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The use of Funds in Governmental Accounting

Governmental Accounting differs from Business enterprise accounting in three major respects:
1 Use a separate funds to accounts for its activities.
2. Use of current financial resources and modified accrual basis.
3. Incorporates Budgetary accounts into the financial Accounting System.

The main objectives of accounting system in government are to provide accountability for resources and to ensure the compliance with budgetary requirements and limitations.

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The use of Funds in Governmental Accounting

  1. 1. Chapter 2 The Use of Funds in Governmental Accounting
  2. 2. Governmental Accounting differs from Business enterprise accounting in three major respects: 1. Use a separate funds to accounts for its activities. 2. Use of current financial resources and modified accrual basis. 3. Incorporates Budgetary accounts into the financial Accounting System. The main objectives of accounting system in government are to provide accountability for resources and to ensure the compliance with budgetary requirements and limitations.
  3. 3. Types of Government Activities • Governmental-type – Day-to-day services of general-purpose governments (states, counties, and cities) • Police and fire protection • Sanitation • Parks and recreation – Financed primarily by tax revenues, intergovernmental grants, and general fees – Controlled by legally adopted budget Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-3
  4. 4. Types of Government Activities • Business-type (Propretary-type) – Specific services • Mass transit • Water utility • Electric utility – Financed primarily by user fees or charges that cover both operating and capital costs Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-4
  5. 5. Types of Government Activities • Fiduciary-type – Used when government provides fiduciary-type services • Holding segregated resources for others • Examples – Tax collection services for other governments – Pension trust funds Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-5
  6. 6. Fund Accounting Entity Concept: is a separate unit whose assets, liabilities, revenue, expenses and equities are included in its financial report. Reporting entity applies as well as to government, it called Primary Government such as, New York City. It also include activities for many separate legal organization like hospitals, police department which are public authorities called Component Units.
  7. 7. • Funds: Building blocks of governmental reporting • Government divided into entities, called FUNDS • Each fund has its own: – Assets, liabilities, net position – Inflows and outflows of resources • 3 categories: Governmental, Proprietary, Fiduciary Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-7 Fund Accounting
  8. 8. Fund Definition The primary government itself disaggregated and subdivided into separate fiscal and accounting entities called funds. Each fund has its own assets, liabilities, net assets, and inflow and outflow of resources. Which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, and limitations.
  9. 9. Why Governments Use Fund Accounting? 1. Needs to ensure compliance with budgetary spending limits that provided by law. 2. Helps ensure that dedicated funds are used as intended. Funds provide a basic control mechanism for ensuring compliance with legal restrictions on the use of governmental resources. Ex. When government use of revenue from sales tax to make roads. 3. Maintain Accountability objectives. ** Increasing in governmental operations leads to excessive use of funds and more funds needed.
  10. 10. Fund Categories The funds used by government are grouped into three categories: 1. Governmental-type Funds. 2. Proprietary-type Funds. 3. Fiduciary-type Funds. ** There are several types of funds within each category.
  11. 11. 1. Governmental-type Funds •Accumulation and spending of resources primarily from taxes and intergovernmental grants •Provide the public with day to day operation services, such as police, fire, education, parks, and roads making. •It also used to acquire or construction of capital assets. Ex. Fund may use to account for the proceed from debts to construct government buildings. •Governmental funds have annual budget for day to day operations. It is short-run in nature covered only one year.
  12. 12. 2. Proprietary-type Funds - Accounts for activities in manner similar to private sector business. - Charges fees for service provided that cover cost and expenses. - Ex. Hospitals, Utilities. - Many of these funds are self supporting because their fees cover their cost other sometimes receive grants from parent government.
  13. 13. 3. Fiduciary Funds - Account for resources they held in trust or agency for others. Others could be individual, government units, or business. - It cannot use the resources to support its own programs because they are not own it. -Ex. Held assets on behalf employees for pension plan. Taxes collected on behalf of other governments, such as sales taxes.
  14. 14. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-14 Fund Accounting: Financial Reporting • Fund Financial Statements – Each major fund gets a column – Separate set of statements for each fund type • Government-Wide Financial Statements – Governmental and business-type only – Adjustment to accrual basis
  15. 15. Measurement Focus and Basis of Accounting 1. Measurement Focus: refers to what is being measured in reporting There are two measurement focus: A. Economic Resources Measurement Focus B. Current Financial Resources Measurement Focus. 2. Basis of Accounting: When resources are being measured, When is an asset or liability recognized in the financial statements? a. Accrual Basis. b. Modified Accrual Basis.
  16. 16. Economic Measurement Focus with Accrual Basis • It applies to Proprietary and Fiduciary Funds. • Their accounting similar to business enterprise. • Therefore, the accounting system need to take into account of transactions and events that affect all the economic resources available to activity i.e. Financial and Capital Resources.
