Governmental Entities: Introduction and General Fund Accounting

Governmental Entities: Introduction and General Fund Accounting
Chapter 17 Governmental Entities: Introduction and General Fund Accounting Note: We provide a summary of the slides and suggestions on how they might be used in the instructor’s manual for each chapter. We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since instructors often have different styles and preferences, we have attempted to include slides that will accommodate different approaches and that can be adapted to classes with different levels of preparation. For example, some instructors prefer to introduce the material before students have read the chapter. We have tried to facilitate these types of introductory discussions by including slides that replicate key points from the chapter. Other instructors expect students to have read the chapter and attempted homework problems before coming to class. As a result, they may not find it useful to review all of the topics in the chapter or to include slides that simply review many of the details they expect students to study before class. However, instructors following this approach often like to use sample exercises and problems built into the slides that allow them to have extended discussions or to facilitate group interaction in class. If instructors elect to spend two class periods on the same subject, they might find a combination of both styles to be useful by first introducing foundational material before students have read the chapter and studied the topic, followed by an extended discussion the next class period after students have read the chapter and attempted homework problems. We have tried to develop slides that can facilitate a flexible approach to allow instructors to select the slides that best match their objectives and style for class discussions. This is the reason we are including a large number of slides for some chapters in the text. We do not expect all instructors to use all slides, but the slide files should help support different teaching approaches and allow instructors to select the subset of slides that best matches their specific discussion objectives. The slides are organized by learning objective. We have included a slide at the beginning of each learning objective to show where the new material begins. Instructors may or may not want to use these learning objective slides in class. We provide them primarily as a way of organizing the material. We also include short multiple choice questions at the end of most learning objectives. Some instructors find it useful to pause periodically during class to assess students’ level of understanding. For this reason, we include several “practice quiz questions” that can be used throughout class discussions to engage students, help them focus on key points, or to facilitate group interaction. Finally, we provide longer exercises and problems that many instructors find useful in assessing understanding and encouraging group learning.

Learning Objective 17-1 Understand and explain the basic differences between governmental and private sector accounting.

Differences Between Governmental and Private Sector Accounting
Governmental entities have operating objectives different from those of commercial entities. As a result, governmental accounting is different from accounting for commercial enterprises. 3

Major differences between governmental and for-profit entities are as follow: Governmental units collect resources and make expenditures to fulfil societal needs. Governmental entities do not have a general profit motive. Governmental operations have legal authorization for their existence, conduct revenue-raising through the power of taxation, and have mandated expenditures they must make to provide their services. Governmental entities use comprehensive budgetary accounting, which serves as a significant control mechanism. 4

Major differences between governmental and for-profit entities are as follow: Accountability for the flow of financial resources is a chief objective of governmental accounting. Governmental entities typically are required to establish separate funds to carry out various missions; each fund is an independent accounting and fiscal entity. Many fund entities do not record fixed assets or long- term debt in their funds. An important objective of governmental financial reporting is accountability. 5

History of Governmental Accounting
Before 1984, directed by the Municipal Finance Officers Association (MFOA). In 1934, the first statement on local governmental accounting was published. In 1968, Governmental Accounting, Auditing, and Financial Reporting (GAAFR) was published. The GAAFR is periodically updated to include the most recent governmental reporting standards. 6

In 1974, the American Institute of Certified Public Accountants (AICPA) published an industry audit guide, in which it stated that “except as modified in this guide, they [GAAFR] constitute generally accepted accounting principles.” In March 1979, the National Council on Governmental Accounting (NCGA) issued its Statement No. 1, “Governmental Accounting and Financial Reporting Principles” (NCGA 1). 7

In 1984, the Financial Accounting Standards Board was created. The Governmental Accounting Standards Board (GASB) is now responsible for maintaining and developing accounting and reporting standards for state and local governments. GASB Statement No. 1 The GASB stated that all NCGA statements and interpretations issued and in effect on that date were accepted as generally accepted accounting principles for governmental accounting. GASB Statement No. 34 Established government-wide financial statements to be prepared on the accrual basis of accounting and an array of fund-based financial statements. 8

The GASB continues to issue new standards to meet the information needs of users of the financial reports of governmental units. Accounting for governmental entities is given the general name of fund accounting to distinguish it from accounting for commercial entities. 9

The Governmental Accounting Standards Board (GASB)
Created in 1984. A sister organization to the FASB. Establishes GAAP for state and local units. No authority to establish GAAP for the federal government. Seven members—simple majority vote needed (4 votes). 10

GAAFR: “The Blue Book” “Governmental Accounting, Auditing, and Financial Reporting.” Published by the Government Finance Officers Association (GFOA). Neither prescribes nor authoritatively interprets GAAP for governmental units. Provides detailed guidance (many examples) for applying governmental GAAP. Widely used by governmental units.

Practice Quiz Question #1
Which of the following statements is correct? a. The GASB is responsible to set standards for governmental units and not-for-profit entities. b. The FASB was created in 1972 and sets standards for governmental units. c. The Blue Book contains financial accounting standards for privately held governmental agencies and companies. d. The GASB is responsible for setting standards for state and local governments but not the federal government.

