Accounting for Governmental operating activities

8/20/2019 Accounting for Governmental operating activities

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Accounting for Governmental

Operating Activities—IllustrativeTransactions

and Financial Statements

Chapter

4

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies Inc! "ll rights reser#e$!


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%earning &b'ecti#es

After studying Chapter 4, you should be able to:

Analyze typical operating transactions forgovernmental activities and prepare appropriate

ournal entries at !ot" t"e government-#ide and fundlevels

$repare ad usting entries at year-end and a pre-

closing trial !alance

$repare closing ournal entries and year-end GeneralFund financial statements


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%earning &b'ecti#es (Cont)$*

Account for interfund and intra- and inter-activitytransactions

Account for transactions of a permanent fund&istinguis" !et#een e'c"ange and none'c"angetransactions( and define t"e classifications used fornone'c"ange transactions


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Measurement focus: Governmental funds focuson the flow of current financial resources

Assets include cash, receivables, marketable securities,prepaid items, and supplies inventoriesLiabilities include current liabilities such as accounts orvouchers payable, accrued liabilities, and deferredrevenues

Capital assets and noncurrent liabilities are not recordedin governmental funds, but are recorded in governmentalactivities at the government-wide level

Basis of accounting: Modified accrual

Governmental Funds


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Dual-track approachTransactions have different effects ongovernmental funds and governmental activitiesat the government-wide level because ofdifferent measurement focuses and bases ofaccounting

sing the dual-track approach each transactionis recorded separately in the general !ournalsfor the governmental fund and governmentalactivities

The Dual-Trac Approach


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The budget for Clark City authori"es e#penditures of$%%,&'(,((( and forecasts revenues of$%(,)*+,((( for +(%./ The entry to record thebudget 0ignoring subsidiary detail1 is2

General Fund: Dr. Cr.

3stimated 4evenues %(,)*+,(((5udgetary und 5alance &66,((( Appropriations %%,&'(,(((

!ecording the "udgetat the "eginning of the #ear


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Question 2 4eferring to the budget !ustrecorded in which appropriations e#ceedestimated revenues by $&66,(((, is this ane#ample of poor financial management7 08eene#t slide1

!ecording the "udgetat the "eginning of the #ear $Cont%d&


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Answer: A budgetary deficit does not necessarilyindicate poor financial management

To provide a financial cushion to cover revenueshortfalls or une#pected e#penditure needs,governments usually maintain a 9target: ratio ofspendable und 5alances to General und4evenues in the range of %( to +; percent


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5efore a department can order materials andsupplies or e=uipment, the department shouldverify that a sufficient une#pended appropriatione#ists to cover the items being ordered

)ncumbrance Accounting


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Assume that the following departments of ClarkCity place purchase orders for supplies totaling$.+(,(((, the entry would be2

General Fund: Dr.Cr.3ncumbrances>+(%. .+(,(((

3ncumbrances ?utstanding>+(%. .+(,(((Encumbrances Subsidiary Ledger:

General Government 6(,(((@ublic 8afety +%(,(((@ublic orks %&(,(((

)ncumbrance Accounting $Cont%d&


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Clark City recorded e#penditures of $.&+,((( forgoods received that had been ordered in thepreceding transaction

General Fund: Dr. Cr.3ncumbrances ?utstanding>+(%. .+(,(((3#penditures>+(%. .&+,(((

3ncumbrances>+(%. .+(,(((Bouchers @ayable .&+,(((

8ee ne#t slide for subsidiary ledger entries

Accounting for )*penditures


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Expenditures Ledger: Dr. Cr.General Government *6,(((@ublic 8afety ++(,(((

@ublic orks %&.,(((

Encumbrances Ledger:General Government 6(,(((

@ublic 8afety +%(,(((@ublic orks %&(,(((

Accounting for )*penditures $Cont%d&


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Governmental Activities: Dr. Cr.3#penses>General Government *6,(((3#penses>@ublic 8afety ++(,(((3#pense>@ublic orks %&.,(((

Bouchers @ayable .&+,(((

ote that the earlier budgetary entry forencumbrances has no effect at the government-wide level

