advanced accounting by hoyle et al, 6th...

© The McGraw-Hill Companies, Inc., 2004

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Chapter ElevenChapter Eleven

Accounting for Accounting for State and Local State and Local Governments Governments

(Part 1)(Part 1)


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Governmental AccountingGovernmental Accounting

Focuses on financial reporting for non-profit governmental agencies.

Many concepts are similar to financial accounting, but terminology and procedures differ.

Governmental Accounting Standards Board (GASB) generates standards.


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Governmental AccountingGovernmental AccountingUser NeedsUser Needs

In Concepts Statement #1, In Concepts Statement #1, GASB identified 3 basic GASB identified 3 basic

groups of users of groups of users of governmental governmental

accounting information:accounting information: CitizenryCitizenry Legislative and oversight Legislative and oversight

bodiesbodies Investors and creditorsInvestors and creditors


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Government-wide Government-wide Financial StatementsFinancial Statements

GASB Statement No. 34GASB Statement No. 34

Requires the production of two sets of statements:

Fund-Based Financial Fund-Based Financial StatementsStatements

Reports all revenues and all costs of

providing services each year and all resources

available to the governmental unit.

Shows restrictions on the use of resources and measures, in the

short run, revenues and expenses from certain

activities.


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Reporting Diverse Governmental Reporting Diverse Governmental Activities - Fund AccountingActivities - Fund Accounting

Governmental units Governmental units have many different have many different types of activities.types of activities.

No common No common motivation links motivation links these activities.these activities.

Therefore, each Therefore, each activity operates activity operates quasi-independent, quasi-independent, self-balancing sets of self-balancing sets of accounts called accounts called funds.funds.

Examples include: Public Safety Sanitation Health & Welfare Education Parks & Recreation Judicial System Water and Sewer Employee Pensions


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Accountability and Governmental Accountability and Governmental AccountingAccounting

Governmental Accounting Statements attempt to answer 3 questions related

to accountability:

Where did the financial resources

come from?

Where did the financial

resources go?

What amount of financial resources is presently held?


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Governmental Funds

Accounting for activities related

to serving the public.

Proprietary Funds

Accounting for business-type

activities.

Fiduciary Funds

Accounting for financial

resources held for others in a

trustee capacity.

Fund Accounting ClassificationFund Accounting Classification

All funds fall into one of three broad classifications.


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Fund Accounting ClassificationFund Accounting ClassificationGovernmental FundsGovernmental Funds

G en eralF und

SpecialReven u e

F und

Cap italPro jects

F und

DebtServic e

F und

Perm anen tF und

(En d ow m en ts)

G o vernm en tal F u n ds


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Governmental FundsGovernmental FundsGeneral FundGeneral Fund

Used to account for all Used to account for all financial resources financial resources except those except those accounted for in other accounted for in other funds.funds.

In 2001, 60% of In 2001, 60% of Baltimore’s Baltimore’s governmental funds governmental funds were accounted for in were accounted for in the General Fund.the General Fund.


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Governmental FundsGovernmental FundsSpecial Revenue FundSpecial Revenue Fund

Expenditures are Expenditures are legally restricted.legally restricted.

Revenues that must be Revenues that must be spent for specific spent for specific purposes.purposes.

St. Paul, MN, requires St. Paul, MN, requires that money received that money received for the sale of zoo for the sale of zoo animals, must be animals, must be spent to acquire NEW spent to acquire NEW animals for the zoo.animals for the zoo.


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Governmental FundsGovernmental FundsCapital Projects FundCapital Projects Fund

Used to account for Used to account for costs to acquire or costs to acquire or build major build major governmental governmental facilities.facilities.

The asset is not The asset is not recorded in this recorded in this account, but the funds account, but the funds to acquire or build it to acquire or build it are accounted for are accounted for here.here.


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Governmental FundsGovernmental FundsDebt Service FundDebt Service Fund

Used to account for financial resources collected to pay long-term liabilities and interest.

In 2001, Birmingham reported paying out $11 million in principal payments and $15 million in interest from its debt service funds.


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Governmental FundsGovernmental FundsPermanent Fund (Endowments)Permanent Fund (Endowments)

Used to account for Used to account for funds donated to the funds donated to the government by government by external donors.external donors.

In 2001, Dallas In 2001, Dallas reported nearly $8 reported nearly $8 million in funds million in funds donated to take care of donated to take care of city parks.city parks.


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Fund Accounting ClassificationFund Accounting ClassificationProprietary FundsProprietary Funds

Enterprise Fund Internal ServiceFund

P ro p rie tary F u n ds


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Proprietary FundsProprietary FundsEnterprise FundEnterprise Fund Used to account for any government activity that is Used to account for any government activity that is

financed by user charges.financed by user charges. An activity MUST be accounted for here if any one of An activity MUST be accounted for here if any one of

the conditions below are met . . . the conditions below are met . . .

