000 for a new fire truck.

Exhibit 14 General Fund Operating Budget

HAAS CITY General Fund

Operating Budget For Period of January 1, 2014, to December 31, 2014

Estimated Revenue:

Property Taxes $775,000 Grants 55,000 Sales Taxes 25,000 Miscellaneous 20,000 Total Estimated Revenue $875,000

Appropriations: General Government $200,000 Streets and Highways 75,000 Public Safety 400,000 Sanitation 150,000 Total Appropriations (825,000)

Excess of Estimated Revenue over Appropriations $ 50,000 Other Financing Uses:

Transfer out to Capital Projects Fund $ (20,000) Transfer out to Initiate Internal Service Fund (10,000) Total Other Financing Uses (30,000)

Excess of Estimated Revenue and Interfund Transfers over Appropriations and Interfund Transfers

$ 20,000

Among the city’s accounting policies, it elects to use the following: 1. Consumption method for inventories. The city budgets the supplies inventory on the consump-

tion method, including only the costs of expected inventory use during the year. 2. Lapsing method of accounting for encumbrances. The city uses the lapsing method for account-

ing for any encumbrances outstanding at the end of fiscal periods. The Appropriations Control for fiscal 2014 includes a reappropriation of the $11,000 of outstanding encumbrances as of De-cember 31, 2013.

3. Use of control accounts. The city uses a comprehensive system of control accounts for its major journals. The following accounts have extensive subsidiary ledgers that correspond to the entries made in the journal: Estimated Revenues Control.

4. Appropriations Control, Encumbrances, and Expenditures. The specific details supporting each of these control accounts are maintained in the subsidiary records. For purposes of focusing on the major aspects of governmental accounting, the Haas City illustration includes the control-level entries only.

5. Budgeted interfund activities. The city includes in the budget all anticipated interfund activities during the fiscal year. The general fund is expected to have the following interfund transfers:

Other Financing Uses: Transfer Out to Capital Projects Fund $20,000 Transfer Out to Internal Service Fund 10,000


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The interfund transfer out to the capital projects fund is to pay for the city’s share of a municipal courthouse addition project, and the transfer out to the internal service fund is to initiate the internal service fund. The following entries are made to record the budget and to renew the lapsing encumbrances from the prior period: January 1, 2014 (10) Estimated Revenues Control 875,000 Appropriations Control 825,000 Estimated Other Financing Uses—Transfer Out To Capital Projects 20,000 Estimated Other Financing Uses—Transfer Out To Internal Service 10,000 Budgetary Fund Balance—Unassigned 20,000 Record budget for fiscal 2014. (11) Fund Balance—Assigned for Encumbrances 11,000 Fund Balance—Unassigned 11,000 Reverse prior-year encumbrance reserve. (12) Encumbrances 11,000 Fund Balance—Unassigned 11,000 Renew encumbrances from prior period as included in budgeted appropriations in 2014. Note: The technique of capitalizing the account titles of all budgetary accounts continues through the comprehen-sive illustration. This technique is used in the course to assist differentiation of the budgetary from the operating accounts. In practice, the budgetary accounts are not capitalized. Property Tax Levy and Collection Most municipalities obtain resources from property taxes, which are recorded as a receivable when an enforceable legal claim arises. Revenue is recorded if the property taxes are measurable and available for current expenditures. Recall that the 60-day rule for property taxes allows the recognition of revenue for the current fiscal period if the property taxes are expected to be collected within 60 days of the end of the current fiscal period. A deferred revenue account is credited if the property taxes are not available for current expenditures. For Haas City, the property taxes are due and available for use within the fiscal period and therefore are recorded as revenue as of the levy date. Note: A provision for uncollectibles must be recorded, and this provision is a reduction of property tax revenue, not a bad debts expense as in commercial accounting. Governmental funds have no such account as bad debts expense. The receivables are classified as current, collectible within this period, or delinquent, for past-due ac-counts. The entries in Haas City’s general fund for the transactions relating to property taxes are as follows: (13) Property Taxes Receivable—Current 785,000

Allowance for Uncollectible Taxes—Current 10,000 Revenue—Property Tax 775,000

Property taxes levied for this fiscal year with a reduction from revenues for the estimated uncollectibles.

(14) Cash 791,000 Property Taxes Receivable—Current 695,000 Property Taxes Receivable—Delinquent 96,000

Collect portion of property taxes including $96,000 of past due accounts.


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(15) Allowance for Uncollectible Taxes—Delinquent 4,000 Property Taxes Receivable—Delinquent 4,000 Write off remaining $4,000 of delinquent property taxes. (16) Allowance for Uncollectible Taxes—Delinquent 1,000 Allowance for Uncollectible Taxes—Current 5,000 Revenues—Property Tax 6,000 Revise estimate of uncollectibles from $10,000 to $5,000 and close remaining $1,000

balance of allowance account for delinquent accounts. (17) Property Taxes Receivable—Delinquent 90,000

Allowance for Uncollectible Taxes—Current 5,000 Property Taxes Receivable—Current 90,000 Allowance for Uncollectible Taxes—Delinquent 5,000 Reclassify remaining receivables and allowance account from current to delinquent. Other Revenue Other sources of income are grants from other governmental units, a portion of the sales tax collected on retail sales made within the city, and miscellaneous revenue from parking meters, fines, and licenses. Grants from other governmental units should be recognized as revenue when the grants become available and measurable. The city’s policy is to recognize these grants as the monies are received because the grants may be withdrawn by the grantor at any time up to the actual transmittal of the monies. In our example, the city receives only 60 percent of the expected grant that had been budgeted at $55,000. Sales tax revenue may be accrued if the city can make a good estimate of the amount to be received and if the sales tax revenue is available for current expenditures. The city’s policy is to recognize the sales taxes when received. Miscellaneous revenue is recognized as received. The entries to record the other sources of income are as follows: (18) Cash 33,000 Revenue—Grant 33,000 Receive only 60 percent of expected grant. (19) Cash 32,000 Revenue—Sale Tax 32,000 Receive sales tax revenue from state. (20) Cash 18,000 Revenue—Miscellaneous 18,000 Receive miscellaneous revenue from fines, license fees, minor disposals of equipment,

and other sources. Expenditures The appropriations were recorded in the budget entry [entry (10)] with a renewal of the encumbrances carried over from the prior period under the lapsing method of accounting for encumbrances [entries (11) and (12)]. Orders for goods and services from outside vendors are encumbered, and a voucher system is used. Recall that a governmental entity typically does not encumber internal payroll. Haas City makes the following entries for the encumbrances, expenditures, and disbursements made in the general fund during the year: (21) Encumbrances 210,000 Budgetary Fund Balance—Assigned for Encumbrances 210,000 Encumber for purchase orders for goods and services ordered from outside vendors.


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(22) Budgetary Fund Balance—Assigned for Encumbrances 5,000 Encumbrances 5,000 Reverse encumbrance for portion of order that is not deliverable because item has been

discontinued.

(23) Budgetary Fund Balance—Assigned for Encumbrances 190,000 Encumbrances 190,000 Reverse reserve for partial order of goods received. (24) Expenditures 196,000 Vouchers Payable 196,000 Receive goods at actual cost of $196,000 that had been encumbered for $190,000.

Difference due to increase in cost of items. Includes supplies for inventory.

(25) Budgetary Fund Balance—Assigned for Encumbrances 11,000 Encumbrances 11,000 Reverse reserve for goods received that were ordered in prior year. (26) Expenditures 9,000 Vouchers Payable 9,000 Receive goods ordered in prior year. Actual cost is $9,000 on encumbered amount of

$11,000. Difference due to price reduction as part of special sale. (27) Expenditures 550,000 Vouchers Payable 550,000 Payroll costs to employees for period. (28) Vouchers Payable 730,000 Cash 730,000

Vouchers approved by city council and paid during period. Acquisition of Capital Asset The budget for the fire department includes $50,000 for a new fire truck. This capital outlay is accounted for as any other expenditure of available resources. The resources for the fire truck are encumbered when the order is placed with the truck manufacturer. The entries in the general fund for the fire truck acquisi-tion are as follows: (29) Encumbrances 50,000

Budgetary Fund Balance—Assigned for Encumbrances 50,000 Order fire truck at estimated cost of $50,000. (30) Budgetary Fund Balance—Assigned for Encumbrances 50,000

Encumbrances 50,000 Reverse reserve for fire truck received. (31) Expenditures 58,000

Vouchers Payable 58,000 Receive fire truck at actual cost of $58,000 due to approved additional items required to

meet new fire code. (32) Vouchers Payable 58,000

Cash 58,000 Voucher approved and disbursement made for fire truck.


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Interfund Activities The anticipated interfund items are included in the budget for the fiscal period. They include the estimat-ed transfer out of $10,000 to initiate the internal service fund and the estimated transfer out of $20,000 for capital improvements to a capital projects fund. In addition to these transfers, the general fund also has an interfund transaction with the internal service fund for services received in the amount of $1,000, and it lends the enterprise fund $3,000. The following entries in the general fund record the general fund’s side of the interfund activities during the year. Chapter 2 continues the comprehensive example of Haas City and presents the entries for these interfund transactions and transfers in each of the related funds so that both sides of accounting for interfund items are illustrated for the Haas City example: (33) Other Financing Uses—Transfer Out to Internal Service Fund 10,000 Due to Internal Service Fund 10,000 Recognize the transfer out and associated liability to the internal service fund as included

in the budget. (34) Other Financing Uses—Transfer Out to Capital Projects Fund 20,000 Due to Capital Projects Fund 20,000 Recognize the transfer out and associated liability to the capital projects fund as included

in the budget. (35) Due to Internal Service Fund 10,000 Cash 10,000 Pay cash to internal service fund for payable from interfund transfer out previously recognized. (36) Due to Capital Projects Fund 20,000 Cash 20,000 Pay cash to capital projects fund for payable from interfund transfer out previously recognized. (37) Expenditures 1,000 Due to Internal Service Fund 1,000 Pay cash to internal service fund for payable from interfund transfer out previously recognized. (38) Due to Internal Service Fund 1,000 Cash 1,000 Pay cash to eliminate payable. (39) Due from Enterprise Fund 3,000 Cash 3,000 City Council approves loan to enterprise fund to be repaid in 90 days. Adjusting Entries Certain adjusting entries are required to state correctly the balance sheet items for the year. Assume that a physical count of the inventory shows an ending balance of $17,000 on December 31, 2014. This is a net increase of $3,000 from the beginning balance of $14,000. The policy of the general fund is to recognize inventory as an asset and to report a reserve against fund balance for the ending balance. Recall that the city is using the consumption method of accounting for inventories. The entries required to adjust the ending balance of the supplies inventory are as follows: (40) Inventory of Supplies 3,000 Expenditures 3,000 Adjust ending inventory to $17,000 and reduce expenditures to net amount consumed during

the period.


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(41) Fund Balance—Unassigned 3,000 Fund Balance—Assigned for Inventories 3,000 Adjust the reserve for inventories from beginning balance of $14,000 to its ending balance

of $17,000. Closing Entries The final set of entries closes the nominal accounts. The format presented first reverses the budget entry and then closes the operating revenues and expenditures. Some governmental entities close the accounts in a slightly different order by closing budgeted revenue against actual revenue and budgeted appropria-tions against actual expenditures. The specific order of closing the accounts has no impact on the final effect; all budgetary accounts and nominal operating accounts must be closed at year-end. A preclosing trial balance is presented in Exhibit 15.

Exhibit 15 Preclosing Trial Balance for General Fund


Preclosing Trial Balance December 31, 2014 Debit Credit Cash Property Taxes Receivable – Delinquent Allowance for Uncollectible Taxes – Delinquent Due from Enterprise Fund Inventory of Supplies Vouchers Payable Fund Balance—Nonspendable Fund Balance—Unassigned Revenue—Property Tax Revenue—Grant Revenue—Sales Tax Revenue—Miscellaneous Expenditures Other Financing Uses—Transfer Out to Capital Projects Fund Other Financing Uses—Transfer Out to Internal Service Fund Estimated Revenues Control Appropriations Control Estimated Other Financing Uses—Transfer Out To Capital Projects Estimated Other Financing Uses—Transfer Out To Internal Service Encumbrances Budgetary Fund Balance—Assigned For Encumbrances Budgetary Fund Balance—Unassigned Total

$102,000 90,000

3,000

17,000

811,000 20,000 10,000

875,000

15,000

$1,943,000

$5,000

55,000 17,000

112,000 781,000

33,000 32,000 18,000

825,000 20,000 10,000

15,000

20,000 $1,943,000

Recall that the city is using the lapsing method of accounting for encumbrances open at the end of the fiscal year. The closing entries for the general fund of Haas City for fiscal 2014 follow: December 31, 2014 (42) Appropriations Control 825,000 Estimated Other Financing Uses—Transfer Out To Capital Projects 20,000

Estimated Other Financing Uses—Transfer Out To Internal Services 10,000 Budgetary Fund Balance—Unassigned 20,000 Estimated Revenues Control 875,000 Close budgetary accounts.


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(43) Budgetary Fund Balance—Assigned for Encumbrances 15,000 Encumbrances 15,000 Close remaining encumbrances by reversing remaining budgetary balance. (44) Fund Balance—Unassigned 15,000 Fund Balance—Assigned for Encumbrances 15,000 Reservation of fund balance for encumbrances that lapse but are expected to be honored in 2014. (45) Revenue—Property Tax 781,000 Revenue—Grant 33,000 Revenue—Sales Tax 32,000 Revenue—Miscellaneous 18,000 Expenditures 811,000 Other Financing Uses—Transfer Out to Capital Projects Fund 20,000 Other Financing Uses—Transfer Out to Internal Service Fund 10,000 Fund Balance—Unassigned 23,000 Close operating statement accounts. The following reconciliation explains the calculation of the Fund Balance—Unassigned account balance:

Fund Balance—Unassigned

Bal. 1/1/14 104,000 (41) 3,000 (11) 11,000 Bal. Preclosing 112,000 (44) 15,000 (45) 23,000 Bal. 12/31/14 120,000

General Fund Financial Statement Information The general fund is always specified as a major governmental fund type. The two required statements for a major governmental fund are (a) the balance sheet and (b) the statement of revenues, expenditures, and changes in fund balance for purposes of illustration, the two financial statements for the general fund are provided, applying the requirements of GASB 34, and then a presentation is made of the fund balance section of the balance sheet under the proposed governmental accounting statement on fund balance reporting and governmental fund type definitions. The Balance Sheet The balance sheet required under GASB 34 is presented in Exhibit 16. This balance sheet includes the supplies inventory for $17,000 and the associated reservation of fund balance, reflecting that the portion of the fund balance already applied to inventory is not expendable. The $3,000 receivable from the inter-fund loan transaction with the enterprise fund is shown as a current asset. The outstanding encumbrances of $15,000 are a reservation of fund balance indicating that a portion of the year’s appropriation has been used but that the ordered goods or services have not yet been received.


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Exhibit 16 General Fund Balance Sheet Information

at the End of the Fiscal Period


Balance Sheet Information December 31, 2014

Assets: Cash $102,000 Property Taxes Receivable—Delinquent $ 90,000 Less: Allowance for Uncollectibles—Delinquent (5,000) 85,000 Due from Enterprise Fund 3,000 Inventory of Supplies 17,000

Total Assets $207,000 Liabilities and Fund Balance:

Vouchers Payable $ 55,000 Fund Balance: Nonspendable:

Supplies Inventory $ 17,000 Spendable: Assigned to General Government Services 15,000 Unassigned 120,000 152,000

Total Liabilities and Fund Balance $207,000 The General Fund’s Balance Sheet under GASB 54 The new statement on fund balance reporting and governmental fund type definitions does not change the reporting of assets or liabilities. It affects only the reporting of the fund balance for governmental fund types that includes the general fund. The fund balance section of the balance sheet could report only aggregate amounts for the nonspendable and spendable categories with detail presented in the footnotes. Alternatively, the balance sheet can report the detailed items within each category of the general fund balance. The nonspendable category includes the two classifications of amounts not in spendable form, such as inventories, or amounts that are legally or contractually required to be maintained. The spendable category includes resources that are in spendable form and are considered to be available for spending, such as fund balance related to cash, investments, and receivables. Amounts in the spendable fund bal-ance category can then be classified as restricted, limited, assigned, or unassigned based on a hierarchy of the level of control over the spending of the resources. Under the newly implemented GASB 54, reserves are not reported on the balance sheet; rather, the amount of encumbrances is reported in a footnote along with other commitments. The Haas City govern-ment has no restricted or limited spendable fund balances, but it does have an assigned amount for the amount of resources intended by the government to be used for the specific purpose of paying currently outstanding encumbrances from goods and services ordered to be used for general government functions. The Statement of Revenues, Expenditures, and Changes in Fund Balance This required statement is presented in Exhibit 17 and has the following sections: 1. Operating section. Revenues less expenditures, resulting in an excess of revenues over expendi-

tures for the period. Expenditures include the interfund services provided and used, and separate reporting of outlays for capital assets.

2. Other financing sources (uses). This section includes interfund transfers and nonrevenue pro-ceeds such as bond issues.


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3. Reconciliation of fund balance. The ending balance in fund balances, including both assigned and unassigned, is reconciled for (a) the results of operations, (b) other financing sources or uses, and (c) special or extraordinary items in the period.

Revenues should be classified by major sources, and expenditures by character and major functions. Although the entries presented in the illustrations for Haas City did not break down the expenditures by function (general government, streets and highways, public safety, and sanitation), this breakdown is done in the actual governmental accounting process so each expenditure can be classified by both function and object (personal services, supplies, and other services and charges). The amounts presented in the expend-itures section in Exhibit 17 are the assumed amounts from a comprehensive accounting system. Total expenditures do reconcile to the expenditures recorded in the Haas City illustration. The statement of revenues, expenditures, and changes in fund balance presents the total fund balance, including both assigned and unassigned. Note that in this example, Haas City reported no extraordinary items or special items. Special items would include significant transactions or other events within the control of management that were either unusual in nature or infrequent in occurrence. An example of a special item could be a one-time sale of some city park land. If the city did have a special item or extraor-dinary item, it would be reported below the other financing sources (uses) section.

Exhibit 17 General Fund Statement of Revenues, Expenditures, and

Changes in Fund Balance Information for Fiscal 2014

HAAS CITY Statement of Revenues, Expenditures, and Changes in Fund Balance Information

General Fund For the Year Ended December 31, 2014

Revenue: Property Taxes $781,000

Grants 33,000 Sales Taxes 32,000 Miscellaneous 18,000

Total Revenues $864,000 Expenditures:

General Government $206,000 Streets and Highways 71,000 Public Safety 335,000 Sanitation 141,000

Capital Outlay: Public Safety 58,000

Total Expenditures 811,000 Excess of Revenues over Expenditures $ 53,000 Other Financing Sources (Uses):

Transfer Out to Capital Projects Fund $ (20,000) Transfer Out to Internal Service Fund (10,000)

Total Other Financing Sources (Uses) (30,000) Net Change in Fund Balances $ 23,000 Fund Balance, January 1 129,000 Fund Balance, December 31

$152,000


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The General Fund’s Statement of Revenues, Expenditures, and Changes in Fund Balance under the Proposed Statement GASB 54 on governmental fund type balances does not require any changes in the statement of revenues, expenditures, and changes in fund balance. The reconciliation in this financial statement is to total fund balance, not to a specific classification of the fund balance. Therefore, this financial statement is the same under GASB 54 as was previously required under GASB 34. Chapter Summary Accounting for state and local governmental units requires the use of fund accounting to recognize properly the variety of services and objectives of the governmental unit. Funds are separate fiscal and accounting entities established to segregate, control, and account for resource flows. Three types of funds are used by governmental units: governmental funds, of which the general fund is usually the most im-portant; proprietary funds; and fiduciary funds. The basis of accounting for each fund depends on the fund’s objective. The current financial resources measurement focus and the modified accrual basis of accounting are used for the governmental fund financial statements. The economic resources measure-ment focus and accrual basis of accounting are used for the government-wide statements, the proprietary fund statements, and the fiduciary fund statements. Under the modified accrual basis, revenue is recognized when it is both measurable and available for financing expenditures of the period. A major source of revenue is property tax levies, but other sources may include sales taxes; grants from other governmental units; and fines, licenses, or permits. Note that in the five governmental funds, the estimated uncollectible property taxes are a reduction of the property tax revenue, not an expense as in commercial accounting. Expenditures are recognized in the period in which the related liability is both measurable and incurred. The expenditure process usually begins with a budg-et, which establishes the spending authority for the fund. Encumbrances are used for purchases outside the governmental entity to recognize the use of a portion of the spending authority for the period and to avoid overspending the expenditure authority. Under current GAAFR, encumbrances outstanding at the end of a fiscal period are reported as a reserve of the fund balance and may be accounted for as lapsing or nonlapsing. Another type of fund balance reserve is a reserve for inventories, which is used if the amount of inventory is material. The general fund is responsible for offering many of the usual services of governmental units. Fire and police protection, the local government’s administrative and legislative functions, and many other basic governmental services are administered through the general fund. The general fund will provide balance sheet information and statement of revenues, expenditures, and changes in fund balances infor-mation to the governmental funds financial statements. The government reporting model, as established by GASB 34, specifies that both fund-based financial statements and government-wide financial statements must be presented. The general fund uses the modified accrual basis of accounting to recognize revenue and expenditure transactions. Furthermore, no long-term capital assets or general long-term debt is recorded in the general fund. However, a reconcilia-tion schedule will be required to go from the governmental fund types financial statements to the govern-ment-wide financial statements. The government-wide financial statements use the accrual basis of ac-counting and report all capital assets and all long-term debt. Government-wide financial statements are presented in Chapter 2 after the conclusion of that chapter’s discussion of the remaining funds. Interfund activities must be evaluated carefully to ensure that the legal and budgetary controls of the governmental unit are not violated. Four types of interfund activities exist: (1) interfund loans, (2) inter-fund services provided and used, (3) interfund transfers, and (4) interfund reimbursements. Outstanding interfund loans are presented as receivables or payables on the fund’s balance sheet information. Inter-fund services provided and used are reported as part of the revenues and expenditures on the operating statements. Interfund transfers are reported separately in the other financing sources (uses) section of the operating statement. Interfund reimbursements are not reported separately on the fund’s financial state-ments.


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Review Questions 1. Fund accounting is used by governmental units with resources that must be: A. Composed of cash or cash equivalents B. Incorporated into combined or combining financial statements C. Segregated for the purpose of carrying on specific activities or attaining certain objectives D. Segregated physically according to various objectives 2. The focus of accounting and reporting for proprietary funds of governmental units is most likely on: A. Determination of operating income B. Project completion C. Current financial resources D. Adherence to the budget 3. A governmental unit could use which of the following types of funds? A. Fiduciary but not Proprietary B. Fiduciary and Proprietary C. Proprietary but not Fiduciary D. Neither Fiduciary nor Proprietary 4. On January 2, City of Walton issued $500,000, 10-year, 7% general obligation bonds. Interest is

payable annually, beginning January 2 of the following year. What amount of bond interest is Walton required to report in the statement of revenue, expenditures, and changes in fund balances of its gov-ernmental funds at the close of this fiscal year, September 30?

A. $0 B. $17,500 C. $26,250 D. $35,000 5. Dayne County’s general fund had the following disbursements during the year: Payment of principal on long-term debt $100,000 Payments to vendors 500,000 Purchase of a computer 300,000 What amount should Dayne County report as expenditures in its governmental funds statement of

revenues, expenditures, and changes in fund balances? A. $300,000 B. $500,000 C. $800,000 D. $900,000 6. For the budgetary year ending December 31, 2014, Maple City’s general fund expects the following

inflows of resources: Property taxes, licenses, and fines $9,000,000 Proceeds of debt issue 5,000,000 Interfund transfers for debt service 1,000,000 In the budgetary entry, what amount should Maple record for estimated revenues? A. $9,000,000 B. $10,000,000 C. $14,000,000 D. $15,000,000


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7. Property taxes and fines represent which of the following classes of nonexchange transactions for governmental units?

A. Derived tax revenues B. Imposed nonexchange revenues C. Government-mandated nonexchange transactions D. Voluntary nonexchange transactions 8. In which situation(s) should property taxes due to a governmental unit be recorded as deferred reve-

nue? I. Property taxes receivable are recognized in advance of the year for which they are levied. II. Property taxes receivable are collected in advance of the year in which they are levied.

A. I only B. Both I and II C. II only D. Neither I nor II 9. The renovation of Fir City’s municipal park was accounted for in a capital projects fund. Financing

for the renovation, which was begun and completed in 2014, came from the following sources: Grant from state government $400,000 Proceeds from general obligation bond issue 500,000 Transfer from Fir’s general fund 100,000 In its 2014 governmental fund statement of revenues, expenditures, and changes in fund balances, Fir

should report these amounts as:

Revenues Other Financing Sources A. $1,000,000 $0 B. $900,000 $100,000 C. $400,000 $600,000 D. $0 $1,000,000 10. The estimated revenues control account of a governmental unit is debited when: A. Actual revenues are recorded B. Actual revenues are collected C. The budget (appropriation) is recorded D. The budget is closed at the end of the year 11. Taxes collected and held by Franklin County for a separate school district are accounted for in which

fund? A. Special revenue B. Internal service C. Trust D. Agency 12. A county’s balances in the general fund included the following: Appropriations $745,000 Encumbrances 37,250 Expenditures 298,000 Vouchers payable 55,875


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What is the remaining amount available for use by the county? A. $353,875 B. $391,125 C. $409,750 D. $447,000 13. During its fiscal year ended June 30, 2014, Cliff City issued purchase orders totaling $5 million,

which were properly charged to encumbrances at that time. Cliff received goods and related invoices at the encumbered amounts totaling $4.5 million before year-end. The remaining goods of $500,000 were not received until after year-end. Cliff paid $4.2 million of the invoices received during the year. What amount of Cliff’s encumbrances were outstanding at June 30, 2014?

A. $0 B. $300,000 C. $500,000 D. $800,000 14. Which of the following amount(s) is (are) included in a general fund’s encumbrance account? I. Outstanding vouchers payable amounts II. Outstanding purchase order amounts III. Excess of the amount of a purchase order over the actual expenditure for that order

A. I only B. I and III only C. II only D. II and III 15. Which of the following journal entries should be made in the general fund of a city to record

$250,000 for salaries and wages incurred during the month of May? Debit Credit A. Salaries & wages expense $250,000 Appropriations $250,000 B. Salaries & wages expense $250,000 Encumbrances $250,000 C. Encumbrances $250,000 Salaries payable $250,000 D. Expenditures – salaries & wages $250,000 Salaries payable $250,000 16. When a snowplow purchased by a governmental unit is received, it should be recorded in the general

fund as a(n): A. Encumbrance B. Expenditure C. General capital asset D. Appropriation 17. Which of the following fund types used by a government most likely would have a fund balance

reserved for an inventory of supplies? A. General B. Internal service C. Private-purpose trust D. Capital projects


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Review Answers 1. A. Incorrect. Funds may account for all types of resources, related liabilities, and residuals. B. Incorrect. The essence of fund accounting is separation of resources into discrete accounting

entities. C. Correct. A fund is 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 bal-ances, 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.

D. Incorrect. Resources must be accounted for separately but need not be physically separated. 2. A. Correct. The financial statements of proprietary funds focus on determination of operating

income, changes in net assets (or cost recovery), financial position, and cash flows. A proprietary fund accounts for the business-type functions of a government. Users of the financial statements for proprietary funds may find profitability information to be valuable.

