Chapter5Recognizing Expenditures

In Governmental Funds

Governmental funds are concerned with expenditures Decreases in net financial resources Generally recognized when an asset is acquired Report only current liabilities

Governmental activities are concerned with expenses Decreases in net economic resources Generally recognized when consumed Report both current & long term liabilities

Expenditures Vs. Expenses

Wages see page 164 – Wages and salaries should be recognized in the period earned not paid! No difference between fund and govt-wide

Vacation see page 166 – Vacation expenditures and related liability should be recognized in the period in which payments are due Notice difference between fund entry and govt-wide entry

Sick – see page 168 Sick expenditures should be recognized in the period in which payments are made Notice difference between fund entry and govt-wide entry

Payroll Items

Payroll accounting is similar for a governmental fund and a for-profit entity, except Expenditures rather than Expenses are recorded Debit Expenditures for full amount of payroll and credit

liabilities for withholdings from employees pay; credit Cash for the amount paid to employees

Record Expenditures for the employer’s payroll costs, including employer’s share of FICA and credit a liability to federal government

Encumbrances usually are not recorded for recurring expenditures such as payroll

Accounting for Payroll

Macon City recognized its payroll for the most recent two week pay period for employees paid from the General Fund. GF General Journal Dr. Cr.Expenditures—2005 948,000

Due to Federal Gov’t 86,000Due to State Gov’t 49,000

Cash 713,000

Accounting for Payroll (Cont’d)

The employer’s share of FICA is recorded.

GF General Journal Dr. Cr.Expenditures—2005 86,000

Due to Federal Gov’t 86,000

Accounting for Payroll (Cont’d)

Two different types: A) Sabbaticals that “enhance reputation or otherwise

benefit the employer Generally activities must be approved Recognize expense in the period leave is taken

B) Sabbaticals for “compensated unrestricted time off” Accrue a liability during the period that leave is earned Would only appear in the governmental activities

Sabbatical Leave

See example on page 170 The expenditure is the amount that will be liquidated

with expendable available financial resources However, notice the difference between the fund and

governmental activities Must recognize full expense in the governmental activities A pension liability will be on the balance sheet for the

difference between expense and what was paid

Pension

See example on page 171-172 The key question is when and in what amount should be

recorded? Usually monetary damages are incurred years prior to

payment Expenditures – should only be recognized in the

governmental funds when amount is paid Expenses – should be recognized in the governmental

activities when Probable that an asset has been impaired Amount of the loss can be estimated

Claims & Judgements

2 Methods – Consumption and Purchases See example on page 173-176

Purchases Method Recognize expenditure when items are purchased Make necessary adjustment to fund balance and asset

account at year end Consumption Method

Recognize an asset when items are purchased Record expenditures when assets are consumed Additional entry to fund balance at year end

Prepayments/Materials/Supplies

Capital assets or their corresponding depreciation cannot be recorded in the governmental funds

Example on page 177 – Governmental fund entry would be:

Expenditures 90,000

Cash 90,000

Governmental activities entry would be:

Truck 90,000

Cash 90,000

Capital Assets

General capital assets are: Capitalized in the governmental activities

accounts at the government-wide level

Depreciated at the government-wide level

Debited to Expenditures in the appropriate governmental fund.

Accounting for General Capital Assets

Accounting for Acquisition of Capital Assets

Example: Purchased office equipment for the Mayor’s office and paid $50,000 cash from the General Fund.

Governmental Activities: Dr. Cr.

Equipment 50,000

Cash 50,000

General Fund:

Expenditures 50,000

Cash50,000

Depreciation on general capital assets, including infrastructure, is required at the government-wide level under GASBS 34.

Depreciation is not recorded on inexhaustible assets, such as land and noncapitalized collections of art.

The government can elect not to depreciate certain eligible infrastructure assets.

Depreciation Accounting and Reporting

Installment Notes: Proceeds from long term debt should be called “other

financing sources” in the governmental funds Expenditures are recognized in the governmental funds

when payment is made See example on page 178 What entry would you expect to see at the government

activities level for this entry?

Installment Notes and Leases

Leases Capital leases are similar to a purchase of an asset Operating leases are conventional rental agreements Capital lease accounting is similar to Installment Notes –

See page 179 – 180

Installment Notes and Leases

Follow SFAS No. 13 criteria to determine if the lease is a capital lease, rather than an operating lease

Record capital assets in the government-wide statements in the amount of the present value of minimum lease payments or fair value, if lower

Record an expenditure in the governmental fund that is using the asset and making the payments.

Accounting for Capital Leases

Remove original cost of assets being disposed of. If only part of structure is demolished, remove a pro-rata share of the cost.

Record in both the governmental fund and the governmental activities general journals.

Accounting for the Disposition of General Capital Assets

Accounting for the Disposition of General Capital Assets (Cont’d)

Example 1: Assume a machine is sold for $500. The asset had originally been purchased for $8,000 using GF revenues. It was fully depreciated.

General Fund: Dr. Cr.

Cash 500

Revenues—Misc.(or OFS) 500

Governmental Activities:Cash 500Accumulated Depreciation 8,000

Machine8,000

Gain on Sale of Machine500

Example 2: Assume a building with an original cost of $100,000 (from tax-supported bonds) is demolished; cost of demolition was $5,000. It was fully depreciated.

General Fund: Dr. Cr.Expenditures 5,000 Cash 5,000

Governmental Activities:Loss on Disposal of Building 5,000Accumulated Depreciation 100,000

Buildings 100,000 Cash 5,000

Accounting for the Disposition of General Capital Assets