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Chapter 17
Governmental
Entities:
Introduction and
General Fund
Accounting
McGraw-Hill Education
Copyright © 2016 by McGraw-Hill Education, All rights reserved.
Learning Objective 17-1
Understand and explain the
basic differences between
governmental and private
sector accounting.
2
Differences Between Governmental and
Private Sector Accounting
 Governmental entities have operating objectives
different from those of commercial entities.
 As a result, governmental accounting is different
from accounting for commercial enterprises.
3
Differences Between Governmental and
Private Sector Accounting
 Major differences between governmental and
for-profit entities are as follow:
1. Governmental units collect resources and make
expenditures to fulfil societal needs.
2. Governmental entities do not have a general profit
motive.
3. Governmental operations 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.
4. Governmental entities use comprehensive budgetary
accounting, which serves as a significant control
mechanism.
4
Differences Between Governmental and
Private Sector Accounting
 Major differences between governmental and
for-profit entities are as follow:
5. Accountability for the flow of financial resources is a
chief objective of governmental accounting.
6. Governmental entities typically are required to
establish separate funds to carry out various missions;
each fund is an independent accounting and fiscal
entity.
7. Many fund entities do not record fixed assets or longterm debt in their funds.
8. An important objective of governmental financial
reporting is accountability.
5
History of Governmental Accounting
 Before 1984, directed by the Municipal Finance
Officers Association (MFOA).
 In 1934, the first statement on local
governmental accounting was 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.
6
History of Governmental Accounting
 In 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.”
 In March 1979, the National Council on
Governmental Accounting (NCGA) issued its
Statement No. 1, “Governmental Accounting and
Financial Reporting Principles” (NCGA 1).
7
History of Governmental Accounting
 In 1984, the Financial Accounting Standards
Board was created.

The Governmental Accounting Standards Board (GASB) is now
responsible for maintaining and developing accounting and
reporting standards for state and local governments.
 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 No. 34

Established government-wide financial statements to be prepared
on the accrual basis of accounting and an array of fund-based
financial statements.
8
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 to
distinguish it from accounting for commercial
entities.
9
The Governmental Accounting Standards
Board (GASB)
 Created in 1984.
 A sister organization to the FASB.
 Establishes GAAP for state and local units.
 No authority to establish GAAP for the
federal government.
 Seven members—simple majority vote
needed (4 votes).
10
GAAFR: “The Blue Book”
 “Governmental Accounting, Auditing, and
Financial Reporting.”
 Published by the Government Finance
Officers Association (GFOA).
 Neither prescribes nor authoritatively
interprets GAAP for governmental units.
 Provides detailed guidance (many
examples) for applying governmental
GAAP.
 Widely used by governmental units.
11
Practice Quiz Question #1
Which of the following statements is correct?
a. The GASB is responsible to set standards
for governmental units and not-for-profit
entities.
b. The FASB was created in 1972 and sets
standards for governmental units.
c. The Blue Book contains financial
accounting standards for privately held
governmental agencies and companies.
d. The GASB is responsible for setting
standards for state and local governments
but not the federal government.
12
Learning Objective 17-2
Understand and explain
major concepts of
governmental accounting.
13
Major Concepts of Governmental Accounting
 Elements of a Statement of Financial Condition
1.
Assets: resources with present service capacity that
the entity presently controls.
2.
Liabilities: present obligations to sacrifice resources
that the entity has little or no discretion to avoid.
3.
A deferred outflow of resources: a consumption of net
assets that is applicable to a future reporting period.
4.
A deferred inflow of resources: an acquisition of net
assets that is applicable to a future reporting period.
5.
Net position: the residual of all other elements
presented in a statement of financial condition.
14
Major Concepts of Governmental Accounting
 Elements of a resource flows statements
1.
An outflow of resources: a consumption of net
assets that is applicable to the current reporting
period.
2.
An inflow of resources: an acquisition of net assets
that is applicable to the current reporting period.
15
Major Concepts of Governmental Accounting
 Expendability of resources versus capital
maintenance objectives:
Commercial Enterprises
Government Entities
Measurement focus
The flow of all economic
resources
Changes in current financial
resources available to
provide services to the
public in accordance with the
budget
Method of
accounting
Accrual method
Modified accrual method
Balance sheet
Contains both current and
noncurrent assets and
liabilities, and the change in
retained earnings reflects
the company’s ability to
maintain its capital
investment
Reports only current assets,
current liabilities, and a fund
balance
16
Practice Quiz Question #2
Which of the following statements is true?
a. Governmental units use the modified
accrual basis of accounting and focus on
the flow of all economic resources.
b. Commercial enterprises use the modified
accrual basis of accounting and focus on
the flow of all economic resources.
c. The balance sheets of governmental units
contain long-term assets and liabilities.
d. The balance sheets of commercial entities
contain a fund balance.
17
Learning Objective 17-3
Understand and explain the
differences between the
various governmental fund
types.
18
Definitions and Types of Funds
 Fund: 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.
 Different funds are established for the specific
functions that a government must provide.
 Each fund has its own asset and liability accounts
and its own revenue and expenditures accounts.
 Separate fund-based financial statements must be
prepared for each fiscal period.
19
Definitions and Types of Funds
 Three Types of Funds



Governmental Funds

Account for 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 governmental funds based on needs.
Proprietary Funds

The objective is to recover the unit’s costs through
user charges.
Fiduciary Funds

Account for resources that are maintained by but
do not belong to a governmental unit.
20
Definitions and Types of Funds
 Five types of governmental funds

General fund

Accounts for all activities not required to be
accounted for in another fund.

Special revenue funds

Capital projects funds

Debt service funds

Permanent funds
21
Definitions and Types of Funds
 Proprietary Funds


Enterprise fund:

Accounts for operations of governmental units that
charge for services provided to the general public.

Examples: sports arenas, municipal electric utilities,
and municipal bus companies.
Internal service fund:

Accounts for the financing of goods or services
provided by one governmental unit’s department
or agency to other of its departments or agencies.

