Public Sector Accounting

RIZKY KHAERANY A311 09 265

Fakultas Ekonomi Universitas Hasanuddin 2011

A. Introduction: The Concept of a General Fund

The general fund is the primary operating fund of a governmental entity. Its purpose is to account for all current financial resources except those that are required to be accounted for in another fund. For example, general property taxes, license and permits, fines and penalties, rents, charges for current services, state shared taxes, and many other revenues flow into ot. The fund also covers a wider range of activities than any other. Alternative names for the general fund include the general revenue fund, general operating fund, and current fund; however, in common usage, the term general fund is preferred. Traditionally, the general fund has been classified as an expendable fund, insofar as the monies in the fund are available for expenditure for the purposes for which it was created. In the modern classification scheme, the general fund is classified as a governmental-fund type, in that its operations are governmental in character. The general fund is thus distinguished from other governmental-type funds (i.e., special revenue funds, debt service funds, capital projects funds, and permanent funds) both in terms of its purpose to account for the activities of general government and its primary revenue source being general revenues.

B. Unique Aspect of the General Fund

There are several unique aspects of the general fund that help to define both its character and role in governmental accounting and finance. First and foremost is the point that the general fund is a governmentaltype fund, which distinguishes its accounting rules and procedures from those employed in the cases of proprietary and fiduciary-type funds. Number of General Fund In any event, it is entirely conceivable that a governmental entity whose operations are relatively simple and uncomplicated may have and report only a general fund. Measurement Focus and Basis Accounting Since the general fund is classified as a governmental-type fund, GAAP require that the Current Financial Resources Measurement Focus and the Modified Accrual Basis of Accounting be employed. Operationally, this means that revenues and other governmental-fund financial resources received are recognized in the accounting period in which they become susceptible to accrualthat is, when they become both measurable and available to finance expenditures of the fiscal period. Available means collectible within the fiscal current period, or shortly enough thereafter to satisfy any liabilities incurred in the current fiscal period. It is a crucial point that the general fund focus is not on earned revenues, as is the case with proprietary and fiduciary type funds. Revenue Recognition Revenues are to be recognized when measurable and available. As a practical matter, this requirement pertains mainly to property taxes, any regularly billed charges for routinely provided services, most of the grants received from other governments, interfund transfers, and sales and income taxes, where taxpayer liability is established and collectability is assured or where losses can be reasonably estimated. In the case of revenues that are received from sources that have not been previously accrued, they are recorded on the modified accrual basis. Expenditure Recognition Expenditures are recognized in a fund when a liability is incurred that will be satisfied by the expenditure of fund assets. Expensesincluding the expenses associated with governmental activitiesare reported in the government-wide Statement of Activities. General Fund Assets In accordance with the current financial resources measurement focus, only current financial assets are to be accounted for in the general fund, and reported on general fund financial statements. This would include cash, inventories, prepaid items, and any otherasset that will be converted into cash in the ordinary course of operations, such as receivables, marketable securities and other investments, and assets that have been acquired for resale in the current period, or shortly after its close. General Fund Liabilities In conformity with the current financial resources measurement focus, only short-term liabilities are accounted for in governmental funds. Liabilities that will be satisfied through the expenditure of general fund assets are the subject of our present concern. If liabilities are held in another fund that will be satisfied by that funds assets, they are not to be recognized as liabilities of the general fund. GAAP require that the government accrue in a governmental fund almost every expenditure and transfer that takes place as a fund liability in the period that it is incurred. Fund Equity and Fund Balance

Since capital assets, capital leases, and intangibles are excluded, a large portion of fund equity may be regarded as available for appropriation and expenditure. However, not all of the assets reported in the general fund are equally expendable or appropriable. Reservations of the general fund equity typically arise from legal restrictions, contract, unexpended encumbrances, prepaid items, and inventories. Reservations of Fund Balance should never have negative balances. Major Fund Focus The general fund is always to be reported as a major fund, whether or not it meets the 5% and 10% criteria that define a fund as a major fund. Budgetary Integration GAAP require that the operating budget be integrated directly into the accounts of any fund for which there is a legally adopted budget. In the case of the general fund, this means that the governmental entitys operating budget normally is posted directly to it, either at the beginning of the fiscal year or upon its adoption, if that occurs after the start of the fiscal year. Budgetary integration also facilitates the creation of the required budgetary comparisons at the end of the fiscal year. Encumbrances and Allotments Encumbrance accounting and reporting are widely regarded as essential attributes of effective cash planning and control. Encumbrances essentially are entries made in order to set aside, or reserve, funds that have been committed to payment for purchase orders and/or contracts for goods and services that have not been received or performed, but which are expected within the near future. Encumbrances are reflected in the general fund balance sheet as a reservation of the fund equity. Allotments are also a cash control device but one that allocates funds to spending units on a periodic basis, according to the policies and preferences of the legislature. Allotments may be entered in the ledger accounts or not. If they are recorded in the ledger, then allotments and unexpended allotments will be closed to fund balance at years end, along with expenditure accounts.

