Beruflich Dokumente
Kultur Dokumente
McGraw-Hill/Irwin
Overview of Chapter 3
The basic accounts used by governmental funds. Recognition criteria for revenues and expenditures under the modified accrual basis. Fund balance classifications for governmental funds.
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The modified accrual basis is a distinct system of accounting that contains financial statement elements that appear nowhere else. Among these are expenditures and fund balances.
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Although, revenues appear in the financial statements of accrual and modified accrual funds, revenues follow different recognition criteria between the two bases. Finally, there are no expenses in modified accrual funds
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Modified Accrual Funds use the Current Financial Resources Measurement Focus
Generally speaking, the assets represent cash and assets that may be expected to be converted into cash in the normal course of operations. (no long-term assets) Similarly, these funds report only those liabilities which will be settled with current financial resources. (no long-term liabilities)
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Fund Balance
Fund Balance serves a purpose similar to retained earnings, in that activity accounts are closed to this account at the end of each accounting period.
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Since only current financial resources and claims against those resources are recognized in these funds, the difference between assets and liabilities (fund balance) represents the net resources of the fund that are currently available for future spending. However, even current financial resources vary in the extent to which government managers have discretion over their future use and this is reflected by assigning fund balance to five categories (nonspendable, restricted, committed, assigned and unassigned).
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Users want to know whether the use of amounts reported in governmental funds is constrained and how binding those constraints are.
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Statement No. 54 affects only fund-basis statements of the Governmental Type funds
Does not affect reporting of Net Assets by Proprietary or Fiduciary Funds Does not affect reporting of Net Assets of Governmental Activities in the government-wide statements.
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Identify those fund resources that are Nonspendable Nonspendable resources include:
Inventories and prepaids (also incudes assets held for sale and
long-term receivables)
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All remaining net resources of a fund after removing those determined to be Nonspendable
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Spendable resources are further classified according to the nature of any constraints imposed on their use, using a hierarchy of constraints
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Constraint Hierarchy:
Restricted Funds
Externally Imposed (debt covenant, grantor, contributors, or other governments) Imposed by law (constitutionally or enabling legislation)
i.e. enforceable requirement that resources be used only for specified purposes
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In general, the definition of restricted fund balance is nearly identical to that of restricted net assets in the Government-wide Statements
Exception is Permanent Fund Principle which is classified as Nonspendable in the governmental funds
Fund-Basis Governmental Funds Balance Sheet
Restricted fund balance $ xxx
$ xxx
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The formal action of the governments highest level of decision making authority.
Constraint Hierarchy:
Rainy Day Funds
Statement 54 also provides guidance on the classification of budget stabilization or rainy day funds Such stabilization amounts that meet certain criteria are classified as committed or (less commonly) restricted, if imposed externally or by law. Rainy day funds are classified as committed only if they are created by a resolution or ordinance that identifies the specific circumstances under which the resources may be expended.
Rainy day amounts that are available in emergencies or in periods of revenue shortfalls would not be classified as committed unless the emergency or shortfall condition is specified and of a magnitude to distinguish it from events that occur routinely. Rainy day funds not meeting these conditions are reported as unassigned fund balance in the General Fund.
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Constraint Hierarchy:
Assigned Funds
Assigned: The government has an Assigned expressed intent to use resources for specific purpose:
For governmental funds other than the General Fund, this is the category for all remaining (positive) amounts. For the General Fund, assignment conveys a narrower intended use than the general purposes of the government 3-20
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Classification: Step 1
Are there assets not in spendable form? e.g. Inventory & prepaids Required to maintain permanent fund corpus?
ASSETS Cash and cash equivalents Investments
CITY
Balance Sheet
Governmental Funds
General
Permanent
Fund 895,300
Fund 230,000
Fund 25,366
Receivables (net)
No
Proceed to spendable categories
Taxes receivable
2,872,611
Accounts Receivable
679,215
14,177
1,085,184
243,264
Supplies Inventory
23,747
Restricted Assets
3,933,126
TOTAL ASSETS
18,315,089
642,014
1,138,564
230,000
25,366
CITY
Classification: Step 1
Assets not in spendable form? Inventory & prepaids Required to maintain permanent fund corpus?