Examples: municipal motor vehicle pools, city print
shops, and central purchasing options.
22
Definitions and Types of Funds
 Fiduciary Funds

Trust Funds




Pension and other employee benefit trust
funds.
Investment trust funds.
Private-purpose trust funds (these activities
do not benefit the government unit).
Agency Funds

Used to account for resources the government
holds solely in a custodial capacity.
23
Definitions and Types of Funds
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.
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.
Accounts for the accumulation of resources for, and the
payment of, general long-term debt principal and
interest.
Debt service fund
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.
24
Definitions and Types of Funds
Proprietary Fund Types
Enterprise fund
Internal service fund
Accounts for operations of governmental units that
charge for services provided to the general public.
Accounts for the financing of goods or services provided
by one department or agency to other departments or
agencies of the governmental unit.
Fiduciary Fund Types and Similar Component Units
Pension (and other
employee benefit)
trust fund
Investment trust fund
Private-purpose trust
fund
Agency fund
Accounts for resources required to be held in trust for
the members and beneficiaries of pension plans, other
post-employment benefit plans, or other EBPs.
Accounts for the external portion of investment pools
reported by the sponsoring government.
Accounts for all other trust arrangements under which
the fund’s resources are to be used to benefit specific
individuals, private organizations, or other
governments.
Accounts for assets held by a governmental unit in an
agency capacity for employees or for other
governmental units.
25
Practice Quiz Question #3
The three major categories of
governmental funds are:
a. Governmental, commercial, and
proprietary.
b. Governmental, trust, and fiduciary.
c. Enterprise, proprietary, and fiduciary .
d. Governmental, proprietary, and
fiduciary.
e. Governmental Service, proprietary,
and commercial
26
Learning Objective 17-4
Understand and explain basic
concepts for financial reporting
in governmental
accounting.
27
Financial Reporting of Governmental Entities
Governmental units present financial statements for the
reporting entity, which consists of:
 The primary government

State government or a general/special-purpose local
government.
 Component units

Legally separate organizations for which the primary
unit has financial accountability.
 Other organizations

Organizations that have a significant relationship with
the primary government and need to be included in its
financial statements to avoid misleading or incomplete
financial representations.
28
Financial Reporting of Governmental Entities

GASB 14

States that financial accountability exists for
those component units if the primary
government unit appoints a majority of an
organizations’ governing body and


is able to impose its will on the organization, or
possesses a financial benefit/assumes a
financial burden for the organization.
29
Financial Reporting of Governmental Entities

GASB 34


Specifies the use of the governmental financial
reporting model.
The reporting model has two integrated levels of
financial statements:
1.
2.
Fund-based financial statements: demonstrate fiscal
accountability of the management of each fund.

Balance sheet

Statement of revenues, expenditures, and changes in fund balance
Government-wide financial statements: demonstrate
the operational accountability of the unit’s management
as a whole.

Includes government funds, capital assets, and long-term debt.
30
Fund-Based Financial Statements
 Balance sheet for governmental funds

Assets




Liabilities



Use the current financial resources measurement focus.
Reports only financial assets used as cash or other assets that will
convert into cash in the normal course of operations over the near
future.
Long-term capital items are not reported on the fund-based balance
sheet, but are scheduled and reported in the government-wide
financial statements.
Reports only those liabilities that have become due and will require
current financial resources to liquidate.
Long-term debt principal not due within the next year is not
reported on the balance sheet, but are scheduled and reported in
the government-wide financial statements.
Net fund balance

Amount of the difference between reported assets and reported
liabilities.
31
Fund-Based Financial Statements

GASB 54 specifies that the fund balances for the governmental
funds should be segregated into two categories:
1. Nonspendable fund balances

Not in spendable form.

Required by legal or contractual provisions to be
maintained intact.
2. Spendable fund balances

Available for spending.

Further classified as:

Restricted

Limited

Assigned

Unassigned
32
Financial Reporting of Governmental Entities
 Balance Sheet for Governmental Funds
Balance Sheet for Governmental Funds
Assets (financial resources available for current use;
presented in order of liquidity)
Total Assets
Liabilities and Fund Balances:
Liabilities (due and expected to be paid from current
financial resources; presented in order of due date)
Fund Balances
Nonspendable
Spendable:
Restricted
Limited
Assigned
Unassigned
Total Liabilities and Fund Balances
$X,XXX
$X,XXX
$ XXX
$ XX
XX
XX
XX
XX
XX
$X,XXX
33
Fund-Based Financial Statements
 Statement of Revenues, Expenditures, and Changes
in Fund Balance for Governmental Funds


Often called the operating statement of the
governmental funds.
Four major sections:




Operating section: revenues less expenditures for the
period.
Other financing sources or uses: includes nonrevenue
items such as bond issue proceeds and interfund transfers.
Special and extraordinary items: lists extraordinary
items that are both unusual and infrequent
Fund balance: balances of both the beginning and the end
of the year.
34
Financial Reporting of Governmental Entities
 Statement of Revenues, Expenditures, and Changes in
Fund Balance for Governmental Funds

Often called the operating statement of the
governmental funds.
Statement of Revenues, Expenditures, and Changes in Fund Balance
Revenues (recognized when both measurable and available; presented
by source of revenue)
$XX,XXX
Expenditures (approved decreases in net financial resources; presented
by function and character)
X,XXX
Excess of Revenues over Expenditures
$ XXX
Other Financing Sources or Uses (other increases or decreases in net
financial resources available, such as bond issue proceeds and interfund
transfers)
XX
Special Items and Extraordinary Items
(X)
Net Change in Fund Balance
$
XX
Fund Balance—Beginning
XXX
Fund Balance—Ending (reconciles to total fund balance on balance sheet)
$ XXX
35
Practice Quiz Question #4
Which of the following is true?
a. The operating statements of governmental
entities focus on revenues and expenses.
b. The balance sheets of governmental entities
focus on the normal accounting equation:
Assets – Liabilities = Owner’s Equity.
c. The operating statements of governmental
entities focus on revenues and liabilities.
d. The balance sheets of governmental entities
focus a modified accounting equation:
Assets – Liabilities = Fund Balance.
e. All governmental fund balances are
spendable.
36
Learning Objective 17-5
Understand and explain the
basic differences in the
measurement focus and basis
of accounting between
governmental and private sector
accounting.
37
Measurement Focus And Basis Of Accounting
 Measurement Focus

What flows should be measured for operations.
 Basis of Accounting

When transactions and events should be recognized in
the financial statements.
38
Measurement Focus And Basis Of Accounting
 Basis of Accounting—Three Types

Cash basis

Accrual basis

Modified accrual basis (hybrid system that includes
both cash and accrual basis aspects)
39
Measurement Focus And Basis Of Accounting
 Modified Accrual Basis

Used in funds that have a flow of current financial
resources measurement focus.



