2. Advanced Accounting, Fourth Edition18
Introduction to Accounting
For State and Local Governmental Units
Advanced Accounting, Fourth Edition

3. Governmental Accounting
GASB’s Statement No. 34, issued June 1999, requires:
Financial statements using government-wide approach.
Statements emphasizing major funds.
Management’s discussion and analysis (MD&A).
GASB Statement No. 34 requires “full accrual” accounting for all government-wide statements (i.e., flow of economic resources approach).

4. Reporting Model: Minimum Information Required
Government-Wide
Fund Financial Statements
Statement of net assets Governmental funds:
Statement of activities Balance sheet
Statement of revenues, expenditures, and changes in fund balances
Reconciliation to government-wide statements
Proprietary funds:
Balance sheet or statement of net assets
Statement of revenues, expenses, and changes in net assets
Statement of cash flows—direct format
Fiduciary funds:
Statement net assets
Statement of changes in net assets

5. History of Governmental Accounting Standards
Hierarchy of Standards
The GASB and the FASB each has primary responsibility for setting standards for entities under its jurisdiction.
Pronouncements of one Board should not be mandatory for entities under the jurisdiction of the other Board.

6. The Structure of Governmental Accounting
Eleven Categories of Fund Entities
Governmental Funds (expendable)—
Focus on sources, use, and balances of current resources.
General Fund
Special Revenue Funds
Capital Projects Funds
Debt Service Funds
Permanent Funds

7. The Structure of Governmental Accounting
Eleven Categories of Fund Entities
Proprietary Funds (nonexpendable)—
Focus on determination of operating income, changes in
net assets, financial position, and cash flows.
Enterprise Funds
Internal Service Funds

8. The Structure of Governmental Accounting
Eleven Categories of Fund Entities
Fiduciary Funds
Focus reports assets held in a trustee or agency capacity
for others.
Pension Trust Funds
Investment Trust Funds
Private-Purpose Trust Funds
Agency Funds

9. Governmental Fund Entities
General Fund
All revenues and expenditures of a governmental unit not accounted for in other governmental or proprietary funds.
Special Revenue Fund
Proceeds of specific revenue sources that are to be used to finance particular functions or activities of the governmental unit.

10. Governmental Fund Entities
In special revenue funds, as in the general fund, the
following steps are taken:
A budget is established.
Encumbrances are used.
Fixed assets are only reported on government-wide statement.
Depreciation is not recorded.
Long-term debt is only reported on government-wide statements.

11. Governmental Fund Entities
Capital Projects Fund
Resources to acquire or construct major capital facilities.
Resources for the acquisition include
proceeds of long-term debt issues,
grants or payments from other governmental units,
funds from private sources,
transfers from other governmental funds,
special assessments, and
other sources.

12. Governmental Fund Entities – Capital Projects
Exercise 18-12: The town of Aberdeen authorized a fire station to be built at an estimated cost of $150,000. On January 1, 2008, 6% bonds with a par value of $150,000 were authorized and issued. Any difference between the par value of the bonds and the proceeds from their sale is transferred to the Debt Service Fund. The following transactions relating to the Capital Project Fund occurred during 2008.
Encumbrances were recorded in the amount of $150,000.
Proceeds from bond issue were received in amount of $155,000.
Premium on bond issue was transferred to the Debt Service Fund.
Contract billings of $150,000 were approved for payment on the completion of the fire station.
Contractor was paid except for retention of 5% of the contract.
Final contract price was paid. The nominal accounts were closed.

13. Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events.
Encumbrances were recorded in the amount of $150,000.
Encumbrance 150,000
Reserve for Encumbrances 150,000
Proceeds of $155,000 from bond issue were received.
Cash 155,000
Bond Issue Proceeds 155,000

14. Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events.
Premium was transferred to the Debt Service Fund.
Transfer to Debt Service Fund 5,000
Cash 5,000

15. Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events.
Contract billings of $150,000 were approved for payment on the completion of the fire station.
Reserve for Encumbrances 150,000
Encumbrances 150,000
Expenditures 150,000
Contracts Payable 150,000

16. Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events.
Contractor was paid except for retention of 5% of the contract.
Contracts Payable 150,000
Contracts Payable - Retained 7,500
Cash 142,500

17. Governmental Fund Entities – Capital Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events.
Final contract price was paid. The nominal accounts were closed.
Contracts Payable - Retained 7,500
Cash 7,500
Bond Issue Proceeds 155,000
Transfer to Debt Service Fund 5,000
Unreserved Fund Balance 150,000
Unreserved Fund Balance 150,000
Expenditures 150,000

18. Governmental Fund Entities
Debt Service Fund
Resources for, and the payment of, general long-term debt principal and interest.
Financed by the following sources
General property tax
Sales tax or other specified tax revenues
Transfers of other fund revenues
Special assessments
Revenue from investment of debt service fund resources.
There is no interest payable accrual on general obligation long-term debt.

