Government Accounting (AFA-II)

Governmental Entities: Introduction and General Fund Accounting

• Governmental entities have operating objectives different from those of commercial
entities; therefore, governmental accounting is different from accounting for commercial
enterprises
• Nature of governmental entities:
a. Collect resources and make expenditures to fulfil societal needs
b. Absence of profit motive except for some activities
c. 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
d. Control mechanism - Use of comprehensive budgetary accounting
e. Accountability for the flow of financial resources is a chief objective
f. Typically are required to establish separate funds to carry out various missions;
each fund is an independent accounting and fiscal entity
g. Many fund entities do not record fixed assets or long-term debt in their funds
h. An important objective of governmental financial reporting is accountability

Elements of a statement of financial condition:

1. Assets are resources with present service capacity that the entity presently controls
2. Liabilities are present obligations to sacrifice resources that the entity has little or no
discretion to avoid
3. A deferred outflow of resources is a consumption of net assets that is applicable to a
future reporting period
4. A deferred inflow of resources is an acquisition of net assets that is applicable to a
future reporting period
5. Net position is the residual of all other elements presented in a statement of financial
condition

Elements of the resource flows statements:

1. An outflow of resources is a consumption of net assets that is applicable to the
current reporting period
2. An inflow of resources is an acquisition of net assets that is applicable to the
current reporting period

Expendability of resources versus capital maintenance objectives:

Commercial Enterprises Government Entities
Changes in current financial
resources available to provide
services to the public in
Measurement focus The flow of all economic resources accordance with the budget
Method of Accounting Accrual method Modified accrual method
Contains both current and
noncurrent assets and liabilities, and
the change in retained earnings Reports only current assets,
reflects the company’s ability to current liabilities, and a fund
Balance sheet maintain its capital investment balance
 • Types of funds
– Governmental Funds:
• Used to 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 funds
– Proprietary Funds
• The objective is to recover the unit’s costs through user charges
– Fiduciary Funds
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 of the governmental
entity.
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.
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. Services are offered
only to governmental agencies.
Fiduciary Fund Types and Similar Component Units
Pension (and other Accounts for resources required to be held in trust for the
employee benefit) trust members and beneficiaries of pension plans, other post-
fund 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 Accounts for all other trust arrangements under which the
fund 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.
Basis of accounting—governmental funds
– Revenue is recorded in the accounting period in which it is both measurable and available to
finance expenditures made during the current fiscal period
– Expenditures are recognized in the period in which the liabilities are both measurable and
incurred and are payable out of current financial resources

Recognition of revenue: How revenues are recognized depends on the category:

• Derived tax revenues, resulting from assessments on exchange transactions
– 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
 • Imposed nonexchange revenues, resulting from assessments on nongovernmental entities,
including individuals
– 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 at the time the asset is recorded if no
time restriction on the fund’s use of the resources exists
Imposed nonexchange revenues, resulting from assessments on nongovernmental entities,
including individuals
– 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 at the time the asset is recorded if no
time restriction on the fund’s use of the resources exists
• Recognition of revenue:
– Government-mandated nonexchange transactions, resulting 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
– Voluntary nonexchange transactions, resulting from legislative or contractual
agreements, other than exchanges
• 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
• Capital budgets

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:

– 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—UNRESERVED
 – Some approved budgets have budget deficits in which expected expenditures exceed
anticipated revenue
– These budgets are recorded with a debit to BUDGETARY FUND BALANCE—
UNRESERVED
The Expenditure Process
– Step 1. Appropriation
• The budget provides the appropriating authority to make future
expenditures
– Step 2. Encumbrance
• An encumbrance is a reservation of part of the budgetary appropriation
and is recognized at the time an order is placed for goods or services
– Step 3. Expenditure
• An expenditure and a corresponding liability are recorded when the
governmental entity receives the goods or services ordered in step 2
– Step 4. Disbursement
• A disbursement is the payment of cash for expenditures
Classification of expenditure transactions and accounts
– Expenditures should be classified by fund, character, function (or program),
organizational unit, activity, and principal classes of objects
Outstanding encumbrances at the end of the fiscal period:
– May be allowed to lapse
– May be carried over as nonlapsing spending authority
Expenditures for inventory
– Determining the method to account for the expenditure of inventories:
• Purchase method: Recognizes the entire expenditure for inventory in the
period the supplies are acquired
• Consumption method: Recognizes expenditures for only the amount of
inventory used in the period
– The specific method to follow depends on the governing unit’s policy and how
inventory expenditures are included in the budget
– Immaterial inventories need not be shown on the balance sheet
– If the inventory is material, it is presented as an asset on the balance sheet
• An amount equal to the inventory also should be shown as a reservation of
the fund balance, indicating that that amount is no longer expendable
Interfund Activities
Overview of Accounting and Financial Reporting for the General Fund