Accounting for Governmental Operating Activities ... · PDF filePayroll accounting is similar for a governmental fund and a for-profit entity, except Expenditures rather than Expenses

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Chapter

4Accounting for Governmental Operating

Activities—Illustrative Transactions and Financial Statements

• Measurement focus: Governmental funds focus on the flow of current financial resources– Includes cash, receivables, marketable securities,

prepaid items, and supplies inventories– Capital assets are not recorded in governmental

funds, but are recorded in governmental activities at the government-wide level

• Basis of accounting: Modified accrual

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Governmental Funds

• Dual-track approach– Transactions have different effects on

governmental funds and governmental activities at the government-wide level because of different measurement focuses and bases of accounting

– Using the dual-track approach each transaction is recorded separately in the general journals for the governmental fund and governmental activities

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Governmental Funds (Cont’d)

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Governmental-Wide Financial Statements

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Fund Financial Statements

The budget for Town of Brighton authorizesexpenditures of $4,180,000, other financing usesof $91,500 and forecasts revenues of $3,986,000for FY 2011. The entry to record the budget(ignoring subsidiary detail) is:

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Recording the Budget at the Beginning of the Year

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Date Explanation General Ledger Subsidiary

Debits Credits Debits Credits

1/1/2011 Dr.\Estimated RevenuesDr.\ Budgetary Fund Balance

Cr.\ AppropriationsCr.\ Estimated other

financing uses

3,986,000285,500

4,180,000

91,500

General Fund Journal:

Governmental Activities Journal:

No Entry

Recording the Budget at the Beginning of the Year

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Interfund transfer to create a new fund

The town council approved the creation of a new SuppliesFund, an internal service fund, effective January 1, 2011, toprovide most operating and office supplies used bydepartments accounted for in the General Fund. The newfund was created by transferring the current inventory ofsupplies and $30,000 in cash from the General Fund,general government function.

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Interfund transfer to create a new fund



1/1/2011 Dr.\Other Financing Uses-Interfund transfers outCr.\ Inventory of SuppliesCr.\ Cash

91,50061,50030,000

Other Financing Uses Ledger:General Government 91,500



No Entry

1/1/2011 Dr.\ Reserve for Inventory of SuppliesCr.\ Fund Balance

61,50061,500

Before a department can order materials and supplies or equipment, the department should verify that a sufficient unexpended appropriation exists to cover the items being ordered

This process is sometimes referred to as “preauditing”

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Encumbrance Accounting

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Assume Interdepartmental requisitions for supplies with anestimated cost of $247,360 were submitted to the SuppliesFund, and purchase orders for certain other supplies andcontracts for services were placed with outside vendors in theamount of $59,090.

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--/--/2011 Dr.\Encumbrances - 2011Cr.\ Reserves for Encumbrances – 2011

306,450306,450

Encumbrance Ledger:General GovernmentPublic SafetyPublic WorksParks and RecreationHealth and welfareMiscellaneous Appropriations

28,00072,000

160,00036,00010,000

450




No Entry

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Accounting for Expenditures

Assume that goods and services ordered during 2011 bydepartments financed by the Town of Brighton General Fundwere received as follows:• All supplies ordered at an estimated cost of $247,360 from the

internal service fund (Supplies Fund) were received at an actualcost of $249,750. (these supplies cost the internal service fund$185,000)

• Only a portion of the supplies and contracts with outsidevendors were filled or completed during the year at an actualcost of $19,700, for which the estimated cost had been$22,415.

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--/--/2011 Dr.\ Reserves for Encumbrances – 2011Cr.\ Encumbrances – 2011

269,775269,775

Encumbrance Ledger:General GovernmentPublic SafetyPublic WorksParks and RecreationHealth and welfareMiscellaneous Appropriations

12,25072,000

150,90030,000

4,175450


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General Fund Journal:Date Explanation General Ledger Subsidiary


--/--/2011 Dr.\ Expenditure-2011Cr.\ Due to other FundsCr.\ Vouchers Payable

269,450249,750

19,700

Expenditures Ledger:General GovernmentPublic SafetyPublic WorksParks and RecreationHealth and welfareMiscellaneous Appropriations