B. Incorrect. Projects and programs are entities for which information is accumulated, not measure-ment models.

C. Incorrect. Current financial resources is the measurement focus of governmental funds. D. Incorrect. Governmental funds have a budgetary orientation. 3. A. Incorrect. A governmental unit can use proprietary funds as well. B. Correct. Three broad categories and eleven generic fund types can be used by a governmental

unit in its fund financial statements. 1) Governmental – general, special revenue, debt service, capital projects, and permanent funds 2) Proprietary – internal service and enterprise funds 3) Fiduciary – pension (and other employee benefit) trust, investment trust, private-purpose

trust, and agency funds. C. Incorrect. A governmental unit can use fiduciary funds. D. Incorrect. A governmental unit can use both fiduciary and proprietary funds. 4. A. Correct. The financial statements of governmental funds are prepared using the modified accrual

basis of accounting. It recognizes expenditures for principal and interest on general long-term debt only when these amounts are due. Because the fiscal year ends on September 30 and the in-terest is payable on the following January 2, Walton does not recognize the bond interest.

B. Incorrect. Walton is not required to report 6 months of interest for the fiscal year, or $17,500 [$500,000 x 7% x (6 ÷ 12)].

C. Incorrect. Walton is not required to report 9 months of interest for the fiscal year, or $26,500 [$500,000 x 7% x (9 ÷ 12)]. This amount is recognized in the government-wide statement of ac-tivities, which is prepared using the accrual basis.

D. Incorrect. Walton is not required to report 12 months of interest for the fiscal year, or $35,000 [$500,000 x 7% x (12 ÷ 12)].

5. A. Incorrect. The purchase of a computer is not the only expenditure. B. Incorrect. The payments to vendors are not the only expenditures. C. Incorrect. The payment on long-term debt also should be considered an expenditure. D. Correct. Expenditures are recognized in the fund financial statements of a governmental fund

under the modified accrual basis. They are decreases in (uses of) expendable available financial resources of a governmental fund. Expenditures are usually measurable and should be recognized when the related liability is incurred. However, expenditures for principal and interest on general long-term debt are usually recognized when those amounts are due. The liabilities for payments to vendors and the computer purchase were most likely incurred in the current year. The liability for payment of the principal on long-term debt was most likely due in the current year. Thus, general fund expenditures equaled $900,000 ($100,000 + $500,000 + $300,000).


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6. A. Correct. Revenues are recognized in governmental funds when they are measurable and availa-ble. They are increases in (sources of) fund financial resources other than from interfund trans-fers, debt issue proceeds, and redemptions of demand bonds. The major source classifications are taxes, licenses and permits, intergovernmental revenues, charges for services, fines and forfeits, and miscellaneous revenues. Hence, Maple’s revenues include taxes, licenses, and fines equal to $9 million.

B. Incorrect. $10,000,000 incorrectly includes the interfund transfers. C. Incorrect. $14,000,000 incorrectly includes the debt issue proceeds. D. Incorrect. $15,000,000 incorrectly includes the debt issue proceeds and interfund transfers. 7. A. Incorrect. Derived tax revenues arise from assessments imposed on exchange transactions. B. Correct. According to GASB 33, Accounting and Financial Reporting for Nonexchange Trans-

actions, imposed nonexchange revenues arise from assessments on nongovernmental entities, in-cluding individuals, other than assessments on exchange transactions. Examples are fines, forfei-tures, and property taxes.

C. Incorrect. Government-mandated nonexchange transactions occur when one government provides resources to a government at another level and requires that they be used for a specific purpose.

D. Incorrect. Voluntary nonexchange transactions result from legislative or contractual agreements, other than exchanges, entered into willingly.

8. A. Incorrect. Property taxes recognized in advance should be initially recorded as deferred revenue. B. Correct. A property tax assessment is made to finance the budget of a specific period. Hence, the

revenue produced should be recognized in the period for which the assessment was levied, pro-vided it meets the criteria of being available and measurable. (Property taxes are accounted for in governmental funds, which use the modified accrual basis.) When property taxes are recognized or collected in advance, they should be recorded as deferred revenue in a governmental fund. They are not recognized as revenue until the year for which they are levied. Under GASB 33, a property tax assessment is classified as an imposed nonexchange revenue transaction. In such a transaction, assets should be recognized when an enforceable legal claim arises or when resources are received, whichever is earlier. Thus, recognition of a receivable in a year prior to that for which the property taxes were levied implies that, under the enabling statute, the enforceable le-gal claim arose in that prior year.

C. Incorrect. Property taxes collected in advance should be initially recorded as deferred revenue. D. Incorrect. Property taxes recognized or collected in advance should be initially recorded as de-

ferred revenue. 9. A. Incorrect. The proceeds from the bond issue and the transfer from the general fund should be

reported under other financing sources. B. Incorrect. The proceeds from bond issue should be reported under other financing sources. C. Correct. Governmental fund revenues are increases in fund financial resources other than from

interfund transfers, debt issue proceeds, and redemptions of demand bonds. Thus, revenues of a capital projects fund include grants. Under GASB 33, the grant (a voluntary nonexchange trans-action) is recognized when all eligibility requirements, including time requirements, have been met. When modified accrual accounting is used, as in a capital projects fund, the grant must also be “available.” Other financing sources include proceeds from bonds and interfund transfers in. Thus, Fir reports revenues of $400,000 and other financing sources of $600,000 ($500,000 + $100,000) in its governmental fund statement of revenues, expenditures, and changes in fund bal-ances.

D. Incorrect. The grant should be reported under revenues.


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10. A. Incorrect. Revenues control is credited and a receivable is debited when actual revenues are recorded.

B. Incorrect. Cash is debited when actual revenues are collected. C. Correct. The budgetary accounts are used to record the budget at the beginning of the fiscal

period. No other entries are made in these accounts until the end of the fiscal year, at which time they are closed to fund balance. The basic entry to record the budget is:

Estimated Revenues Control $x,xxx,xxx Appropriations Control $xx,xxx,xxx Budgetary Fund Balance xxx,xxx

No other entries are made in these accounts until the end of the fiscal year, at which time they are closed to fund balance.

D. Incorrect. Estimated revenues control is credited when the budget is closed at the end of the year. 11. A. Incorrect. Special revenue funds are governmental funds. Special revenue funds account for

proceeds of specific revenue sources legally restricted to expenditure for specified purposes. However, a special revenue fund is not required unless legally mandated.

B. Incorrect. Internal service funds may be used for activities that provide goods and services to other subunits of the primary government and its component units or to other governments on a cost-reimbursement basis. However, if the reporting government is not the predominant partici-pant, the activity should be reported as an enterprise fund.

C. Incorrect. A trust fund differs from an agency fund because the trust agreement determines how long resources are held and the degree of management involvement.

D. Correct. Agency funds report resources held solely in a custodial capacity. These funds ordinari-ly account only for the receipt, temporary investment, and payment of resources to individuals, private organizations, or other governments. Thus, tax agency funds are used when a governmen-tal entity is the collection agent of taxes for disbursement to other governmental units, e.g., school districts, city governments, or special taxing districts.

12. A. Incorrect. $353,875 results from subtracting the vouchers payable balance, the account credited

when expenditures is debited. B. Incorrect. $391,125 results from subtracting vouchers payable instead of encumbrances. C. Correct. Appropriations is the account credited in the general fund’s budgetary entry. It estab-

lishes the total amount available for use during the period. When a commitment is made to ex-pend resources of a governmental unit, the appropriations account is encumbered by a journal en-try in which the encumbrances account is debited and the reserve for encumbrances account (a fund balance account) is credited for the amount of the purchase order. Comparison of encum-brances, appropriations, and expenditures determines the unencumbered amount of appropriations that may still be expended. The encumbrances account will be decreased when previously ordered items have been received. Expenditures and vouchers payable will be increased for the actual amount to be paid for the items. Accordingly, the remaining amount available for use by the county is $409,750 [($745,000 - ($37,250 - $298,000)).

D. Incorrect. $447,000 results from not subtracting encumbrances. 13. A. Incorrect. Not all of the goods related to the encumbrance amounts were received during the year. B. Incorrect. $300,000 is the excess of goods received over the amount actually paid on the invoices

during the year. C. Correct. In fund accounting, when a commitment is made to expend monies, encumbrances is

debited and Budgetary Fund Balance—Assigned for Encumbrances is credited. When the goods are received and the liability is recognized, this entry is reversed and an expenditure is recorded. Because goods totaling $500,000 were not received at year-end, encumbrances outstanding total $500,000 ($5,000,000 - $4,500,000).

D. Incorrect. $800,000 is the excess of total encumbrances over the amount paid on the invoices.


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14. A. Incorrect. The encumbrance entry is reversed and the encumbrance is eliminated when the ex-penditure and the voucher payable relating to the purchase order are recorded.

B. Incorrect. The encumbrance includes only outstanding purchase order amounts. C. Correct. The encumbrance account is debited when goods are approved to be purchased, and a

purchase order is prepared. When the contract is complete or virtually complete, the encumbrance account is credited, effectively eliminating the purchase order amount. It is no longer outstanding. Thus, the encumbrance account includes only those amounts that represent outstanding purchase orders.

D. Incorrect. When the contract is complete or virtually complete, the original encumbrance entry is reversed. The actual amount owed is recorded in the expenditures account, so any excess is not reflected in the encumbrance account.

15. A. Incorrect. Appropriations is credited only when the budget is recorded. B. Incorrect. Salaries and wages are not encumbered. C. Incorrect. Salaries and wages are not encumbered expenditures or expenses. D. Correct. If performance of an executory contract is complete or virtually complete, e.g., because

wages and salaries have been earned by employees, an expenditure and a liability should be rec-ognized, not an encumbrance. An encumbrance is recorded for budgetary control purposes only when a commitment has been made related to an unperformed contract for goods or services. An expenditure is recorded when a current liability is to be liquidated with expendable available cur-rent resources.

16. A. Incorrect. An encumbrance is recorded to account for the purchase commitment. B. Correct. When previously ordered goods are received, the entry includes a debit to expenditures

for the actual amount to be paid. An expenditure is recognized when a liability is incurred, that is, when an executory contract is complete or virtually complete.

C. Incorrect. General capital assets are reported only in the governmental activities column of the government-wide statement of net assets.

D. Incorrect. Appropriations are accounted for when recording the budget. 17. A. Correct. If purchasing is centralized, the supply activities of a governmental unit are usually

accounted for in an internal service fund. However, an internal service fund is a proprietary fund for which net assets, not a fund balance, is reported. Moreover, smaller entities often record the purchases of supplies inventory in the general fund. In accounting for supplies, the entire ex-penditure may be recognized in the period of purchase (the purchases method). An alternative is the consumption method; it recognizes expenditures for only the amount of inventory used in the period. In the former case, a significant inventory must be recognized as an asset at the end of the period, with a corresponding reservation of fund balance. In the latter case, fund balance is re-served for inventory only if amounts must be maintained and are therefore not available for ex-penditure.

B. Incorrect. A proprietary fund does not have a fund balance. C. Incorrect. Private-purpose funds accounts for trust arrangements under which the fund’s resources

are to be used to benefit specific individuals, private organizations, or other governments, as specified in the trust agreement.

D. Incorrect. A capital projects fund accounts for the acquisition or construction of capital or fixed assets and has no need to account for the expenditure of supplies in such a fund.

Chapter 2

Special Funds and Financial Reporting Learning Objectives

Discern which basis of accounting is used by fiduciary funds Identify which type of bonds consist of debt typically issued for one or two years and are usually

secured by specific tax revenue, which must first be used to repay the debt Recognize the type of financial statements which are required for governmental funds Spot the correct accounting equation for the enterprise fund Recognize the basic criterion used by GASB 34 to determine the reporting entity for a govern-

mental unit Pinpoint which GASB Statement requires additional disclosures for defined benefit plans and dis-

closures by the employers Introduction A government should establish those funds required by law and the specific operating and management needs of the government entity. Unnecessary, additional funds add unneeded complexity and do not enhance the operational efficiency of the government. A general rule followed in many governmental entities is that all activities should be accounted for in the general fund unless specifically required by law or the different measurement focus used for proprietary and fiduciary funds. This rule does not prohibit the creation of additional funds but places a reasonable restraint on the proliferation of additional funds. The structure of funds discussed in this chapter is the typical one used in most state and local governmen-tal systems. Exhibit 1 presents the typical fund organization for a local government.

Exhibit 1 Typical Fund Structure

Governmental Fund Types 1. 2. 3. 4. 5.

General fund Special revenue funds Debt service funds Capital projects funds Permanent funds

Proprietary Fund Types 1. 2.

Enterprise funds Internal service funds

Fiduciary Fund Types 1. 2. 3. 4.

Pension trust funds Investment trust funds Private-purpose trust funds Agency funds

One event may require entries in several funds. For example, the construction of a new municipal building through the issuance of general obligation bonds may require entries in both a capital project fund and a debt service fund. In addition, interfund activities require entries in two or more funds.

Chapter 2 – Special Funds and Financial Reporting

54

The governmental funds use the modified accrual basis of accounting, and the proprietary and fiduci-ary funds use the accrual basis of accounting. Governmental entities recognize estimated uncollectible amounts as a reduction of revenue, not as an expense. The five governmental funds do not report long-term assets or long-term debt, but the government-wide statements do report them. Investments are re-ported in the appropriate funds and are valued at their fair market values at each balance sheet date. The government entity’s financial report includes both fund-based and government-wide financial statements. The government-wide statements are prepared using the accrual basis of accounting. Reconciliation schedules are required to show the differences between the amounts reported in the governmental funds financial statements, presented using the modified accrual basis of accounting, and the amounts reported in the government-wide financial statements, presented using the accrual basis of accounting. Some governmental units have pension trust funds for their employees. Accounting and reporting for pension trust funds is quite complex. Pension trust funds are covered briefly in the “Additional Consid-erations” section of this chapter. This chapter continues the example of Haas City started in Chapter 1, where the entries and financial reports for the general fund were presented for 2014. Haas City uses the lapsing method of accounting for encumbrances and the consumption method for inventories and records all expected budgetary accounts including anticipated interfund transactions. The techniques of capitalizing all budgetary accounts and recording journal entries at the control level are continued from Chapter 1. The financial statements for the illustration are prepared using the requirements of GASB 34. Many of the numbers for the Haas City example are assumed in order to focus on the main concepts of accounting and financial reporting for a governmental entity. Thus, some of the numbers cannot be computed from the data given. Instead, focus on the concepts being discussed. We present the fund balance reported for the governmental funds that is now required under the new GASB 54. The final section of this chapter presents the government-wide financial statements for Haas City. Exhibit 2 presents an overview of the major accounting and financial standards for the individual funds. This exhibit can be used as a continual reference point during study of this chapter.


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Exhibit 2 Overview of Accounting and Financial Reporting for Governments

Governmental Funds

General Fund

Special Revenue

Funds Capital

Projects Funds Debt Service

Funds Permanent

Funds

Measurement focus Current financial

resources

Current financial

resources

Current financial

resources

Current financial

resources

Economic resources

Basis of accounting Modified accrual

Modified accrual

Modified accrual

Modified accrual

Modified accrual

Budgetary basis recorded (budget-ary accounts are typically used when a legally adopted annual operating budget is passed)

Operating budget often

recorded

Operating budget often

recorded

Capital budget usually not recorded

Not Required

Not Required

Long-term productive assets (buildings, equipment, etc.) reported

No No No No No

Long-term debt reported No No No No No Encumbrances recorded Yes Yes Possibly Possibly Possibly Financial Statements Balance sheet X X X X X Statement of net assets Statement of revenues, expendi-

tures, and changes in fund value X X X X X

Statement of revenues, expenses, and changes in fund net assets

Statement of activities Statement of cash flows Statement of fiduciary net assets Statement of changes in fiduciary

net assets

(continued on next page)


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Exhibit 2 – Overview of Accounting and Financial Reporting for Governments (continued from previous page)

Proprietary Funds Fiduciary Funds Government-wide Funds Enterprise

Funds Internal

Service Funds Trust Funds Agency Funds

Measurement focus Economic resources

Economic resources

Economic resources

Economic resources

Basis of accounting Accrual Accrual Accrual Accrual Accrual Budgetary basis recorded (budg-

etary accounts are typically used when a legally adopted annual operating budget is passed)

Rarely Rarely No

Long-term productive assets (buildings, equipment, etc.) reported

Yes Yes Yes No Yes

Long-term debt reported Yes Yes Yes No Yes Encumbrances recorded No No No No

Financial Statements Balance sheet Statement of net assets X X X Statement of revenues, expendi-

tures, and changes in fund value

Statement of revenues, expenses, and changes in fund net assets

X X X

Statement of activities X Statement of cash flows X X Statement of fiduciary net assets X X Statement of changes in fiduciary

net assets X X

Governmental Funds Worksheets Each of the five governmental funds will report three fund-based financial statements: the balance sheet, the statement of revenues, expenditures, and changes in fund balance. Rather than presenting each of the separate governmental funds’ financial statements in the chapter, we provide worksheets to summarize all governmental funds’ financial statements. Specifically, Exhibit 3 presents the individual fund information that will be used to prepare the governmental funds’ balance sheet. Exhibit 4 presents the individual governmental funds information that will be used to prepare the governmental funds’ statement of reve-nues, expenditures, and changes in fund balance. The amounts for the general fund are taken from the information in Chapter 1. The amounts for the other funds will be developed throughout this chapter. We use these two work-sheets throughout the chapter as the basis for preparing the governmental funds’ financial statements that will be presented later in the chapter. The worksheets also include major funds tests that will be discussed later in the chapter. Thus, we develop the two worksheets through the discussions of each fund type in this chapter. Special Revenue Funds Current governmental resources may be restricted to expenditure for specific purposes, such as develop-ment of the state highway system, roadway repairs, maintenance of public parks, or operation of the public school system, city libraries, and museums. The necessary revenue often comes from special tax levies, such as the gasoline taxes to finance road repairs, or federal or state governmental grants. Some minor revenue may be earned through user charges, but these charges are usually not sufficient to fully fund the service.


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Special revenue funds are used to account for such restricted resources. The governmental entity usually has a separate special revenue fund for each different activity of this type. Thus, a city may have several special revenue funds. The accounting for special revenue funds is identical to the accounting for the general fund. The modified accrual basis of accounting is used, no fixed assets or depreciation are recorded, the operating budget is typically recorded in the accounts, and no long-term debt is recorded. Special revenue fund accounting is not illustrated in the chapter because the principles for the special revenue fund are the same as those for the general fund as covered in Chapter 1. For purposes of the governmental funds statements, assume that $62,000 of property taxes were collected for the special revenue fund and that $49,000 was expended for the designated culture and recreation purposes for which the special revenue fund was established. The focus of this chapter is on the unique or interesting aspects of governmental accounting and financial reporting. Exhibit 3 presents the assumed numbers for the special revenue fund’s balance sheet and Exhibit 4 presents the revenues ($62,000) and expenditures ($49,000) assumed for the special revenue fund.

Exhibit 3 Worksheet for the Balance Sheet for the Governmental Funds

Governmental Funds

General

Special Revenue

Capital Projects

Debt Service Permanent

Total Govt Funds

Enterprise Fund

Total Govt and Enterprise

Assets Cash 102,000 15,000 16,000 2,000 13,000 Property Taxes (net of allowances) 85,000 1,000 3,000 Due from Enterprise Fund 3,000 Inventory of Supplies 17,000

Noncurrent Investment in Govt. Bonds 90,000

Total Assets 207,000 16,000 16,000 5,000 103,000 347,000 140,000 487,000

Liabilities and Fund Balances Vouchers Payable 55,000 3,000 Contract Payable-Retainage 10,000

Total Liabilities 55,000 3,000 10,000 -0- -0- 68,000 112,000 180,000

Fund Balances Nonspendable:

Inventories 17,000 Permanent Fund 103,000

Spendable: Assigned to:

General Govt. Services 15,000 6,000 Debt Service 5,000

Unassigned, reported in: General Fund 120,000 Special Revenue Fund 7,000 Capital Projects Fund 6,000

Total Fund Balances 152,000 13,000 6,000 5,000 103,000 279,000 Total Liabilities and Fund Balances 207,000 16,000 16,000 5,000 103,000 347,000 Major Fund Tests on Total Assets:

10% Test of Total Govt or Enterprise 4.61% 4.61% 1.44% 29.66% 100.00% 5% Test of Govt Plus Enterprise 3.29% 3.29% 1.03% 21.15% 28.75% Major Fund Test (Yes or No) Yes No No No Yes Yes

Major Fund Tests on Total Liabilities: 10% Test of Total Govt or Enterprise 4.41% 14.71% 0.00% 0.00% 100.00% 5% Test of Govt Plus Enterprise 1.67% 5.56% 0.00% 0.00% 62.22% Major Fund Test (Yes or No) Yes No Yes No No Yes


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Exhibit 4 Worksheet for the Statement of Revenues, Expenditures,

and Changes in Fund Balances for the Governmental Funds Governmental Funds

General

Special Revenue

Capital Projects

Debt Service Permanent

Total Govt Funds

Enterprise Fund

Total Govt and Enterprise

Revenue Property Taxes 781,000 62,000 Sales Taxes 32,000 33,000 Grants 33,000 10,000 Miscellaneous 18,000 8,000

Total Revenues 864,000 62,000 10,000 33,000 8,000 977,000 37,000 1,014,000 Expenditures

Current General Government 206,000 Streets and Highways 71,000 Public Safety 335,000 Sanitation 141,000 Culture and Recreation 49,000 5,000 Miscellaneous Debt Service Principal Retirement 20,000 Interest Charges 10,000 Capital Outlay 58,000 124,000

Total Expenditures/Expenses 811,000 49,000 124,000 30,000 5,000 1,019,000 35,000 1,054,000 Excess (Deficiency) of Revenues

over Expenditures 53,000 13,000 (114,000) 3,000 3,000 (42,000)

Other Financing Sources (Uses) Proceeds of Bond Issue 102,000 Transfers In 20,000 2,000 Transfers Out (30,000) (2,000)

Total Other Financing Sources and Uses (30,000) -0- 120,000 2,000 -0- 92,000

Special Item Contribution 100,000 100,000

Net Change in Fund Balances 23,000 13,000 6,000 5,000 103,000 150,000 Fund Balances – Beginning 129,000 -0- -0- -0- -0- 129,000 Fund Balances – Ending 152,000 13,000 6,000 5,000 103,000 279,000 Major Fund Tests on Total Revenues:

10% Test of Total Govt or Enterprise 6.35% 1.02% 3.38% 0.82% 100.00% 5% Test of Govt Plus Enterprise 6.11% 0.99% 3.25% 0.79% 3.65% Major Fund Test (Yes or No) Yes No No No No No

Major Fund Tests on Total Expendi-tures/Expenses:

10% Test of Total Govt or Enterprise 4.81% 12.17% 2.94% 0.49% 100.00% 5% Test of Govt Plus Enterprise 4.65% 11.76% 2.85% 0.47% 3.32% Major Fund Test (Yes or No) Yes No Yes No No No

Capital Projects Funds Capital projects funds account for financial resources that are specified for the acquisition or construction of major capital facilities or improvements that benefit the public. Typical examples are the construction of libraries, civic centers, fire stations, courthouses, bridges, major streets, and city municipal buildings. A separate capital projects fund is created at the time the project is approved and ceases at its completion. Each project or group of related projects usually is accounted for in a separate capital projects fund. Accounting for capital projects funds is similar to accounting for the general fund. The modified accrual basis of accounting is used, no fixed assets or depreciation are recorded in the capital projects funds, and no long-term debt is recorded in these funds. Capital projects funds, however, typically do not have annual operating budgets. Instead, a capital budget is prepared as a basis for selling bonds to finance


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a project, and the capital budget is the control mechanism for the length of the project. The capital budget for the project may, or may not, be formally recorded in the accounts. Theoretically, encumbrances are part of the budgetary system and should flow from the appropriating authority of the budget. However, encumbrances may be recorded even if the capital project budget is not recorded. The capital projects fund records capital outlays as expenditures. Thus, no fixed assets are recorded in this fund. A record of the construction in progress, however, may be maintained in memorandum format. Why Capital Projects Funds Exist The receipt and disbursement of resources to be utilized for the construction or acquisition of capital facilities to be used in the performance of activities financed by governmental funds is accounted for by capital projects funds. Receipts for such purposes arise from the sale of general obligation bonds, grants from other governmental units, transfers from other funds, or gifts from individual or organizations. For instance, special assessments such as levies on affected property owners to install sewers are accounted for in a capital project fund. The reason for creating a fund to account for each capital project is the reason for creating special revenue funds: to provide a formal mechanism to enable administrators to ensure that revenues dedicated a certain purpose are used for that purpose and no other, and to enable administrators to report to credi-tors, and other grantors of capital projects fund resources, that their requirements regarding the use of the resources were met. Capital projects funds differ from general and special revenue funds in that the latter categories have a year-to-year life, whereas each capital projects fund exists only for the duration of the project. A fund is created when a capital project or a series of related projects is legally authorized; it is closed when the project is in itself an appropriation of the total amount which may be obligated for the construction or acquisition of the capital asset specified in the project or series is completed. Budgetary accounts need not be used because the legal authorization to engage in the project is in itself an appropriation of the total amount which may be obligated for the construction or acquisition of the capital asset specified in the project authorization. Estimated revenues need not be recorded because few contractors will start work on a project until financing is ensured through sale of bonds or receipt of grants or gifts. To provide control over the issuance of contracts and purchase orders, which may be numerous and which may be outstanding for several years in construction projects, it is recommended that the encumbrance procedure be used. Since the purpose of the capital project fund is to account for the acquisition and disposition of revenues for a specific purpose, it (as is true for general and special revenue funds) contains proprietary accounts for only liquid assets and for the liabilities to be liquidated by those assets. As discussed previously, the acquisition of capital assets from current revenues of a general and special revenue fund is budgeted and accounted for by that fund; no capital projects fund would be in-volved in accounting for these more or less routine acquisitions involving relatively modest amounts. In some jurisdictions annual revenues are raised for the expressed purpose of financing major repairs to existing capital assets, or for replacement of components of those assets (for example, furnaces, air conditioning systems, roofs, and so forth). Revenues of the nature described are accounted for by a capi-tal improvements fund, sometimes called a cumulative building fund. The specific repairs and replace-ments to be undertaken in a given year are not necessarily known at the time the revenues are budgeted. The appropriation process described in previous chapters is used to authorize expenditures form capital improvement funds when the nature and approximated costs of needed repairs and replacements become known. Necessary expenditures which cannot be financed by appropriation of the Fund Balance of a capital improvement fund, nor from the general fund or special revenue funds, may occasion the estab-lishment of a capital projects fund. Illustrative Transactions On January 1, 2014, Haas City establishes a capital projects fund to account for a capital addition to the municipal courthouse. The expected cost of the addition is $120,000. A $100,000, 10 percent general obligation bond issue is sold at 102, for total proceeds of $102,000. The bond is a five-year serial bond


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with equal amounts of $20,000 to be paid each year, beginning on December 31, 2014, until the debt is extinguished. The bond proceeds are not revenue to the capital projects fund; they are reported in the other financing sources section of the fund’s statement of revenues, expenditures, and changes in fund balance. Any debt issue costs such as underwriting fees or attorney fees are recognized as expenditures when the liabilities are both measurable and incurred, and are payable out of current financial resources. The capital projects fund is not entitled to the $2,000 premium on the sale of bonds. This premium is transferred as a transfer out to the debt service fund immediately upon receipt. The debt service fund records the receipt of the transfer as a transfer in (see entry [15] later in this chapter). The premium is viewed as an adjustment of the interest rate, not as a part of the funds expendable by the capital projects fund. If bonds are sold at a discount, either the amount expended for the improvement must be decreased or the general fund must make up the difference to the face value of the bonds. In addition, a federal grant for $10,000 is received as financial support for part of the capital addition, and the capital projects fund receives an interfund transfer in of $20,000 from the city’s general fund. Recall that an interfund transfer is an interfund transaction in which resources are moved from one fund, usually from the general fund, to another fund to be used for the operations of the receiving fund. The general fund records this transfer of $20,000 as an interfund transfer out (see entry [34] in 1). The follow-ing entries are recorded for the 2014 fiscal year. Capital Projects Revenue and Bond Proceeds The sale of the bonds and receipt of the federal grant and operating transfer in are recorded as follows: (1) Cash 102,000 Other Financing Sources—Bond Issue 100,000 Other Financing Sources—Bond Premium 2,000 Issue $100,000 of bonds at 102. (2) Other Financing Uses—Transfer Out to Debt Service Fund 2,000 Cash 2,000 Forward bond premium to debt service fund. (3) Cash 10,000 Revenue—Federal Grant 10,000 Receive federal grant to be applied to courthouse addition. (4) Due from General Fund 20,000 Other Financing Sources—Transfer In from General Fund 20,000 Establish receivable for interfund transfer in from general fund. (5) Cash 20,000 Due from General Fund 20,000 Receive transferred resources from general fund. Entry (3) recognizes the $10,000 grant from the federal government as revenue when the grant is received. Some grants from the federal government are termed “expenditure-driven” grants, for which revenue can be recognized only as expenditures are incurred in conformity with the grant agreement. For these expenditure-driven grants, the local governmental entity recognizes revenue only after the eligibility requirements for the government-mandated nonexchange transaction have been met: that is, the allowable expenditures have been made. Capital Projects Fund Expenditures The following encumbrances, expenditures, and disbursements are recorded in 2014.


