Chapter 1

The Government and Not-forProfit Environment

Basics
Describing governments & nonprofits Governmental characteristics Nonprofit characteristics Standard-setting: GASB & FASB Financial Reporting Users

Describing Governments & Nonprofits

US governments: federal, state & local Branches: legislative, executive & judicial Constitution: federal vs. state jurisdiction Nonprofits: over 1.5 million organizations, $1.3 trillion in assets Nonprofits: colleges & universities, hospitals, voluntary health & welfare organizations, other Nonprofits: importance of IRS & tax-exempt status

Characteristics of Governments & Nonprofits

No profit motive Ownership interests are nontransferable (& usually not defined) Fund accounting recommended Differential GAAP Emphasis of accountability of resources & flow of these resources Unique revenue sources Often lack of direct cost/benefit relationships Importance of budgeting

Government Characteristics
Federal Government: Broad jurisdiction, 2000 receipts $1,958 billion; 2000 outlays $1,781 billion 50 states: jurisdiction defined in Constitution, establishes legal roles of local governments 87,453 local governments: 3,043 counties; 36,001 cities; 13,726 school districts; 34,683 special districts

Other Governmental Financial Characteristics

Ability of governments to levy taxes Use of modified accrual; revenues & expenditures; budget entries Financial operations may be restrictedone reason for fund accounting Power to issue tax-exempt debt (e.g, municipal bonds) Intergovernmental financial relationships (importance of intergovernmental revenues) Overlapping jurisdictions & overlapping debt GASB 34: addition of government-wide statements (full accrual) & other reporting requirements

Nonprofit Characteristics
Importance of IRS & tax-exempt status Nonprofits must file for tax-exempt status: charities are recognized as 501(c)(3) organizations, based on filing Form 1023 Annual report, Form 990, must be followed using IRS format Other nonprofit categories also exist See www.irs.ustreas.gov/

Purpose of Financial Reporting

Assess financial condition (operating results & financial resources) Compare actual results with the budget Legal compliance Evaluate performance (especially efficiency and effectiveness; service effort & accomplishment)

Governmental Financial Reports

Comprehensive Annual Financial Report (CAFR)--two levels of reporting: (1) governmentwide (full accrual), (2) fund accounting (modified accrual for governmental funds) Annual Operating Budget(s) Other documents: for citizens or media; specialized reports, etc. Most governments have well-developed web pages Note importance of interperiod equity

Users of Governmental Financial Reports

Executives & employees Governing Boards (legislative function) Investors & Creditors (importance of municipal bonds; credit-rating agencies) Taxpayers & voters Regulatory agencies (e.g., Texas Education Agency for Texas ISDs)

Standard Setting
Financial Accounting Foundation

Financial Accounting Standards Board (1973) [Non-profits]

Governmental Accounting Standards Board (1984) [Governments]

Standard Setting History

Government GAAP initially established by National Council of Governmental Accounting (NCGA); GASB established in 1984 Nonprofit GAAP initially established by industry: (1) colleges & universities, (2) NP hospitals, (3) other AICPA would write two audit guides (voluntary health & welfare organizations & other); FASB took over jurisdiction in the 1980s. Federal government establishes its own standards, through the Federal Accounting Standards Advisory Board (FASAB)

Chapter 2
Fund Accounting

Fund Accounting
What is a Fund? The government or nonprofit is the economic entity. The fund is the fiscal & accounting entity. Each organization usually has several funds. Each fund is a separate self-balancing set of accounts. A major reason for funds is control purposes, both legal & fiscal

Funds Used by State & Local Governments

Governmental Funds: also called source & disposition funds or expendable funds. Most governmental activities are financed through these funds. Proprietary Funds: also called business-type funds, which handle most activities financed through user charges. Fiduciary Funds or trust & agency funds, where government acts as trustee or agent

Governmental Funds
General Fund: primary operating fund; by definition it accounts for all activities not required for another fund. The General Fund is used for unrestricted operations. Special Revenue Fund: specific revenue source used for a specific purpose. This is an operating fund. Capital Projects Fund: Used specifically for the acquisition & construction of capital assets. Debt Service Fund: Used for funding & payment of interest & principal on long-term debt. Permanent Fund: New-required by GASB 34 Trust Funds to support government programs.

Proprietary Funds
Enterprise Funds: provide services to the public on a user-fee basis. The most common category is government-owned utilities; also, mass transit, airport, housing authorities, government-owned hospitals, etc. Internal Service Fund: provide services to other departments in the same government, such as motor pool, data processing, or supplies purchasing.

Fiduciary Funds
Pension Trust Funds: provide retirement benefits to governmental employees Permanent private-purpose trust funds: endowments to benefit other organizations or individuals; e.g., student scholarships Agency Funds: temporary accounting for assets held for other governments or organizations, tax collected for other governments

Financial Reports
The complete annual report is the Comprehensive Annual Financial Report (CAFR). The three sections are: Introductory Section, Financial Section, & Statistical Section. Governments also prepare annual operating budgets & may have capital budgets & other statements.

CAFR (Old Format)

Introductory Section: includes transmittal letter & may include Certificate of Achievement, organization chart, table of contents, etc. Financial Section: includes Auditors Report; Combined Financial Statements, Notes; & statements by fund category. Statistical Section: various tables & other information on economic, demographic & supplementary fiscal data.

CAFR (GASB 34 Format)

Same basic format with the following additions: Management Discussion & Analysis (MD&A) added to Introductory Section. Government-wide Financial Statements added, based on full accrual accounting (1) statement of net assets & (2) statement of activities.

Chapter 3
Issues of Budgeting & Control

Budgeting
The Current Operating Budget (also called an appropriation budget): a plan of financial operations for the period. The annual budget authorizes, and provides the basis for control of, financial operations during the year (NCGA Statement #1). The Budget is a formal expression of public policy on objectives & priorities & how the resources will be provided to meet them (NCGA Statement #1).

Functions of Budgets
Planning: type, quantity & quality of services to be provided & how to pay for these services. Control: budgets insure that resources are available & are used to monitor compliance with legislative spending authority. Review: budgets can be compared to actual results to evaluate whether legislative & other legal mandates were carried out, as well as effectiveness & efficiency.

Types of Annual Operating Budgets

Traditional Budget: classifies spending by line item (object classification), which focuses on control. Appropriations specifically limits spending on each line item. Performance Budget: use measurable units of SEA. Program Budgets: budgets are defined by programs, based on specific objectives for each identified program.

