Unique Aspects of Accounting Local Governments – Part I:
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1 Unique Aspects of Accounting Local Governments – Part I: Chapter TwelveLecture NotesUnique Aspects of Accountingfor State andLocal Governments – Part I:The Recording Process
2 A Third Basis of Accounting: Modified AccrualCash Accounting recognizes revenues when cash is received andexpenses when bills are paid (focus on cash movement).Accrual Accounting recognizes revenue when goods or services havebeen provided and recognizes expenses when resources have beenused (focus on when revenues are earned or resources are consumed).Governmental funds use Modified Accrual Accounting. Expendituresare recognized when resources are received. Revenues are recognized when they are measurable and available within the accounting period or shortly afterwards (focus on financial resources).Financial resources are cash or assets that can be translatedto cash, less current liabilities.
3 Inflow (Revenue) Recognition Measurable and AvailableEarnedCollectedPayment has beenreceived or will bereceived soon.Payment hasbeen received.Service hasbeen provided.AccrualBasisemphasize that the three conditions do not have to be in the exact time order shown. For example, it is possible to collect revenue before it is earned.ModifiedAccrual BasisCashBasisNote: Governmental resource inflows are available if they are deemed to becollectable during or shortly after the end of the accounting period. This mayhappen before cash is received.
4 Outflow (Expense or Expenditure) Recognition PaymentEncumbranceDeliveryUseAppropriationAuthorizationto spend money.Order hasbeen placed.Order hasbeen received by buyer.Payment ismade.Item isconsumed.the order or events may also be different with resource outflows. For example, a resource might be used before it is paid for.AccrualBasisExpensenow.No expenseat this time -any basis.No expenseat this time -any basis.ModifiedAccrualBasis -Expenditurenow.CashBasisExpensenow.
5 Implications of Modified Accrual Accounting No long-term assets.- Long-term acquisitions such as buildings and equipment are recognized as expenditures when acquired.- There is no recognition of depreciation.No long-term liabilities.- Principal (repayment of debt) and interest are recognizedas expenditures when paid.Proceeds from borrowing are treated as a nonrevenue source of fund balance rather than as a liability.
6 Differences Between Bases of Accounting AccrualModified AccrualOutflows(Expenses or Expenditures)When resourceis usedWhen resource is acquired, legal obligation to pay exists and payment will come from available resourcesInflows(Revenues)is earnedWhen resource is legally owed, measurable andavailableAssetsCurrent and long termCurrentLiabilitiesCurrent andlong term
7 Governments and Fund Accounting Governments use funds to account for separate sub-entities.Governments have three major classes of funds:- Governmental funds account for the operating activitiesof governments (Modified Accrual Accounting).- Proprietary funds account for activities that are run ona business-like basis (Accrual Accounting).- Fiduciary funds account for the government's activitiesas trustee and agent (Accrual Accounting).
8 The Governmental Funds Governmental funds include:- General Fund used for the bulk of the day-to-day revenuesand expenditures of the government.- Special Revenue Funds for the revenues and expendituresof specific activities that are subject to legal or management-imposed restrictions.- Capital Project Funds to account for major acquisitions ofplant or equipment.Debt Service Funds to account for the accumulation ofresources to pay for principal and interest on long-term debt.- Permanent Funds, which are similar to endowment funds.
9 Proprietary FundsProprietary Funds are used for activities that are run on abusiness-like basis. Revenues come from fees, tolls, andother charges:- Internal Service Funds are established to account forelements of the government that provide services to other governmental units.- Enterprise Funds are established to track the activities of governmental units which provide goods and services toindividuals and organizations outside of the government.
10 Fiduciary Funds Fiduciary funds are held for another. They are not the resources of the government.- Trust Funds are established whenever money is given toa government under the terms of a trust agreement such asfor an employee pension plan or an unemploymentcompensation fund.- Agency Funds are used to account for money that agovernment is holding for some other operating entity like avolunteer fire department or another level of government.
11 Modified Accrual Transactions The Town of Millbridge buys and receives some fireworks on January 15th that it intends to use on July 4th. It receives a bill from the manufacturer for $50,000. How would the transaction be recorded by the Town under modified accrual accounting?Modified accrual accounting (purchase approach)Assets = Liabilities Fund Balance No Change = A/P + $50, Expenditure $50,000Governments generally record transactions using modified accrual, but have the option of using modified accrual or accrual for prepayments, materials, and supplies.