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(6) Encumbrances 110,000 Budgetary Fund Balance—Assigned for Encumbrances 110,000 Budgetary entry to record the issuance of a construction contract for $110,000. (7) Budgetary Fund Balance—Assigned For Encumbrances 110,000 Encumbrances 110,000 Budgetary entry to record the completion of the construction project. Reverse reserve for

encumbrances. (8) Expenditures 118,000 Contract Payable 108,000 Contract Payable—Retained Percentage—Grant 10,000 Actual construction cost of courthouse addition is $118,000. Additional cost is approved.

Contract terms include retained percentage of $10,000 until full and final acceptance of project. (9) Expenditures 6,000 Vouchers Payable 6,000 Additional items for courthouse addition. (10) Vouchers Payable 6,000 Contract 108,000 Cash 114,000 Pay current portion of construction contract and vouchers. In entry (8), Contract Payable is credited for $108,000 for the current portion due, and Contract Payable—Retained Percentage is credited for $10,000. In entry (10), the $108,000 current portion of the contract liability is paid in full. A normal practice of governmental units is to have a retained percentage of the total amount due under a construction contract held back to ensure that the contractor fully com-pletes the project to the satisfaction of the governmental unit. For example, a city may stipulate that 10 percent of the total contract price is retained until the project is fully completed and accepted. This re-tainage payable is released and paid upon final acceptance of the project by the governmental unit. Closing Entries in the Capital Projects Fund The nominal accounts are closed with the following entries: (11) Revenue—Federal Grant 10,000 Fund Balance—Unassigned 114,000 Expenditures 124,000 Close operating accounts of revenue and expenditures. (12) Other Financing Sources—Bond Issue 100,000 Other Financing Sources—Bond Premium 2,000 Fund Balance—Unassigned 102,000 Close other financing sources. (13) Other Financing Sources—Transfer In from General Fund 20,000 Other Financing Uses—Transfer Out to Debt Service Fund 2,000 Fund Balance—Unassigned 18,000 Close interfund transfers. No encumbrances are outstanding as of the end of the fiscal year. At this point, the Fund Balance—Unassigned account has a credit balance of $6,000. Upon completion and final approval of a capital


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project, the remaining fund balance is transferred either to the general fund or to the debt service fund, depending on the policy of the governmental unit. The transfer is a transfer out for the capital projects fund and a transfer in for the receiving fund because it involves the one-time transfer of the remaining resources in the capital projects fund. In the preceding example, Haas City decided that the fund should remain open through the first part of the next fiscal year in case any minor modifications of the new courthouse addition are required. If no further modifications are required, and the courthouse addition project is officially accepted, the $10,000 in the Contract Payable—Retained Percentage account is paid to the contractor. Any remaining resources in the capital projects fund are then transferred and the capital projects fund is closed. Financial Statement Information for the Capital Projects Fund The financial statement information for the capital projects funds is presented in Exhibit 3 for the balance sheet and in Exhibit 4 for the statement of revenues, expenditures, and changes in fund balances. The Bancroft City capital projects fund was created on January 1, 2014, the date the capital addition was approved and the serial bonds were sold. Exhibit 3 shows that the only asset remaining in this fund on December 31, 2014, is $16,000 of cash, which includes the $10,000 for the contract payable—retainage. Exhibit 4 for the capital projects fund column presents the $102,000 of proceeds from the bond issue, which is reported among other financing sources, with a reduction for the transfer out of the $2,000 premium to the debt service fund, and the transfer in of $20,000, netting against the large excess of ex-penditures over revenue in the amount of $114,000. The statement of revenues, expenditures, and changes in fund balance reconciles to the $6,000 fund balance at the end of the fiscal period.

Short Quiz

Indicate whether each of the following is true or false. 1. Generally accepted accounting principles require that all governmental expenditures for long-

lived assets be accounted for by a capital projects fund. 2. Capital projects funds should use the accrual basis of accounting for revenues and expenditures. 3. Although capital projects funds do not use the Estimated Revenues and Appropriations Control

accounts, it is recommended that the Encumbrances Control account be used. 4. Capital Improvement Fund is an acceptable alternative name for a capital projects fund. 5. Construction contracts for governmental projects often provide that a stipulated percentage of

each billing by the contractor will be retained by the governmental unit until the project is in-spected and accepted upon completion.

Answers

1. False. If the acquisition of long-lived assets can be financed form use of general fund, or special revenue fund, revenues a capital projects fund need not be utilized.

2. False. GAAS recommends the use of the modified accrual basis. 3. True. Contracts and purchase orders for a project accounted for by a capital projects fund may be

numerous and may be outstanding for several years. Thus, it is recommended that the encum-brance procedure be used.

4. False. A capital improvement fund accounts for annual revenues raised to finance major repairs to existing capital assets or replacement of components of existing capital assets.

5. True. Presumably this clause is considered to protect the governmental unit against careless work by the contractor.

Debt Service Funds Debt service funds account for the accumulation and use of resources for the payment of general long-term debt principal and interest. A government may have several types of general long-term debt obliga-tions, as follows:


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1. Serial bonds. The most common form of debt issued by governments is in the form of serial bonds. The bonds are repaid in installments over the life of the debt. A serial bond is called “regu-lar” if the installments are equal and “irregular” if they are not equal.

2. Term bonds. This form of debt is less frequent now than in the past. The entire principal of the debt is due at the maturity date.

3. Special assessment bonds. Special assessment bonds are secured by tax liens on the property located within the special assessment tax district. The governmental unit also may become obli-gated in some manner to assume the payment of the debt in the event of default by the property owners. Special assessment bonds may be used to finance capital projects or to acquire other as-sets such as ambulances or fire engines necessary to operate the governmental unit. Construction of sidewalks in a new subdivision financed by special assessment bonds is a capital project. Spe-cial assessment bonds sold to acquire enterprise fund assets, however, should be accounted for within the enterprise fund. The special assessment feature simply states the source of financing and means of repayment.

4. Notes and warrants. These consist of debt typically issued for one or two years. These debts are usually secured by specific tax revenue, which must first be used to repay the debt. Property tax anticipation warrants are an example.

5. Capital leases. Governmental entities must record capital leases in accordance with GAAP. These leases then become long-term liabilities of the governmental unit.

Some governmental entities service long-term debt directly from the general fund, thereby eliminat-ing the need for a debt service fund as a separate fiscal, accounting, and reporting entity. However, if a governmental entity has several long-term general obligations outstanding, it may be required by bond indentures or other regulations to establish a separate debt service fund for each obligation to account for the proper servicing of each debt obligation. The accounting and financial reporting for debt service funds are the same as for the general fund. The modified accrual basis of accounting is used, and only that portion of the long-term debt that has matured and is currently payable is recorded in the debt service funds. Revenues are recognized when they are measurable and available. Moreover, assets from imposed nonexchange revenue transactions, such as property tax levies, should be recognized when an enforceable legal claim arises or the resources are received, whichever is earlier. If the legal claim arises in the period after that for which the property taxes are levied, a receivable is recognized when revenues are recog-nized. Revenues are recognized in the period for which the taxes are levied if the availability criterion is met. For property taxes, this criterion is met if they are collected within the current period or soon enough thereafter (not exceeding 60 days) to pay current liabilities. Interest payable on long-term debt is not accrued; interest is recognized as a liability only when it comes due and payable. The “when due” recognition of interest matches the debt service expenditures with the resources accumulated to repay the debt. This approach prevents an understatement of the debt service fund balance. For example, if interest is accrued before it is actually due, the fund balance may show a deficit because of the excess of liabilities over assets. The function of the debt service fund is to accumulate resources to pay debt principal and interest as they become due. Thus, the when-due recogni-tion of interest is consistent with the fund’s objectives. Note: Construction of sidewalks in a new subdivision financed by special assessment bonds is a capital project that results in a general capital asset that will be recognized only in the governmental activities column of the govern-ment-wide statement of net assets. If the governmental unit is obligated in some manner on the special assess-ment debt, this capital improvement may be accounted for in the same way as other capital transactions. Hence, the transactions of the construction phase are reported in a capital projects fund. Transactions of the debt service phase are reported in a debt service fund, if one is required. If the government is not obligated, the construction transactions may still be reported in a capital projects fund, but the debt service transactions are recorded in an agency fund.


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Illustrative Transactions Haas City establishes a debt service fund to service the $100,000, five-year, 10 percent serial bond issued on January 1, 2014, to finance the capital project courthouse addition. The bond initially sold at a premi-um of $2,000. The resources to pay the bond principal and interest as they become due will be obtained from a property tax levy specifically for debt service. Adoption of Debt Service Fund Budget Debt service funds are not required to adopt annual operating budgets because the fund’s expenditures are generally mandated by bond agreements and an operating budget may be viewed as unnecessarily redun-dant. Nevertheless, there is no restriction against having an operating budget for the debt service fund as part of a comprehensive budgeting system for a governmental entity, as illustrated here. The appropria-tions budget of a debt service fund should include amounts which will be required during the budget period to pay interest on outstanding long-term debt and to repay any maturing issues or installments. The annual operating budget for the debt service fund is adopted at the time the fund is created to service the serial bonds sold for the courthouse addition. Appropriations of $30,000 are budgeted to pay $20,000 of maturing principal and $10,000 of interest for the year. Haas City budgets all expected inter-fund transactions, and the anticipated interfund transfer in of the $2,000 premium on the serial bonds sold is recorded with the budget: (14) Estimated Revenues Control Estimated Other Financing Sources—Transfer In 30,000 Appropriations Control 2,000 Budgetary Fund Balance 30,000 Adopt budget for 2014. 2,000 The budgetary accounts Estimated Revenues Control and Appropriations Control are used to account for servicing serial bonds. Debt Service Fund Revenue and Other Financing Sources In this example, the debt service fund obtains revenue from a specified property tax levy. The bond premium received from the capital projects fund is recognized as a transfer in. Note that the capital pro-jects fund records this transfer as an interfund transfer out (see entry [2] earlier in this chapter). The entries to record the receipt of the bond premium and the levy and collection of taxes are as follows: (15) Cash 2,000 Other Financing Sources—Transfer In from Capital Projects Fund 2,000 Receive bond premium from capital projects fund. (16) Property Taxes Receivable 35,000 Allowance for Uncollectible Taxes 5,000 Revenue—Property Tax 30,000 Levy property taxes and provide for allowance for uncollectible taxes. Estimated

uncollectible property taxes reduce Revenue. (17) Cash 30,000 Property Taxes Receivable 30,000 Receive portion of property taxes.


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(18) Property Taxes Receivable—Delinquent 5,000 Cash 5,000 Allowance for Uncollectible Taxes 5,000 Revenue—Property Tax 3,000 Allowance for Uncollectible Taxes—Delinquent 2,000 Reclassify remaining property taxes as delinquent and reduce allowance for uncollectible

taxes from $5,000 to $2,000. Debt Service Fund Expenditures The primary expenditures of the debt service fund are for the first annual payment of principal and for interest on the serial bonds payable. An encumbrance system is typically not used for matured principal and interest because the debt agreement serves as the expenditure control mechanism: (19) Expenditures—Principal 20,000 Matured Bonds Payable 20,000 Recognize matured portion of serial bond: $100,000 ± 5 years (20) Expenditures—Interest 10,000 Matured Interest Payable 10,000 Recognize interest due this period: $100,000 x 0.10 x 1 year (21) Matured Bonds Payable 20,000 Matured Interest Payable 10,000 Cash 30,000 Pay first year’s installment plus interest on bond. Closing Entries in the Debt Service Fund The nominal accounts are closed as follows: (22) Appropriations Control 30,000 Budgetary Fund Balance 2,000 Estimated Revenues Control 30,000 Estimated Other Financing Sources—Transfer In 2,000 Close budgetary accounts. (23) Revenue—Property Tax 33,000 Expenditures—Principal 20,000 Expenditures—Interest 10,000 Fund Balance—Assigned for Debt Service 3,000 Close operating revenue and expenditures. (24) Other Financing Sources—Transfer In from Capital Projects Fund 2,000 Fund Balance—Assigned for Debt Service 2,000 Close interfund transfer.

If the debt service fund services term bonds, a different budgetary account system is used. The fol-lowing budgetary entry would be made for term bonds for the periods prior to the maturity date:

Required Contributions xxx Required Earnings xxx

Budgetary Fund Balance xxx


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The budgetary amounts are determined based on a computation of the contributions needed each period to be invested, earning a given return to accumulate to the amount required for the payment of the bonds. The debt service fund may then receive resources from the general fund or from a tax levy, which it would invest until the term bonds became due. In the period the term bonds reach maturity, the debt service fund pays the matured principal and interest from its available resources. The debt service fund may make temporary investments of excess cash in order to maximize the return from its resources. These investments are reported as an asset of the debt service fund. Most temporary investments are made in low-risk U.S. Treasury securities or in certificates of deposit from larger banks. Interest income is accrued as earned. The investments are valued in accordance with GASB Statement No. 31, Accounting for Fi-nancial Reporting for Certain Investments and for External Investment Pools (GASB 31). The general valuation standard in GASB 31 is fair value for most investments made by a governmental entity. How-ever, an exception is allowed for governmental entities other than external investment pools, so that market investments may be reported at amortized cost, provided the investment has a remaining maturity of one year or less from the date of purchase. Unrealized gains or losses on investments are combined with realized gains or losses and are reported on the governmental entity’s operating statements as net investment income or loss. Financial Statement Information for the Debt Service Fund The financial statement information for the debt service fund for the governmental funds is presented in Exhibit 3 for the balance sheet and in Exhibit 4 for the governmental funds statement of revenues, ex-penditures, and changes in fund balance.

Short Quiz

Indicate whether each of the following is true or false. 1. Debt service funds exist to accumulate resources to pay general obligation bond issues at maturi-

ty. Interest on such bonds is paid from general fund appropriations. 2. Debt service funds are established only for bonded debt, not for debt arising from use of notes or

warrants. 3. Budgetary control accounts for Estimated Revenues and Appropriations are used by debt service

funds, but Encumbrances is not used. 4. General obligation bond debt service is ordinarily handled through the banking system. 5. Two types of serial bonds are: regular and ordinary.

Answers

1. False. Debt services are created to account for revenues raised for interest expenditures as well as for principal repayment.

2. False. Debt service funds should be used to account for revenues raised to account for debt ser-vice on all forms of general obligation debt.

3. True. Debt service funds ordinarily have no need for encumbrance accounting. 4. True. Bondholders may live many miles from the governmental unit. 5. False. Two types of serial bonds are: regular and irregular.

Permanent Funds Permanent funds are established in those cases in which there is a donor restriction that the fund principal must be preserved. Permanent funds are classified in the governmental funds category because the income resources in these funds are to be used toward the government’s programs and services for its general citizenry. The donation may be from individuals, estates, and public or private organizations. The modi-fied accrual basis of accounting is used in this fund and the financial statements for the permanent funds are the same as for all other governmental funds.


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Illustrative Transactions On January 1, 2014, Haas City receives a $100,000 bequest from a long-term city resident. The will stipulates that the $100,000 be invested and the income be used to provide for maintenance and improve-ment of the city park. Note that a private-purpose fund, which would be a fiduciary fund, is one in which the government is required to use the principal or earnings for the benefit of specific individuals, private organizations, or other designated governments, as stated in the trust agreement. This bequest is for the benefit of the general citizenry, however, and is established as a permanent fund that is a governmental fund type. The entries in this permanent fund during 2014 are as follows: (25) Cash 100,000 Contributions 100,000 Accept permanent fund resources. This contribution will be reported as a special item, after other financing sources and uses, toward the bottom of the statement of revenues, expenditures, and changes in fund balance, Investment and Interest The fund’s resources are used to acquire $100,000 face value, high-grade, 8 percent governmental securi-ties at 90 to yield an effective interest rate of 10 percent. Interest income is accrued under the modified accrual method, which means that the revenue recognition may be for only that amount of interest that is both measurable and available to finance expenditures made during the current fiscal period. Therefore, only the $8,000 of accrued interest receivable is available for expenditures this period, and the discount amortization would not be shown in the modified accrual basis financial statements. (26) Investment in Bonds 90,000 Cash 90,000 Acquire $100,000 face value government securities at 90. (27) Accrued Interest Receivable 8,000 Interest Revenue 8,000 Accrue interest: $8,000 = $100,000 x 0.08, nominal (coupon) rate (28) Cash 8,000 Accrued Interest Receivable 8,000 Collect accrued interest on securities. Expenditures The permanent trust fund expends $5,000 during the period for maintenance of the city park and recog-nizes the following entry: (29) Expenditures 5,000 Cash 5,000 Expenditures made for maintenance of the city park. The balance sheet information for the permanent fund as of December 31, 2014, is presented in Exhibit 3. The entire amount of the fund balance for the permanent fund is classified as unspendable because the principal must be preserved and the income in this fund is required to be used for specified purposes. The information for the statement of revenues, expenditures, and changes in fund balance for the permanent fund is presented in Exhibit 4. Note that the $100,000 contribution is not part of operations but is reported at the bottom of the operating statement.


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Governmental Funds Financial Statements GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments (GASB 34), requires two financial statements for the governmental funds. Exhibit 5 presents the first, the governmental funds balance sheet, and Exhibit 6 presents the second, the governmental statement of revenues, expenditures, and changes in fund balance. The worksheets in Exhibits 3 and 4 are the basis for preparing these two financial statements. In practice, the two financial statements will be prepared for each individual governmental fund and these individual fund statements are the foundation for the financial statements prepared for the governmental entity. But the fund-based financial statements for the governmental entity’s annual report separately report only major governmen-tal funds, not necessarily individually each of the five governmental funds. GASB 34 specifies that the general fund is always a major fund. But some of the other governmental funds may not be determined to be major funds, and these nonmajor funds are aggregated and reported in a single column as other gov-ernmental funds. GASB 34 establishes criteria that also encompass the enterprise funds. To determine which of the other governmental or specific enterprise funds are major, GASB 34 specifies that both of the following criteria must be met: 1. 10 percent criterion: Total assets, liabilities, revenues, or expenditures/expenses of that individu-

al governmental or enterprise fund are at least 10 percent of the corresponding total (assets, liabil-ities, revenues, or expenditures/expenses) for all funds of that category or type (i.e., total govern-mental funds or total enterprise funds).

2. 5 percent criterion: Total assets, liabilities, revenues, or expenditures/expenses of the individual governmental fund or enterprise fund are at least 5 percent of the corresponding total for all gov-ernmental plus enterprise funds combined.


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Exhibit 5 Governmental Funds Balance Sheet

HAAS CITY Balance Sheet

Governmental Funds December 31, 2014

General Capital Projects Permanent

Other Governmental

Funds

Total Governmental

Funds Assets Current

Cash $102,000 $16,000 $13,000 $17,000 $148,000 Property Taxes (net of allowances) 85,000 4,000 89,000 Due from Enterprise Fund 3,000 3,000 Inventory of Supplies 17,000 17,000

Noncurrent Investment in Government Bonds

90,000

90,000

Total Assets $207,000 $16,000 $103,000 $21,000 $347,000 Liabilities and Fund Balances

Vouchers Payable 55,000 3,000 $ 58,000 Contract Payable-Retainage $10,000 10,000

Total Liabilities $ 55,000 $10,000 $ 3,000 $ 68,000 Fund Balances:

Nonspendable: Inventory $17,000 $ 17,000 Permanent Fund Principal $100,000 100,000

Spendable: Restricted for:

Maintain City Park 3,000 3,000 Limited to:

Culture & Recreation $13,000 13,000 Assigned to:

General Government 15,000 15,000 Courthouse Project $ 6,000 6,000 Debt Service 5,000 5,000

Unassigned 120,000 120,000 Total Fund Balances $152,000 $ 6,000 $103,000 $18,000 $279,000 Total Liabilities and Fund Balances $207,000 $16,000 $103,000 $21,000 $347,000


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Exhibit 6 Governmental Funds Statement of Revenues, Expenditures,

and Changes in Fund Balance

HAAS CITY Statement of Revenues, Expenditures, and Changes in Fund Balance

Governmental Funds For the Year Ended December 31, 2014

General Capital Projects Permanent

Other Governmental

Funds

Total Governmental

Funds Revenues Property Taxes $781,000 $95,000 $876,000 Sales Taxes 32,000 32,000 Grants 33,000 $10,000 43,000 Miscellaneous 18,000 $8,000 26,000 Total Revenues $864,000 $10,000 $8,000 $95,000 $977,000

Expenditures Current General Government $206,000 $206,000 Streets and Highways 71,000 71,000 Public Safety 335,000 335,000 Sanitation 141,000 141,000 Culture and Recreation $5,000 $49,000 54,000 Debt Service Principal Retirement 20,000 20,000 Interest Charges 10,000 10,000 Capital Outlay 58,000 $ 124,000 182,000 Total Expenditures $811,000 $ 124,000 $5,000 $79,000 $1,019,000

Excess (deficiency) of Revenues over Expenditures $ 53,000 $(114,000) $3,000 $16,000 $(42,000) Other Financing Sources (Uses)

Proceeds of Bond Issue $ 102,000 $102,000 Transfers In 20,000 $ 2,000 22,000 Transfers Out $ (30,000) (2,000) (32,000) Total Other Financing-Sources and Uses

$ (30,000) $ 120,000 $-0- $ 2,000 $92,000

Contributions, Special Items and Extraordinary Items:

Contribution $100,000 $100,000 Net Change in Fund Balanc-es $ 23,000 $6,000 $103,000 $18,000 $150,000

Fund Balances-Beginning 129,000 -0- -0- -0- 129,000 Fund Balances-Ending $152,000 $6,000 $103,000 $18,000 $279,000

Note that the major fund reporting requirements apply to a governmental or enterprise fund only if the same element (e.g., assets, liabilities, revenues, or expenditures/ expenses) exceeds both the 10 percent and the 5 percent criteria. These major funds tests are presented at the bottom of Exhibits 3 and 4. To prepare the tests, information is also required for the enterprise funds. The underlying transactions for Haas City’s enterprise fund are presented in the next section of this chapter. The information for the total assets, liabilities, revenues, and expenses of Haas City’s enterprise fund is taken from the enterprise fund’s financial statement information. For right now, the information for the enterprise fund is presented solely to discuss the major funds tests. More detail on the enterprise fund will be presented immediately after the following discussion of the two major funds tests.


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10 Percent Criterion Tests To compute the 10 percent criterion tests for the five governmental funds, the denominators of the four tests (assets, liabilities, revenues, and expenditures) are the totals from the five governmental funds. For example, Exhibit 3 shows the total assets of the governmental funds as $347,000. Note again that the general fund is always a major fund, so no percentages need be computed for that fund. The 10 percent asset test shows that the permanent fund meets the 10 percent criterion for total assets (29.68% = $103,000 ÷ $347,000). Continuing down to the liabilities, only the capital projects fund meets the 10 percent criterion for total liabilities (14.71% = $10,000 ÷ $68,000). Information in Exhibit 4 indicates that none of the nongeneral governmental funds meets the 10 percent criterion for revenues. For expenditures, the capital projects fund meets the 10 percent criterion for total expenditures (12.17% = $124,000 ÷ $1,019,000). Thus, the only two nongeneral governmental funds that meet the 10 percent criterion tests for a major fund are (1) the permanent fund (for total assets) and (2) the capital projects fund (for both total liabilities and for total expenditures). 5 Percent Criterion Tests To compute the 5 percent criterion tests, the second group of major fund tests, the GASB specifies that the denominator of each of the four tests (assets, liabilities, revenues, and expenditures/expenses) is the combined total of each of these items for the five governmental funds plus the enterprise funds. For example, Exhibit 3 shows the combined total assets for the 5 percent asset test is $487,000 ($347,000 from the governmental funds plus $140,000 from the enterprise fund). For the nongeneral governmental funds, the permanent fund is the only one that meets the 5 percent criterion for total assets (21.15% = $103,000 ÷ $487,000). For total liabilities, the capital projects fund meets the 5 percent criterion (5.56% = $10,000 ÷ $180,000). Exhibit 4 shows that for revenues, the special revenue fund meets the 5 percent criterion (6.11% = $62,000 ÷ $1,014,000). For expenditures/expenses, only the capital projects fund meets the 5 percent criterion (11.76% = $124,000 ÷ $1,054,000). Note that a governmental fund other than the general fund must meet both the 10 percent and the 5 percent criterion tests for at least one of the four financial statement items to be classified as a major fund. Thus, the following governmental funds are classified as major funds: (1) the general fund—always a major fund, (2) the capital projects fund (for liabilities and expenditures), and (3) the permanent fund (for assets). As shown in Exhibits 5 and 6, the governmental funds financial statements present details on these three funds. The two nonmajor funds, special revenue and debt service, are combined into a single Other Governmental Funds column. However, management of the governmental unit may elect to pro-vide separate disclosure on any nonmajor fund that it believes is important for users of the financial statements to fully understand. GASB 34 requires that a total for all governmental funds be provided. Note that enterprise funds are not governmental-type funds. Government units are permitted to disclose, on the governmental funds’ balance sheet, designations of unassigned funds. A designation is not a legal reservation or restriction but is similar to an appropria-tion of retained earnings for a commercial entity. The designation represents management’s plans for the intended use of the resources and is a communication to users of the financial statements. However, designations are not permitted to be reported on the government-wide financial statements. GASB 34 requires a reconciliation schedule to the government-wide financial statements to be pre-sented either at the bottom of each of the two fund financial statements or in accompanying schedules. These two schedules reconcile the modified accrual basis of accounting used for the governmental funds to the accrual basis of accounting used for reporting in the two government-wide financial statements. The reconciliation schedules are presented later in this chapter within the discussion of presenting the government-wide financial statements. Proprietary Funds Some activities of a governmental unit, such as the operation of a public swimming pool or a municipal water system, are similar to those of commercial enterprises. The objective of the governmental unit is to recover its costs in these operations through a system of user charges. Accounting and reporting for a proprietary fund are similar to accounting for a commercial operation. The financial statements of proprietary funds include (1) statement of cash flows, (2) statement of net


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assets, and (3) statement of revenues, expenses and changes in net assets. A proprietary fund accounts for the business-type functions of a government. Users of the financial statements for proprietary funds may find profitability information to be valuable. The statement of net assets of each proprietary fund reports all assets, including long-term capital assets, and all liabilities, including long-term liabilities. The two types of proprietary funds typically used by governmental entities are enterprise funds and internal ser-vice funds. Enterprise Funds Enterprise funds and internal service funds are both classified as proprietary funds. Internal service funds (to be discussed later), are used to account for services provided by one department or agency of a gov-ernmental unit to other departments or agencies, or to other governmental units on a user-charge basis. Enterprise funds differ from special revenue funds in that the costs of enterprise fund activities are recov-ered by user charges. Therefore, the primary difference between establishing a special revenue fund and an enterprise fund is the source of revenue. Enterprise funds may also be used to account for any operations “where the government body has decided that periodic determination of revenues earned, expenses incurred, and/or net income appropriate for capital maintenance, public policy, management control, accountability, and or other purposes.” From this description, and from the fact that the word “enterprise” is often used as a synonym for “business,” it may be apparent that enterprise funds should use the same basis of accounting and account for all assets used in the production of goods or services offered by the fund. Similarly, if long-term debt is to be serviced by the fund it is accounted for by the fund. Distinction should be made in fund equity accounts between equity contributed to the fund, and earnings resulting from operations of the fund. The amounts charged to customers are intended to recover all or most of the cost of these goods or services. A city may operate electric, gas, and water utilities; transportation systems such as buses, trains, and subways; airports; sports arenas; parking lots and garages; and public housing. Other examples of governmental enterprise are public utilities, notably water and sewer utilities. Services of the kinds men-tioned are generally accounted for by the enterprise funds because they are intended to be largely self-supporting. However, they are properly accounted for by a revenue fund by those municipalities which support the activities largely from general or special revenue sources other than user charges, and are not concerned with measuring the cost of the activities. Almost every kind of enterprise operated by a municipality has its counterpart in the private sector. In order to take advantage of the work done by regulatory agencies and trade associations to develop useful accounting information systems for the investor-owned enterprise, it is recommended that municipally-owned enterprises use the accounting structures developed for investor-owned enterprise of the same nature. Budgetary accounts should be used only if required by law. Debt service and construction activi-ties of a municipal enterprise are accounted for within the enterprise fund, rather than by separate debt services and capital project funds. Thus, the reports of enterprise funds are self-contained, and creditors, legislators, or the general public can evaluate the performance of investor-owned enterprise in the same industry. Enterprise funds have a measurement focus of all economic resources and use the accrual basis of accounting. Capital assets, such as equipment, are reported in the government-wide statement of net assets and in the proprietary fund statement of net assets. They must be depreciated over their estimated useful lives unless they are inexhaustible or are infrastructure assets that meet certain requirements. Proprietary funds report fixed assets, which are depreciated, and long-term debt, if issued, and they focus on income determination and capital maintenance, the same as for commercial entities. The finan-cial statements for proprietary funds are very similar to those for commercial entities: (1) the statement of net assets (balance sheet), (Current assets + noncurrent assets - current liabilities - noncurrent liabilities = net assets). (2) the statement of revenues, expenses, and changes in fund net assets (income statement), and (3) the statement of cash flows. Budgeting in the proprietary funds also has the same role as in commercial entities. A budget may be prepared for management planning purposes; however, the budget is normally not entered into the ac-counts.


