Download budgetary fund balance

Essentials of Accounting for
Governmental and
Not-for-Profit Organizations
Chapter 4
Accounting for the General and
Special Revenue Funds
Copyright © 2015 McGraw-Hill Education. All rights reserved.
Chapter 4 – Learning objectives



Apply the modified accrual basis of accounting
in the recording of typical transactions of a
General and special revenue fund
Prepare closing entries and classify fund
balances
Prepare the fund-basis financial statements of
a General and special revenue fund
4-2
Review: Fund Accounting

The purpose of fund accounting is to
segregate those financial resources that
have constraints or limitations on their use
so that the government may demonstrate
compliance with those limitations.

The General Fund reports those resources not
subject to such restrictions.
4-3
GASB 54 – Fund Definitions
General Fund

The General Fund is used to account for
and report all financial resources not
accounted for and reported in another fund.
4-4
Purpose: General fund

Many resources have no limitations on their
use and do not require segregation. The
General Fund accounts for any resources
not reported in one of the other (limiteduse) funds.

Every general purpose government will have
one, and only one, General Fund.
4-5
GASB – Fund Definitions
Special Revenue Funds

Account for and report the proceeds of
specific revenue sources that are
restricted or committed (does not include
assigned) to expenditure for specified
purpose other than debt service or capital
projects.
4-6
Special Revenue Funds - Purpose

Special revenue funds are an example of a
fund established because of constraints
place on the use of government resources.

Note, however, that special revenue funds are
not used if the resources are required to be used
to acquire capital assets (capital projects funds)
or for the payment of interest and principal on
long-term debt (debt service funds).
4-7
Special revenue funds received
particular guidance from GASB:

Although other resources may supplement a
special revenue fund, assignment of resources
is not sufficient for the establishment of a
special revenue fund.

Further, if the government expects that a substantial portion of the
resources supporting a special revenue fund’s activities will no longer
be derived from restricted and committed revenue sources, the
government should discontinue the use of a special revenue fund and
report the fund’s remaining resources in the General Fund.
4-8
Review: Modified Accrual vs. Accrual

Accrual



Recognize revenues when earned
Match expenses against the revenues when resources or services are
used.
Modified Accrual

Recognize revenues when measurable and available


(available to pay this year’s bills— for example, property taxes received
within 60 days of year end)
Recognize expenditures when the liability is incurred — no attempt to
match to revenues, match to period of occurrence only

Exception — recognize interest and principal payments as expenditures
when DUE
4-9
Modified Accrual Revenue Cycle

Assume





Property tax for 2015 levied = $1,000,000;
$800,000 is collected in calendar year 2015
$120,000 is collected in January and February 2016
$80,000 is collected in March and April 2016
ENTRIES DURING 2015:

Record levy:
Taxes receivable 1,000,000
Revenue (tentative)
1,000,000

2015 collections
Cash

800,000
Taxes Receivable
800,000
Year end adjustment: Revenue
80,000
Deferred Revenue
80,000

(Property taxes expected to be collected more than 60 days after year end will be a 2016 revenue)
4-10
Modified Accrual Revenue Cycle

Assume





Property tax for 2015 levied = $1,000,000;
$800,000 is collected in calendar year 2015
$120,000 is collected in January and February 2016
$80,000 is collected in March and April 2016
ENTRIES DURING 2016:

Beginning of Year Entry:
Deferred Revenue
Revenue

80,000
80,000
2016 Collections:
Cash

200,000
Taxes Receivable
200,000
(Property taxes expected to be collected more than 60 days after year end will be a 2016 revenue)
4-11
Uncollectible amounts

An allowance for uncollectible taxes is
recorded at the time of a tax levy.

