17

Governmental
Entities:
Introduction
and General
Fund
Accounting

Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin 17-1
 Overview
Governmental entities have operating
objectives different from those of
commercial entities; therefore,
governmental accounting is different from
accounting for commercial enterprises

17-2
 Overview
Nature of governmental entities:
1. Collect resources and make expenditures to
fulfill societal needs
2. Absence of profit motive except for some
activities
3. Have legal authorization for their existence,
conduct revenue-raising through the power
of taxation, and have mandated
expenditures they must make to provide
their services
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 Overview
Nature of governmental entities:
4. Control mechanism - Use of comprehensive
budgetary accounting
5. Accountability for the flow of financial
resources is a chief objective
6. Typically are required to establish separate
funds to carry out various missions; each
fund is an independent accounting and fiscal
entity

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 Overview
Nature of governmental entities:
7. Many fund entities do not record fixed
assets or long-term debt in their funds
8. An important objective of governmental
financial reporting is accountability

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 History of Governmental
Accounting
History
Before 1984, directed by the Municipal
Finance Officers Association (MFOA)
In 1934, the first statement on local
governmental accounting published
In 1968, Governmental Accounting,
Auditing, and Financial Reporting (GAAFR)
was published
The GAAFR is periodically updated to include the
most recent governmental reporting standards

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 History of Governmental
Accounting
1974 The American Institute of Certified
Public Accountants (AICPA) published an
industry audit guide, in which it stated that
except as modified in this guide, they
[GAAFR] constitute generally accepted
accounting principles
March 1979 The National Council on
Governmental Accounting (NCGA) issued its
Statement No. 1, Governmental Accounting
and Financial Reporting Principles (NCGA
1)
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 History of Governmental
Accounting
1984 Governmental Accounting
Standards Board (GASB) established
GASB Statement No. 1
The GASB stated that all NCGA statements and
interpretations issued and in effect on that date
were accepted as generally accepted accounting
principles for governmental accounting
GASB Statement 34
Established government-wide financial
statements to be prepared on the accrual basis
of accounting and an array of fund-based
financial statements
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 History of Governmental
Accounting
The GASB continues to issue new
standards to meet the information needs
of users of the financial reports of
governmental units
Accounting for governmental entities is
given the general name of fund
accounting

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 Major Concepts of
Governmental Accounting
Elements of financial statements
Each definition uses the central focus of a
resource, which is an item having a present
capacity to provide, directly or indirectly,
services for the governmental entity

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 Major Concepts of
Governmental Accounting
Elements of a statement of financial condition:
1. Assets are resources with present service capacity
that the entity presently controls
2. Liabilities are present obligations to sacrifice
resources that the entity has little or no discretion to
avoid
3. A deferred outflow of resources is a consumption of
net assets that is applicable to a future reporting
period
4. A deferred inflow of resources is an acquisition of net
assets that is applicable to a future reporting period
5. Net position is the residual of all other elements
presented in a statement of financial condition

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 Major Concepts of
Governmental Accounting
Elements of the resource flows
statements:
1. An outflow of resources is a consumption of
net assets that is applicable to the current
reporting period
2. An inflow of resources is an acquisition of
net assets that is applicable to the current
reporting period

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 Major Concepts of
Governmental Accounting
Expendability of resources versus capital
maintenance objectives
Commercial Enterprises Government Entities
Changes in current financial
resources available to provide
services to the public in
Measurement focus The flow of all economic resources accordance with the budget
Method of Accounting Accrual method Modified accrual method

Contains both current and

noncurrent assets and liabilities, and
the change in retained earnings Reports only current assets,
reflects the companys ability to current liabilities, and a fund
Balance sheet maintain its capital investment balance

17-13
 Major Concepts of
Governmental Accounting
Definitions and types of funds
To accomplish the objectives of the
governmental unit, the unit establishes a
variety of funds as fiscal and accounting
entities of the governmental unit
A fund is a separate accounting group with
accounts to record the transactions and
prepare the financial statements of a defined
part of the governmental entity that is
responsible for specific activities or
objectives
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 Major Concepts of
Governmental Accounting
Each governmental fund has its own
asset and liability accounts and its own
revenue and expenditures accounts
The term expenditures refers to
decreases in net financial resources
available under the current financial
resources measurement focus