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Illustrative Transactions Haas City has a municipal water utility that it operates as an enterprise fund. The trial balance of the water utility as of January 1, 2014, the first day of the 2014 fiscal year, is presented here:

HAAS CITY Trial Balance for Water Utility Enterprise Fund

January 1, 2014

Debit

Credit Cash Machinery and Equipment Buildings Accumulated Depreciation—Machinery and Equipment Accumulated Depreciation—Buildings Bonds Payable, 5% Net Assets: Invested in Capital Assets, Net of Related Debt Unrestricted

$ 9,000 94,000 40,000

$ 15,000 2,000

100,000

17,000 9,000

Totals $143,000 $143,000

One difference between balance sheet accounts for commercial entities and those for proprietary funds is the absence of a stockholders’ equity section in governmental accounting. The general public is the theoretical owner of all governmental assets. Furthermore, no stock certificates are issued; therefore, a net assets section is used instead of common stock and additional paid-in capital. GASB 34 requires the separate disclosure of the net assets invested in capital assets, net of related debt, which reports the book value (cost basis less accumulated depreciation) invested in capital assets such as land, buildings, machin-ery, equipment, and other tangible and intangible assets having expected useful lives exceeding one year. These resources are not readily available for other unrestricted uses as are the current assets. The related debt is that directly associated with the capital assets and is typically long-term in nature. For our exam-ple, assume the $100,000 of bonds payable is related to the $117,000 of net capital assets ($134,000 cost less $17,000 of accumulated depreciation). Other interesting differences are the large relative amounts of fixed assets and long-term debt because enterprise funds typically require large investments in productive assets in order to provide the necessary level of service to the public, and these investments are usually financed by long-term revenue bonds. The water utility sells its product to the residents of Haas City based on a user charge. In addition to water revenue, the water utility receives a $3,000 short-term interfund loan from the general fund and obtains its office supplies from the city’s centralized purchasing operation, which is accounted for as an internal service fund. During the year, the water utility acquires a new pump costing $6,000. Enterprise Fund Revenues The water utility provides service during the period and bills its customers for the amount of water used. The utility estimates that 7.5 percent of its billings will not be collected. Note that revenues are reported net of uncollectibles. These transactions are recorded as follows: (30) Accounts Receivable 40,000 Allowance for Uncollectibles 3,000 Revenue—Water Sales 37,000 Bill customers for water used as indicated by meter readings. Estimate $3,000 of billings

will be uncollectible.


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(31) Cash 32,000 Accounts Receivable 32,000 Collect portion of accounts receivable. Capital Asset Acquisition The water utility acquires a new pump during the year. (32) Equipment 6,000 Vouchers Payable 6,000 Receive new pump for well house. (33) Vouchers Payable 6,000 Cash 6,000 Pay voucher for new pump. Interfund Activities Several interfund transactions occur during the year. First, in an interfund financing transaction, the water utility receives $3,000 from the general fund as a short-term loan to be repaid within 90 days. The general fund records this as a short-term receivable, Due from Enterprise Fund (see entry [39] in Chapter 1). Second, the utility acquires its office supplies from the internal service fund in an interfund services provided and used transaction. The internal service fund reports this as a revenue transaction (see entry [48] later in this chapter): (34) Cash 3,000 Due to General Fund 3,000 Recognize payable for loan from general fund. (35) Supplies Inventory 3,000 Due to Internal Service Fund 3,000 Receive office supplies from centralized purchasing department at a cost of $3,000. (36) Due to Internal Service Fund 2,000 Cash 2,000 Approve payment of $2,000 to centralized purchasing department for supplies received. Enterprise Fund Expenses The water utility fund incurs $9,000 of operating expenses during the period. In addition, several adjust-ing journal entries are required at the end of the fiscal year to recognize additional expenses. Note that these adjusting entries are similar to those of a commercial entity: (37) General Operating Expenses 9,000 Vouchers Payable 9,000 Incur operating expenses during year. (38) Vouchers Payable 6,000 Cash 6,000 Pay approved vouchers for operating expenses. (39) General Operating Expenses 3,000 Supplies Inventory 3,000 Adjust for $3,000 of supplies consumed.


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(40) Depreciation Expense 18,000 Accumulated Depreciation—Machinery and Equipment 15,000 Accumulated Depreciation—Buildings 3,000 Recognize depreciation expense for year. (41) Interest Expense 5,000 Accrued Interest Payable 5,000 Accrue interest on bond payable: $100,000 x 0.05 x 1 year . Closing and Reclassification Entries in the Enterprise Fund The nominal accounts are closed, the period’s profit or loss is determined, and, at the close of the fiscal year, the government reclassifies the various components of net assets based on the year-end amount of net assets invested in capital assets, net of related debt: (42) Revenue—Water Sales 37,000 General Operating Expenses 12,000 Depreciation Expense 18,000 Interest Expense 5,000 Profit and Loss Summary 2,000 Close nominal accounts into profit and loss summary. (43) Profit and Loss Summary 2,000 Net Assets—Unrestricted 2,000 Close profit and loss summary into net assets. (44) Net Assets—Invested in Capital Assets, Net of Related Debt 12,000 Net Assets—Unrestricted 12,000 To reclassify net assets as of end of fiscal period:

12/31/2013 balance: $ 5,000 = $105,000 capital assets – $100,000 of related debt 1/1/2014 balance: 17,000 = $117,000 capital assets – $100,000 of related debt $12,000 = Decrease during period in net assets invested in capital assets, net of related debt

Financial Statements for the Proprietary Funds Three financial statements are required for the proprietary funds. If a governmental entity has more than one enterprise fund, each must be individually assessed by both the 10 percent criterion and the 5 percent criterion tests to determine whether it is a major fund. Haas City has only one enterprise fund. Exhibit 7 presents the statement of net assets for the enterprise proprietary fund and for the internal service proprie-tary fund that will be discussed in the next section of this chapter. Exhibit 8 presents the statement of revenues, expenses, and changes in fund net assets for Haas City’s two proprietary funds. Exhibit 9 presents the statement of cash flows for these two proprietary funds. The statement of net assets in Exhibit 7 is similar to that required for commercial entities. Proprietary funds report their own fixed assets, investments, and long-term liabilities. GASB 34 specifies that the net assets section for the proprietary funds, which is presented below liabilities, be separated into three com-ponents: (1) invested in capital assets, net of related debt; (2) restricted because of restrictions beyond the government’s control, such as externally imposed restrictions or legal requirements; and (3) unrestricted. GASB Statement 46, Net Assets Restricted by Enabling Legislation (GASB 46), issued in 2004, amended GASB 34 with regard to net assets restricted by legally enforceable actions such as enabling legislation, which specifies that a government use resources only for the purposes as specified in the enabling legisla-tion. GASB 46 provides guidance for reporting the net assets so restricted and accounting for changes when new enabling legislation replaces the prior legislation. The key point is that GASB 46 confirms the GASB 34 requirement for separate disclosure of net assets restricted by legal requirements. For our example, there are no externally imposed or legal restrictions on net assets. The amount of the net assets


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invested in capital assets, net of related debt, is computed as capital assets less accumulated depreciation, less outstanding principal of related debt. For purposes of this example, assume that the information in Exhibit 7 shows that the enterprise fund has $5,000 of net assets invested in capital assets, net of related debt ($105,000 – $100,000), and the internal service fund has $2,000 invested in capital assets, net of related debt ($2,000 – $0). The statement of revenues, expenses, and changes in fund net assets is similar to the income state-ment for commercial entities. A separation of operating and nonoperating revenues and expenses is made to provide more information value regarding the operations of the proprietary funds. Contributions and transfers in or out are reported below the income (loss) line in the statement of revenues, expenses, and changes in fund net assets. Contributions would include any capital asset transfers from a governmental fund to a proprietary fund. For example, the general fund may transfer equipment to an enterprise fund. Note that the governmental funds describe the interfund transfers as other financing sources or uses, but the proprietary funds use only the terms transfer in or transfer out to describe these nonoperating inter-fund transactions. And both interest income and interest expense are reported as nonoperating items. The sequence of items in the all-inclusive format shown below must be followed in each column of the statement: Operating revenues (detailed) + Total operating revenues Operating expenses (detailed) – Total operating expenses Operating income (loss) +/- Nonoperating revenues and expenses (detailed) = Income before other revenues, expenses, gains, losses, and transfers +/- Capital contributions, additions to endowments, special and extraordinary items, and interfund transfers = Change in net assets + Net assets – beginning = Net assets – ending

The statement of cash flows for enterprise funds is specified by GASB Statement No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprie-tary Fund Accounting (GASB 9). This standard provides a format that differs somewhat from the three-section format of the statement of cash flows for commercial entities. Because of the large number of capital asset acquisition and financing transactions in proprietary funds, the GASB specified four sections of the statement of cash flows, as follows: 1. Cash flows from operating activities. This first section includes all transactions from providing

services and delivering goods. GASB 34 requires the use of the direct method of computing cash flows from operating activities. It includes cash flows from interfund operating transac-tions and reimbursements from other funds.

2. Cash flows from noncapital financing activities. This second section includes activities such as borrowing or repaying money for purposes other than to acquire, construct, or improve capital assets. It includes cash for financing activities received from, or paid to, other funds except that which is specified for capital asset use.

3. Cash flows from capital and related financing activities. This third section includes all activi-ties clearly related to, or attributable to, the acquisition, disposition, construction, or improve-ment of capital assets. This section also includes the interest paid on borrowings for capital as-sets.

4. Cash flows from investing activities. This fourth section includes all investing activities, inter-est and dividend revenue, and acquisition and disposition of debt or equity instruments.


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In addition to the statement of cash flows, proprietary funds also are required to provide a supplemen-tary schedule that reconciles the cash flow from operating activities with the operating income or loss reported on the statement of revenues, expenses, and changes in fund net assets.

Short Quiz

Indicate whether each of the following is true or false. 1. Enterprise funds and permanent funds are classified by the NCGA as “proprietary funds.” 2. Enterprise funds are used by state and local governmental units to account for services which are

provided to the general public on a user charge basis or to account for any services which the governing body of the governmental units has decided should be accounted for on a “business ba-sis.”

3. Public utilities owned and operated by governmental units are the most common examples of ac-tivities customarily accounted for as enterprise funds.

Answers

1. False. Enterprise funds and internal service funds are classified as proprietary funds. 2. True. Even if user charges are not the primary source of revenues, the enterprise fund approach

may be used for any activities for which the governing body desires periodic determination of revenues earned, expenses incurred, and/or net income.

3. True. Almost any kind of enterprise may be operated by a governmental unit, but public utilities are the most common examples.

Internal Service Funds All of the municipal funds discussed previously (general, special revenue, capital projects, debt service, and permanent funds) owe their existence to legal constraints placed upon the raising of revenue and/or the use of resources for the provision of services to the public or segments thereof, and for the acquisition of facilities to aid in the provision of services. As governmental units became more complex it became apparent that efficiency should be improved if services used by the several departments or funds, or even several governmental units, were combined in a single administrative unit. A logical name for a fiscal and accounting entity created to account for resources used for providing centralized services is Internal Service Fund. The reason for the creation of funds in this category is to improve the management of resources; however, it should be stressed, a fund is a fiscal entity as well as an accounting entity, conse-quently establishment of a fund is ordinarily subject to legislative approval. Internal service funds, and enterprise funds are classified by the National Council on Governmental Accounting as proprietary funds. That is, funds which are accounted for in a manner similar to investor-owned business enterprises. Accordingly, proprietary funds account for all fixed assets used in their operations and for long-term debt to be serviced from revenues generated from their operations, as well as current assets and current liabilities. Distinction should be made in the equity accounts of internal service funds between equity contributed to the fund and retained earnings resulting from operations of the fund. Proprietary funds do not record their budgets in their accounting systems. Internal service funds account for the financing of goods or services provided by one department or agency to other departments or agencies on a cost-reimbursement basis. These services are not available to the general public, making the internal service fund different from the enterprise fund. Examples are central motor vehicle pools and garages, central IT facilities, printing shops, central risk financing activi-ties, and centralized purchasing and storage facilities. Separate internal service funds are established for each of these functions maintained by the local governmental unit. Accounting and financial reporting for internal service funds are the same as for enterprise funds or for commercial entities. The accrual basis is used to measure revenue and expenses (not expenditures), and the balance sheet may include fixed assets, which are depreciated, and long-term debt, if issued. The statement of revenue, expenses, and changes in fund net assets reports the fund’s income for the period. The statement of cash flows also is required.


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Establishment and Operation of Internal Service Funds The ordinance, or other legislative action, which authorizes the establishment of an internal service fund should also specify the source, or sources, of financial resources which are to be used for fund operations. The original allocation of resources to the fund may be derived from a transfer of assets of another fund, such as the general fund or an enterprise fund, intended as a contribution not to repaid, or a transfer which is in the nature of a long-term advance to be repaid by the internal revenue service fund over a period of years. Alternatively, or additionally, the resources initially allocated to an internal service fund may be acquired from the process of a general obligation bond issue, or transfers from other governmental units that anticipate utilizing the services to be rendered by the internal service fund. Since service funds are established to improve the management of resources, it is generally considered that they should be operat-ed and accounted for as a business – in order that their financial statements can disclose their success in maintaining their capacity to continue to render service to using funds and units. For that reason internal service funds follow the business accounting practice of reporting accumulated net income (or losses) in a net assets account. Illustrative Transactions Haas City decides to establish a centralized purchasing and storage function as an internal service fund. This centralized purchasing department provides office supplies to all other funds of the local government on a user-charge basis. After acquiring the necessary supplies, the centralized purchasing department makes the following sales:

Buying Fund Selling Price Cost to Internal

Service Fund General fund $1,000 $ 500 Enterprise fund 3,000 1,500

The following entries are made during the year to record the activities of the centralized purchasing and storage department. Establishment of Internal Service Fund and Acquisition of Inventories The fund is started with a transfer in from the general fund in the amount of $10,000, which the internal service fund then uses to acquire inventory and equipment. The general fund records this interfund trans-fer as a transfer out (see entry [33] in Chapter 1): (45) Cash 33,000 Transfer In 33,000 Receive interfund transfer in from general fund to initiate centralized purchasing and

storage function. (46) Inventory 33,000 Vouchers Payable 33,000 Acquire inventory of supplies. (47) Machinery and Equipment 33,000 Vouchers Payable 33,000 Acquire equipment. Internal Service Fund Revenue The revenue of the internal service fund is earned by selling supplies to other funds and billing them for the value of the supplies. The billing rate is typically established at more than the operating costs of the internal service fund so that the fund may acquire replacement assets or new assets:


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(48) Due from General Fund 1,000 Due from Enterprise Fund 3,000 Charges for Services 4,000 Recognize revenue from providing supplies to general fund and enterprise fund. (49) Cash 3,000 Due from General Fund 1,000 Due from Enterprise Fund 2,000 Collect portion of receivables. The general fund records the $1,000 for supplies as an interfund expenditures transaction (see entry [37] in Chapter 1). The enterprise fund records the $3,000 as an interfund inventory purchase transaction (see entry [35] earlier in this chapter). Internal Service Fund Expenses The internal service fund incurs $4,000 of operating expenses, including payroll, during the period. In addition, cost of goods sold of $2,000 and $1,000 of depreciation expense are recognized in adjusting entries. The $9,000 of vouchers paid includes a voucher in the amount of $3,000 for the equipment ac-quired in entry (47) above: (50) General Operating Expenses 4,000 Vouchers Payable 4,000 Incur operating expenses. (51) Vouchers Payable 9,000 Cash 9,000 Pay approved vouchers. (52) Cost of Goods Sold 2,000 Inventory 2,000 Recognize cost of supplies sold. (53) Depreciation Expense 1,000 Accumulated Depreciation 1,000 Depreciation of equipment. Closing Entries in the Internal Service Fund The closing and reclassifying entries for the internal service fund follow. Profit and Loss Summary is used here in the closing process; however, some governmental units use the account called Excess of Net Revenues over Costs to perform the same function. (54) Charges for Services 4,000 Profit and Loss Summary 3,000 Cost of Goods Sold 2,000 General Operating Expenses 4,000 Depreciation Expense 1,000 Close revenue and expenses. (55) Transfer In 10,000 Profit and Loss Summary 3,000 Net Assets—Unrestricted 7,000 Close profit and loss summary and transfer in to net assets.


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(56) Net Assets—Unrestricted 2,000 Net Assets—Invested in Capital Assets, Net of Related Debt 2,000 To reclassify net assets as of end of fiscal period: $2,000 = $2,000 net capital assets – $0

related debt. Financial Statements for Internal Service Funds The financial statements required for internal service funds are the same as those required for the enter-prise fund. Exhibit 7 presents the statement of net assets, and Exhibit 8 presents the statement of revenues, expenses, and changes in fund net assets for the internal service fund. Exhibit 9 presents the statement of cash flows for the internal service fund.

Exhibit 7 Proprietary Funds Statement of Net Assets

HAAS CITY

Statement of Net Assets Proprietary Funds

December 31, 2014

Enterprise

Fund

Internal Service

Fund Assets: Current Assets:

Cash $ 30,000 $ 4,000 Accounts Receivable (net) 5,000 Due from Other Funds 1,000 Inventory of Supplies 6,000

Total Current Assets $ 35,000 $11,000 Noncurrent Assets:

Capital Assets: Machinery and Equipment $100,000 $ 3,000

Less: Accumulated Depreciation (30,000) (1,000) Buildings 40,000

Less: Accumulated Depreciation (5,000) Total Noncurrent Assets $105,000 $ 2,000

Total Assets $140,000 $13,000 Liabilities:

Current Liabilities: Vouchers Payable 3,000 $ 6,000 Accrued Interest Payable 5,000 Due to Other Funds 4,000

Total Current Liabilities 12,000 $ 6,000 Noncurrent Liabilities:

Bonds Payable, 5% 100,000 Total Liabilities $112,000 $ 6,000

Net Assets: Invested in Capital Assets, Net of Related Debt 5,000 $ 2,000 Unrestricted 23,000 5,000

Total Net Assets $ 28,000 $ 7,000


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Exhibit 8 Proprietary Funds Statement of Revenues, Expenses,

and Changes in Fund Net Assets

HAAS CITY Proprietary Funds

Statement of Revenues, Expenses, and Changes in Fund Net Assets For the Year Ended December 31, 2014

Enterprise Fund

Internal Service

Fund Operating Revenues: Charges for Services $37,000 $ 4,000 Total Operating Revenues $37,000 $ 4,000 Operating Expenses: General Operating $12,000 $ 4,000 Cost of Goods Sold 2,000 Depreciation 18,000 1,000 Total Operating Expenses $30,000 $ 7,000 Nonoperating Revenue (Expenses): Interest Expense $(5,000) Total Nonoperating Expense $ 5,000

Income (Loss) before Contributions and Transfers $ 2,000 $(3,000)

Transfer In 10,000 Change in Net Assets $ 2,000 $ 7,000 Net Assets—Beginning 26,000 -0- Net Assets—Ending $28,000 $ 7,000

Exhibit 9

Proprietary Funds Statement of Cash Flows

HAAS CITY Statement of Cash Flows

Proprietary Funds For the Year Ended December 31, 2014

Enterprise Fund Internal Service Fund Cash Flows from Operating Activities: Receipts from Customers Cash Payments for Goods and Services Cash Paid to Internal Service Fund for Supplies Net Cash Provided (Used) by Operating Activities Cash Flows from Noncapital Financing Activities: Cash Received from General Fund for Noncapital Loan

$32,000 (6,000)

(2,000) $24,000

$ 3,000 (6,000)

$(3,000)

Acquisition of Capital Asset $(6,000) $(3,000) Cash Received from General Fund for Capital Activity 3,000 Net Cash Provided (Used) for Capital Financing Activities $(6,000) $-0- Cash Flows from Investing Activities $-0- $-0- Net Increase in Cash $21,000 $4,000 Balances—Beginning of Year 9,000 -0- Balances—End of Year $30,000 $4,000


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Reconciliation of Operating Income to Net Cash Provided by Operating Activities:

Operating Income $7,000 $(3,000) Adjustments to Reconcile Operating Income to Net Cash Provided (Used) by Operating Activities:

Depreciation 18,000 1,000 Change in Assets and Liabilities: Increase in Net Accounts Receivable (5,000) Increase in Due from Other Funds from Billings (1,000) Increase in Inventory of Supplies (6,000) Increase in Vouchers Payable 3,000 6,000 Increase in Due to Internal Service Fund 1,000 Net Cash Provided (Used) by Operating Activities $24,000 $(3,000)

Short Quiz

Indicate whether each of the following is true or false. 1. Internal service funds are classified as governmental funds. 2. Internal service funds are accounted for in a manner similar to investor-owned businesses: among

other features, the accrual basis is used and all of the property, plant, and equipment used in fund operations is accounted for by the using fund.

3. Internal service funds account for any long-term debt to be serviced from revenues derived from fund operations.

4. The Encumbrances account should be used by an internal service fund in the same manner as by a general fund.

5. Internal service funds account for operating expenses on the accrual basis. 6. Revenue of internal service funds should be accounted for on the modified accrual basis. 7. Internal service funds should account for depreciation of their plant and equipment in a manner

similar to that used by business organizations. Answers

1. False. Internal service funds are classified as proprietary funds. 2. True. The features described are characteristic of the AIPA/NCGA recommended accounting for

proprietary funds. 3. True. Long-term debt of an internal service fund ordinarily results from advances from other

funds or governmental units, not from outside creditors. 4. False. Internal service funds should debit appropriately named asset accounts for all fixed assets

as well as current assets used in fund operations. The Encumbrances account is not used because legal appropriation accounting is not in conformity with GAAP for internal service funds.

5. True. Internal service funds account for expenses, not expenditures, and use the accrual basis. 6. False. Revenues of internal service funds should be accounted for on the accrual basis. 7. True. Depreciation accounting for an internal service fund is the same as for a business organiza-

tion.

Fiduciary Funds Fiduciary funds are used to account for assets held by a government unit acting as a trustee or agent for individuals, organizations, other government units, or other funds of the same governmental unit. In law there is a clear distinction between an agency relationship and a trust relationship. In practice the legalis-tic distinctions between trust funds and agency funds are not of major significance. The important and perhaps the sole consideration from an accounting standpoint is: What can and what cannot be done with the fund’s assets, in accordance with the laws and other pertinent regulations?


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Four types of fiduciary funds are provided for a governmental unit. Three are trust funds that account for financial resources maintained in trust by the government. These three are pension and other employee benefit trust funds, investment trust funds, and private-purpose trust funds. A pension and other employee benefit trust fund is a separate category of trust fund because of the importance of disclosure of pension funds and because both the assets contributed to the trust fund and the earnings thereon may be expended for the purposes and in the amounts set forth in the pension agreement. An agency fund accounts for assets held by a governmental unit temporarily as agent for individuals, organizations, other funds, or other governmental units. Trust Funds Trust funds are a fiduciary fund type that accounts for resources held by a government unit in a trustee capacity. The governmental unit acts as a fiduciary for monies or properties held on behalf of individuals, employees, or other governmental agencies. The three main types of fiduciary trust funds are (1) pension and other employee benefit trust funds, (2) investment trust funds, and (3) private-purpose trust funds. The accrual basis of accounting is used for the fiduciary funds, and the financial statements required for fiduciary funds are the statement of fiduciary net assets (Exhibit 10) and the statement of changes in fiduciary net assets (Exhibit 11). The statement of fiduciary net assets includes all trusts and agency funds. The statement of changes in fiduciary net assets includes only the trust funds because agency funds do not have a net asset balance; their assets must equal their liabilities (Assets = Liabilities). An agency fund does not report revenues. Agency funds are discussed after trust funds. Private-purpose trust funds account for trust agreements for which the principal and/or income bene-fits specific individuals, private organizations, or other governments. Note that the benefit is limited to private, rather than general public, purposes. The trust agreement may require the principal to be pre-served (i.e., nonexpendable principal), in which case an endowment is created. In other trust agreements, both the principal and income may be used for the specific purposes for which the trust was created. The governmental entity does not have to accept the donation if it is not consistent with the government’s objectives. However, there are many cases in which a governmental entity accepts the donation and agrees to its provisions because of the benefits that can be achieved with the resources. For example, a citizen group may donate money to a city to be used for award recognition for businesses located in the downtown area that update and improve the appearances of their storefronts. The governmental entity is typically allowed to charge the private-purpose trust fund a fee for managing the trust’s resources, which would include investing the resources and making the allowed expenditures from the resources. An example of a private-purpose trust fund is illustrated in the next section of this chapter. Public employee pension funds are discussed in the “Additional Considerations” section later in the chapter. Illustration of Private-Purpose Trust Fund On January 1, 2014, Haas City receives a $50,000 donation from Charles Alt, a citizen of Haas City. The terms of the trust agreement specify that the city is to use about $25,000 each year for the next two years to help alleviate the cost of transporting senior citizens to and from the senior citizens’ center. The city accepts the donation and, as allowed by the trust agreement, invests $25,000 in highly rated bonds. The remaining $25,000 is deposited in a bank account that earns 4 percent interest. The terms of the trust agreement allow the city to deduct $1,000 per year for its administrative costs of managing the trust and the transportation services. During the first year, 2014, $23,000 is paid out of the fund for transportation services. The fund pays out the remaining resources in 2014. (57) Cash 50,000 Additions—Contributions 50,000 The city accepts a private-purpose trust fund of $50,000. (58) Investment in Bonds 25,000 Cash 25,000 The city invests half of the trust funds, as allowed by the trust agreement.


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(59) Cash 600 Additions—Interest 600 Interest earned during the year on the monies deposited in the bank is recognized from

bank statements. (60) Deductions—Transportation Benefits 23,000 Cash 23,000 Transportation costs during the year are paid. (61) Deductions—Administration Costs 1,000 Cash 1,000 The $1,000 of administrative costs allowed to the city are recognized and paid.