E.g., the five governmental funds.
Concentrates on the flow of current financial
resources and their proper expendability for
designated purposes.
Expenditures recognized are amounts that would
normally be liquidated with expendable available
financial resources.
40
Measurement Focus And Basis Of Accounting
 Modified Accrual Basis
Present a Statement of Revenues and Expenditures and
Changes in Fund Balance
 Shows financial resources received and spent.
 Shows change in net financial resources.
 Shows balance available for spending in the near
future.
41
Measurement Focus And Basis Of Accounting
 Modified Accrual Basis Funds

Governmental Funds

General Fund

Special Revenues Fund

Capital Projects Funds

Debt Service Funds

Permanent Funds
42
Measurement Focus And Basis Of Accounting
 Accrual Basis

Used in funds that have a flow of economic resources
measurement focus.


E.g., the proprietary funds, fiduciary funds, and
government-wide financial statements.
Allows for a comparison of revenues and expenses
and a focus on maintenance of capital.
43
Measurement Focus And Basis Of Accounting
 Accrual Basis
Present a Statement of Revenues and Expenses

Shows the change in the economic condition
Also present a Statement of Cash Flows
44
Measurement Focus And Basis Of Accounting
 Accrual Basis Funds


Proprietary funds

Enterprise Fund

Internal Service Fund
Fiduciary funds

Trust Funds (3 types)

Agency Funds
45
Basis of Accounting – Governmental Funds
 Modified Accrual Basis Application

Revenue: recorded when measurable and available to
finance expenditures.



Measurable: amount can be objectively
determined.
Available: collected within the current period or
expected to be collected soon enough thereafter to
be used to pay current-period liabilities (not more
than 60 days after the end of the current fiscal
period).
Expenditures: recognized when measurable and
incurred and are payable out of current financial
resources.
46
Revenue from Nonexchange Transactions
 Nonexchange transaction revenue: a
government’s authority to levy taxes gives it the
ability to receive value without directly giving
equal value in exchange.
47
Recognition of Revenue
 How revenues are recognized depends on the
category
 Four categories:

Category 1: derived tax revenues—from assessments
on exchange transactions.

E.g., income taxes and sales taxes.

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.
48
Recognition of Revenue
 How revenues are recognized depends on the
category
 Four categories:

Category 2: imposed nonexchange revenues—from
assessments on nongovernmental entities, including
individuals.



E.g., property taxes and fines.
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 when the asset is recorded if no time
restriction on the fund’s use of the resources exists.
49
Recognition of Revenue
 How revenues are recognized depends on the
category.
 Four categories:

Category 3: government-mandated nonexchange
transactions—from one governmental unit’s
provision of resources to a governmental unit at
another level and the requirement that the recipient
use the resources for a specific purpose.


E.g., federal programs that state or local governments
are required to perform.
Category 4: voluntary nonexchange transactions—
from legislative or contractual agreements other than
exchanges.

E.g., certain grants and private donations.
50
Practice Quiz Question #5
The modified accrual basis of accounting:
a. recognizes revenues when earned and
expenditures when incurred.
b. recognizes revenues when they become
available and measureable and expenditures
when liabilities become measurable and
incurred.
c. recognizes revenues when earned and
expenses when incurred
d. recognizes revenues when they become
available and measureable and expenditures
when they become available and spendable.
51
Learning Objective 17-6
Understand and explain basic
budgeting concepts in
governmental accounting.
52
Accounting for Expenditures
 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


Prepared for: general, special revenue, and debt
service funds.
Capital budgets

Prepared for: capital projects fund.
53
Budgetary Aspects of Governmental
Operations
 Appropriation: the legal description of the authority to
expend resources.
 Annual Budgets for the General Fund and the Special
Revenue Funds are always recorded in the general
ledger for control purposes.

Also done for Capital Projects Funds and Debt Service Funds if
useful.
 Encumbrances: commitments related to unperformed
(executory) contracts for goods or services.
 Special general ledger accounts are used to record
encumbrances—the purpose is to prevent spending more
than has been appropriated.
 Budget entries have no effect on reported operations.
54
Introduction: Budget / Expenditure Process
1. Budget—Recorded in the books

CAPITAL LETTERS (legally binding)
2. Expenditures


Appropriation (authorization of the expenditure)
Encumbrance (set aside or reserve part of the
budgetary appropriation)

Expenditure

Disbursement
55
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 fund’s accounting records
on this date is as follows:
January 1, 20X1
(1) ESTIMATED REVENUES CONTROL
APPROPRIATIONS CONTROL
BUDGETARY FUND BALANCE - UNASSIGNED
Record general fund budget for year.
56
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 BALANCE—UNASSIGNED.
 Some approved budgets have budget deficits in which
expected expenditures exceed anticipated revenue.

These budgets are recorded with a debit to
BUDGETARY FUND BALANCE—UNASSIGNED.
57
Practice Quiz Question #6
Why do state and local governments record
encumbrances?
a. To ensure that the entity earns sufficient
revenues to achieve profitability.
b. To ensure that the entity does not spend more
than has been appropriated.
c. To ensure that all sub-entities within the
organization are not encumbered.
d. To ensure that the entity spends at least as
much as has been appropriated.
58
Learning Objective 17-7
Make calculations and record
journal entries for the general
fund.
59
Accounting for Expenditures
 Four sequential steps
1. Appropriation
2. Encumbrance
3. Expenditure
4. Disbursement
60
Step 1: Appropriation
 Appropriation: the legal description of the
authority to expend resources.
 The budget enables the appropriating authority
to make future expenditures.
61
Step 1: Appropriation
 Recording the general fund budget
Assume that on 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 fund’s accounting records
on this date is as follows:
January 1, 20X1
(1) ESTIMATED REVENUES CONTROL
APPROPRIATIONS CONTROL
BUDGETARY FUND BALANCE - UNASSIGNED
Record general fund budget for year.
62
Step 2: Encumbrance
 Encumbrance: a reservation of part of the
budgetary appropriation and is recognized at the
time an order is placed for goods or services.



