ILLUSTRATIVE CASE – FOR GENERAL FUND

Example Entry in the general ledger

A governmental unit collects revenue from the following Cash --------------------------------- Dr 75,100
source for the month of January Revenues ------------------------------ Cr 75,100
License and permits 13,200
Inter governmental revenues 50,000 Revenue Ledger (Subsidiary Ledger)
Charges for services 7,800 License and permits 13,200
Fines and forfeits 2,600 Inter governmental revenues 50,000
Miscellaneous 1,500 Charges for services 7,800
Fines and forfeits 2,600
Miscellaneous 1,500

ILLUSTRATIVE CASE – FOR GENERAL FUND OF XYZ CITY

Assume that at the beginning of fiscal year 2005, ABC’s city general fund had the following balances in its accounts:
XYZ CITY
GENERAL FUND
TRIAL BALANCE
JANUARY 1, 2005
Debits Credits
Cash------------------------------------------------- ------------- $200,000
Taxes receivable – delinquent ----------------------------------800,000
Estimated uncollectible delinquent taxes ------------------------------ ----------------------$80,000
Interest and penalties receivables on taxes ---------------------50,000
Estimated uncollectible interest and penalties ------------------------- -----------------------20,000
Accounts payable --------------------------------------------------------------------------------270,000
Deferred revenues – property taxes -------------------------------------------------------------40,000
Due to federal government------------------------------------------------------------------------60,000
Fund balance – reserved for encumbrances (2005). -------------------------------------------90,000
Fund balance – unreserved ----------------------------------------------------------------------490,000
Total $ 1,050,000 $1,050,000

Note that the deferred revenue – proper taxes account reflects the portion of the $800,000 in taxes receivable that have not yet
been recognized as revenue. The fund balance – reserved for encumbrances account represents the amount of purchase orders and
contracts related to the prior year that are open at the beginning of 2005.

RECORDING GOVERNMENTAL OPERATING ACTIVITIES

Transaction No. 1: Recording the Budget

At the beginning of fiscal year 2005, it is necessary to record the budget (assuming that all legal requirements have been met). If
the total estimated revenue budget for 2005 is $ 12,400,000, the total appropriations are $ 10,400,000, the total planned transfers
to debt service fund is $ 408,000, and a planned transfer to establish an internal service fund is $ 1,192,000, the necessary entry to
record the budget would be as follows (keeping in mind that appropriate subsidiary ledger detail would be required in actual
situations).
Debits Credits
Estimated revenues control --------------------------------------12,400,000
Appropriations control ---------------------------------------------10,400,000
Estimated other financing uses control ---------------------------1,600,000
Budgetary fund balance-----------------------------------------------400,000
Assume the appropriations budget includes $ 90,000 to honor the purchase orders outstanding at the beginning of the year. This
might have been done
- By adding $ 90,000 to the 2005 budgets of the departments involved or
- By requiring the departments to cover the $ 90,000 out of the budgeted funds for 2005.
Transaction N. 2: Recording re – establishment of encumbrances
Assuming the $ 90,000 in purchase orders at the beginning of the year will be honored, it is necessary to re- establish the
encumbrances. Also, the fund Balance – reserved for encumbrances account is no longer needed.
Debits Credits
Encumbrances control -------------------------------------90,000
Budgetary fund balance reserved for encumbrances ----------------------------90,000

Fund Balance – reserved for encumbrances -----------90,000

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ILLUSTRATIVE CASE – FOR GENERAL FUND

Fund balance – Unreserved --------------------------------90,000

Transaction No.3: Recording Prior Year Property Taxes as Revenues

GASB standards for property tax revenue recognition under the modified accrual basis of accounting provide that revenue should
not be recognized for property taxes expected to be collected more than 60 days beyond the end of the fiscal year. In fact, some
governments defer all of their property taxes receivable at year –end. At the end of 2004, the XYZ city deferred $ 40,000 in
property taxes, and that amount is reflected in the beginning trial balance. In transaction No-3, recognizes that amount as revenue
for 2005.
Debits Credits
Deferred revenues – property taxes - ---------------------------40,000
Revenues control -----------------------------------------------------40,000