An adjusting journal entry is made on December 31, 2014, to revalue the investment in bonds to their fair values, as follows: (62) Investment in Bonds 1,200 Additions—Investment Revalued 1,200 The fair value of the investment in bonds increased by $1,200 by the end of the year. Note that this private-purpose trust fund had an expendable principal as well as earnings. The re-quirement for a private-purpose trust fund is that its resources may be used only for specific individuals, organizations, or other governmental units as specified by the donor. Some private-purpose trust funds specify that the principal is nonexpendable and that only the earnings may be used for the private purpose. A private-purpose trust fund is differentiated from a permanent fund, which is part of the governmental fund, in the following manner. A permanent fund must maintain its principal, but the earnings are used to support the government’s programs that benefit all citizens. A private-purpose trust fund must be used only for the specific purposes specified by the donor or grantor of the trust fund and is not available to support the government’s general programs. Exhibit 10 reports the statement of fiduciary net assets for the fiduciary funds for Haas City, including the private-purpose fund and agency fund. Exhibit 11 presents the statement of changes in fiduciary net assets for the private-purpose trust fund. Agency funds are presented in the next section of the chapter.

Exhibit 10 Fiduciary Funds Statement of Fiduciary Net Assets

HAAS CITY

Statement of Fiduciary Net Assets Fiduciary Funds

December 31, 2014

Private-Purpose Funds

Agency Funds

Assets: Cash $1,600 $1,000 Investments, at Fair Value: Municipal Bonds 26,200 Total Assets $27,800 $1,000

Liabilities:

Due to Insurance Company $1,000 Total Liabilities $-0- $1,000 Net Assets Held in Trust $27,800


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Exhibit 11 Fiduciary Funds Statement of Changes in Fiduciary Net Assets

HAAS CITY Statement of Changes in Fiduciary Net Assets

Fiduciary Funds For the Year Ended December 31, 2014

Private-Purpose Fund

Additions: Contributions $50,000 Investment Earnings: Increase in Fair Value of Investments $1,200 Interest 600 Total Investment Earnings $1,800 Total Additions $51,800

Deductions: Benefits $23,000 Administrative Costs $1,000 Total Deductions $24,000 Change in Net Assets $27,800 Net Assets—Beginning of Year $-0- Net Assets—End of Year $27,800

Agency Funds An agency fund comes into existence because the governmental unit, in its capacity as agent for accom-plishing some particular mission, becomes incidentally a custodian of assets. When this occurs, accounts are required to record on the accrual basis not only the assets received but also the liabilities to those for whose benefit they were received. The other major transaction (or transactions) of the fund is disburse-ment of the assets to their real owners. Although revenue and expenditure transactions are not impossible for an agency fund, they are not typical. Furthermore, an agency fund will have little or no Fund Balance; the proceeds of any fee levied for the service rendered belong to some other fund and should be shown as a liability to that fund. Agency funds are a fiduciary fund type that accounts for resources held by a governmental unit as a custodial agent for individuals, private organizations, other funds, or other governmental units. Examples are tax collection funds that collect property taxes and then distribute them to local governmental units and employee benefit funds for such items as dental insurance or charitable contributions that employees authorize as withholdings from their paychecks. The agency relationship does not always require creation of an agency fund. For example, a munici-pality must act as agent of the federal and state governments in the collection of employees’ withholding taxes, social security taxes and retirement contributions. As illustrated in the chapters dealing with reve-nue funds, amounts withheld from employee’s pay be the municipality acting as agent for higher levels of government are ordinarily credited to a revenue fund current liability account at the time the withholding is recorded, and debited to the same liability account when the amount is remitted to the stated or federal government. If required by law or administrative decision in a given jurisdiction, a separate agency fund is operated by the municipality to account for employees’ taxes and contributions. If a separate agency fund is not required by law, it appears perfectly acceptable for the fund which accounts for the gross pay to account for the withholdings and contributions; this is so because the agency relationship is incidental to the primary purposes of the fund which accounts for gross pay, the amounts tend to be small in relation to total expenditures, and the agency relationship is ordinarily discharged on a rather current basis. The accounting equation for an agency fund is Assets = Liabilities. Because agency funds are custodial in nature, assets always equal liabilities and there is no fund equity. The financial statement for agency funds is the statement of fiduciary net assets as presented in


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Exhibit 9. Note that there cannot be any net asset balance for agency funds; therefore, no statement of changes in fiduciary net assets is required for agency funds. Agency funds for Revenue Collection Sales taxes, gasoline taxes, motor vehicle taxes, and many other taxes are commonly collected by a state government agency and apportioned, on the basis specified by law, to other state units and to governmen-tal bodies within the state. At the local government level it is common for the treasurer of each county to serve as collector for all property taxes owed by persons owning property within the county. Thus it is obvious that tax agency fund records must be organized in a manner facilitating proper distribution of tax collections to each of the governmental bodies (and by it to each of its funds) in the proportion the tax levied by the body (or its funds) bears to the total levied against the parcel for that year. An agency fund does not report revenues. Illustrative Transactions in an Agency Fund Haas City has established an agency fund to account for employees’ share of health insurance, which is deducted from the employees’ monthly paychecks and then forwarded to the insurance company on a quarterly basis. For this example, a total of $9,000 was deducted from the employees’ paychecks, and $8,000 was paid to the insurance company in 2014. The remaining $1,000 will be paid to the insurance company in the first quarter of 2014. Agency Fund Receipts and Disbursements The receipts and disbursements in the agency fund during 2014 are as follows: (63) Cash 9,000 Due to Insurance Company 9,000 Employees’ contributory share of health insurance deducted from payroll checks. (64) Due to Insurance Company 8,000 Cash 8,000 Pay liability to insurance company for employees’ share of insurance cost.

Short Quiz

Indicate whether each of the following is true or false. 1. Funds used to account for transactions related to assets held by a governmental unit as a trustee or

agent are known as fiduciary funds. 2. There are certain accounting characteristics common to all fiduciary funds. 3. Agency funds should account for assets and liabilities on the modified accrual basis, even though

revenue and expenditure transaction are not common. 4. An agency relationship which usually necessities the creation of an agency funds is the collection

of revenues by one governmental body for several of its funds and/or for other governmental units and their funds.

Answers

1. True. Agencies and trusteeships are two of the common relationships classified in law as fiduci-ary relationships.

2. False. There is no set of accounting characteristics common to all fiduciary funds. 3. True. Agency fund assets and liabilities are to be recognized on the modified accrual basis. 4. True. Agency funds of this nature are commonly found at the state level, and also at the county

level.


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The Government Reporting Model GASB 34 specifies the reporting model for governmental entities. All general-purpose units such as states, counties, and municipalities must provide all financial statements required in GASB 34. These statements are both the fund-based financial statements presented earlier in this chapter plus the govern-ment-wide financial statements that will be discussed in a following section of this chapter. Some special-purpose government units such as cemetery associations that are engaged in a single governmental activi-ty are not required to provide the government-wide financial statements but still must provide fund-based financial statements. We now discuss four major issues arise in the government reporting model. Four Major Issues Issue 1: What Organizations Comprise the Reporting Entity? The first issue to address is the determination of the reporting entity for which the statements will be provided. The primary government is part of the reporting entity, but this issue concerns what other boards, commissions, agencies, or authorities should be included with the reporting entity. GASB 34 defines the reporting entity as (a) the primary government, such as a city, county, or state; (b) a compo-nent unit for which the primary government is financially accountable; and (c) any organization that has a significant relationship with the primary government and should be included to avoid misleading or incomplete financial statements. Issue 2: What Constitutes Financial Accountability? The financial reporting entity is defined as the primary government, organizations for which the primary government is financially accountable, and other organizations with a relationship with the primary government such that exclusion would cause the reporting entity’s basic financial statements to be mis-leading or incomplete. This definition is based on financial accountability. Financial accountability is the basic criterion used to determine the reporting entity for a governmental unit. GASB Statement No. 14, The Financial Reporting Entity (GASB 14), states that financial accounta-bility of the primary government for the component organization is evidenced by either board appoint-ment or fiscal dependence. Financial accountability is evidenced when the primary government appoints a majority of the organization’s governing board. Thus, the primary government has effective control over the organization, which in turn may provide specific benefits to, or may impose specific financial burdens on, the primary government. Financial accountability also may exist if the organization has a separately elected or appointed board but fiscally depends on the primary government for the financial resources required to operate. The primary government’s ability to impose its will on an organization is evidenced by such things as its ability to (1) remove appointed members of the organization’s governing board, (2) approve or modify the organization’s budget or approve rates or fee changes, (3) veto or overrule the decisions of the organi-zation’s governing body, or (4) appoint, hire, reassign, or dismiss those persons responsible for the organ-ization’s day-to-day operations. The potential for an organization to impose specific burdens on the primary government is evidenced by such things as the primary government’s legal obligation or its assumption of the obligation to finance the deficits, or otherwise provide financial support to, the organi-zation, or the primary government’s obligation in some manner for the debt of the organization. These criteria indicate that when the primary governmental unit is financially accountable for legally separate organizations, those organizations should be included in the primary government’s financial statements as component units. Issue 3: What Other Organizations Should Be Included in the Reporting Entity? GASB 14 specifies a third category of organizations to be evaluated to determine if they are part of the reporting entity with the primary government. These are legally separate, tax-exempt entities for which the primary government is not financially accountable. GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units (GASB 39), amended parts of GASB 14 to more fully define what other organizations should be included in a government’s reporting entity. In general, a


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legally separate, tax-exempt organization is reported as a component unit of the primary government if all three of the following characteristics are met: 1. The resources of the separate organization are held for the benefit of the primary government, its

component units, or the persons served by the primary government or its component units. 2. The primary government, or its component units, is entitled to, or can use, a majority of the

economic resources of the separate organization. 3. The economic resources of the separate organization that the primary government, or its compo-

nent units, can use are significant to the primary government.

Examples of other organizations that should be included in the reporting entity include university foundations and university alumni associations. Issue 4: How Should the Financial Results of the Component Units Be Reported? The fourth issue is how to report the financial results of component units. A choice between two methods must be made: (1) discrete presentation in a separate column of the primary government’s financial statements or (2) blended presentation by combining the organization’s results into the primary govern-ment’s financial results. Most component units are discretely presented; however, the blending method should be used when the component unit is so intertwined with the primary government that, in essence, they are the same governmental unit. Blending should be used when either (1) the component unit’s governing body is substantively the same as the primary government’s governing body or (2) the component unit provides services entirely, or almost entirely, to the primary government or almost exclusively benefits the primary government. Some of these organizations are similar to the internal services fund. Component units may use governmental fund accounting or proprietary fund accounting, depending on their types of activities. Neither discretely presenting nor blending should change the measurement basis of the type of accounting used by the component unit; however, a general fund of a blended component unit should be reported as a special revenue fund for the primary government. For purposes of the Haas City example, assume that the city has a separate library board responsible for managing the city library. The mayor appoints the library board, which must have its budget and tax levy approved by the mayor and council. In this case, the library is a component unit that will be discrete-ly presented in a separate column of Haas City’s two government-wide financial statements.

Exhibit 12 The Comprehensive Annual Financial Report (CAFR)

Section 1: Introductory Section This section contains organizational information and other preliminary items. Section 2: Financial Section The financial section contains the following items:

1. Independent auditors report. 2. Management's discussion and analysis (required supplementary information) (GASB 34). 3. Government-wide financial statements.

a. b.

Statement of net assets (Exhibit 13). Statement of activities (Exhibit 14).

4. Fund-based financial statements. a. Governmental funds. (1)

(2)(3)

Balance sheet (Exhibit 5). Statement of revenues, expenditures, and changes in fund balances (Exhibit 6). Reconciliation schedules (Exhibits 15 and 16).

b. Proprietary funds. (1)

(2)(3)

Statement of net assets (Exhibit 7). Statement of revenues, expenses, and changes in fund net assets (Exhibit 8). Statement of cash flows (Exhibit 9).

c. Fiduciary funds.


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(1)(2)

Statement of fiduciary net assets (Exhibit 10). Statement of changes in fiduciary net assets (Exhibit 11).

5. Notes to the financial statements (GASB 34 and 38). 6. Required supplementary information (RSI).

a. b. c.

Budgetary comparison schedules (Exhibit 17) (GASB 41). Information about infrastructure assets (GASB 34 for modified approach). Information about pension funding progress and employer contributions to retirement and pen-sion funds (GASB 25, 27, 43, 45, and 50).

Section 3: Combining and Individual Fund Financial Statements This section contains the financial statements of each individual fund as well as financial statements showing the combining of individual funds together as a fund type (e.g., combining all individual special projects fund into one fund). Section 4: Statistical Section This section presents the economic condition reporting required by GASB 44 to be presented in the statistical section of the annual report.

Government Financial Reports The annual report of a governmental entity is termed the comprehensive annual financial report (CAFR). Exhibit 12 presents the components of the CAFR along with parenthetical information noting the Exhibit number in the course, or the number of the GASB standard providing guidance on the information to be included in that item. The GASB has continued to develop the reporting standards for the statistical section to make it more useful and comparative for users of the annual report. In 2004, the GASB issued GASB Statement 44, Economic Condition Reporting: The Statistical Section—an Amendment of NCGA Statement 1 (GASB 44), which specifies the types of information that should be reported in each of the five sections of the statistical section: (1) financial trends information, (2) revenue capacity information, (3) debt capacity information, (4) demographic and economic information, and (5) operating information. The intent of this statement is to further improve the understandability and usefulness of this section by also requiring the governmental unit to add information about the sources of the data and the major assumptions used and expand explanations for any unusual information presented. Thus, the statistical section is an important part of the CAFR. The fund-based financial statements were discussed previously in this chapter. The following discus-sion centers on the government-wide financials and the required supplementary information (RSI). Government-Wide Financial Statements The basic financial statements include government-wide financial statements, fund financial statements, and the notes to the financial statements. Government-wide financial statements do not display funds or fund types but instead report information about the overall government. They distinguish between the primary government and its discretely presented component units and between the governmental activities and business-type activities of the primary government by reporting such information in separate rows and columns. The government-wide financial statements include (1) the statement of net assets and (2) the state-ment of activities. GASB 34 requires that government-wide financial statements be prepared on the economic resources measurement focus with the accrual basis of accounting. Note: The fiduciary funds (e.g., private-purpose trust funds and agency funds) are not included in the two govern-ment-wide financial statements because fiduciary funds are not available to support government programs. Statement of Net Assets Exhibit 13 presents the statement of net assets for Haas City. Some important points regarding this state-ment of net assets follow: 1. Format. The format of the statement is Assets – Liabilities = Net Assets. This focuses attention

on the net assets of the government entity.


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2. Columnar presentation. A columnar presentation is used because it emphasizes that the primary government has two different categories of activities, each needing a net asset base to support that category’s activities, and the reporting entity’s component units have their own net asset base.

a. The primary government’s activities are assigned to either governmental activities or busi-ness-type activities.

b. The internal service funds are included as part of the governmental activities. This is because internal service funds provide service only to the governmental entity, not to external parties. The enterprise funds are presented as business-type activities of the primary government. This is because the enterprise funds offer services to the public, and thus they are more busi-ness oriented.

3. Assets. Reported assets include all types of assets of the governmental entity, including infra-

structure such as roads, sewers, and so on. These capital assets are not reported in the governmen-tal funds that, under the current financial resources measurement focus, record costs of capital as-sets as expenditures of the period. GASB 34 requires that all capital and infrastructure assets be reported on the government-wide financial statements. Capital assets, such as buildings and equipment, will be depreciated and that depreciation will be presented as an expense on the gov-ernment-wide statement of activities. Infrastructure assets are, by their definition, long-lived as-sets that can be maintained for a much longer time than capital assets. Roads can be paved over, bridges can be repaired, and water and sewer systems can be maintained. Because of the difficul-ty in determining any reasonable estimated useful life for the infrastructure assets, GASB 34 pro-vides for two methods to account for the depreciating attribute of these infrastructure assets.

a. Report estimated depreciation expense. The first method requires governments to estimate depreciation expense and report that estimated expense on the government-wide statement of activities.

b. Modified approach. The second approach allows governments to avoid the requirement to estimate depreciation expense on infrastructure assets that are part of a network or subsystem of a network as long as the government manages those assets using an asset management sys-tem and the government can document that the assets are preserved approximately at, or above, a condition level established by the government. Under the modified approach, the government entity annually expenses actual repair and renewal costs associated with the in-frastructure assets. Additions and improvements are added to the cost basis of the infrastruc-ture asset. Required footnote disclosures include (1) an estimate of the amount required to maintain or preserve the infrastructure assets, along with the actual costs for each of the last five years, and (2) the presentation of condition assessments of the infrastructure assets for the last three years to show that these assets are indeed being maintained.


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Exhibit 13 Government-Wide Statement of Net Assets

HAAS CITY

Statement of Net Assets December 2014

Primary Government

Total Component

Unit Governmental

Activities Business-type

Activities Assets: Cash and Cash Equivalents $152,000 $ 30,000 $182,000 $3,000

Receivables, Net 89,000 5,000 94,000 Internal Balances 4,000 (4,000) -0- Inventories 23,000 23,000 1,000 Investment in Government Bonds 91,000 91,000 Capital Assets:

Land and Infrastructure 3,000,000 3,000,000 Depreciable Assets, Net 1,202,000 105,000 1,307,000 870,000

Total Assets $4,561,000 $136,000 $4,697,000 $874,000 Liabilities:

Vouchers Payable $64,000 $3,000 $67,000 Accrued Interest Payable 5,000 5,000 Contract Payable—Retainage 10,000 10,000 Noncurrent Liabilities:

Due in More than 1 Year 80,000 100,000 180,000 $120,000 Total Liabilities $154,000 $108,000 $262,000 $120,000 Net Assets:

Invested in Capital Assets, Net of Related Debt

$4,122,000 $5,000 $4,127,000 $750,000

Restricted for: Debt Service 5,000 5,000 Permanent Funds 103,000 103,000

Unrestricted 177,000 23,000 200,000 4,000 Total Net Assets $4,407,000 $28,000 $4,435,000 $754,000

Many governments use the modified approach rather than the estimated depreciation expense

method. Regardless of the method used for the depreciation element, the government must report the infrastructure assets in the asset section of the government-wide statement of net assets.

Note that Haas City distinguishes between its infrastructure assets and its buildings and equip-ment. Haas City has chosen to use the modified approach in recognizing the depreciating factors in its infrastructure assets. Thus, the depreciation expense reported on the statement of activities is only from the Depreciable Assets category, which includes items such as buildings and equipment. The as-set, Internal Balances, represents interfund receivables/ payables between the governmental activities and the business-type activities. In the Haas City example, the enterprise fund owes a total of $4,000 to other funds: $3,000 to the general fund for a loan and $1,000 to the internal fund for supplies pur-chases. Note again that the internal fund is considered a governmental activity because the internal fund provides services and supplies only to other entities within the government’s reporting entity.

The asset Internal Balances represents interfund receivables/payables between the primary gov-ernment’s funds comprising the governmental activities (governmental funds plus internal service funds) and the funds comprising the business-type activities (the enterprise funds). These internal bal-


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ances cancel out each other for the total column. GASB Statement No. 37, Basic Financial State-ments—and Management’s Discussion and Analysis—for State and Local Governments: Omnibus (GASB 37), issued in 2001, eliminated the requirement for capitalizing construction-period interest on capital assets used in governmental activities. Thus, on the government-wide financial statements, this interest is now shown as an indirect expense of the period in which it is incurred.

4. Categories of net assets. Net assets are separated into three categories, as follows: a. Invested in capital assets, net of related debt. b. Restricted (by external requirements of creditors, grantors, contributors, or other governmen-

tal entities). c. Unrestricted. Note that restricted and unrestricted do not mean the same things as assigned and unassigned as

used for the fund-based statements. Statement of Activities The statement of activities for Haas City is presented in Exhibit 14. Important observations regarding this statement of activities follow:

1. Accrual basis. The full accrual basis of accounting is used to measure revenues and expenses for the government-wide statements. A reconciliation between the modified accrual basis of account-ing for the governmental funds and the accrual basis of the government-wide statements is re-quired.

2. Format. The format of the statement of activities is based on the functions or programs of the government entity. a. Program revenues are categorized by type, and the net expenses (revenues) are shown sepa-

rately for each of the governmental and business-type activities. b. The internal service fund is blended into the Governmental Activities because this fund pro-

vides service solely within the governmental entity. c. The enterprise funds are presented in the Business-Type Activities column because this fund

includes resources obtained by user charges to the public. d. Fiduciary funds are not reported on the statement of activities because these funds are not

available to be used for providing governmental services. e. Note that the component unit, the city library, is discretely presented in its own column.

3. Expenses. The expenses include depreciation of the capital assets and expenses for any infra-structure assets. However, the expenses would not include any expenditures in the governmental funds that were made for long-term capital assets. For government-wide statements, these ex-penditures must be included as increases to long-term capital assets on the balance sheet.

4. General revenues. General revenues are reported separately on the bottom of the statement. The-se are revenues that are not directly tied to any specific program. GASB 34 requires that contribu-tions to permanent endowments, special items, and extraordinary items be reported in this section for the government-wide statements. Special items are events within the control of management that are either unusual in nature or infrequent in occurrence. Haas City has no special or extraor-dinary items, and the only contribution to a permanent endowment was the $100,000 contribution received by the permanent fund. Note that the amount of ending net assets reported in this state-ment articulates with the amount of ending net assets presented on the statement of net assets.


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Exhibit 14 Government-Wide Statement of Activities

Expenses

Charges For

Services

Operating Grants and

Contributions

Capital Grants and

Contributions Governmental

Activities

Business-Type

Activities Total Component

Unit Functions/Programs Primary Government Governmental Activities: General Government $212,000 $4,000 $23,000 $20,000 $(165,000) $(165,000) Streets and Highways 71,000 (71,000) (71,000) Public Safety 335,000 (335,000) (335,000) Sanitation 141,000 (141,000) (141,000) Culture and Recreation 54,000 (54,000) (54,000) Depreciation of Cap. Assets 120,000 (120,000) (120,000) Interest on Long-Term Debt 10,000 (10,000 (10,000 Total Government Activities $943,000 $4,000 $23,000 $20,000 $(896,000) $(896,000) Business-Type Activities: Water $38,000 $40,000 $2,000 $2,000 Total Business-Type Activities $38,000 $40,000 Total Primary Government $981,000 $44,000 $23,000 $20,000 $(896,000) $2,000 $(894,000)

Component Unit: Library $6,000 Total Component Unit $6,000 $-0- $(6,000) General Revenues: Taxes: Property Taxes, Levied for General Purposes 781,000 Property Taxes, Levied for Special Purposes 62,000 $12,000 Property Taxes, Levied for Debt Service 33,000 Sales Taxes 32,000 Investment Earnings 9,000 Miscellaneous Revenues 18,000 Contribution 100,000 Transfers between Govt and Business-Type Funds -0- Total General Revenues, Special Items, and Transfers $1,035,000 $1,035,000 Change in Net Assets $139,000 $2,000 $141,000 $6,000 Net Assets – Beginning 4,268,000 26,000 4,294,000 748,000 Net Assets – Ending $4,407,000 $28,000 $4,435,000 $754,000

Reconciliation Schedules GASB 34 requires that two reconciliation schedules be presented to reconcile the net change in the total amounts reported on the governmental funds statements with the amounts reported on the government-wide statements. These reconciliation schedules may be presented as part of the governmental funds statements or in an accompanying schedule on the page immediately following the governmental fund financial statement it supports. The two required reconciliation schedules are as follows:

1. Reconciliation schedule for Statement of Net Assets. The first reconciliation schedule, the rec-onciliation between the fund balances reported for the governmental funds to the net assets for the government-wide financials, is presented in Exhibit 15. This schedule describes the adjustments necessary to move from the modified accrual basis used in the governmental funds to the accrual basis used for the government-wide statements. For example, the balance sheets of the govern-ment funds do not include infrastructure and capital assets. These costs are recognized as expend-itures in the periods in which they are made. However, the government-wide statement of net as-sets must report the balance sheet date cost less depreciation of these infrastructure and capital as-sets. In addition, the government-wide statements must include the accounts of the internal ser-vice funds, which are separately reported from the governmental funds in the fund-based financial statements.


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2. Reconciliation schedule for Statement of Activities. The second reconciliation schedule, the rec-onciliation between the net change in fund balances reported in the governmental funds’ state-ment of revenues, expenditures, and changes in fund balance to the change in net assets reported in the government-wide financials, is presented in Exhibit 16. For example, interest revenue on the investment in bonds in the permanent fund was presented in that fund under the modified ac-crual basis for the amount of $8,000. However, under the accrual basis, the interest revenue would be computed based on the effective interest rate, with amortization of the discount, in the amount of $9,000 ($90,000 x 0.10). The difference of $1,000 is an adjustment both to the change in net assets and to the net assets.

Exhibit 15

Reconciliation Schedule for the Statement of Net Assets

HAAS CITY Reconciliation of the Balance Sheet of

Governmental Funds to the Statement of Net Assets December 31, 2014

Fund balances reported in the governmental funds Amounts reported for the governmental activities in the statement of net assets are different because:

$279,000

Capital assets used in governmental activities are not financial resources and therefore are not reported in the governmental funds.

4,200,000

Internal service funds are used by management to charge the costs of certain activities, such as centralized purchasing and storage functions, to individual funds.

The assets and liabilities of the internal service fund are included in governmental activi-ties in the statement of net assets.

7,000

Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds.

(80,000)

Interest on bonds in the permanent fund is recognized in that fund under the modified accrual basis but must be adjusted to the accrual basis for the government-wide financial state-ments.

1,000

Net assets of governmental activities $4,407,000

Exhibit 16

Reconciliation Schedule for the Statement of Revenues, Expenditures, and Changes in Fund Balances

HAAS CITY

Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities

For the Year Ended December 31, 2014

Net change in fund balances – Governmental funds Governmental funds report capital outlays as expenditures. However, in

the statement of activities, the costs of those assets are capitalized and depreciated over their estimated useful lives. This is the amount by which capital outlays in the governmental funds ($182,000) ex-ceeded depreciation of the governmental assets ($119,000).

Bond proceeds provide current financial resources for the governmental funds. However, the issuance of debt increases long-term liabilities in the statement of net assets. Repayment of debt principal is an ex-

$150,000

63,000 (82,000)

1,000 7,000


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penditure in the governmental funds, but the repayment reduces the long-term liabilities in the statement of net assets. This is the amount by which bond proceeds ($102,000) exceeded the net repayments of principal ($20,000).

Revenues in the statement of activities are recorded on the accrual basis. Interest revenue in the governmental funds is recorded on the modi-fied accrual basis. This is the amount that accrual interest exceeded the interest recognized in the permanent funds.

Internal service funds are used by management to charge the costs of certain services, such as a centralized purchasing function, to individu-al funds. The net revenue (expense) of the internal service funds is reported with governmental activities.

Change in net assets of governmental activities $139,000

Budgetary Comparison Schedule GASB 34 requires that a budgetary comparison schedule be presented as required supplementary infor-mation for the general fund and for each special revenue fund that has a legally adopted annual budget. This schedule may be presented as a separate financial statement after the governmental funds financials or in the footnotes of the annual report. The budgetary comparison schedule for Haas City’s general fund is presented in Exhibit 17.