General Special Revenue Fund 627,837
Balance Sheet
Governmental Funds
Permanent
Fund 895,300
Fund 230,000
Fund 25,366
yes
Receivables (net)
Taxes receivable
2,872,611
Accounts Receivable
679,215
14,177
1,085,184
243,264
Supplies Inventory
Restricted Assets
23,747
3,933,126
TOTAL ASSETS
18,315,089
642,014
1,138,564
230,000
25,366
LIABILITIES
CITY
Balance Sheet
Governmental Funds
yes
ASSETS Cash and cash equivalents Investments
General
Debt Service
Permanent
Fund 627,837
Fund 895,300
Fund 230,000
Fund 25,366
Assume the following: Bond sinking fund Federal school lunch grant State highway grant
Receivables (net)
Taxes receivable
2,872,611
Accounts Receivable
679,215
14,177
1,085,184
243,264
Supplies Inventory
23,747
Restricted Assets
3,933,126
TOTAL ASSETS
18,315,089
642,014
1,138,564
230,000
25,366
LIABILITIES
CITY
Balance Sheet
Governmental Funds
yes
General Special Revenue Capital Projects Debt Service Permanent
Assume the following: Construction contracts School construction funds Rainy day reserve
Fund 627,837
Fund 895,300
Fund 230,000
Fund 25,366
Receivables (net)
Taxes receivable
2,872,611
Accounts Receivable
679,215
14,177
1,085,184
243,264
Supplies Inventory
23,747
Restricted Assets
3,933,126
TOTAL ASSETS
18,315,089
642,014
1,138,564
230,000
25,366
CITY
Balance Sheet
Governmental Funds
yes
General Special Revenue Capital Projects Debt Service Permanent ASSETS Cash and cash equivalents Investments Fund 6,408,214 3,312,992 Fund 627,837 Fund 895,300 Fund 230,000 Fund 25,366
Receivables (net)
Taxes receivable
2,872,611
Accounts Receivable
679,215
14,177
1,085,184
243,264
Supplies Inventory
23,747
Restricted Assets
3,933,126
TOTAL ASSETS
18,315,089
642,014
1,138,564
230,000
25,366
LIABILITIES
CITY
Balance Sheet
Governmental Funds
yes
ASSETS Cash and cash equivalents Investments
General
Special Revenue
Capital Projects
Debt Service
Permanent
Fund 627,837
Fund 895,300
Fund 230,000
Fund 25,366
Assume the government has outstanding encumbrances for the following: Library acquisitions Other capital projects
Receivables (net)
Taxes receivable
2,872,611
Accounts Receivable
679,215
14,177
1,085,184
243,264
Supplies Inventory
23,747
Restricted Assets
3,933,126
TOTAL ASSETS
18,315,089
642,014
1,138,564
230,000
25,366
LIABILITIES
CITY
Balance Sheet
Governmental Funds
Debt Service
Permanent
The remaining net resources of the General Fund are classified as Unassigned
Fund 627,837
Fund 895,300
Fund 230,000
Fund 25,366
Receivables (net)
Taxes receivable
2,872,611
Accounts Receivable
679,215
14,177
1,085,184
243,264
Supplies Inventory
23,747
Restricted Assets
3,933,126
TOTAL ASSETS
18,315,089
642,014
1,138,564
230,000
25,366
LIABILITIES
Accounts payable
2,085,358
70,000
207,134
Classification Completed
General Fund FUND BALANCES Special Revenue Fund Capital Projects Fund Nonspendable Supplies Inventory Permanent fund principal Restricted Bond Sinking Fund School lunch grant Highway grant Committed Construction Contracts School construction Rainy Day Funds Assigned School lunch program Capital projects 95,000 202,014 40,032 3,500,000 120,000 450,000 370,000 302,000 23,747
25,000
200,000
Encumbrances Under past reporting practices, outstanding encumbrances at year end were reported in the governmental funds as fund balance: reserve for encumbrances.
Statement 54 requires that significant encumbrances be disclosed in the notes along with required disclosures about other commitments.
However, there is no separate reporting of encumbrances within the fund balance section of the governmental funds balance sheet.
Rather, encumbered resources should be reported within the restricted, committed or assigned categories in a manner consistent with the criteria for those classifications.
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Encumbrances Interpretation
At the very least, the existence of an encumbrance suggests that the government has an expressed intent to use resources for a particular purpose and therefore these resources should not be classified as unassigned. Encumbrance accounting may also be used in the case of contractual obligations, such as construction contracts. Statement 54 requires that resources obligated to contractual obligations be classified as committed.
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Negative Balances
Statement 54 does not permit the reporting of negative restricted, committed or assigned fund balances. If this occurs, the government should reduce any assigned fund balances (in that fund) by the amount of the negative balance. The rationale is that if expenditures exceed restricted or committed resources, then funds have in effect been reallocated to the purpose used. If a deficit remains once all assigned fund balances are zero, the remaining negative amount should be reported as unassigned fund balance.
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Other Financing Sources include transfers in from other funds and the proceeds of long-term borrowing. Revenues are defined as all other inflows and include taxes, charges for services, and amounts provided by other entities such as the state or federal government.
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Expenditures are recognized when a liability is incurred that will be settled with current financial resources in the fund. Expenditures may be for salaries (current), land, buildings or equipment (capital) or for payment of interest and principal on debt (debt service). Transfers out of a fund to other funds are classified as Other Financing Uses.
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Where the money came from: taxes, licenses and permits, charges for service, etc May be subdivided further such as by type of tax, sometimes shown in separate schedule
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Outflow Classifications
Character groupings are always: CURRENT, CAPITAL OUTLAY, and DEBT SERVICE Current are typically classified by function:
General government, public safety, streets and highways
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Budgetary Accounting
GASB standards require governments to present a comparison of budgeted and actual results for the General Fund and special revenue funds with legally adopted budgets. While GASB standards guide the format of this comparison, the GASB does not prescribe budgetary accounting practices and does not require governments to maintain budgetary accounts.