Transaction No. 4: Recording tax Anticipation Notes Payable

In the trial balance to the general fund of XYZ city, liabilities (accounts payable and due to federal government) total $ 330,000.
Cash of the general fund on the date of the trial balance amounts to $ 200,000. Although some collections of delinquent taxes
receivable are expected early in the year, payrolls and other liabilities are incurred and must be paid before substantial amounts of
cash will be collected; accordingly, it is desirable to arrange a short term loan. The taxing power of the city is a sample security
for a short – term debt, local banks customarily meet the working capital needs of governmental units by accepting a “tax
anticipation note” ( a short- term note) from the government officials. If the amount of $ 400,000 is borrowed at this time the
necessary entry is as follows:
Debits Credits
Cash ---------------------------------------------------400,000
Tax anticipation Notes payable -------------------------------------400,000

Transaction No. 5: Recording payment of liability

Checks were drawn to pay the account payable and the amount due to the federal government as of the end of 2005.
Debits Credits
Accounts payable ------------------------------------------------270,000
Due to federal government---------------------------------------60,000
Cash ------------------------------------------------------------------------------330,000

Transaction No. 6: Recording Issuance of Purchase Orders

In addition to the $ 90,000 outstanding at the beginning of the year, purchase orders for materials and supplies are issued in the
amount of $1,600,000. The general ledger entry to record the encumbrances for the purchase orders is as follows (subsidiary
ledger detail is omitted from this example but should be recorded by an actual governmental unit):
Debit Credit
Encumbrances control -------------------------------1,600,000
Budgetary fund Balance reserved for
Encumbrances --------------------------------------------------------- 1,600,000

Transaction No. 7: Recording Property Tax Levy

Assume that the budgeted revenue from real property taxes, included in the total estimated revenues recorded in transaction No. 1
of this chapter, was $ 6, 400,000, excluding the 40,000 in transaction number 3. Assume further that 2 percent of these taxes are
estimated to be uncollectible due to tax collection policy and local economic conditions. In order to generate revenues of $
6,400,000, the gross levy must be in the amount of $ 6,530,612 ($6,400,000/0.98).Therefore, when the taxes are levied, the
following entry, should be made:

Debits Credits
Taxes receivable – current -------------------------------------6,530,612
Estimated uncollectible current taxes -------------------------------------------130,612
Revenue control ------------------------------------------------------------------6,400,000

Transaction No. 8: Recording Collection of Delinquent Taxes

Delinquent taxes are subject to interest and penalties that must be paid at the time the tax bill is paid. It is possible for a
government to record the amount of the penalties at the time that the taxes become delinquent. Interest may be computed and
recorded at year – end so that financial statements report the account on the accrual basis. Interest must also be computed and
recorded for the period from the date of last recording to the date when a taxpayer pays the delinquent taxes.
In the current year, XYZ city collected delinquent taxes in the amount $ 660,000, on which interest and penalties of $40,000 had
been accrued at the end of 2004; further $ 6,000 additional interest was collected for the period from the first day of 2005 to the

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ILLUSTRATIVE CASE – FOR GENERAL FUND

dates on which the delinquent taxes were collected. Below the first entry shows additional interest as revenue of 2005; where as
the later one reveal the collection of the delinquent taxes and the total interest and penalties owed on them.

Debits Credits
Interest and penalties receivable on taxes----------------------------6,000
Revenues control -----------------------------------------------------6,000

Cash ----------------------------------------------------------------706,000
Taxes receivable – delinquent -------------------------------------660,000
Interest and penalties receivable taxes -----------------------------46,000

Transaction No. 9: Recording Collection of Current Taxes

Collections during 2005 of property taxes levied are $ 5,400,000. Since the revenue was recognized at the time receivable was
recorded, the following entry would be made:
Debits Credit
Cash -------------------------------------------------------------- 5,400,000
Taxes receivable current-------------------------------------------5,400,000

Transaction No. 10: Recording Revenues Recognized on cash basis

Revenue from licenses and permits, fines and forfeits, and other sources not susceptible to accrual is recognized on the cash basis.
Collections during the year 2005 are $ 5,600,000.
Debits Credit
Cash --------------------- ------ ------------------5,600,000
Revenues control-------- ----------------------------5,600,000