12 Property Tax Transactions Millbridge issues $611,000 in property tax bills this year. Total collections forthe year are $600,000 made up of $575,000 of this year's taxes and $25,000 fromlast year's tax bills. The remaining $36,000 from this year is expected to be collected within 60 days of year-end. It is "available." How would these financial events be recorded? Assets = Liabilities Fund Balance Recording the property taxes billed this year Taxes TaxReceivable + $611, = No Change Revenue $611,000 Recording the receipt of $600,000 in collected taxes Cash + $600,000Taxes Receivable - $600, = No Change No ChangeWhere are the $25,000 in last year’s collected taxes and the $36,000 in uncollected taxes from this year in these transactions?the $25,000 in last years taxes are included in the taxes collected as a reduction in taxes receivable. They were reflected in last years revenue.the $36,000 in this years taxes have been reflected in revenue because they meet the definition of "available funds" and are part of the year end property taxes receivable.
13 Long-Term Liabilities Modified Accrual Accounting When a government borrows money on a long-term basis:- no liability is created on the balance sheet.- cash is increased and the fund balance is increased.This is how a $1,000,000 loan would be recorded: Assets = Liabilities + Fund Balance Other FinancingCash + $1,000,000 = No Change + Sources $1,000,000Note that the increase in the fund balance is not referredto as revenue.
14 An Interfund Transaction During the fiscal year the general fund was legally required to transfer$100,000 to the debt service fund. Only $97,000 was transferred.How would this transaction be recorded?Assets = Liabilities Fund BalanceGeneral FundDue to Other Financing Use Cash - $97, = DSF + $3, Transfer to DSF$100,000 Debt Service Fund Cash + $97, No Other Financing Source Due from GF + $3,000 = Change Transfer from GF $100,000
15 Debt Repayment Transaction The interest and principal due on Millbridge's debt during the year were $15,000 and $50,000, respectively. Payments were made from the debt service fund. How were the payments recorded? Debt Service FundAssets = Liabilities Fund Balance Interest Principal Cash = No expenditure - expenditure- $65, Change $15, $50,000Both the interest and the principal were recorded as expenditures. Would the transaction have been recorded in the same way under accrual accounting?Why was there no change in any liability account?No. Under accrual accounting, only the interest payment would have been shown as an expense.The principal repayment would have been recorded ion the balance sheet as a reduction in the long-term debt liability
16 Acquiring a BuildingAssume that a building is purchased for $270,000, with full payment in cash.What if the Town issued a bond for $270,000 to pay for the building?Question 1Under accrual accounting, the organization would have recorded a fixed asset and depreciated it over its useful life. the expense would have reflected use not resource acquisition.Question 2the proceeds of the bond issue would have resulted in an increase in cash and an increase in the liability for bonds payable
17 Transactions for Acquiring a Building Capital Projects FundAssets = Liabilities Fund BalanceAcquisition Using Available Cash Building acquisitionCash - $270,000 = No Change expenditure $270,000Purchase of the Building by Issuing BondOther sources ofCash + $270,000 = No Change financing $270, Building acquisitionCash - $270,000 = No Change expenditure $270,000
18 Budgetary AccountingGovernment budgets are recorded in their accounting systems.Aids compliance with legal spending restrictions.Aids budget control.Uses system of appropriations and encumbrances.
19 Budgetary Accounting Example – Supplies Budget Appropriation $ 130,000Less: ExpendituresLess: EncumbrancesAmount Available for Spending $ 130,000Supply order for $60,000 is placed. If someone wanted to place another order they would find that the balance available to spend is:Less: Encumbrances ,000Amount Available for Spending $ 70,000
20 Budgetary Accounting Example, continued When the supplies are received, the encumbrance transactionis reversed, and an expenditure transaction is recorded:Appropriation $ 130,000Less: Expenditures ,000Less: EncumbrancesAmount Available for Spending $ 70,000Suppose another order is now placed for $50,000 of supplies.The supplies account would be encumbered, and the newbalance available to spend would be $20,000, as follows:Less: Encumbrances ,000Amount Available for Spending $ 20,000