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 Major Concepts of
Governmental Accounting
Types of funds
Governmental Funds:
Used to provide basic governmental services to
the public
Each entity creates only one general fund, but it
may create more than one of each of the other
types of funds
Proprietary Funds
The objective is to recover the units costs
through user charges
Fiduciary Funds
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 Major Concepts of
Governmental Accounting
Governmental Fund Types
General fund Accounts for all financial resources except for those
accounted for in another fund. Includes transactions for
general governmental services provided by the executive,
legislative, and judicial operations of the governmental
entity.
Special revenue fund Accounts for the proceeds of specific revenue sources that
are restricted for specified purposes.
Capital projects fund Accounts for financial resources for the acquisition or
construction of major capital facilities that benefit many
citizens, such as parks and municipal buildings.
Debt service fund
Accounts for the accumulation of resources for, and the
payment of, general long-term debt principal and interest.
Permanent fund Accounts for resources that are restricted such that only
earnings, but not principal, may be used in support of
governmental programs that benefit the government or its
citizenry.

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 Major Concepts of
Governmental Accounting
Proprietary Fund Types
Enterprise fund Accounts for operations of governmental units that charge
for services provided to the general public.
Internal service fund Accounts for the financing of goods or services provided
by one department or agency to other departments or
agencies of the governmental unit. Services are offered
only to governmental agencies.
Fiduciary Fund Types and Similar Component Units
Pension (and other Accounts for resources required to be held in trust for the
employee benefit) trust members and beneficiaries of pension plans, other post-
fund employment benefit plans, or other EBPs.
Investment trust fund Accounts for the external portion of investment pools
reported by the sponsoring government.
Private-purpose trust Accounts for all other trust arrangements under which the
fund funds resources are to be used to benefit specific
individuals, private organizations, or other governments.
Agency fund Accounts for assets held by a governmental unit in an
agency capacity for employees or for other governmental
units.
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 Financial Reporting of
Governmental Entities
The financial statements of a
governmental entity are presented for the
reporting entity:
The primary government
Component units
Other organizations that have a significant
relationship with the primary government
GASB 34 reporting model
Fund-based financial statements
Government-wide financial statements
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The Government Reporting
Model

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 Financial Reporting of
Governmental Entities
Governmental funds financial
statements:
Balance sheet
Statement of revenues, expenditures and
changes in fund balance
The five governmental funds use the
current financial resources measurement
focus

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Financial Reporting of
Governmental Entities

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 Financial Reporting of
Governmental Entities
Statement of revenues, expenditures,
and changes in fund balance
Often called the operating statement of the
governmental funds

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 Measurement Focus and Basis
of Accounting
The modified accrual basis is used in
funds that have a flow of current financial
resources measurement focus
The five governmental funds have this focus
The accrual basis is used in funds that
have a flow of economic resources
measurement focus
Proprietary funds and fiduciary funds have
this focus
The government-wide financial
statements are based on the accrual 17-24
 Measurement Focus and Basis
of Accounting
Basis of accountinggovernmental
funds
Revenue is recorded in the accounting
period in which it is both measurable and
available to finance expenditures made
during the current fiscal period
Expenditures are recognized in the period in
which the liabilities are both measurable and
incurred and are payable out of current
financial resources
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 Measurement Focus and Basis
of Accounting
Recognition of revenue: How revenues are recognized
depends on the category:
1. Derived tax revenues, resulting from assessments on
exchange transactions
The asset is recognized when the underlying transaction occurs
or resources are received, whichever comes first
Revenue recognition depends on the accounting basis used to
measure the transaction
2. Imposed nonexchange revenues, resulting from assessments
on nongovernmental entities, including individuals
The asset is recognized when the government has an
enforceable legal claim to the resources or the resources are
received, whichever comes first
Revenue recognition is made in the period when use of the
resources for current expenditures is first permitted or required, or
at the time the asset is recorded if no time restriction on the
funds use of the resources exists

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Measurement Focus and Basis
of Accounting
2. Imposed nonexchange revenues, resulting
from assessments on nongovernmental
entities, including individuals
The asset is recognized when the government
has an enforceable legal claim to the resources
or the resources are received, whichever comes
first
Revenue recognition is made in the period when
use of the resources for current expenditures is
first permitted or required, or at the time the
asset is recorded if no time restriction on the
funds use of the resources exists
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 Measurement Focus and Basis
of Accounting
Recognition of revenue:
3. Government-mandated nonexchange
transactions, resulting from one
governmental units provision of resources
to a governmental unit at another level and
the requirement that the recipient use the
resources for a specific purpose
4. Voluntary nonexchange transactions,
resulting from legislative or contractual
agreements, other than exchanges