The Budget Cycle

Budget Preparation (several months before the start of the fiscal year) Legislative Approval (before the start of the fiscal year) Fiscal Year Operations (Budget Execution) Feedback & Review (after the end of the fiscal year)

Budget Preparation
Chief financial officer (CFO) accumulates budget requests based on chief executive officer (CEO) & City Council objectives, along with revenue forecasts to develop a proposed budget. Inputs: revenue forecasts, expenditure requests & priorities Outcome: proposed (executive) budget

Legislative Approval
Legislature must approve the budget before taxes can be levied & appropriations spent. Considerations: tax levy(ies), bond (& other borrowing) initiatives, budget authorization & mandate Outcome: annual operating budget (this process & the budget is publicly available)

Fiscal Year Operations (Execution)

Budget journal entries begin the new fiscal year accounting & operations depend on these budget entries. Actual revenues & expenditures Budget revisions & transfers Adjusting & closing process

Feedback & Review

Reporting & auditing: financial reports are prepared & audited CAFR is issued Other analysis conducted: budget to actual comparisons, service effort & accomplishment, etc.

Budget Entries
Revenue-related: Debit estimated revenues & Credit fund balance. Expenditure-related: Debit fund balance & credit Appropriations. Operations: revenues are credited when measurable & available & expenditure debited when corresponding liability is recorded. Both budget & actual entries are closed out at year-end.

Encumbrances
Encumbrances are journal entries used to recognize future commitments (such as purchase orders) & earmark these funds for control purposes. When commitments are recognized (e.g., for approved purchase orders) debit encumbrances & credit fund balance reserved for encumbrances. Encumbrances are reversed when expenditures are recognized for the commitments.

Chapter 4
Recognizing Revenues in Governmental Funds

Revenues
Basis of Accounting [when transactions/events are recognized]: Modified Accrual Accounting in the Governmental Funds. Measurement Focus [what is being measured]: Current (expendable) financial resources. Revenues are recognized when measurable & available.

Revenue Recognition
Revenue must be measurable & available. Measurable: amount is known or can be reasonably estimated. Available: physically available: collected in cash during the fiscal year or shortly thereafter (60 day rule for property tax); legally available (e.g., levied or can can be spent based on contract or regulation). Note: importance of nonexchange revenues (pp. 123-4).

Resource Inflows
Revenues are recorded by source: Property Taxes Sales Taxes Licenses & permits Fines & Forfeitures Intergovernmental Grants Other Other Financing Sources are resource inflows that include transfers in, bond proceeds, etc.

Nonexchange Revenues
Imposed nonexchange revenues: assessment on individuals or businesses; e.g., property taxes & fines. Derived tax revenues: taxes derived from exchange transactions, such as sales & income taxes. Government-mandated, such as a state requiring a city to use resources for specific purposes. Voluntary: contractual agreements such as contributions from donors. Note time & purpose limitations (these usually must be met before revenues are recognized).

Simplified Budgeting Strategy (Local Governments)

Estimate spending needs. Forecast all revenues except property tax. The difference is the amount that has to be collected from property taxes. Calculate property tax rates (based on net assessed value & collection estimates) & total tax levy.

Budget Strategy Example (1) Property Tax

Anticipated spending needs = $800,000; forecasted revenue, all sources except property tax = $200,000; then revenue collected from property tax = $600,000. Assuming that 92% of property tax is collected (assume no delinquent tax collection) then tax levy = 600,000/.92 = $652,174 for a balanced budget.

Budget Strategy Example (2) Property Tax

Net assessed value: assume total assessed value of property is $2.3 billion less property exemptions of $300 millionnet assessed value = $2 billion. Tax rate: property tax required / (collection rate x net assessed value/100) = 600,000 / (.92 x 2 billion) = $0.3261 per $100 NAV. Tax levy = $2 billion/100 x 0.326087 = $652,174.

Budget Strategy Example (3) Journal Entries

Budget entry (balanced budget): Estimated Revenues 800,000 Fund Balance 800,000 Tax Levy: Taxes Receivable [Current] 652,174 Revenues-Property Tax 600,000 Allowance for Uncoll. Tax 52,174

Budget Strategy Example (4) Closing Entries

Fund Balance 800,000 Estimated Revenues 800,000 Revenue-Property Tax 600,000 Fund Balance 600,000

Other Revenues
Fines (pp. 129-130) Sales Taxes (pp. 130-3) Income Taxes (pp. 133-5) Grants (pp. 135-142) Unrestricted Grants Restricted Grants (designated purposes) Contingent Grants (based on specific actions or occurrences) Entitlements (entitled by formula) Shared Revenues (on a predetermined basis) Payments in Lieu of Taxes (replaces property taxes) Sale of capital assets (pp. 142-3) Investment Income: investments recorded at fair value & investment income includes changes in fair value (pp. 143-7).

Other Financing Sources

Resource inflows that include transfers in & bond proceeds. They are operating inflows, but not considered revenues. Monies are often transferred from one fund to another; e.g., the General Fund transfers $10,000 to the Debt Service Fund for an interest payment: this is an other financing sources to the DSF. Bond proceeds (usually to a Capital Project Fund) also are other financing sources (the money has to be paid back).

Government-wide Statements
In addition to fund accounting, state & local governments prepare government-wide statements based on full accrual accounting. Generally, the government keeps its books using fund accounting, then makes an additional set of adjusting entries to arrive at the information to prepare government-wide statements. Therefore, revenues are recognized on a different basis, similar to commercial accounting. Generally, the major difference is that available is not a criteria for revenue recognition.

Chapter 5
Recognizing Expenditures in Governmental Funds

Expenditures
Expenditures are associated with the acquisition of goods & services (usually recognized when the liability is recorded). Expenditures are decreases in net financial resources. Expenses are associated with the consumption of goods & services. Expenses are decreases in net economic resources. Expenditures are used instead of expenses in the governmental funds. [Expenses are used for government-wide statements.] The acquisition of equipment for $10,000 cash in a general fund would be: Expenditures-Capital Asset 10,000 Cash 10,000

Resource Outflows
Expenditures are usually cross-classified by (1) department or program (e.g., public works, public safety, parks & recreation) & (2) object of expenditures (e.g., salaries, supplies, maintenance, etc.). Other financing uses are resource outflows, with transfers out being the most common.

Expenditure Characteristics
Mainly associated with exchange transactions; e.g., employee compensation, acquisition (or use) of supplies. Examples: Wages & Salaries (pp. 164-171) Supplies (pp. 173-5): purchase or consumption methods allowed Capital assets (pp. 176-180) Non-exchange transactions (pp. 183-4)

Spending Entries (1): Budget

Spending needs: salaries, $650,000; supplies, $150,000. Budget entry: Fund Balance 800,000 Appropriations 800,000

Spending Journal Entries-Salaries

Salaries: Expenditures-Salaries 642,000 Salaries Payable 642,000 Year-end accruals: at year-end, expenditures are recognized for the days works for which they havent been paid. Expenditures-Salaries 8,000 Accrued Salaries 8,000

Other Salary Considerations

Vacation Pay: recorded in year vacation actually taken [accrued for government-wide reporting]. Sick Leave: recorded in year sick leave taken [accrued for government-wide reporting.] Pension contributions: generally recorded when cash payment made to a pension trust fund [recorded as expenses based on calculated amount for government-wide reporting

Spending Journal Entries-Supplies

Supplies (Purchase method) Encumbrances 150,000 Reserve for Encumbrances 150,000 Reserve for Encumbrances 150,000 Encumbrances 150,000 Expenditures-Supplies 150,000 Vouchers Payable 150,000 [Note: supplies on hand at year-end total $10,000.]