12,30072,000

150,60030,000

4,100450

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Governmental Activities Journal:• The expenses recorded in the governmental activities accounts at the

government-wide level should be the cost of the goods to the Supplies Fund.• The earlier budgetary entry for encumbrances has no effect at the government-

wide level



--/--/2011 Dr.\ Expenses – General GovernmentDr.\ Expenses – Public SafetyDr.\ Expenses – Public WorksDr.\ Expenses – Parks and recreationDr.\ Expenses – Health and welfare

Cr.\ Vouchers PayableCr.\ Inventory of Supplies

9,88554,889

114,14822,741

3,03719,700

185,000

Accounting for Governmental Activity Expenses

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Payment for Liabilities

Checks were drawn to pay:• Vouchers payable balance of $339,700 ($320,000 balance

at the end of 2010 + the $19,700 amount from currentyear)

• The 2010 year end amount due to the federal government($90,000)

• The General Fund paid the Supplies Fund $249,750 forsupplies purchased.

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General Fund Journal:Date Explanation General Ledger Subsidiary


--/--/2011 Dr.\ Vouchers PayableDr.\ Due to Other fundsDr.\ Due to Federal Government

Cr.\ Cash

339,700249,750

90,000679,450

Payment for Liabilities

Governmental Activities Journal:Date Explanation General Ledger Subsidiary


--/--/2011 Dr.\ Vouchers PayableDr.\ Due to Federal Government

Cr.\ Cash

339,70090,000

429,700

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Accounting for Capital Assets

Assume an purchase order for equipment needed for GeneralGovernment with an estimated cost of $175,000 weresubmitted to vendors in15/1/2011The Equipment received in 30/4/2011 at an actual cost of$180,000.

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15/1/2011 Dr.\Encumbrances - 2011Cr.\ Reserves for Encumbrances – 2011

175,000175,000

Encumbrance Ledger:General Government 175,000


30/4/2011 Dr.\ Reserves for Encumbrances – 2011Cr.\ Encumbrances – 2011

175,000175,000

Encumbrance Ledger:General Government 175,000

30/4/2011 Dr.\ Expenditure-2011Cr.\ Vouchers Payable

180,000180,000

Expenditure Ledger:General Government 180,000

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Governmental Activities Journal:Date Explanation General Ledger Subsidiary


30/4/2011 Dr.\ EquipmentCr.\ Vouchers Payable

180,000180,000

Payroll accounting is similar for a governmental fund anda for-profit entity, except Expenditures rather thanExpenses are recordedDebit Expenditures for full amount of payroll and

credit liabilities for withholdings from employees’ pay;credit Cash for the amount paid to employees

Record Expenditures for the employer’s payroll costs,including employer’s share of FICA and credit a liabilityto federal government

Encumbrances usually are not recorded for recurringexpenditures such as payroll

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Accounting for Payroll

Town of Brighton recognized its payroll for the most recent twoweek pay period for employees paid from the General Fund

General Fund:

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Accounting for Payroll (Cont’d)



--/--/2011 Dr.\ Expenditures—2011Cr.\ Due to Federal GovernmentCr.\ Due to State GovernmentCr.\ Cash

948,00086,00049,000

813,000

Expenditures Subsidiary Ledger:General GovernmentPublic SafetyPublic Works

178,000480,000290,000

The journal entry to record the payroll in the governmentalactivities journal at the government-wide level is:

Governmental Activities:

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Date Explanation General Ledger

Debits Credits

--/--/2011 Dr.\ Expenses—General GovernmentDr.\ Expenses—Public SafetyDr.\ Expenses—Public Works

Cr.\ Due to Federal GovernmentCr.\Due to State GovernmentCr.\ Cash

178,000480,000290,000

86,00049,000

813,000

The employer’s share of FICA is recorded in the General Fund

General Fund:

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--/--/2011 Dr.\ Expenditures—2011Cr.\ Due to Federal Government

88,00088,000

Expenditures Subsidiary Ledger:General GovernmentPublic SafetyPublic Works

16,52344,55726,920

The employer’s share of FICA is recorded in thegovernmental activities journal


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Debits Credits

--/--/2011 Dr.\ Expenses—General GovernmentDr.\ Expenses—Public SafetyDr.\ Expenses—Public Works

Cr.\ Due to Federal Government

16,52344,55726,920

88,000

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Accounting for Cash Revenue

Revenues from sources such as licenses and permits, fines and forfeits,charges for services, and certain other sources are often not measurableuntil received in cash.However, under the modified accrual basis of accounting, if suchrevenues are measurable in advance of collection and available forcurrent period expenditure, they should be accrued by recording a debitto a receivable and a credit to Revenues.

