Beams, Advanced Accounting 10e, Ch. 19 4/21/2017 Chapter 19: Accounting for State and Local Governmental Units – Governmental Funds by Jeanne M. David, Ph.D., Univ. of Detroit Mercy to accompany Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-1 © Pearson Education, Inc. publishing as Prentice Hall 1

Governmental Funds: Objectives Prepare journal entries to record transactions in governmental funds. Learn about accounting methods unique to governmental accounting – budgetary issues, encumbrance accounting, and interfund transactions. Determine the appropriate governmental fund to be used. Prepare governmental fund financial statements. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-2

Objectives (cont.) Convert governmental fund financial statements to government-wide financial statements. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-3

Accounting for State and Local Governmental Units – Governmental Funds 1: Record Transactions © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-4

General Fund Transactions General fund entries Start of fiscal year During the year and adjustments Closing entries Sample entries follow. These are neither complete, nor self-reconciling. Entries for interfund transfers and encumbrances are shown later, with Objective 2. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-5

Beginning of Year Reserve for encumbrances 90   Reserve for encumbrances - prior year Estimated revenues 3,500 Appropriations 3,320 Estimated other financing uses - transfers out 115 Unreserved fund balance 65 $90 in outstanding purchase orders were included on last year's balance sheet. These are reclassified at the start of the current year. This year's approved budget is recorded. The difference between expected sources of funds and expected uses of funds is credited to the unreserved fund balance. Debit unreserved fund balance if expected uses exceed sources,. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-6

Revenue and Collections Taxes receivable - current 2,000   Allowance for uncollectibles – current 20 Revenues 1,980 Cash 1,900 Taxes receivable – current 1,760 Taxes receivable – delinquent 140 Allowance for uncollectibles – delinquent 10 Taxes receivable - delinquent Record revenues net of the estimated allowance. Separate receivable and allowance accounts are used for this year's taxes and all prior years' taxes. Write-offs occur when the taxes are deemed uncollectible. When they are late, they are simply moved from current to delinquent (an adjustment). © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-7

Expenditures (Without Encumbrance) and Payments 200   Vouchers payable 187 Cash For Expenditures that are not encumbered first (no purchase orders are placed for wages, utilities, and many other items), they are recorded as they become due. These expenditures can be for current services or capital outlays (like fixed assets) © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-8

Supplies (without encumbrance) Supplies inventory 55   Vouchers payable Expenditures 345 For supplies, this is the consumption method, like most businesses use. Adjustments will recognize supplies used as Expenditures. For the purchase method, Expenditures would be debited at the time of purchase. At year end, an adjusting entry would record Supplies inventory and Reserve for Supplies. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-9

Expenditures – Prior Year 85   Vouchers payable When purchase orders for items are placed in one year and received in the following year, the expenditure is classified separately – for control purposes. These "expenditures" are still included with other expenditures from this year on the Statement of revenues, expenditures and changes in fund balance. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-10

Adjustments (1 of 2) Expenditures 30 Supplies inventory Revenues 50   Supplies inventory Revenues 50 Deferred revenue Supplies inventory (consumption method) is adjusted to its proper balance. Revenues that haven't been collected yet and are not expected to be collected in the next 60 days are reclassified. They will be revenue next period when collected. A revenue item may be recorded as deferred revenue initially, if the timing of the collection is known. Grants might be recorded this way. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-11

Adjustments (2 of 2) Taxes receivable – delinquent 240   Allowance for uncollectibles – current 20 Taxes receivable – current Allowance for uncollectibles – delinquent At the end of the fiscal year (or tax year), amounts still due from taxpayers are reclassified from current to delinquent. The balance in the "current" accounts is moved to the "delinquent" accounts. Prior delinquencies may still be in the delinquent accounts. This does not write off any account or suspend collection procedures. It empties the "current" accounts so that new taxes can be recorded. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-12

Closing the Budget Appropriations 3,320   Estimated other financing uses - transfers out 115 Unreserved fund balance 65 Estimated revenues 3,500 The current year's budget is removed from the books at the end of the year. This entry is a reversal of the initial entry putting the budget on the books. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-13

Closing Current Year Accounts Revenues 3,520   Other financing sources - bond proceeds 45 Expenditures 3,264 Encumbrances 50 Other financing uses - transfers out 164 Unreserved fund balance 87 There may be multiple accounts for other financing sources and uses (transfers in, proceeds from sales of fixed assets, nonreciprocal transfers out). The unreserved fund balance is adjusted for difference between total fund sources and total fund uses. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-14

