1. McGraw-Hill/Irwin©2007, The McGraw-Hill Companies, All Rights Reserved Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 4: Accounting for the General and Special Revenue Funds

2. 4-2 Overview of Chapter 4 Accounting for Nonexchange Transactions Modified Accrual Basis Common Entries during the year The closing process

3. 4-3 Exchange vs Nonexchange Transactions GASB Statement No. 33 indicates the timing will be different for –Exchange and exchange-like transactions These are like true sales — you pay a certain amount and receive equivalent value in return –nonexchange transactions For taxes and certain other transactions you pay more or less than the value of services received

4. 4-4 Exchange Transactions Revenue resulting from exchange transactions is recognized in the period(s) that it is earned For example, revenue from the rental of government property would be recognized over the term of the lease

5. 4-5 Types of Nonexchange Transactions 1.Imposed nonexchange revenues property tax, special assessments, fines/forfeits 2.Derived tax revenues sales, income, motor fuel taxes 3.Government mandated transactions federal government requires lower level expenditures 4.Voluntary nonexchange transactions grants, donations

6. 4-6 Imposed Nonexchange Revenue Taxes and other assessments that do not result from an underlying transaction. Examples include property taxes and special assessments imposed on property owners. Also includes fines and forfeits

7. 4-7 Revenue Recognition – Modified Accrual (Fund Basis Statements) Record the receivable (and an allowance for uncollectibles) when an enforceable claim exits. Revenues should be recognized in the period for which the taxes are levied (i.e. budgeted), but are also subject to the 60 day rule. Revenues expected to be collected > 60 days after year- end are deferred. Revenue Recognition – Accrual (Government-wide Statements) Record the receivable (and allowance) when an enforceable claim exits. Revenues should be recognized in the period for which the taxes are levied – not subject to the 60 day rule. Imposed Nonexchange Revenue

8. 4-8 Derived Tax Revenues These are taxes assessed on exchange transactions conducted by businesses or citizens. Examples include sales, income, and excise taxes.

9. 4-9 Revenue Recognition – Modified Accrual (Fund Basis Statements) Record the receivable when the taxpayer’s underlying transaction takes place. Revenues should be recognized when available and measurable. Revenues not expected to be collected in time to settle current liabilities are deferred (i.e. available and measurable criteria). Revenue Recognition – Accrual (Government-wide Statements) Record the receivable when the underlying transaction takes place. Revenues should be recognized when the taxpayer’s underlying transaction takes place, regardless of when it is to be collected. Derived Tax Revenue

10. 4-10 Government Mandated Nonexchange transactions Grants from higher levels of government (federal or state) given to support a program. Since the program is required, the lower-level government has no choice but to accept. For example, a state may require schools to mainstream certain students and provide funds to carry out this mandate.

11. 4-11 Revenue Recognition – Modified Accrual (Fund Basis Statements) Record the receivable and the revenue when all eligibility requirements have been met. Many of these are reimbursement grants. In this case, revenue is recognized only when qualified expenditures have been incurred. Advance receipts are deferred until expenditures are incurred. Revenue recognition is subject to the available and measurable criteria. Revenue Recognition – Accrual (Government-wide Statements) The recognition criteria for grants under accrual accounting are generally the same as modified accrual. However, recognition in the government-wide statements does not require revenues to be collected in time to settle current liabilities (i.e. available and measurable criteria do not apply). Government-Mandated Nonexchange Revenue

12. 4-12 Voluntary Nonexchange Transactions Donations and grants given to support a program. Since the program is not required, the receiving government voluntarily agrees to participate.

13. 4-13 Revenue Recognition – Modified Accrual (Fund Basis Statements) The recognition rules are the same as mandated grants. Revenue Recognition – Accrual (Government-wide Statements) The recognition rules are the same as mandated grants. Voluntary Nonexchange Revenue

14. 4-14 Review: Modified Accrual vs. Accrual Accrual –Recognize revenues when earned –Match expenses against the revenues Modified Accrual –Recognize revenues when measurable and available (available to pay this year’s bills— for example, property taxes received within 60 days of year end) –Recognize expenditures when the liability is incurred — no attempt to match to revenues, match to period of occurrence only Exception — recognize interest and principal payments as expenditures when DUE

15. 4-15 Modified Accrual Revenue Cycle Property tax for 2007 levied = $1,000,000; $800,000 is collected in calendar year 2007 $120,000 is collected in January and February 2008 $80,000 in collected in March and April 2008 ENTRIES DURING 2007 : –Record levy: Taxes receivable 1,000,000 Revenue (tentative) 1,000,000 –2007 collections Cash 800,000 Taxes Receivable 800,000 –Year end adjustment: Revenue 80,000 Deferred Revenue 80,000 (Receipts of property taxes over 60 days after year end will be a 2008 revenue)

16. 4-16 Modified Accrual Expenditure Cycle Supplies are ordered at an estimated cost of $ 3,000 Supplies are received with an actual cost of $ 3,000 plus shipping of $ 250 Invoice from the supplies is paid Journal Entries –Place OrderEncumbrances3,000 Budgetary Fund Balance Reserve for Encumbrances3,000 Receive Goods Expenditures3,250 Accounts Payable3,250 Budgetary Fund Balance Reserve for Encumbrances3,000 Encumbrances3,000 PaymentAccounts Payable3,250 Cash3,250

17. 4-17 Quasi-External Transactions These are between funds but they are exchange- like transactions with an objective basis for determining the amount Treated as revenue and expense or expenditure Example, sale of electricity by the Electricity Enterprise fund to the General Fund Would be treated as revenue for Enterprise Fund and expenditure for General Fund GASB 34 calls these “Interfund Services Provided & Used” instead of quasi-external

18. 4-18 Reimbursements Assume the UPS delivers a $10,000 shipment of supplies which are initially recorded in the General Fund as follows: GF: Expenditures $10,000 Accounts Payable $10,000 Later, it is discovered that $2,000 of these supplies were for the Electricity Enterprise fund, and the supplies are given to the Electricity fund. The following would be recorded: GF: Due from Electricity $2,000 Expenditures $2,000 EF: Expenditures $2,000 Due to General Fund $2000

19. 4-19 Reimbursements Cont’d Reimbursements do not show up separately on the Activity or Budget statement, but are internal balance corrections When the reimbursement is made, the expense or expenditure is recorded in the correct fund and the incorrect expense or expenditure is decreased

20. 4-20 Transfers Any shifting of resources from one fund to another where there is no expectation that the amounts will be repaid. Transfers In are considered Other Financing Sources Transfers Out are considered Other Financing Uses Recurring Transfers such as for debt service may be built into the budget

21. 4-21 The Closing Process - Slide 1 Background — the business closing process –Close revenues and expenses to income summary, close income summary and withdrawals to Retained Earnings or Capital

22. 4-22 The Closing Process - Slide 2 Closing process for government type funds needs to accomplish the following: –Close budgetary accounts –Close Revenues, expenditures, encumbrances, and related other financing sources or uses to Fund Balance –Reclassify the Budgetary Fund Balance – Reserved for Encumbrances to Fund Balance – Reserved for Encumbrances