19. Governmental Fund Entities
Permanent Fund
Two types of Nonexpendable Trust funds:
Principal must be retained intact but earnings may be expended.
Principal and the earnings must be retained intact.
Established as a result of a gift, a bequest, or some other action that requires the governmental unit to act in a fiduciary capacity.

20. Proprietary Funds
Proprietary fund reporting focuses on determination of operating income, changes in net assets, financial position, and cash flows.
Net Assets Approach: All changes in net assets are included somewhere in the “statement of activities.”
Proprietary funds include:
Enterprise Funds.
Internal Service Funds.

21. Proprietary Funds Enterprise Funds
Activity for which a fee is charged to external users for goods and services.
Common examples:
Public utilities (water or electricity)
Airports
Transportation systems
Parking lots and garages
Recreational facilities (swimming pools)

22. Proprietary Funds Enterprise Funds
Resources may come from contributions or from the proceeds of long-term debt issues or both.
Contributions may be obtained from
Other governmental units,
Resources of the General Fund
Property owners,
Subdivision developers, or
Customers.

23. Proprietary Funds Internal Service Funds
Activity that provides goods or services to other funds, departments, or agencies of the primary governmental unit and its component units, or to other governments, on a cost reimbursement basis.
Common examples:
Central computer facilities,
Central garages and motor pools,
Central purchasing and stores departments, and
Central printing departments.

24. Proprietary Funds Internal Service Funds
Resources obtained from contributions from
Other funds,
Proceeds from sale of general obligation bonds, or
Long-term advances from other funds.

25. Fiduciary Funds Trust and Agency Funds
Fiduciary funds are used to report assets held in a trustee or agency capacity and therefore cannot be used to support the government’s own programs.
Fiduciary funds include:
Pension trust funds,
Investment trust funds,
Private-purpose trust funds, and
Agency funds.

26. Capital Assets and Long-Term Debt
The purchase of capital assets are recorded as an expenditure in the governmental fund statements.
Proceeds from the issuance of long-term debt is recorded as Other Financing Sources in the governmental fund statements.
Under GASB Statement No. 34, governments report all capital assets, including infrastructure assets, and unmatured general long-term debt on a government-wide basis and report depreciation expense as a charge to operations in each period.

27. External Reporting Requirements (GASB No. 34)
The following statements and disclosures are required:
Governmental Fund Financial Statements
Proprietary Fund Financial Statements
Fiduciary Funds (and Similar Component Units) Financial Statements
Government-wide Statements
Combining Statements for Major Component Units

28. Government Fund-Based Reporting
Governments are required only to report the major funds in separate columns, but have flexibility to report more funds separately if desired.
Individual governmental funds and proprietary funds are major funds if the total assets, liabilities, revenues, or expenditure/expenses of that individual fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise funds) and at least 5% of the corresponding total for all governmental and enterprise funds combined.

29. Government-wide Reporting
Primary financial statements under GASB Statement No. 34 are prepared on a government-wide basis.
Statements are prepared on the accrual basis using the flow of economic resources concept.
These primary statements include:
The statement of net assets.
The statement of activities.
Governmental-wide statement of cash flows is not required.

30. Government-Wide Reporting
Statement of Net Assets
Prepared using the accrual basis.
At a minimum, assets, liabilities, and net assets should be disclosed for each of the following categories:
A. Primary Government
1. Government activities
2. Business-type activities
3. Total primary government activities
B. Discretely Presented Component Units

31. Government-wide Reporting
Statement of Activities
Presented using a net cost format.
Separates revenues into program revenues and general revenues.
Expenses are reduced by program revenues resulting in “net (expense) revenue.”
General revenues, extraordinary items and special items, and transfers are reported separately.

