Advanced Accounting, Fourth Edition 17 Introduction to Fund Accounting Advanced Accounting, Fourth Edition

Fund Accounting Fund Accounting Accounting for nonbusiness organizations. Nonbusiness Organizations Provide socially desirable service without regard to financial gain. Business Enterprises Earn a return on investment. Competitive market. Liquidity concerns.

Classification of Nonbusiness Organizations Five Major Classifications Governmental units. Hospitals and other health care providers. Colleges and universities. Voluntary health and welfare organizations. Other nonbusiness organizations (trade associations, professional associations, museums, religious organizations, etc.)

Distinctions between Nonbusiness Organizations and Profit-Oriented Enterprises Absence of primary goal to earn a profit. No equity interests. Seldom finance through user charges. Rely on political action or fund-raising campaigns. Income determination model generally not applicable. Restrictions or limitations on use of resources. LO 1 Nonbusiness organizations versus profit-oriented enterprises.

Fund Entity Classification Fund Accounting Fund Entity Classification Expendable – Basic fund accounting concepts. Proprietary – Business type activity. Fiduciary - Agent or trustee. LO 2 The role of fund accounting.

Fund Accounting Expendable Fund Entities Financial resources dedicated to a specified use. Examples - Capital Projects or Debt Service fund. Resources consist of cash and claims to cash. Resources - Claims against resources = Fund balance. Measurement focus is on flow of current financial resources. Accounting Model LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting Proprietary Fund Entities Activities that are similar to business enterprises. Examples: Electric or water utility by a municipality Rental of real estate by religious organization. Focus on determination of net income, financial position, and cash flows. LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting Fiduciary Fund Entities Trust and Agency funds: Pension trust fund. Agency fund (resources of taxes, bonds, and other receipts held for individuals, outside organizations, and/or other funds). LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting Budgetary Fund Entities (Governmental Funds) Approved resource flows are incorporated into annual budgets. Budgeted expenditures are referred to as appropriations. Approved budget may be recorded in the accounting records. Budgetary account integration is useful in the control and administration of fund resources. LO 3 Differences in applications of revenue, expense, and expenditures.

Basic Financial Statements Fund Accounting Basis of Accounting Basic Financial Statements Government-Wide Nonfiduciary activities. Short- and long-run information. Economic resources measurement concept. Accrual basis of accounting. Governmental Fund (expendable) Current financial resources concept. Modified accrual basis of accounting. Revenues recognized when measurable and available. Expenditures recorded when liability is incurred. LO 3 Differences in applications of revenue, expense, and expenditures.

Question Fund Accounting When used in fund accounting, the term “fund” usually refers to A sum of money designated for a special purpose. A liability to other governmental units. The equity of a municipality in its own assets. A fiscal and accounting entity having a set of self-balancing accounts. LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting Classification of Revenues By Fund and Major Revenue Source Major Sources of Revenue Property taxes Income taxes Sales and excise taxes Gift and inheritance taxes Fines and penalties Gifts and donations Forfeits Licenses and permits Sales of property Charges for services Interest earned on loans and investments From federal, state, or local units: Grants Shared revenues Payments in lieu of taxes LO 4 Classification of revenues.

Fund Accounting Other Financing Sources Debt issue proceeds are accounted for as “other financing sources.” Interfund operating transfers are accounted for as “other financing sources,” or “uses.”

Fund Accounting Recognition of Revenue (Expendable Funds) Revenue is ordinarily not recognized until it can be objectively measured and is available for expenditures of current period.

Fund Accounting Recognition of Revenue (Expendable Funds) Revenue recognized when measurable and available. When Recognized? Property Taxes Levied Income Tax and Sales Tax Returns are filed with payment Fines and Forfeits Collected Sales of Property Time of sale Pledges Time of pledge Grants May or may not at time authorized

Purchase Order or Contract Fund Accounting Recognition of Expenditures Appropriation Encumbrance Expenditure Authorized to Spend Purchase Order or Contract Receipt of Goods Encumbrances and expenditures are classified on the same basis (by fund, function, organizational unit, activity, character, or object class) as appropriations. Disbursement Payment LO 5 Classification of expenditures.