Spending Closing Entries

Appropriations 800,000 Fund Balance 800,000 Fund Balance 800,000 Expenditures-Salaries 650,000 Expenditures-Supplies 150,000 Inventory-Supplies 10,000 Fund Balance Reserved for Supplies 10,000

Supplies-Consumption Method
[Encumbrances, same as above.] Supplies Inventory 150,000 Vouchers Payable 150,000 Expenditures-Supplies 140,000 Supplies Inventory 140,000 Fund Balance 10,000 Fund Balance Reserved for Supplies 10,000

Prepayments
Prepayments are common for insurance & certain other spending items; General Fund (& other governmental funds) can use the purchase or consumption method. Purchase method: Expenditures-Insurance 10,000 Vouchers Payable 10,000

Prepayments-Consumption Method
Prepaid Insurance Vouchers Payable 10,000 10,000

Usage (usually by month): Expenditures-Insurance Prepaid Insurance 3,000 3,000

Capital Assets
Expenditures-Capital Assets 20,000 Contracts Payable 20,000 If the money is on a long-term note: Cash 20,000 Other Financing SourcesNote proceeds 20,000 Expenditures-Capital Assets 20,000 Contracts Payable 20,000 Capital Lease: Expenditures-Capital Assets 20,000 Other Financing SourcesCapital Lease 20,000 [Note: long-term liabilities are serviced in a debt service fund.]

Multiple-fund Transactions
Many transactions involve more than one fund; therefore, journal entries are required in two or more funds. A common example in interfund transfers (classified as other financing sources & uses). Other examples of financing sources & uses include proceeds from long-term debt & proceeds from the sales of capital assets. Note that charges for services would be recorded as revenue & expenditures (or expenses).

Interfund Transfer
The General Funds sends $20,000 in cash to the Debt Service Fund for a future interest payment on long-term notes: General Fund Transfers Out 20,000 Cash 20,000 Debt Service Fund Cash 20,000 Transfers In 20,000

Chapter 6
Accounting for Capital Projects & Debt Service

Fund Purpose
Capital project & debt service funds are governmental funds used for specific purposes. The purpose of capital project funds is to acquire & use the resources dedicated to acquire or build specific capital projects (e.g., buildings, roads, etc.). Debt service funds are used to acquire & use financial resources to pay interest & principal on long-term debt associated with the governmental funds. Both funds use modified accrual accounting.

Characteristics of Capital Project Funds (CPFs)

Capital projects are generally funded using longterm municipal (tax exempt) debt to fund capital projects. Debt covenants usually require resources to be used exclusively for the specific capital projects funded. Capital projects usually are budgeted through capital budgets & may not require annual budget entries (this varies from one government to another). The primary reason for budget entries is for control.

Basic Journal Entries Capital Project Funds

Budget entry (if necessary), $50,000 from bonds for construction: Estimated Bond Proceeds 50,000 Appropriations 50,000 Issuance of Bond: Cash 50,000 Bond Proceeds (other financing sources) 50,000

Basic Journal Entries Capital Project Funds (2)

Signing of construction contract for $50,000: Encumbrances 50,000 Reserve for Encumbrances 50,000 Construction is completed & contractor paid $50,000: Reserve for Encumbrances 50,000 Encumbrances 50,000 ExpendituresConstruction 50,000 Cash 50,000

Basic Journal Entries Capital Project Funds (3)

Closing entries: Appropriations 50,000 Estimated Bond Proceeds 50,000 Bond Proceeds 50,000 Expenditures-Construction 50,000

Other CPF Issues

Bond Premiums & Discounts; issue costs. Bond premiums are usually recorded as other financing sources & transferred to debt service funds (note: a multiple fund entry). Other sources of funding including grants, transfers from other funds, & investment earnings.

Characteristics of Debt Service Funds (DSFs)

Debt service funds primarily service the long-term debt associated with acquiring capital assets in CPFs. Cash is usually transferred in from the general fund (or other fund). Other possible resources include taxes payable specifically to the DSF & investment earnings, Interest is most often paid semi-annually Many of the bonds are serial bonds, where some amount of principal is repaid annually. Also, long-term notes & capital leases. Interest & principal are recognized as current liabilities in the DSF in the period they must be paid.

Basic Journal Entries Debt Service Funds

Nonreciprocal transfer from the general fund (note: a multi-fund transaction) for the payment of interest, $10,000: Cash 10,000 Transfers In (other financing sources) 10,000 Payment of interest, $10,000: Expenditures-Interest 10,000 Matured Interest Payable 10,000 Matured Interest Payable 10,000 Cash 10,000 Closing entry: Transfers In 10,000 Expenditures-Interest 10,000

Basic Journal Entries Debt Service Funds (2)

Nonreciprocal transfer from the general fund (note: a multi-fund transaction) for the payment of interest, $10,000, & principal, $160,000: Cash 170,000 Transfers In (other financing sources) 170,000 Payment of interest & principal, $170,000: Expenditures-Interest 10,000 Expenditures-Principal 160,000 Matured Interest Payable 10,000 Matured Bonds Payable 160,000 Matured Interest Payable 10,000 Matured Bonds Payable 160,000 Cash 170,000 Closing entry: Transfers In 170,000 Expenditures-Interest 10,000 Expenditures-Principal 160,000

Other DSF Issues

Budget entries can be used. Transfer in of premium on bonds from a DSF (an other financing source recorded as a nonreciprocal transfer). Investing cash in investments & recognizing revenues from investments. Recognizing tax revenues (the same process as with the General Fund).

Government-wide Statements
Full accrual: includes all assets & liabilities Construction costs are accumulated as construction in progress & capitalized in the financial statements. Debt Service: principal payments reduce liabilities; interest is an expense (& is accrued).

Special Assessments
This is usually associated with construction projects associated with specific property owners (e.g., to build sidewalks), with construction costs charged to these property owners as special assessments (either with one lump payment or over time). The construction activity would be accounted for in a CPF. If the government is obligated for the debt (which is usually the case), the debt is paid through a DSF. If the government is not obligated (that is, the property owners are obligated), the debt is serviced in an agency fund.