C. General Fund Classification

Estimated Revenues, Revenues, and Other Financing Sources Governmental revenues are properly classified by fund and source. Classification by fund denotes which fiscal and accounting entity is affected. Revenue source classifications should be in sufficient detail to be meaningful to readers of the financial statements. The major source categories for which estimated revenues and those commonly reported include taxes, special assessments, licenses and permits, intergovernmental revenues, charges for services, fines and forfeitures, and miscellaneous revenues. The source categories may be further subcategorized according to the preferences of the government. For instance, taxes may be reported in subcategories for property taxes, and income taxes. Revenues are to be carefully distinguished from other financing sources. These represent either transfers to the general fund from other funds, interfund loans, or the proceeds of long-term borrowing. Such items are not revenues, although they do have the effect of increasing the general funds fund balance when the accounts are closed. Revenues are classified on the government-wide statement of activities as either general revenues or, when derived from the activities connected with some specific program, as program revenues. Three categories of program revenues are reported: charges for services, operating program revenues, and capital program revenues. Multipurpose grants and contributions should be reported as general revenue. Earnings from endowments, permanent funds, or other investments that are restricted for a specific purpose should be reported as program revenue. Unrestricted earnings from such sources should be reported as general revenue. All taxesincluding those that have been earmarked by law for a specific purposeshould be reported as general revenue. Appropriations, Expenditures, and Other Financing Uses In order to promote budgetary control, appropriations and expenditures generally are classified by fund, function (or program), department or unit, activity, character, and object. Classification by fund denotes the fiscal and accounting entity that is affected. Classification by function or program assists in budgeting resources to carry out the major service activities of the government and in capturing data required to be reported on the government-wide statement of activities. Classification by department or unit fixes responsibility for spending, and therefore serves to pinpoint accountability for resource management. Classification by activity assists in assessing the governments efficiency of performance in major areas of activity (such as parks and recreationswimming pool).

Classification by character thus classifies appropriations and expenditures as current expenditures, capital spending or current-period debt service, and intergovernmental outlays. Classification by object assists in determining the amounts that are expended on specific items, such as personal services, travel, supplies, etc. In the case of the general fund, other financing uses refers to transfers toother funds. These are not expenditures as these transfers have not been expended and therefore have not left the government. Otherfinancing uses are recognized on the modified accrual basis when incurred if they are expected to be repaid from currently available resources of the general fund.

D. Budgetary Integration
The purpose of budgetary integration is to enhance financial planning, control, and performance evaluation Consequently, GASB has adopted a three-part Statement of Principle for Budgeting and Budgetary Control; Every governmental unit should adopt an annual budget. The appropriate basis for budgetary control is the accounting system. Budgetary comparison schedules should be included for all governmental units that have annually adopted budgets.

E. Levying and Collecting General Taxes and Other Revenues

the receivable for property taxes is to be debited when there is an enforceable claim. Under the modified accrual basis of accounting, property taxes are not subject to accrual until they are measurable and available. Property taxes are not accrued until they are levied. The levy establishes a legal obligation to pay on the part of property owners. The government levying the taxes will establish a receivable as of the levy, along with an estimate of uncollectible taxes, with the balance credited to an appropriately titled revenue account. The estimate of uncollectible taxes generally is based on the governments historical experience. The sum credited to estimate uncollectible taxes ought to approximate the amount that the government believes will remain uncollected at the end of the fiscal year.

F. Encumbrances and Allotments

Encumbrances as an Instrument for Cash and Budget Control In operating a system of encumbrances, it is useful to distinguish between appropriations, expenditures, encumbrances, and vouchers. When the budget is legally adopted, an appropriation is an authorization to incur liabilities on behalf of the governmental unit, for purposes specified in the budget. An appropriation is properly considered to be expended when the previously authorized liabilities have been incurred (but not necessarily paid). Encumbrances are not liabilities, but are, rather, potential liabilities. A voucher is a control document that provides evidence that a transaction is proper. A voucher payable is a liability for goods and services that have been approved for payment on the basis of a payment voucher. In the event that goods and services are received after the close of the fiscal year, they are charged against the subsequent years appropriations. Any balance remaining in the reserve for encumbrances account at fiscal yearend will appear in the fund equity section of the general fund balance sheet as a reservation of fund balance. Allotments as a Budgetary Control Device Allotments divide an annual appropriation into portions such as quarterly or monthly portions, making the portions available to spending departments and agencies for expenditure or encumbrance during the allotment period. Accounting for allotments is straightforward. When the initial budget entry is made, the credit is made to Unalloted Appropriations, instead of Appropriations. In the year-end closing process, all unexpended allotments and unalloted appropriations, along with expenditures and encumbrances, are closed to Fund Balance.

