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2-*
Introduction to Governmental and
Not-for-Profit Accounting, 7e
Chapter 2: The Use of Funds in
Governmental Accounting
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
Introduction
As noted in Chapter 1 , state and local governmental
accounting differs from business enterprise accounting in
three major respects. State and local governmental
accounting
a) uses separate funds to account for its financial
activities,
b) focuses on flows of current financial resources and
uses a modified accrual basis of accounting in some
funds, and
c) incorporates budgetary accounts into the financial
accounting system for some funds.
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Introduction
This chapter provides an overview of the material that will
be discussed in detail in Chapters 3 through 10 . We
discuss the nature of fund accounting, describe the
purposes of the various funds used in state and local
governmental accounting, and introduce the concept of the
current financial resources measurement focus and
modified accrual basis of accounting.
To better understand the unique aspects of state and local
governmental accounting, it is necessary to consider the
types of activities performed by governments,
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Types of Government Activities
• Governmental-type
– Day-to-day services of general-purpose
governments (states, counties, and cities)
• Police and fire protection الشرطة والدفاع المدني
• Sanitation تعزيز الصحة العامة
• Parks and recreation المنتزهات واالستجمام
– Financed primarily by tax revenues,
intergovernmental grants, and general fees
– Controlled by legally adopted budget
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental – Business - Fiduciary
Types of Government Activities
• Business-type
– Specific services
• Mass transit
• Water utility
• Electric utility
– Financed primarily by user fees or charges
that cover both operating and capital costs
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Types of Government Activities
• Fiduciary-type
– Used when government provides fiduciary-
type services
• Holding segregated resources for others
• Examples
– Tax collection services for other governments
– Pension trust funds
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
• Funds: Building blocks of governmental
reporting
• Government divided into entities, a.k.a.
funds
• Each fund has its own:
– Assets, liabilities, net position
– Inflows and outflows of resources
• 3 categories: Governmental, proprietary,
fiduciary Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fund Accounting
Formal Fund Definition
…a fiscal and accounting entity with a self-
balancing set of accounts recording cash
and other financial resources, together
with all related liabilities and residual
equities or balances, and changes therein,
which are segregated for the purpose of
carrying on specific activities or attaining
certain objectives in accordance with
special regulations, restrictions, or
limitations. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Why Are Funds Used?
• Fund accounting facilitates compliance
with laws
• Helps ensure that dedicated funds are
used as intended
• Legislature may dedicate specific
revenues for specific purposes
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fund Accounting:
1- Governmental Funds
• Used to: Provide Basic day-to-day public services
• Inflows: Taxes, intergovernmental grants
• Outflows: Police, education, sanitation
• Capital assets used: are often financed through
the proceeds of debt, which are accounted for in a
separate governmental-type fund.
• Resources legally earmarked for specific purpose
• Controlled by legally adopted budgets
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fund Accounting:
2- Proprietary Funds
• Activities are run like private business
– Charge fees for services
– Measure whether revenues cover costs
• Hospitals, utilities, mass transit, lotteries
• Cover costs OR provide net revenues
– OR get subsidized by parent unit ميتم دعمها من الوحدة األ
• Resources held in trust (for others)
– Cannot be used to support government’s own
programs
• Individuals, other governments, or private
organizations
• Pension assets, investment pools
• Taxes collected on behalf of other
governments
– Example: sales taxes
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fund Accounting:
3- Fiduciary Funds
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fund Accounting:
Financial Reporting
• Fund Financial Statements
– Separate set of statements for each fund type
– The fund set of financial statements are grouping
Each major fund gets a column
– Different Financial Statement for each Fund Type
• Government-Wide Financial Statements
– Governmental and business-type only
– Adjustment to accrual basis
Two sets of financial statements are required.
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fund Accounting:
Financial Reporting
• Fund Financial Statements
– Different Financial Statement for each Fund Type
Two sets of financial statements are required.
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fund Accounting:
Financial Reporting
Two sets of financial statements are required.