Understand and explain major concepts of governmental accounting.
Learning Objective 17-2 Understand and explain major concepts of governmental accounting.

Major Concepts of Governmental Accounting
Elements of a Statement of Financial Condition Assets: resources with present service capacity that the entity presently controls. Liabilities: present obligations to sacrifice resources that the entity has little or no discretion to avoid. A deferred outflow of resources: a consumption of net assets that is applicable to a future reporting period. A deferred inflow of resources: an acquisition of net assets that is applicable to a future reporting period. Net position: the residual of all other elements presented in a statement of financial condition. 14

Elements of a resource flows statements An outflow of resources: a consumption of net assets that is applicable to the current reporting period. An inflow of resources: an acquisition of net assets that is applicable to the current reporting period. 15

Expendability of resources versus capital maintenance objectives: Commercial Enterprises Government Entities Measurement focus The flow of all economic resources Changes in current financial resources available to provide services to the public in accordance with the budget Method of accounting Accrual method Modified accrual method Balance sheet Contains both current and noncurrent assets and liabilities, and the change in retained earnings reflects the company’s ability to maintain its capital investment Reports only current assets, current liabilities, and a fund balance 16

Which of the following statements is true? Governmental units use the modified accrual basis of accounting and focus on the flow of all economic resources. Commercial enterprises use the modified accrual basis of accounting and focus on the flow of all economic resources. The balance sheets of governmental units contain long-term assets and liabilities. The balance sheets of commercial entities contain a fund balance.

Learning Objective 17-3 Understand and explain the differences between the various governmental fund types.

Definitions and Types of Funds
Fund: a separate accounting group with accounts to record the transactions and prepare the financial statements of a defined part of the governmental entity that is responsible for specific activities or objectives. Different funds are established for the specific functions that a government must provide. Each fund has its own asset and liability accounts and its own revenue and expenditures accounts. Separate fund-based financial statements must be prepared for each fiscal period. 19

Three Types of Funds Governmental Funds Account for provide basic governmental services to the public. Each entity creates only one general fund, but it may create more than one of each of the other types of governmental funds based on needs. Proprietary Funds The objective is to recover the unit’s costs through user charges. Fiduciary Funds Account for resources that are maintained by but do not belong to a governmental unit. 20

Five types of governmental funds General fund Accounts for all activities not required to be accounted for in another fund. Special revenue funds Capital projects funds Debt service funds Permanent funds

Proprietary Funds Enterprise fund: Accounts for operations of governmental units that charge for services provided to the general public. Examples: sports arenas, municipal electric utilities, and municipal bus companies. Internal service fund: Accounts for the financing of goods or services provided by one governmental unit’s department or agency to other of its departments or agencies. Examples: municipal motor vehicle pools, city print shops, and central purchasing options.

Fiduciary Funds Trust Funds Pension and other employee benefit trust funds. Investment trust funds. Private-purpose trust funds (these activities do not benefit the government unit). Agency Funds Used to account for resources the government holds solely in a custodial capacity.

Governmental Fund Types General fund Accounts for all financial resources except for those accounted for in another fund. Includes transactions for general governmental services provided by the executive, legislative, and judicial operations. Special revenue fund Accounts for the proceeds of specific revenue sources that are restricted for specified purposes. Capital projects fund Accounts for financial resources for the acquisition or construction of major capital facilities that benefit many citizens, such as parks and municipal buildings. Debt service fund Accounts for the accumulation of resources for, and the payment of, general long-term debt principal and interest. Permanent fund Accounts for resources that are restricted such that only earnings, but not principal, may be used in support of governmental programs that benefit the government or its citizenry. 24

Proprietary Fund Types Enterprise fund Accounts for operations of governmental units that charge for services provided to the general public. Internal service fund Accounts for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit. Fiduciary Fund Types and Similar Component Units Pension (and other employee benefit) trust fund Accounts for resources required to be held in trust for the members and beneficiaries of pension plans, other post-employment benefit plans, or other EBPs. Investment trust fund Accounts for the external portion of investment pools reported by the sponsoring government. Private-purpose trust fund Accounts for all other trust arrangements under which the fund’s resources are to be used to benefit specific individuals, private organizations, or other governments. Agency fund Accounts for assets held by a governmental unit in an agency capacity for employees or for other governmental units. 25

The three major categories of governmental funds are: Governmental, commercial, and proprietary. Governmental, trust, and fiduciary. Enterprise, proprietary, and fiduciary . Governmental, proprietary, and fiduciary. Governmental Service, proprietary, and commercial

Learning Objective 17-4 Understand and explain basic concepts for financial reporting in governmental accounting.

Financial Reporting of Governmental Entities
Governmental units present financial statements for the reporting entity, which consists of: The primary government State government or a general/special-purpose local government. Component units Legally separate organizations for which the primary unit has financial accountability. Other organizations Organizations that have a significant relationship with the primary government and need to be included in its financial statements to avoid misleading or incomplete financial representations.