Debt Refunding
Governments can retire debt before maturity (e.g., using callable bonds). When governments retire debt early & replace it with new debt, this is called bond refunding. Major reasons include lower interest rates on new debt, changing the maturity structure, & eliminating certain restrictive covenants. In-substance defeasance: an advance refunding when the borrowing satisfies the obligations economically, but not legally (e.g., placing required funding in trust or escrow). Costs & benefits would normally be recorded in a DSF.

Chapter 7
Long-lived Assets & Investments in Marketable Securities

General Capital Assets

General capital assets (essentially property, plant & equipment) are not-financial & associated with the government as a whole. Since they are non-financial, they are not accounted for in specific funds (which have a financial resources focus). Capital assets include land, buildings, equipment, improvements other than buildings, construction in progress & infrastructure assets (e.g., roads & bridges).

Accounting for General Capital Assets

Acquisition or construction of capital assets is recorded as an expenditures in a governmental fund (e.g., capital projects fund). The asset is not capitalized. [Trade-in transactions are reported as expenditures at their net of trade-in cost. Governments must maintain records of capital assets. Government-wide reporting: reported at historical costs less accumulated depreciation, plus notes with additional information.

Should Governments Report on Infrastructure Assets?

Controversial issue; historically, governments could choose whether or not to accounting for infrastructure assets. GASB emphasizes the importance of cost of services. Traditional approach (GASB 34): expenditures in governmental funds; capitalize the costs & record depreciation in the government-wide statements. Modified approach (government-wide statements): capitalize but do not record depreciation; instead, expense preservation costs (which extend the useful life of the assets). Importance of maintenance: governments must disclose maintenance costs for a 5-year period & comparisons of required maintenance to maintain a specific condition.

Impairment of Capital Assets

An asset is impaired if its service utility has declined significantly. Governments should test for impairment (GASB 42), using one of three methods: 1. Restoration cost approach (cost to restore asset utility). 2. Service-units approach (% decline in service units). 3. Deflated depreciation replacement cost approach (estimate new carry value).

Investments in Marketable Securities

Governments invest in stocks, bonds & other marketable securities, primarily because they can accumulate large amounts of cashtax collections, bond proceeds before construction is completed & paid for, etc. [Pensions & endowments will be discussed later.] Investments can include repurchase agreements (usually with broker-dealers & derivatives. Governments can use resource pools (e.g., managed by the state). Investments are recorded at fair value; investment income includes changes in fair value. According to GASB 40, governments must disclose information on risks: credit risks of investments (e.g., bond ratings), investments concentration (greater than 5% of total investments), interest rate risks, & foreign currency risks.

Chapter 8
Long-term Obligations

Information on Long-term Debt

Financial information should provide information on resources & obligation. Key issues are credit risk & fiscal stress. Governments rarely go bankrupt, but essential services must go onfiscal stress may make providing adequate services problematic. General long-term debt includes bonds, notes special assessments. General obligation (GO) debt is backed by the full faith & credit of the government (& its taxing powers).

Accounting for Long-term Debt

Long-term debt is not included in governmental fund statements. However, governments must maintain a schedule of long-term debt. Long-term debt is included in governmentwide statements, similar to commercial accounting.

Government-wide Journal Entries

GO bonds issued at par: Cash 500,000 Bonds Payable 500,000 Interest is paid on Bonds: Interest Expense 15,000 Cash 15,000 Interest & principal is paid on debt: Interest Expense 15,000 Bonds Payable 50,000 Cash 65,000 Premiums & discounts would be amortized over the live of the debt (i.e., present value is used).

Other Types of Debt

Demand bonds: permit the investor to demand redemption early; are classified as long-term debt (if an appropriate take-out agreements exists) Bond Anticipation Notes (BANs): short-term notes issued & will be shortly replaced with long-term debt. Usually classified as long-term debt (appropriate legal steps for refinancing must take place). Tax anticipation notes (TANs) & revenue anticipation notes (RANs) are classified as short-term. Revenue bonds are backed by specific future revenues & usually issued by Enterprise Funds.

Capital Leases
Governments can issued both capital & operating leases (same definitions as commercial accounting). When issued for governmental purposes: Expenditures-capital asset Other Financial Sources-CL The interest & principal payment in DSF: Expenditures-Interest Expenditures-Principal Cash

Capital LeaseGovernment-wide Statements

Recognize capital lease: Capital Asset (Under CL Obligation) Capital Lease Obligation Lease payment: Capital Lease Obligation Interest Expense Cash Annual depreciation: Depreciation Expense Accumulated Depreciation

Industrial Development
Local governments (including Bryan & College Station) make substantial efforts to encourage new business to locate in the local area. Incentives can include tax abatements, government-funded land and/or buildings, etc. Governments can issue debt for the benefit of non-governments, called conduit debt. This would have the lower interest rate of government debt, but be serviced by the nongovernmental entity. Long-term bonds for this purpose are called industrial development bonds.

Overlapping Debt & Debt Margin

Specific local governments have overlapping geographic jurisdictions with other governments: a city is located within a county, there may be a school district & any number of special districts. Particularly important is overlapping debt: the obligations of property owners for a share of the debt of all these governments. Most government prepare a schedule of direct (the debt of that government) & a % share of the debt of overlapping governments (see pp. 290-1). Governments may be limited for the amount of long-term debt they can incur, called debt margin. This is usually calculated as a % of net assessed value. If the debt margin is 5% of NAV & NAV is $315 million, then debt margin is 5% x 315 million = $15.75 million.

Bond Ratings
Ratings of Moodys & Standard & Poors are the most common. Moodys ratings: AAA is the highest rating BAA-AAA are investment grade ratings BA-C are below investment grade (junk bonds). It is difficult for governments to issue junk bonds Interest rates depend on bond ratings (& other factors), with interest rates the lowest for the highest rated bonds. Bond issuers can buy bond insurance from Municipal Bond Insurance Association (MBIA) & other insurers. The premium can be large (up to 2% of principal & interest) for governments with high credit risk, but the result is a AAA bond rating by Moodys & likely lower interest rates.

Chapter 9
Business-type Activities

Proprietary Funds
Most business-type activities of state & local governments are recorded in Proprietary Funds. Enterprise Funds provide goods & services for to public & charge for these services. Examples include electric, water, sewage, & trash utilities; certain airport services, land fills, etc. Internal Service Funds provide goods & services to other governmental departments & charge for these services. Typical services include computer services, motor pool & maintenance, copying, etc.

Accounting Model
Proprietary Funds use full accrual accounting: revenue is recognized when earned; expenses are used & matched to revenue; capital assets are capitalized & depreciated; & long-term debt is recorded. Categories: operating revenues (esp. charges for services), operating expenses, & non-operating revenues & expenses (e.g., interest). Why: those activities involve exchange transactions, primarily direct charges for goods & servicesthe basic focus of full accrual.