Net revenues provide the

security for the activity’s debts.

The the law requires costs to

be recovered from user fees.

Fees are set high enough to recover costs..


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Proprietary FundsProprietary FundsInternal Service FundInternal Service Fund

Used for any unit that Used for any unit that provides services to provides services to the OTHER the OTHER governmental governmental departments.departments.

Inter-departmental Inter-departmental fees are charged.fees are charged.

Tennessee Tech Tennessee Tech University charges the University charges the departments for the departments for the use of University use of University vehicles.vehicles.


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Fund Accounting ClassificationFund Accounting ClassificationFiduciary FundsFiduciary Funds

Investm entTrust Funds

Private PurposeTrust Funds

PensionTrust Funds

AgencyFunds

Fiduciary Funds(O nly used for funds

held for external parties)


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Coverage of Fund Accounting Coverage of Fund Accounting ProceduresProcedures


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Let’s look at an overview of

the Government-

Wide Statements.


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Government-Wide Financial Government-Wide Financial StatementsStatements

Two separate statements are

required:

Statement of Net Assets

&Statement of

Activities

The economic resources

measurement focus requires reporting of

ALL assets and liabilities.


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Statement of Net AssetsStatement of Net Assets

Note that we Note that we keep the keep the

Governmental Governmental Activities Activities

separate from separate from the Business-the Business-

Type Activities.Type Activities.

Exh.11-1


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Statement of Net AssetsStatement of Net Assets

Also note that Also note that this statement this statement does not give does not give information information

about about Fiduciary Fiduciary

FundsFundsThis is consistent with the This is consistent with the

economic resources economic resources management focus which only management focus which only includes assets and liabilities includes assets and liabilities that are available to use for that are available to use for

governmental purposes.governmental purposes.

Exh.11-1


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Statement of ActivitiesStatement of Activities

The net for a given function is determined horizontally, while the

totals for expenses and revenues are

determined vertically.

Exh.11-2


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Statement of ActivitiesStatement of Activities

The general revenues are

shown separately at the bottom of

the statement.

Exh.11-2


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Now, let’s look

at an overview

of the Fund-

Based

Statements.


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Fund-Based Financial StatementsFund-Based Financial Statements

Two separate statements are required:

Balance Sheet&

Statement of Revenues, Expenditures, and Changes in Fund

Balance

Fund-Based statements

include information on fiduciary funds.


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Fund-Based Financial StatementsFund-Based Financial Statements

These statements will differ from the Government-Wide financial statements for three reasons.

3

The proprietary funds are reported in a separate statement.

The current financial resources measurement basis is used.

The modified accrual accounting approach is used.


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Fund Accounting Balance Fund Accounting Balance Sheet ExampleSheet Example

Exh.11-3


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Internal Service Funds Internal Service Funds are included in separate are included in separate

statements for statements for Proprietary Funds.Proprietary Funds.

The “current financial The “current financial resources” resources”

measurement is used.measurement is used.

Modified accrual Modified accrual accounting is used.accounting is used.

Exh.11-3


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Note that the Note that the statement has a statement has a separate column separate column for the General for the General

Fund and for each Fund and for each fund identified as fund identified as a “major” fund.a “major” fund.

Two criteria determine whether a fund is classified as

“major”:1. Total assets, liabilities,

revenues, or expenditures are at least 10% of the

corresponding total for all funds of the same category.

2. Total assets, liabilities, revenues, or expenditures

are at least 5% of the corresponding for all other

funds combined.

Exh.11-3


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Statement of Revenues, Expenditures, & Statement of Revenues, Expenditures, & Changes in Fund Balances - ExampleChanges in Fund Balances - Example

ContinueContinue

Exh.11-4


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Statement of Revenues, Expenditures, & Statement of Revenues, Expenditures, & Changes in Fund Balances - ExampleChanges in Fund Balances - Example

Exh.11-4


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Let’s look at the accounting

procedures for the Governmental

Accounts for both the Fund-Based and Government-Wide

Statements.


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Recording Budgetary EntriesRecording Budgetary Entries

Purposes of the budget, per the GASB:

1. Expresses public policy.2. Serves as an expression

of financial intent.3. Provides control by

establishing spending limits.

4. Offers a means of evaluating performance.

Budget information

for the General Fund and for each of the major

Special Funds must be

presented.


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Prepare the journal entry to record the Special Revenue

Fund budget.