Ensures that the expenditures within a period do not
exceed the budgeted appropriations.
Provides a control system and safeguard for
governmental unit administrators.
When an order is placed for goods/services to be
received from outside the governmental unit, the
budgeted appropriation is encumbered for the order’s
estimated cost.
63
Step 2: Encumbrance
 Recording the order for goods
Assume that on August 1, 20X1, Barb City completed a purchase order
(PO) to buy goods estimated to cost $15,000 from an outside vendor.
The entry to record this application of the budgeted appropriation
authority for the period is as follows:
August 1, 20X1
ENCUMBRANCES
BUDGETARY FUND BALANCE - ASSIGNED FOR ENC.
Record order for goods estimtaed to cost $15,000.
 ENCUMBRANCES account: budgetary account that reserves part of the
budget’s appropriation authority; governmental entities often maintain a
subsidiary ledger including accounts for specific types of encumbrances to
correspond to each specific type of appropriation.
 BUDGETARY FUND BALANCE—ASSIGNED FOR ENCUMBRANCES
account: a reservation (or restriction) of the budgetary fund balance; not
an actual liability.
64
Step 3: Expenditure
 An expenditure and a corresponding liability
are recorded when the governmental entity
receives the goods or services ordered in step 2.
 When the goods are received, the encumbrance
entry is reversed for the amount encumbered
and the expenditure is recorded for the actual
cost to the governmental entity.
65
Step 3: Expenditure
 Reverse encumbrances for goods received
Assume that the goods are received on September 20, 20X1, at an
actual cost of $14,000. The entries to reverse the encumbrance for the
goods and to record the actual expenditures are as follows:
September 20, 20X1
BUDGETARY FUND BALANCE - ASSIGNED FOR ENC.
ENCUMBRANCES
Reverse encumbrances for goods received.
Expenditures
Vouchers Payable
Receive goods at cost of $14,000.
66
Step 3: Expenditure
 Determine remainder of appropriating
authority
Appropriating
authority = APPROPRIATIONS – (ENCUMBRANCES + Expenditures)
remaining
available
67
Step 4: Disbursement
 Disbursement: the payment of cash for
expenditures.

The governing board or council usually must
approve disbursements as an additional level of
control over them.
68
Step 4: Disbursement
 Payment of voucher for goods received
If Barb City council approved the voucher at its October 8 meeting and
a check was prepared in the amount of $14,000 and mailed on October
15, 20X1, the following entry records the disbursement:
October 15, 20X1
Vouchers Payable
Cash
Payment of voucher for goods received.
69
Major Expenditure Classifications for
Government Funds
70
Outstanding Encumbrances at the End of the
Fiscal Period
 Should governmental units honor
outstanding encumbrances from the previous
year?


Not required to do so.
In virtually all cases, they are rebudgeted and
honored.
71
Outstanding Encumbrances at the End of the
Fiscal Period
 Option 1: Encumbrances lapse at year-end







Close remaining budgetary encumbrances.
Reserve actual fund balance for outstanding encumbrances at end
of 20X1 expected to be honored in 20X2.
Reverse prior year encumbrance reserve.
Establish budgetary control over encumbrances renewed from
prior period.
Receive goods and remove budgetary reserve for encumbrances.
Record actual expenditure for goods received.
Close expenditures account.
 Option 2: Encumbrances do not lapse at year-end





Close remaining budgetary encumbrances.
Reserve actual fund balance for outstanding encumbrances at end
of 20X1 expected to be honored in 20X2.
Reclassify reserve from prior year.
Record actual expenditure for goods received.
Close expenditures account.
72
Outstanding Encumbrances at the End of the
Fiscal Period
Assume the following:
• On August 1, 20X1, the unit ordered $15,000 of goods and made an
appropriate entry to record the encumbrance.
• The unit had not received the goods on December 31, 20X1, the end
of the fiscal period.
• It receives the goods on February 1, 20X2, at an actual cost of
$14,000.
How should the unit account for this outstanding encumbrance if it (a)
allows the encumbrance to lapse and (b) does not allow the
encumbrance to lapse?
73
Outstanding Encumbrances at the End of the
Fiscal Period
Item
Outstanding Encumbrances
Lapse at Year-End
Outstanding Encumbrances
Nonlapsing at Year-End
December 31, 20X1
Close remaining
budgetary
encumbrances
BUDGETARY FUND BALANCE ASSIGNED FOR ENCUMBRANCES
ENCUMBRANCES
Reserve actual fund
balance for
outstanding
encumbrances
at end of 20X1
expected to be
honored in
20X2
Fund Balance - Unassigned
Fund Balance - Assigned for
Encumbrances
15,000
BUDGETARY FUND BALANCE ASSIGNED FOR ENCUMBRANCES
ENCUMBRANCES
15,000
Fund Balance - Unassigned
Fund Balance - Assigned for
Encumbrances
15,000
15,000
15,000
15,000
15,000
15,000
January 1, 20X2
Reverse prior year
encumbrance
reserve
Fund Balance - Assigned for
Encumbrances
Fund Balance - Unassigned
Establish budgetary
control over
encumbrances
renewed from
prior period
ENCUMBRANCES
BUDGETARY FUND
BALANCE - ASSIGNED
FOR ENCUMBRANCES
15,000
15,000
15,000
15,000
Reclassify reserve
from prior year
Fund Balance - Assigned for
Encumbrances
Fund Balance - Assigned
for Encumbrances - 20X1
February 1, 20X2
Receive goods and
remove budgetary
reserve for
encumbrances
BUDGETARY FUND BALANCE ASSIGNED FOR
ENCUMBRANCES
ENCUMBRANCES
Record actual
expenditure for
goods received
Expenditures
Vouchers Payable
14,000
Fund Balance - Unassigned
Expenditures
14,000
15,000
15,000
15,000
15,000
14,000
Expenditures - 20X1
Vouchers Payable
14,000
14,000
December 31, 20X2
Close expenditures
account
14,000
Fund Balance - Assigned for
Encumbrances - 20X1
Expenditures - 20X1
Fund Balance - Unassigned
15,000
14,000
1,000
74
Expenditures for Inventory
 Consumption Method


Recognizes expenditures only for the amount of
inventory used in the period (the amount consumed).
The use of inventory is treated as an outflow of
resources.
 Purchases Method