Assume that Town of Brighton has collected revenues in cash from:Licenses and permits $100,000Fines and forfeits 151,000Charges for services 7,000Miscellaneous Revenues 1,200

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--/--/2011 Dr.\CashCr.\ Revenues

259,200259,200

Revenues Ledger:Licenses and PermitsFines and ForfeitsCharges for servicesMiscellaneous Revenues

100,000151,000

7,0001,200


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Debits Credits

--/--/2011 Dr.\ CashCr.\ Program Revenues -General Government-Charges for servicesCr.\ Program Revenues - Public Safety - Charges for servicesCr.\ Program Revenues - Public Works - Charges for servicesCr.\ Program Revenues - Parks & Recreation - Charges for servicesCr.\ General Revenues – Miscellaneous

259,200100,000

91,00060,000

7,0001,200

Note: The GASB decided to classify Fines and Forfeits as Charges for Servicesto avoid the need to add a fourth category of program revenues in thegovernment-wide statement of activities.

• The tax levy is the amount billed to taxpayers

• Initial determination of required tax levy: Levy = Revenues required (Estimated Revenue) ÷Estimated collectible proportion

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Accounting for Property Tax Revenue

• The tax rate is the measure that is actually set by legislative action, after the required size of the levy is determined. Tax rate (per $100 or per $1,000 of assessed valuation) = required tax levy ÷ assessed valuation (see next slide for definition of assessed valuation)

• If tax rate exceeds the statutory limit it will be necessary to reduce the required tax levy and readjust the budget accordingly

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Accounting for Property Tax Revenue (Cont’d)

Accounting for Property TaxRevenue (Cont’d)

• Assessed valuation is generally determined by an elected “Tax Assessor”

• Calculation: Assessed valuation = estimated true value of taxable

property X assessment ratio

• In many jurisdictions the assessment ratio is 1.00 (i.e., full estimated market value); in other jurisdictions it might be some fraction of full value

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Assume revenues of $495,000 are required and it isestimated that 1% will be uncollectible:Levy = $495,000/.99 = $500,000.(ignore subsidiary ledger entry)

General Fund:

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Debits Credits

--/--/2011 Dr.\Taxes Receivable—CurrentCr.\Estimated Uncollectible Current TaxesCr.\Revenues

500,0005,000

495,000

The required entry at the government-wide level issimilar except for that the credit is to General Revenuesas follows:


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Debits Credits

--/--/2011 Dr.\Taxes Receivable—CurrentCr.\Estimated Uncollectible Current TaxesCr.\General Revenues-Property Taxes

500,0005,000

495,000

Assume by the end of year $450,000 of current taxes have been collected, the entry is:

General Fund and Governmental Activities:

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Debits Credits

--/--/2011 Dr.\Cash Cr.\Taxes Receivable—Current

450,000450,000

The entry to reclassify uncollected current taxes to delinquent status at year-end:


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Debits Credits

--/--/2011 Dr.\Taxes Receivable—DelinquentDr.\Estimated Uncollectible Current Taxes

Cr.\Taxes Receivable—CurrentCr.\ Estimated Uncollectible Delinquent Taxes

50,0005,000

50,0005,000

Interest and penalties of $500 are accrued on delinquenttaxes, of which 10% is estimated to be uncollectible.