Question Fund Accounting Authority granted by a legislative body to make expenditures and to incur obligations during a fiscal year is the definition of an Appropriation. Authorization. Encumbrance. Expenditure. LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting Exercise 17-3: (partial) Listed are transactions of the Town of Jackson. A contract was signed with an independent company to do the trash collecting for the year. The contract price was $96,000. The first monthly bill of $8,000 was received from the trash collector. The $8,000 bill was paid. Required: Prepare the journal entries needed in the records of the General Fund for these transactions. LO 5 Classification of expenditures.

Fund Accounting Exercise 17-3: 1. A contract was signed with an independent company to do the trash collecting for the year. The contract price was $96,000. 1. Encumbrance 96,000 Reserve for Encumbrances 96,000 LO 5 Classification of expenditures.

Fund Accounting Exercise 17-3: 2. The first monthly bill of $8,000 was received from trash collector. 3. The $8,000 bill was paid. 2. Expenditures 8,000 Contracts payable 8,000 Reserve for Encumbrances 8,000 Encumbrance 8,000 3. Contracts payable 8,000 Cash 8,000 LO 5 Classification of expenditures.

Question Fund Accounting What type of account is used to earmark the fund balance to liquidate the contingent obligations of goods ordered but not yet received? Appropriations. Encumbrances. Obligations. Reserve for encumbrances. LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting Capital Expenditures (Expendable Fund) Treated as a current period expenditure. Middletown purchased a police car for $10,000. Expenditures 10,000 Cash 10,000 LO 7 Capital expenditures.

Fund Accounting Recording Budgeted and Actual Revenue and Expenditures Exercise 17-3: (partial) A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of $1,800,000 was passed by the town council. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible. Property taxes in the amount of $1,080,000 were collected. Equipment costing $200,000 was purchased, and the old equipment was sold at for $24,000. Required: Prepare required journal entries for General Fund.

Fund Accounting Exercise 17-3: 1. A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of $1,800,000 was passed by the town council. 1. Estimated Revenues 1,950,000 Appropriations 1,800,000 Unreserved Fund Balance 150,000

Fund Accounting Exercise 17-3: 2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible. 3. Property taxes of $1,080,000 were collected. 2. Property Tax Receivable 1,150,000 Estimated Uncollectible Taxes 35,000 Revenue 1,115,000 3. Cash 1,080,000 Property Tax Receivable 1,080,000

Fund Accounting Exercise 17-3: 4. Equipment costing $200,000 was purchased, and the old equipment was sold at for $24,000. 4. Expenditures 200,000 Cash 200,000 Cash 24,000 Revenue 24,000

Fund Accounting Exercise 17-5 (variation): The preclosing trial balance for the General Fund of the City of Springfield is presented below. Trial Balance for December 31, 2008:

Fund Accounting Exercise 17-5: Prepare closing entries. Unreserved Fund Balance 140,000 Appropriations 1,550,000 Estimated Revenue 1,690,000 Unreserved Fund Balance 165,000 Encumbrances 165,000 Revenue 1,675,000 Expenditures 1,310,000 Unreserved Fund Balance 75,000

Fund Accounting – Comprehensive Illustration Problem 17-1: The general ledger trial balance of the General Fund of the City of Bedford on January 1, 2008, shows the following: Cash $100,000 Taxes Receivable 75,000 Allowance for Uncollectible Taxes $ 35,000 Unreserved Fund Balance 110,000 Reserve for Encumbrances—2007 30,000 Total $175,000 $175,000 Prepare journal entries to record the following activities and transactions for the General Fund during 2008. Debit Credit LO 8 Understand the general fund.

Fund Accounting Problem 17-1: 1. The City Council adopted a budget with estimated revenues of $1,560,000 and appropriated expenditures of $1,400,000. Estimated Revenue 1,560,000 Appropriations 1,400,000 Unreserved Fund Balance 160,000 LO 8 Understand the general fund.