Recognizes the entire expenditure for inventory in
the period the supplies are acquired (the amount
purchased).
The acquisition of inventory is treated as an outflow
of resources.
75
Expenditures for Inventory
 Both inventory methods are used in practice.
 The method a specific governmental unit uses
depends on its budgeting policy.
 The choice of method has no effect on the
balance sheet amounts—the only effect is on
the period in which the expenditures for
inventory are reported.
76
Expenditures for Inventory
Assume that Barb City acquires $2,000 of inventory on November 1,
20X1, having held no inventory previously. On December 31, 20X1, the
end of Barb City’s fiscal year, a physical count shows $1,400 still in
stock. During 20X2, $900 of this inventory is used, resulting in a $500
remaining balance of supplies on December 31, 20X2.
How should Barb City account for these inventories? Show both the
purchase and consumption methods.
77
Expenditures for Inventory
Item
Purchase Method of Accounting
Consumption Method of Accounting
November 1, 20X1
Record acquisition of
$2,000 of
inventory.
Expenditures
Vouchers Payable
2,000
Inventory of Supplies
Fund Balance Nonspendable
1,400
2,000
Expenditures
Vouchers Payable
2,000
Inventory of Supplies
Expenditures
1,400
2,000
December 31, 20X1
Recognize ending
inventory of
$1,400.00
1,400
Fund Balance - Unassigned
1,400
Fund Balance - Nonspendable
December 31, 20X2
Record remaining
inventory of
$500, with
$900 of supplies
having been
consumed
during 20X2.
1,400
Fund Balance - Nonspendable
Inventory of Supplies
900
900
Expenditures
Inventory of Supplies
900
Fund Balance - Nonspendable
Fund Balance - Unassigned
900
1,400
900
900
78
Illustration of Accounting for Inventories
Baker County, Iowa purchased $6,000 of supplies inventory on
7/1/X5, the first day of the fiscal year. Assume that the
beginning inventory balance was $1,500 and that the county has
a policy of initially recording all inventory purchases as
expenditures and then adjusting the balances at the end of the
accounting period based on the actual amount of inventory on
hand per the physical count. Assume the actual inventory on
hand on 6/30/X6 is $2,500.
REQUIRED
1. Assuming the purchase method, record the initial inventory
purchase on 7/1/X5. Then, record the adjusting entry on
6/30/X6.
2. Assuming the consumption method, record the initial inventory
purchase on 7/1/X5. Then, record the adjusting entry on
6/30/X6.
79
Consumption Method
(Expenditure = Amount CONSUMED)
To record the purchase of $6,000 of inventory on 7/1/X5.
To adjust inventory balance per the physical count on 6/30/X6.
To adjust non-spendable fund balance to the actual on 6/30/X6
Expenditures
Inventory
Fund Balance—NS
BB 1,500
1,500 BB
EB 2,500
2,500 BB 80
Purchase Method
(Expenditure = Amount Purchased)
To record the purchase of $6,000 of inventory on 7/1/X5.
To adjust inventory and the non-spendable fund balance to the
actual inventory balance per the physical count on 6/30/X6.
Expenditures
6,000
Amount
CONSUMED
Inventory
BB 1,500
Fund Balance—NS
1,500 BB
EB 2,500
2,500 BB
81
Accounting for Fixed Assets
 Accounting for fixed assets


Governmental funds: recognize cost of the acquisition of
equipment and other capital assets 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.
If assets are donated, contribution revenue is recognized in
the government-wide financial statements.
82
Long-Term Debt and Capital Leases
 Long-term debt




Governmental funds record the proceeds differently
than commercial, profit-seeking businesses.
Proceeds from a bond issue recorded as a debit to
Cash and a credit to Bond Issue Proceeds, an otherfinancing 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.
83
Long-Term Debt and Capital Leases
 Capital leases



Capital leases are accounted for in a manner similar to
long-term debt.
Proprietary fund: lease is accounted for using methods
similar to those that commercial, profit-seeking
entities use by recording an asset and a lease liability.
Governmental fund: lease is accounted for using
methods similar to a bond’s accounting.
84
Investments
 Investments




