©The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin Chapter 17 Governmental Entities: General Fund

2 Governmental Entities in United States Include: Federal Government State Government Counties Townships Municipalities School districts Special districts

3 Objectives of Financial Reporting (GASB issued Concept Statement No. 1): Should enable users to assess Government’s accountability Should assist users in evaluating the operating result of Governmental Entity Should assist users in assessing the level of service provided and Government’s ability to meet its obligation

4 The principal accounting unit is fund. GASB has identified in three categories: Governmental Funds Proprietary Funds Fiduciary Funds

5 GOVERNMENTAL FUNDS GENERAL FUNDS SPECIAL REVENUE FUNDS CAPTIAL PROJECT FUNDS DEBT SERVICE PERMANENT FUNDS

6 PROPERTIARY ENTERPRISE FUND INTERNAL SERVICE FUND

7 FIDUCIARY FUNDS PENSION Investment Trust Fund Private Purpose Fund Agency Funds

8 General Fund General fund accounts for the general activities of a government that are not accounted for by any other fund Only one general fund per reporting entity General fund is created at beginning of the “Unit” and it exists throughout the life of that unit.

9 Governmental Fund of Governmental Entities use Modified Accrual Basis of Accounting Revenues are recognized only when they become both measurable and available Expenditure are recognized when the related liabilities are incurred Short term prepayments are not recognized as assets

10 Budgets are Legislative Control over Governmental Entities Annual Budget (Include estimated revenue and appropriations for specific fiscal Year) Capital Budget (used to control expenditure for construction projects, appropriate for capital project fund) Basic Classification of Budgets

11 Budgetary accounting is used to control expenditures and to account for the levy of taxes sufficient to cover estimated expenditures. Budgetary accounts are “estimated accounts” that are the opposite (in terms of debit and credit) from real accounts. Entry to record budgetary accounts are made twice during the year. At the beginning of the year to record budget. And at the end of the year to reverse and close budget.

12 Journal Entry at the beginning of the year to Record Budget: Dr Estimated Revenues Dr Estimated Other Financing Sources Cr Appropriations Cr Estimated Other Financing Uses Cr/Dr Budgetary Fund Balance

13 Journal Entry at the end of the year to Reverse and close Budget: DrAppropriations Cr Estimated Other Financing Uses Dr/CrBudgetary Fund Balance Cr Estimated Revenues Cr Estimated Other Financing Sources

14 Entries for Recording Revenue: Billed DrTaxes Receivable – Current Cr Allowances for Uncollectible Taxes CrRevenue Collections DrCash CrTaxes Receivable – Current Taxes Determined Uncollectible DrAllowances for Uncollectible Taxes CrTaxes Receivable - Current

15 Journal Entry to transfer uncollected taxes to a delinquent category: Journal entry to reclassify receivable to delinquent DrTaxes Receivable – delinquent CrTaxes Receivable – current Journal entry to reclassify current allowance for uncollectible taxes to delinquent DrAllowance for uncollectible taxes – current CrAllowances for uncollectible taxes - delinquent

16 Encumbrances It is necessary to reflect not only the expenditures, but also the obligations to spend (Purchase Order). This is done to prevent overspending of appropriations. Subsidiary Ledgers are used to record the details of budgetary accounts, encumbrances and other general ledger accounts

17 An encumbrance should not be viewed as an expenditure. Similarly the reserve for expenditure is not a liability. Example : 1.Assume a purchase order is issued to purchase two sanitation trucks by the City of A.The estimated Cost is $45000 each. 2. The invoice is received for one to the trucks, at an actual cost of $44000.

18 Example for Encumbrance Accounting: 1. Assume a purchase order is issued to purchase two sanitation trucks by the City of A.The estimated Cost is $45000 each. 2. The invoice is received for one to the trucks, at an actual cost of $ Assume that second truck is backordered. 1. Set up Encumbrance DrEncumbrance90,000 Cr Reserve for Encumbrance90, Record invoice and Reverse estimated encumbrance (a)Dr Expenditure44,000 Cr Vouchers Payable (or Cash) 44,000 (b)Dr Reserve for Encumbrance45,000 Cr Encumbrance45, At year end if encumbrance (Purchase Order) is still outstanding (a)Dr Reserve for Encumbrance45,000 Cr Encumbrance45,000 (b)Dr Unreserved fund balance 45,000 Cr Fund Balance reserved for encumbrance 45,000

19 Inventory of Supplies (The Inventory of Supplies is evidence of the availability of resources to benefit future periods and the reserve for inventory of supplies account serves as a reservation of fund balance.) Entry when invoice received Dr Inventory of Supplies CrVouchers Payable Entry for Use of Supplies Dr Expenditures CrInventory of Supplies

20 Transfers Between Funds Types of transfers between funds can be grouped as under. Quasi – External Transfers Operating Transfers Reimbursement Transfer Routine fund transfer of Loan or Advance Nature (Cash needed by one fund may be obtained from other funds.)

21 Entry to Record Routine Transfer DrDue from other fund CrCash Or DrCash CrDue to other fund

22 Entry to Record Operating Transfer DrOther Financing Uses CrCash/Other Fund Or DrCash/Other Fund CrOther Financing Sources

23 Financial Statements for the General Fund of a Governmental Entity Balance Sheet And Statement of Revenues,Expenditures and Changes in Fund Balance. (Budgeted amounts, actual amounts and variances from budgeted amounts are included in this statement)

24 Closing entries for a general fund at the end of a fiscal year: Journal entry to close the budget at year end (reverse for the same amount) Journal entry to close Encumbrances ledger account to the Unreserved and Undesignated Fund balance account Journal entry to close the Revenues, Other Financing Sources, Expenditures, and Other Financing Uses Ledger to the Unreserved and Undesignated Fund Balance account