Exhibit 17 Budgetary Comparison Schedule

HAAS CITY Budgetary Comparison Schedule

General Fund For the Year Ended December 31, 2014

Budgeted Amount Actual Amounts (Budgetary

Basis)

Variance with Final Budget

Positive (Negative)

Original Final

Budgetary fund balance, January 1 $129,000 $129,000 $129,000 -0- Resources (inflows): Property Taxes 775,000 775,000 781,000 6,000 Grants 55,000 55,000 33,000 (22,000) Sales Taxes 25,000 25,000 32,000 7,000 Miscellaneous 20,000 20,000 18,000 (2,000) Amounts available for appropriation $875,000 $875,000 $864,000 $(11,000) Charges to appropriations (outflows): General Government $200,000 $200,000 $206,000 $(6,000) Streets and Highways 75,000 75,000 71,000 4,000 Public Safety 400,000 400,000 393,000 7,000 Sanitation 150,000 150,000 141,000 9,000 Nondepartmental: Transfers out to other funds 30,000 30,000 30,000 -0- Total charges to appropriations $855,000 $855,000 $841,000 $14,000 Budgetary fund balance, December 31 $149,000 $149,000 $152,000 $3,000


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Important observations regarding the budgetary comparison schedule follow: 1. GASB 34 requires that both the original budget and the final budget be presented. The original

budget is the first budget for the fiscal period adopted by the government entity. Through the year, many government entities will modify the original budget because of new events or changes in expectations. These changes must go through the legislative process of the government, such as the city council. For our example, no changes were made to the formal budget during the year.

2. The budgetary comparison schedule should be presented on the same format with the same terminology and classifications as the original budget.

3. A separate column for the variance between the final budget and the actual amounts is encour-aged but not required. It is presented here to provide a complete presentation of the possible dis-closures of a governmental entity.

GASB Statement No. 41, Budgetary Comparison Schedules—Perspective Differences (GASB 41), amended GASB 34 for state and local governments that have significantly different structures for budget-ary purposes from the fund structures in GASB 34. These differences are termed perspective differences. A government with significant budgetary perspective differences such that the government cannot provide budgetary comparisons for the fund structure of the general fund and each special revenue fund is then required to present a budgetary comparison schedule in its required supplementary information based on the fund, program, or organizational structure that government uses for its legally adopted budget. Management’s Discussion and Analysis GASB 34 specifies that the Management’s Discussion and Analysis (MD&A) be included in the required supplementary information (RSI) of the government-wide financial statements. The MD&A is presented before the financial statements and provides an analytical overview of the government’s financial and operating activities. It is based on currently known facts, decisions, or conditions and includes compari-sons of the current and prior years, with an emphasis on the current year, based on government-wide information. Currently known facts are those of which management is aware at the audit report date. The purpose of this RSI item is to provide users of the financial statements an objective discussion of whether the government’s financial position has improved or deteriorated during the year. GASB 37 states that the MD&A should be limited to the items specified in GASB 34 rather than be used to present an abundance of other topics not specifically required. The GASB believes that additional discussions beyond those required might result in information that is not objective and cannot be directly analyzed. Governments that wish to provide additional information may do so in other supplementary information such as footnotes or transmittal letters. Notes to the Government-Wide Financial Statements Notes to the financial statements are an integral part of the basic financial statements because they dis-close information essential to fair presentation that is not reported on the face of the statements. The focus is on the primary government’s governmental activities, business-type activities, major funds, and nonma-jor funds in the aggregate. GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments (GASB 34), specified a number of required note disclosures in the government-wide financial statements that include the following: 1. Accounting and measurement policies used in the primary governmental entity. 2. Information about capital assets, including beginning and ending balances, along with capital

acquisitions and sales during the year; and depreciation expense and accumulated depreciation. 3. For collections not capitalized, disclosures describing the collection, along with the reasons for

not capitalizing these collections. 4. Note disclosures about long-term liabilities include a schedule of the beginning and ending bal-

ances along with increases or decreases during the year, for each long-term debt item; the current portion of each long-term item; and the amount of annual debt service required.

5. Disclosures about donor-restricted endowments should include net increases in investments for which the income is available for expenditure, and the policy for spending investment income.


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6. Segment information is to be provided for the enterprise funds included in the government-wide financial statements.

GASB Statement No. 38, Certain Financial Statement Note Disclosures (GASB 38), was issued in June 2001 and stated that the required footnotes should be modified for the following: 1. In the summary of significant accounting policies, provide descriptions of the activities accounted

for in the major funds, internal service fund type, and fiduciary fund types. This change is a result of GASB 34’s focus on major funds rather than all funds.

2. Delete the requirement to disclose the accounting policy for encumbrances in the summary of significant accounting policies (i.e., the lapsing or nonlapsing method).

3. Disclose the period of availability used for recording revenues in governmental funds. 4. Disclose debt service requirements to maturity, separately identifying principal and interest for

each of the subsequent five years and in five-year increments thereafter and changes in variable-rate debt. In addition, governments should disclose the future minimum payments for each of the five succeeding years for capital and noncancellable operating leases.

5. Provide a schedule of changes in short-term debt during the year along with the purposes for which the debt was issued.

6. Add a disclosure of actions taken to address any significant violations of finance-related legal or contractual provisions to the footnote describing these significant violations.

7. Disclose details of the payable and receivable amounts for interfund balances and the purposes of the interfund transfers. In addition, disclosures should be made regarding the amounts of inter-fund transfers during the period along with a description and amount of significant transfers that are not expected to occur on a routine basis.

8. Provide details of the components of accounts payable so that the financial statement users can understand the timeliness and payment priorities of payables.

9. Provide details about significant individual accounts when their nature is obscured by aggrega-tion. For example, more disclosure could be made for receivables that contain a myriad of differ-ent credit risks or liquidity attributes.

Note: The focus of governmental and proprietary fund financial statements is on major funds (but major fund reporting is not required for internal service funds). Each major fund is presented in a separate column, and nonmajor funds are aggregated in one column. Combining statements are not required for nonmajor funds. The main operating fund (e.g., the general fund) is always reported as a major fund and any governmental or enter-prise fund believed to be particularly important to users may also be reported in this way. Other individual gov-ernmental or enterprise funds must be reported as major if they meet the quantitative thresholds. Other Financial Report Items Governments may choose to provide additional information beyond that required as discussed previously. For example, some government entities present comprehensive annual financial reports (CAFRs), which include additional statistical information about the sources of revenues, property tax levies and property values, demographic statistics, and other miscellaneous statistics that management of the governmental entity believes will aid users of the financial report. Some governmental entities may additionally disclose financial statements for individual funds or combined by fund type. Some governments may go beyond the required footnote disclosures and provide additional schedules and information. As with commercial enterprises, it is up to the management of the governmental entity to determine how much additional disclosure it wishes to provide in its annual report. Interim Reporting Governmental entities generally are not required to publish interim reports, although many prepare monthly or quarterly reports to determine the current progress of compliance with legal and budgetary limitations and to plan for changes in events or developments that were not foreseen when the annual


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budget was prepared. Interim reports are a valuable internal management control instrument; they typical-ly are not made available to the general public. Auditing Governmental Entities Most governmental entities are audited annually because of state or federal requirements or because long-term creditors demand audited statements as part of the debt agreements. The audit of a governmental entity is different from the audit of a commercial entity. The auditor not only must express an opinion on the fairness of the audited entity’s financial statements in conformity with applicable accounting princi-ples but also must assess the audited entity’s compliance with legal or contractual provisions of state law, debt covenants, terms of grants from other governmental entities, and other restrictions on the govern-mental entity. The AICPA publishes the State and Local Governments—Audit and Accounting Guide that provides guidance relevant to audits of state and local governments. The guide includes planning the audit under the Risk Assessment Statements of Auditing Standards (SAS) in eight recent standards, number 104 through number 111. In addition, the guide defines internal control deficiencies for state and local gov-ernments. The Single Audit Act of 1984 is a federal law specifying the audit requirements for all state and local governments receiving federal financial assistance. The audit act requires auditors to determine whether (1) the financial statements fairly present the government’s financial condition, (2) the governmental entity has an internal control system to provide reasonable assurance that it is managing federal financial assistance programs in compliance with applicable laws and regulations, and (3) the governmental entity has complied with laws and regulations that may have a material effect on each federal program. The auditors issue not only the standard audit report but also special reports on items (2) and (3) above. The Single Audit Act does not apply to all governmental entities receiving federal assistance. For fiscal years ending after December 31, 2003, governmental entities that expend $500,000 or more in federal awards in a year must have either a single or a program-specific audit for that year. A governmen-tal entity is eligible for a program-specific audit only if the federal award is expended under a single federal program and that federal program’s laws, regulations, or grant agreements do not require the governmental entity to have a financial statement audit. Otherwise a single audit is required. Governmen-tal entities that expend less than $500,000 in federal awards in a year are exempt from the single audit requirement for that year. However, their records must be available for review or audit by officials from the federal agency, the pass-through entity providing the award, or the Government Accountability Office (GAO). Additional Considerations Special-Purpose Governmental Entities The accounting and financial reporting standards for general-purpose governments such as states, coun-ties, and municipalities are discussed in this chapter and 1. However, a number of governments are spe-cial-purpose governments, which are legally separate entities. They may be component units of a general-purpose government or stand-alone governments apart from a general-purpose government. Special-purpose governments include governmental entities such as cemetery districts, levee districts, park dis-tricts, tollway authorities, and school districts. Some of these special-purpose government entities may be engaged in governmental activities that generally are financed through taxes, intergovernmental revenues, and other nonexchange revenues. These activities are usually reported in governmental or internal service funds. Some of these entities are engaged in business-type activities that are financed by fees charged for goods or services. These activities are usually reported in enterprise funds. GASB 34 establishes specific reporting requirements for each of the following types of special-purpose governments: 1. Engaged in more than one governmental program or in both governmental and business-type

activities: These governmental entities must provide both fund financial statements and govern-ment-wide financial statements as presented earlier in this chapter and in Chapter 1.


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2. Engaged in a single governmental program (such as cemetery districts or drainage districts): These governmental entities may present a simplified set of government-wide and fund-based fi-nancial statements, often combining these two statements.

3. Engaged in only business-type activities: These governmental entities must present only the financial statements required for enterprise funds. Many public universities and public hospitals will be included in this category.

4. Engaged in only fiduciary-type activities: These governmental entities are not required to present the government-wide financials but must provide only the financial statements required for fidu-ciary funds. This category includes special-purpose governments responsible for managing pen-sion funds.

Regardless of the category of special-purpose government entity, all governments must include in their financial reports the Management’s Discussion and Analysis, the footnotes, and any required sup-plementary information. Financial Reporting for Pensions and Other Postemployment Benefits Plans Most states and many local governments provide a variety of pensions and other postemployment benefits (OPEB) to their employees. OPEBs include postemployment health care, life insurance, and other non-pension benefits for persons after retirement from the governmental unit. The GASB has a series of standards that prescribe the employer’s accounting for these costs and the financial reporting by the entity that maintains the plans. In some cases, the governmental unit administers its own plans, such as a state-based pension plan covering all state employees in a specific employment category, while in other cases the governmental unit uses a multiemployer plan, such as a firefighter’s retirement plan that includes firefighters from a number of cities. Two GASB statements present the accounting and financial reporting requirements for the entity that administers the plan’s assets and for the employer of the employees covered by the plans. The first is GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans (GASB 25), which established the financial reporting requirements for pension plans. For defined benefit plans, the payout to the retirees is based on work-related factors such as number of years worked and is not related to the amount in the plan. For defined contribution plans, the payout is based on the amount accumulated for each employee. Some plans are contributory, in which the employees must make contributions, and some plans are noncontributory, in which the employer makes all the contributions. GASB 25 requires that a defined contribution pension plan report a plan description, a summary of significant accounting policies, and information about investment concentrations. The plan description should identify the plan as a defined contribution plan and disclose the number of participat-ing employers and other contributing entities. The description should also include the classes of employ-ees covered and the total current membership, a brief description of plan provisions and the authority under which they are established (or may be amended), and contribution requirements. The second standard is GASB Statement No. 43, Financial Reporting for Postemployment Benefits Plans Other Than Pension Plans (GASB 43), which provided financial reporting standards for OPEB plans. The general principles in these two standards are similar. The entity that administers the plan must provide two categories of information in its financial reporting: (a) current financial information about plan assets and funding activities and (b) information about the funded position of the plan and the plan’s progress in accumulating sufficient financial resources to provide benefits when due. The two financial statements required for pension plans and other postemployment benefits plans are (a) a statement of plan net assets that provides information about the fair value and composition of the plan’s assets and infor-mation about the plan’s liabilities and (b) a statement of changes in plan net assets that provides infor-mation on the period’s changes in the net assets of the plans. If a pension or OPEB plan is included within the reporting entity, that is, the governmental entity administers the plans, then the information for these two statements will be included with the other fiduciary funds in that fund’s financial statements. The accrual method of accounting is required and informative footnotes must be provided.


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Fiduciary fund financial statements include information about all fiduciary funds and similar compo-nent units. The statements report information in a separate column for each fund type but not by major fund. The notes present financial statements for individual pension plans and postemployment healthcare plans unless separate GAAP reports have been issued. A statement of fiduciary net assets is required for fiduciary funds. It reports assets, liabilities, and net assets for each fiduciary fund type but does not pre-sent the three components of net assets reported in the government-wide statement of net assets or in the proprietary fund statement of net assets. Employer Accounting for Pensions and OPEB Plan Benefits Two GASB statements present the standards for the employer’s measurement and display of accounting for the expenditures/expenses for the benefits and any related liabilities (or assets) for the difference between the expenditure/expenses recognition and the amount funded by the employer. The first is GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers (GASB 27), which presents the standards for pensions. The second is GASB Statement No. 45, Accounting and Fi-nancial Reporting by Employers for Postemployment Benefits Other Than Pensions (GASB 45). The general principles for measurement, recognition, and display in these two standards are similar. The accrual method of accounting is typically used for the government-wide financial statements to measure the expenses of the employer for pension costs for its employees and for the costs of other postemploy-ment benefits for its employees. Actuarial assumptions are required under the accrual method. The state and local government employers must report the expense/expenditures and related liabilities (or assets) for both their pension benefits and their OPEBs. Although GASB 27 and GASB 45 have many of the same measurement and display standards, there are some differences due to the differences in the nature of the specific benefits given by the employer. Accountants responsible for accounting for these two sets of postemployment benefits readily acknowledge that some plans and benefits can be quite complex and require detailed study of the specific requirements in the related GASB statements. GASB Statement No. 50, Pension Disclosures—an Amendment of GASB Statement No. 25 and No. 27 (GASB 50), requires additional disclosures for defined benefit plans and disclosures by the employers. The plans and the employers must present the following in their financial statements: (a) notes disclosing the funded status of the plan along with any actuarial methods and significant assumptions used to make the most recent actuarial valuation; (b) as RSI, a schedule of funding progress of defined benefit plans for which the annual required contribution of the employer is based on the aggregate actuarial cost method; (c) notes disclosing legal or contractual maximum contribution rates; and (d) notes disclosing changes in actuarial assumptions for successive years. Accounting for Termination Benefits Finally, termination benefits are sometimes offered by governmental entities when an employee is invol-untarily terminated (i.e., fired or laid off) or voluntarily terminates in order to accept early-retirement benefits. These termination benefits may include health care–related programs, job transition costs, early retirement incentives, and other similar types of items. The accounting and reporting requirements for these benefits are presented in GASB Statement No. 47, Accounting for Termination Benefits (GASB 47). In the case of employees who voluntarily terminate, the employer recognizes a liability and expense when the employee accepts the offer and the amount can be estimated. The general measurement principle is that the dollar amount recognized should be the discounted present value of the estimated future pay-ments. Governmental entities may develop a plan for a reduction in their workforce that involves the invol-untary termination of some employees. A liability and an expense should be recognized when the plan of termination is approved by the governing body, the plan has been communicated to the employees, and the amount can be estimated. For the government-wide financial statements, the accrual method is used to recognize the discounted present value of the estimated future payments. Governmental entities have found that they must offer employees benefits similar to those offered in the private sector in order to attract and employ persons who would otherwise seek employment with


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business firms in the private sector. Thus, as the private sector changes what it offers employees, govern-mental entities will have to adjust what they offer to their employees.

Short Quiz

Indicate whether each of the following statements is true or false. 1. The governmental funds use the accrual basis of accounting; the other funds use the modified

accrual basis of accounting. 2. The fiduciary funds must be included in the two government-wide financial statements. 3. Government entities must include required supplementary information (RSI) in their annual

financial reports. Answers 1. False. The governmental funds use the modified accrual basis of accounting; the other funds use

the accrual basis of accounting. 2. False. The fiduciary funds (e.g., private-purpose trust funds and agency funds) are not included in

the two government-wide financial statements because fiduciary funds are not available to sup-port government programs.

3. True. Government entities must include RSI in their annual financial reports as specified by GASB 34. This RSI includes reconciliation schedules and a budgetary comparison schedule. GASB 54 specifies changes for fund balance reporting in the governmental fund types.

Chapter Summary This chapter covered accounting and financial reporting principles used by local and state governments. Governments may use five governmental fund types, two proprietary fund types, and four fiduciary fund types. The governmental funds use the modified accrual basis of accounting; the other funds use the accrual basis of accounting. The government reporting model is currently specified in GASB 34. Both fund-based financial state-ments and government-wide financial statements are required. The government-wide statements are based on the accrual basis and present both long-term capital assets, including infrastructure assets, and long-term debt. Government entities must include required supplementary information (RSI) in their annual financial reports as specified by GASB 34. This RSI includes reconciliation schedules and a budgetary comparison schedule. A new GASB statement, GASB 54, specifies changes for fund balance reporting in the governmental fund types. Exhibit 18 provides an overview of minimum elements for general-purpose financial reporting. Exhibit 19 summarizes measurement focus and basis of accounting for financial statements.

Exhibit 18 Minimum Elements for General-Purpose Financial Reporting


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Exhibit 19 Measurement Focus and Basis of Accounting for Financial Statements

Financial Statements Measurement Focus Basis of Accounting

Government-Wide Financial Statements Governmental Funds Financial Statements Proprietary Funds Financial Statements Fiduciary Funds Financial Statements

Economic Resources Current Financial Resources Economic Resources Economic Resources

Accrual Modified Accrual Accrual Accrual


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Review Questions 1. Lake County received the following proceeds that are legally restricted to expenditure for specified

purposes: Levies on affected property owners to install sewers $500,000 Gasoline taxes to finance road repairs 900,000 What amount most likely will be accounted for in Lake's special revenue funds? A. $1,400,000 B. $900,000 C. $500,000 D. $0 2. Kew City received a $15 million federal grant to finance the construction of a center for rehabilitation

of drug addicts. The proceeds of this grant should be accounted for in the: A. Special revenue funds B. General fund C. Capital projects funds D. Trust funds 3. In what fund type should the proceeds from special assessment bonds issued to finance construction

of sidewalks in a new subdivision be reported? A. Agency fund B. Special revenue fund C. Enterprise fund D. Capital projects fund 4. A public school district should recognize revenue from property taxes levied for its debt service fund

when: A. Bonds to be retired by the levy are due and payable B. Assessed valuations of property subject to the levy are known C. Funds from the levy are measurable and available to the district D. Proceeds from collection of the levy are deposited in the district's bank account 5. In the fund financial statements of which of the following fund types of a city government are reve-

nues and expenditures recognized on the same basis of accounting as the general fund? A. Private-purpose trust B. Internal service C. Enterprise D. Debt service 6. During the year, a city’s electric utility, which is operated as an enterprise fund, rendered billings for

electricity supplied to the general fund. Which of the following accounts should be debited by the general fund?

A. Appropriations B. Expenditures C. Due to electric utility enterprise fund D. Other financing uses—interfund transfer


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7. On January 2, Basketville City purchased equipment with a useful life of three years to be used by its water and sewer enterprise fund. Which of the following is the correct treatment for the asset?

A. Record the purchase of the equipment as expenditure B. Capitalize; depreciation is optional C. Capitalize; depreciation is required D. Capitalize; depreciation is not permitted 8. The statement of revenues, expenses, and changes in fund net assets for proprietary funds: A. Combines special and extraordinary items in a subtotal presented before nonoperating reve-

nues and expenses B. Must report revenues at gross amounts, with discounts and allowances disclosed parentheti-

cally C. Distinguishes between operating and nonoperating revenues and expenses D. Must define operating items in the same way as in the statement of cash flows 9. The following transactions were among those reported by Corfe City's electric utility enterprise fund

for 2014: Capital contributed by subdividers $900,000 Cash received from customer households 2,700,000 Proceeds from sale of revenue bonds 4,500,000 In the proprietary funds statement of cash flows for the year ended December 31, 2014, what amount

should be reported as cash flows from the electric utility enterprise fund's capital and related financ-ing activities?

A. $4,500,000 B. $5,400,000 C. $7,200,000 D. $8,100,000 10. Government-wide financial statements: A. Display individual funds B. Display aggregated information about fund types C. Exclude information about discretely presented component units D. Use separate columns to distinguish between governmental and business-type activities 11. Budgetary comparison schedules must: A. Be reported for the general fund and each major special revenue fund with a legally adopted

budget. B. Be presented instead of budgetary comparison statements included in the basic statements. C. Convert the appropriated budget information to the GAAP basis for comparison with actual

amounts reported on that basis. D. Compare only the final appropriated budget with actual amounts. 12. GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and

Local Governments includes presentation of Management's discussion and analysis (MD&A) as: A. Required supplementary information after the notes to the financial statements B. Part of the basic financial statements C. A description of currently known facts, decisions, or conditions expected to have significant

effects on financial activities D. Information that may be limited to highlighting the amounts and percentages of change from

the prior to the current year


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13. What is the correct approach to presentation of the notes to the financial statements? A. The notes are essential for fair presentation of the statements B. The notes are required supplementary information (RSI) C. The notes have the same status as MD&A D. The notes give equal focus to the primary government and its discretely presented component

units 14. The focus of certain fund financial statements is on major funds. Accordingly: A. Major internal service funds must be presented separately in the statement of net assets for

proprietary funds B. The main operating fund is always reported as a major fund C. Combining statements for nonmajor funds are required D. Enterprise funds not meeting the quantitative criteria are not eligible for presentation as major

funds 15. A government is reported as a special-purpose government if it: A. Has governmental and business-type activities B. Is engaged in two or more governmental programs C. Is not a legally separate entity D. Is engaged in one governmental program (such as cemetery districts or drainage districts) 16. Fiduciary fund financial statements report A. Information by major fund B. Three components of net assets C. A separate column for each fund type D. No separate statements for individual pension plans 17. River City has a defined contribution pension plan. How should River report the pension plan in its

financial statements? A. Amortize any transition asset over the estimated number of years of current employees'

service B. Disclose in the notes to the financial statements the amount of the pension benefit obligation

and the net assets available for benefits C. Disclose in the notes to the financial statements the classes of employees covered and the

employer's and employees' obligations to contribute to the fund D. Accrue a liability for benefits earned but not paid to fund participants


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Review Answers 1. A. Incorrect. $1,400,000 includes the special assessment for a capital project. B. Correct. Special assessments for construction activity may be accounted for in a capital projects

fund or other appropriate fund. The gasoline taxes are special revenues received from the state government to be expended for a specific purpose and are properly recorded in the special reve-nue funds. However, special revenue funds need not be used unless they are legally mandated.

C. Incorrect. $500,000 is the amount of the special assessment for a capital project. D. Incorrect. $0 is based on the assumption that neither revenue source is accounted for in special

revenue funds. 2. A. Incorrect. A special fund used to account for revenues from specific taxes or other earmarked

revenue sources which by law are designated to finance particular functions or activities of gov-ernment.

B. Incorrect. This fund type does not record resources to be used for major capital facilities. C. Correct. The capital projects fund is used to account for the receipt and disbursement of re-

sources restricted for the acquisition of major capital facilities (other than those financed by pro-prietary and trust funds) through purchase or construction.

D. Incorrect. A grant for a drug rehabilitation center is to be used for a public purpose, that is, to support the government's programs and therefore would not be accounted for in a trust fund. A trust fund accounts for assets held by a governmental entity in the capacity of a fiduciary for indi-viduals, private organizations, or other governments.

3. A. Incorrect. Agency funds are purely custodial funds. However, an agency fund should report debt

service transactions related to special assessment debt if the governmental unit is not obligated in any manner.

B. Incorrect. Bond proceeds are not considered revenues of a governmental unit. They must be repaid.

C. Incorrect. Enterprise funds account for business-type activities. D. Correct. Construction of sidewalks in a new subdivision financed by special assessment bonds is

a capital project that results in a general capital asset that will be recognized only in the govern-mental activities column of the government-wide statement of net assets. If the governmental unit is obligated in some manner on the special assessment debt, this capital improvement may be ac-counted for in the same way as other capital transactions. Hence, the transactions of the construc-tion phase are reported in a capital projects fund. Transactions of the debt service phase are re-ported in a debt service fund, if one is required. If the government is not obligated, the construc-tion transactions may still be reported in a capital projects fund, but the debt service transactions are recorded in an agency fund.

4. A. Incorrect. Revenues are recognized when property taxes are levied. B. Incorrect. The assessed valuations are necessary for calculating the amount of tax but do not

make the tax revenue available. C. Correct. Debt service funds apply the modified accrual basis of accounting. Thus, revenues are

recognized when they are measurable and available. Moreover, assets from imposed nonexchange revenue transactions, such as property tax levies, should be recognized when an enforceable legal claim arises or the resources are received, whichever is earlier. If the legal claim arises in the pe-riod after that for which the property taxes are levied, a receivable is recognized when revenues are recognized. Revenues are recognized in the period for which the taxes are levied if the availa-bility criterion is met. For property taxes, this criterion is met if they are collected within the cur-rent period or soon enough thereafter (not exceeding 60 days) to pay current liabilities.

D. Incorrect. Revenue recognition is not on the cash basis.


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5. A. Incorrect. A private-purpose trust fund is a fiduciary fund. Its financial statements are prepared on the same basis as those of proprietary funds.

B. Incorrect. The internal service fund is a proprietary fund. Its financial statements are prepared using the accrual basis of accounting.

C. Incorrect. The enterprise fund is a proprietary fund. Its financial statements are prepared using the accrual basis of accounting.

D. Correct. The debt service fund is the only fund listed that is classified as a governmental fund. The other funds are proprietary or fiduciary. Governmental funds use the modified accrual basis in preparing their fund financial statements, and proprietary and fiduciary funds use the accrual basis.

6. A. Incorrect. Appropriations is debited when the budgetary accounts are closed. B. Correct. Enterprise funds are used to account for operations similar to those of private business-

es. This rendition of services by the enterprise fund to the general fund is presumably at prices equivalent to external exchange values and is classified as an interfund service provided and used. The result is revenue to the seller and an expenditure to the buyer, a governmental fund. Unpaid amounts are interfund receivables or payables. The entry is to debit expenditures control and credit due to enterprise fund.

C. Incorrect. Due to enterprise fund should be credited. D. Incorrect. This transaction is an interfund service provided and used, not an interfund transfer. 7. A. Incorrect. Under the modified accrual basis, the entity must record the purchase of the equipment

as an expenditure if it is acquired with governmental fund financial resources. B. Incorrect. Only depreciation is mandatory. C. Correct. An enterprise fund is a proprietary fund. Thus, the economic resources measurement

focus and the accrual basis of accounting are required in its financial statements. Capital assets, such as equipment, are reported in the government-wide statement of net assets and in the propri-etary fund statement of net assets. They must be depreciated over their estimated useful lives un-less they are inexhaustible or are infrastructure assets that meet certain requirements.

D. Incorrect. Only depreciation of inexhaustible assets, such as land and land improvements, is prohibited.

8. A. Incorrect. Nonoperating revenues and expenses are presented immediately after operating income

(loss). Moreover, special and extraordinary items are reported separately. B. Incorrect. Revenues are reported by major source either net with disclosure of discounts and

allowances or gross with discounts and allowances reported beneath the revenue amounts. C. Correct. A statement of revenues, expenses, and changes in fund net assets or fund equity (either

label may be used) is the required operating statement for proprietary funds. Operating and non-operating revenues and expenses should be distinguished, with separate subtotals for operating revenues, operating expenses, and operating income.

D. Incorrect. A government should consistently follow appropriate definitions of operating items. One consideration in defining these items is the principal purpose of the fund. A second consider-ation is their presentation in a cash flows statement. Thus, SGAS 34 provides general guidelines and mandates consistent use of definitions, but it does not require that the categorization of items in the statement of cash flows control the definitions of operating items in the statement of reve-nues, expenses, and changes in fund net assets.