GASB 14 States that financial accountability exists for those component units if the primary government unit appoints a majority of an organizations’ governing body and is able to impose its will on the organization, or possesses a financial benefit/assumes a financial burden for the organization. 29

GASB 34 Specifies the use of the governmental financial reporting model. The reporting model has two integrated levels of financial statements: Fund-based financial statements: demonstrate fiscal accountability of the management of each fund. Balance sheet Statement of revenues, expenditures, and changes in fund balance Government-wide financial statements: demonstrate the operational accountability of the unit’s management as a whole. Includes government funds, capital assets, and long-term debt. 30

Fund-Based Financial Statements
Balance sheet for governmental funds Assets Use the current financial resources measurement focus. Reports only financial assets used as cash or other assets that will convert into cash in the normal course of operations over the near future. Long-term capital items are not reported on the fund-based balance sheet, but are scheduled and reported in the government-wide financial statements. Liabilities Reports only those liabilities that have become due and will require current financial resources to liquidate. Long-term debt principal not due within the next year is not reported on the balance sheet, but are scheduled and reported in the government-wide financial statements. Net fund balance Amount of the difference between reported assets and reported liabilities. 31

GASB 54 specifies that the fund balances for the governmental funds should be segregated into two categories: Nonspendable fund balances Not in spendable form. Required by legal or contractual provisions to be maintained intact. Spendable fund balances Available for spending. Further classified as: Restricted Limited Assigned Unassigned 32

Balance Sheet for Governmental Funds Balance Sheet for Governmental Funds Assets (financial resources available for current use; presented in order of liquidity) $X,XXX Total Assets Liabilities and Fund Balances: Liabilities (due and expected to be paid from current financial resources; presented in order of due date) $ XXX Fund Balances Nonspendable $ XX Spendable: Restricted XX Limited Assigned Unassigned XX XX Total Liabilities and Fund Balances 33

Statement of Revenues, Expenditures, and Changes in Fund Balance for Governmental Funds Often called the operating statement of the governmental funds. Four major sections: Operating section: revenues less expenditures for the period. Other financing sources or uses: includes nonrevenue items such as bond issue proceeds and interfund transfers. Special and extraordinary items: lists extraordinary items that are both unusual and infrequent Fund balance: balances of both the beginning and the end of the year. 34

Statement of Revenues, Expenditures, and Changes in Fund Balance for Governmental Funds Often called the operating statement of the governmental funds. Statement of Revenues, Expenditures, and Changes in Fund Balance Revenues (recognized when both measurable and available; presented by source of revenue) $XX,XXX Expenditures (approved decreases in net financial resources; presented by function and character) X,XXX Excess of Revenues over Expenditures $ XXX Other Financing Sources or Uses (other increases or decreases in net financial resources available, such as bond issue proceeds and interfund transfers) XX Special Items and Extraordinary Items (X) Net Change in Fund Balance $ XX Fund Balance—Beginning XXX Fund Balance—Ending (reconciles to total fund balance on balance sheet) $ XXX 35

Which of the following is true? a. The operating statements of governmental entities focus on revenues and expenses. b. The balance sheets of governmental entities focus on the normal accounting equation: Assets – Liabilities = Owner’s Equity. c. The operating statements of governmental entities focus on revenues and liabilities. The balance sheets of governmental entities focus a modified accounting equation: Assets – Liabilities = Fund Balance. All governmental fund balances are spendable.

of accounting between governmental and private sector accounting.
Learning Objective 17-5 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting.

Measurement Focus And Basis Of Accounting
What flows should be measured for operations. Basis of Accounting When transactions and events should be recognized in the financial statements.

Basis of Accounting—Three Types Cash basis Accrual basis Modified accrual basis (hybrid system that includes both cash and accrual basis aspects)

Modified Accrual Basis Used in funds that have a flow of current financial resources measurement focus. E.g., the five governmental funds. Concentrates on the flow of current financial resources and their proper expendability for designated purposes. Expenditures recognized are amounts that would normally be liquidated with expendable available financial resources.

Modified Accrual Basis Present a Statement of Revenues and Expenditures and Changes in Fund Balance Shows financial resources received and spent. Shows change in net financial resources. Shows balance available for spending in the near future.

Modified Accrual Basis Funds Governmental Funds General Fund Special Revenues Fund Capital Projects Funds Debt Service Funds Permanent Funds

Accrual Basis Used in funds that have a flow of economic resources measurement focus. E.g., the proprietary funds, fiduciary funds, and government-wide financial statements. Allows for a comparison of revenues and expenses and a focus on maintenance of capital.

Accrual Basis Present a Statement of Revenues and Expenses Shows the change in the economic condition Also present a Statement of Cash Flows

Accrual Basis Funds Proprietary funds Enterprise Fund Internal Service Fund Fiduciary funds Trust Funds (3 types) Agency Funds

Basis of Accounting – Governmental Funds
Modified Accrual Basis Application Revenue: recorded when measurable and available to finance expenditures. Measurable: amount can be objectively determined. Available: collected within the current period or expected to be collected soon enough thereafter to be used to pay current-period liabilities (not more than 60 days after the end of the current fiscal period). Expenditures: recognized when measurable and incurred and are payable out of current financial resources.