Financial Reporting
Fund Accounting: statement of net assets; statement of revenues, expenses & changes in fund net assets; & statement of cash flows. Government-wide statements: Proprietary Fund amounts are recorded in a separate columns for the statement of net assets & statement of activities.

Cash Flow Statement

Based on GASB Statement 9; somewhat different than for commercial firms. Cash Flows from Operating Activities Cash Flows from Noncapital Financial Activities Cash Flows from Capital & Related Financing Activities Cash Flows from Investing Activities

Internal Service FundsTypical Entries

Data processing ISF: 1. ISF is established from a cash transfer (equity/nonreciprocal) from the General Fund, $100,000. Cash 100,000 [Equity] Transfer In 100,000 2. Computer is purchased for cash, $95,000. Equipment Cash 95,000 95,000

Internal Service FundsTypical Entries (2)

Salaries are $35,000 less withholding of $3,800 & Social Security of $2,7000 (due to Federal Government). Operating Expenses-Salaries 35,000 Due to Federal Govern. 6,500 Salaries Payable 28,500 General Fund is billed $41,000 & Enterprise Fund, $19,000. Due From General Fund 41,000 Due From Enterprise Fund 19,000 Operating RevenuesCharges for Services 60,000

Internal Service FundsTypical Entries (3)

Depreciation is recorded for $9,500. Operating ExpensesDepreciation 9,500 Accumulated Depreciation 9,500 Closing Entryequity transfer usually closed to invested capital. [Equity] Transfers In 100,000 Ops. Rev.-Char. For Serv. 60,000 Ops. Exp.-Salaries 35,000 Ops. Exp.-Depr. 9,500 Invested in Capital Assets 100,000 Net Assets-Unrestricted 21,500

Self-Insurance
A government can self-insure through an Internal Service Fund. Generally, premiums would be paid from the General & other Funds, based on actual losses or an actuarial method or historical cost method. Premiums would be recorded as a credit to operating revenues (expenditure in the General Fund). Claims (losses) would be recorded an asset has been impaired or a liability incurred & the amount can be reasonably estimated. The amount would be charged as a debit to Operating Expenses-Claims.

When to Use an Enterprise Fund

Governments can use an Enterprise Fund when it charges fees to external users for goods & services. An Enterprise Fund is required when it is financed solely by revenue debt (plus other criteria). Example: a citys pool complex is funded by both charges for services & specific taxes. It could possibly be accounted for in an Enterprise Fund or a Special Revenue Fund. The city can use an Enterprise Fund, but must use it if the construction was funded exclusively by revenue bonds.

Typical Entriesa Utility Fund

Charges for service to non-municipal customers of $950,000 & the General Fund of $10,000: Accounts Receivable 950,000 Due From General Fund 10,000 Operating Revenues 960,000 (Charges for Services) Provision for Uncollectible accounts was increased by $2,000. Operating Expenses-Bad Debts 2,000 Allow. For Uncollect. AR 2,000 Salaries payable of $85,000 are recorded. Operating Expenses-Salaries 85,000 Salaries Payable 85,000

Typical Entriesa Utility Fund (2)

Customer deposits of $8,400 were collected. [Note: there are other methods]. Cash-Restricted 8,400 Customer Deposits 8,400 Interest on revenue bonds of $18,000 was paid. Non-operating Expense-Interest 18,000 Cash 18,000 Liabilities were recognized for purchase of supplies, $14,000 and construction in progress for plant assets, $56,000. Supplies Inventory Construction in Progress Accounts Payable Contracts Payable 14,000 56,000

14,000 56,000

Capital Contributions
The primary source of capital is an equity (non-reciprocal) transfer from the General Fund (called Invested in Capital Assets or Contributed Capital). Other sources of capital may be from contribution from other governments & contributions from developers & others. For example, developers may put in streets, sidewalks, etc. & then contribute these assets to the government. Note that all transfers or contributions would be first recorded in the operating statement (statement of revenues, expenses & changes in net assets). Other capital contributions include tap fees (charges to customers to hook up to the utility system (e.g., water or electricity). Net accumulated earnings (Retained Earnings) are generally recorded as Unrestricted Net Assets.

Restricted Assets
Unlike commercial firms, utilities (& other proprietary funds) may have a considerable number of restricted assets. Cash for customer deposits is usually restricted. Revenue bonds may include a number of asset (& other) restrictions, including use of bond proceeds & cash set-asides for the repayment of principal and/or interest.

Landfill Accounting
Government-owned landfills are usually accounted for in an Enterprise Fund (assuming that the primary funding if from user charges). Operating costs must include the future costs for closing the landfill & required monitoring. The journal entry for this is: Landfill Expense Liability for Landfill Closure (see pp. 322-325).

Combined vs. Consolidated Financial Statements

Fund accounting statement are combined; that is, the accounting is by fund which included double accounting for various transfers, charges for services, etc. Government-wide statements are consolidated; that is, the double counting is eliminated. Note also that Internal Service Fund activity is normally included in the government-wide statements under Governmental Activities.

Chapter 10
Fiduciary Funds & Permanent Funds

Fiduciary Funds
Fiduciary funds account for assets held by the government in a trustee capacity or as an agent for other individuals or entities. Endowments (non-expendable trust funds): principal must remain intact; earnings are to be used for the purpose designated by the donor. Extendable trust funds: similar to endowments, but principal can be used for the purpose designated by the donor. Pension Trust Funds: defined benefit retirement funds for the benefit of government employees Agency Funds: custodian or clearing accounts where cash & related resources are held for other organizations.

Permanent Funds
Permanent Funds are endowments or other nonexpendable trust funds where the donor specifies that the earnings (& perhaps principal) are to be used to benefit the government; for example, to buy library books for the city library or support a government-owned museum. These are governmental funds, using modified accrual accounting. Earnings are often transferred to a Special Revenue Fund.

Journal Entries for a Permanent Fund

Individual establishes an endowment of $900,000 in cash to buy library books for the city library. Cash 900,000 Endowment Contributions 900,000 Equity investments are bought, $900,000. Common Stock 900,000 Cash 900,000

Journal Entries for a Permanent Fund (2)

Cash dividends are received, $18,000. Cash 18,000 Revenue-Dividends 18,000 Stock increase in value $12,000. Common Stocks 12,000 Revenue-Investments 12,000

Journal Entries for a Permanent Fund (3)

Fund is closed out at year-end & earnings transferred to a Special Revenue Fund. Revenue-Dividends 18,000 Revenue-Investments 12,000 Earnings Available to SRF 30,000 Transfer Out 30,000 Cash 30,000 Endowment Contributions 900,000 Earnings Available to SRF 30,000 Transfer Out 30,000 Fund Balance-Endowment 900,000

Earnings Issues with Permanent Funds

A percentage of earnings may be maintained in the endowment to compensate for inflation, usually calculated as an annual percentage (see pp. 366-7). An alternative to distributing earnings is a fixed return approach, distributing a fixed percentage based on expected long-term return (see pp 363-4).

