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17
Introduction to Fund Accounting

Advanced Accounting, Fourth Edition

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Fund Accounting
Fund Accounting Accounting for nonbusiness organizations.

Nonbusiness Organizations
Provide socially desirable service without regard to financial gain.

Business Enterprises
Earn a return on investment. Competitive market. Liquidity concerns.

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Classification of Nonbusiness Organizations

Five Major Classifications
1. Governmental units.
2. Hospitals and other health care providers. 3. Colleges and universities. 4. Voluntary health and welfare organizations. 5. Other nonbusiness organizations (trade
associations, professional associations, museums, religious organizations, etc.)

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Distinctions between Nonbusiness Organizations and Profit-Oriented Enterprises

Distinctions
Absence of primary goal to earn a profit. No equity interests.

Seldom finance through user charges.

Rely on political action or fund-raising campaigns. Income determination model generally not applicable. Restrictions or limitations on use of resources.

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LO 1 Nonbusiness organizations versus profit-oriented enterprises.

Fund Accounting
Fund Entity Classification
Expendable Basic fund accounting concepts.
Proprietary Business type activity. Fiduciary - Agent or trustee.

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LO 2 The role of fund accounting.

Fund Accounting
Expendable Fund Entities
Financial resources dedicated to a specified use. Examples - Capital Projects or Debt Service fund. Resources consist of cash and claims to cash. Resources - Claims against resources = Fund balance. Measurement focus is on flow of current financial resources. Accounting Model
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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting
Proprietary Fund Entities
Activities that are similar to business enterprises. Examples:
Electric or water utility by a municipality Rental of real estate by religious organization.

Focus on determination of net income, financial position, and cash flows.

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting
Fiduciary Fund Entities
Trust and Agency funds: Pension trust fund. Agency fund (resources of taxes, bonds, and other
receipts held for individuals, outside organizations, and/or other funds).

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting
Budgetary Fund Entities (Governmental Funds)
Approved resource flows are incorporated into annual budgets. Budgeted expenditures are referred to as appropriations. Approved budget may be recorded in the accounting records. Budgetary account integration is useful in the control and administration of fund resources.
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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting
Basis of Accounting
Basic Financial Statements
Government-Wide

Governmental Fund (expendable)

Nonfiduciary activities. Short- and long-run information. Economic resources measurement concept. Accrual basis of accounting.

Current financial resources concept. Modified accrual basis of accounting. Revenues recognized when measurable and available.

Expenditures recorded when liability is incurred.

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting

Question
When used in fund accounting, the term fund usually refers to a. A sum of money designated for a special purpose. b. A liability to other governmental units. c. The equity of a municipality in its own assets. d. A fiscal and accounting entity having a set of selfbalancing accounts.

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting
Classification of Revenues
By Fund and Major Revenue Source
Major Sources of Revenue Property taxes Income taxes Sales and excise taxes Gift and inheritance taxes Fines and penalties Gifts and donations Forfeits Licenses and permits
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Sales of property Charges for services Interest earned on loans and investments From federal, state, or local units: Grants Shared revenues Payments in lieu of taxes
LO 4 Classification of revenues.

Fund Accounting
Other Financing Sources
Debt issue proceeds are accounted for as other financing sources. Interfund operating transfers are accounted for as other financing sources, or uses.

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Fund Accounting
Recognition of Revenue (Expendable Funds)
Revenue is ordinarily not recognized until it 1) can be objectively measured and

2) is available for expenditures of current period.

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Fund Accounting
Recognition of Revenue (Expendable Funds)
Revenue recognized when measurable and available.
When Recognized? Property Taxes
Income Tax and Sales Tax

Levied
Returns are filed with payment

Fines and Forfeits

Sales of Property Pledges Grants
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Collected
Time of sale Time of pledge May or may not at time authorized

Fund Accounting
Recognition of Expenditures
Appropriation
Authorized to Spend

Encumbrance
Purchase Order or Contract

Expenditure
Receipt of Goods

Encumbrances and expenditures are classified on the same basis (by fund, function, organizational unit, activity, character, or object class) as appropriations.
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Disbursement
Payment

LO 5 Classification of expenditures.

Fund Accounting

Question
Authority granted by a legislative body to make expenditures and to incur obligations during a fiscal year is the definition of an

a. Appropriation.
b. Authorization. c. Encumbrance. d. Expenditure.

