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CHAPTER
24
GOVERNMENTAL
ACCOUNTING:
BASIC
PRINCIPLES AND
THE GENERAL
FUND
FOCUS OF CHAPTER 24
• The Governmental Accounting
Standards Board
• The Nature and Diversity of Activities
• The Objectives of Governmental
Financial Reporting
• Measurement Focus and Basis of
Accounting
• Basic Principles of the GASB
Codification
• The General Fund
The Governmental Accounting
Standards Board (GASB)
• 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).
Jurisdictional Arrangement
Between GASB and FASB
• GASB has primary responsibility for state
and local governmental units.
• State and local governmental units:
– Must follow FASB rules if GASB says
so.
– May elect to follow a FASB rule if
GASB has not addressed a specific
issue.
• If election is made, must use ALL
such rules.
The Government Finance Officers
Association (GFOA): Its Function
• GFOA:
– The equivalent of the AICPA for the
private sector.
– Publishes or provides the following to
enhance and promote professional
management of governmental units:
• Books, periodicals, monthly newsletter.
• Services to members.
• Software.
GAAFR: “The Blue Book ”
• Stands for Governmental Accounting,
Auditing, and Financial Reporting.
• Published by the GFOA.
• Neither prescribes nor authoritatively
interprets GAAP for governmental units.
• Provides detailed guidance (many
examples) for applying governmental
GAAP.
• Widely used by governmental units.
The Nature & Diversity
of Governmental Activities
• Absence of a Profit Motive:
– What to measure?
• Revenues & costs of providing
services?
• Inflows and outflows of all
resources?
• Inflows and outflows of certain
resources?
The Nature & Diversity
of Governmental Activities
• Extensive Legal Requirements:
– Constitutions, charters, and statutes
regulate governmental units.
– Some legal provisions pertain to
accounting and financial reporting
matters:
• Keeping separate books for certain
activities.
• Being audited by outside CPAs.
The Nature & Diversity
of Governmental Activities
• Diversity of Activities—Operations are
classified as:
– Governmental—these activities DO NOT
resemble commercial activities.
– Proprietary type—these activities DO
resemble commercial activities—Can
measure profitability or capital
maintenance.
– Fiduciary—holding and managing assets
owned by others (e.g., pension assets).
Use of Fund Accounting
• Fund Accounting:
– Accounting for certain activities separately
from all other operations.
– Fund defined: A fiscal and accounting
entity with a self-balancing set of
accounts (like a branch or a division of a
commercial entity).
– The General Fund: The main and largest
fund—records most routine transactions.
Use of Fund Accounting
• Fund Accounting (cont.):
– The difference between a fund’s
ASSETS and LIABILITIES is called:
Governmental and
Fiduciary-Type Funds
Proprietary
Funds
FUND BALANCE
Net Assets
Use of Fund Accounting
• Specific General Ledger Accounts Used:
Governmental and
Fiduciary-Type Funds
Fund Balance:
Reserved for encumbrances
Unreserved
Proprietary
Funds
Net Assets:
Invested in capital
assets, net of
related debt
Restricted
Unrestricted
The Objectives of Governmental
Financial Reporting
• GASB Concepts Statement No. 1—
Financial Reporting should:
– Assist in fulfilling accountability and
enabling users to assess accountability.
– Assist users in evaluating operating results.
• How has the financial condition
changed?
– Assist users in assessing service level
capabilities and ability to meet obligations
as they become due.
Measurement Focus And Basis
Of Accounting (MFBOA)
• Measurement Focus:
– WHAT flows to measure for operations.
• Basis of Accounting:
– WHEN should transactions and events be
recognized in the financial statements.
MFBOA: Proprietary
Activities
• Measure flow of ALL ECONOMIC
RESOURCES (both reporting levels):
– Present a Statement of REVENUES
and EXPENSES—reveals the CHANGE
IN THE ECONOMIC CONDITION.
– Use accrual basis of accounting (needed
in order to report ALL revenues &
expenses).
– Also present a Statement of Cash Flows.
MFBOA: Governmental
Activities
• Measure flow of CURRENT FINANCIAL
RESOURCES at the fund-based reporting
level:
– Present a Statement of Revenues and
Expenditures and Changes in Fund
Balance—reveals:
• Financial resources received and spent.
• Change in net financial resources available
for spending in the near future.
– Use modified accrual basis of accounting.
MFBOA: Current Financial
Resources
• Current Financial Resources—Typical Items:
– Cash, property tax receivables, prepaids, and
supplies inventories.
• Claims Against Current Financial Resources
—Typical Items:
– Wages, payroll taxes, payables to vendors,
and liabilities expected to be paid in the
NEAR FUTURE (typically within 60 days
after the year-end).
MFBOA: What is lacking at the
Fund-Based Reporting Level?
• A Statement of Revenues and Costs of
Providing Services—It would:
– Reveal the flow of all economic
resources.
– Be a “true” operating statement.
– Include ALL expenses—not just those
actually paid and expected to be paid
in the near future.