Should All Investment Gains & Losses be Distributed?

There is no definitive answer based on GAAP. This may be specified in the trust agreement or a specific requirement by the government holding the endowment.

Trust Fund Accounting Issues

Endowments (& expendable trust funds) where the earnings benefit other individuals or groups are accounted for as Trust Funds. Trust Funds use full accrual accounting; generally, the accounting is similar to the Permanent Funds. There are some differences relative to Permanent Funds, such as accruing interest before its received in cash & depreciating any capital assets used for the fund.

Types of Pensions
Defined contribution plans: employers &/or employees make tax deductible cash (or stock) contributions to the employees retirement planthe government has no further obligations. Defined benefit plans: employer agrees to fund the employees retirement, usually based on final salary & length of service; the government has complete responsibility for the obligation & substantial accounting is required.

Pension Accounting Issues

Governments may account for their defined benefit pension plans (often Public Employee Retirement System or PERS). The pensions of local governments are often run by the state as a separate system, such as CalPERS. The accounting is different than for commercial accounting (GASB 25 & 27 vs. FASB 35, 87 & others).

Pension Accounting Issues (2)

The two major components are (1) the plan assets which are invested in stock, bonds & other earnings assets (using fair value) and (2) the pension obligations associated with current & future retirement-related payments. The difference between the assets & liabilities is the net assets availablewhether the plan is over- or under-funded is a key factor for analysis

Pension Contributions
A major issue is the amount of pension contributions calculated each year, based on actuarial assumptions & other issues. The calculation includes normal cost plus a provision for amortizing the unfunded actuarial accrued liability. Normal cost is the portion of the present value of pension plan benefits allocated to this fiscal year by some actuarial method (6 methods are allowed determined by actuaries, not the accountants). Unfunded actuarial accrued liability includes transitional losses, actuarial losses, improvements in pension benefits, & special termination benefits (see p. 375).

Reporting Pension Costs

During the fiscal year the government will contribute some amount of cash to the pension fund, which may or may not be the same as the actuarial calculated annual pension cost. Assume a fund contributed $90,000 in cash, but the actuarially determined amount is $98,000. How this is accounted for depends on the fund making the entry.

Reporting Pension Costs (2)

Journal entryGeneral Fund: Expenditures-Pension 90,000 Cash 90,000 Journal entryEnterprise Fund: Operating Expense-Pension 98,000 Cash 90,000 Net Pension Obligation 8,000 Governmental funds recognize only the cash contribution; note that the net pension obligation is included in the Government-wide statements; Proprietary Fund record the entire obligation.

Post-employment Benefits
In addition to pensions, government often pay for health care & other insurance costs, as well as other benefits to former employees These are considered obligations called post-employment benefits. Final GASB pronouncements have not been issued; however, accounting is expected to be similar to pensions.

Agency Funds
Agency funds are custodial, where the government acts as an agent for other funds or governments; thus, serving as a conduit for cash & other financial assets. Agency funds are commonly used when one government collects the taxes for all governments within its jurisdiction & remits the funds to those governments (e.g., a county maintains the property tax records for all local governments in the county). Pass-through grants are commonly allocated through Agency Funds.

Agency Fund Accounting

Only current assets & liabilities are usedthere are no operating entries recorded. Assume a county collect $5,000 in cash for the city & $3,000 for the school district in cash for property tax. The entry would be: Cash 8,000 Due to City 5,000 Due to ISD 3,000 When remitted in cash: Due to City 5,000 Due to ISD 3,000 Cash 8,000

Chapter 11
Reporting, Disclosure & Financial Analysis

Reporting Issues
The Reporting Entity: what must be included in the CAFR? Financial Reporting: what information is included in the CAFR? Financial Analysis: what information is useful to evaluate the government? Issues include relative efficiency, services provided vs. taxes, & fiscal stress.

Primary Government
Primary government: government unit that is issuing a CAFR. It is legally separate & fiscally independent from other governmental units. Fiscally independent means it has the authority to determine its budget, levy taxes & set rates, & issue bonds

Component Unit
Component unit: a legally separate government, but the elected officials of a primary government are financially accountable & can impose their will; or the component unit can provide special benefits or impose specific financial burdens on the primary government. Key criteria: primary government appoints a voting majority of the units governing board or a majority of the units governing body is composed of primary government officials.

Financially Accountable Component Unit (CU)

Primary government can impose its will; e.g., it can remove appointed CU members; modify or approve the CU budget; veto, overrule or modify CU decisions; hire the CUs managers. CU benefits or specific financial burdens (the CU is fiscally dependent): primary government is entitled to the CUs financial resources; legally obligated for the CU deficits, operations or debt obligations.

Reporting Component Units

Discrete presentation: CUs are reported in one column of the financial statements of the primary government. This is the more common form of presentation. Blending: combining the CUs operations as if it were a part of the primary government. Note that the General Fund of the CU would be treated as a Special Revenue Fund of the primary government. Additional disclosures on the CUs can be made in the government-wide statement, notes or in combining statements.

Other Types of Entities

Joint ventures are contracts that create a new entity to carry out a specific activity (e.g., construct an airport). If the funding comes from proprietary fund resources, the JV would be recorded in a proprietary fund. If the funding comes from a governmental fund, the JV would be recorded in a governmental fund. Related government: similar to a CU, but it does not meet all the criteria. It is not reported as a CU, but the relationship is disclosed.

Comprehensive Annual Financial Report (CAFR)

CAFR has 3 sections: Introductory section Financial section Statistical section The most recent authority for the composition of the CAFR is GASB 34.

Introductory Section
Table of Contents Letter of Transmittalusually from the city manager or CFO, usually focusing on current operations & fiscal/economic conditions. Other: Certificate of Achievement indicates that the CAFR meets the standards of the GFOA.