Revenue from Nonexchange Transactions
Nonexchange transaction revenue: a government’s authority to levy taxes gives it the ability to receive value without directly giving equal value in exchange. 47

Recognition of Revenue
How revenues are recognized depends on the category Four categories: Category 1: derived tax revenues—from assessments on exchange transactions. E.g., income taxes and sales taxes. The asset is recognized when the underlying transaction occurs or resources are received, whichever comes first. Revenue recognition depends on the accounting basis used to measure the transaction. 48

How revenues are recognized depends on the category Four categories: Category 2: imposed nonexchange revenues—from assessments on nongovernmental entities, including individuals. E.g., property taxes and fines. The asset is recognized when the government has an enforceable legal claim to the resources or the resources are received, whichever comes first. Revenue recognition is made in the period when use of the resources for current expenditures is first permitted or required, or when the asset is recorded if no time restriction on the fund’s use of the resources exists. 49

How revenues are recognized depends on the category. Four categories: Category 3: government-mandated nonexchange transactions—from one governmental unit’s provision of resources to a governmental unit at another level and the requirement that the recipient use the resources for a specific purpose. E.g., federal programs that state or local governments are required to perform. Category 4: voluntary nonexchange transactions— from legislative or contractual agreements other than exchanges. E.g., certain grants and private donations. 50

The modified accrual basis of accounting: a. recognizes revenues when earned and expenditures when incurred. b. recognizes revenues when they become available and measureable and expenditures when liabilities become measurable and incurred. c. recognizes revenues when earned and expenses when incurred d. recognizes revenues when they become available and measureable and expenditures when they become available and spendable.

Learning Objective 17-6 Understand and explain basic budgeting concepts in governmental accounting.

Accounting for Expenditures
Budgets Used in governmental accounting to assist in management control and to provide the legal authority to levy taxes, collect revenue, and make expenditures in accordance with the budget. Types of budgets: Operating budgets Prepared for: general, special revenue, and debt service funds. Capital budgets Prepared for: capital projects fund. 53

Budgetary Aspects of Governmental Operations
Appropriation: the legal description of the authority to expend resources. Annual Budgets for the General Fund and the Special Revenue Funds are always recorded in the general ledger for control purposes. Also done for Capital Projects Funds and Debt Service Funds if useful. Encumbrances: commitments related to unperformed (executory) contracts for goods or services. Special general ledger accounts are used to record encumbrances—the purpose is to prevent spending more than has been appropriated. Budget entries have no effect on reported operations.

Introduction: Budget / Expenditure Process
Budget—Recorded in the books CAPITAL LETTERS (legally binding) Expenditures Appropriation (authorization of the expenditure) Encumbrance (set aside or reserve part of the budgetary appropriation) Expenditure Disbursement

Recording the Operating Budget Assume that at January 1, 20X1, the first day of the new fiscal period, the city council of Barb City approves the operating budget for the general fund, providing for $900,000 in revenue and $850,000 in expenditures. Approval of the budget provides the legal authority to levy the local property taxes and to appropriate resources for the expenditures. The entry made in the general fund’s accounting records on this date is as follows: 56

The ESTIMATED REVENUES CONTROL account is an anticipatory asset. The APPROPRIATIONS CONTROL account is an anticipatory liability. The excess of estimated revenues over anticipated expenditures is the budget surplus and is recorded to BUDGETARY FUND BALANCE—UNASSIGNED. Some approved budgets have budget deficits in which expected expenditures exceed anticipated revenue. These budgets are recorded with a debit to BUDGETARY FUND BALANCE—UNASSIGNED. 57

Why do state and local governments record encumbrances? a. To ensure that the entity earns sufficient revenues to achieve profitability. b. To ensure that the entity does not spend more than has been appropriated. c. To ensure that all sub-entities within the organization are not encumbered. d. To ensure that the entity spends at least as much as has been appropriated.

Make calculations and record journal entries for the general fund.
Learning Objective 17-7 Make calculations and record journal entries for the general fund.

Accounting for Expenditures
Four sequential steps Appropriation Encumbrance Expenditure Disbursement 60

Step 1: Appropriation Appropriation: the legal description of the authority to expend resources. The budget enables the appropriating authority to make future expenditures.

Step 1: Appropriation Recording the general fund budget
Assume that on January 1, 20X1, the first day of the new fiscal period, the city council of Barb City approves the operating budget for the general fund, providing for $900,000 in revenue and $850,000 in expenditures. Approval of the budget provides the legal authority to levy the local property taxes and to appropriate resources for the expenditures. The entry made in the general fund’s accounting records on this date is as follows: 62

Step 2: Encumbrance Encumbrance: a reservation of part of the budgetary appropriation and is recognized at the time an order is placed for goods or services. Ensures that the expenditures within a period do not exceed the budgeted appropriations. Provides a control system and safeguard for governmental unit administrators. When an order is placed for goods/services to be received from outside the governmental unit, the budgeted appropriation is encumbered for the order’s estimated cost.