Transaction No 11: Recording of Tax Anticipation Notes

As tax collections begin to exceed current disbursements, it becomes possible for the XYZ city to repay the local bank for the
money borrowed in tax anticipation notes (in transaction No. 4). Just as borrowing money did not involve the recognition of
revenue, the repayment of the principal is merely the extinguishment of short-term debt of the general fund and not expenditure.
Payment of interest, however, must be recognized as the expenditure of an appropriation. Assuming the interest is $ 10,000, the
entry is as follows:

Debit Credits
Tax anticipation notes payable ----------------------- 400,000
Expenditures controls -------------------------------------10,000
Cash -----------------------------------------------------410,000

Transaction No 12: Recording Recognition of Expenditure for Encumbered items

Some of the materials and supplies ordered last year and this year (in transaction No. 2 and 6) were received. Invoices for the
items received total $ 1,640,600; related purchase orders totaled $ 1,590,000(Purchase fulfilled amounts). After inspection of the
goods and supplies and pre-audit of the invoices, the invoices were approved for payment. Since the purchase orders had been
recorded as encumbrance against the appropriations, it is necessary to reverse the encumbered amount and record the expenditure
in the amount of the actual liability:
Debit Credit
Budgetary fund balance – reserved for encumbrance…….1, 590,000
Encumbrance-------------------------------------------------1,590,000

Expenditures control -------------------------------------1,640,600

Accounts payable --------------------------------------------------1,640,600

Note that the net effect of the above two entries on the departmental appropriations accounts is a $ 50,600 reduction in total
available balances.

Transaction No. 13; Recording Payrolls and Payroll Taxes

The gross pay of employees of General fund departments accounted to $ 6,690,000. XYZ city does not use the encumbrance
procedure for payrolls. Deductions from gross pay for the period amount to $ 1,528,000 for employees’ Share of tax authority.
The gross pay is chargeable to the appropriations of the individuals departments. Assuming the liability for net pay is vouching,
the entry is as follows:

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ILLUSTRATIVE CASE – FOR GENERAL FUND

Debits Credits
Expenditures control ------------------------------------ 6,690,000
Due to tax authority (federal government) --------------- 1,528,000
Accounts payable -------------------------------------------- 5,162,000

 Payment of the vouchers for the net pay results in the following entry :
Debit Credits
Account payable ------------------------------------------5,162,000
Cash ----------------------------------------------5,162,000

Transaction No. 14: Recording Contribution of XYZ City to retirement funds

Assumed XYZ city contributes $ 846,000 to retirement fund for the year. The city‘s liabilities for its contributions must be
recoded.
Debit Credit
Expenditure control ------------------ --------------------846,000
Due to social authority -------------------------------------------846,000
(Federal government)

Transaction No. 15: Recording Payment of Vouchers and Other items

Payment is made on $ 1,540, 000 of the outstanding accounts payable, and the amounts due to federal governments $1,528,000
and $ 846,000 are paid in full:
Debits Credits
Account payable ---------------- -----------------------1,540,000
Due to federal government – (social security ------1,528,000
Authority)
Due to federal government – tax authority-----------846,000
Cash ----------------------------------------------------3,914,000

Transaction No. 16: Recording Correction of Errors

No problems arise in the collection of current taxes if they are collected as billed; the collections are debited to cash and credited
to taxes receivable current. Some times, even in a well – designed and well – operated system, errors occur and must be
corrected. If, for example, duplicate taxes bills totaling $ 2,400 were sent over for the same piece of property, the following entry
would be required.
Debits Credit
Revenues control ------------------------------------------2,400
Taxes receivable ---------------------------------------------------------------- 2,400

Note that if the error occurred in a prior year however the expenditure account in error has been closed to fund Balance
unreserved, so theoretically the correcting entry should be made to that account. The error also caused a slight over statement of
the credit to estimated uncollectible current taxes in transaction no 7, but the error in that account is not considered enough to
correct.