  17. 17. Economic Measurement Focus with Accrual Basis • Both of Proprietary and Fiduciary funds use accrual basis of accounting. This means that revenues are recognized in the period they are earned even if cash has nor received. Expense also recognized when assets are consumed or when liabilities are incurred even if cash has not paid. • Capital Assets are depreciated, unpaid interest are incurred and also long term liabilities are recorded.
  18. 18. Current Financial Resources and Modified Accrual Basis. • This Basis apply to governmental type funds to manage the budget. • Government budget officer needs to know the amount of Financial Resources available for current spending and to monitor actual performance against current year budget. •The governmental budget process is spending oriented, cash oriented, and short run in nature. •Financial resources available for spending • (budget focused) • Capital assets/long-term debt not recorded • Records inflows and outflows of liquid assets
  19. 19. Current Financial Resources and Modified Accrual Basis. To apply the current financial resources measurement focus modified accrual basis used to provide data on the amount of financial resources available for current spending.
  20. 20. 1. Revenue Recognition: Revenues such as taxation and grants recognized when they are measurable and available. Measurable means the ability to state the amount of revenue in term of dollars. Available means collectable within current period or not more than 60 days after the accounting period ends.
  21. 21. 2. Expenditures Recognition •Three types of Expenditures are included in operating statement: 1. Capital Assets Acquisition. 2. Current operating items, such as salaries and utilities. 3. Debt services include payment of debts and interest.
  22. 22. Expenditures vs. Expenses Under economic resources measurement focus, Expense are recognized when assets are consumed or liabilities are incurred. Such as use of capital assets (Depreciation) Under financial resources measurement focus, Expenditures are recognized in decreasing the financial resources. When capital assets acquired or when debt settled this leads to decrease in financial resources it called Expenditures.
  23. 23. Acquisition of Capital assets and bond proceeds and repayment. Under modified accrual basis: Capital assets acquisition recognized as expenditures when purchased with no depreciation recognized. Bonds proceeds consider as inflow of current resources and recorded in operating statement as other financing sources (Like Revenues) and repayment of debts reported as expenditures.
  24. 24. Funds Summary Accounting Basis Measurement FocusCategoryFund Type ModifiedCurrent FinancialGovernmentalGeneral ModifiedCurrent FinancialGovernmentalSpecial Revenue ModifiedCurrent FinancialGovernmentalDebt Services ModifiedCurrent FinancialGovernmentalCapital Project ModifiedCurrent FinancialGovernmentalPermanent AccrualEconomic ResourcesProprietaryEnterprise AccrualEconomic ResourcesProprietaryInternal Service AccrualEconomic ResourcesFiduciaryPension Trust AccrualEconomic ResourcesFiduciaryInvestment Trust AccrualEconomic ResourcesFiduciaryPrivate Purpose AccrualEconomic ResourcesFiduciaryAgency
  25. 25. 1. Governmental Type Funds Description: * Accounted for basic day to day governmental operations. * Current Financial Resources Measurement Focus. * Modified Accrual Basis. * The governmental type funds Includes the following: a. General Fund b. Special Revenue Funds c. Debt Service Funds d. Capital Project Funds e. Permanent Funds.
  26. 26. a. General Fund (GF) Description: - Every government body must at least have one general fund. - Called residual fund because contains any activities are not accounted for in other funds. - Includes day to day governmental operations such as, taxation activities, police department, and fire department. Source of Revenue - From taxes on real property, sales, corporate and personal income. - Governmental Grants. - Licenses, fees, and fines.
  27. 27. a. General Fund (GF) Cont. Expenditures - Basic operating programs such as, police, fire, trash removal, parking, roads and traffic and cultural activities. - Acquisition of capital assets such as for police and others. - Transfer to other funds. Assets Only current assets according to current financial resources measurement focus such as: Cash, investment, receivables (called due from other funds) and advances to other funds.
  28. 28. a. General Fund (GF) Cont. Liabilities Currently due to be paid such as claims of various suppliers and payables (called due to other funds). Fund Balance -Assets = Liabilities + Fund balance (no equity) so -Assets – liabilities = Fund balance. - Fund balance separated into two categories: 1. Unreserved portion: available for spending. 2. Reserved: for specific purpose and not available for spending.
  29. 29. a. General Fund (GF) Cont. Financial Statement: 1. Balance Sheet: * Only current assets and liabilities. * Unclassified form. * Fund balance rather than Equity( Reserved and Unreserved. 2. Statement of Revenue, Expenditures, and change in fund balance. It also called operating statement. It is similar to multiple step income statement.
  30. 30. a. General Fund (GF) Cont. 2. Statement of Revenue, Expenditures, and change in fund balance.  Format:  Revenues  Less Expenditures  + or - Other Financing Sources or Uses and Special Items  = Change in Fund Balance  + Beginning Fund Balance  = Ending Fund Balance No Statement of cash flows.
  31. 31. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-31 Governmental Funds: General Fund • Every general-purpose government has one • Used for most basic day-to-day operations • Residual fund – Used to account for financial resources not accounted for in another governmental fund – Law/contract/manager may require use of another fund
  32. 32. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-32 Governmental Funds: Basic Accounting Equation Financial Assets* Matured Short-Term Liabilities + Fund Balance=