GASB 31 establishes a general rule of fair market valuation
for investments held by a government entity.
The following investments are to be valued at fair value if
determinable in the asset section of the balance sheet:
investments in debt securities, equity securities, open-end
mutual funds, investment pools, and interest-earning
investment contracts.
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
making the investment.
GASB 40 requires footnote disclosures of the policies and
the profiles of the government’s investment portfolios.
85
Group Exercise:
Comprehensive General Fund Entries
The City of Cottersen, Texas, is a small town with a population
of approximately 15,000. The city noted the following
transactions during fiscal 20X8.
REQUIRED
1. Prepare General Fund journal entries only for these items.
2. Prepare closing entries at 6/30/X8.
3. Prepare a Statement of Revenues, Expenditures, and
Changes in Fund Balance as of 6/30/X8.
4. Provide a summary of the fund balance by category as of
6/30/X8.
86
Group Exercise:
Requirement 1 (Journal Entries)
1. The Cottersen City Council approved the following budget:
Estimated revenues
$820,000
Authorized expenditures (including
$60,000 reappropriated for encumbrances
outstanding at 6/30/X7 that had lapsed)
720,000
Authorized transfers out to other funds
($35,000 and $20,000)
55,000
Estimated inflow from the discontinuance of
the Auto Repair Internal Service Fund
25,000
To record the budget.
87
Group Exercise:
Requirement 1 (Journal Entries)
2.
The city levied property taxes totaling $570,000. Of this amount, $10,000
was estimated to be uncollectible. Collections during the year totaled
$525,000, of which $12,000 were associated with property taxes levied in
the prior year that had been declared delinquent at the end of the prior
year. All of the remaining property taxes receivable at the beginning of
the current year, totaling $5,000, were written off as uncollectible. The net
realizable amount at 7/1/X7 ($11,000) is expected to be collected within
60 days.
To record the property tax levy.
To record property tax collections.
88
Group Exercise:
Requirement 1 (Journal Entries)
2.
The city levied property taxes totaling $570,000. Of this amount, $10,000
was estimated to be uncollectible. Collections during the year totaled
$525,000, of which $12,000 were associated with property taxes levied in
the prior year that had been declared delinquent at the end of the prior
year. All of the remaining property taxes receivable at the beginning of
the current year, totaling $5,000, were written off as uncollectible. The net
realizable amount at 7/1/X7 ($11,000) is expected to be collected within
60 days.
Property Taxes
Receivable—Delinquent
BB 17,000
Allowance for
Uncollectibles—Delinquent
NRV = 11,000
6,000 BB
12,000 Collected
Given 5,000
5,000
Write
off
5,000
1,000 Left over
Close out
89
Group Exercise:
Requirement 1 (Journal Entries)
To write-off uncollectible accounts and eliminate the
remaining $1,000 credit balance in the allowance account.
Property Taxes
Receivable—Delinquent
Allowance for
Uncollectibles—Delinquent
BB 17,000
6,000 BB
12,000 Collected
Given 5,000
5,000
Write
off
5,000
1,000 Left over
Close out
90
Group Exercise:
Requirement 1 (Journal Entries)
2. The city levied property taxes totaling $570,000. Of this amount,
$10,000 was estimated to be uncollectible. Collections during the
year totaled $525,000, of which $12,000 were associated with
property taxes levied in the prior year that had been declared
delinquent at the end of the prior year. All of the remaining property
taxes receivable at the beginning of the current year, totaling $5,000,
were written off as uncollectible. The net realizable amount at
7/1/X7 ($11,000) is expected to be collected within 60 days.
To transfer delinquent property taxes to specifically designated
accounts.
91
Group Exercise:
Requirement 1 (Journal Entries)
3. The estimated revenues for the year include a $44,000
entitlement from the federal government. During the year,
the city received $50,000.
To record entitlement from the federal government.
To record collection of entitlement.
92
Group Exercise:
Requirement 1 (Journal Entries)
4. The City’s income taxes, sales taxes, permits, licenses, and
other miscellaneous revenues totaled 225,000.
To record revenues accounted for on the cash basis.
93
Group Exercise:
Requirement 1 (Journal Entries)
5. Encumbrances outstanding at the beginning of the year
totaled $60,000. The goods and services related to these
encumbrances were received along with invoices for $58,000.
To reverse the 6/30/X7 appropriation of fund balance for
encumbrances outstanding.
To reestablish budgetary control over encumbrances
outstanding at 6/30/X7.
94
Group Exercise:
Requirement 1 (Journal Entries)
5. Encumbrances outstanding at the beginning of the year
totaled $60,000. The goods and services related to these
encumbrances were received along with invoices for $58,000.
To cancel encumbrances of $60,000 upon receipt of goods and
services totaling $58,000.
To record expenditures of $58,000 for goods and services.
95
Group Exercise:
Requirement 1 (Journal Entries)
6.
Purchase orders and contracts totaling $380,000 were entered into
during the year. For $340,000 of this amount, invoices that totaled
$336,000 for services and goods were received. The city generally
allows encumbrances outstanding at year-end to lapse but
reappropriates the amounts in the following year to honor the
encumbrances. Of the $336,000 invoiced, $75,000 relates to the
acquisition of supplies inventory. The city uses the consumption
method for accounting for supplies.
To record encumbrances for purchase orders issued and
contracts entered into during the year.
96
Group Exercise:
Requirement 1 (Journal Entries)
6.
Purchase orders and contracts totaling $380,000 were entered into
during the year. For $340,000 of this amount, invoices that totaled
$336,000 for services and goods were received. The city generally
allows encumbrances outstanding at year-end to lapse but
reappropriates the amounts in the following year to honor the
encumbrances. Of the $336,000 invoiced, $75,000 relates to the
acquisition of supplies inventory. The city uses the consumption
method for accounting for supplies.
To cancel encumbrances of $340,000 upon receipt of goods and services
totaling $336,000.
To record expenditures of $261,000 including supplies inventory of $75,000, the
total of which was previously encumbered for $340,000. We will record any
remaining Inventory at the end of the period as per the consumption method. 97
Group Exercise:
Requirement 1 (Journal Entries)
7. Payroll and other items not involving the use of purchase
orders and contracts totaled $270,000. This amount does
not include interfund billings.
To record expenditures for items not previously encumbered
(other than amounts relating to interfund billings).