General Fund:

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--/--/2011 Dr.\Interest and Penalties Receivable on TaxesCr.\Estimated Uncollectible Interest and PenaltiesCr.\ Revenues

50050

450

Revenues Subsidiary Ledger:Interest and Penalties on Delinquent Taxes 450

The required entry to accrue interest and penalties at the government-wide level is similar, except for the revenues account:


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Debits Credits

--/--/2011 Dr.\Interest and Penalties Receivable on TaxesCr.\Estimated Uncollectible Interest and PenaltiesCr.\General Revenues—Interest and Penalties on

Delinquent Taxes

50050

450

Write-off of uncollectible taxes. Assume property taxes of $500 are written off, on which accumulated interest and penalties amount to $80. The required journal entry is:


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Debits Credits

--/--/2011 Dr.\Estimated Uncollectible Delinquent TaxesDr.\Estimated Uncollectible Interest & Penalties

Cr.\Taxes Receivable—DelinquentCr.\Interest and Penalties Receivable on Taxes

50080

50080

• Revenues from property taxes are often collectedduring one or two months of the year

• Expenditure demands may occur more or lessuniformly during the year

• A local bank may extend a line of credit in the formof TANs to meet short-term cash needs since thenotes will be backed by the power of lien overtaxable properties

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Issuance of Tax Anticipation Notes (TANs)

Assume on April 1, 2011, Town of Brighton signs a 60-day$300,000 tax anticipation note, discounted at 6% per annum.

General Fund:

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Tax Anticipation Notes - TANs (Cont’d)


Debits Credits

--/--/2011 Dr.\CashDr.\Expenditures-2011

Cr.\ Tax Anticipation Notes Payable

297,0003,000

300,000

Note: 0.06 X 60/360 X $300,000 = $3,000. The entry at thegovernment-wide level would be the same, except the debit is toExpense—Interest on Tax Anticipation Notes instead of Expenditures

Town of Brighton repaid the 60-day $300,000 tax anticipation note on the due date.


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Tax Anticipation Notes - TANs (Cont’d)


Debits Credits

--/--/2011 Dr.\Tax Anticipation NotesCr.\ Cash

300,000300,000

• Interim financial reporting is used for internal management purposes; it is not required for external financial reporting

• At a minimum, interim budgetary comparison schedules such as those shown in next 2 slides

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Interim Financial Reporting

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Special Topics

1. Correction of Errors2. Receipts of Goods ordered in prior year3. Revision of the General Fund Budget4. Internal Exchange Transactions5. Accounting for Inventories6. Closing Entries7. Year-end Financial Statements

Many additional transactions are assumed to have occurred during 2011,the recording of which would have been redundant of the transactionsalready illustrated.

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Sometimes, even in a well-designed and well-operated system, errors occur andmust be corrected.Assume the assessed valuation of a parcel of property were legally reduced butthe tax bill erroneously issued at the higher valuation, the following correctingentry would be made when the error was discovered, assuming the correctedbill to be $364 smaller than the original bill.

General Fund:Date Explanation General Ledger Subsidiary


--/--/2011 Dr.\RevenuesCr.\ Taxes Receivables-current

364364

Revenues Ledger:Property Taxes 364

Special Topics1) Correction of Errors

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Debits Credits

--/--/2011 Dr.\General Revenues-Property TaxesCr.\ Taxes Receivables-current

364364


Special Topics1) Correction of Errors

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• The Appropriations account for 2010, was closed at the end of thatyear, as were the other budgetary accounts for that year.

• The Balance “Reserved for Encumbrances” at the end of 2010 shouldbe reestablished at the beginning of the current year 2011

• When the goods on order at the end of fiscal year 2010 are receivedin 2011, their actual cost is considered an expenditure of the 2010appropriations to the extent of the amount encumbered in 2010; anyadditional amount must be charged to the 2011 appropriations.

Assume that all goods and services for which encumbrances wereoutstanding at the end of 2010 were received in 2011 at a total invoicecost of $127,250

Special Topics2) Receipt of Goods Ordered in Prior Year

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01/01/2011 Dr.\Encumbrances - 2010Cr.\ Fund Balance

