accounting for state and local governments (part 1)...accounting for activities related to serving...

© The McGraw-Hill Companies, Inc., 2004

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11-1

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Chapter Eleven

Accounting for

State and Local

Governments

(Part 1)


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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 Accounting User 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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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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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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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 Classification Governmental Funds

General

Fund

Special

Revenue

Fund

Capital

Projects

Fund

Debt

Service

Fund

Permanent

Fund

(Endowments)

Governmental Funds


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Governmental Funds General Fund

Used to account for all

financial resources

except those

accounted for in other

funds.

In 2001, 60% of

Baltimore’s

governmental funds

were accounted for in

the General Fund.


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Governmental Funds Special Revenue Fund

Expenditures are

legally restricted.

Revenues that must be

spent for specific

purposes.

St. Paul, MN, requires

that money received

for the sale of zoo

animals, must be

spent to acquire NEW

animals for the zoo.


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Governmental Funds Capital Projects Fund

Used to account for

costs to acquire or

build major

governmental

facilities.

The asset is not

recorded in this

account, but the funds

to acquire or build it

are accounted for

here.


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Governmental Funds Debt Service Fund

Used to account for

financial resources

collected to pay long-

term liabilities and

interest.

In 2001, Birmingham

reported paying out

$11 million in principal

payments and $15

million in interest from

its debt service funds.


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Governmental Funds Permanent Fund (Endowments)

Used to account for

funds donated to the

government by

external donors.

In 2001, Dallas

reported nearly $8

million in funds

donated to take care of

city parks.


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Fund Accounting Classification Proprietary Funds

Enterprise Fund Internal Service

Fund

Proprietary Funds


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Proprietary Funds Enterprise Fund

Used to account for any government activity that is

financed by user charges.

An activity MUST be accounted for here if any one of

the conditions below are met . . .

Net revenues

provide the

security for the

activity’s debts.

The the law

requires costs to

be recovered

from user fees.

Fees are set high enough to

recover costs..


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Proprietary Funds Internal Service Fund

Used for any unit that provides services to the OTHER governmental departments.

Inter-departmental fees are charged.

Tennessee Tech University charges the departments for the use of University vehicles.


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Fund Accounting Classification Fiduciary Funds

Investment

Trust Funds

Private Purpose

Trust Funds

Pension

Trust Funds

Agency

Funds

Fiduciary Funds(Only used for funds

held for external parties)


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Coverage of Fund Accounting Procedures


Statements

Government-Wide


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

Fiduciary

Funds


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Statements

Government-Wide


Governmental

Funds






recognition.





recognition.

Proprietary

Funds





recognition.

same

Fiduciary

Funds


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Statements

Government-Wide


Governmental

Funds






recognition.





recognition.

Proprietary

Funds





recognition.





recognition.

Fiduciary

Funds



accrual for the timing of

revenue and expense

recognition.

Not applicable


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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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Governmental

Activities

Business-Type

Activities Total

ASSETS:

Cash 100$ 130$ 230$

Other Current Assets 1,580 430 2,010$

Capital Assets 2,950 2,750 5,700$

Total Assets 4,630$ 3,310$ 7,940$

LIABILITIES:

A/P 750$ 230$ 980$

Noncurrent Liabilities

- Due within one year 400 180 580$

- Due in more than one year 1,800 700 2,500$

Total Liabilities 2,950$ 1,110$ 4,060$

NET ASSETS:

Invested in Capital Assets, Net of Debt 1,410$ 2,110$ 3,520$

Restricted for:

Capital Projects 50 - 50$

Debt Service 140 60 200$

Unrestricted 80 30 110$

Total Net Assets 1,680$ 2,200$ 3,880$

Note that we

keep the

Governmental

Activities

separate from

the Business-

Type Activities.

Exh.

11-1


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Governmental

Activities

Business-Type

Activities Total

ASSETS:

Cash 100$ 130$ 230$

Other Current Assets 1,580 430 2,010$

Capital Assets 2,950 2,750 5,700$

Total Assets 4,630$ 3,310$ 7,940$

LIABILITIES:

A/P 750$ 230$ 980$

Noncurrent Liabilities

- Due within one year 400 180 580$

- Due in more than one year 1,800 700 2,500$

Total Liabilities 2,950$ 1,110$ 4,060$

NET ASSETS:

Invested in Capital Assets, Net of Debt 1,410$ 2,110$ 3,520$

Restricted for:

Capital Projects 50 - 50$

Debt Service 140 60 200$

Unrestricted 80 30 110$

Total Net Assets 1,680$ 2,200$ 3,880$

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.

