Chapter2Fund Accounting

Assets = Liabilities + Net Assets (Fund Balance)

Fund balance is a residual just like owner’s equitySame double-entry system is utilized

Accounting Equation

Reporting Entity

A reporting entity consists of:

A primary government and

Component units

Reporting Entity (Cont’d)

A primary government is: A state government,

General purpose local government (e.g., a city, town, village, township, borough, county, etc.), or a

Special purpose government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments

Reporting Entity (Cont’d)

A component unit is

a legally separate organization for which the elected officials

of a primary government are financially accountable

may also include another organization for which the nature

and significance of its relationship with a primary

government or its component units is such that exclusion

would cause the reporting entity’s financial statements to be

misleading

Reporting Entity (Cont’d)

The financial information of a component unit can be

reported by:

Discrete presentation (i.e., in a separate column from the

primary government’s financial information), or by

Blending (combined with financial information of the

primary government)

Notes to financial statements should describe reporting entity

Required Financial Statements

Two sets of “basic” financial statements required (in addition to MD&A and other required supplementary information)

Government-wide 2 financial statements Fund financial statements

2 Governmental fund financial statements3 Proprietary fund financial statements2 Fiduciary fund financial statements

See previous days notes for specifics

Required Financial Statements

Government-wide financial statements: Are prepared on the accrual basis and use the economic resources

measurement focus (i.e., similar to for-profit business entities)

Report the primary government’s financial information in two

columns (governmental activities and business-type activities)

Internal service fund information usually reported in the

governmental activities column; fiduciary activities not reported at

all in the government-wide financial statements

Basis of Accounting and Measurement

Basis of accounting: Determines when transactions and events are

recognized. Accrual – recognition when substantive economic impact

completed Cash – recognize only when it relates the transaction to cash

Measurement Focus – Determines what is being reported upon. Accrual accounting reports on all assets and liabilities and

increases/decreases in net capital are recognized as revenues or

expenses Governments often adopt a modified accrual basis of accounting

and a measurement focus on ST financial assets and liabilities

Basis of Accounting

When are revenues and expenses/expenditures measured?

Modified accrual basis of accountingRevenues recognized when available and

measurable; expenditures when incurredAccrual basis of accounting

Revenues when earned; expenses when incurred

Measurement FocusWhat is measured?

Economic resources measurement focus Report on the determination of net income, financial position,

and cash flows (i.e., capital maintenance) To measure operational accountability

Current financial resources measurement focus Report on the inflows and outflows of current financial

resources (i.e., cash or other items expected to be converted into cash during the current period)

To measure fiscal accountability; meet the legal and budgetary needs of government

Fund accounting reports financial information for separate self-balancing sets of accounts, segregated for separate purposes or to account for resources restricted as to use by donors or grantors.

Funds are separate accounting and fiscal entities.

Fund Accounting

Definition of “Fund”

In other words, a fund is conceptually an entity with its

own set of books (i.e., chart of accounts, general journal,

general ledger, trial balances, and financial statements)

Major Funds

Financial statements for governmental funds must contain a

separate column for each major governmental fund. Financial statements for proprietary funds must contain a

separate column for each major enterprise fund; financial

information for all internal service funds is reported in a

single column.

Types of Funds

Governmental Funds (5 types)General Fund; Special Revenue Funds; Capital Projects Funds

Debt Service Funds; Permanent Funds

Proprietary Funds (2 types) Internal Service Funds and Enterprise Funds

Fiduciary Funds (2 types)Agency Funds and Trust Funds

Governmental Funds

General Fund (GF) Only one per government Most of general government operating activities

are accounted for in the GF Accounts for all unrestricted resources Includes the following:

Police & fire Sanitation Administration Street Maintenance

Governmental Funds (Cont’d)

Special Revenue Funds (SRF) Used when required by law or by policy to account

for financial resources earmarked for a specified operating purpose

Accounting and budgeting usually identical to GF Includes the following

Gas tax for highway maintenance Lottery fund for education Donations to maintain

Parks & Cemeteries

Governmental Funds (Cont’d)

Debt Service Funds (DSF) Used to account for financial resources segregated

to pay principal or interest on long-term general liabilities

Similar to a sinking fund Get money from other funds or

special taxes

I.O.U.