  33. 33. Governmental Funds: Basic Accounting Equation • Financial Assets – Cash, investments, and receivables • Matured Short-Term Liabilities – Short-term has a shorter time frame than “current” in business accounting, which means payable in a year. • Accounts payable, salaries payable, and amounts payable to other funds • Matured liabilities due for payment and expected to be paid shortly after the accounting period ends Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-33
  34. 34. b. Special Revenue Funds (SRF) Description - Used to account for the proceeds of special resources that are legally restricted to be spent for particular purpose. - The same as general fund but less scope. - Restrictions come to maintain control over the collection and use of funds. - Examples: Sales tax revenue used for road maintenance. Special grants to support education. Sources of Revenues Taxes, Rents, royalties, fees, and grants. Sources of Expenditures Identifiable services.
  35. 35. b. Special Revenue Funds (SRF) Cont. In SRF assets, liabilities, and fund balance the same as General fund. Financial Statement also the same.
  36. 36. c. Debt Service Funds. (DSF) - Accumulation of resources for paying principals and interest and used when legally mandated. - Most of Resources in debt services come from GF. - Accounting procedures the same as GF. Assets, liabilities, fund balance, revenue, expenditures, and financial reporting are the same as GF.
  37. 37. d. Capital Projects Funds. (CPF) - Accounts for receipts and disbursement of resources used to acquire capital facilities through purchasing or constructions. - Used to account for capital outlay financed from general obligation bonds proceeds. - Separate capital project fund for each project. These funds contains construction work. - Accounting procedures and financial reporting similar to GF, SRF, and DSF. - Neither long term assets and liabilities recognized in balance sheet. - In Statement of Rev and Exp. Other financing sources will be greater than operating revenue because of bonds proceeds and transfer from other funds.
  38. 38. e. Permanent Funds. (PF) - Used to report resources that are legally restricted to support and benefit governmental programs. - Example: Endowment to serve library. - Revenue such as, investment income and dividend, Expenditures include transfer out to special revenue.
  39. 39. 2. Proprietary type Funds Description: - Similar to business enterprise. - Activity charges fees to cost of services provided. - Example: Electric and Water Utilities, Airports. - Economic Resources Measurement Focus. Accrual Basis. This type of funds include: a. Enterprise Funds. b. Internal Service Funds
  40. 40. a. Enterprise Fund (EF) Description - Used to account for any activity whose products or services and one of the following criteria should be met: 1. Activity financed with debts secured by pledge of revenue. 2. Cost of providing services or goods should be covered. 3. Pricing policies set fees and charges to cover cost. Examples: Utilities, parks, airport.
  41. 41. a. Enterprise Fund (EF) Cont. Accounting Procedures and Reporting - Economic resources measurement focus and accrual basis. Similar to business enterprise. Balance Sheet (Statement of Net Position): (1) Classified as business (2) net assets used instead of equity and it classified to restricted net assets for specific purpose such as capital assets or debt payment. And unrestricted net assets. Statement of Revenue, Expenditures and change in net position: Also called operating statement and presented in multiple step format. Statement of cash flow: includes (1)cash flow from operating (2) Cash flows from Investing (3) cash flow from capital and related financing activities.
  42. 42. Ex. Operating Statement: Operating revenue Less: operating expense = operating income (loss) Non operating revenue and expense income before other revenue, expenses, gains, losses, and transfer + capital contributions + or – extraordinary items + or – transfers Increase or decrease in net assets + net assets at beginning of period Net assets at end of period
  43. 43. b. Internal Service Fund (ISF): - Used to account for providing goods or services within governmental units. - Reason to establish theses funds: (1) reduce cost of obtaining goods or services. (2) improvement in the distribution within governmental unit. Example: data processing, information technology. - Often bill the fund receiving goods or services often GF and this amount treated as revenue.
  44. 44. Fiduciary Funds • Assets held by government in a trust or agency capacity for others – Cannot be used to support government’s own programs • Economic resources measurement focus • Accrual basis of accounting Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-44
  45. 45. Fiduciary Funds: Types and Statements • Pension (and other employee benefit) Trust Funds • Investment Trust Funds • Private-Purpose Trust Funds • Agency Funds • Statement of Fiduciary Net Position • Statement of Changes in Fiduciary Net Position* Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-45
  46. 46. Fiduciary Funds • Pension (and other employee benefit) Trust Funds – Hold restricted resources – For pensions, health care, etc. • Investment Trust Funds – For investment pools – External portion only Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-46
  47. 47. Fiduciary Funds • Private-Purpose Trust Funds – For all other trust arrangements – Example: escheat property • Agency Funds – For custody arrangements, example: sales tax collections for other governments Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 2-47

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  • arextgeth

    Jun. 11, 2021

Governmental Accounting differs from Business enterprise accounting in three major respects: 1 Use a separate funds to accounts for its activities. 2. Use of current financial resources and modified accrual basis. 3. Incorporates Budgetary accounts into the financial Accounting System. The main objectives of accounting system in government are to provide accountability for resources and to ensure the compliance with budgetary requirements and limitations.

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