Financial Section
Auditors Report (should be an unqualified opinion) Management discussion & analysisa new section required by GASB 34, with potentially useful additional information. Financial statements Required supplementary information, including budget-to-actual comparisons, infrastructure condition & pension valuation Combining & individual statements & schedules Statistical data

Financial Statements
Government-wide statements: Statement of net assets Statement of activities Governmental funds Balance sheet Statement of revenues, expenditures & changes in fund balances Proprietary funds Statement of Net Assets Statement of revenues, expenses, & changes in net assets Statement of cash flows Fiduciary Funds Statement of fiduciary net assets Statement of changes in fiduciary net assets

Statistical Section
Financial trends, including net assets Revenue capacity, including tax rates, tax levies & collections, & property values Debt capacity, including leverage ratios, overlapping debt & debt margin Demographic & economic data, such as population & per capital income Operating information such as number of employees

Public Colleges & Universities

Are under the jurisdiction of GASB Are allowed to report as special-purpose governments engaging only in business-type activities; that is, full accrualNote: this is a choice, not a requirement Using this choice, a college do not need to present detailed fund statements; the required statements would be a statement of net assets; statement of revenues and expenses; & a statement of cash flows

Financial Analysis
Analysis of financial condition: will the government be able to finance its services & meet its obligations? Could be useful to voters & taxpayers, as well as debt holders. Analysis includes detailed review of economic & demographic information, the CAFR (& operating budget), plus additional calculations, trends & ratios that provide additional insight. See Table 11-5 for a detailed example (pp. 422424).

Economic/Demographic Factors
Economic conditions include population, population changes, average income, unemployment rate. Demographic factors include relative age (especially dependent populationunder 16 & over 65) & education levels. Political factors include the government structure (e.g., city manager vs. mayorcouncil for cities), voting characteristics

Overall Financial Characteristics

Budget information (from operating budget): balanced budget, changes from year-to-year for both revenues & spending, obvious problems. Financial statement trends: surplus or deficit (especially in the General Fund & government-wide), relative fund balance/ net assets (especially in the General Fund & government-wide),

Some Key Ratios

Fiscal effort, such as own-source revenues divided by net assessed value Adequacy & stability of revenues, such as property tax revenue to total operating revenues & uncollected property tax to total tax levies. Spending patterns, such as expenditures for specific function divided by total expenditures. Liquidity & leverage, such as current assets to current liabilities & long-term debt divided by population.

Chapter 12
Other Not-for-Profit Organizations

Not-for-Profit Organizations (NPs)

Typical NPs: Colleges & universities (private & public) NP Hospitals/healthcare Voluntary health & welfare organizations All other: churches, labor unions, industry groups, hobby groups, museums, etc.

Accounting Jurisdiction
Historically, each NP industry developed a separate set of GAAP; the AICPA issued audit guides & statements of position. To some extent, current AICPA audit guides are authoritative. The GASB assumed jurisdiction for governmentowned NPs (public colleges, government-owned hospitals, etc.). The FASB began issuing GAAP for NPs in 1987 (FASB 93) & assumed jurisdiction for all other NPs. It has not issued comprehensive guidance for all issues & all NPs.

GAAP Adopting Issues

Voluntary health & welfare & all other accounting model developed by AICPA & not much different than commercial GAAP. NP hospital model developed by American Hospital Association, with a unique full accrual model. Primary revenue source is charges for services & generally similar to commercial accounting.

Adopting IssuesColleges & Universities (C&U)

Unique model developed by NACUBO, somewhat similar to governmental model; used by both public & private C&Us. Now split jurisdiction: public C&Us under the GASB & private C&Us under the FASB. Significant issues & problems adopting either a FASB or GASB approach. Public colleges often account for most activities as Proprietary Funds.

FASB Financial Statement Requirements

Required statements (FASB 117): Statement of financial position Statement of activities Statement of cash flows Net assets classified into 3 categories: Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets

Analysis of Net Assets

Most operating resources are unrestricted, such as charges for services, tuition, unrestricted contributions, and so on. Resources restricted for a current use are temporarily restricted, such as a donor restricted gift to be used specifically for scholarships this year. An endowment is permanently restricted. Separate fund can be created for temporarily & permanently restricted funds. See Table 12-1 (pp. 454-5) for a typical presentation.

Disclosing Revenues & Expenses

Revenues & expenses are reported in a statement of activity. Revenue reporting depends on donor restrictions. Most revenues are unrestricted; however, donor-restricted revenues are either temporarily or permanently restricted. All expenses are reported as unrestricted. See Tables 12-1 & 2 (pp. 454-7) for financial statements of a Voluntary health & welfare organization (VH&WO). VH&WOs also report a statement of function expenses, cross-classified by program & support services & line item (see Table 12-3, p. 458).

Unrestricted Revenue Journal Entries

A donor to a VH&WO makes a cash contribution of $3,000 with no restrictions. This is recorded in the unrestricted fund as: Cash 3,000 Revenue from Contributions 3,000 A NP hospital charges a patient for service, $8,000. Accounts Receivable 8,000 Patient Revenues 8,000

Restricted Fund Journal Entries

A gift restricted for a specific purpose would be recorded in a temporarily restricted fund; however, all expenses are recorded as unrestricted funds. If $10,000 in cash was donated to provide health education, the entry would be in a temporary restricted fund: Cash 10,000 Revenue from Contributions 10,000

Restricted Fund Journal Entries (2)

The cash is spent for health education; the cash would be used, while the expense is recorded in the unrestricted fund: Temporarily Restricted Fund Resources Released from Restriction 10,000 Cash 10,000 Unrestricted Fund Program Expenses-Health Education 10,000 Resources Released from Restriction 10,000

Statement of Cash Flows

FASB 117 modifies FASB 95 to make cash flow reporting more relevant to NPs. The same 3 categories are used: Cash flows from operations Cash flows from financing Cash flows from investing Cash flows from financing include contributions restricted to long-term purposes & interest & dividends from investments restricted to longterm purposes. NPs are encouraged to use the direct method. See Tables 12-4 & 12-5 (pp. 460-1).

Contributions
Contributions are the major source of revenue for most VH&WOs. Contributions are nonreciprocal receipts of assets or services; that it, the recipient gives nothing in return. This contrasts to exchange transaction, the primary revenue source for most NPs, such as NP hospitals.

Pledges
Pledges are unconditional promises to contribute cash or other assets or services in the future. Based on FASB 116, unrestricted pledges are reported as revenue in the period received, based on present value (estimated future cash flows discounted for relative risk). Pledges expected to be collected within one year need not be discounted.

Pledges Journal Entries

Pledges of $100,000 are received. $60,000 will be collected this year: Unrestricted Fund Pledges Receivable 60,000 Revenue from Contributions 60,000 Cash 60,000 Pledges Receivable 60,000

Pledges Journal Entries (2)

$40,000 will not be collected this year, of which $10,000 is expected to be uncollectible: Temporarily Restricted Fund Pledges Receivable 40,000 Allowance for Uncollectible Pledges 10,000 Revenues from Contributions 30,000

Pledges Journal Entries (3)

Pledges of $18,000 are collected & released from TR category: Temporarily Restricted Fund Resources Released from Restrictions 18,000 Pledges Receivable 18,000 Unrestricted Fund Cash 18,000 Resources Released from Restrictions 18,000 For use of PV calculations, see pp. 465-6.

