1. Beams, Advanced Accounting 10e, Ch. 19
4/21/2017
Chapter 19: Accounting for State and Local Governmental Units – Governmental Funds
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
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2. Governmental Funds: Objectives
Prepare journal entries to record transactions in governmental funds.
Learn about accounting methods unique to governmental accounting – budgetary issues, encumbrance accounting, and interfund transactions.
Determine the appropriate governmental fund to be used.
Prepare governmental fund financial statements.
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3. Objectives (cont.)
Convert governmental fund financial statements to government-wide financial statements.
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4. Accounting for State and Local Governmental Units – Governmental Funds
1: Record Transactions
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5. General Fund Transactions
General fund entries
Start of fiscal year
During the year and adjustments
Closing entries
Sample entries follow. These are neither complete, nor self-reconciling.
Entries for interfund transfers and encumbrances are shown later, with Objective 2.
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6. Beginning of Year Reserve for encumbrances 90
Reserve for encumbrances - prior year
Estimated revenues
3,500
Appropriations
3,320
Estimated other financing uses - transfers out
115
Unreserved fund balance 65
$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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7. Revenue and Collections
Taxes receivable - current
2,000
Allowance for uncollectibles – current 20
Revenues
1,980
Cash
1,900
Taxes receivable – current
1,760
Taxes receivable – delinquent
140
Allowance for uncollectibles – delinquent 10
Taxes receivable - delinquent
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).
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8. Expenditures (Without Encumbrance) and Payments
200
Vouchers payable
187
Cash
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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9. Supplies (without encumbrance)
Supplies inventory 55
Vouchers payable
Expenditures
345
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.
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10. Expenditures – Prior Year85
Vouchers payable
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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11. Adjustments (1 of 2) Expenditures 30 Supplies inventory Revenues 50
Supplies inventory
Revenues 50
Deferred revenue
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.
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12. Adjustments (2 of 2) Taxes receivable – delinquent 240
Allowance for uncollectibles – current 20
Taxes receivable – current
Allowance for uncollectibles – delinquent
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.
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13. Closing the Budget
Appropriations
3,320
Estimated other financing uses - transfers out
115
Unreserved fund balance 65
Estimated revenues
3,500
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.
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14. Closing Current Year Accounts
Revenues
3,520
Other financing sources - bond proceeds 45
Expenditures
3,264
Encumbrances 50
Other financing uses - transfers out
164
Unreserved fund balance 87
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.
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15. Closing Prior Year Accounts
Reserve for encumbrances - prior year 90
Expenditures - prior year 85
Unreserved fund balance 5
"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.
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16. 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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17. SRF - Grant Entries
Receive cash
Cash 20
Deferred revenue – grant
Expenditures 18
Vouchers payable
Revenue
Meet require-ments
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
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18. Permanent Funds Cash or Investments 500
Revenues – addition to permanent endowments
Cash 12
Revenues – investment income
Expenditures 3
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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19. 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
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20. CPF Entries (1 of 3)
Cash
302
Other financing sources – Proceeds from bonds
At the approval of the capital project, a memo entry is made
$300 of bonds are issued for the project, and sell at a premium of $2
Encumbrances
280
Reserve for encumbrances
A contract for the project is signed for $280
The signed contract is recorded as an Encumbrance
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21. CPF Entries (2 of 3)
CPF
Other financing uses – nonreciprocal transfer to debt service fund 2
Cash
Other financing sources – nonreciprocal transfer from capital projects fund
DSF
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
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22. CPF Entries (3 of 3) Encumbrances 100 Reserve for encumbrances
Reserve for encumbrances
Expenditures
Contracts payable 90
Contracts payable – retained percentage 10
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 completion, assumed to be 10%
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23. 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
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24. 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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25. DSF Entries (1 of 2)
DSF
Cash 16
Other financing sources – nonreciprocal transfer from general fund
Other financing uses – nonreciprocal transfer to debt service fund GF
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
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26. DSF Entries (2 of 2) Expenditures – principal 14
Expenditures – interest 2
Matured principal payable
Interest payable
Matured interest payable
Cash 16
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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27. 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
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28. 2: Governmental Accounting Particulars
Accounting for State and Local Governmental Units – Governmental Funds
2: Governmental Accounting Particulars
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29. The Budget
Governmental entities formally record the budget in the accounting records
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
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30. Budget – Levels of Detail
Budgeted revenues are classified by source
Taxes, licenses, fines, investment income
Appropriations, the budgeted expenditures, are organized by
Character class, current services, capital outlays
And function, general government, public safety
May also further classify
Department, fire, police, zoning
Object, supplies, salaries
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31. Encumbrance Accounting
Place order
Encumbrances
150
Reserve for encumbrances
Expenditures
140
Vouchers payable
Receive goods
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)
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32. Interfund Transactions - TransfersGF
Other financing use … nonreciprocal transfer to debt service fund 14
Cash
Other financing source … nonreciprocal transfer from general fund
DSF
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
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33. Interfund Transactions - OtherGF
Expenditures 5
Cash
Revenues EF
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)
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34. Accounting for State and Local Governmental Units – Governmental Funds
3: Which Fund?
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35. Five Governmental Fund Types
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36. 4: Fund Financial Statements
Accounting for State and Local Governmental Units – Governmental Funds
4: Fund Financial Statements
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37. Fund Financial Statements
Required governmental fund financial statements
Statement of net assets or balance sheet
Statement of revenues, expenditures and changes in fund balance
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)
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38. General Fund Balance Sheet
Assets
$187
Taxes receivable- delinquent
$240
Allowance for uncollectibles
(20)
220
Accounts receivable
180
Supplies 90
Total
$677
Vouchers payable
$325
Deferred revenue 50
$375
Reserve for encumbrances
$50
Unreserved
252
302
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39. General Fund Statement of Revenues, Expenditures and Changes in Fund Balance
Total revenues
$3,519
Less expenditures
Current services*
(3,158)
Capital outlays
(190)
Excess of revenues over expenditures
$171
Other financing sources (uses)
Capital leases 45
Transfers out
(164)
Excess of revenues and OF sources over expenditures and OF uses
$52
Fund balance, 10/1//06
250
Fund balance, 9/30/07
$302
Expenditures include those from "prior year" encumbrances.
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40. 5: Government-wide Financial Statements
Accounting for State and Local Governmental Units – Governmental Funds
5: Government-wide Financial Statements
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41. Government-wide Statements
Governmental fund statements
Modified accrual basis
Government-wide statements
Accrual basis
Covert governmental funds to accrual basis for inclusion government-wide statements
Adjustments are prepared on worksheet
Individual fund records are not changed
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42. 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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43. Long Term Debt Add existing long term liabilities, reduce net assets
Current borrowings
Remove other financing source
Increase liability
Current principal repayments
Remove expenditures
Decrease liability
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44. 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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45. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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