Chapter 18: An Introduction to

Accounting for State and Local

Governmental Units
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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Governmental: Objectives
1. Learn about the historical development of
accounting principles for state and local
governmental units.
2. Understand the need for fund accounting and its
basic premises.
3. Perform transaction analysis using proprietary
and governmental accounting models.
4. Recognize various fund categories, as well as
their measurement focus and basis of accounting.
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Objectives (cont.)
5. Review basic governmental accounting
principles.
6. Learn about the contents of a governmental
entity's comprehensive annual financial report.

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An Introduction to Accounting for State and Local

Governmental Units

1: History

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Governmental Entity
Popular election of officers or appointment by
officials of one or more state or local
governments
Potential for unilateral dissolution by
government
Net assets revert to government
Power to enact or enforce a tax

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Developing Standards
Municipal Finance Officers Association
Governmental Accounting, Auditing and Financial
Reporting, 1968
AICPA
Audits of State and Local Governmental Units, 1974
National Council on Governmental Accounting
Governmental Accounting and Financial Reporting
Principles (beginning 1979)
Governmental Accounting Standards Board
GASB Statements (beginning 1984)
Codification (1985, updated continually)

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Hierarchy of GAAP
GAAP for local and state governmental
accounting:
1. GASB Statements and Interpretations
2. GASB Technical Bulletins
3. Consensus positions of GASB's Emerging
Issues Task Force
4. Implementation Guides
5. Other accounting literature

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An Introduction to Accounting for State and Local

Governmental Units

2: Fund Accounting

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Accounting for Governments

Focus on continuing ability to fund and provide
goods and services
Not profit
Types of activities
1. Business type activities
Provide services or goods to users for fees
2. General governmental activities
Provide services or goods to citizens
without regard for ability to pay
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Fund (def.)
"a fiscal or accounting entity with a self balancing
set of accounts recording cash and other
balances, and changes therein, which are
segregated for the purpose of carrying on
specific activities" [GASB Codification]
Groups of funds:
Proprietary funds
Governmental funds
Fiduciary funds
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Fund Accounting
Each fund has
Accounting equation
Journals, ledgers and other records
Financial statements

A single governmental unit, e.g., one city, has

multiple funds each with their own financial
statements. There is a comprehensive report.
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Proprietary Fund Model

Current assets
+ noncurrent assets
- current liabilities
- noncurrent liabilities
= net assets
CA + NCA CL NCL = Net assets
Accounting is similar to business enterprises.
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Governmental Fund Model

Current assets
current liabilities
= fund balance
CA CL = Fund Balance
Accounting focuses on current financial resources.
Expenditures reflect the use of working capital, instead
of expenses which focus on consumption of resources.

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General FA and LTD

General fixed assets (FA) are not recorded in
governmental funds.
General fixed asset and depreciation records
are maintained separately
General long term debt (LTD) is not recorded in
governmental funds.
Separate records are also kept
Both are reported in the government-wide
statements
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An Introduction to Accounting for State and Local

Governmental Units

3: Transaction Analysis

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Transactions
1. Borrowed $75 by issuing a 3-year note.
2. Purchased equipment costing $30 for cash.
3. Sold a fully depreciated truck costing $80, with
a residual value of $10 for $8 cash.
4. Computed current depreciation as $15.
5. Borrowed $30 on a six month note.

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Using Proprietary Fund Model

Model: CA + NCA CL NCL = Net Assets
CA

NCA

CL

NCL

Net
Assets

1 Borrowed long term

75

2 Bought equipment

(30)

30

(10)

(2)

(15)

(15)

3 Sold truck
4 Depreciation
5 Borrowed short term

30

75

30

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Using Governmental Fund Model

Model: CA CL = Fund balance
CA

CL

Fund
balance

1 Borrowed long term

75

75

2 Bought equipment

(30)

(30)

3 Sold truck
4 Depreciation

The long term borrowing is a source of current financial

5 Borrowed
term
30
30
resources,
as is short
the sale
of the truck.
Acquisition of equipment uses current financial resources

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An Introduction to Accounting for State and Local

Governmental Units

4: Fund Categories

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Proprietary Fund Types

1. Internal service funds
Provide goods or services on a business type
basis primarily for internal customers
For departments and agencies of that
government
Motor pools, central printing
2. Enterprise funds
Provide goods or services on a business type
basis primarily for external customers
For citizens and others
Utilities, trash service, mass transit
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Governmental Fund Types

1. Special revenue funds
General governmental financial resources
restricted for specific purposes
2. Permanent funds
Resources are restricted but earnings benefit
government or citizens
3. Capital projects funds
Resources used to construct or acquire
major governmental fixed assets
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Governmental Funds (cont.)