Fund Accounting Problem 17-1: 1. The budget authorized the transfer of $50,000 from the Water Fund to the General Fund. Interest due for the year on the $1,000,000, 8% bond issue for the Civic Center is approved for transfer from the General Fund to the Debt Service Fund. Due from Water Fund 50,000 Transfer from Water Fund 50,000 Transfer to Debt Service Fund 80,000 Due to Debt Service Fund 80,000 LO 8 Understand the general fund.

Fund Accounting Problem 17-1: 2. The annual property tax levy of 10% on assessed valuation ($11,000,000) is billed to property owners. Two percent is estimated to be uncollectible. Property Tax Receivable 1,100,000 Revenue 1,078,000 Allowance for Uncollectible Taxes 22,000 LO 8 Understand the general fund.

Fund Accounting Problem 17-1: 3. Goods and services amounting to $1,150,000 were ordered during the year. Encumbrances 1,150,000 Reserve for Encumbrances 1,150,000 4. Invoices for all goods ordered in 2007 amounting to $29,000 were approved for payment. Expenditures – 2007 29,000 Vouchers Payable 29,000 LO 8 Understand the general fund.

Fund Accounting Problem 17-1: 5. Funds for bond interest on Civic Center bonds were transferred to the Debt Service Fund. Due to Debt Service Fund 80,000 Cash 80,000 LO 8 Understand the general fund.

Fund Accounting Problem 17-1: 6. Invoices for goods received during the year totaled $1,155,000. These were encumbered [see (3) above]. Expenditures 1,155,000 Vouchers Payable 1,155,000 Reserve for Encumbrances 1,150,000 Encumbrances 1,150,000 LO 8 Understand the general fund.

Fund Accounting Problem 17-1: 7. Transfer of funds from the Water Company was received in lieu of taxes. Cash 50,000 Due from Water Fund 50,000 8. Taxes were collected from property owners in the amount of $1,050,000. Cash 1,050,000 Property Tax Receivable 1,050,000 LO 8 Understand the general fund.

Fund Accounting Problem 17-1: 9. Past-due tax bills of $17,000 were charged off as uncollectible. Allowance for Uncollectible Taxes 17,000 Property Tax Receivable 17,000 10. Checks in payment of invoices for goods ordered in 2007 and 2008 were issued [see items (4) and (6) above]. Vouchers Payable * 1,184,000 Cash 1,184,000 * ($29,000 + $1,155,000) LO 8 Understand the general fund.

Fund Accounting Problem 17-1: 11. Revenues received from miscellaneous sources, other than property taxes, of $455,000 were recorded. Cash 455,000 Revenue 455,000 12. Purchase order for two trash collection vehicle systems was issued. Bid price per system was $120,000. Encumbrances (2 x $120,000) 240,000 Reserve for Encumbrances 240,000 LO 8 Understand the general fund.

Fund Accounting Financial Statements Two Basic Statements (expendable fund entities) Balance sheet Statement of revenue, expenditures, and changes in fund balance Revenue classified by major sources. Expenditures classified by major functions. Comparative information presented for prior years. Statement comparing budgeted and actual should be prepared for budgetary fund entities. LO 8 Understand the general fund.

Reporting Inventory and Prepayments Two Methods Consumption method Purchases method Under GASB Statement No. 34, consumption method is consistent with the Government-wide approach. Purchases method is not acceptable. Both acceptable for fund purposes LO 9 Consumption and purchases Methods.

Reporting Inventory Assume $20,000 of beginning inventory, $50,000 is purchased, and ending inventory of $24,000. Consumption Method When Purchased: Expenditures 50,000 Cash 50,000 End of Year: Inventory 4,000 Expenditures 4,000 Purchases Method When Purchased: Expenditures 50,000 Cash 50,000 End of Year: NO ENTRY LO 9 Consumption and purchases Methods.

Reporting Inventory and Prepayments Reserve for Inventory Purchases Method Material amounts of inventory should be disclosed by Footnote or Reporting asset with contra account (Reserve for Inventory). Consumption Method Reserve for inventory created debiting or crediting the “unreserved fund balance.” LO 9 Consumption and purchases Methods.

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