© 2009 pearson education, inc. publishing as prentice hall19-1 chapter 19: accounting for state and...

© 2009 Pearson Education, Inc. publishing as Prentice Hall 19-1

Chapter 19: Accounting for State and Local Governmental Units –

Governmental Fundsby Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany

Advanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement,

Joseph H. Anthony, and Suzanne Lowensohn


Governmental Funds: Objectives

1. Prepare journal entries to record transactions in governmental funds.

2. Learn about accounting methods unique to governmental accounting – budgetary issues, encumbrance accounting, and interfund transactions.

3. Determine the appropriate governmental fund to be used.

4. Prepare governmental fund financial statements.


Objectives (cont.)

5. Convert governmental fund financial statements to government-wide financial statements.


1: Record Transactions1: Record Transactions

Accounting for State and Local Governmental Units – Governmental Funds


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.


Beginning of Year

• $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,.

Reserve for encumbrances 90 Reserve for encumbrances - prior year 90

Estimated revenues 3,500 Appropriations 3,320 Estimated other financing uses - transfers out 115 Unreserved fund balance 65


Revenue and Collections

• 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).

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 10


Expenditures (Without Encumbrance) and Payments

• 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)

Expenditures 200

Vouchers payable 200


Cash 187


Supplies (without encumbrance)

• 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.

Supplies inventory 55

Vouchers payable 55

Expenditures 345



Expenditures – Prior Year

• 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.

Expenditures - prior year 85

Vouchers payable 85


Adjustments (1 of 2)

• 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.

Expenditures 30

Supplies inventory 30

Revenues 50

Deferred revenue 50


Adjustments (2 of 2)

• 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.

Taxes receivable – delinquent 240 Allowance for uncollectibles – current 20

Taxes receivable – current 240 Allowance for uncollectibles – delinquent 20


Closing the Budget

• 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.

Appropriations 3,320

Estimated other financing uses - transfers out 115

Unreserved fund balance 65

Estimated revenues 3,500


Closing Current Year Accounts

• 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.

Revenues 3,520

Other financing sources - bond proceeds 45

Expenditures 3,264

Encumbrances 50

Other financing uses - transfers out 164



Closing Prior Year Accounts

• "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.

Reserve for encumbrances - prior year 90

Expenditures - prior year 85



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


SRF - Grant Entries

• 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

Cash 20 Deferred revenue – grant 20

Expenditures 18 Vouchers payable 18

Deferred revenue – grant 18 Revenue 18

Receive cash

Meet require-ments


Permanent Funds

• 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

Cash or Investments 500 Revenues – addition to permanent endowments 500

Cash 12 Revenues – investment income 12

Expenditures 3 Cash 3


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


CPF Entries (1 of 3)

• 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

Cash 302

Other financing sources – Proceeds from bonds 302

• A contract for the project is signed for $280• The signed contract is recorded as an Encumbrance

Encumbrances 280

Reserve for encumbrances 280



• 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

Other financing uses – nonreciprocal transfer to debt service fund 2

Cash 2

Cash 2 Other financing sources – nonreciprocal transfer from capital projects fund 2

CPF

DSF



• 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%

Encumbrances 100 Reserve for encumbrances 100

Expenditures 100 Contracts payable 90

Contracts payable – retained percentage 10


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


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.


DSF Entries (1 of 2)

• 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

Cash 16 Other financing sources – nonreciprocal transfer from general fund 16

Other financing uses – nonreciprocal transfer to debt service fund 16

Cash 16

DSF

GF


DSF Entries (2 of 2)

• 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

Expenditures – principal 14

Expenditures – interest 2

Matured principal payable 14Interest payable 2

Matured interest payable 14

Interest payable 2

Cash 16


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


2: Governmental Accounting 2: Governmental Accounting ParticularsParticulars



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


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


Encumbrance Accounting

• 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)

Encumbrances 150 Reserve for encumbrances 150

Reserve for encumbrances 150 Encumbrances 150

Expenditures 140 Vouchers payable 140

Place order

Receive goods


Interfund Transactions - Transfers

• 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

Other financing use … nonreciprocal transfer to debt service fund 14

Cash 14 Cash 14

Other financing source … nonreciprocal transfer from general fund 14

GF

DSF


Interfund Transactions - Other

• 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)

Expenditures 5

Cash 5

Cash 5

Revenues 5

GF

EF


3: Which Fund?3: Which Fund?



Five Governmental Fund Types


4: Fund Financial Statements4: Fund Financial Statements



Fund Financial StatementsRequired governmental fund financial statements1. Statement of net assets or balance sheet2. Statement of revenues, expenditures and

changes in fund balance3. Budgetary comparison information

• General fund• Special revenue funds with legally adopted

budget1 and 2: Prepare statements columns for general

fund and other significant governmental fund• Combine insignificant funds• Show total (no interfund eliminations)


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

Total $677


General Fund Statement of Revenues, Expenditures and Changes in Fund BalanceTotal 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.


5: Government-wide Financial 5: Government-wide Financial StatementsStatements



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


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


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


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


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