Advanced accounting 10th by a beams athony ch19

publishing as Prentice Hall 19-5 General Fund Transactions General fund entries • Start of fiscal year • During the year and adjustments... Special Revenue Funds• Accounts for revenue so

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by 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.

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Objectives (cont.)

5 Convert governmental fund financial statements to

government-wide financial statements.

1: Record Transactions

Accounting for State and Local Governmental Units –

Governmental Funds

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19-5

General Fund Transactions

General fund entries

• Start of fiscal year

• During the year and adjustments

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,.

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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).

Allowance for uncollectibles – 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)

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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.

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.

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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.

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.

Allowance for uncollectibles – current 20  

Allowance for uncollectibles –

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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.

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

Other financing sources - bond proceeds 45  

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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.

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

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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

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

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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

• A contract for the project is signed for $280

• The signed contract is recorded as an Encumbrance

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CPF Entries (2 of 3)

• 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

Other financing sources – nonreciprocal

CPF

DSF

CPF Entries (3 of 3)

• 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

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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.

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19-25

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

Other financing sources – nonreciprocal

Other financing uses – nonreciprocal

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

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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

Particulars

Accounting for State and Local Governmental Units –

Governmental Funds

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• 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

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19-31

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)

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

Other financing source … nonreciprocal

GF

DSF

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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)

3: Which Fund?

Accounting for State and Local Governmental Units –

Governmental Funds

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19-35

Five Governmental Fund Types

4: Fund Financial Statements

Accounting for State and Local Governmental Units –

Governmental Funds

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Fund Financial Statements

Required governmental fund financial statements

1 Statement of net assets or balance sheet

2 Statement of revenues, expenditures and changes in fund

balance

3 Budgetary comparison information • • General fund Special revenue funds with legally adopted budget

1 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

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General Fund Statement of Revenues,

Expenditures and Changes in Fund Balance

Excess of revenues and OF sources over

Expenditures include those from "prior year" encumbrances.

5: Government-wide Financial

Statements

Accounting for State and Local Governmental Units –

Governmental Funds

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19-41

Government-wide Statements

• Governmental fund statements

– Modified accrual basis

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

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Long Term Debt

• Add existing long term liabilities, reduce net assets

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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