Step 2: Encumbrance Recording the order for goods
Assume that on August 1, 20X1, Barb City completed a purchase order (PO) to buy goods estimated to cost $15,000 from an outside vendor. The entry to record this application of the budgeted appropriation authority for the period is as follows: ENCUMBRANCES account: budgetary account that reserves part of the budget’s appropriation authority; governmental entities often maintain a subsidiary ledger including accounts for specific types of encumbrances to correspond to each specific type of appropriation. BUDGETARY FUND BALANCE—ASSIGNED FOR ENCUMBRANCES account: a reservation (or restriction) of the budgetary fund balance; not an actual liability. 64

Step 3: Expenditure An expenditure and a corresponding liability are recorded when the governmental entity receives the goods or services ordered in step 2. When the goods are received, the encumbrance entry is reversed for the amount encumbered and the expenditure is recorded for the actual cost to the governmental entity.

Step 3: Expenditure Reverse encumbrances for goods received
Assume that the goods are received on September 20, 20X1, at an actual cost of $14,000. The entries to reverse the encumbrance for the goods and to record the actual expenditures are as follows: 66

Step 3: Expenditure Determine remainder of appropriating authority
remaining available = APPROPRIATIONS – (ENCUMBRANCES + Expenditures) 67

Step 4: Disbursement Disbursement: the payment of cash for expenditures. The governing board or council usually must approve disbursements as an additional level of control over them.

Step 4: Disbursement Payment of voucher for goods received
If Barb City council approved the voucher at its October 8 meeting and a check was prepared in the amount of $14,000 and mailed on October 15, 20X1, the following entry records the disbursement: 69

Major Expenditure Classifications for Government Funds

Outstanding Encumbrances at the End of the Fiscal Period
Should governmental units honor outstanding encumbrances from the previous year? Not required to do so. In virtually all cases, they are rebudgeted and honored.

Option 1: Encumbrances lapse at year-end Close remaining budgetary encumbrances. Reserve actual fund balance for outstanding encumbrances at end of 20X1 expected to be honored in 20X2. Reverse prior year encumbrance reserve. Establish budgetary control over encumbrances renewed from prior period. Receive goods and remove budgetary reserve for encumbrances. Record actual expenditure for goods received. Close expenditures account. Option 2: Encumbrances do not lapse at year-end Reclassify reserve from prior year.

Assume the following: On August 1, 20X1, the unit ordered $15,000 of goods and made an appropriate entry to record the encumbrance. The unit had not received the goods on December 31, 20X1, the end of the fiscal period. It receives the goods on February 1, 20X2, at an actual cost of $14,000. How should the unit account for this outstanding encumbrance if it (a) allows the encumbrance to lapse and (b) does not allow the encumbrance to lapse?

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Expenditures for Inventory
Consumption Method Recognizes expenditures only for the amount of inventory used in the period (the amount consumed). The use of inventory is treated as an outflow of resources. Purchases Method Recognizes the entire expenditure for inventory in the period the supplies are acquired (the amount purchased). The acquisition of inventory is treated as an outflow of resources.

Both inventory methods are used in practice. The method a specific governmental unit uses depends on its budgeting policy. The choice of method has no effect on the balance sheet amounts—the only effect is on the period in which the expenditures for inventory are reported. 76

Assume that Barb City acquires $2,000 of inventory on November 1, 20X1, having held no inventory previously. On December 31, 20X1, the end of Barb City’s fiscal year, a physical count shows $1,400 still in stock. During 20X2, $900 of this inventory is used, resulting in a $500 remaining balance of supplies on December 31, 20X2. How should Barb City account for these inventories? Show both the purchase and consumption methods. 77

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Illustration of Accounting for Inventories
Baker County, Iowa purchased $6,000 of supplies inventory on 7/1/X5, the first day of the fiscal year. Assume that the beginning inventory balance was $1,500 and that the county has a policy of initially recording all inventory purchases as expenditures and then adjusting the balances at the end of the accounting period based on the actual amount of inventory on hand per the physical count. Assume the actual inventory on hand on 6/30/X6 is $2,500. REQUIRED Assuming the purchase method, record the initial inventory purchase on 7/1/X5. Then, record the adjusting entry on 6/30/X6. Assuming the consumption method, record the initial inventory purchase on 7/1/X5. Then, record the adjusting entry on 6/30/X6.