Why ?
1. The measurement focus and basis of accounting used in the
governmental-type fund category is different from that in the other
two categories, as discussed in the next section.
2. The information provided by the fund statements for the
governmental-type fund category is incomplete (and may be
misleading because it is incomplete).
3. While reporting on each fund serves a purpose, there is also a
need for an overview of the finances of the government as a
whole.
Measurement Focus and Basis
of Accounting • Measurement focus
– Which resources are being measured
• All assets (financial and capital resources) are
reported in proprietary-type funds, but only
financial resources available for spending are
reported in governmental-type funds.
• Basis of accounting
– When resources are being measured
• When is an asset or liability recognized in the
financial statements?
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Measurement Focus and Basis of
Accounting: Proprietary and Fiduciary
• Economic resources measurement focus
– All transactions affecting financial/capital
resources
• Accrual basis of accounting
– Revenues when earned, expenses when
incurred
– Regardless of cash
– Depreciate capital assets, interest accrued
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Measurement Focus and Basis of
Accounting: Governmental • Current financial resources measurement
focus
– Financial resources available for spending
(budget focused)
– Capital assets/long-term debt not recorded
– Records inflows and outflows of liquid assets
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Measurement Focus and Basis of
Accounting: Governmental • Modified accrual basis of accounting
– Only accruals that affect near-term financial
resource inflows and outflows
– Revenue recognition
• Measurable and
• Available
– Resources must be collectible within current
period or soon enough thereafter to pay current
bills.
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Measurement Focus and Basis of
Accounting: Governmental • Modified accrual basis of accounting
– Expenditures—decreases in financial
resources
– 3 types of expenditures
• Operating—record when liability incurred
• Capital outlay—record when financial assets are
used to acquire capital assets
• Debt service—record when long-term debt
principal or interest is due for payment
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
5 Types
• General Fund
• Special Revenue Funds
• Debt Service Funds
• Capital Projects Funds
• Permanent Funds
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Financial Statements
Fund level:
• Balance Sheet
• Statement of Revenues, Expenditures,
and Changes in Fund Balance
– a.k.a. Operating Statement
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Operating Statement Format
Revenues
- Expenditures
= Excess of revenues over expenditures
+/- Other financing sources and uses
+/- Special and extraordinary items
= Net change in fund balance
+ Fund balance at beginning of period
= Fund balance at end of period
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
General Fund
• Every general-purpose government has
one
• Used for most basic day-to-day operations
• Residual fund
– Used to account for financial resources not
accounted for in another governmental fund
– Law/contract/manager may require use of
another fund
Governmental Funds:
General Fund • Inflows from:
– Taxes on real property, sales, and personal or
corporate income
– Intergovernmental grants
– Licenses, fees, forfeitures, and fines
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Basic Accounting Equation
Financial
Assets*
Matured Short-Term
Liabilities** + Fund
Balance*** =
*Some governments may have deferred outflows of resources, which should be
added to assets in the accounting equation.
**Some governments may have deferred inflows of resources, which should be
added to liabilities in the accounting equation.
***GASB S54 classifies Fund Balance by degree of constraint on use of resources.
Governmental Funds:
Basic Accounting Equation • Financial Assets
– Cash, investments, and receivables
• Matured Short-Term Liabilities
– Short-term has a shorter time frame than
“current” in business accounting, which
means payable in a year.
• Accounts payable, salaries payable, and amounts
payable to other funds
• Matured liabilities due for payment and expected to
be paid shortly after the accounting period ends
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Special Revenue Funds • Used to account for proceeds of specific
revenue sources that are restricted or
committed to spending for specific
purposes (other than debt service or
capital projects)
– Specific revenue sources must be a
substantial portion of fund’s resources.