Accounting for Governmental Activity)*penses


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@ayroll accounting issimilar for a governmental fund and a for-profit entity,e#cept expenditures rather than e#penses are

recordedDebit Expenditures for the full amount of payroll andcredit liabilities for withholdings from employeesE payFcredit Cash for the amount paid to employees

4ecord Expenditures for the employerEs payroll costs,including employerEs share of


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Clark City recogni"ed its payroll for the mostrecent two week pay period for employees paidfrom the General und

General Fund : Dr.Cr.3#penditures>+(%. ).6,(((Due to ederal Government 6',(((Due to 8tate Government .),(((Cash 6%&,(((

Expenditures Subsidiary Ledger: General Government %*6,(((@ublic 8afety .6(,(((@ublic orks +)(,(((

(llustrative .ournal )ntries for +ayroll


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The !ournal entry to record the payroll in thegovernmental activities !ournal at thegovernment-wide level is2

Governmental Activities : Dr. Cr.3#penses>General Government %*6,(((3#penses>@ublic 8afety .6(,(((3#penses>@ublic orks +)(,(((

Due to ederal Government 6',(((Due to 8tate Government .),(((

Cash 6%&,(((

(llustrative .ournal )ntries for +ayroll$Cont%d&


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The employerEs share of +(%. 66,(((

Due to ederal Government66,(((

Expenditures Ledger: General Government %',;+&@ublic 8afety ..,;;*@ublic orks +',)+(



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The employerEs share of General Government %',;+&

3#penses>@ublic 8afety ..,;;*

3#penses>@ublic orks +',)+(

Due to ederal Government66,(((



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The tax levy is the amount billed to ta#payers


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The tax rate is the measure that is actually set bylegislative action, after the re=uired si"e of thelevy is determined/ Ta# rate 0per $%(( or per$%,((( of assessed valuation1 re=uired ta# levyH assessed valuation 0see ne#t slide for definitionof assessed valuation1


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Accounting for +roperty Ta*!evenue $Cont%d&

Assessed valuation is generally determined by anelected 9Ta# Assessor:

Calculation2 Assessed valuation estimated true value of ta#ableproperty I assessment ratio


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Assume revenues of $.);,((( are re=uired and it isestimated that %J will be uncollectible2Levy $.);,(((K/)) $;((,(((0ignore subsidiary ledger entry1

General Fund: Dr. Cr.Ta#es 4eceivable>Current ;((,((( 3st/ ncollectible Current Ta#es ;,(((

4evenues .);,(((

(llustrative .ournal )ntriesfor +roperty Ta*es


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The re=uired entry at the government-wide level issimilar e#cept for that the credit is to General4evenues as follows2

Governmental Activities: Dr. Cr.Ta#es 4eceivable>Current ;((,(((

3st/ ncollectible Current Ta#es ;,((( General 4evenues>

@roperty Ta#es .);,(((

(llustrative .ournal )ntriesfor +roperty Ta*es $Cont%d&


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Assume by the end of year $.;(,((( of current ta#eshave been collected, the entry is2

General Fund and Governmental Activities: Dr. Cr.Cash .;(,(((

Ta#es 4eceivable>Current .;(,(((



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The entry to reclassify uncollected current ta#es todelin=uent status at year-end2

General Fund and Governmental Activities: Dr. Cr.Ta#es 4eceivable>Delin=uent ;(,(((3stimated ncollectible Current Ta#es ;,(((

Ta#es 4eceivable>Current ;(,(((

3stimated ncollectible Delin=uent Ta#es ;,(((



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The re=uired entry to accrue interest and penalties atthe government-wide level is similar, e#cept for therevenues account2

Governmental Activities: Dr. Cr.


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rite-off of uncollectible ta#es/ Assumeproperty ta#es of $;(( are written off, onwhich accumulated interest and penaltiesamount to $6(/ The re=uired !ournalentry is2General Fund and Governmental Activities: Dr. Cr.