Closing Prior Year Accounts Reserve for encumbrances - prior year 90   Expenditures - prior year 85 Unreserved fund balance 5 "Reserve for encumbrances – prior year" is a temporary account established at the start of the year and closed at the end. The "reserve for encumbrance" account is part of fund equity which is on the balance sheet. $90 represents the purchase order that was outstanding at the end of last year, whereas $85 is the actual bill on the goods received. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-15

Special Revenue Funds Accounts for revenue sources restricted by law or administrative action, other than those for: Permanent funds (endowment) Capital projects funds (construction) Debt service funds (repayment of debt) Example: education, highway maintenance Accounting is similar to the general fund Usually does not use encumbrances Budgetary accounts needed if the budget is legally adopted © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-16

SRF - Grant Entries Receive cash Cash 20   Deferred revenue – grant Expenditures 18 Vouchers payable Revenue Meet require-ments Special revenue funds are often used to account for federal or other grants Revenue is recognized when eligibility requirements are met, usually when the required expenditure is made Could be before or after cash receipt © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-17

Permanent Funds Cash or Investments 500   Revenues – addition to permanent endowments Cash 12 Revenues – investment income Expenditures 3 Used to account for funds on which only the earnings can be expended. The earnings may or may not be restricted Its "Fund Balance" is a reserved fund balance. Unrestricted earnings are transferred to the general fund Restricted earnings may be spent in this fund or transferred to a special revenue fund © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-18

Capital Projects Funds Accounts for funds being used for major capital projects, such as building new town offices Use encumbrance accounting for the construction contract and for other purchase orders and commitments Generally no budgetary accounts Spending on the project is an Expenditure Its main source of funds may be Other financing sources, such as proceeds from bonds Bond receipts are recorded at gross Any premium received is generally transferred to the debt service fund © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-19

CPF Entries (1 of 3) Cash 302   Other financing sources – Proceeds from bonds At the approval of the capital project, a memo entry is made $300 of bonds are issued for the project, and sell at a premium of $2 Encumbrances 280   Reserve for encumbrances A contract for the project is signed for $280 The signed contract is recorded as an Encumbrance © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-20

CPF Entries (2 of 3) CPF Other financing uses – nonreciprocal transfer to debt service fund 2   Cash Other financing sources – nonreciprocal transfer from capital projects fund DSF The premium from the bonds is transferred out of the capital projects fund to the debt service fund. There it can be applied to the upcoming interest payment or invested to use later in repaying the bonds. The debt service fund would record the receipt © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-21

CPF Entries (3 of 3) Encumbrances 100 Reserve for encumbrances   Reserve for encumbrances Expenditures Contracts payable 90 Contracts payable – retained percentage 10 When the contractor bills the city, both entries are made The encumbrance (a portion of the contract) is removed An expenditure is recorded for that amount The payable is usually split between the amount due now and the percent that waits until successful contract completion, assumed to be 10% © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-22

CPF – Completing the Project Fixed assets: As construction continues, construction in progress is recognized as part of fixed assets in an amount equal to expenditures At completion, the construction in process becomes the fixed asset, building, etc. Capital projects fund: Capital project fund closing entries and statements are prepared each period with ongoing construction At completion, any remaining cash is transferred to debt service or general fund © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-23

Debt Service Funds Accounts for the funds set aside and being used to repay debt principal and interest Most inflows are transfers from other funds although there will be investment revenue Interest and principal are recorded as expenditures and payables when due. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-24

DSF Entries (1 of 2) DSF Cash 16   Other financing sources – nonreciprocal transfer from general fund Other financing uses – nonreciprocal transfer to debt service fund GF The debt service fund receives $16 from the general fund for the upcoming amounts due on bonds: $2 interest and $14 principal The general fund would record the payment to debt service © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-25

DSF Entries (2 of 2) Expenditures – principal 14   Expenditures – interest 2 Matured principal payable Interest payable Matured interest payable Cash 16 Principal on bonds, $14, is due along with $2 interest Interest and principal are recorded as expenditures and liabilities on the date due Liabilities are removed when paid © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-26

DSF – Continuing Payments The debt service fund continues to accept money (usually from general fund) and make payments on the outstanding bonds or other debt Use debt service for capital lease payments Legal requirements may dictate separate debt service funds for separate debt, but some may be combined Cash in debt service fund is usually invested to provide earnings until needed Investments Investment Revenue © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-27

2: Governmental Accounting Particulars Accounting for State and Local Governmental Units – Governmental Funds 2: Governmental Accounting Particulars © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-28