Governmental Funds (Cont’d)

Capital Projects Funds (CPF) Used to account for financial resources segregated to

pay for construction or acquisition of long-lived capital assets

Typically get resources from bond issuance

Governmental Funds (Cont’d)

Permanent Funds Used to account for resources provided by trust in

which the earnings but not the principal must be used for public purposes

Example someone dies and gives

money to maintain a park

Governmental Funds Common Characteristics

Current financial resources measurement focus (cash, receivables, inventories)

Modified accrual basis of accounting used – (We will look at details in the next few chapters)

Account for expenditures of appropriations (not expenses)

Capital assets (land, building, equipment) and long-term liabilities are not accounted for within governmental funds

Governmental Funds

Required financial statements Balance Sheet

Statement of Revenues, Expenditures, and Changes in Fund Balances

Also must have a reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities at the government-wide level.

Proprietary Funds

Internal service funds (ISF) Used to account for activities in which goods or

services are provided to other departments of the same government or to other governments for a charge

Examples include central stores, central computing, motor pools, and printing

ISF are reported as governmental activities in the government-wide statements because they primarily benefit the government.

(Page 42)

Proprietary Funds (Cont’d)

Enterprise Funds Used to account for activities in which goods or services are provided to the general public for a charge

Examples include electric and water utilities, airports, parking garages, transportation systems, and liquor stores

EF are reported as business-type activities in the government-wide financial statements (page 42)

Proprietary Funds Common Characteristics

Accounting and reporting are essentially the same as those of for-profit entities, including full accrual accounting

Capital assets and long-term liabilities are accounted for in the funds

Depreciation expense is reported in the funds

Reports expenses not expenditures

Proprietary Funds (Cont’d)

Required Financial Statements Similar to those of for-profit entities

Statement of Net Assets Statement of Revenues, Expenses, and

Changes in Net Assets Statement of Cash Flows

Fiduciary Funds Agency Funds (often several)

To account for financial resources that the govt. holds temporarily for another party

Accounting is simple; assets = liabilities. No revenue and expense accounts used, nor is

there a fund/equity account Examples are tax agency funds, special

assessment debt service funds, and pass-through agency funds

Not consolidated into government-wide statements

Fiduciary Funds (Cont’d)

Trust Funds Fund held by one person for the benefit

of another – intended to benefit parties other than the government.

3 Types Pension Trust – benefit government

employees (retirement, disability) Investment Trust – (like mutual fund) Private Purpose Trust – benefit people not

associated with the government (escheated fund or historical society)

Reporting Capital Assets

General capital assets should be distinguished from

capital assets of proprietary and fiduciary funds General capital assets are reported in the government-wide financial

statements but not in fund financial statements

Proprietary capital assets are reported in both the government-wide and fund

financial statements

Fiduciary capital assets are reported only in the statement of fiduciary net

assets, a fund financial statement.

Valuation of Capital Assets

Capital assets should be accounted

for at historical cost, or estimated

cost if actual cost is unknown.

Donated assets should be

accounted for at estimated fair

value at time of gift.

Depreciation of Capital Assets

Capital assets should be depreciated over their estimated useful lives,

except inexhaustible assets such as land

A “modified approach” may be used for certain infrastructure assets

instead of depreciation

Depreciation expense for general capital assets is reported only in the

government-wide financial statements; for other capital assets it is

also reported in the fund financial statements.

Reporting Long-term Liabilities

General long-term liabilities should be reported in the

government-wide statements but not in the fund financial

statements.

Long-term liabilities to be repaid from proprietary funds

should be reported in the proprietary fund statements.

Long-term liabilities to be repaid from fiduciary funds should

be reported in the fiduciary fund statements.

Measurement Focus and Basis of

Accounting Summary !!!!!!!! Measurement

Focus Basis of

Accounting

Government-wide statements

Economic resources

Accrual

Governmental fund statements

Current financial resources

Modified accrual

Proprietary fund statements

Economic resources

Accrual

Fiduciary fund statements

Economic resources

Accrual