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16

C H A P T E R

Accounting for State and Local Governments

(Part One)

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Governmental Accounting

Focuses on financial reporting for non-profit governmental agencies.

Many concepts are similar to financial accounting, but terminology and procedures differ.

Governmental Accounting Standards Board (GASB) generates standards.

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Governmental AccountingUser Needs

In Concepts Statement #1, GASB identified 3 basic

groups of users of governmental accounting

information: Citizenry Legislative and oversight

bodies Investors and creditors

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Accountability and Governmental Accounting

Governmental Accounting Statements attempt to answer 3 questions related to

accountability:

Where did the financial resources

come from?

Where did the financial

resources go?

What amount of financial resources is presently held?

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Government-wide Financial Statements

GASB Statement No. 34

Requires the production of two sets of statements:

Fund-Based Financial Statements

Reports all revenues and all costs of

providing services each year and all resources

available to the governmental unit.

Shows restrictions on the use of resources and measures, in the

short run, revenues and expenses from certain

activities.

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Reporting Diverse Governmental Activities - Fund Accounting

Governmental units have many different types of activities.

No common motivation links these activities.

Therefore, each activity operates quasi-independent, self-balancing sets of accounts called funds.

Examples include: Public Safety Sanitation Health & Welfare Education Parks & Recreation Judicial System Water and Sewer Employee Pensions

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Governmental Funds

Accounting for activities related

to serving the public.

Proprietary Funds

Accounting for business-type

activities.

Fiduciary Funds

Accounting for financial

resources held for others in a

trustee capacity.

Fund Accounting Classification

All funds fall into one of three broad classifications.

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Fund Accounting ClassificationGovernmental Funds

G en eralF und

SpecialReven ue

F un d

Cap italPro jects

F und

DebtService

F un d

Perm anen tF un d

(En d ow m en ts)

G overnm enta l F unds

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Fund Accounting ClassificationProprietary Funds

Enterprise Fund Internal ServiceFund

Proprie ta ry F unds

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Fund Accounting ClassificationFiduciary Funds

Investm entT rust Funds

Private PurposeT rust Funds

PensionT rust Funds

AgencyFunds

Fiducia ry Funds(O nly used for funds

held for external parties)

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Understanding The Accounting Process

Fund-Based Financial Statements

Government-Wide Financial Statements

Governmental Funds

Use the current financial resources measurement focus and modified accrual accounting for the timing of revenue and expenditure recognition.

Use the economic resources measurement focus and accrual accounting for the timing of revenue and expense recognition.

Proprietary Funds

Use the economic resources measurement focus and accrual accounting for the timing of revenue and expense recognition.

Use the economic resources measurement focus and accrual accounting for the timing of revenue and expense recognition.

Fiduciary Funds

Use the economic resources measurement focus and accrual for the timing of revenue and expense recognition.

Not applicable

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Now, let’s look

at an overview

of the Fund-

Based

Statements.

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Fund-Based Financial Statements

Two separate statements are required:

Balance Sheet&

Statement of Revenues, Expenditures, and Changes in Fund

Balance

Fund-Based statements

include information on fiduciary funds.

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Fund-Based Financial Statements

These statements will differ from the Government-Wide financial statements for three reasons.

3

The proprietary funds are reported in a separate statement.

The current financial resources measurement basis is used.

The modified accrual accounting approach is used.

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Balance Sheet - Example

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Statement of Revenues, Expenditures, and Changes in Fund Balances - Example

ContinueContinue

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Statement of Revenues, Expenditures, and Changes in Fund Balances - Example

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Let’s look at an overview of

the Government-

Wide Statements.

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Government-Wide Financial Statements

Two separate statements are

required:

Statement of Net Assets

&Statement of

Activities

The economic resources

measurement focus requires reporting of

ALL assets and liabilities.

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Statement of Net Assets - Example

Note that we keep the

Governmental Activities

separate from the Business-

Type Activities.

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Statement of Net Assets - Example

Also note that this statement does not give information

about Fiduciary

Funds

This is consistent with the economic resources

management focus which only includes assets and liabilities that are available to use for

governmental purposes.

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Statement of Activities - Example

The net for a given function is determined horizontally, while the

totals for expenses and revenues are

determined vertically.

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Statement of Activities - Example

The general revenues are

shown separately at the bottom of

the statement.

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Let’s look at the accounting

procedures for the Governmental

Accounts for both the Fund-Based and Government-Wide

Statements.

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Recording Budgetary Entries

Purposes of the budget, per the GASB:

Expresses public policy. Serves as an expression

of financial intent. Provides control by

establishing spending limits.