8. Cash disbursements (not including payments to other
funds) totaled $664,000.
To record cash disbursements other than interfund
disbursements.
98
Group Exercise:
Requirement 1 (Journal Entries)
9. The Auto Repair internal service fund was discontinued as
determined by the city council at the beginning of the year.
The actual amount disbursed to the General Fund when the
fund was discontinued was $22,000.
To record transfer received from the Motor Pool Internal
Service Fund, which was discontinued.
10. A payment was made for $30,000 to the Electric Utility
Enterprise Fund to make up its operating deficit, which had
originally been estimated to be $35,000.
To record payment of transfer to the Electric Utility
Enterprise Fund ($5,000 under $35,000 budgeted amount).
99
Group Exercise:
Requirement 1 (Journal Entries)
11. A $20,000 payment was made to a Capital Projects fund to
cover a portion of street improvements (which was exactly
the amount budgeted).
To record payment of transfer to a Capital Projects Fund.
100
Group Exercise:
Requirement 1 (Journal Entries)
12. The Electric Utility Enterprise fund billed the city for a total
of $28,000 for electricity used by the city and supplied by
the Electric Utility. The cash disbursements throughout the
year for periodic billings totaled $24,000.
To record as expenditures electricity purchased from the
Electric Utility Enterprise Fund (a quasi-external transaction).
To record payments made to the Electric Utility Enterprise
Fund for electricity purchased.
101
Group Exercise:
Requirement 1 (Journal Entries)
13. The City disbursed $79,000 to the City Center for the
Performing Arts Enterprise Fund as a loan. The repayment
is expected in three years.
To record advance to Center Performing Arts Enterprise
Fund (repayable in three years).
102
Group Exercise:
Requirement 1 (Journal Entries)
14. A physical count of the supplies inventory at year-end
indicates that the balance decreased from $44,000 to
$41,000 during the year.
Supplies Inventory
BB 44,000
Expenditures
Inv. 75,000
EB 41,000
Fund Balance—
Non-spendable
Fund Balance—Unassigned
44,000 BB
41,000 EB
103
Group Exercise:
Requirement 1 (Journal Entries)
14. A physical count of the supplies inventory at year-end
indicates that the balance decreased from $44,000 to
$41,000 during the year.
Note: Supplies purchased during the year totaled $75,000 and
have already been expensed as indicated in #6. Moreover,
physical inventory decreased $3,000 from the beginning of the
year.
Note: This entry changes the amount set aside in the fund
balance for inventory to reflect the decrease in inventory from
the prior period.
104
Group Exercise:
Requirement 2 (Encumbrances Closing Entries)
ENCUMBRANCES
40,000
Fund Balance—Unassigned
BUGETARY FUND BALANCE
ASSIGNED FOR
ENCUMBRANCES
40,000
Fund Balance—
Assigned for Encumbrances
105
Group Exercise:
Requirement 2 (Encumbrances Closing Entries)
To close encumbrances outstanding at year-end by reversing
the entry that previously recorded them (see #6).
To record the actual fund balance reserve account to
indicate the portion of year-end fund balance segregated for
expenditure upon vendor performance.
106
Group Exercise:
Requirement 2 (Budget Closing Entry)
To reverse the entry previously made to record the legally
adopted annual operating budget.
107
Group Exercise:
Requirement 2 (Closing Operating Accounts)
Revenues—
Property Tax
X
Revenues—
Entitlements
560,000 #2
44,000 #3
1,000 #2
6,000 #3
561,000
X
50,000
Other Financing
Sources—Trans. In
Expenditures
22,000 #9 #5 58,000
#6 336,000
#7 270,000
#12 28,000
#14 3,000
X
22,000
695,000
X
Revenues—
Other
225,000 #4
X
225,000
Other Financing
Uses—Transfers Out
#10 30,000
#11 20,000
50,000
X
108
Group Exercise:
Requirement 2 (Closing Operating Accounts)
Revenues—Property Taxes
Revenues—Entitlements
Revenues—Other
Other Financing Sources—Transfer In
Expenditures
Other Financing Uses—Transfer Out
Unassigned Fund Balance
To close the actual revenues, expenditures, and other financing
uses into Unassigned Fund Balance.
109
Group Exercise: Requirement 2 (Statement of
Revenues, Expenditures, and Changes in Fund Balance)
Variance
Budget
Actual
Revenues:
Property taxes ($560,000 + $1,000)
Intergovernmental entitlement
Miscellaneous
Total Revenues
Expenditures:
Excess of Revenues over Expenditures
Favorable
(Unfavorable)
$570,000)
44,000)
206,000)
$820,000)
$561,000)
50,000)
225,000)
$836,000)
$(9,000))
6,000)
19,000)
$16,000)
720,000)
$100,000)
695,000)
$141,000)
25,000)
$41,000)
$25,000)
$22,000)
$(3,000)
(35,000)
(20,000)
$(30,000)
(30,000)
(20,000)
$(28,000)
5,000)
0)
$2,000)
$70,000)
200,000)
$270,000)
$113,000)
200,000)
$313,000)
$43,000)
0)
$43,000)
Other Financing Sources (Uses):
Transfer in from Auto Repair Internal Service Fund
Transfers Out—
to Electric Utility Enterprise Fund
to Capital Projects Fund
Total Other Financing Sources (Uses)
Excess of Revenues over Expenditures
and Other Financing Uses:
Fund Balance – 7/1/X7
Fund Balance – 6/30/X8
Note:
)
The large favorable variance is attributable primarily to encumbrances of $40,000
outstanding at year-end that will be reflected as expenditures in the following year and
a decrease in supplies inventory of $3,000.
110
Group Exercise:
Requirement 4 (Fund Balance Summary)
Fund Balance:
Nonspendable:
Supplies Inventory
Spendable:
Assigned for
Governmental Services
Unassigned
Total Fund Balance
$ 41,000
40,000
232,000
$ 313,000
111
Learning Objective 17-8
Make calculations and record
journal entries for basic
interfund activities.
112
Interfund Activities
 Interfund Activities: resource flows between
fund entities.
 Governmental accounting requires the separate
maintenance and reporting of interfund items.
 GASB 34 establishes four types of interfund
activities:
1. Interfund loans
2. Interfund services provided and used
3. Interfund transfers
4. Interfund reimbursements
113
Interfund Transactions and Transfers
FIGURE 17-6 Interfund Transactions and Transfers
Item
1. Interfund loan
2. Interfund
service provided
and used
3. Interfund
transfer
4. Interfund
reimbursement
Entry in General Fund
Entry in Other Fund
Due from Internal Service Fund
4,000
Cash
Cash
4,000
Due from Internal Service Fund
Expenditures
Due to Internal Service Fund
Due to internal service Fund
Cash
Other Financing Uses Transfer Out to Capital
Projects Fund
Cash
Cash
4,000
4,000
100
100
100
100
10,000
10,000
3,000
Expenditures
3,000
INTERNAL SERVICE FUND:
Cash
Due to General Fund
Due to General Fund
Cash
INTERNAL SERVICE FUND:
Due from General Fund
Charge for Services
Cash
Due from General Fund
CAPITAL PROJECTS FUND:
Cash
Other Financing
Sources - Transfer In
from General Fund
CAPITAL PROJECTS FUND:
Expenditures
Cash
4,000
4,000
4,000
4,000
100
100
100
100
10,000
10,000
3,000
3,000
114
Interfund Loans
 Loans must be repaid, usually within one
year, or before the end of the fiscal period.
 Not shown on a fund’s statement of