Transaction No.17; Recording Amendment of the budget

Comparisons of budgeted and actual revenues by sources and comparisons of departmental or program appropriations with
expenditures and encumbrances, as well as an interpretation of information that was not available at the time the budgets were
originally adopted, may indicate the desirability or necessity of legally amending the budget during the fiscal year. For example,
assume that the revenues budget was increased by $ 100,000 in the charges for services source category and that the
appropriation for the public safety department was increased by $ 200,000. The amendments to the budget would be recorded
when they were legally approved, as shown below:

Debits Credit
Estimated revenues control --------------------------100,000
Budgetary fund balance-------------------------------100,000
Appropriations control -----------------------------------------------------------200,000

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ILLUSTRATIVE CASE – FOR GENERAL FUND

ILLUSTRATION FOR INTER FUND ACTIVITY

Transaction No. 18: Recording Interfund Services Used by General Fund Provided by Enterprise Fund. .
A government – owned water utility expected to support the cost of its operations by user charges should be accounted for as an
enterprise fund. Public safety (fire protection) is logically budgeted as an activity of the public safety (fire) department.
Assuming that the amount charged by the water utility (water provider) to the general fund (water consumer) was $ 160,000, the
General fund entry would be as follows:
Debits Credit
Expenditures control -----------------------------------160,000
Due to water utility fund --------------------------------------------160,000

Transaction No.19: Recording Contribution Received by General Fund from enterprise fund.
Government – owned utility property is not assessed for property tax purposes, but a number of government utilities make an
annual contribution to the general fund of the governmental unit in recognition of the fact that the utility does receive police and
fire protection and other services. Assume that if the water utility of XYZ city agrees to contribute $ 120,000 to the general fund
in lieu of taxes, which is approximately equal to the service provided, the general fund entry is as follows:
Debits Credits
Due from water utility fund -------------------120,000
Revenues control ---------------------------------------------------------120,000
Transaction No. 20: Recording Purchase of Supplies (services) from internal fund by General fund.
Another common transaction for the general fund is the receipt of supplies or services from an internal service fund established to
provide purchasing and distribution services to another government department. Assume that the general fund received $ 754,000
in supplies from the supplies fund and later made a partial payment of $ 644,000 in cash. The entries would be as follows.
Debit Credit
Expenditure control ------------------------------------754,000
Due to supplies fund ------------------------------------------------------------754,000

Due to supplies fund ---------------------------------644,000

Cash ------------------------------------------------------------------------------644,000
Transaction No. 21: Recording Other Financing Sources (Uses) or inter fund transactions.
Some transactions are labeled as “other financing sources (uses) – transfers “in order to avoid reporting revenues and
expenditures more than once in the governmental unit. Assuming that the general fund made the budgeted transfer (other
financing uses) to a debt service the general fund entry would be as follows:
Debits Credits
Other financing uses – Transfers out control-----408,000
Due to debt service fund -------------------------------------------------408,000
Note that when the cash is paid, the entry would be as follows:
Debits Credits
Due to debt service fund ------------------------408,000
Cash -------------------------------------------------------408,000
Transaction No. 22: Recording Permanent transfer from General fund to internal fund.
Other transfers are non routine transactions, often made to establish or liquidate a fund. Assume that the general fund made a
permanent transfer of $ 1, 192,000 to establish an internal service fund. The General fund entry would be as follows:
Debits Credits
Other financing uses – transfers out control ----1,192,000
Cash ---------------------------------------------------------1,192,000

Transaction No. 23: recording inter fund reimbursements

Assume that $ 40,000 of the expenditure in transaction No. 12 related to supplies used for road maintenance that should have
been charged to the motor fuel tax fund, a special revenue fund. It was decided that $ 40,000 cash would be transferred from the
motor fuel tax fund and that the transaction be treated as an inter fund reimbursement .Accordingly, $ 40,000 is charged to the
motor fuel tax fund and general fund expenditures are reduced by $ 40,000.

Debits Credits
Cash -------------------------------------------------------40,000
Expenditures control ----------------------------------------------------40,000
Transaction No. 24: Recording write-off uncollectible Delinquent taxes
When delinquent taxes are deemed to be uncollectible, the related interest and penalties must also be written off. If the treasure of
the ABC city received approval to write off delinquent taxes totaling $60,000 and related interest and penalties of $ 6000, the
entry would be as follows:

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ILLUSTRATIVE CASE – FOR GENERAL FUND

Debits Credit
Estimated uncollectible delinquent taxes -------------60,000
Taxes receivable – Delinquent ----------------------------------60,000
Estimated uncollectible interest and penalties -------6,000
Interest and penalties receivable on taxes -----------------------6,000