Service Contributions
When people volunteer their time (services), this is usually not recorded. Volunteer services (FASB 116) can be recorded only if they are profession in nature & the NP would have to pay for the service otherwise. Assume an accountant donates his/her services to audit a NP, valued at $10,000. This would be recorded (unrestricted) as: Expense-Professional Services10,000 Revenue-Contributed Services 10,000

Conditional Promises
A condition promise means the donor will contribute only if specific conditions are satisfied. For example, A corporation promises to match the contributions on a fund drive for a local museum. The museum received contributions of $20,000 from other donors. Since the stipulations have been substantially met (FASB 116), the corporations matching donation would be recorded (unrestricted): Pledges Receivable 20,000 Revenues-Contributions 20,000

Investment Gains & Losses

Investment accounting generally follows commercial accounting. Investments are normally recorded as fair value & gains & losses are recognized. [Note the use of the equity method & marketable securities held to maturity as exceptions.] An unrestricted gain of $1,000 on investment would be recorded as: Investments 1,000 Investment Earnings 1,000 (Appreciation in fair value) Investments associated with restricted resources may be restricted or unrestricted, depending on the circumstances. Derivatives usually are recorded at fair value & detailed disclosures are required, based on SFAS 119. Charitable remainder trusts are split interest agreements, where the assets are given to the NP, with the stipulation that an annuity is paid to the donor (& usually the spouse) for the remainders of their lives & reverts to the NP at their deaths. This is recorded at present value.

Depreciation
Depreciation on capital assets must be recognized as expense for NPs (SFAS 93). The expense is unrestricted, even if the capital assets are restricted. Assume a foundation records annual depreciation of $5,000. The entry is (unrestricted): Depreciation Expense 5,000 Accumulated Depreciation 5,000

Reporting Entity Issues

Generally based on AICPA Statement of Position 94-3, where the key criteria are exercising significant influence. The important factors in the SOP are: Consolidate when a controlling financial interest exists (usually based on ownership or voting rights). Consolidate when it has both a voting majority & an economic interest. It may consolidate with other means of control, such as contractual.

Museum Accounting
Book reviews Museum of American Culture (pp. 479-49=87). A museum is an other non-profit. There are few industry-related issues & the accounting is relatively straight forward. The museum reports no restricted funds (see statement of financial position, p. 480). However, there are restricted contributions, which are temporarily restricted (see statement of activity, p. 485)

Museum Revenues
Note revenue sources for museum: admissions & memberships are the major source; investment earnings, including gains & losses; & unrestricted & restricted contributions. Auxiliary enterprises typically are business-type activities such as gift shop sales for a museum. These may be accounted for separately, but summarized in the unrestricted fund for financial reporting.

Museum-Restricted Contributions
Contributions can be a major revenue source, including pledges that can be time-restricted & use-restricted contributions. These would normally be recorded in the temporarily restricted fund. See pp. 483-4. Time-restricted pledges are usually associated with pledges that will be collected in future periods, but the use is unrestricted; revenue is recognized in the temporarily restricted fund, net of uncollectible pledges. When the cash is received the resources are released from restrictions & available in the unrestricted fund. Contributions that are use-restricted are recognized as revenue in the temporarily restricted fund & the resources are released when the cash is used for the designated purpose in the unrestricted fund.

Museum Expenses
All expenses are recognized in the unrestricted fund. Full accrual accounting is used, which includes depreciation. Supplies & prepaid items are recorded on a consumption basis (as used).

Healthcare Accounting
Healthcare represents over 15% of GDP & has significant public policy issues. Most payments are made by third party providers, including insurance companies, Medicare & Medicaid. About 15% of the population is uninsured; therefore, bad debts is a significant issue. Restricted funds are associated primarily is donations

Healthcare Revenues
Primary revenue source is patient care revenue, charges for services for routine services, other nursing services, professional services (e.g., pharmacy, radiology) Other revenue includes contributions, educational services, & other. Revenue is reduced by contractual adjustments (negotiated payment schedules with specific third party payors that are less than the standard rates). Charity care need not be recorded.

Healthcare Expenses
The major function categories are nursing services; other professional services; general, administrative & fiscal services (including accounting); bad debts; depreciation & interest. Expenses are cross-classified by object, including salaries, employee benefits, supplies, etc.

Patient Care Journal Entries

Basic entry for providing healthcare services for $50,000 would be: Accounts Receivable 50,000 Patient Revenues 50,000 Assume that 30% of these receivables are expected to be uncollectible: Bad Debts Expense 15,000 Accounts ReceivableAllowance for Bad Debts 15,000

Patient Care Journal Entries (2)

Hospitals typically negotiate lower rate with specific insurance companies. Assume that the hospital gives contractual adjustments of 20% to ABC Insurance; the standard rate charges are $100,000. The entries would be: Accounts Receivable 100,000 Patient Revenues 100,000 Patient Revenues-Estimated Contractual Adjustments 20,000 Accounting Receivable-Allowance for Contractual Adjustments 20,000

Malpractice
Malpractice charges can be substantial for hospitals & other healthcare professionals. Generally, healthcare organizations purchase malpractice insurance, which is recorded as an expense. Beyond insurance coverage, malpractice liability is governed by FASB 5 on contingencies. Liabilities would be recorded if it is probable that a liability has been incurred & the amount of the loss can be reasonably estimated. The journal entry for an estimated malpractice loss of $150,000 would be: Anticipated Legal Expense 150,000 Contingency Liability 150,000

Colleges & Universities (C&U)

Public C&Us can be accounted for in an enterprise fund (GASB 34). Private C&Us follow FASB pronouncements, including the use of unrestricted, temporarily restricted & permanently restricted funds. Because endowments are common in C&Us, permanently restricted accounts can be extensive. See Tables 12-11 & 12 for C&U financial statements (pp. 507-8).

C&U Revenues & Expenditures

Major revenue categories include: tuition & fees, government appropriations (public), government grants, gifts & private grants, endowment income, auxiliary enterprises (e.g., bookstores), investment gains & losses. Expenses are primarily education & general, which includes instruction & departmental research, libraries, student services & extension & public services. Other expense categories are sponsored research, operation & maintenance of plant (capital assets), & general.

Revenues From Tuition & Fees

The journal entry for tuition & fees of $500,000 in cash would be: Cash 500,000 Revenue-Tuition & Fees 500,000 Prepaid tuition & fees for a semester in the next fiscal year would be deferred ($25,000): Cash 25,000 Deferred Revenue 25,000

Research Grants
Most grants reimburse for actual research costs. Assume that expenses total $40,000 on a $100,000 federal grant; the government department is notified for reimbursement: Expenses-Sponsored Research 40,000 Cash 40,000 Due From Federal Govt. 40,000 Revenue-Govt. Grant 40,000