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting
Exercise 17-3: (partial) Listed are transactions of the Town of Jackson. 1. A contract was signed with an independent company to do the trash collecting for the year. The contract price was $96,000. 2. The first monthly bill of $8,000 was received from the trash collector.

3. The $8,000 bill was paid.

Required: Prepare the journal entries needed in the records of the General Fund for these transactions.
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LO 5 Classification of expenditures.

Fund Accounting
Exercise 17-3: 1. A contract was signed with an independent company to do the trash collecting for the year. The contract price was $96,000. 1. Encumbrance 96,000

Reserve for Encumbrances

96,000

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LO 5 Classification of expenditures.

Fund Accounting
Exercise 17-3: 2. The first monthly bill of $8,000 was received from trash collector. 3. The $8,000 bill was paid. 2. Expenditures 8,000

Contracts payable Reserve for Encumbrances

Encumbrance

8,000 8,000
8,000

3.

Contracts payable
Cash

8,000
8,000
LO 5 Classification of expenditures.

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Fund Accounting

Question
What type of account is used to earmark the fund balance to liquidate the contingent obligations of goods ordered but not yet received?

a. Appropriations.
b. Encumbrances. c. Obligations. d. Reserve for encumbrances.

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting
Capital Expenditures (Expendable Fund)
Treated as a current period expenditure.
Middletown purchased a police car for $10,000. Expenditures Cash 10,000 10,000

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LO 7 Capital expenditures.

Fund Accounting
Recording Budgeted and Actual Revenue and Expenditures
Exercise 17-3: (partial)
1. A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of $1,800,000 was passed by the town council.

2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible.

3. Property taxes in the amount of $1,080,000 were collected. 4. Equipment costing $200,000 was purchased, and the old equipment was sold at for $24,000. Required: Prepare required journal entries for General Fund.
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Fund Accounting
Exercise 17-3: 1. A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of $1,800,000 was passed by the town council. 1. Estimated Revenues 1,950,000

Appropriations
Unreserved Fund Balance

1,800,000
150,000

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Fund Accounting
Exercise 17-3: 2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible. 3. Property taxes of $1,080,000 were collected. 2. Property Tax Receivable Revenue 1,150,000

Estimated Uncollectible Taxes

35,000
1,115,000

3.

Cash Property Tax Receivable

1,080,000 1,080,000

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Fund Accounting
Exercise 17-3: 4. Equipment costing $200,000 was purchased, and the old equipment was sold at for $24,000. 4. Expenditures 200,000

Cash

200,000

Cash

24,000

Revenue

24,000

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Fund Accounting
Exercise 17-5 (variation): The preclosing trial balance for the General Fund of the City of Springfield is presented below.
Trial Balance for December 31, 2008:
Cash Certificates of Deposit Property Taxes Receivable Estimated Revenue Expenditures Encumbrances Estimated Uncollectible Taxes Vouchers Payable Unreserved Fund Balance Reserve for Encumbrances Appropriations Revenue $3,550,000
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90,000 120,000 175,000 1,690,000 1,310,000 165,000 $51,000 65,000 44,000 165,000 1,550,000 1,675,000 $3,550,000

Fund Accounting
Exercise 17-5: Prepare closing entries.
Unreserved Fund Balance Appropriations Estimated Revenue 140,000 1,550,000 1,690,000

Unreserved Fund Balance

Encumbrances

165,000
165,000

Revenue
Expenditures Unreserved Fund Balance
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1,675,000
1,310,000 75,000

Fund Accounting Comprehensive Illustration

Problem 17-1: The general ledger trial balance of the General Fund of the City of Bedford on January 1, 2008, shows the following:
Cash Taxes Receivable Allowance for Uncollectible Taxes Unreserved Fund Balance Reserve for Encumbrances2007 Total Debit $100,000 75,000 Credit

$175,000

$ 35,000 110,000 30,000 $175,000

Prepare journal entries to record the following activities and transactions for the General Fund during 2008.
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LO 8 Understand the general fund.

Fund Accounting
Problem 17-1: 1. The City Council adopted a budget with estimated revenues of $1,560,000 and appropriated expenditures of $1,400,000. Estimated Revenue 1,560,000

Appropriations
Unreserved Fund Balance

1,400,000
160,000

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LO 8 Understand the general fund.