3stimated ncollectible Delin=uent Ta#es ;((3stimated ncollectible Delin=uent ;((


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4evenues from property ta#es are oftencollected during one or two months of the year

3#penditure demands may occur more or lessuniformly during the year

A local bank may e#tend a line of credit in the

form of TA s to meet short-term cash needssince the notes will be backed by the power oflien over ta#able properties

(ssuance of Ta* Anticipation /otes $TA/s&


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Assume on April %, +(%., Clark City signs a '(-day$&((,((( ta# anticipation note, discounted at 'percent per annum/

General Fund: Dr. Cr.Cash +)*,(((3#penditures >+(%. &,(((

Ta# Anticipation otes @ayable &((,(((

ote2 (/(' I '(K&'( I $&((,((( $&,(((/ The entry at thegovernment-wide level would be the same, e#cept the debit isto 3#penses>General Government instead of 3#penditures

Ta* Anticipation /otes - TA/s $Cont%d&


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Clark City repaid the '(-day $&((,((( ta# anticipationnote on the due date/

General Fund and Governmental Activities: Dr. Cr.Ta# Anticipation otes @ayable &((,(((

Cash &((,(((

Ta* Anticipation /otes - TA/s $Cont%d&


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Question: hy might a government need torevise its legally adopted budget during theyear7

Discuss/

!evision of the "udget During the #ear


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Answer 2 An error may have been made inestimating revenues or e#penditures, orongoing events and circumstances may havealtered estimated revenues or causedunforeseen e#penditure needs/ Also, becausethe budget is legally binding on managers, it isimportant that the budget be revised to reflectchanged conditions

'0 1hy ight a Government /eed to !evise its2egally Adopted "udget During the #ear


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Answer 2


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Accounting for encumbrances depends on the budgetlaws of a particular state or other government


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Assume at the end of +(%&, the balance of the3ncumbrances account was $6,&(( and the governmentEspolicy is to honor outstanding encumbrances/ 3arly in +(%., the goods are received at an actual cost of $6,;((/

General Fund : Dr. Cr.3ncumbrances ?utstanding>+(%& 6,&((3#penditures>+(%& 6,&((

3#penditures>+(%. +(( 3ncumbrances>+(%& 6,&(( Cash 6,;((

ote that only $+(( is charged to the +(%. appropriation

)ncumbrances of a +rior #ear $Cont%d&


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Assume now that the actual cost of the goodsreceived in early +(%. is only $6,%(( rather than$6,;((/

General Fund: Dr. Cr.3ncumbrances ?utstanding>+(%& 6,&((3#penditures>+(%& 6,%(( 3ncumbrances>+(%& 6,&((

Cash 6,%((

ote that the +(%. appropriation is unaffected since thecarryover +(%& encumbrance was more than ade=uate to

cover the e#penditure/

)ncumbrances of a +rior #ear $Cont%d&


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Two methods of inventory accounting2 purchasesmethod and consumption method

The purchases method is consistent with the modifiedaccrual basis of accounting since it reports totale#penditures for supplies purchased during the year/The purchases method has traditionally been used bygovernmental funds

The consumption method is consistent with the accrualbasis of accounting since it reports the amount ofsupplies consumed/


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Purchases method, with periodic in entor! procedures "#eneral$und%:

sing periodic inventory procedures, as is usual with the purchasesmethod, purchases of inventory during the year are recorded as2

General Fund 2 Dr. Cr.3#penditures %((,(((

Cash %((,(((

The ad!usting entry at year-end accounts for the assumed increase ininventory2 onspendable>


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Consumption method with perpetual in entor! procedures"go ernment-wide le el%:

Although periodic inventory procedures are often used, perpetualinventory procedures are preferred when using the consumptionmethod/ @urchases of inventory during the year are recorded as2Governmental Activities 2 Dr. Cr.