127,000127,000

Encumbrances Ledger:Parks & Recreation - 2010 127,000


(Goods received)--/--/2011

Reserve for Encumbrances – 2010Cr.\ Encumbrances – 2010

127,000127,000


--/--/2011 Dr.\ Expenditures – 2010Dr.\ Expenditures – 2011

Cr.\ Vouchers Payable

127,000250

127,250

Expenditures Ledger:Parks & Recreation - 2010Parks & Recreation - 2011

127,000250

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Debits Credits

--/--/2011 Dr.\Expenses – Parks & RecreationCr.\ Vouchers Payable

127,250127,250


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--/--/2011 Reserve for Encumbrances – 2010Cr.\ Encumbrances – 2010

127,000127,000


Assume that the actual cost of the goods received in earlyFY 2011 is only $126,500 rather than $127,250

--/--/2011 Dr.\ Expenditures – 2010Cr.\ Vouchers Payable

126,500126,500

Expenditures Ledger:Parks & Recreation - 2010 126,500

Question: Why might a government need to revise its legally adopted budget during the year?

Answer:An error may have been made in estimating revenues orexpenditures, or changed conditions may have alteredestimated revenues or caused unforeseen expenditureneeds. Also, because the budget is legally binding onmanagers, it is important that the budget be revised toreflect changed conditions

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Special Topics3) Revision of the General Fund Budget

Q: How are Budget Revisions Recorded?

Answer:If estimated revenues is increased, debit EstimatedRevenues and credit Budgetary Fund Balance. Ifappropriations are increased, debit Budgetary FundBalance and credit Appropriations

• A decrease in either item would result in the reverseof the above entry

• Subsidiary ledger detail accounts would be adjustedaccordingly

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Special Topics3) Revision of the General Fund Budget

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Special Topics4) Internal Exchange Transactions

Assuming the amount charged by the water utility to theGeneral Fund for hydrants and water service is $30,000, andthe fire department budget is a part of the Public Safetycategory in the Town of Brighton.



--/--/2011 Dr.\ Expenditures - 2011Cr.\ Due to other Funds

30,00030,000

Expenditures Ledger:Public Safety 30,000

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Debits Credits

--/--/2011 Dr.\Expenses – Public safetyCr.\ Internal Balances

30,00030,000


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An amount in lieu of taxes is often billed to the utility’scustomers; the aggregate amount so collected is simplypassed on to the General Fund.

Assume the water utility of the Town of Brighton agrees tocontribute $25,000 to the General Fund in lieu of taxes andthat amount fairly represents the value of services receivedfrom the general government

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--/--/2011 Dr.\ Due from Other FundsCr.\ Revenues

25,00025,000

Revenues Ledger:Miscellaneous Revenues 25,000


Debits Credits

--/--/2011 Dr.\Internal BalancesCr.\ General Revenues-Payments in Lieu of Taxes

25,00025,000


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Special Topics5) Accounting for Inventories

It is generally recommended that the purchasing, warehousing, anddistribution functions be centralized and managed by an internal servicefund.Governments that account for their supplies within the General Fundcan use either the purchases method or the consumption method.

Purchases method:• Expenditures for supplies equals the total amount purchased for the

year, even if the amount of supplies consumed is less than or greaterthan the amount purchased. the purchases method is consistent withthe modified accrual basis of accounting.

• The purchases method has traditionally been used by governmentalfunds.

• Use periodic inventory system.

Consumption Method:Is consistent with the accrual basis of accounting, as supplies consumedin providing services is the essence of an expense.It must be used at the government-wide level and by proprietary funds.May use periodic or perpetual inventory system.

Ex:Assume the following information for supplies purchases and usage of a certain city for its 2011 fiscal year.

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Purchases method:General Fund:

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Debits Credits

--/--/2011 Dr.\ExpendituresCr.\ Cash

260,000260,000

The adjusting entry at year-end accounts for the increase in inventory:


Debits Credits

31/12/2011 Dr.\Inventory of SuppliesCr.\ Reserve for Inventory of Supplies

10,00010,000

Purchases method:Governmental Activities:

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Debits Credits

--/--/2011 Dr.\Expenses-……Cr.\ Cash

260,000260,000



Debits Credits

31/12/2011 Dr.\Inventory of SuppliesCr.\ Expenses-………….