Consumption Method (Expenditure = Amount CONSUMED)
To record the purchase of $6,000 of inventory on 7/1/X5. To adjust inventory balance per the physical count on 6/30/X6. To adjust non-spendable fund balance to the actual on 6/30/X6 Expenditures Inventory Fund Balance—NS BB 1,500 1,500 BB EB 2,500 2,500 BB

Purchase Method (Expenditure = Amount Purchased)
To record the purchase of $6,000 of inventory on 7/1/X5. To adjust inventory and the non-spendable fund balance to the actual inventory balance per the physical count on 6/30/X6. Expenditures Inventory Fund Balance—NS 6,000 BB 1,500 1,500 BB Amount CONSUMED EB 2,500 2,500 BB

Accounting for Fixed Assets
Governmental funds: recognize cost of the acquisition of equipment and other capital assets as an expenditure in the year the asset is acquired. Proprietary funds: account for acquisitions of capital assets in the same manner as commercial entities. Works of art and historical treasures For the purposes of government-wide financial statements, governments should capitalize these assets at their historical costs at acquisition or at their fair values at the date of the contribution. If assets are donated, contribution revenue is recognized in the government-wide financial statements. 82

Long-Term Debt and Capital Leases
Governmental funds record the proceeds differently than commercial, profit-seeking businesses. Proceeds from a bond issue recorded as a debit to Cash and a credit to Bond Issue Proceeds, an other- financing source. Bond issue proceeds are not revenue because the bonds must be repaid. Bonds are not reported on the governmental funds’ balance sheets but only on the government-wide financial statements. 83

Long-Term Debt and Capital Leases
Capital leases are accounted for in a manner similar to long-term debt. Proprietary fund: lease is accounted for using methods similar to those that commercial, profit-seeking entities use by recording an asset and a lease liability. Governmental fund: lease is accounted for using methods similar to a bond’s accounting. 84

Investments Investments
GASB 31 establishes a general rule of fair market valuation for investments held by a government entity. The following investments are to be valued at fair value if determinable in the asset section of the balance sheet: investments in debt securities, equity securities, open-end mutual funds, investment pools, and interest-earning investment contracts. Changes in the fair value of investments should be recognized as an element of investment income in the operating statement (or statement of activities) of each fund making the investment. GASB 40 requires footnote disclosures of the policies and the profiles of the government’s investment portfolios. 85

Group Exercise: Comprehensive General Fund Entries
The City of Cottersen, Texas, is a small town with a population of approximately 15,000. The city noted the following transactions during fiscal 20X8. REQUIRED Prepare General Fund journal entries only for these items. Prepare closing entries at 6/30/X8. Prepare a Statement of Revenues, Expenditures, and Changes in Fund Balance as of 6/30/X8. Provide a summary of the fund balance by category as of 6/30/X8.

Group Exercise: Requirement 1 (Journal Entries)
The Cottersen City Council approved the following budget: Estimated revenues $820,000 Authorized expenditures (including $60,000 reappropriated for encumbrances outstanding at 6/30/X7 that had lapsed) 720,000 Authorized transfers out to other funds ($35,000 and $20,000) ,000 Estimated inflow from the discontinuance of the Auto Repair Internal Service Fund ,000 To record the budget.

The city levied property taxes totaling $570,000. Of this amount, $10,000 was estimated to be uncollectible. Collections during the year totaled $525,000, of which $12,000 were associated with property taxes levied in the prior year that had been declared delinquent at the end of the prior year. All of the remaining property taxes receivable at the beginning of the current year, totaling $5,000, were written off as uncollectible. The net realizable amount at 7/1/X7 ($11,000) is expected to be collected within 60 days. To record the property tax levy. To record property tax collections.

The city levied property taxes totaling $570,000. Of this amount, $10,000 was estimated to be uncollectible. Collections during the year totaled $525,000, of which $12,000 were associated with property taxes levied in the prior year that had been declared delinquent at the end of the prior year. All of the remaining property taxes receivable at the beginning of the current year, totaling $5,000, were written off as uncollectible. The net realizable amount at 7/1/X7 ($11,000) is expected to be collected within 60 days. Property Taxes Receivable—Delinquent Allowance for Uncollectibles—Delinquent NRV = 11,000 BB 17,000 6,000 BB 12,000 Collected 5,000 Write off Given 5,000 1,000 Left over Close out

To write-off uncollectible accounts and eliminate the remaining $1,000 credit balance in the allowance account. Property Taxes Receivable—Delinquent Allowance for Uncollectibles—Delinquent BB 17,000 6,000 BB 12,000 Collected 5,000 Write off Given 5,000 1,000 Left over Close out

The city levied property taxes totaling $570,000. Of this amount, $10,000 was estimated to be uncollectible. Collections during the year totaled $525,000, of which $12,000 were associated with property taxes levied in the prior year that had been declared delinquent at the end of the prior year. All of the remaining property taxes receivable at the beginning of the current year, totaling $5,000, were written off as uncollectible. The net realizable amount at 7/1/X7 ($11,000) is expected to be collected within 60 days. To transfer delinquent property taxes to specifically designated accounts.

The estimated revenues for the year include a $44,000 entitlement from the federal government. During the year, the city received $50,000. To record entitlement from the federal government. To record collection of entitlement.

The City’s income taxes, sales taxes, permits, licenses, and other miscellaneous revenues totaled 225,000. To record revenues accounted for on the cash basis.

Encumbrances outstanding at the beginning of the year totaled $60,000. The goods and services related to these encumbrances were received along with invoices for $58,000. To reverse the 6/30/X7 appropriation of fund balance for encumbrances outstanding. To reestablish budgetary control over encumbrances outstanding at 6/30/X7.

