Chapter 5 Objectives: Learn the rationale behind expenditures How different expenditures are recognized How to do interfund transfers Learn about other financial sources (uses)

Expenditures vs. Expenses Expenses are recognized when incurred which includes accruing expenses at the end of accounting period. Expenditures are for current liabilities or those due within 60 days when goods and services acquired.

Wages and Salaries Recognize those already paid in the current period and those that are earned and will be paid shortly after the beginning of the new fiscal year and which are presumably in the current appropriations. Expenditures - Payroll$100 Accrued wages and salaries$100 How treated on new government-wide statements?

Employee Benefits Expenditure recognized when used in the current year. Vacation Expenditure1,500 Cash 1,500 If owed at the end of the year and the time vests with the employee, and it is probably that the vacation time will be used, then a liability should be carried forward. Such vested vacations must be adjusted for any intervening wage increases before they are taken. On government-wide statements accrued in other liabilities.

Sick Leave If used during the year, expend as normal If vested like vacation pay, accounted for in the schedule of long term debt. Adjust for wage increases. Government-wide must match and accrue, appears on statement of net assets.

Sabbatical Leave Since Sabbatical leave is contingent on approval and is contingent on other things, no accruals take place. Expended as taken! On government-wide statements, there are no differences.

Pensions Amounts to be recognized based on actuarial assumptions If actuarial amount is deposited into the pension trust fund, it is recognized as an expenditure If not all of the actuarial amount is deposited the difference is recognized on the schedule of Long Term Debt. On Government-wide statements use FASB rules, liability recognized for difference between payments and actuarial liability.

Entries Accrued Pension Expense is $15,000, city pay $10,000 to trust fund: In General Fund: Expenditure10,000 Cash 10,000 Difference on schedule of long term debt. Post-employment benefits accounted for similarly.

Judgments Criteria for recognition similar to contingent liabilities. If paid in current period the amount paid is an expenditure If deferred, the amount is recognized on Schedule of Long Term Debt. Circumstances of the judgment should be disclosed

Supplies Two methods of recognition which produce the same effect on the financials: Purchases method Consumption method

Purchases method When received, supplies are recognized as an expenditure Make an adjusting entry at the end of the fiscal year to record the remaining supplies on hand In subsequent years, adjust reserve to reflect current inventory of supplies

Consumption method Recognize as an asset when received Recognize expenditure as used, like FASB rules

Prepaids Also uses purchases or consumption methods Most entities use purchases method.

Fixed Assets Expenditure recognized when purchased Listed on the schedule of General Fixed Assets, those in proprietary funds excluded If financed with debt, this is an other financing source and principal and interest repayments are also expenditures. This does not result in double expensing the asset, because the OFS adds to fund balance to offset asset expenditure. Capital leases treated similarly to FASB.

Entries Cash Received: Cash50,000 OFS - loan proceeds50,000 Must keep track of long term liability Purchase asset: Fixed Asset Expenditure 50,000 Cash 50,000 Net no effect on fund balance after closing. Keep track of the asset

Interest and Principal Payment of note (in debt service fund): Debt Service expenditureprin13,000 Debt Service expenditure int 2,000 Cash 15,000 Reduction of debt principal also recorded on the schedule of Long term debt.

Capital Leases z FASB criteria z Government-wide similar to FASB z Fund statements y PV of Lease payments on schedule of L/T debt y Asset on schedule of Fixed Assets y Capital lease OFS y Payments recognize expenditure on implied interest and principal

Bond Premiums and Discounts z Interest is an expenditure when paid or when accrued at the end of the year, if the amount is in the current budget z Principal is an expenditure when paid z No adjustments for premiums and discounts on fund statements z Treat under FASB rules for government-wide.

Grant Expenditures z Recognize expenditures as actually costs incurred. z Same recognition on government- wide statements z Remember revenue recognition is expenditure driven zNon-exchange transactions

Interfund Transfers Non-exchange transfers among funds are in two types: Operating Transfer- to provide routine funds for payments and expenditures Language: Operating transfer in (out) Residual Equity transfers- to provide seed money to start new fund or enterprise Closed in closing entries. Reciprocal interfund transfers are revenue and expenditures for services of loans and repayments Also can be interfund loans, recognized as “due to” and “due from”

Other Financing Sources Proceeds from Long term debt Proceeds from sales of assets Assets and Liabilities created from capital lease Transfers in Eliminated on government-wide statements

Other Financing Uses z Payments to “escrow agents” z Interfund transfers out

Presentation of Statement Governmental Funds Revenues Expenditures Excess of Revenues over(under) expenditures Other financing sources (uses) Excess of revenues and other sources over (under) expenditures and other uses +/- changes in reserves Beginning fund balance Residual transfers Ending fund balance

Closing Entries 1. Close Budgetary accounts 2. Close revenue and other financing sources Revenue Other Financing sources Transfers in Fund Balance 3. Close Expenditures Fund Balance Expenditures Other Financing uses Transfers out

Review zLearn how to record expenditures z Learn about interfund transfers z Learn about other financing sources and uses