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 Budgetary Aspects of
Governmental Operations
Budgets
Used in governmental accounting to assist
in management control and to provide the
legal authority to levy taxes, collect revenue,
and make expenditures in accordance with
the budget
Types of budgets:
Operating budgets
Capital budgets

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 Budgetary Aspects of
Governmental Operations
Recording the Operating Budget
Assume that at January 1, 20X1, the first day of the new fiscal period, the city
council of Barb City approves the operating budget for the general fund,
providing for $900,000 in revenue and $850,000 in expenditures. Approval of
the budget provides the legal authority to levy the local property taxes and to
appropriate resources for the expenditures. The entry made in the general
funds accounting records on this date is as follows:

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 Budgetary Aspects of
Governmental Operations
The ESTIMATED REVENUES CONTROL account is
an anticipatory asset
The APPROPRIATIONS CONTROL account is an
anticipatory liability
The excess of estimated revenues over anticipated
expenditures is the budget surplus and is recorded to
BUDGETARY FUND BALANCEUNRESERVED
Some approved budgets have budget deficits in which
expected expenditures exceed anticipated revenue
These budgets are recorded with a debit to BUDGETARY
FUND BALANCEUNRESERVED

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 Accounting for Expenditures
The Expenditure Process
Step 1. Appropriation
The budget provides the appropriating authority to make
future expenditures
Step 2. Encumbrance
An encumbrance is a reservation of part of the budgetary
appropriation and is recognized at the time an order is
placed for goods or services
Step 3. Expenditure
An expenditure and a corresponding liability are recorded
when the governmental entity receives the goods or
services ordered in step 2
Step 4. Disbursement
A disbursement is the payment of cash for expenditures

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 Accounting for Expenditures
Classification of expenditure transactions
and accounts
Expenditures should be classified by fund,
character, function (or program),
organizational unit, activity, and principal
classes of objects
Outstanding encumbrances at the end of
the fiscal period:
May be allowed to lapse
May be carried over as nonlapsing spending
authority
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17-34
 Accounting for Expenditures
Expenditures for inventory
Determining the method to account for the
expenditure of inventories:
Purchase method: Recognizes the entire
expenditure for inventory in the period the
supplies are acquired
Consumption method: Recognizes expenditures
for only the amount of inventory used in the
period
The specific method to follow depends on
the governing units policy and how
inventory expenditures are included in the
budget
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 Accounting for Expenditures
Expenditures for inventory
Immaterial inventories need not be shown
on the balance sheet
If the inventory is material, it is presented as
an asset on the balance sheet
An amount equal to the inventory also should be
shown as a reservation of the fund balance,
indicating that that amount is no longer
expendable

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Accounting for Expenditures

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 Accounting for Expenditures
Accounting for fixed assets
Governmental funds: Recognized as an
expenditure in the year the asset is acquired
Proprietary funds: Account for acquisitions
of capital assets in the same manner as
commercial entities
Works of art and historical treasures
For the purposes of government-wide
financial statements, governments should
capitalize these assets at their historical
costs at acquisition or at their fair values at
the date of the contribution 17-38
 Accounting for Expenditures
Long-term debt and capital leases
The governmental funds record the
proceeds from a bond issue as a debit to
Cash and a credit to Bond Issue Proceeds,
an other-financing source
Bond issue proceeds are not revenue
because the bonds must be repaid
Bonds are not reported on the governmental
funds balance sheets but only on the
government-wide financial statements
Capital leases are accounted for in a
manner similar to long-term debt
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 Accounting for Expenditures
Investments
GASB 31 established a general rule of fair
market valuation for investments held by a
government entity
Changes in the fair value of investments
should be recognized as an element of
investment income in the operating
statement (or statement of activities) of each
fund
GASB 40 requires footnote disclosures of
the policies and the profiles of the
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 Interfund Activities
Interfund activities are resource flows
between fund entities
GASB 34 established four types of
interfund activities:
Interfund loans
Interfund services provided and used
Interfund transfers
Interfund reimbursements

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Interfund Activities

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Overview of Accounting and
Financial Reporting for the
General Fund

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Overview of Accounting and
Financial Reporting for the
General Fund

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 Additional Considerations
In February 2008, the GASB published
an exposure draft (ED) of a proposed
statement entitled Fund Balance
Reporting and Governmental Fund Type
Definitions
The proposed statement applies only to the
five governmental fund types

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