G. Interfund Activity
Interfund transactions involve purchases of goods and service from, and on behalf of, other funds, interfund loans, transfers, and reimbursements. Generally, interfund activity is divided by two big activity. They are Reciprocal Interfund Activity and Non reciprocal Interfund Activity.

Reciprocal Interfund Activity

 Interfund Exchange Transactions It is a fairly common occurrence for departments accounted for in the general fund to make purchases on behalf of other funds, to purchase services from other funds, and/or to provide other funds with services directly. Transactions between governmental funds generally are recognized as expenditures when a liability is credited. The fund receiving the payment may recognize it as a revenue item. It should be stressed that this is the only form of interfund transfer that will result in revenue recognition on the part of the fund providing the service. Interfund Loans Interfund loans are those made from one fund to another with the intent that they will be repaid. If repayment is not expected within a reasonable time, then the interfund loan balance should be reduced, with the amount that is not expected to be repaid reported as an interfund transfer from/to the fund that made/received the loan. Interfund loans are to be classified as Interfund Loans ReceivableCurrent (or PayableCurrent), if the intent is to repay the loan during the current year (or shortly thereafter). Otherwise, they are to be classified as Noncurrent Loans items. Nonreciprocal Interfund Activity Interfund Transfer Nonreciprocal interfund transfers of both operating transfer and equity transfers are classified as Interfund Transfers under current GASB standards. Interfund transfers take place without an equivalent flow of assets back to the transferring fund, neither with any expectation of repayment. They are reported on the financial statements as Other Financing Uses by the fund making the transfer, and as Other Financing Sources by the receiving fund. A typical example of an operating transfer is the payment of debt service by a debt service fund using a portion of general tax revenues collected by the general fund. A fairly common example of an equity transfer concerns the permanent transfer of seed money from the general fund to a new capital projects fund in order to initiate the acquisition or construction of a capital asset, or the transfer of residual balances from a capital projects fund that has completed its work to another fund. Interfund Reimbursements Reimbursements are repayments from the funds responsible for particular expenditures or expenses to the funds that initially paid for them . In this instance, one fund records an expenditure for items that should have been recorded as expenditures of the fund that is responsible for those kinds of expenditures. When that happens, the fund receiving the reimbursement should record it as a reduction (credit) of its expenditures (or expenses), with a corresponding debit to cash. Reimbursements are not to be reported in the financial statements. Intra and Interactivity Transactions Intra-activity transactions are those that take place between two governmental-type funds (including internal service funds), or between two enterprise funds. Neither governmental activities nor business- type activities are affected at the government-wide level of reporting, so there are no requirements for additional entries or recordkeeping in the general fund for these transactions. However, in the case of interactivity transactions, interfund loans or other transactions take place between a governmental fund (including internal service funds) and an enterprise fund. In this case, additional entries and record-keeping become necessary, insofar as internal balances are reported in the government-wide statement of net assets, and transfers in the statement of activities Intra-Entity Transactions Intra-entity transactions are exchange or nonexchange transactions between the primary government and its component units. To the extent that any such transaction involves the primary government and a blended component unit of the reporting entity, these transfers should be reclassified as internal interfund activity of the reporting entity. However, resources that flow between a fund of the primary government and its discretely reported component units should be treated as if they were transactions with an external entity and recognized as revenues or expenses on the government-wide statement of activities.

H. General Fund Financial Statements

In contrast to the government-wide financial statements, which report on the governments operational accountability, the general fund financial statementslike all governmental fund financial statementsreport on the governments fiscal accountability. The focus of general fund reporting is therefore on the flow and use of current financial resources employed in general government operations. General Fund Operating Statements