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The authors anticipate that many governmentswill shift to the consumption method forgovernmental fund accounting since only theconsumption method is acceptable for use at thegovernment-wide level

Future Accounting for (nventories

Closing ournal )ntries


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4everse the original and revised budgetary entries03stimated 4evenues, 3stimated ?ther inancing8ources, Appropriations, 3stimated ?ther inancing

ses, and 5udgetary und 5alance1 08ee 3ntry +&a inthe te#t1Close operating statement accounts 04evenues, ?ther

inancing 8ources, 3#penditures, and ?ther inancingses1 in a second entry, debiting or crediting fund

balance accounts as necessary to balance the entry08ee 3ntry +&b1Close 3ncumbrances to 3ncumbrances ?utstanding,but only necessary if a new appropriation is re=uired

Closing .ournal )ntries

!ecommended by the Authors


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Purpose: Created when revenues are received thatmust be e#pended for a specific operating purpose

&'amples:

Motor fuel ta#es earmarked for streets, roads, andbridges

ederal grant to operate a counseling program fortroubled youths

Accounting, budgeting, and financial reporting are essentially

the same as for the General und

5pecial !evenue Fund Accounting


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Assume a grant of $%((,((( is received in cash atthe beginning of the fiscal year from the federalgovernment to operate a counseling program for

troubled youths/ ntil the grant has been 9earned:by meeting eligibility re=uirements related to servicerecipients, it is reported as 9Deferred 4evenue:>aliability/ The entry in the special revenue fund is2

Special Revenue Fund: Dr. Cr.Cash %((,((( Deferred 4evenue %((,(((

Accounting for 6perating Grants


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Assume that during the year the Counseling @rograme#pended $*;,((( for costs related to youthcounseling, while meeting eligibility re=uirements, theentries would be2 Special Revenue Fund: Dr.Cr.3#penditures *;,(((

Bouchers @ayable *;,(((

Deferred 4evenues *;,(((4evenues *;,(((

This amount would also be recorded in the 4evenue detailaccount in the 4evenues subsidiary ledger

Accounting for 6perating Grants $Cont%d&


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4eport special revenue fund activity in theGovernmental Activities column of thegovernment-wide financial statements

@rovide a column in the governmental fundsbalance sheet and statement of revenues,e#penditures, and changes in fund balances forthe special revenue fund financial information if

the fund meets the definition of a ma!or fund 0seeCh/ + and the Glossary1F otherwise report thefundEs financial information in the 9?therGovernmental unds: column

5!F - !e7uired Financial 5tatements


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(nterfund Activity

(nterfund loansLoans made from one fund to another with the intent thatthey be repaidClassified as 9Current 0or@ayable>Current1,: if the intent is to repay during thecurrent yearF otherwise 9 oncurrent:

(nterfund transfersonreciprocal activity in which financial resources are

transferred between funds with no intention of repaymentThe receiving fund records ?ther inancing 8ources>


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(ntra- versus (nter-Activity Transactions

(ntra-acti it! transaction A transaction between two governmental funds 0including aninternal service fund1 or between two enterprise funds

either governmental activities nor business-type activities isaffected at the government-wide level

(nter-acti it! transaction


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+ermanent Funds

To account for contributions received under trustagreements in which the principal amount is note#pendable, but earnings can be e#pended for a

specified purpose8pecifically intended for a public purpose 0i/e/, tobenefit a government program or function, or theciti"enry, rather than individuals, private

organi"ations, or other governments1


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)*change Transactions

Transactions in which each party receives valueessentially e=ual to the value given

e/g/, one party sells goods or services and the

other buys4ecogni"e the revenue when it is earned, andthe e#penseKe#penditure when it is incurred

3#change-like transactions are those in whichthe values e#changed may be related but not=uite e=ual


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/one*change Transactions

3#ternal events in which a government givesKreceives value without directly receivingKgivinge=ual value in e#change

4evenue recognition depends on time requirements—the period in which the resources are re=uired to be 0ormay be1 used


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Classes of /one*change Transactions

Derived ta# revenuese/g/, income and sales ta#es


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!evenue !ecognition Criteria for/one*change Transactions

Derived ta# revenues4ecogni"e in the period in which the underlyinge#change occurs 0sale occurs or income is earned1


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Mastery of the revenue and e#penditureKe#penseaccounting principles covered in Chapter . isessential to a sound understanding ofgovernmental fund accounting, as well asunderstanding accounting and financial reportingfor the other governmental funds discussed in thefollowing chaptersThe General und and special revenue fundsencompass most of the operating activities of thetypical government

3 D

Concluding Comments

Documents

Accounting for Governmental operating activities