2. Advanced Accounting, Fourth Edition17
Introduction
to Fund Accounting
Advanced Accounting, Fourth Edition

3. 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.

4. 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.)

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.”

15. 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.

16. 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

17. 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.

18. 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.

19. 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.

20. Fund Accounting
Exercise 17-3: 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.

21. Fund Accounting
Exercise 17-3: 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.

22. 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.

23. 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.

24. 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.

25. 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

26. Fund Accounting
Exercise 17-3: 2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible 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

27. 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

28. 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:

29. 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

30. 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— ,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.

31. 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.

32. 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.

33. 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.

34. 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 – ,000
Vouchers Payable 29,000
LO 8 Understand the general fund.

35. 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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.

43. 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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