Fund Accounting
Problem 17-1: 1. The budget authorized the transfer of $50,000 from the Water Fund to the General Fund. Interest due for the year on the $1,000,000, 8% bond issue for the Civic Center is approved for transfer from the General Fund to the Debt Service Fund.

Due from Water Fund

Transfer from Water Fund

50,000
50,000

Transfer to Debt Service Fund

Due to Debt Service Fund
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80,000
80,000

LO 8 Understand the general fund.

Fund Accounting
Problem 17-1: 2. The annual property tax levy of 10% on assessed valuation ($11,000,000) is billed to property owners. Two percent is estimated to be uncollectible. Property Tax Receivable 1,100,000

Revenue
Allowance for Uncollectible Taxes

1,078,000
22,000

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LO 8 Understand the general fund.

Fund Accounting
Problem 17-1: 3. Goods and services amounting to $1,150,000 were ordered during the year. Encumbrances Reserve for Encumbrances 1,150,000 1,150,000

4. Invoices for all goods ordered in 2007 amounting to $29,000 were approved for payment. Expenditures 2007 Vouchers Payable
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29,000 29,000
LO 8 Understand the general fund.

Fund Accounting
Problem 17-1: 5. Funds for bond interest on Civic Center bonds were transferred to the Debt Service Fund. Due to Debt Service Fund 80,000

Cash

80,000

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LO 8 Understand the general fund.

Fund Accounting
Problem 17-1: 6. Invoices for goods received during the year totaled $1,155,000. These were encumbered [see (3) above]. Expenditures 1,155,000

Vouchers Payable
Reserve for Encumbrances Encumbrances 1,150,000

1,155,000

1,150,000

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LO 8 Understand the general fund.

Fund Accounting
Problem 17-1: 7. Transfer of funds from the Water Company was received in lieu of taxes. Cash Due from Water Fund 50,000 50,000

8. Taxes were collected from property owners in the amount of $1,050,000. Cash Property Tax Receivable
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1,050,000 1,050,000
LO 8 Understand the general fund.

Fund Accounting
Problem 17-1: 9. Past-due tax bills of $17,000 were charged off as uncollectible. Allowance for Uncollectible Taxes Property Tax Receivable 17,000 17,000

10. Checks in payment of invoices for goods ordered in 2007 and 2008 were issued [see items (4) and (6) above]. Vouchers Payable * Cash
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1,184,000 1,184,000
LO 8 Understand the general fund.

* ($29,000 + $1,155,000)

Fund Accounting
Problem 17-1: 11. Revenues received from miscellaneous sources, other than property taxes, of $455,000 were recorded. Cash Revenue 455,000 455,000

12. Purchase order for two trash collection vehicle systems was issued. Bid price per system was $120,000. Encumbrances (2 x $120,000) Reserve for Encumbrances
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240,000 240,000

LO 8 Understand the general fund.

Fund Accounting
Financial Statements
Two Basic Statements (expendable fund entities)
1. Balance sheet 2. Statement of revenue, expenditures, and changes in fund balance Revenue classified by major sources. Expenditures classified by major functions.

Comparative information presented for prior years.

Statement comparing budgeted and actual should be prepared for budgetary fund entities.
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LO 8 Understand the general fund.

Reporting Inventory and Prepayments

Inventory
Two Methods
1. Consumption method 2. Purchases method Under GASB Statement No. 34, consumption method is consistent with the Government-wide approach. Purchases method is not acceptable. Both acceptable for fund purposes
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LO 9 Consumption and purchases Methods.

Reporting Inventory
Assume $20,000 of beginning inventory, $50,000 is purchased, and ending inventory of $24,000.
Consumption Method When Purchased: End of Year: Purchases Method Expenditures Cash Inventory Expenditures 50,000 50,000 4,000 4,000

When Purchased:
End of Year:
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Expenditures Cash
NO ENTRY

50,000
50,000

LO 9 Consumption and purchases Methods.

Reporting Inventory and Prepayments

Reserve for Inventory
Purchases Method
Material amounts of inventory should be disclosed by Footnote or Reporting asset with contra account (Reserve for Inventory).

Consumption Method
Reserve for inventory created debiting or crediting the unreserved fund balance.
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LO 9 Consumption and purchases Methods.

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