– Reveal the change in economic condition.
Basic Principles of the GASB
Codification: Grouped into 7
Categories
•
•
•
•
•
•
•
Accounting & Reporting Capabilities
Types of Funds
Basis of Accounting
Financial Reporting
Long-Term Liabilities
Capital Assets
Budgets and Budgetary Accounting
Category 1—
Accounting & Reporting Capabilities
Basic Principles:
• Present financial statements on a GAAP
basis.
• When conflicts exist between GAAP
BASIS and LEGAL REQUIREMENTS:
– Demonstrate legal compliance by
either:
• Additional schedules and narrative
explanations or
• A separate legal basis report.
Basic Principles: Category 2—
Types of Funds
• Governmental Funds:
– General Fund—Accounts for all
activities not required to be accounted
for in another fund.
– Special Revenue Fund—A clone of the
General Fund.
– Capital Projects Funds
– Debt Service Funds
– Permanent Funds
Basic Principles: Category 2—
Types of Funds & Account Groups
• Proprietary Funds:
– Enterprise Funds—Provides services
PRIMARILY to nongovernmental users
(city-owned utilities are prime example).
– Internal Service Funds—Provides
services SOLELY governmental
departments.
Basic Principles: Category 2—
Types of Funds & Account Groups
• Fiduciary Funds:
– Trust Funds:
• Pension (and similar) Trust Funds
• Investment Trust Funds
• Private-Purpose Trust Funds
(these activities do not benefit the
government unit)
– Agency Funds
Basic Principles: Category
3—Basis of Accounting
• Accrual Basis Funds:
– Proprietary funds—
• Enterprise Funds
• Internal Service Funds
– Fiduciary funds (3 Trust & 1 Agency)
• The two propriety funds and the three trust
funds have either a profitability or capital
maintenance orientation.
Basic Principles: Category
3—Basis of Accounting
• Modified Accrual Basis Funds:
– Governmental funds—
• General Fund
• Special Revenues Fund
• Capital Projects Funds
• Debt Service Funds
• Permanent Funds
Basic Principles: Category
3—Basis of Accounting
• Modified Accrual Basis Defined:
– REVENUES: Recognize in period in
which they become available and
measurable.
• Available means: Collectible within
the current period or soon enough
thereafter to be used to pay current
period liabilities.
Basic Principles: Category
3—Basis of Accounting
• Pointers on Recognizing REVENUES:
– Revenues STAND ALONE.
– Revenues are not “earned” as in the
private sector.
– The delivery of services requires
expenditures—but delivery does not
“generate” revenues.
Basic Principles: Category
3—Basis of Accounting
• Modified Accrual Basis Defined:
– EXPENDITURES: Recognize in the
accounting period in which the fund
liability is incurred.
• One exception exists for interest on
general long-term liabilities.
Basic Principles: Category
3—Basis of Accounting
• Pointers on recognizing EXPENDITURES:
– Liabilities are recorded when they are
incurred.
– The offsetting debit will usually be to:
• Expenditures (and thus reported in the
current operating statement) OR
• The Net Assets—Unrestricted account in
the GCA-GLTL g/l—the debit balance will
be reported as expenditures in a later
future period.
Basic Principles: Category 4(A)—
Financial Reporting—The Basics
• THE BALANCE SHEET—Display restrictions of
the fund balance in the following manner:
Fund Balance:
Reserved for encumbrances.... $ 33,000
Unreserved................................. 417,000
Total Fund Balance.............. $450,000
–
Numerous types of restrictions can exist—
thus several types of “reservations” are used.
Basic Principles: Category 4(A)—
Financial Reporting—The Basics
• THE OPERATING STATEMENT—Use the “allinclusive” format that includes the analysis of
the fund balance (modified accrual basis
funds) or net assets (accrual basis funds) for
the period:
– Revenues (inflows)
Expenditures (outflows)
Excess of Revenues over Expenditures
Fund Balance, 1/1/06
Fund Balance, 12/31/06
Basic Principles: Category 4(B)—
Financial Reporting—Bond Proceeds
• BOND PROCEEDS—For governmental
funds, report in a special category in the
operating statement as follows:
Revenues (inflows)
Expenditures (outflows)
Other Financing Sources and Uses:
Bond proceeds (an inflow)
Basic Principles: Category 4(B)—
Financial Reporting—Interfund Transfers
• INTERFUND ACTIVITIES—Report in one
of the following four categories (A and B
are reciprocal in nature; C & D are
nonreciprocal in nature):
– (A) Interfund loans.
– (B) Interfund services provided and
used.
– (C) Reimbursements.
– (D) Transfers (“ the last resort”).
Basic Principles: Category 4(B)—Financial
Reporting—Interfund Transfers
• (B) INTERFUND SERVICES PROVIDED
AND USED:
– Transactions in which one fund provides a
service to another fund.
– Such service would be provided by an
outside company if not provided internally.
Service provider reports REVENUES.
Service recipient reports EXPENDITURES
(or expenses if an accrual basis fund).