9. A. Incorrect. $4,500,000 omits the capital contributed by subdividers. B. Correct. Cash flows should be classified as operating, noncapital financing, capital and related

financing, or investing. Operating activities include producing and delivering goods and provid-ing services. Thus, cash from customer households is a revenue item reported under cash flows from operating activities. Capital and related financing activities include acquiring and disposing


108

of capital assets, borrowing and repaying money related to capital asset transactions, etc. Assum-ing the sale of revenue bonds and the capital contributions by subdividers are for the acquisition or improvement of capital assets, the amount to report under capital and related financing activi-ties is $5,400,000 ($900,000 + $4,500,000).

C. Incorrect. $7,200,000 includes customer fees revenue and omits capital contributed by subdivid-ers.

D. Incorrect. $8,100,000 includes customer fees. 10. A. Incorrect. Government-wide financial statements do not display funds. B. Incorrect. Information about fund types is reported in the fund financial statements. C. Incorrect. Separate rows and columns report information about discretely presented component

units. D. Correct. The basic financial statements include government-wide financial statements, fund

financial statements, and the notes to the financial statements. Government-wide financial state-ments do not display funds or fund types but instead report information about the overall gov-ernment. They distinguish between the primary government and its discretely presented compo-nent units and between the governmental activities and business-type activities of the primary government by reporting such information in separate rows and columns.

11. A. Correct. Certain information must be presented as RSI in addition to MD&A. Budgetary com-

parison schedules must be reported for the general fund and each major special revenue fund with a legally adopted annual budget. A schedule includes the original budgets, that is, the first com-plete appropriated budgets; the final appropriated budgets; and the actual inflows, outflows, and balances stated on the budgetary basis of accounting. Thus, budgetary comparison schedules are not required for proprietary funds, fiduciary funds, and governmental funds other than the general fund and major special revenue funds.

B. Incorrect. A government may elect to report budgetary comparison information in a statement as part of the basic statements.

C. Incorrect. The budgetary comparison schedules compare the budgets with actual inflows, out-flows, and balances stated on the government's budgetary basis. However, a reconciliation to GAAP is required.

D. Incorrect. The original and final appropriated budgets are compared with the actual inflows, outflows, and balances.

12. A. Incorrect. MD&A precedes the basic financial statements. B. Incorrect. MD&A is not part of the basic financial statements, but a separate presentation. C. Correct. Management's discussion and analysis (MD&A) is required supplementary information

(RSI) that precedes the basic financial statements and provides an analytical overview of financial activities. It is based on currently known facts, decisions, or conditions and includes comparisons of the current and prior years, with an emphasis on the current year, based on government-wide information. Currently known facts are those of which management is aware at the audit report date.

D. Incorrect. MD&A should state the reasons for change from the prior year, not merely the amounts or percentages of change.

13. A. Correct. Notes to the financial statements are an integral part of the basic financial statements

because they disclose information essential to fair presentation that is not reported on the face of the statements. The focus is on the primary government's governmental activities, business-type activities, major funds, and nonmajor funds in the aggregate.

B. Incorrect. RSI mandated by GASB 34 includes MD&A, budgetary comparison schedules for governmental funds, and information about infrastructure assets reported using the modified ap-proach.


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C. Incorrect. Notes to the financial statements are an integral part of the basic financial statements D. Incorrect. The notes focus on the primary government. 14. A. Incorrect. Major fund reporting requirements apply to governmental and enterprise funds but not

to internal service funds. B. Correct. The focus of governmental and proprietary fund financial statements is on major funds

(but major fund reporting is not required for internal service funds). Each major fund is presented in a separate column, and nonmajor funds are aggregated in one column. Combining statements are not required for nonmajor funds. The main operating fund (e.g., the general fund) is always reported as a major fund, and any governmental or enterprise fund believed to be particularly im-portant to users may also be reported in this way. Other individual governmental or enterprise funds must be reported as major if they meet the quantitative thresholds.

C. Incorrect. Combining statements for nonmajor funds are not required but may be reported as supplementary information.

D. Incorrect. A government may report any governmental or enterprise individual fund as major if it is believed to be particularly important to users.

15. A. Incorrect. A government that has governmental and business-type activities should be reported in

the same manner as a general-purpose government. B. Incorrect. A government that is engaged in two or more governmental programs should be report-

ed in the same manner as a general-purpose government. C. Incorrect. A special-purpose government is a legally separate entity. D. Correct. Special-purpose governments are legally separate entities that are component units or

other stand-alone governments. If they have governmental and business-type activities or are en-gaged in two or more governmental programs, they should be reported as general-purpose gov-ernments. A government is reported as a special-purpose government if it is engaged in one gov-ernmental program (such as cemetery districts or drainage districts). These governmental enti-ties may present a simplified set of government-wide and fund-based financial statements, often combining these two statements.

16. A. Incorrect. Major funds are reported only in governmental and enterprise fund statements. B. Incorrect. Three components of net assets are reported only in the government-wide statement of

net assets and in the proprietary fund statement of net assets. C. Correct. Fiduciary fund financial statements include information about all fiduciary funds and

similar component units. The statements report information in a separate column for each fund type but not by major fund. The notes present financial statements for individual pension plans and postemployment healthcare plans unless separate GAAP reports have been issued. A state-ment of fiduciary net assets is required for fiduciary funds. It reports assets, liabilities, and net as-sets for each fiduciary fund type but does not present the three components of net assets reported in the government-wide statement of net assets or in the proprietary fund statement of net assets.

D. Incorrect. Separate financial statements for individual pension plans and postemployment healthcare plans are reported in the notes. However, if separate GAAP financial statements have been issued for such plans, information is given in the notes about how those statements may be obtained.

17. A. Incorrect. No transition asset arises under a defined contribution plan. B. Incorrect. A pension benefit obligation arises under a defined benefit pension plan. C. Correct. GASB 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures

for Defined Contribution Plans, requires that a defined contribution pension plan report a plan description, a summary of significant accounting policies, and information about investment con-centrations. The plan description should identify the plan as a defined contribution plan and dis-close the number of participating employers and other contributing entities. The description


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should also include the classes of employees covered and the total current membership, a brief description of plan provisions and the authority under which they are established (or may be amended), and contribution requirements.

D. Incorrect. Under a defined contribution plan, the governmental employer's obligation is for con-tributions, not benefits.

Glossary A Abatement – a complete or partial cancellation of a levy imposed by a governmental unit. Abatements

usually apply to tax levies, special assessments, and service charges.

Account group – a self-balancing set of accounts, but not a fiscal entity; therefore not a fund. One of the awkward aspects of the old reporting regime was the use of account groups, so called because they did not exactly qualify as funds. They were simply areas where long-lived assets and long-term debt were parked in the absence of a conceptually sound place to put them in statements focused on current resources.

Accounting system – the total structure of records and procedures which discover, record, classify, and report information on the financial position and operations of a governmental unit or any of its funds and organizational components.

Accounts receivable – amounts owing on open account from private persons, firms, or corporations for goods and services furnished by a governmental unit (but not including amounts due from other funds of the same governmental unit).

Accrual basis – the basis of accounting under which revenues are recorded when earned and expendi-tures are recorded as soon as they result in liabilities for benefits received, notwithstanding that the receipt of cash or the payment of cash may take place, in whole or in part, in another accounting pe-riod. See also Accrue and Levy.

Accrue – to record revenues when earned and to record expenditures as soon as they result in liabilities for benefits received, notwithstanding that the receipt of cash or payment of cash may take place, in whole or in part, in another accounting period. See also Accrual basis, Accrued expenses, and Ac-crued revenue.

Accrued expenses – expenses incurred during the current accounting period but which are not payable until a subsequent accounting period. See also Accrual basis and Accrue.

Accrued income – see Accrued revenue.

Accrued interest on investments purchased – interest accrued on investments between the last interest payment date and the date of purchase.

Accrued interest payable – a liability account which represents the amount of interest expense accrued at the balance sheet date but which is not due until a later date.

Accrued revenue – revenue earned during the current accounting period but which is not to be collect-ed until a subsequent accounting period. See also Accrual basis and Accrue.

Acquisition adjustment – premium paid for a utility plant, over and above original cost less deprecia-tion. Similar to goodwill in nonmonopolistic enterprises.

Activity – a specific and distinguishable line of work performed by one or more organizational compo-nents of a governmental unit for the purpose of accomplishing a function for which the governmen-tal unit is responsible. For example, “food inspection” is an activity performed in the discharge of the “health” function. See also Function, Subfunction, and Subactivity.

Activity classification – a grouping of expenditures on the basis of specific lines of work performed by organization units. For example, sewage treatment and disposal, garbage collection, garbage dis-posal, and street cleaning are activities performed in carrying out the function of sanitation, and segregation of the expenditures made for each of these activities constitutes an activity classifica-tion.

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Actuarial basis – a basis used in computing the amount of contributions to be made periodically to a fund so that the total contributions plus the compounded earnings thereon will equal the required payments to be made out of the fund. The factors taken into account in arriving at the amount of these contributions include the length of time over which each contribution is to be held and the rate of return compounded on such contribution over its life. A trust fund for a public employee re-tirement system is an example of a fund set up on an actuarial basis.

Ad valorem – in proportion to value. A basis for levy of taxes upon property.

Advance refunding – the issuance of debt instruments to refund existing debt before the existing debt matures or is callable.

Agency fund – a fund consisting of resources received and held by the governmental unit as an agent for others; for example, taxes collected and held by a municipality for a school district. Note. Sometimes resources held by one fund of a governmental unit for other funds of the unit are handled through an agency fund. An example would be taxes held by an agency fund for redistribution among other funds: See also Allocation.

Allocate – to divide a lump-sum appropriation into parts which are designated for expenditure by specif-ic organization units and/or for specific purposes, activities, or objects. See also Allocation.

Allocation – a part of a lump-sum appropriation which is designated for expenditure by specific organi-zation units and/or for special purposes, activities, or objects. In federal usage, a transfer of obliga-tional authority from one agency to another. See also Allocate.

Allot – to divide an appropriation into amounts which may be encumbered or expended during an allotment period. See also Allotment and Allotment period.

Allotment – a part of an appropriation (or, in federal usage, parts of an apportionment) which may be encumbered (obligated) or expended during an allotment period. See also Allot and Allotment peri-od.

Allotment period – a period of time less than one fiscal year in length during which an allotment is effective. Bimonthly and quarterly allotment periods are most common. See also Allot and Allot-ment.

Allowance for amortization – the account in which are accumulated the amounts recorded as amortiza-tion of the intangible asset to which the allowance relates.

Allowance for depreciation – the account in which are accumulated the amounts of cost of the related asset which have been charged to expense.

Amortization – (1) gradual reduction, redemption, or liquidation of the balance of an account according to a specified schedule of times and amounts. (2) Provision for the extinguishment of a debt by means of a Debt Service Fund.

Annuities payable – a liability account which records the amount of annuities due and payable to retired employees in a public employee retirement system.

Annuity – a series of equal money payments made at equal intervals during a designated period of time. In governmental accounting the most frequent annuities are accumulations of debt service funds for term bonds and payments to retired employees under public employee retirement systems.

Annuity, amount of – the total amount of money accumulated or paid during an annuity period from an annuity and compound interest at a designated rate.

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Annuity funds – funds established to account for assets given to an organization subject to an agree-ment which binds the organization to pay stipulated amounts periodically to the donor(s).

Annuity period – the designated length of time during which an amount of annuity is accumulated or paid.

Appropriation – an authorization granted by a legislative body to incur liabilities for purposes specified in the appropriation act .

Appropriation act, bill, ordinance, resolution or order – a legal action giving the administration of a governmental unit authorization to incur on behalf of the unit liabilities for the acquisition of goods, services, or facilities to be used for purposes specified in the act, ordinance, etc., in amounts not to exceed those specified for each purpose. The authorization usually expires at the end of a specified term, most often one year.

Appropriation budget – appropriations requested by departments or by the central administration of a governmental unit for a budget period. When the appropriation budget has been adopted in accord with procedures specified by relevant law the budget becomes legally binding upon the administra-tion of the governmental unit for which the budget has been adopted.

Appropriation expenditures – see Expenditures.

Appropriation expenditure ledger – see Appropriation ledger.

Appropriation ledger – a subsidiary ledger containing an account for each appropriation. Each account usually shows the amount originally appropriated, transfers to or from the appropriation, amounts charged against the appropriation, the net balance, and other related information. If allotments are made and a separate ledger is maintained for them, each account in the appropriation ledger usual-ly shows the amount appropriated, transfers to or from the appropriation, the amount allotted, and the unallotted balance.

Assess – to value property officially for the purpose of taxation. Note. The term is also sometimes used to denote the levy of taxes, but such usage is not correct because it fails to distinguish between the valuation process and the tax levy process.

Assessed valuation – a valuation set upon real estate or other property by a government as a basis for levying taxes.

Assessment – (1) the process of making the official valuation of property for purposes of taxation. (2) The valuation placed upon property as a result of this process.

Assessment roll or ledger – in the case of property subject to ad valorem taxes, the official list contain-ing the legal description of each parcel of property, its assessed valuation, and name and address of owner. Additionally, in the case of property in special assessment districts, identification of the dis-trict, total amount of assessment, amount and due date of each installment, interest charges on each installment, and record of collection of all charges.

Assets – financial representations of economic resources owned by an organization or individual.

Audit – the examination of documents, records, reports, systems of internal control, accounting and financial procedures, and other evidence for one or more of the following purposes: 1) To ascertain whether the statements prepared from the accounts present fairly the financial po-

sition and the results of financial operations of the constituent funds with generally accepted accounting (GAAP) principles and on a basis consistent with that of the preceding year.

2) To determine the compliance with applicable laws and regulations of a governmental unit's fi-nancial transactions.

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3) To review the efficiency and economy with which operations were carried out. 4) To review effectiveness in achieving program results.

Auditor's opinion – a statement signed by an auditor in which he states that he has examined the finan-cial statements in accordance with generally accepted auditing standards (with exceptions, if any) and in which he expresses his opinion on the financial condition and results of operations of some or all of the constituent funds of the governmental unit, as appropriate.

Authority – a governmental unit or public agency created to perform a single function or a restricted group of related activities. Usually such units are financed from service charges, fees, and tolls, but in some instances they also have taxing powers. An authority may be completely independent of other governmental units, or in some cases it may be partially dependent upon other governments for its creation, its financing, or the exercise of certain powers.

Authority bonds – bonds payable from the revenues of a specific authority. Since such authorities usually have no revenue other than charges for services, their bonds are ordinarily revenue bonds.

Auxiliary enterprises – activities of a college or university which furnish a service to students, faculty, or staff on a user-charge basis. The charge is directly related to, but not necessarily equal to, the cost of the service. Examples include college unions, residence halls, stores, faculty clubs, and intercolle-giate athletics.

B Balance sheet – a statement which discloses the assets, liabilities, reserves, and equities of a fund or

governmental unit at a specified date, properly classified to exhibit financial position of the fund or unit at that date.

Board-designated funds – funds created to account for assets set aside by the governing board of an organization for specified purposes.

Bond – a written promise to pay a specified sum of money, called the face value or principal amount, at a specified date or dates in the future, called the maturity date(s), together with periodic interest at a specified rate. Note: The difference between a note and a bond is that the latter runs for a longer period of time and requires greater legal formality.

Bond anticipation notes – short-term interest-bearing notes issued by a governmental unit in anticipa-tion of bonds to be issued at a later date. The notes are retired from proceeds of the bond issue to which they are related.

Budgetary accounts – those accounts which reflect budgetary operations and condition, such as esti-mated revenues, appropriations, and encumbrances, as distinguished from proprietary accounts. See also Proprietary accounts.

C Capital projects fund – a fund created for all resources used for the construction or acquisition of desig-

nated fixed assets by a governmental unit except those financed by special assessment, proprietary, or fiduciary funds.

Cash basis – the basis of accounting under which revenues are recorded when received in cash and expenditures are recorded when cash is disbursed.

Character – a basis for distinguishing expenditures according to the periods they are presumed to bene-fit. See also Character classification.

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Character classification – a grouping of expenditures on the basis of the fiscal periods they are pre-sumed to benefit. The three groupings are: (1) current expenditures, presumed to benefit the cur-rent fiscal period; (2) debt service, presumed to benefit prior fiscal periods primarily but also present and future periods; and (3) capital outlays, presumed to benefit the current and future fiscal peri-ods. See also Activity, Activity classification, Function, Functional classification, Object, Object classi-fication, and Expenses.

Commitments – see Encumbrances, also Obligations.

Control account – an account in the general ledger in which are recorded the aggregate of debit and credit postings to a number of identical or related accounts called subsidiary accounts. For example, the taxes receivable account is a control account supported by the aggregate of individual balances in individual property taxpayers' accounts. See also General ledger and Subsidiary account.

D Debt limit – the maximum amount of gross or net debt which is legally permitted.

Debt margin – the difference between the amount of the debt limit and the net amount of outstanding indebtedness subject to the limitation.

Debt service fund – a fund established to finance and account for the payment of interest and principal on all general obligation debt, serial and term, other than that payable exclusively from special as-sessments, revenues of proprietary funds, or revenues of fiduciary funds. Formerly called a Sinking fund.

Deficit – (1) the excess of liabilities and reserved equity of a fund over its assets; (2) The excess of ex-penditures over revenues during an accounting period; or, in the case of Enterprise and Internal Ser-vice Funds, the excess of expense over income during an accounting period.

Delinquent taxes – taxes remaining unpaid on and after the date on which a penalty for nonpayment is attached. Even though the penalty may be subsequently waived and a portion of the taxes may be abated or canceled, the unpaid balances continue to be delinquent taxes until abated, canceled, paid, or converted into tax liens.

Direct debt – the debt which a governmental unit has incurred in its own name or assumed through the annexation of territory or consolidation with another governmental unit. See also Overlapping debt.

Disbursements – payments in cash.

Donated assets – noncash contributions. Donated assets may be in the form of securities, land, build-ings, or equipment, or materials.

Donated materials – see Donated assets.

Donated services – the services of volunteer workers who are unpaid, or who are paid less than the market value of their services.

E Encumbrances – contingent liabilities in the form of purchase orders, contracts, or salary commitments

which are chargeable to an appropriation and for which a part of the appropriation is reserved. They cease to be encumbrances when paid or when the actual liability is recorded.

Endowment fund – a fund whose principal must be maintained inviolate but whose income may be expended. An endowment fund is accounted for as a trust fund.

Enterprise debt – debt which is to be retired primarily from the earnings of governmentally owned and operated enterprises. See also Revenue bonds.

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Enterprise fund – a fund established to finance and account for the acquisition, operation, and mainte-nance of governmental facilities and services which are entirely or predominantly self-supporting by user charges; or where the governing body of the governmental unit has decided that periodic de-termination of revenues earned, expenses incurred, and/or net income is appropriate. Government-owned utilities and hospitals are ordinarily accounted for by enterprise funds.

Entitlement – the amount of payment to which a state or local government is entitled as determined by the federal government pursuant to an allocation formula contained in applicable statutes.

Entry – (1) the record of a financial transaction in its appropriate book of account. (2) The act of record-ing a transaction in the books of account.

Estimated revenue – for revenue accounts kept on an accrual basis this term designates the amount of revenue estimated to accrue during a given period regardless of whether or not it is all to be collect-ed during the period. For revenue accounts kept on a cash basis the term designates the amount of revenue estimated to be collected during a given period. Under the modified accrual basis estimated revenues include both cash and accrual basis revenues. See also Revenue, Cash basis, Accrual basis, and Modified accrual basis.

Expendable fund – a fund whose resources, including both principal and earnings, may be expended. See also Nonexpendable trust fund.

Expenditures – expenditures are recorded when liabilities are incurred pursuant to authority given in an appropriation. If the accounts are kept on the accrual basis or the modified accrual basis, this term designates the cost of goods delivered or services rendered, whether paid or unpaid, including ex-penses, provision for debt retirement not reported as a liability of the fund from which retired, and capital outlays. Where the accounts are kept on the cash basis, the term designates only actual cash disbursements for these purposes. Note: Encumbrances are not expenditures.

Expenses – charges incurred, whether paid or unpaid, for operation, maintenance, interest, and other charges which are presumed to benefit the current fiscal period.

F Fidelity bond – a written promise to indemnify against losses from theft, defalcation, and misappropria-

tion of public funds by government officers and employees. See also Surety bond.

Fiduciary funds – any fund held by a governmental unit in a fiduciary capacity, ordinarily as agent or trustee. Also called Trust and agency funds.

Fiscal agent – a bank or other corporate fiduciary which performs the function of paying, on behalf of the governmental unit, or other debtor, interest on debt or principal of debt when due.

Fiscal period – any period at the end of which a governmental unit determines its financial position and the results of its operations.

Fiscal year – a 12-month period of time to which the annual budget applies and at the end of which a governmental unit determines its financial position and the results of its operations.

Fixed assets – assets of a long-term character which are intended to continue to be held or used, such as land, buildings, machinery, furniture, and other equipment. Note: The term does not indicate the immobility of an asset, which is the distinctive character of “fixture.”

Fixed charges – expenses, the amount of which is set by agreement. Examples are interest, insurance, and contributions to pension funds.

Fixed liabilities – see Long-term debt.

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Full faith and credit – a pledge of the general taxing power for the payment of debt obligations. Note:. Bonds carrying such pledges are usually referred to as general obligation bonds, full faith and credit bonds, or tax-supported bonds.

Function – a group of related activities aimed at accomplishing a major service or regulatory responsibil-ity for which a governmental unit is responsible. For example, public health is a function. See also Subfunction, Activity, Character, and Object.

Functional classification – a grouping of expenditures on the basis of the principal purposes for which they are made. Examples are public safety, public health, public welfare, etc. See also Activity, Char-acter, and Object classification.

Fund – 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 chang-es therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.

Fund accounts – all accounts necessary to set forth the financial operations and financial position of a fund.

Fund balance – the excess of the assets of a fund over its liabilities and reserves except in the case of funds subject to budgetary accounting where, prior to the end of a fiscal period, it represents the excess of the fund's assets and estimated revenues for the period over its liabilities, reserves, and available appropriations for the period.

Fund balance sheet – a balance sheet for a single fund. See Fund and Balance sheet.

Funded debt – same as Bonded debt, which is the preferred term.

Funded deficit – a deficit eliminated through the sale of bonds issued for that purpose. See also Funding bonds.

Fund type – a group of funds which are similar in purpose and character. For example, several special revenue funds constitute a fund type. See also Related funds.

Funding – the conversion of floating debt or time warrants into bonded debt.

Funding bonds – bonds issued to retire outstanding floating debt and to eliminate deficits.

G General fund – a fund used to account for all transactions of a governmental unit which are not ac-

counted for in another fund. Note: The general fund is used to account for the ordinary operations of a governmental unit which are financed from taxes and other general revenues.

General journal – a journal in which are entered all entries not recorded in special journals.

General ledger – a book, file, or other device which contains the accounts needed to reflect, in summary and in detail, the financial position and the results of financial operations of the governmental unit. Note: In double entry bookkeeping, the debits and credits in the general ledger are equal, and there-fore the debit balances equal the credit balances. See also Control account, Subsidiary account, and Subsidiary ledger.

General obligation bonds – bonds for whose payment the full faith and credit of the issuing body are pledged. More commonly, but not necessarily, general obligation bonds are considered to be those payable from taxes and other general revenues. In some states these bonds are called tax supported bonds. See also Full faith and credit.

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General obligation special assessment bonds – see Special assessment bonds.

General revenue – the revenues of a governmental unit other than those derived from and retained in an enterprise. Note: If a portion of the net income in an enterprise fund is contributed to another nonenterprise fund, such as the general fund, the amounts transferred constitute general revenue of the governmental unit.

Governmental funds – a generic classification adopted by the National Council on Governmental Ac-counting to refer to all funds other than proprietary and fiduciary funds. The general fund, special revenue funds, capital projects funds, and debt service funds are the types of funds referred to as “governmental funds.”

Grant – a contribution by one governmental unit to another unit. The contribution is usually made to aid in the support of a specified function (for example, education), but it is sometimes also for general purposes.

Grants-in-aid – see Grant.

Gross bonded debt – the total amount of direct debt of a governmental unit represented by outstanding bonds before deduction of any assets available and earmarked for their retirement. See also Direct debt.

Gross revenue – see Revenue.

H Historical cost – the amount paid, or liability incurred, by an accounting entity to acquire an asset and

make it ready to render the services for which it was acquired.

I Industrial aid bonds – bonds issued by governmental units, the proceeds of which are used to construct

plant facilities for private industrial concerns. Lease payments made by the industrial concern to the governmental unit are used to service the bonds. Such bonds may be in the form of general obliga-tion bonds or revenue bonds.

Interest and penalties receivable on taxes – the uncollected portion of interest and penalties receivable on taxes.

Interest receivable on investments – amount of interest receivable on investments, exclusive of interest purchased. Interest purchased should be shown in a separate account.

Interest receivable – special assessments-the amount of interest receivable on unpaid installments of special assessments.

Interfund accounts – accounts in which transactions between funds are reflected. See Interfund trans-fers.

Interfund loans – loans made by one fund to another.

Interfund transfers – amounts transferred from one fund to another.

Intergovernmental revenue – revenue from other governments. Grants, shared revenues, and entitle-ments are types of intergovernmental revenue.

Interim borrowing – (1) short-term loans to be repaid from general revenues during the course of a fiscal year. (2) Short-term loans in anticipation of tax collections or bonds issuance. See Bond antici-pation notes, Tax anticipation notes, and Revenue anticipation notes.

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Interim statement – a financial statement prepared before the end of the current fiscal year and cover-ing only financial transactions during the current year to date. See also Statements.

Internal service fund – a fund established to finance and account for services and commodities fur-nished by a designated department or agency to other departments and agencies within a single governmental unit, or to other governmental units. Amounts expended by the fund are restored thereto either from operating earnings or by transfers from other funds, so that the original fund capital is kept intact. Formerly called a working capital fund, or intragovernmental service fund.

Intragovernmental service fund – see Internal service fund.

Investment in general fixed assets – an account in the general fixed assets group of accounts which represents the governmental unit's equity in general fixed assets. The balance of this account is subdivided according to the source of funds which financed the asset acquisition, such as general fund revenues, special assessments, etc.

Investments – securities and real estate held for the production of income in the form of interest, dividends, rentals, or lease payments. The term does not include fixed assets used in governmental operations.

J Judgment – an amount to be paid or collected by a governmental unit as the result of a court decision,

including a condemnation award in payment for private property taken for public use.

Judgment bonds – bonds issued to pay judgments. See also Funding.

Judgments payable – amounts due to be paid by a governmental unit as the result of court decisions, including condemnation awards in payment for private property taken for public use.

L Lapse – (verb) as applied to appropriations, this term denotes the automatic termination of an appro-

priation. Note: Except for indeterminate appropriations and continuing appropriations, an appropri-ation is made for a certain period of time. At the end of this period, any unexpended and unencum-bered balance thereof lapses, unless otherwise provided by law.

Leasehold – the right to the use of real estate by virtue of a lease, usually for a specified term of years, for which a consideration is paid.

Levy – (verb) to impose taxes, special assessments, or service charges for the support of governmental activities. (Noun) the total amount of taxes, special assessments, or services charges imposed by a governmental unit.

Liabilities – debt or other legal obligations arising out of transactions in the past which must be liquidat-ed, renewed, or refunded at some future date. Note: The term does not include encumbrances.

Life income funds – funds, ordinarily of colleges and universities, established to account for assets given to the organization subject to an agreement to pay to the donor or designee the income earned by the assets over a specified period of time.

Line item budget – a detailed expense or expenditure budget, generally classified by object within each organizational unit, and, often, classified within each object as to authorized number of employees at each salary level within each job classification, etc.