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Recording Budgets
Although budgetary accounts do not appear in the general purpose financial statements, governments typically record budgets and governmental accounting systems are designed to assure compliance with budgets.
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Budgetary Accounts
Revenues to be raised pursuant to law during a budget period are set forth in an Estimated Revenues budget. An Appropriation, when enacted into law, is the legal authorization for the government to incur liabilities for purposes specified in the appropriations statue or ordinance.
Estimated Other Financing Sources and Estimated Other Financing Uses are budgetary accounts reflecting anticipated inflows and outflows of resources from sources other than revenues and expenditures
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Encumbrances
When a purchase order or contract is issued as authorized by an appropriation, the government recognizes this commitment as an Encumbrance.
An encumbrance is not a liability since the goods or services have merely been ordered, not received.
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Encumbrances
Commitments are reflected in the budgetary accounts through the recording of Encumbrances and the corresponding Budgetary Fund Balance - Reserve for Encumbrances.
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Expenditure Cycle
Encumbrance to Expenditure
Once goods or services are received, the government has a liability. At this point, two journal entries are necessary.
The first reverses the encumbrance at its original amount. Since the government has incurred an actual liability, it is no longer necessary to reflect a commitment for the outstanding purchase orders or contracts. The second entry records the liability (Accounts Payable) and an Expenditure in the amount of the invoice.
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In business accounting, orders are not entered into the general ledger
Governments recognize that an outstanding order will turn into an expenditure and a liability when the goods arrive To prevent over-spending, outstanding orders are entered into the books
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Encumbrance Example
Place an order for $150,000 which consists of three mini-buses costing $50,000 each. Recorded as:
Encumbrances Budgetary Fund Balance Reserve for Encumbrances 150,000 150,000
Assume two of the buses arrive, but with freight, they cost $102,000 instead of $100,000.
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Since taxes and many other revenues do not involve exchange transactions, governments cannot determine the point at which these revenues are earned.
Therefore revenue recognition occurs when the resulting resources are deemed to be both measureable and available to finance expenditures of the current period.
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Revenue Recognition
Nonexchange transactions are transactions in which a government receives resources without directly giving equal value in exchange. The most common forms of nonexchange transactions are tax revenues and intergovernmental grants. Before a government may recognize revenue resulting from nonexchange transactions, it must meet a number of eligibility requirements.
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Required Characteristics of Recipients. The recipient must have the characteristics specified by the provider. Time Requirement. If time requirements (for expenditure) are specified by the resource provider or legislation, those time requirements must be met Reimbursement. For those grants and gifts that are payable only upon the incurrence of qualifying outlays, revenues would be recognized only when the expenditures have been incurred. Contingencies. Resources pledged that have a contingency attached are not recognized as revenue until the contingency has been met.
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1.
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Taxes and other assessments that do not result from an underlying transaction.
Examples include property taxes and special assessments imposed on property owners. Also includes fines and forfeits.
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1. Property taxes levied 2. Deferral of portion expected to be collected > 60 days after year end
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1. Income tax withholdings 1. Cash .Dr Revenues Control Cr are received. 2. Additional income taxes 2. Taxes Receivable .Dr Revenues Control Cr expected to be received after year end. Part of this Deferred Revenues Income Taxes Cr will not be received in time to be avail-able for current liabilities.
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These are commonly grants from higher levels of government (federal or state) given to support a program.
Since the program is required, the lower-level government has no choice but to accept.
For example, a state may require schools to mainstream certain students and provide funds to carry out this mandate.
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Since the program is not required, the receiving government voluntarily agrees to participate.
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1. Expenditures Control ..Dr Accounts Payable/Cash ..Cr 2. Due from grantor Dr Revenues Control Cr
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1. Receipt of advance 2a. Expenditures Control ...Dr funding. Accounts Payable/Cash ..Cr 2. Incur qualified expenditures and recognize 2b. Deferred Revenues revenue. Grants .. Dr Revenues Control Cr
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In the above entry, Budgetary Fund Balance is the expected change in fund balance assuming actual amounts are exactly as budgeted. It may be either a credit (or less frequently) or debit balance in the entry.
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Budget Revisions
Budget revisions may be necessary during the year due to changes in revenue projections or operating conditions for example, electricity price increases, decrease in sales taxes due to low consumer spending
Budget revisions usually are taken back to the appropriate legislative body for approval, although some jurisdictions may allow some percentage of the budget to be transferred between accounts
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In the above entry, the budget reflects a decrease in estimated revenues of $ 80,000 and an increase in appropriations of $ 70,000.
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Both the original and the final adjusted budget is shown The revised appropriations are compared to the Actual Expenditures for the current period plus Outstanding Encumbrances A variance column is typically shown, but is optional
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The actual column should use the basis of accounting assumed in the budget. This may be different than GAAP basis
Another schedule will reconcile the actual figures on the budgetary vs. GAAP basis
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