Offers a means of evaluating performance.

Budget information for

the General Fund and for each of the

major Special Funds must be

presented.

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Prepare the journal entry to record the Special Revenue

Fund budget.

For example, assume a town enacts a motel excise tax to promote tourism and conventions. For 2001, the tax is expected to generate $490,000 in Special Revenues. Of the total, $200,000 is designated for salaries, $30,000 for

utilities, $80,000 for advertising, and $90,000 for supplies.

Recording Budgetary Entries

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Prepare the journal entry to record the General Fund budget.

A city estimates all General Fund revenues for 2001 at $1,640,000. The budget calls for

spending of $1,180,000. Transfers to other funds of $400,000 have also been approved.

Recording Budgetary Entries

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Budget Encumbrance Actual

Encumbrances

In a governmental unit, purchase commitments and contracts are recorded, even though they may not yet represent liabilities.

A recorded commitment or contract is called an “encumbrance”.

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Encumbrances

For Fund-Based Financial Statements: An entry is required to record the

encumbrance. An entry is required when the bill is

received. For Government-Wide Financial

Statements: No entry is required to record the

encumbrance. An entry is required when the bill is

received.

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Record the order in Drye Township’s books.

EncumbrancesExample

Drye Township has budgeted office supplies for $180,000 for 2002. On May 15, Drye Township

places an order for $16,000 office supplies with Ye Olde Office Supplies.

Remember, this entry is only recorded for Fund-Based Financial Statements.

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Record the receipt of the supplies in Drye Township’s books for the Fund-

Based Statements.

On May 17, the supplies are received with a bill for $15,680 (some of the items went on sale on May 16, and the city was given the sale price).

EncumbrancesExample

This is the account title typically used in governmental accounting in

place of Accounts Payable.

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Record the receipt of the supplies in Drye Township’s books for the Government-Wide Statements.

On May 17, the supplies are received with a bill for $15,680 (some of the items went on sale on May 16, and the city was given the sale price).

EncumbrancesExample

Note that with the Government-Wide Financial Statements, no entry is

necessary for the encumbrances used with the Fund-Based Statements.

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Fund-Based StatementsFixed Assets

While the expenditure for a fixed asset is usually recorded in the

General Fund . . . . . . the fixed asset itself is recorded in the General Fixed

Assets Account Group. Depreciation is not recorded in

the governmental fund, since net income is not a concept

relevant to governmental units.

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Government-Wide StatementsFixed Assets

Historically, recording of fixed assets in the General Fixed Assets Account

Group was optional. GASB Statement No. 34 requires a

record of ALL capital assets in the Statement of Net Assets in the government-wide statements.

Depreciation expense is recorded. Governments have 4 years to

capitalize previously acquired assets.

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Classifications Derived Tax Revenues Imposed Nonexchange

Revenues Government-mandated

Nonexchange Transactions

Voluntary Nonexchange Transactions

Recognition of RevenuesNonexchange Transactions

For Government-Wide Statements,

record the revenues at the “time of

eligibility”.

For Fund-Based Statements, record the revenues when

they become “available for recognition”.

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Prepare the journal entry to record the bonds for government-wide statements.

Issuance of Bonds

Government-Wide Financial Statements

Increase the Cash and the Debt.

Fund-Based Financial Statements

Increase Cash and Other Financing Sources.

Drye Township issues $50,000 in bonds for new sidewalks.

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Prepare the journal entry to record the bonds for fund-based statements.

Issuance of Bonds

Government-Wide Financial Statements

Increase the Cash and the Debt.

Fund-Based Financial Statements

Increase Cash and Other Financing Sources.

Drye Township issues $50,000 in bonds for new sidewalks.

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Prepare the journal entry to record the loan payment for government-wide statements.

Payment of Long-Term Liabilities

Government-Wide Financial Statements

Record principle and interest as with GAAP.

Fund-Based Financial Statements

Record expenditures in the Debt Service Fund.

Drye Township makes a $10,000 payment on a loan that includes $1,000 in interest.

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Prepare the journal entry to record the loan payment for fund-based statements.

Payment of Long-Term Liabilities

Government-Wide Financial Statements

Record principle and interest as with GAAP.

Fund-Based Financial Statements

Record expenditures in the Debt Service Fund.

Drye Township makes a $10,000 payment on a loan that includes $1,000 in interest.

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Ms. Chairperson, what fund should we charge your

Paris trip to?

Since I voted for a balanced budget, let’s charge it to the Debt Service

Fund.

End of Chapter 16