Exh.

11-1


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Statement of Activities

Function Expenses

Program

Revenues

Governmental

Activities

Business-Type

Activities Total

Governmental Activities:

- General Government 3,200$ 1,400$ (1,800)$ (1,800)$

- Public Safety 9,700 880 (8,820) (8,820)

- Public Works 2,600 600 (2,000) (2,000)

- Education 8,400 300 (8,100) (8,100)

Total Gov't Activities 23,900$ 3,180$ (20,720)$ -$ (20,720)$

Business-Type Activities:

- Water 3,600 4,030 430 430

- Sewer 4,920 5,610 690 690

- Airport 2,300 3,120 820 820

Total Business-Type

Activities $ 10,820 $ 12,760 $ - $ 1,940 $ 1,940

Total Government 34,720$ 15,940$ (20,720)$ 1,940$ (18,780)$

Net (Expense) Revenue

The net for a given

function is determined

horizontally, while the

totals for expenses

and revenues are

determined vertically.

Exh.

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Statement of Activities

Continued

Function Expenses

Program

Revenues

Governmental

Activities

Business-Type

Activities Total

Total Government 34,720$ 15,940$ (20,720)$ 1,940$ (18,780)$

General Revenues:

- Property Taxes 20,400$ 20,400$

- Investment Earnings 420 70 490

- Transfers 600 (600) -

Total Gen'l Revenues 21,420$ (530)$ 20,890$

Change in Net Assets 700$ 1,410$ 2,110$

Beginning Net Assets 980 790 1,770

Ending Net Assets 1,680$ 2,200$ 3,880$

Net (Expense) Revenue

The general

revenues are

shown

separately at

the bottom of

the

statement.

Exh.

11-2


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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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11-29

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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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11-30

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Fund Accounting Balance Sheet Example

General Fund

Library

Program

Other Gov't

Funds

Total Gov't

Funds

ASSETS:

Cash 40$ 10$ 50$ 100$

Investments 580 120 200 900

Receivables 120 200 210 530

Supplies & Materials 10 10 10 30

Total Assets 750$ 340$ 470$ 1,560$

LIABILITIES:

A/P 230$ 170$ 110$ 510$

Notes Payable 300 - 100 400

Total Liabilities 530$ 170$ 210$ 910$

FUND BALANCES

Reserved for:

Supplies 10$ 10$ 10$ 30$

Encumbrances 120 30 40 190

Debt Service - - 110 110

Unreserved: -

General Fund 90 - - 90

Special Revenue Fund - 130 20 150

Capital Projects Fund - - 80 80

Total Fund Balances 220$ 170$ 260$ 650$

Total Liabilities and Fund Balances 750$ 340$ 470$ 1,560$

Exh.

11-3


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General Fund

Library

Program

Other Gov't

Funds

Total Gov't

Funds

ASSETS:

Cash 40$ 10$ 50$ 100$




Total Assets 750$ 340$ 470$ 1,560$

LIABILITIES:

A/P 230$ 170$ 110$ 510$



FUND BALANCES

Reserved for:

Supplies 10$ 10$ 10$ 30$



Unreserved: -






Internal Service Funds

are included in separate

statements for

Proprietary Funds.

The “current financial

resources”

measurement is used.

Modified accrual

accounting is used.

Exh.

11-3


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General Fund

Library

Program

Other Gov't

Funds

Total Gov't

Funds

ASSETS:

Cash 40$ 10$ 50$ 100$




Total Assets 750$ 340$ 470$ 1,560$

LIABILITIES:

A/P 230$ 170$ 110$ 510$



FUND BALANCES

Reserved for:

Supplies 10$ 10$ 10$ 30$



Unreserved: -






Note that the

statement has a

separate column

for the General

Fund and for each

fund identified as

a “major” fund.