Encumbrances outstanding at the beginning of the year totaled $60,000. The goods and services related to these encumbrances were received along with invoices for $58,000. To cancel encumbrances of $60,000 upon receipt of goods and services totaling $58,000. To record expenditures of $58,000 for goods and services.

Purchase orders and contracts totaling $380,000 were entered into during the year. For $340,000 of this amount, invoices that totaled $336,000 for services and goods were received. The city generally allows encumbrances outstanding at year-end to lapse but reappropriates the amounts in the following year to honor the encumbrances. Of the $336,000 invoiced, $75,000 relates to the acquisition of supplies inventory. The city uses the consumption method for accounting for supplies. To record encumbrances for purchase orders issued and contracts entered into during the year.

Purchase orders and contracts totaling $380,000 were entered into during the year. For $340,000 of this amount, invoices that totaled $336,000 for services and goods were received. The city generally allows encumbrances outstanding at year-end to lapse but reappropriates the amounts in the following year to honor the encumbrances. Of the $336,000 invoiced, $75,000 relates to the acquisition of supplies inventory. The city uses the consumption method for accounting for supplies. To cancel encumbrances of $340,000 upon receipt of goods and services totaling $336,000. To record expenditures of $261,000 including supplies inventory of $75,000, the total of which was previously encumbered for $340,000. We will record any remaining Inventory at the end of the period as per the consumption method.

Payroll and other items not involving the use of purchase orders and contracts totaled $270,000. This amount does not include interfund billings. To record expenditures for items not previously encumbered (other than amounts relating to interfund billings). Cash disbursements (not including payments to other funds) totaled $664,000. To record cash disbursements other than interfund disbursements.

The Auto Repair internal service fund was discontinued as determined by the city council at the beginning of the year. The actual amount disbursed to the General Fund when the fund was discontinued was $22,000. To record transfer received from the Motor Pool Internal Service Fund, which was discontinued. A payment was made for $30,000 to the Electric Utility Enterprise Fund to make up its operating deficit, which had originally been estimated to be $35,000. To record payment of transfer to the Electric Utility Enterprise Fund ($5,000 under $35,000 budgeted amount).

A $20,000 payment was made to a Capital Projects fund to cover a portion of street improvements (which was exactly the amount budgeted). To record payment of transfer to a Capital Projects Fund.

The Electric Utility Enterprise fund billed the city for a total of $28,000 for electricity used by the city and supplied by the Electric Utility. The cash disbursements throughout the year for periodic billings totaled $24,000. To record as expenditures electricity purchased from the Electric Utility Enterprise Fund (a quasi-external transaction). To record payments made to the Electric Utility Enterprise Fund for electricity purchased.

The City disbursed $79,000 to the City Center for the Performing Arts Enterprise Fund as a loan. The repayment is expected in three years. To record advance to Center Performing Arts Enterprise Fund (repayable in three years).

A physical count of the supplies inventory at year-end indicates that the balance decreased from $44,000 to $41,000 during the year. Supplies Inventory Expenditures BB 44,000 Inv. 75,000 EB 41,000 Fund Balance— Non-spendable Fund Balance—Unassigned 44,000 BB 41,000 EB

A physical count of the supplies inventory at year-end indicates that the balance decreased from $44,000 to $41,000 during the year. Note: Supplies purchased during the year totaled $75,000 and have already been expensed as indicated in #6. Moreover, physical inventory decreased $3,000 from the beginning of the year. Note: This entry changes the amount set aside in the fund balance for inventory to reflect the decrease in inventory from the prior period.

Group Exercise: Requirement 2 (Encumbrances Closing Entries)
BUGETARY FUND BALANCE ASSIGNED FOR ENCUMBRANCES ENCUMBRANCES 40,000 40,000 Fund Balance— Assigned for Encumbrances Fund Balance—Unassigned

Group Exercise: Requirement 2 (Encumbrances Closing Entries)
To close encumbrances outstanding at year-end by reversing the entry that previously recorded them (see #6). To record the actual fund balance reserve account to indicate the portion of year-end fund balance segregated for expenditure upon vendor performance.

Group Exercise: Requirement 2 (Budget Closing Entry)
To reverse the entry previously made to record the legally adopted annual operating budget.

Group Exercise: Requirement 2 (Closing Operating Accounts)
Revenues— Property Tax Revenues— Entitlements Revenues— Other 560,000 #2 44,000 #3 225,000 #4 1,000 #2 6,000 #3 X 561,000 X 50,000 X 225,000 Other Financing Sources—Trans. In Other Financing Uses—Transfers Out Expenditures #5 58,000 22,000 #9 #10 30,000 #6 336,000 #7 270,000 #11 20,000 #12 28,000 #14 3,000 X 22,000 695,000 X 50,000 X

Group Exercise: Requirement 2 (Closing Operating Accounts)
Revenues—Property Taxes Revenues—Entitlements Revenues—Other Other Financing Sources—Transfer In Expenditures Other Financing Uses—Transfer Out Unassigned Fund Balance To close the actual revenues, expenditures, and other financing uses into Unassigned Fund Balance.

