Chapter 2
Chapter 2
Chapter 2
2
PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE
AND LOCAL GOVERNMENTAL UNITS
- The word FUND is given special definition as it relates to Fund Accounting. The narrow
definition of Fund as used in ordinary conversation is a “resource of money”. However
in this course it is given the special definition above. It has key phrases indicating the
following points; It is by itself is an entity, having its own accounting existence and a
self balancing set of books (double entry system). That set of books is established for
recording a specific financial activity. The establishment of the fund will attain a specific
objective and will have regulations, restrictions or limitations.
There are seven types of funds, which are subdivided into three categories:
I. GOVERNMENTAL FUNDS
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projects) that are legally restricted to expenditure for
specific purposes.
3. Capital Project Fund-
Fund- to account for financial resources to be used for the acquisition
or construction of major capital facilities (other them those
financed by proprietary & trusts funds)
4. Debt Service Funds-
Funds- to account for the accumulation of resources for & the payment
of general long term debt principal & interest.
All governmental funds are Expendable Funds
5. Enterprise Funds-
Funds- to accounts for operations
1. That are financed and operated in a manner similar to private business
enterprises-where the intention of the governing body is that the costs
(expenses, including depreciation) of providing goods or services to the
general public on a continuing basis be financed or recovered primarily
through user charges; or
2. Where the governing body has decided that periodic determinations of
reveries earned, expenses incurred and/or net income is appropriate for
capital maintenance, public policy, management control, accountability, or
other purposes.
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3. Pension trust funds
4. Agency funds
All governmental funds are Expendable Funds; expendable funds are meant to be
expended or their resources are used up entirely usually within one fiscal year. As a
practical matter, any money that remains in an expendable fund at the end of the year
typically must be returned to its source. The accounting equation for an expendable fund
(from the definition of Fund above) is cash plus other financial resources minus liabilities
= fund balance. (C + OR - L = FB). There are no ownership interests in an NFP. So there
is no capital or owners equity. There is only a balance remaining to be used for specific
purpose.
Non-Expendable Funds are used when maintenance of capital is desired, and the
unexpended funds are not meant to be returned. All proprietary funds are non-expendable
funds
The seven fund types are to be used if needed by Governmental unit to demonstrate
compliance with legal requirements or if needed to facilitate sound financial
administration.
2.2.5 Accounting for fixed assets & long-term liabilities (Principle #5)
A clear distinction should be made between Fund fixed assets & general fixed assets &
Fund long-term liabilities & General long-term debt
A. Fixed assets related to specific proprietary funds & trust funds should be
accounted for through those funds.
All other fixed assets of governmental units should be accounted for through the
general fixed asset account group.
B. Long term liabilities of proprietary funds & trusts fund should be accounted for
through those funds.
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All other unmanured general long-term liabilities of governmental unit including
special assessments debt for which the government is obligated in some manner
should be accounted for through the general long-term debt account group.
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nature of the fund is expendable or non-expendable. Both kinds are possible in
fiduciary funds.
Modified accrual basis
For Expendable trust funds and Agency fund
Accrual basis
For Nonexpendable trusts and Pension Trust Funds
D. Transfers of financial resources among funds should be recognized in all funds
affected in the period in which the interfund receivables & payable(s) arise.
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1. Combined statement would should the operations of the entire governmental entity
constituting all the individual funds in to one statement. Combining would
candidate the results of all funds of same type e.g. all special revenue funds.
Individual fund statement would be prepared for each individual fund.
I. Classification of Transfers
Inter fund transactions are transactions between individual funds. Inter fund transactions
are of particular interest to financial statement preparers and users because failure to
report these transactions properly results in two funds being misstated. Additionally,
because most of these transactions are eliminated in the government wide statements, it is
particularly important they be identified in the accounts of the affected funds. Like related
party transactions, transactions between funds of the same government may not be
assumed to be arm’s length in nature. An arm’s length transaction is one in which both
parties act in their own self-interest and are not subject to pressure or influence. GASB
standards require that inter fund transactions be classified into two categories, each with
two subcategories. Journal entries to record inter fund transactions are based on these
classifications. Reciprocal inter fund activity is the internal counterpart to exchange and
exchange-like transactions and includes inter fund loans and inter fund services
provided and used. Nonreciprocal inter fund activity includes inter fund transfers
and inter fund reimbursements.
Inter fund loans are resources provided from one fund to another with the requirement for
repayment. The fund providing the resources records an inter fund receivable (Due from
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Other Funds ) and the fund receiving the resources records an inter fund payable ( Due to
Other Funds ). Long-term loans use the terms Advance to Other Funds and Advance from
Other Funds. Inter fund loan receivables and payables are separately reported on the
balance sheets of the affected funds.
Journal entry
Inter fund services provided and used represent transactions involving sales and purchases
of goods and services between funds. An example is the sale of water from a water utility
(enterprise) fund to the General Fund. In these transactions, one fund records a revenue
(enterprise, in this example) and the other fund records an expenditure or expense (the
General Fund). Sometimes called quasi-external transactions, these transactions are
reported as if they were transactions with parties outside the government .
Journal entry
Inter fund transfers represent flows of cash or other assets without a requirement for
repayment. An example would be an annual transfer of resources from the General Fund
to a debt service fund. Inter fund transfers act (in terms of debits and credits) as if they are
revenues or expenditures (expenses) but are classified as other financing sources (the debt
service fund) and other financing uses (the General Fund).
Journal entry
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Fund Making the Payment Fund Receiving the Payment
Other Financing Uses — Transfers Out …… Dr Cash ………………. Dr
Cash …………..………….......... Cr Other Financing Sources —Transfers In.…. Cr
Inter fund reimbursements represent repayments to the funds that initially recorded
expenditures or expenses by the funds responsible. For example, assume the General Fund
had previously debited expenditures to acquire some supplies, but the supplies should
have been charged to a special revenue fund. The reimbursement entry would have one
fund (the special revenue fund) debit an expenditure (or expense) and the other fund (the
General Fund) credit an expenditure or expense.
Journal entry
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E.g. in profit making accounting, a car would be considered as an asset & depreciation
would be recorded as an expense as the car is used up on wears out, in a fund the car
would be considered as expenditure at the time of purchase.
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II. Accounting characteristics common to funds of the proprietary fund
category.
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