2 Chapter Fund Accounting

Accounting Equation Assets = Liabilities + Net Assets (Fund Balance) Fund balance is a residual just like owner’s equity Same double-entry system is utilized

Reporting Entity A reporting entity consists of: A primary government and Component units

Reporting Entity (Cont’d) A primary government is: A state government, General purpose local government (e.g., a city, town, village, township, borough, county, etc.), or a Special purpose government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments

Reporting Entity (Cont’d) A component unit is a legally separate organization for which the elected officials of a primary government are financially accountable may also include another organization for which the nature and significance of its relationship with a primary government or its component units is such that exclusion would cause the reporting entity’s financial statements to be misleading

Reporting Entity (Cont’d) The financial information of a component unit can be reported by: Discrete presentation (i.e., in a separate column from the primary government’s financial information), or by Blending (combined with financial information of the primary government) Notes to financial statements should describe reporting entity

Required Financial Statements Two sets of “basic” financial statements required (in addition to MD&A and other required supplementary information) Government-wide 2 financial statements Fund financial statements 2 Governmental fund financial statements 3 Proprietary fund financial statements 2 Fiduciary fund financial statements See previous days notes for specifics

Required Financial Statements Government-wide financial statements: Are prepared on the accrual basis and use the economic resources measurement focus (i.e., similar to for-profit business entities) Report the primary government’s financial information in two columns (governmental activities and business-type activities) Internal service fund information usually reported in the governmental activities column; fiduciary activities not reported at all in the government-wide financial statements

Basis of Accounting and Measurement Basis of accounting: Determines when transactions and events are recognized. Accrual – recognition when substantive economic impact completed Cash – recognize only when it relates the transaction to cash Measurement Focus – Determines what is being reported upon. Accrual accounting reports on all assets and liabilities and increases/decreases in net capital are recognized as revenues or expenses Governments often adopt a modified accrual basis of accounting and a measurement focus on ST financial assets and liabilities

Basis of Accounting When are revenues and expenses/expenditures measured? Modified accrual basis of accounting Revenues recognized when available and measurable; expenditures when incurred Accrual basis of accounting Revenues when earned; expenses when incurred

Measurement Focus What is measured? Economic resources measurement focus Report on the determination of net income, financial position, and cash flows (i.e., capital maintenance) To measure operational accountability Current financial resources measurement focus Report on the inflows and outflows of current financial resources (i.e., cash or other items expected to be converted into cash during the current period) To measure fiscal accountability; meet the legal and budgetary needs of government

Fund Accounting Fund accounting reports financial information for separate self-balancing sets of accounts, segregated for separate purposes or to account for resources restricted as to use by donors or grantors. Funds are separate accounting and fiscal entities.

Definition of “Fund” In other words, a fund is conceptually an entity with its own set of books (i.e., chart of accounts, general journal, general ledger, trial balances, and financial statements)

Major Funds Financial statements for governmental funds must contain a separate column for each major governmental fund. Financial statements for proprietary funds must contain a separate column for each major enterprise fund; financial information for all internal service funds is reported in a single column.

Types of Funds Governmental Funds (5 types) General Fund; Special Revenue Funds; Capital Projects Funds Debt Service Funds; Permanent Funds Proprietary Funds (2 types) Internal Service Funds and Enterprise Funds Fiduciary Funds (2 types) Agency Funds and Trust Funds

Governmental Funds General Fund (GF) Only one per government Most of general government operating activities are accounted for in the GF Accounts for all unrestricted resources Includes the following: Police & fire Sanitation Administration Street Maintenance

Governmental Funds (Cont’d) Special Revenue Funds (SRF) Used when required by law or by policy to account for financial resources earmarked for a specified operating purpose Accounting and budgeting usually identical to GF Includes the following Gas tax for highway maintenance Lottery fund for education Donations to maintain Parks & Cemeteries

Governmental Funds (Cont’d) Debt Service Funds (DSF) Used to account for financial resources segregated to pay principal or interest on long-term general liabilities Similar to a sinking fund Get money from other funds or special taxes I.O.U.

Governmental Funds (Cont’d) Capital Projects Funds (CPF) Used to account for financial resources segregated to pay for construction or acquisition of long-lived capital assets Typically get resources from bond issuance

Governmental Funds (Cont’d) Permanent Funds Used to account for resources provided by trust in which the earnings but not the principal must be used for public purposes Example someone dies and gives money to maintain a park

Governmental Funds Common Characteristics Current financial resources measurement focus (cash, receivables, inventories) Modified accrual basis of accounting used – (We will look at details in the next few chapters) Account for expenditures of appropriations (not expenses) Capital assets (land, building, equipment) and long-term liabilities are not accounted for within governmental funds

Governmental Funds Required financial statements Balance Sheet Statement of Revenues, Expenditures, and Changes in Fund Balances Also must have a reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities at the government-wide level.

Proprietary Funds Internal service funds (ISF) Used to account for activities in which goods or services are provided to other departments of the same government or to other governments for a charge Examples include central stores, central computing, motor pools, and printing ISF are reported as governmental activities in the government-wide statements because they primarily benefit the government. (Page 42)

Proprietary Funds (Cont’d) Enterprise Funds Used to account for activities in which goods or services are provided to the general public for a charge Examples include electric and water utilities, airports, parking garages, transportation systems, and liquor stores EF are reported as business-type activities in the government-wide financial statements (page 42)

Proprietary Funds Common Characteristics Accounting and reporting are essentially the same as those of for-profit entities, including full accrual accounting Capital assets and long-term liabilities are accounted for in the funds Depreciation expense is reported in the funds Reports expenses not expenditures

Proprietary Funds (Cont’d) Required Financial Statements Similar to those of for-profit entities Statement of Net Assets Statement of Revenues, Expenses, and Changes in Net Assets Statement of Cash Flows

Fiduciary Funds Agency Funds (often several) To account for financial resources that the govt. holds temporarily for another party Accounting is simple; assets = liabilities. No revenue and expense accounts used, nor is there a fund/equity account Examples are tax agency funds, special assessment debt service funds, and pass-through agency funds Not consolidated into government-wide statements

Fiduciary Funds (Cont’d) Trust Funds Fund held by one person for the benefit of another – intended to benefit parties other than the government. 3 Types Pension Trust – benefit government employees (retirement, disability) Investment Trust – (like mutual fund) Private Purpose Trust – benefit people not associated with the government (escheated fund or historical society)

Reporting Capital Assets General capital assets should be distinguished from capital assets of proprietary and fiduciary funds General capital assets are reported in the government-wide financial statements but not in fund financial statements Proprietary capital assets are reported in both the government-wide and fund financial statements Fiduciary capital assets are reported only in the statement of fiduciary net assets, a fund financial statement.

Valuation of Capital Assets Capital assets should be accounted for at historical cost, or estimated cost if actual cost is unknown. Donated assets should be accounted for at estimated fair value at time of gift.

Depreciation of Capital Assets Capital assets should be depreciated over their estimated useful lives, except inexhaustible assets such as land A “modified approach” may be used for certain infrastructure assets instead of depreciation Depreciation expense for general capital assets is reported only in the government-wide financial statements; for other capital assets it is also reported in the fund financial statements.

Reporting Long-term Liabilities General long-term liabilities should be reported in the government-wide statements but not in the fund financial statements. Long-term liabilities to be repaid from proprietary funds should be reported in the proprietary fund statements. Long-term liabilities to be repaid from fiduciary funds should be reported in the fiduciary fund statements.

Measurement Focus and Basis of Accounting Summary !!!!!!!!