Transaction No. 25; Recording Reclassification of Current Taxes

Assuming that all property taxes levied by the XYZ city for 2005 were to have been paid by property owners before the end of
the year, any balance of taxes receivable at year – end is properly classified as delinquent, rather than current. The related
allowance for estimated uncollectible taxes also should be transferred to the delinquent classification. Assuming the estimate is
reasonable, the entry would be as follows:

Debits Credits
Taxes receivable – delinquent -------------------------1,128,212
Taxes receivable – current ---------------------------------------------------- 1,128,212

Estimated uncollectible current taxes ------------------130,612

Estimated uncollectible delinquent taxes --------------------------------------130,612

Transaction No. 26: Recording Accrual of interest and penalties

Delinquent taxes are subject to interest and penalties .The amount of interest and penalties earned in 2005 by the general fund of
the ABC city and not yet recognized is $ 112,820, but it is expected that only $ 78,980 of that can be collected. The entry would
be as follows:
Debits Credits
Interest and penalties receivable of taxes ----------112,820
Estimated uncollectible interest and penalties --------------------------------33,840
Revenues control -----------------------------------------------------------------78,980
Transaction No. 27: Recording Recognition of Deferral of property Tax Revenue

A review of the taxes receivable subsidiary ledger indicated that approximately $ 80,000 would probably be received more than
60 days beyond the end of the fiscal year. As per GASB standards require that the $ 80,000 be deferred:
Debits Credits
Revenue control --------------------------------------80,000
Deferred revenues – property taxes ------------------------------------80,000

Transaction No. 28: Recording special item

GASB requires that extra ordinary items and special items be reported separately after other financing sources and uses. Extra
ordinary items are significant transactions or other events that are both unusual and infrequent. Special items are significant
transactions or other events that are either unusual or infrequent but within the control of management. Assume the city sold land
for $ 600,000.
Debits Credits
Cash ------------------------------------------------600,000
Special item – proceeds from sale of land ------------------------------------600,000

Note that the reduction in the land account would be reported in the government – wide financial statements.

PREPARATION OF PRE -CLOSING TRIAL BALANCE

Assuming that the illustrated entries for the transactions and events pertaining to the year 2005 for the city of XYZ have been
made and posted, the following trial balance shows the general fund general ledger accounts before closing entries:

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ILLUSTRATIVE CASE – FOR GENERAL FUND

CITY OF XYZ GENERAL FUND

TRIAL BALANCE
AS OF DECEMBER 31, 2005
Debits Credits
Cash -------------------------------------------------886,000
Taxes receivable – delinquent -----------------1,208,212
Estimated uncollectible delinquent taxes -------------------------------------------150,612
Interest and penalties receivable on taxes -----116,820
Estimated uncollectible interest and penalties---------------------------------------47,840
Due from water utility fund ---------------------120,000
Accounts payable -----------------------------------------------------------------100,600
Due to water utility fund -------------------------------------------------------------160,000
Due to supplies fund ------------------------------------------------------------------110,000
Deferred revenues – property taxes---------------------------------------------------80,000
Budgetary fund Balance reserved for encumbrances -----------------------------100,000
Fund balance – unreserved -----------------------------------------------------------580,000
Estimated revenues control ------------------12,500,000
Revenues control -------------------------------------------------------------------12,162,580
Appropriation control -------------------------------------------------------------10,600,000
Estimated other financing uses control --------------------------------------------1,600,000
Budgetary fund balance ----------------------------------------------------------------300,000
Expenditures control ---------------------------10,060,600
Encumbrances control -----------------------------100,000
Other financing uses – transfers out control...1,600,000
Special item –proceeds from sale of land ------------------------------------------600,000
Total $26,591,632 $26,591,632

PASSING CLOSING ENTRIES

The essence of the closing process for the General fund or special revenue funds of a state or local governmental unit is the
transfer of the balances of the operating statement accounts and the balances of the budgetary accounts for the year to the fund
balance un reserved account. Note that the first closing entry has the effect of reversing the entry to record the budget (in
transaction no.1) and the entry to amend the budget (transaction no. 17)

After the closing entries are posted, the fund balance – unreserved account represents the net amount of resources available for
appropriation.