32. Management’s Discussion and Analysis (MD&A)
Required by GASB Statement No. 34.
Discussion should provide objective and readable analysis of the government’s financial activities.
Should present both a short-term and a long-term analysis of the government’s activities.
Should discuss the current-year results in comparison with the prior year.
Focus is on the primary government (i.e., should distinguish between the primary government and component units).

33. Special Assessments
Service-type special assessments - Assessments levied against the benefited property owners for services
Street lighting, street cleaning, and snow plowing.
Capital improvement special assessments - Assessments levied against the benefited property owners for capital improvements
Paving or widening of residential streets or the construction of sidewalks or storm sewers.

34. Interfund Activity
Interfund activity within governmental, proprietary, and fiduciary funds should be reported as follows:
A. Reciprocal interfund activity
1. Interfund loans
2. Interfund services provided and used
B. Nonreciprocal interfund activity
1. Interfund transfers
2. Interfund reimbursements

35. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded.
1. Bond proceeds of $1,000,000 were received to be used in constructing a firehouse. An equal amount is contributed from general revenues.
Capital Projects Fund
Cash 2,000,000
Bond issue proceeds 1,000,000
Transfer from General Fund 1,000,000
General Fund
Transfer to Capital Projects 1,000,000
Cash 1,000,000

36. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded.
2. $800,000 of serial bonds matured. Interest of $120,000 was paid on these and other serial bonds outstanding.
Debt Service Fund
Expenditures 920,000
Cash 920,000

37. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded.
3. $8,000 was received as insurance proceeds from the accidental destruction of a police car costing $24,000.
General Fund
Cash 8,000
Revenue 8,000

38. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded.
4. $120,000 in expendable funds was transferred from the City Parks Endowment Fund to the City Parks Special Revenue Fund.
Trust Fund
Transfer to Special Revenue 120,000
Cash 120,000
Special Revenue Fund
Cash 120,000
Transfer from Trust Fund 120,000

39. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded.
5. Equipment purchased from general revenues at a cost of $200,000 was sold for $40,000.
GeneralFund
Cash 40,000
Revenue 40,000

40. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded.
6. The City Water Company (an enterprise fund) issued a bill for $800 for water provided to the street department’s street cleaner.
Enterprise Fund
Due from General Fund 800
Revenue 800
General Fund
Expenditures 800
Due to Enterprise Fund 800

41. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded.
7. The City Water Company transferred $400,000 in excess funds to the General Fund.
Enterprise Fund
Transfer to General Fund 400,000
Cash 400,000
General Fund
Cash 400,000
Transfer from Enterprise Fund 400,000

42. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s).
8. A central motor pool was established by a contribution of $120,000 from the General Fund, a long-term loan of $80,000 from the City Parks Special Revenue Fund, and general obligation bond issue proceeds of $200,000.
Internal Service Fund
Cash 400,000
Contributions from General Fund 120,000
Due to Special Revenue Fund 80,000
Contributions from bonds 200,000
Continued

43. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s).
8. A central motor pool was established by a contribution of $120,000 from the General Fund, a long-term loan of $80,000 from the City Parks Special Revenue Fund, and general obligation bond issue proceeds of $200,000.
General Fund
Transfer to Internal Service 120,000
Cash 120,000
Special RevenueFund
Due from Internal Service fund 80,000
Cash 80,000

44. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s).
9. The Motor Pool Fund billed the General Fund $10,000 and the City Parks Fund $4,000 for the use of motor vehicles.
Internal ServcieFund
Due from General Fund 10,000
Due from Special Revenue 4,000
Revenue 14,000
General Fund
Expenditures 10,000
Due to Internal Service 10,000

45. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s).
10. Special Assessment Bonds in the amount of $400,000 were retired. The city has indicated a willingness to guarantee the payment of principal.
Debt ServcieFund
Expenditures 400,000
Cash 400,000

46. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s).
11. Customers’ deposits of $8,000 for water meters were received by the City Water Company during the year. The monies are to be held in trust until the customers request that their services be disconnected and the final bills are collected.
Agency Fund
Cash 8,000
Customer Deposit Agency Fund 8,000

47. Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s).
12. It is determined that the Service Fund will require an annual contribution of $60,000 and earnings of $6,000 in the current year to accumulate the amounts necessary to retire general obligation term bonds.
Debt ServiceFund
Required additions 60,000
Retained earnings 6,000
Unreserved fund balance 66,000

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