The Budget Governmental entities formally record the budget in the accounting records Most limit expenditures in functional or object categories Excess spending needs approval Budgetary and other accounts must contain sufficient detail for control Only summary accounts are used here Budgetary accounts have normal balances in contrast to the actual accounts to facilitate control Revenues (cr) and Estimated revenues (dr) Budget entries were already presented with general fund beginning and closing entries © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-29

Budget – Levels of Detail Budgeted revenues are classified by source Taxes, licenses, fines, investment income Appropriations, the budgeted expenditures, are organized by Character class, current services, capital outlays And function, general government, public safety May also further classify Department, fire, police, zoning Object, supplies, salaries © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-30

Encumbrance Accounting Place order Encumbrances 150   Reserve for encumbrances Expenditures 140 Vouchers payable Receive goods Encumbrances are recorded at the time a purchase order is placed for the known or estimated amount When the item is received, the encumbrance is reversed (using the amount originally recorded as an encumbrance) and the expenditure recorded for the actual amount Use for orders of supplies and capital assets, and for construction contracts (in capital projects fund) © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-31

Interfund Transactions - Transfers GF Other financing use … nonreciprocal transfer to debt service fund 14   Cash Other financing source … nonreciprocal transfer from general fund DSF Involve entries in more than one fund account Example: General fund (first entry) transfers $14 to the debt service fund; Debt service fund receives payment from general fund Nonreciprocal transfers imply that it will not be paid back; Reciprocal transfers used for long term loans between funds © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-32

Interfund Transactions - Other GF Expenditures 5   Cash Revenues EF The above entries might be a city general fund paying its water bill and the city water department fund (enterprise fund) recording the receipt of revenue. Accounts used for short term receivables and payables Due from other funds (basically, accounts receivable) Due to other funds (analogous to accounts payable) Advance to other fund (short term loan receivable) Advance from other fund (short term loan payable) © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-33

Accounting for State and Local Governmental Units – Governmental Funds 3: Which Fund? © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-34

Five Governmental Fund Types © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-35

4: Fund Financial Statements Accounting for State and Local Governmental Units – Governmental Funds 4: Fund Financial Statements © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-36

Fund Financial Statements Required governmental fund financial statements Statement of net assets or balance sheet Statement of revenues, expenditures and changes in fund balance Budgetary comparison information General fund Special revenue funds with legally adopted budget 1 and 2: Prepare statements columns for general fund and other significant governmental fund Combine insignificant funds Show total (no interfund eliminations) © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-37

General Fund Balance Sheet Assets   $187 Taxes receivable- delinquent $240 Allowance for uncollectibles (20) 220 Accounts receivable 180 Supplies 90 Total $677 Vouchers payable $325 Deferred revenue 50 $375 Reserve for encumbrances $50 Unreserved 252 302 © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-38

General Fund Statement of Revenues, Expenditures and Changes in Fund Balance Total revenues $3,519 Less expenditures   Current services* (3,158) Capital outlays (190) Excess of revenues over expenditures $171 Other financing sources (uses) Capital leases 45 Transfers out (164) Excess of revenues and OF sources over expenditures and OF uses $52 Fund balance, 10/1//06 250 Fund balance, 9/30/07 $302 Expenditures include those from "prior year" encumbrances. © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-39

5: Government-wide Financial Statements Accounting for State and Local Governmental Units – Governmental Funds 5: Government-wide Financial Statements © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-40

Government-wide Statements Governmental fund statements Modified accrual basis Government-wide statements Accrual basis Covert governmental funds to accrual basis for inclusion government-wide statements Adjustments are prepared on worksheet Individual fund records are not changed © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-41

Fixed Assets Add existing fixed assets with accumulated depreciation to assets and net assets Current acquisitions Remove expenditures for capital outlays Add to fixed assets Current dispositions Remove other financing source – proceeds from sale of fixed assets Reduce fixed assets, accumulated depreciation and record gain or loss © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-42

Long Term Debt Add existing long term liabilities, reduce net assets Current borrowings Remove other financing source Increase liability Current principal repayments Remove expenditures Decrease liability © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-43

Leases and Other Adjustments Capital leases have both fixed asset and long term liability adjustments Revenues Deferrals based on 60 day availability may be recognized Expenditures convert to expenses Interfund activities and balances Eliminate transfers and balances to/from Eliminate interfund internal service activities © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-44

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2009 Pearson Education, Inc.   Publishing as Prentice Hall © 2009 Pearson Education, Inc. publishing as Prentice Hall 19-45