A) Closing budgetary accounts

Debits Credits
Appropriations control -------------------------------10,600,000
Estimated other financing uses control -------------1,600,000
Budgetary fund balances -------------------------------300,000
Estimated revenues control ------------------------------------------------12,500,000
B) Closing actual accounts
Debits Credits
Revenues -----------------------------------------------12,162,580
Special items – proceeds from sale of land------------600,000
Expenditures control -----------------------------------------------------10,060,600
Other financing uses – transfer out control -----------------------------1,600,000
Encumbrances control ------------------------------------------------------100,000
Fund balance – unreserved -----------------------------------------------1,001,980
C) Transferring the Budgetary Fund Balance Reserved for Encumbrances to Fund Balance -Reserved for
Encumbrances
Debits Credits
Budgetary fund balance reserved for encumbrance. 100,000
Fund balance – reserved for encumbrances-----------------------------100,000
PREPARATION OF YEAR – END FINANCIAL STATEMENTS

The Balances sheet:

The balance sheet for the general fund of the ABC city as of the end of 2005 is shown below. Note that the amount due from the
water utility fund has been offset against the amount due to the water utility fund.

7
ILLUSTRATIVE CASE – FOR GENERAL FUND

XYZ CITY
GENERAL FUND BALANCE SHEET
AS OF DECEMBER 31, 2005

ASSETS
Cash ------------------------------------------------------------------------------------------$886,000
Taxes receivable – delinquent -----------------------1,208,212
Less: estimated uncollectible --------------------------150,612 1,057,600
Interest and penalties receivable on taxes ---------116,820
Less: estimated uncollectible --------------------------47,840 68,980
Total assets --------------------------------------------------------------------------------2,012,580
LIABILITIES AND FUND EQUITY
Liabilities:
Accounts payable -------------------------------------$ 100,600
Due to water utility --------------------------------------40,000
Due to supplies fund -----------------------------------110,000
Deferred revenues – property taxes -------------------80,000
Total liabilities -----------------------------------------------------------------------------$330,600
Fund equity:
Fund balance – reserved for encumbrances --------100,000
Fund balance – unreserved -------------------------1,581,980
Total fund equity --------------------------------------------------------------------------1,681,980
Total liabilities and fund equity ------------------------------------------------------$2,012,580
Statement of revenues, expenditures, and changes in fund balance
A second financial statement that should be presented in the year – end comprehensive annual financial reports is a statement of
revenues, expenditures, and changes in fund balance. Below are presented the actual revenues and actual expenditures that
resulted from translations illustrated in this chapter.
Note that the expenditures do not include the current encumbrances of $ 100,000, because GASB standards specify that
encumbrances are not to be reported as expenditures (except in statements on schedulers prepared in conformity with budgetary
practices instead of GAAP).
ABC CITY GENERAL FUND
STATEMENT OF REVENUES, EXPENDITURES AND
CHANGES IN FUND BALANCE
FOR THE YEAR ENDED DECEMBER 31, 2005
Revenue (amounts assumed):
Property taxes ---------------------------------------------------------------$6,178,800
Interest and penalties on delinquent taxes ------------------------------------84,980
Sales taxes ---------------------------------------------------------------------2,820,000
Licenses and permits ---------------------------------------------------------1,080,000
Fines and forfeits ---------------------------------------------------------------860,000
Intergovernmental revenue ---------------------------------------------------700,000
Charges for services -----------------------------------------------------------200,000
Miscellaneous revenues --------------------------------------------------------60,000
Total revenues -------------------------------------------------------------------------$ 12,162,580

Expenditures (amounts assumed):

General government ----------------------------------------------1,620,000
Public safety -------------------------------------------------------5,539,000
Health and welfare --------------------------------------------------960,200
Recreation ---------------------------------------------------------1,054,800
Contribution to retirements funds (pension) --------------------846,000
Miscellaneous expenditures ----------------------------------------40,600
Total expenditures---------------------------------------------------(10,060,600)
Excess of revenues over expenditures ------------------------------------------------2,101,980
Other financing sues:
Transfer out --------------------------------------------------------------------(1,600,000)
Special item:
Proceeds from sale of land ------------------------------------------------------600,000
Net change in fund balance -------------------------------------------------------------1,101,980
Fund balance, January, 2005------------------------------------------------------------580,000
Fund Balance, December 31, 2005-------------------------------------------------$1,681,980