Loan fund – a fund whose principal and/or interest is loaned to individuals in accordance with the legal requirements and agreements setting up the fund. Such a fund is accounted for as a trust fund. See also Trust fund.

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Long-term debt – debt with a maturity of more than one year after the date of issuance.

M Matured bonds payable – bonds which have reached or passed their maturity date but which remain

unpaid.

Matured interest payable – interest on bonds which has reached the maturity date but which remains unpaid.

Modified accrual basis – under the modified accrual basis of accounting, recommended for use by governmental funds, revenues are recognized in the period in which they become available and measurable, and expenditures are recognized at the time a liability is incurred pursuant to appropri-ation authority.

Municipal – in its broadest sense, an adjective which denotes the state and all subordinate units of government. In a more restricted sense, an adjective which denotes a city or town as opposed to other units of local government.

Municipal bond – a bond issued by a state or local governmental unit.

Municipal corporation – a body politic and corporate established pursuant to state authorization for the purpose of providing governmental services and regulations for its inhabitants. A municipal corpora-tion has defined boundaries and a population, and is usually organized with the consent of its resi-dents. It usually has a seal and may sue and be sued. Cities and towns are examples of municipal corporations.

N Net bonded debt – gross bonded debt less any cash or other assets available and earmarked for its

retirement.

Net income – a term used in accounting for governmental enterprises to designate the excess of total revenues over total expenses for an accounting period. See also Operating revenue and Operating expenses.

Nonexpendable trust fund – a fund the principal, and sometimes also the earnings, of which may not be expended. See also Endowment fund.

O Object – as used in expenditure classification, this term applies to the article purchased or the service

obtained (as distinguished from the results obtained from expenditures). Examples are personal ser-vices, contractual services, materials, and supplies. See also Activity, Character, Function, and Object classification.

Object classification – a grouping of expenditures on the basis of goods or services purchased; for example, personal services, materials, supplies, and equipment. See also Functional, Activity, and Character classifications.

Objects of expenditure – see Object.

Obligations – generally amounts which a governmental unit may be required legally to meet out of its resources. They include not only actual liabilities, but also unliquidated encumbrances.

Operating expenses – (1) as used in the accounts of governmental enterprises, the term means those costs which are necessary to the maintenance of the enterprise, the rendering of services, the sale of merchandise, the production and disposition of commodities produced, and the collection of en-

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terprise revenues. (2) The term is also sometimes used to describe expenses for general governmen-tal purposes.

Operating fund – the title of the fund used to account for all assets, and related liabilities used in the routine activities of a hospital. Also sometimes used by governmental units as synonym for General fund.

Operating income – income of a governmental enterprise which is derived from the sale of its goods and/or services. For example, income from the sale of water by a municipal water utility is operating income. See also Operating revenues.

Operating revenues – revenues derived from the operation of governmental enterprises of a business character.

Operating statement – a statement summarizing the financial operations of a governmental unit for an accounting period as contrasted with a balance sheet which shows financial position at a given mo-ment in time.

Order – a formal legislative enactment by the governing body of certain local governmental units which has the full force and effect of law. For example, county governing bodies in some states pass “or-ders” rather than laws or ordinances.

Ordinance – a formal legislative enactment by the council or governing body of a municipality. If it is not in conflict with any higher form of law, such as a state statute or constitutional provision, it has the full force and effect of law within the boundaries of the municipality to which it applies. Note: The difference between an ordinance and a resolution is that the latter requires less legal formality and has a lower legal status. Ordinarily, the statutes or charter will specify or imply those legislative ac-tions which must be by ordinance and those which may be by resolution. Revenue-raising measures, such as the imposition of taxes, special assessments, and service charges, universally require ordi-nances.

Original cost – the total of assets given and/or liabilities assumed to acquire an asset. In utility account-ing, the original cost is the cost to the first owner who dedicated the plant to service of the public.

Outlays – sometimes synonymous with disbursements.

Overdraft – (1) the amount by which checks, drafts, or other demands for payment on the treasury or on a bank exceed the amount of the credit against which they are drawn. (2) The amount by which requisitions, purchase orders, or audited vouchers exceed the appropriation or other credit to which they are chargeable.

Overhead – those elements of cost necessary in the production of an article or the performance of a service which are of such a nature that the amount applicable to the product or service cannot be determined accurately or readily. Usually they relate to those objects of expenditures which do not become an integral part of the finished product or service, such as rent, heat, light, supplies, man-agement, supervision, etc.

Overlapping debt – the proportionate share of the debts of local governmental units located wholly or in part within the limits of the reporting government which must be borne by property within each governmental unit.

P Pay-as-you-go basis – a term used to describe the financial policy of a governmental unit which finances

all of its capital outlays from current revenues rather than by borrowing. A governmental unit which pays for some improvements from cur-rent revenues and others by borrowing is said to be on a par-tial or modified pay-as-you-go basis.

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Plant acquisition adjustment – see Acquisition adjustment.

Proprietary fund – sometimes referred to as “income determination,” or “commercial-type,” funds of a state or local governmental unit. Examples are enterprise funds and internal service funds.

R Rate base – the value of utility property used in computing an authorized rate of return as authorized by

law or a regulatory commission.

Realize – to convert goods or services into cash or receivables. Also to exchange for property which is a current asset or can be converted immediately into a current asset. Sometimes applied to conver-sion of noncash assets into cash.

Rebates – abatements or refunds.

Receipts – this term, unless otherwise qualified, means cash received.

Recoverable expenditure – an expenditure made for or on behalf of another governmental unit, fund, or department, or for a private individual, firm, or corporation, which will subsequently be recov-ered in cash or its equivalent.

Refund – (noun) an amount paid back or credit allowed because of an overcollection or on account of the return of an object sold. (Verb) To pay back or allow credit for an amount because of an overcol-lection or because of the return of an object sold. (Verb) To provide for the payment of a loan through cash or credit secured by a new loan.

Refunding bonds – bonds issued to retire bonds already outstanding. The refunding bonds may be sold for cash and outstanding bonds redeemed in cash, or the refunding bonds may be exchanged with holders of outstanding bonds.

Reimbursement – cash or other assets received as a repayment of the cost of work or services per-formed or of other expenditures made for or on behalf of another governmental unit or department or for an individual, firm, or corporation.

Related funds – funds of a similar character which are brought together for administrative or reporting purposes; for example. Trust and Agency Funds.

Reserve – an account which records a portion of the fund equity which must be segregated for some future use and which is, therefore, not available for further appropriation or expenditure. See Re-serve for inventory or Reserve for encumbrances.

Reserve for advance to-fund – a reserve which represents the segregation of a portion of a fund equity to indicate that assets equal to the amount of the reserve are invested in a long-term loan to anoth-er fund and are, therefore, not available for appropriation.

Reserve for depreciation – see Allowance for depreciation.

Reserve for employee contributions – a reserve in a Trust Fund for a public employee retirement sys-tem which represents the amount of accumulated contributions made by employee members plus interest earnings credited in accordance with applicable legal provisions.

Reserve for employer contributions – a reserve in a Trust Fund for a public employee retirement system which represents the amount of accumulated contributions paid by the governmental unit as em-ployer plus interest earnings credited in accordance with applicable legal provisions.

Reserve for employer contributions – actuarial deficiency-a reserve in a Trust Fund for a public employ-ee retirement system which represents the amount of the actuarial deficiency in contributions made by a governmental unit as employer.

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Reserve for encumbrances – a reserve representing the segregation of fund equity in the amount of encumbrances outstanding. See also Reserve.

Reserve for inventory – a reserve which represents the segregation of a portion of fund equity to indi-cate that assets equal to the amount of the reserve are invested in inventories and are, therefore, not available for appropriation.

Reserve for membership annuities – a reserve in a Trust Fund for a public employee retirement system which represents the amount set aside for payment of annuities to retired members. In a joint con-tributary system this reserve is established at the time of employee retirement by transfers from ac-cumulations in the Reserve for Employees' Contributions and the Reserve for Employer Contribu-tions accounts.

Reserve for revenue bond contingency – a reserve in an Enterprise Fund which represents the segrega-tion of a portion of retained earnings equal to current assets that are restricted for meeting various contingencies, as may be specified and defined in the revenue bond indenture. Reserve for revenue bond debt service-a reserve in an Enterprise Fund which represents the segregation of a portion of retained earnings equal to current assets that are restricted to current servicing of revenue bonds in accordance with the terms of a bond indenture.

Reserve for revenue bond retirement – a reserve in an Enterprise Fund which represents the segrega-tion of a portion of retained earnings equal to current assets that are restricted for future servicing of revenue bonds in accordance with the terms of a bond indenture.

Reserve for uncollected taxes – a reserve representing the segregation of a portion of a fund equity equal to the amount of taxes receivable by a fund, thus effectively placing the fund on the cash basis of revenue recognition.

Reserve for undistributed interest earnings – an unallocated reserve in a Trust Fund for a public em-ployee retirement system which represents interest earnings of the system that have not been dis-tributed to other reserves such as the Reserve for Employees' Contributions and the Reserve for Employer Contributions.

Resolution – a special or temporary order of a legislative body; an order of a legislative body requiring less legal formality than an ordinance or statute. See also Ordinance.

Resources – the contingent assets of a governmental unit, such as estimated revenues applying to the current fiscal year, and bonds authorized but not yet issued.

Restricted assets – assets (usually of an Enterprise Fund) which may not be used for normal operating purposes because of the requirements of regulatory authorities, provisions in bond indentures, or other legal agreements, but which need not be accounted for in a separate fund.

Restricted fund – a fund established to account for assets the use of which is limited by the require-ments of donors or grantors. Hospitals may have three types of restricted funds: specific-purpose funds, endowment funds, and plant replacement and expansion funds. The governing body or ad-ministration cannot restrict the use of assets; they may only designate the use of assets. See Board designated funds.

Retained earnings – the accumulated earnings of an Enterprise or Internal Service Fund which have been retained in the fund and which are not reserved for any specific purpose.

Retirement allowances – amounts paid to government employees who have retired from active service, or to their survivors. See Annuity.

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Retirement fund – a fund out of which retirement annuities and/or other benefits are paid to author-ized and designated public employees. A retirement fund is accounted for as a Trust Fund.

Revenue – for those revenues which are recorded on the accrual basis, this term designates additions to assets which: (a) do not increase any liability; (b) do not represent the recovery of an expenditure; (c) do not represent the cancellation of certain liabilities without a corresponding increase in other liabilities or a decrease in assets; and (d) do not represent contributions of fund equity in Enterprise and Internal Service Funds. The same definition applies to those cases where revenues are recorded on the modified accrual or cash basis, except that additions would be partially or entirely to cash. See also Accrual basis, Modified accrual basis, Cash basis, and Receipts.

Revenue anticipation note – notes issued in anticipation of the collection of revenues, usually from specified sources, and to be repaid upon the collection of the revenues.

Revenue bonds – bonds whose principal and interest are payable exclusively from earnings of a public enterprise. In addition to a pledge of revenues, such bonds sometimes contain a mortgage on the enterprise's property and are then known as mortgage revenue bonds.

Revenue ledger – a subsidiary ledger which supports both the Estimated Revenues control account and the Revenues control account of a fund.

S Serial bonds – bonds the principal of which is repaid in periodic installments over the life of the issue.

Shared revenue – revenue which is levied by one governmental unit but shared, usually on a predeter-mined basis, with another unit of government or class of governments.

Shared tax – see Shared revenue.

Short-term debt – debt with a maturity of one year or less after the date of issuance. Short-term debt usually includes floating debt, bond anticipation notes, tax anticipation notes, and interim warrants.

Sinking fund – see Debt service fund.

Sinking fund bonds – bonds issued under an agreement which requires the governmental unit to set aside periodically out of its revenues a sum which, with compound earnings thereon, will be suffi-cient to redeem the bonds at their stated date of maturity. Sinking Fund bonds are usually also term bonds.

Special assessment bonds – bonds payable from the proceeds of special assessments (q.v.). If the bonds are payable only from the collections of special assessments, they are known as “special-special as-sessment bonds.” If, in addition to the assessments, the full faith and credit of the governmental unit is pledged, they are known as “general obligation special assessment bonds.”

Special district – an independent unit of local government organized to perform a single governmental function or a restricted number of related functions. Special districts usually have the power to incur debt and levy taxes; however, certain types of special districts are entirely dependent upon enter-prise earnings and cannot impose taxes. Examples of special districts are water districts, drainage districts, flood control districts, hospital districts, fire protection districts, transit authorities, port au-thorities, and electric power authorities.

Special district bonds – bonds issued by a special district. See Special district.

Special fund – any fund which must be devoted to some special use in accordance with specific regula-tions and restrictions. Generally, the term applies to all funds other than the General Fund.

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Special revenue fund – a fund used to account for revenues from specific taxes or other earmarked revenue sources which by law are designated to finance particular functions or activities of govern-ment. After the fund is established, it usually continues year after year until discontinued or revised by proper legislative authority. An example is a motor fuel tax fund used to finance highway and road construction.

Specific-purpose fund – a fund classification provided for hospitals to record the principal and income of assets which may be used only for purposes specified by the donor.

Statements – (1) used in a general sense, statements are all of those formal written presentations which set forth financial information. (2) In technical accounting usage, statements are those presenta-tions of financial data which show the financial position and the results of financial operations of a fund, a group of accounts, or an entire govern-mental unit for a particular accounting period.

Statute – a written law enacted by a duly organized and constituted legislative body. See also Ordi-nance, Resolution, and Order.

Subactivity – a specific line of work performed in carrying out a governmental activity. For example, replacing defective street lamps would be a subactivity under the activity of street light mainte-nance.

Subfunction – a grouping of related activities within a particular governmental function. For example, “police” is a subfunction of the function “public safety.”

Subsidiary account – one of a group of related accounts which support in detail the debit and credit summaries recorded in a control account. An example is the individual property taxpayers' accounts for taxes receivable in the general ledger. See also Control account and Subsidiary ledger.

Subsidiary ledger – a group of subsidiary accounts the sum of the balances of which is equal to the balance of the related control account. See also Control account and Subsidiary account.

Subvention – a grant.

Surety bond – a written promise to pay damages or to indemnify against losses caused by the party or parties named in the document, through nonperformance or through defalcation. An example is a surety bond given by a contractor or by an official handling cash or securities.

Syndicate, underwriting – a group formed for the marketing of a given security issue too large for one member to handle expeditiously, after which the group is dissolved.

T Tax anticipation notes – notes (sometimes called warrants) issued in anticipation of collection of taxes,

usually retirable only from tax collections, and frequently only from the proceeds of the tax levy whose collection they anticipate.

Tax anticipation warrants – see Tax anticipation notes.

Tax certificate – a certificate issued by a governmental unit as evidence of the conditional transfer of title to tax-delinquent property from the original owner to the holder of the certificate. If the owner does not pay the amount of the tax arrearage and other charges required by law during the speci-fied period of redemption, the holder can foreclose to obtain title. Also called “tax sale certificate” and “tax lien certificate” in some jurisdictions. See also Tax deed.

Tax deed – a written instrument by which title to property sold for taxes is transferred unconditionally to the purchaser. A tax deed is issued upon foreclosure of the tax lien obtained by the purchaser at the tax sale. The tax lien cannot be foreclosed until the expiration of the period during which the

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owner may redeem his property through paying the delinquent taxes and other charges. See also Tax certificate.

Tax expenditure – a revenue loss attributable to provisions of federal tax laws which allow a special exclusion, exemption, or deduction from gross income, or which provide a special credit, a preferen-tial rate of tax, or a deferral of tax liability.

Tax levy – see Levy.

Tax levy ordinance – an ordinance by means of which taxes are levied.

Tax liens – claims which governmental units have upon properties until taxes levied against them have been paid. Note: The term is sometimes limited to those delinquent taxes for the collection of which legal action has been taken through the filing of liens.

Tax rate – the amount of tax stated in terms of a unit of the tax base; for example, 25 mills per dollar of assessed valuation of taxable property.

Tax rate limit – the maximum rate at which a governmental unit may levy a tax. The limit may apply to taxes raised for a particular purpose, or to taxes imposed for all purposes; and may apply to a single government, to a class of governments, or to all governmental units operating in a particular area. Overall tax rate limits usually restrict levies for all purposes and of all governments, state and local, having jurisdiction in a given area.

Taxes – compulsory charges levied by a governmental unit for the purpose of financing services per-formed for the common benefit. Note: The term does not include specific charges made against par-ticular persons or property for current or permanent benefits such as special assessments. Neither does the term include charges for services rendered only to those paying such charges as, for exam-ple, sewer service charges.

Term bonds – bonds the entire principal of which matures on one date.

Term bonds payable – a liability account which records the face value of general obligation term bonds issued and outstanding.

Time warrant – a negotiable obligation of a governmental unit having a term shorter than bonds, and frequently tendered to individuals and firms in exchange for contractual services, capital acquisi-tions, or equipment purchases.

Time warrants payable – the amount of time warrants outstanding and unpaid.

Trust fund – a fund consisting of resources received and held by the governmental unit as trustee, to be expended or invested in accordance with the conditions of the trust. See also Endowment fund.

Trust and agency fund – see Agency fund, Trust fund, and Fiduciary fund.

U Unbilled accounts receivable – an account which designates the estimated amount of accounts receiva-

ble for services or commodities sold but not billed. For example, if a utility bills its customers bi-monthly but prepares monthly financial statements, the amount of services rendered or commodi-ties sold during the first month of the bimonthly period would be reflected in the balance sheet un-der this account title.

Underwriting syndicate – see Syndicate, underwriting.

Unencumbered appropriation – that portion of an appropriation not yet expended or encumbered.

Unexpended allotment – that portion of an allotment which has not been expended.

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Unexpended appropriation – that portion of an appropriation which has not been expended.

Unliquidated encumbrances – encumbrances outstanding.

Unrestricted assets – assets which may be utilized at the discretion of the governing board of a govern-mental or nonprofit entity.

Unrestricted funds – funds which are established to account for assets or resources which may be utilized at the discretion of the governing board. Antonym of Restricted funds.

User charge – a charge levied against users of a service or purchasers of a product of an Enterprise Fund or an Internal Service Fund.

V Voucher system – a system which calls for the preparation of vouchers for transactions involving pay-

ments and for the recording of such vouchers in a special book of original entry, known as a voucher register, in the order in which payment is approved.

Vouchers payable – liabilities for goods and services evidenced by vouchers which have been preaudit-ed and approved for payment but which have not been paid.

W Warrant – an order drawn by the legislative body or an officer of a governmental unit upon its treasurer,

directing the latter to pay a specified amount to the person named or to the bearer. It may be paya-ble upon demand, in which case it usually circulates the same as a bank check; or it may be payable only out of certain revenues when and if received, in which case it does not circulate as freely.

Warrants payable – the amount of warrants outstanding and unpaid.

Working capital fund – see Internal service fund.

Z Zero-based budget – a budget based on the concept that the very existence of each activity must be

justified each year, as well as the amounts of resources requested to be allocated to each activity.

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129

Index

A

Accounting for fixed assets, 29 Accrual basis of accounting, 7, 19, 45, 54, 62, 71, 72, 83, 89, 92,

101 Acquisition of inventories, 78 Adjusting entries, 40 Agency funds, 19, 53, 63, 83, 84, 85, 86, 112, 126

illustrative transactions, 86 receipts and disbursements, 86

AICPA audit guide, Audits of State and Local Governmental Units, 3

Anticipatory asset, 20 Anticipatory liability, 20 APB 18, 30 Appropriation, 21, 113 Appropriations Control account, 20, 26, 36, 37, 41, 62, 64, 65 Assets, 4

B

Budget, adoption of, 35 Budgetary comparison schedule, 95, 96, 101 Budgetary Fund Balance—Unassigned, 20, 37, 41 Budgets, 19, 20

C

Capital asset, 39, 74, 81 Capital budgets, 19 Capital improvements fund, 59 Capital leases, 30, 63 Capital maintenance objectives, 5 Capital projects funds, 53, 58, 59, 62

closing entries, 61 expenditures, 60 financial statement information, 62

Capital projects revenue and bond proceeds, 60 Capital projects, illustrative transactions, 59 Cash flows from capital and related financing activities, 76 Cash flows from investing activities, 76 Cash flows from noncapital financing activities, 76 Cash flows from operating activities, 76 Closing entries, 41, 61, 65, 79 Commercial entities, 2, 4, 20, 29, 72, 73, 75, 76, 77 Component units, 10, 88 Comprehensive annual financial report (CAFR), 88, 89 Consumption method, 27, 28, 29, 36, 40, 54 Control accounts, 20, 36, 66 Criterion tests

10 percent, 71 5 percent, 71

Cumulative building fund, 59 Current financial resources measurement focus, 6, 11, 13, 14,

30, 45, 90

D

Debt service funds, 53, 62, 64, 66 adoption of budget, 64 closing entries, 65 expenditures, 65 financial statement information, 66

Deferred inflow of resources, 4 Deferred outflow of resources, 4 Derived tax revenues, 14, 16 Disbursement, 16, 19, 21, 22, 32, 39, 59, 85

E

Economic resources measurement focus, 14, 19, 30, 45, 89 Encumbrances, 21

lapsing and nonlapsing, 24 nonlapsing, 26 outstanding at year-end, 25 reporting of, 27

Enterprise funds, 6, 7, 53, 72, 77 closing and reclassification entries, 75 expenses, 74 revenues, 73

Entitlements, 16, 18, 118 Estimated Revenues Control account, 20, 26, 36, 37, 41, 64, 65 Expendability of resources, 5 Expenditures, 22, 38, 67

accounting for, 21 process, 21 recognition of, 18

F

FASB (Financial Accounting Standards Board), 3 Fiduciary funds, 7, 9, 10, 11, 14, 15, 19, 45, 53, 54, 82, 83, 84,

86, 88, 89, 92, 99, 100, 101, 114, 115, 116, 118 basis of accounting, 19 statement of changes in fiduciary net assets, 85 statement of fiduciary net assets, 84

Financial accountability, 87 Financial Accounting Foundation (FAF), 3 Financial Accounting Standards Board (FASB), 3 Financial statements, elements of, 4 Fixed assets, accounting for, 29 Fund

definition, 5 enterprise, 6 fiduciary, 7 five types of, 6 general, 34 internal service, 7 proprietary, 6 Structure, 8 types of, 5 typical structure, 53

Fund accounting, 3, 4, 5, 6, 7, 14, 45, 57, 88 Fund-based financial statements, 10

Index

130

G

GASB (Governmental Accounting Standards Board), 3 GASB 1, 3 GASB 14, 10, 87 GASB 25, 89, 99 GASB 27, 100 GASB 31, 30, 66 GASB 33, 14, 16 GASB 34, 4, 10, 21, 30, 31, 35, 42, 45, 54, 68, 71, 73, 75, 76,

87, 88, 89, 90, 92, 93, 95, 96, 97, 98, 101 GASB 36, 16 GASB 37, 92, 96 GASB 38, 97 GASB 39, 87 GASB 40, 31 GASB 41, 89, 96 GASB 43, 99 GASB 44, 89 GASB 45, 100 GASB 46, 75 GASB 47, 100 GASB 50, 100 GASB 52, 31 GASB 54, 12, 27, 43, 45, 54, 101 GASB 9, 76 General fund, 34

accounting for, 35 balance sheet, 35, 43 operating budget, 36 overview, 34 preclosing trial balance, 41

Government reporting model, 10, 87 Governmental accounting

background, 3 balance sheet, 11 basis of accounting, 13 budgetary aspects of, 19 financial reporting, 9 financial reports, 89 major concepts, 4 measurement focus, 5 overview of financial reporting, 55 recognition of revenue, 14 statement of revenues, expenditures, and changes in fund

balance, 12 types of funds, 6 vs. commercial accounting, 5

Governmental Accounting Standards Board (GASB), 3 Governmental entities, 2, 3, 4, 18, 29, 54, 63, 97, 98, 100 Governmental funds

balance sheet, 69 financial statements, 68 major expenditure classifications, 23 statement of revenues, expenditures, and changes in fund

balance, 70 worksheets, 56

Government-mandated nonexchange transactions, 15, 16 Government-wide financial statements, 10, 11, 14, 30, 45, 54,

71, 87, 88, 89, 90, 92, 94, 96, 97, 98, 100, 101 budgetary comparison schedule, 95 management's discussion and analysis, 96 notes, 96

reconciliation schedules, 93 statement of activities, 92, 93 statement of net assets, 89, 91

Grants, 18, 36, 38, 44, 58, 70, 93, 95, 118

H

Historical treasures, 30

I

Imposed nonexchange revenues, 15, 16 Income taxes, 18 Interest, 67 Interest on investments and delinquent taxes, 18 Interest payable on long-term debt, 63 Interfund activities, 31, 32, 34, 36, 40, 45, 53, 74 Interfund loans, 31 Interfund reimbursements, 33 Interfund transactions, 32 Interfund transfers, 12, 13, 14, 16, 31, 32, 33, 35, 36, 43, 45, 61,

76, 97 Interim reporting, 97 Internal service fund

closing entries, 79 establishment of, 78 expenses, 79 financial statements, 80 revenue, 78

Internal service funds, 7, 53, 56, 72, 77, 78, 80, 82, 94, 115, 124 Inventory, 27, 28, 29, 35, 40, 41, 43, 57, 69, 74, 78, 79, 80, 82

purchase vs. consumption method, 28 Inventory, acquisition of, 78 Investments, 30, 54, 66, 67, 84, 85, 119

L

Lapsing encumbrances, 24, 36 Liabilities, 4 Long-term debt, 3, 4, 8, 9, 10, 11, 12, 19, 30, 34, 45, 46, 54, 57,

58, 62, 63, 64, 72, 73, 77, 82, 93, 96, 101, 111

M

Miscellaneous revenue, 18, 38 Modified accrual basis of accounting, 13, 14, 16, 18, 35, 45, 54,

57, 58, 63, 66, 71, 92, 101, 120 Municipal funds, 77

N

NCGA 3, 17 Net position, 4 Nonbusiness organizations, 1, 2 Nonexchange transactions, 14, 16

classes and timing of recognition, 16 Nonlapsing encumbrances, 24, 26 Nonspendable fund balances, 12 Notes and warrants, 63

Index

131

O

Operating budgets, 19, 21 Operating section, 12, 43 Other financing sources (uses), 43 Outstanding encumbrances, 24

P

Pensions, 11, 99, 100 Permanent funds, 53, 66 Postemployment benefits, 99, 100 Primary government, 9, 10, 87, 88, 89, 90, 91, 96 Private-purpose trust funds, 53, 83 Proceeds from the sale of bonds, 18 Profit motive, 2 Property tax levy and collection, 37 Property taxes, 17, 37 Property taxes, timing of revenue recognition, 17 Proprietary funds, 6, 56, 71, 75, 80, 81, 102

basis of accounting, 19 financial statements, 75 statement of cash flows, 81 statement of net assets, 80 statement of revenues, expenses, and changes in fund net

assets, 81 Purchases method, 27

R

Reconciliation of fund balance, 44

S

Sales taxes, 14, 16, 18, 38, 45 Sample journal entries, 20, 21, 22, 25, 29, 37, 38, 39, 40, 41, 60,

61, 64, 65, 67, 73, 74, 75, 78, 79, 83 Serial bonds, 63 Shared revenue, 18 Short quizzes, 2, 7, 9, 26, 34, 62, 66, 77, 82, 86, 101 Single Audit Act of 1984, 98 Special assessment bonds, 63, 118, 124 Special revenue funds, 53, 56, 57 Special-purpose governmental entities, 98 Special-purpose governments, 98, 99 Spendable fund balances, 12 Statement of Revenues, Expenditures, and Changes in Fund

Balance, 12, 13, 43, 44, 45, 70

T

Term bonds, 63, 126 Termination benefits, 100 Trial balance, illustrative, 73 Trust funds, 83

V

Voluntary nonexchange transactions, 15, 16

W

Works of art, 30

Documents

Governmental Accounting and Reporting - CPE Store · Chapter 1 – Governmental Accounting: An Overview 2 Short Quiz Indicate whether each of the following is true or false. 1. Governmental