Introduction to Governmental and Not-for-Profit Accounting, 7e · PDF fileTitle: Introduction to Governmental and Not-for-Profit Accounting, 7e Author: DELL Created Date: 9/5/2015

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,


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


Governmental – Business - Fiduciary


• Business-type

– Specific services

• Mass transit

• Water utility

• Electric utility

– Financed primarily by user fees or charges

that cover both operating and capital costs



• Fiduciary-type

– Used when government provides fiduciary-

type services

• Holding segregated resources for others

• Examples

– Tax collection services for other governments

– Pension trust funds


• 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-*


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


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


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


Fund Accounting:

3- Fiduciary Funds


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.


Fund Accounting:

Financial Reporting

• Fund Financial Statements

– Different Financial Statement for each Fund Type



Fund Accounting:

Financial Reporting


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?



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



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



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.



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


Governmental Funds:

5 Types

• General Fund

• Special Revenue Funds

• Debt Service Funds

• Capital Projects Funds

• Permanent Funds


Governmental Funds:

Financial Statements

Fund level:

• Balance Sheet

• Statement of Revenues, Expenditures,

and Changes in Fund Balance

– a.k.a. Operating Statement


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


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



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



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


Governmental Funds:

Special Revenue Funds • Accounting same as general fund

• May have more than one special revenue

fund


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


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


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


Governmental Funds:

Debt Service Funds • Required when

– Legally mandated

– Financial resources being accumulated for principal and interest payments that come due in future years


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


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


– Provides accurate measure of revenues and

expenses to help determine user charges



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


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


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


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




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


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


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”


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photocopying, recording, or otherwise, without the prior

written permission of the publisher. Printed in the United

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Introduction to Governmental and Not-for-Profit Accounting, 7e · PDF fileTitle: Introduction to Governmental and Not-for-Profit Accounting, 7e Author: DELL Created Date: 9/5/2015