4. Debt service funds
Resources to be used to pay principle,
interest and charges on long term debt
5. General fund
Working capital available for general
governmental use
Governmental offices, police, fire, library

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Fiduciary Fund Types

Basic proprietary model:
CA + NCA CL NCL = Net Assets
1. Pension trust funds
2. Investment trust funds
3. Private purpose trust funds
An abbreviated model:
CA = CL
4. Agency funds
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Apply Model to Specific Funds

1.
2.
3.
4.
5.
6.

Issued general obligation bonds, par value of $3,000, at 101

to finance construction of a government office building.
Transferred the premium on the bonds to the fund used to
account for payment of principal and interest on the bonds.
Incurred and paid construction costs of $125 on the
building.
Levied and collected sales taxes restricted to use for
economic development, $60.
Paid general governmental employees salaries, $450.
Another $50 of salaries accrued but has not been paid.
Borrowed $7,500 on a six-month note to finance general
operating costs of the government.

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Transactions in Governmental
Type Funds
Model: CA CL = Fund balance
Specific Fund:
1Capital projects fund

CA

CL

Fund
balance

3,030

3,030

2a Capital projects fund

(30)

(30)

2b Debt service fund

30

30

3 Capital projects fund

(125)

(125)

4 Special revenue fund

60

60

5 General fund

(450)

50

6 General fund

1,500

1,500

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Bases of Accounting

Governmental type funds

Modified accrual basis of accounting
Focus on flow of current financial resources
Record expenditures

Proprietary & fiduciary type funds

Accrual basis of accounting
Focus on economic resources
Record expenses
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An Introduction to Accounting for State and Local

Governmental Units

5: Governmental Accounting
Principles
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Revenue Recognition
Exchange or exchange-like transactions
Nonexchange transactions

Derived tax revenues (sales or income tax)

Imposed nonexchange (property tax)
Government mandated nonexchange (federal
mandates)
Voluntary nonexchange (donations)

Recognize revenue in governmental funds

Transaction is substantially complete
Funds are measurable and available
Not more than 60 days
Net revenue approach (net of uncollectibles)
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Expenditures and Expenses

Expenses
Cost of assets or services used
Recognize in period incurred
Expenditures
Cost of goods or service acquired, whether or
not consumed
Maturing of long term debt principal
Recognized in period current liability is
incurred
Except: interest on long term debt is
recognized when due
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Interfund Activity

Interfund loans
Interfund transfers
Operating or residual equity
1. Nonreciprocal
Government funds
Other financing sources and uses
Proprietary funds
Nonoperating revenues or expenses
2. Reciprocal
Seller has revenues
Purchaser has expense or expenditure
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Budget
When approved by the legislative body, the budget
for expenditures becomes a spending ordinance
that has the force of law. An approved revenue
plan also has the force of law.
Appropriations
Approved or authorized expenditures
Allotment
Appropriation for a specific time period

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Financial Reporting Entity

Primary government
City, town, state
Special purpose government
Water district, hospital, transit authority
Treated as primary government
Separately elected body, legally separate,
fiscally independent
Component unit
Legally separate, but primary government is
financially accountable
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An Introduction to Accounting for State and Local

Governmental Units

6: Comprehensive Annual Financial

Report (CAFR)
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Primary Government Reporting

Annual report called Comprehensive Annual
Financial Report (CAFR)
Includes primary government and blended
component units
GASB Statement No. 34
Government wide financial statements
Fund financial statements

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CAFR Introductory Section

Table of contents
Letter of transmittal
Principal officers
Organizational chart

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CAFR Financial Section

Management's Discussion & Analysis
Auditor's report
Government-wide financial statements
Statement of Net Assets
Statement of Activities
Fund financial statements (detailed later)
Notes and required supplementary information

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Statement of Net Assets

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Statement of
Activities

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Fund Financial Statements

Balance sheet Governmental funds (GF)
Statement of revenues, expenditures, and changes
in fund balance GF
Statement of net assets Proprietary funds (PF)
Statement of revenues, expenses and changes in
net assets PF and similar trust funds
Statement of cash flows PF and similar trust
funds
Statement of fiduciary net assets
Statement of fund changes in fiduciary net assets
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CAFR Statistical Section

Includes
social and economic data
Financial trends
Fiscal capacity
Comparative, multi-period
Accounting and non-accounting data

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Printed in the United States of America.

Copyright 2009 Pearson Education, Inc.

Publishing as Prentice Hall
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