Two criteria determine whether

a fund is classified as

“major”:

1. Total assets, liabilities,

revenues, or expenditures

are at least 10% of the

corresponding total for all

funds of the same category.

2. Total assets, liabilities,

revenues, or expenditures

are at least 5% of the

corresponding for all other

funds combined.

Exh.

11-3


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

General Fund

Library

Program

Other Gov't

Funds

Total Gov't

Funds

REVENUES

- Property Taxes 17,200$ 900$ 2,300$ 20,400$

- Investment Earnings 100 200 180 480

- Program Revenues 500 100 2,500 3,100

Total Revenues 17,800$ 1,200$ 4,980$ 23,980$

EXPENDITURES:

Current:

General Government 3,400$ -$ 100$ 3,500$

Public Safety 5,100 - 400 5,500

Education 6,700 800 - 7,500

Debt Service: -

Principal - - 1,000 1,000

Interest - - 600 600

Capital Outlay 1,100 300 3,300 4,700

Total Expenditures 16,300$ 1,100$ 5,400$ 22,800$

Continue

Exh.

11-4


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

Continued General Fund

Library

Program

Other Gov't

Funds

Total Gov't

Funds

OTHER FINANCING SOURCES:

Bond Proceeds -$ -$ 1,000$ 1,000$

Transfers In - 20 580 600

Transfers Out (1,300) - (1,000) (2,300)

Total Other Financing Sources and

Uses $ (1,300) $ 20 $ 580 $ (700)

Change in Fund Balance 200$ 120$ 160$ 480$

Fund Balances - Beginning 20 50 100 170

Fund Balances - Ending 220$ 170$ 260$ 650$

Exh.

11-4


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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:

1. Expresses public policy.

2. Serves as an expression of financial intent.

3. Provides control by establishing spending limits.

4. 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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11-37

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Date Description Debit Credit

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 2004, 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


Estimated Revenues - Tax Levy 490,000

Appropriations - Salaries 200,000

Appropriations - Utilities 30,000

Appropriations - Advertising 80,000

Appropriations - Supplies 90,000

Fund Balance 90,000


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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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General Fund - Drye TownshipDate Description Debit Credit

General Fund - Drye TownshipDate Description Debit Credit

15-May Encumbrances Control 16,000

Fund Balance - Reserve

For Encumbrances 16,000

Record the order in Drye Township’s books.

Encumbrances – Example Fund-Based Statements

Drye Township has budgeted office supplies

for $180,000 for 2004. 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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11-41

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General Fund - Drye Township


Record the receipt of the supplies in

Drye Township’s books for the Fund-

Based Statements.



17-May Supplies Inventory 15,680

Vouchers Payable 15,680

Fund Balance - Reserve

For Encumbrances 16,000

Encumbrance Control 16,000

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).

Encumbrances – Example Fund-Based Statements

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.



17-May Supplies Inventory 15,680

Vouchers Payable 15,680

Note that with the Government-Wide

Financial Statements, no entry is

necessary for the encumbrances used

with the Fund-Based Statements.

Encumbrances – Example 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).


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Fund-Based Statements Fixed 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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11-44

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Government-Wide Statements Fixed 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 Revenues Nonexchange 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.


Cash 50,000

Bonds Payable 50,000

Issuance of Bonds

Government-Wide


Increase the Cash and

the Debt.


Statements

Increase Cash and Other

Financing Sources.

Drye Township issues $50,000 in bonds for new

sidewalks.


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11-47

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Prepare the journal entry to record the

bonds for fund-based statements.


Cash 50,000

Other Financing

Sources 50,000

Issuance of Bonds

Government-Wide


Increase the Cash and

the Debt.


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.


Note Payable 9,000

Interest Expense 1,000

Cash 10,000

Payment of Long-Term Liabilities

Government-Wide


Record principle and

interest as with GAAP.


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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11-49

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Prepare the journal entry to record the loan

payment for fund-based statements.


Expenditure - N/P 9,000

Expenditure - Interest 1,000

Cash 10,000

Payment of Long-Term Liabilities

Government-Wide


Record principle and

interest as with GAAP.


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 11

accounting for state and local governments (part 1)...accounting for activities related to serving...

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