The operating statement is formally entitled the Statement of Revenues, Expenditures and Changes in Fund Balances, and must be labeled as such when officially published. The statement reports the following information, in the format and sequence indicated: Revenues (in detail) Expenditures (in detail) Excess (deficiency) of revenues over expenditures Other financing sources and uses, including transfers (in detail) Special and extraordinary items (in detail) Net change in fund balances Fund balancesbeginning of period (including reserved and unreserved amounts) Fund balancesend of period In accordance with the emphasis on major funds, the operating statement will include columns for all major governmental funds, a single column for nonmajor funds, and a total column. General Fund Balance Sheet The governmental funds balance sheet reports information about the current financial resources for each major governmental fund and nonmajor governmental funds in the aggregate. Assets, liabilities, and fund balances are presented in a balance sheet format. Reserved and unreserved fund balances are to be reported in a segregated fashion. Reserved fund balances should be reported in sufficient detail and labeled so as to disclose the purpose of the reservation. Statement of Cash Flow A statement of cash flow is not required for the general fund. Required Reconciliation Statements/Schedules In order to avoid confusion concerning financial and operating results being reported on two different bases of accountingfull accrual accounting at the government-wide level and modified accrual accounting for governmental fundsGASB standards require that reconciliations be provided either at the bottom of the fund financial statements or in accompanying schedules. The items that typically need to be reconciled are specified in the standard, including revenues reported on the accrual basis, depreciation expense versus capital expenditures, long-term debt reported as a liability instead of as an other financing source, and expenses reported at the government-wide level on the accrual basis. Required Budgetary Comparison Budgetary comparison information must include the original adopted budget, final appropriated budget (including the effects of all amendments that may have occurred during the fiscal year), and actual inflows, outflows, and balances on the governments budgetary basis. A separate column also may be included to report the variance between actual and final budgeted amounts, but is not required. All governments are encouraged to present their budgetary comparison information as schedules as part of their required supplementary information (RSI); however, governments have the option of reporting budgetary comparison information in the form of a statement as part of the basic financial statements. When presented as a basic financial statement, the budgetary comparison is denoted as a Statement. This presentation places the budgetary comparison within the scope of the independent audit. When presented as RSI, the budgetary comparison is denoted as a Schedule, which is subject to limited test procedures by the independent auditor. Interim Financial Reports Interim financial statements are considered desirable cash and budget control devices. Administrators and legislators have the greatest need for interimquarterly or monthlyreports. Interim financial statements resemble the official annual statements in most important respects but also will contain items that do not appear in the annual statements. There usually is no interim operating statement,but rather, schedules accompanying the interim balance sheet will disclose budgeted versus actual revenues, appropriations, expenditures, and encumbrances in sufficient detail as to be useful to executive branch officials, managers, and legislators.

I. General Fund Accounting and Financial Reporting Issues

Major general fund accounting and financial reporting issues concern the recognition of certain revenue items and the liabilities associated with certain tax, revenue, or grant anticipation notes.

Revenues Collected after the Close of the Fiscal Year

Taxes receivable at fiscal year-end must be reclassified as delinquent, and an estimate of uncollectibles made and recorded. According to GASB Interpretation No. 5, revenues to be collected after the close of the current fiscal year, but which will be used to satisfy liabilities of the current year, may be subject to recognition in the current period. Sales Tax Revenue Since municipal sales tax revenue is classified as an imposed nonexchange revenue item, it is not to be accrued when collected by merchants unless and until they are due and payable to the government. In general, municipal sales tax revenue is to be recognized on the modified accrual basis. Certain Tax, Revenue, or Grant Anticipation Notes In general, tax anticipation notes, other revenue anticipation notes, and grant anticipation notes are to be treated as liabilities of the funds that will receive the proceeds.

J. Current and Future Developments

Communications Methods In April 2005, the GASB issued Concepts Statement No. 3 concerning the proper placement of information in the general financial reports. Four possible placements of financial information are contemplated: recognition in the financial statements, notes disclosures, RSI disclosure, and presentation as supplementary information. Elements of Financial Statements Independent Definitions of Financial Statements Elements First, the statement defines financial statement elements independently of one another. The exposure draft therefore adopts the concept of a resource as a central attribute of the basic elements. Resources are defined as something with a present capacity to provide, directly or indirectly, services. Five elements definitions in the proposed statement incorporate this notion of a resource: Assets are resources that the governmental entity controls at present. Liabilities are present obligations to sacrifice resources, now or in the future, that a government has little or no discretion to avoid. Net assets are the residual of all other elements presented in a statement of financial position. An outflow of resources is a consumption of net resources that is applicable to the current reporting period. An inflow of resources is an acquisition of net resources that is applicable to the current reporting period. Assets, liabilities, and net assets are elements of statements of financial position, and would pertain, for example, to the governmental funds balance sheet, which includes the general fund, and to the government-wide statement of net assets. Outflows and inflows of resources are elements of what the statement terms resource flows statements, which include the governmental-fund statement of revenues, expenditures, and changes in fund balance. Treatment of Deferrals Deferred items have not previously been uniquely defined, leading to some confusion over just what they are when they appear with assets and liabilities on the balance sheet. Insofar as they do not have similar characteristics as assets and liabilities, the GASB undertook to define them separately: A deferred outflow of resources is a consumption of net resources by a government that applies to a future reporting period. A deferred inflow of resources is an acquisition of net resources by a government that applies to a future reporting period. Examples of deferred items are unearned revenues and deferred expenses.