10,00010,000

Consumption method:General Fund:

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Debits Credits

--/--/2011 Dr.\ExpendituresCr.\ Cash

260,000260,000



Debits Credits

31/12/2011 Dr.\Inventory of SuppliesCr.\ Expenditures

10,00010,000

31/12/2011 Dr.\ Fund BalanceCr.\ Reserve for inventory supplies

10,00010,000

Consumption method:Governmental Activities:

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Debits Credits

--/--/2011 Dr.\Inventory of SuppliesCr.\ Cash

260,000260,000

The adjusting entry at year-end accounts for consumption of inventory:


Debits Credits

31/12/2011 Dr.\Expenses……Cr.\ Inventory of Supplies

250,000250,000

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Special Topics6) Closing Entries

Assume that all illustrated journal entries for thetransactions and events pertaining to the Town ofBrighton’s 2011 fiscal year have been posted to the generaland subsidiary ledgers. As a result of all transactions andevents recorded for the year, the balances of all balancesheet, operating statement, and budgetary accounts beforeclosing entries are presented in the following trial balance.

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At fiscal year-end, all temporary accounts, both budgetary andoperating, must be closed to the appropriate fund balanceaccount.• Budgetary accounts are closed by simply reversing the original

budgetary entry (or entries) made at the beginning of the fiscalyear, as well as any amended budget entries made during theyear.

• Close any remaining balance in the Encumbrances account to thegeneral ledger Fund Balance account.

• Close the operating accounts (revenues & expenditures) to theFund Balance.

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Debits Credits

31/12/2011 Dr.\ AppropriationsDr.\ Estimated other financing uses

Cr.\ Estimated RevenuesCr.\ Budgetary Fund Balance

4,210,00091,500

4,001,000300,500

31/12/2011 Dr.\ RevenuesDr.\ Fund Balance

Cr.\ Expenditures-2011Cr.\ Expenditures-2010Cr.\ Other financing uses-Interfund transfers out

4,015,000334,260

4,130,760127,000

91,500

31/12/2011 Dr.\ Fund BalanceCr.\ Encumbrances

70,24070,240

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Special Topics7) Year-end Financial Statements

Year-end financial statements for governmental fund include:1. Balance sheet2. Statement of Revenues, Expenditure, and Changes in Fund

Balance3. Schedule of Revenues, Expenditures, and Changes in Fund

Balance – Budget and Actual

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Notes for the Balance sheet:• Note that the $25,000 receivable from the Water Utility Fund is

offset against the $30,000 payable to that fund, so that only the$5,000 net amount payable to the Water Utility Fund is reportedas Due to other funds in the Liabilities section of the balancesheet.

• It is not acceptable, however, to offset receivables or payablesfrom one fund against those of a different fund.

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Notes:• The amounts in the Revenues section of the Actual column in Budgetary

comparison schedule present the same information as shown in the Revenuessection in Statement of Revenues, Expenditure, and Changes in Fund Balance.

• The amounts in the Expenditures section of the Actual column of the budgetarycomparison schedule differ from the expenditures shown in Statement ofRevenues, Expenditure, and Changes in Fund Balance. Because:

Expenditures chargeable to 2010 appropriations of $127,000. are notincluded in budgetary comparison schedule.

Expenditures of the 2011 appropriations of $4,130,760 are reported andencumbrances are not reported in the Expenditures section of the statementof Revenues, Expenditure, and Changes in Fund Balance.

Purpose: Created when revenues are received that must be expended for a specific operating purpose

Examples:• Motor fuel taxes earmarked for streets, roads,

and bridges and• Federal grant to operate a counseling program

for troubled youthsAccounting, budgeting, and financial reporting are essentially the same as for the General Fund

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Special Revenue Fund (SRF) Accounting

Assume a grant of $100,000 is received at the beginning ofthe fiscal year from the federal government to operate acounseling program for troubled youths. Until the granthas been “earned” by meeting eligibility requirementsrelated to service recipients, it is reported as “DeferredRevenue”—a liability. The entry in the special revenuefund is:

Special Revenue Fund:

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SRF - Accounting for Operating Grants


Debits Credits

--/--/2011 Dr.\CashCr.\ Deferred Revenue

100,000100,000

Assume that during the year the Counseling Program expended$75,000 for costs related to youth counseling, while meetingeligibility requirements, the entries would be:Special Revenue Fund:

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Accounting for Operating Grants (Cont’d)


Debits Credits

--/--/2011 Dr.\ExpendituresCr.\ Vouchers Payable

75,00075,000

This amount would also be recorded in the Revenue detailaccount in the Revenues subsidiary ledger

--/--/2011 Dr.\Deferred RevenuesCr.\ Revenues

75,00075,000

• Report special revenue fund activity in theGovernmental Activities column of the government-wide financial statements

• Provide a column in the governmental funds balancesheet and statement of revenues, expenditures, andchanges in fund balances, for the special revenue fundfinancial information if the fund meets the definition ofa major fund; otherwise report the fund’s financialinformation in the “Other Governmental Funds”column

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SRF - Required Financial Statements

Interfund Activity

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1) Reciprocal Interfund ActivityInterfund Loans

2) Nonreciprocal Interfund activityInterfund Transfers

3) Intra- versus Inter-Activity Transactions

• Transactions between two funds that are similar to thoseinvolving the government and an external entity

Example: Billing from a City’s water utilityfund (an enterprise fund) to the City’sGeneral Fund for the Fire Department

• The two funds recognize a revenue and expenditure,respectively, rather than interfund transfers in and out

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Interfund Activity1) Reciprocal Interfund Activity

Interfund loans• Loans made from one fund to another with the intent that

they be repaid• Classified as “Interfund Loans Receivable—Current (or

Payable—Current)”, if the intent is to repay during the currentyear; otherwise “Noncurrent”

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Interfund Activity1) Reciprocal Interfund Activity

Ex:Assuming that the General Fund makes a short-term loan in theamount of $100,000 to the Central Stores Fund, an internalservice fund.

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Interfund Activity1) Reciprocal Interfund Activity-Interfund Loans


Debits Credits

--/--/2011 Dr.\Interfund Loans Receivable-CurrentCr.\ Cash

100,000100,000


General Fund:


Debits Credits

--/--/2011 Dr.\ CashCr.\ Interfund Loans Payable-Current

100,000100,000

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If this interfund loan did not require repayment for more thanone year, the word “Noncurrent” would be used rather than“Current” to signify the noncurrent nature of the loan.

Because the noncurrent interfund loan receivable representsassets that are not available for the current year’s appropriationin the General Fund, the Fund Balance account should bereserved for this amount, as was done for encumbered amountsand ending inventories of supplies.


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Debits Credits

--/--/2011 Dr.\Interfund Loans Receivable-NoncurrentCr.\ Cash

100,000100,000


General Fund:


Debits Credits

--/--/2011 Dr.\ CashCr.\ Interfund Loans Payable-Noncurrent

100,000100,000

--/--/2011 Dr.\ Fund BalanceCr.\ Reserve for Noncurrent Interfund

Loans Receivable

100,000

100,000

Interfund transfers• Nonreciprocal activity in which financial resources are

transferred between funds with no intention of repayment• The receiving fund records Other Financing Sources—

Interfund Transfers In; the giving fund records OtherFinancing Uses—Interfund Transfers Out

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Interfund Activity2) Nonreciprocal Interfund Activity

Interfund Activity 3) Intra- versus Inter-Activity Transactions

Intra-activity transaction• A transaction between two governmental funds (including an internal

service fund) or between two enterprise funds• Neither governmental activities nor business-type activities is affected

at the government-wide level

Inter-activity transaction• Interfund loans or transfers between a governmental fund (including

internal service fund) and an enterprise fund• Report these as “Internal Balances” on the government-wide statement

of net assets and “Transfers” on the statement of activities

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Permanent Funds

• To account for contributions received under trustagreements in which the principal amount is notexpendable, but earnings can be expended for aspecified purpose.