revenues, expenditures, and changes in
fund balance.
 All loans must be shown on the balance
sheet as payables or receivables.
115
Interfund Loans: Example
Assume that Barb City’s general fund loans the internal service fund
$4,000 for two months. The general fund reports a receivable for the
amount of the loan until it is repaid.
FIGURE 17-6 Interfund Transactions and Transfers
Item
1. Interfund loan
Entry in General Fund
Due from Internal Service Fund
4,000
Cash
Cash
4,000
Due from Internal Service Fund
2. Interfund
service
provided and
used
Expenditures
Due to Internal Service Fund
Due to internal service Fund
Cash
3. Interfund
transfer
Other Financing Uses Transfer Out to Capital
Projects Fund
Cash
4. Interfund
reimbursement
Entry in Other Fund
Cash
4,000
4,000
100
100
100
100
10,000
10,000
3,000
Expenditures
3,000
INTERNAL SERVICE FUND:
Cash
Due to General Fund
Due to General Fund
Cash
INTERNAL SERVICE FUND:
Due from General Fund
Charge for Services
Cash
Due from General Fund
CAPITAL PROJECTS FUND:
Cash
Other Financing
Sources - Transfer In
from General Fund
CAPITAL PROJECTS FUND:
Expenditures
Cash
4,000
4,000
4,000
4,000
100
100
100
100
10,000
10,000
3,000
3,000
116
Interfund Services Provided and Used
 Transactions that would be treated as revenue,
expenditures, or expenses if they involved parties
external to the governmental unit.
 Still reported as revenue, expenditures, or expenses but
differently.
 Examples:
 The general fund purchases goods or services from an
internal service or enterprise fund.
 Payments are made to the general fund from the
enterprise fund for fire and police protection.
117
Interfund Services Provided and Used: Example
Assume that Barb City’s general fund uses an auto from the city motor
pool. The motor pool operates as an internal service fund. The general
fund is billed $100 based on mileage and pays the bill 30 days later.
FIGURE 17-6 Interfund Transactions and Transfers
Item
1. Interfund loan
Entry in General Fund
Due from Internal Service Fund
4,000
Cash
Cash
4,000
Due from Internal Service Fund
2. Interfund
service
provided and
used
Expenditures
Due to Internal Service Fund
Due to internal service Fund
Cash
3. Interfund
transfer
Other Financing Uses Transfer Out to Capital
Projects Fund
Cash
4. Interfund
reimbursement
Entry in Other Fund
Cash
4,000
4,000
100
100
100
100
10,000
10,000
3,000
Expenditures
3,000
INTERNAL SERVICE FUND:
Cash
Due to General Fund
Due to General Fund
Cash
INTERNAL SERVICE FUND:
Due from General Fund
Charge for Services
Cash
Due from General Fund
CAPITAL PROJECTS FUND:
Cash
Other Financing
Sources - Transfer In
from General Fund
CAPITAL PROJECTS FUND:
Expenditures
Cash
4,000
4,000
4,000
4,000
100
100
100
100
10,000
10,000
3,000
3,000
118
Interfund Transfers
 The general fund often transfers resources into another
fund for the receiving fund to use for its own operations.
 Interfund transfers are not expected to be repaid.
 Classified under “Other Financing Sources or Uses” in the
operating financial statement of the funds.
 Examples:
 A transfer of resources, such as cash or other assets, is
made from the general fund to an enterprise fund or
internal service fund that has an operating deficit that
must be eliminated.
 A transfer of resources from the general fund to a
capital projects fund is made to help finance new
construction.
119
Interfund Transfers: Example
Assume that Barb City’s general fund agrees to provide $10,000 to the capital projects fund
toward the construction of a new library. The Transfer Out account in the general fund is
closed to its Unassigned Fund Balance at the end of the fiscal period. The capital projects
fund also closes its Transfer In account at the end of the fiscal period to its Unassigned Fund
balance. These interfund transfers are not expected to be repaid.
FIGURE 17-6 Interfund Transactions and Transfers
Item
1. Interfund loan
Entry in General Fund
Due from Internal Service Fund
4,000
Cash
Cash
4,000
Due from Internal Service Fund
2. Interfund
service
provided and
used
Expenditures
Due to Internal Service Fund
Due to internal service Fund
Cash
3. Interfund
transfer
Other Financing Uses Transfer Out to Capital
Projects Fund
Cash
4. Interfund
reimbursement
Entry in Other Fund
Cash
4,000
4,000
100
100
100
100
10,000
10,000
3,000
Expenditures
3,000
INTERNAL SERVICE FUND:
Cash
Due to General Fund
Due to General Fund
Cash
INTERNAL SERVICE FUND:
Due from General Fund
Charge for Services
Cash
Due from General Fund
CAPITAL PROJECTS FUND:
Cash
Other Financing
Sources - Transfer In
from General Fund
CAPITAL PROJECTS FUND:
Expenditures
Cash
4,000
4,000
4,000
4,000
100
100
100
100
10,000
10,000
3,000
3,000
120
Interfund Reimbursements
 Reimbursing a fund’s expenditure or expense that was initially made
from the fund but that is properly chargeable to another fund.
 Initial payments are sometimes made either because of improper
classification to the wrong fund or for expediency within the
governmental entity.
 Recorded as a reduction of the expenditure in the fund initially
recording the expenditure and a recording of the expenditure in the
proper fund for the appropriate amount.
 Examples:
 The general fund initially records and pays an expenditure
properly chargeable to the special revenue fund, and the special
revenue fund subsequently reimburses the general fund.
 The general fund records and pays for an expenditure to
provide preliminary architectural work on the planning for a
new sports arena. The sports arena enterprise fund later
reimburses the general fund.
121
Interfund Reimbursements: Example
Assume that Barb City’s general fund recorded a $3,000 expenditure for a bill
from outside consultants that is later discovered to be properly chargeable to the
capital projects fund. Upon notification, the capital projects fund reimbursed the
general fund and properly recorded the expenditure in its fund.
FIGURE 17-6 Interfund Transactions and Transfers
Item
1. Interfund loan
Entry in General Fund
Due from Internal Service Fund
4,000
Cash
Cash
4,000
Due from Internal Service Fund
2. Interfund
service
provided and
used
Expenditures
Due to Internal Service Fund
Due to internal service Fund
Cash
3. Interfund
transfer
Other Financing Uses Transfer Out to Capital
Projects Fund
Cash
4. Interfund
reimbursement
Entry in Other Fund
Cash
4,000
4,000
100
100
100
100
10,000
10,000
3,000
Expenditures
3,000
INTERNAL SERVICE FUND:
Cash
Due to General Fund
Due to General Fund
Cash
INTERNAL SERVICE FUND:
Due from General Fund
Charge for Services
Cash
Due from General Fund
CAPITAL PROJECTS FUND:
Cash
Other Financing
Sources - Transfer In
from General Fund
CAPITAL PROJECTS FUND:
Expenditures
Cash
4,000
4,000
4,000
4,000
100
100
100
100
10,000
10,000
3,000
3,000
122
Overview of Accounting and Financial
Reporting for the General Fund
123
Overview of Accounting and Financial
Reporting for the General Fund
124
Conclusion
The End