• Revenue from dedicated source, such as
a special tax, grant, or fee
– Specific-purpose federal grant proceeds
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Special Revenue Funds • Accounting same as general fund
• May have more than one special revenue
fund
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Capital Projects Funds
• Used to account for financial resources
restricted or otherwise limited to spending for
capital outlays
– Acquisition or construction of capital facilities or
other capital assets
• NOT for assets of a(n):
– Enterprise fund, internal service fund, trust fund
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Capital Projects Funds
• Required to use CPF if capital outlays
financed from general obligation bond
proceeds
– Many capital assets are acquired through the
General Fund when general obligations bonds
are not issued
• Separate fund per project or bond
• No long-term assets or debt reported in CPF
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Debt Service Funds • Used to account for financial resources that
are restricted or otherwise limited to spending for principal and interest on general long-term debt – Proprietary fund debt not included
• Resources in debt service funds – Transfers from other funds
– Investment earnings
– Taxes specifically assessed for debt service
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Debt Service Funds • Required when
– Legally mandated
– Financial resources being accumulated for principal and interest payments that come due in future years
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Governmental Funds:
Permanent Funds
• Only earnings may be used
– Not principal
• To support government or citizens
• Doesn’t include private-purpose trust
funds
• Examples: Library endowment, cemetery
• Same accounting as general fund
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Proprietary Funds:
Types and Statements
• Enterprise Funds
• Internal Service Funds
• Statement of Net Position
• Statement of Revenues, Expenses, and
Changes in Net Position
• Statement of Cash Flows
Proprietary Type Funds:
Measurement Focus • Economic resources measurement focus
• Accrual basis of accounting
– Provides accurate measure of revenues and
expenses to help determine user charges
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Proprietary Funds:
Operating Statement Format Operating revenues - Operating expenses = Operating income (loss) +/- Non-operating revenues and expenses = Income before other revenues, expenses, gains, losses, and transfers + Capital contributions +/- Special and extraordinary items +/- Transfers = Increase (decrease) in net position + Net position at beginning of period = Net position at end of period
Reconciliation
• For products/services sold for a fee
• Primarily to external users
• Typically, separate fund for each activity
• Examples
– Municipal airport
– Municipal electric utility
– Municipal water and sewer utilities
– Toll roads
– Lotteries Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Proprietary Funds:
Enterprise Funds
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Proprietary Funds:
Enterprise Funds
• Enterprise funds required if
– Pricing intended to cover costs
– Law requires costs of providing services be
recovered through fees and charges, OR
– Debt secured only by net revenues of activity
(revenue bonds)
• For products/services sold for a fee
– Fee designed to recover cost
• To internal users or other governments
– Reporting government must be predominant
participant
• Established for cost savings
– To consolidate support activities performed by
several agencies
– To obtain bulk discounts
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Proprietary Funds:
Internal Service Funds
Proprietary Funds:
Internal Service Funds • Separate fund for each activity
• Bill other funds for products/services
– Revenue to Internal Service Fund
– Expenditure/expense to fund receiving
products/services
• Examples
– Motor pool operations
– Data processing
– Printing services
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fiduciary Funds
• Assets held by government in a trust or
agency capacity for others
– Cannot be used to support government’s own
programs
• Economic resources measurement focus
• Accrual basis of accounting
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fiduciary Funds:
Types and Statements • Pension (and other employee benefit) Trust
Funds
• Investment Trust Funds
• Private-Purpose Trust Funds
• Agency Funds
• Statement of Fiduciary Net Position
• Statement of Changes in Fiduciary Net Position*
*Not used by agency funds
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fiduciary Funds
• Pension (and other employee benefit)
Trust Funds
– Hold restricted resources
– For pensions, health care, etc.
• Investment Trust Funds
– For investment pools
– External portion only
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
Fiduciary Funds
• Private-Purpose Trust Funds
– For all other trust arrangements
– Example: escheat property
• Agency Funds
– For custody arrangements, example: sales
tax collections for other governments
– No “net assets”
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-*
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted,
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photocopying, recording, or otherwise, without the prior
written permission of the publisher. Printed in the United
States of America.