• Specifically intended for a public purpose (i.e., tobenefit a government program or function, or thecitizenry, rather than individuals, privateorganizations, or other governments)

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Permanent Funds

Ex:Assume on November 1, 2010, Wilma Wexner died, having made a validwill that provided for the gift of marketable securities to the City ofConcordia to be held as a nonexpendable trust.Income, so measured, is to be transferred to the City’s Library OperatingFund, a special revenue fund.The gift was accepted by the City of Concordia, which established theLibrary Endowment Fund (a permanent fund) to account for operation ofthe trust. The following securities were received by the LibraryEndowment Fund:

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Notes:• Assuming semiannual interest was last received on July 1, 2010.• As of January 1, 2011, semiannual interest of $19,200 is received on the AB

Company bonds.• Assuming dividends on the stock held by the Library Endowment Fund were

received early in January 2011 in the amount of $9,800.

4-90

Permanent Funds


Debits Credits

1/11/2010 Dr.\ Investment in BondsDr.\ Investment in StocksDr.\ Accrued Interest Receivables

Cr.\ Revenues-Contributions for Endowment

652,000496,000

12,8001,160,800

Solution:Interest accrued on the bonds for the period 1/7/2010 – 1/11/2010

= $640,000 x 6% x 4/12 = $12,800

4-91

Permanent Funds


Debits Credits

1/1/2011 Dr.\ CashCr.\ Accrued Interest ReceivableCr.\ Revenues – Bond Interest

19,20012,800

6,400

--/1/2011 Dr.\ CashCr.\ Revenues – Dividend

9,8009,800

Interest revenue on bonds for the period 1/11/2010 – 1/1/2012= $640,000 x 6% x 2/12 = $6,400

4-92

Permanent Funds

As the bond interest and dividends on stock were received in cash, the LibraryEndowment Fund has sufficient cash to pay the amount to be transferred to theLibrary Operating Fund for interest and dividends earned since the endowmentwas created ($6,400 Interest + $9,800 dividend = $16,200)


Debits Credits

--/--/2011 Dr.\ Other Financing Uses-Interfund Transfers OutCr.\ Cash

16,20016,200

4-93

Permanent Funds

On the advice of an investment manager, 1,800 shares of M Company stockwere sold for $99,000; this amount and cash of $7,000 were invested in 4,000shares of LH Company common stock.

Percentage of Shares sold = 1,800 / 5,400 = 1/3Carrying amount of Investment Sold = $282,000 x 1/3 = $94,000Gain (loss) of Investment sold = Selling price – Carrying amount

= 99,000 – 94,000 = $5,000

Cost of Investment Purchased = $99,000 + $7,000 = $106,000

4-94

Permanent Funds


Debits Credits

--/--/2011 Dr.\ CashCr.\ Investment in StocksCr.\ Revenues – Change in fair value of Investments

99,00094,000

5,000

--/--/2011 Dr.\ Investment in StocksCr.\ Cash

106,000106,000

4-95

Permanent Funds

The fair value of the Library Endowment Fund investments as of June 30, 2011,the last day of the City of Concordia’s fiscal year, is given below.

Investment Carrying Amount

Fair Value30/6/2011

Bonds of AB Company $652,000 $674,000

Stocks:

M Company (3,600 share) 188,000 194,000

S Company (22,000 share) 214,000 220,600

LH Company (4,000 share) 106,000 104,500

Total $508,000 $519,500

Change in Fair Value

$22,000

6,400

6,600

(1,500)

$11,500

4-96

Permanent Funds


Debits Credits

30/6/2011 Dr.\ Investment in BondsDr.\ Investment in Stocks

Cr.\ Revenues – Change in fair value of Investments

22,00011,500

33,500

30/6/2011 Dr.\ Accrued Interest ReceivablesCr.\ Revenues – Bond Interest

19,20019,200

30/6/2011 Dr.\ Other financing Uses – Interfund Transfers OutCr.\ Due to Libarary Operating Fund

19,20019,200

4-97

Permanent Funds

Closing Entry:


Debits Credits

30/6/2011 Dr.\ Revenues – Contributions for EndowmentDr.\ Revenues – Bond InterestDr.\ Revenues – DividendsDr.\ Revenues – Change in F.V. of Investments

Cr.\ Other Financing Uses – Interfund transfers OutCr.\ Fund Balance – Reserved for Endowment

1,160,80025,600

9,80038,500

35,4001,199,300

Documents

Accounting for Governmental Operating Activities ... · PDF filePayroll accounting is similar for a governmental fund and a for-profit entity, except Expenditures rather than Expenses