Group Exercise: Requirement 2 (Statement of Revenues, Expenditures, and Changes in Fund Balance)
Variance Favorable Budget Actual (Unfavorable) Revenues: Property taxes ($560,000 + $1,000) $570,000) $561,000) $(9,000)) Intergovernmental entitlement 44,000) 50,000) 6,000) Miscellaneous 206,000) ,000) 19,000) Total Revenues $820,000) $836,000) $16,000) Expenditures: 720,000) ,000) 25,000) Excess of Revenues over Expenditures $100,000) $141,000) $41,000) Other Financing Sources (Uses): Transfer in from Auto Repair Internal Service Fund $25,000) $22,000) $(3,000) Transfers Out— to Electric Utility Enterprise Fund (35,000) (30,000) 5,000) to Capital Projects Fund (20,000) (20,000) ) Total Other Financing Sources (Uses) $(30,000) $(28,000) $2,000) Excess of Revenues over Expenditures and Other Financing Uses: $70,000) $113,000) $43,000) Fund Balance – 7/1/X ,000) ,000) ) Fund Balance – 6/30/X8 $270,000) $313,000) $43,000) ) Note: The large favorable variance is attributable primarily to encumbrances of $40,000 outstanding at year-end that will be reflected as expenditures in the following year and a decrease in supplies inventory of $3,000.

Group Exercise: Requirement 4 (Fund Balance Summary)
Nonspendable: Supplies Inventory $ 41,000 Spendable: Assigned for Governmental Services ,000 Unassigned ,000 Total Fund Balance $ 313,000

Learning Objective 17-8 Make calculations and record journal entries for basic interfund activities.

Interfund Activities Interfund Activities: resource flows between fund entities. Governmental accounting requires the separate maintenance and reporting of interfund items. GASB 34 establishes four types of interfund activities: Interfund loans Interfund services provided and used Interfund transfers Interfund reimbursements 113

Interfund Transactions and Transfers
114

Interfund Loans Loans must be repaid, usually within one year, or before the end of the fiscal period. Not shown on a fund’s statement of revenues, expenditures, and changes in fund balance. All loans must be shown on the balance sheet as payables or receivables. 115

Interfund Loans: Example
Assume that Barb City’s general fund loans the internal service fund $4,000 for two months. The general fund reports a receivable for the amount of the loan until it is repaid. 116

Interfund Services Provided and Used
Transactions that would be treated as revenue, expenditures, or expenses if they involved parties external to the governmental unit. Still reported as revenue, expenditures, or expenses but differently. Examples: The general fund purchases goods or services from an internal service or enterprise fund. Payments are made to the general fund from the enterprise fund for fire and police protection. 117

Interfund Services Provided and Used: Example
Assume that Barb City’s general fund uses an auto from the city motor pool. The motor pool operates as an internal service fund. The general fund is billed $100 based on mileage and pays the bill 30 days later. 118

Interfund Transfers The general fund often transfers resources into another fund for the receiving fund to use for its own operations. Interfund transfers are not expected to be repaid. Classified under “Other Financing Sources or Uses” in the operating financial statement of the funds. Examples: A transfer of resources, such as cash or other assets, is made from the general fund to an enterprise fund or internal service fund that has an operating deficit that must be eliminated. A transfer of resources from the general fund to a capital projects fund is made to help finance new construction. 119

Interfund Transfers: Example
Assume that Barb City’s general fund agrees to provide $10,000 to the capital projects fund toward the construction of a new library. The Transfer Out account in the general fund is closed to its Unassigned Fund Balance at the end of the fiscal period. The capital projects fund also closes its Transfer In account at the end of the fiscal period to its Unassigned Fund balance. These interfund transfers are not expected to be repaid. 120

Interfund Reimbursements
Reimbursing a fund’s expenditure or expense that was initially made from the fund but that is properly chargeable to another fund. Initial payments are sometimes made either because of improper classification to the wrong fund or for expediency within the governmental entity. Recorded as a reduction of the expenditure in the fund initially recording the expenditure and a recording of the expenditure in the proper fund for the appropriate amount. Examples: The general fund initially records and pays an expenditure properly chargeable to the special revenue fund, and the special revenue fund subsequently reimburses the general fund. The general fund records and pays for an expenditure to provide preliminary architectural work on the planning for a new sports arena. The sports arena enterprise fund later reimburses the general fund. 121

Interfund Reimbursements: Example
Assume that Barb City’s general fund recorded a $3,000 expenditure for a bill from outside consultants that is later discovered to be properly chargeable to the capital projects fund. Upon notification, the capital projects fund reimbursed the general fund and properly recorded the expenditure in its fund. 122

Overview of Accounting and Financial Reporting for the General Fund
123

Overview of Accounting and Financial Reporting for the General Fund
124

Conclusion The End

Governmental Entities: Introduction and General Fund Accounting

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Governmental Entities: Introduction and General Fund Accounting

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