For example, assume a town enacts a motel excise tax to promote tourism and conventions. For 2004, the tax is expected to generate $490,000 in Special Revenues. Of the total, $200,000 is designated for salaries, $30,000 for

utilities, $80,000 for advertising, and $90,000 for supplies.

Recording Budgetary EntriesRecording Budgetary Entries


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Budget Encumbrance Actual

EncumbrancesEncumbrances

In a governmental unit, purchase commitments and contracts are recorded, even though they may not yet represent liabilities.

A recorded commitment or contract is called an “encumbrance”.


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EncumbrancesEncumbrances

For Fund-Based Financial Statements: An entry is required to record the

encumbrance. An entry is required when the bill is

received. For Government-Wide Financial

Statements: No entry is required to record the

encumbrance. An entry is required when the bill is

received.


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Record the order in Drye Township’s books.

Encumbrances – ExampleEncumbrances – ExampleFund-Based StatementsFund-Based Statements

Drye Township has budgeted office supplies for $180,000 for 2004. On May 15, Drye

Township places an order for $16,000 office supplies with Ye Olde Office Supplies.

Remember, this entry is only recorded for Fund-Based Financial Statements.


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Record the receipt of the supplies in Drye Township’s books for the Fund-

Based Statements.

On May 17, the supplies are received with a bill for $15,680 (some of the items went on sale on May 16,

and the city was given the sale price).

Encumbrances – ExampleEncumbrances – ExampleFund-Based StatementsFund-Based Statements

This is the account title typically used in governmental accounting in

place of Accounts Payable.


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Record the receipt of the supplies in Drye Township’s books for the Government-Wide Statements.

Note that with the Government-Wide Financial Statements, no entry is

necessary for the encumbrances used with the Fund-Based Statements.

Encumbrances – ExampleEncumbrances – ExampleGovernment-Wide StatementsGovernment-Wide Statements

On May 17, the supplies are received with a bill for $15,680 (some of the items went on sale on May 16,

and the city was given the sale price).


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Fund-Based StatementsFund-Based StatementsFixed AssetsFixed Assets

While the expenditure for a While the expenditure for a fixed asset is usually recorded fixed asset is usually recorded

in the General Fund . . .in the General Fund . . . . . . the fixed asset itself is . . . the fixed asset itself is recorded in the General Fixed recorded in the General Fixed

Assets Account Group.Assets Account Group. Depreciation is not recorded in Depreciation is not recorded in

the governmental fund, since the governmental fund, since net income is not a concept net income is not a concept

relevant to governmental relevant to governmental units.units.


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Government-Wide StatementsGovernment-Wide StatementsFixed AssetsFixed Assets

Historically, recording of fixed assets in the General Fixed Assets Account

Group was optional. GASB Statement No. 34 requires a

record of ALL capital assets in the Statement of Net Assets in the government-wide statements.

Depreciation expense is recorded. Governments have 4 years to

capitalize previously acquired assets.


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Classifications Derived Tax Revenues Imposed Nonexchange

Revenues Government-mandated

Nonexchange Transactions

Voluntary Nonexchange Transactions

Recognition of RevenuesRecognition of RevenuesNonexchange TransactionsNonexchange Transactions

For Government-Wide Statements,

record the revenues at the “time of

eligibility”.

For Fund-Based Statements, record the revenues when

they become “available for recognition”.


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Prepare the journal entry to record the bonds for government-wide statements.

Issuance of BondsIssuance of Bonds

Government-Wide Financial Statements

Increase the Cash and the Debt.

Fund-Based Financial Statements

Increase Cash and Other Financing Sources.

Drye Township issues $50,000 in bonds for new sidewalks.


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Prepare the journal entry to record the bonds for fund-based statements.

Issuance of BondsIssuance of Bonds


Increase the Cash and the Debt.


Increase Cash and Other Financing Sources.

Drye Township issues $50,000 in bonds for new sidewalks.


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Prepare the journal entry to record the loan payment for government-wide statements.

Payment of Long-Term LiabilitiesPayment of Long-Term Liabilities


Record principle and interest as with GAAP.


Record expenditures in the Debt Service Fund.

Drye Township makes a $10,000 payment on a loan that includes $1,000 in interest.


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Prepare the journal entry to record the loan payment for fund-based statements.

Payment of Long-Term LiabilitiesPayment of Long-Term Liabilities


Record principle and interest as with GAAP.


Record expenditures in the Debt Service Fund.

Drye Township makes a $10,000 payment on a loan that includes $1,000 in interest.


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Ms. Chairperson, what fund should we charge your

Paris trip to?

Since I voted for a balanced budget, let’s charge it to the Debt Service

Fund.

End of Chapter 11End of Chapter 11

advanced accounting by hoyle et al, 6th...

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