Basic Principles: Category 4(B)—
Financial Reporting—Interfund Transfers
• (C) REIMBURSEMENTS:
– Occur when a fund that is ultimately
responsible for a particular
expenditure or expense repays (or
agrees to repay) some other fund that
initially paid for the item on its behalf.
– Results in getting the expenditure or
expense recorded in the proper general
ledger.
Basic Principles: Category 4(B)—Financial
Reporting—Interfund Transfers
• (D) TRANSFERS:
– The default category: For transfers that
cannot be classified into one of the other
three categories (A, B, and C).
Report in the OTHER FINANCING SOURCES
AND USES section of the operating statement
for governmental funds.
Basic Principles: Category 4(B)—
Financial Reporting—Other Financing
Sources and Uses
• OTHER FINANCING SOURCES AND USES
category of the operating statement—limited
to the following types of transactions:
– Bond proceeds
– Transfers in
– Transfers out
– Proceeds from sale of general capital
assets
– Proceeds from capital lease
Basic Principles: Category 4(C)—
Financial Reporting—The CAFR
• Comprehensive Annual Financial
Report (CAFR):
– Includes 2 types of financial
statements:
• #1: Government-wide statements
(show the “big picture”)
• #2: Fund-based statements.
Basic Principles: Category 4(C) —
Financial Reporting—The CAFR
• The General Purpose Financial
Statements:
– GOVERNMENT-WIDE STATEMENTS:
Consists of two specific financial
statements designed to present an
OVERVIEW of financial position and
operations.
– FUND-BASED STATEMENTS: Consists
of seven specific financial statements
(narrow focus statements).
Basic Principles: Category 5—
Long-Term Liabilities
• Certain funds account for and report
long-term liabilities.
• Long-term liabilities not accounted for in a
specific fund is called General Long-Term
Liabilities:
– GLTL is accounted for in the GCA-GLTL
g/l.
– GLTL is the liability of the government as
a whole and not that of any specific
fund.
Basic Principles: Category 6—
Fixed Assets
• Certain funds account for & report capital
assets.
• Fixed assets not accounted for in a specific
fund are called General Capital Assets.
– They are reported in the GCA-GLTL g/l.
• Depreciation expense is not reported in
the operating statement of the
governmental funds—at the fund-based
reporting level.
Basic Principles: Category 7—
Budgets and Budgetary Accounting
• Appropriation: The statutory
authorization for spending a budgeted
amount during a coming year.
• 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.
Basic Principles: Category 7—
Budgets and Budgetary Accounting
• 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.
• SUCH ENTRIES HAVE NO EFFECT ON
REPORTED OPERATIONS.
Inventories of Supplies:
Two Alternative Ways to Handle
• Consumption Method:
– The preferred method—it parallels
business practice.
– The ACQUISITION of inventory is
treated as the conversion of
resources (debit Inventory).
– The USE of inventory is treated as an
outflow of resources (credit Inventory
and debit Expenditures or Expenses).
Inventories of Supplies:
Two Alternative Ways to Handle
• Purchases Method:
– The ACQUISITION of inventory is
treated as an outflow of resources
(debit Expenditures or Expenses).
The Operating Statement for
Governmental Funds: Classifications
• REVENUES:
– Always classified by source.
• EXPENDITURES:
– Always classified by character:
• Current, Capital Outlay, or Debt
Service
– And then by function (for example):
• Health, Welfare, Sanitation, Public
Safety
Measuring FLOWS: Cash
Only
STATEMENT OF CASH FLOWS
(simplified)
INFLOWS:
Property tax collections...................... $100,000
Parking meter receipts........................
5,000
Total CASH Inflows....................... $105,000
OUTFLOWS:
Payments to employees..................... $ 90,000
Payments to services vendors...........
11,000
Total CASH Outflows................... $101,000
Net CASH Inflow...................... $ 4,000
Measuring FLOWS:
Cash & Receivables Only
STATEMENT OF FLOWS OF
CASH & RECEIVABLES
(simplified)
INFLOWS (REVENUES):
Property tax assessments, net........... $120,000
Parking meter receipts.......................
5,000
Total Inflows................................... $125,000
OUTFLOWS:..
Payments to employees.................... $ 90,000
Payments to services vendors.......... 11,000
Total Outflows.............................. $101,000
Net Inflow..............................… $ 24,000
Measuring FLOWS: Cash, Receivables,
& Vouchers Payable Only
STATEMENT OF FLOWS OF CASH,
RECEIVABLES, & VOUCHERS PAYABLE
(simplified)
INFLOWS (REVENUES):
Property tax assessments, net................. $120,000
Parking meter receipts.............................
5,000
Total Inflows........................................ $125,000
OUTFLOWS (EXPENDITURES):
Employee salary costs incurred............. $ 96,000
Services provided by service vendors..
17,000
Total Outflows.................................... $113,000
Net Inflow.....................................… $ 12,000
End of Chapter 24
Time to Clear Things Up—Any
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