Since uncollectible amounts will not be available
to finance current expenditures, revenues are
effectively reduced by the amount of the estimate

Record levy:
Taxes receivable
1,075,000
Allowance for uncollectible taxes
Revenue (net of uncollectibles)
75,000
1,000,000
4-12
Write-offs of uncollectible amounts

The write-off of an uncollectible account
does not affect revenues or expenditures.
Allowance for uncollectible taxes
Taxes receivable
5,200
5,200
4-13
Modified Accrual Expenditure Cycle

Supplies are ordered at an estimated cost of $ 3,500
Supplies are received with an actual cost of $ 3,000 plus shipping of $ 250
Invoice from the supplies is paid

Journal Entries



Place Order
Receive Goods
Encumbrances
3,500
Budgetary Fund Balance Reserve for Encumbrances
Expenditures
3,250
Accounts Payable
Budgetary Fund Balance Reserve for Encumbrances
Encumbrances
Payment
3,500
Accounts Payable
Cash
3,250
3,500
3,500
3,250
3,250
4-14
Short-term Borrowing


Since governmental funds recognize obligations
requiring current financial resources to settle,
current borrowings are recorded in the same
manner as commercial businesses.
e.g. Short-term Tax anticipation notes
Cash
250,000
Tax Anticipation Note Payable
250,000
4-15
Repayment of Short-term
Borrowing

Repayment of principal of short-term oblgations
is not an expenditure, but the associated
interest is recorded as an expenditure

e.g. Short-term Tax anticipation notes
Tax Anticipation Note Payable
250,000
Interest Expenditure (6% for 3 months)
3,750
Cash
253,750
4-16
Interfund Transactions

Transactions between funds are of
particular interest to financial statement
preparers and users since failure to
properly report these transactions results in
two funds being misstated.

Additionally, since most of these transactions are
eliminated in the government-wide statements, it
is particularly important that they be identified in
the accounts of the affected funds.
4-17
Interfund Transactions - Types

Interfund Transactions may be



Interfund Services (Quasi-external) transactions
Reimubursements
Transfers
4-18
Interfund Services

Sometimes called quasi-external transactions,
these are transactions (typically sales of services)
between funds and are exchange-like
transactions

They are treated as revenue and expense or
expenditure of the affected funds


Example, sale of electricity by the Electricity Enterprise fund
to the General Fund
The sale would be treated as revenue for Enterprise Fund
and expenditure for General Fund
4-19
Reimbursements

Initially, one fund
pays for a good or
service for another
fund.

When the reimbursement is made, the
expense or expenditure
is recorded in the correct
fund and the initial
(incorrect) expense or
expenditure is reversed
4-20
Reimbursements

Assume the government receives a bill for
engineering services in the amount of $10,000; and it
is initially recorded in the General Fund as follows:
GF: Expenditures
Accounts Payable

10,000
10,000
Later, it is discovered that $2,000 of these services
were for the Electricity Enterprise fund. The following
would be recorded:
GF: Due from Electricity 2,000
Expenditures
EF: Expenditures
2,000
Due to General Fund
2,000
2,000
4-21
Transfers

Any assignment of resources from one fund
to another where there is no expectation that
the amounts will be repaid.


Transfers Into a Fund are considered Other
Financing Sources
Transfers Out are considered Other Financing Uses

Recurring Transfers (such as for debt service) are
commonly built into the General Fund budget
4-22
Special Items

Special items are significant transactions
that are either unusual or infrequent but
within the control of management.


Example: sale of a capital asset
The proceeds of capital assets are designated as
special items:
Cash
77,000
Special Item – Proceeds of sale of capital assets 77,000
4-23
The Closing Process

Closing process for government type
funds needs to accomplish the
following:

Close budgetary accounts

Close Revenues, expenditures,
encumbrances, and related other financing
sources or uses to Fund Balance
4-24
Closing the budget

The budgetary accounts (considering any
budget revisions) are closed to budgetary
fund balance
Appropriations
Estimated Other Financing Uses
Budgetary Fund Balance
Estimated Revenues
Estimated Other Financing Sources
11,700,000
250,000
550,000
12,000,000
500,000
4-25
Closing encumbrance accounts

Encumbrance accounts are closed at year end and reestablished in the next year.
December 31, 2015
Budgetary Fund Balance – Reserve
for Encumbrances
500,000
Encumbrances
500,000
To close encumbrances at the end of 2015
………………………………………………………………………………….
January 1, 2016
Encumbrances
500,000
Budgetary Fund Balance -Reserve for Encumbrances
500,000
To re-establish encumbrances at the beginning of 2016
Closing activity accounts

Activity accounts are closed to fund
balance:
Revenues
Other Financing Sources
Special Item: Sale of capital assets
Fund Balance
Expenditures
11,900,000
223,000
77,000
1,200,000
11,000,000
4-27
Fund balance - presentation

Fund Balance is presented within the five
categories of fund balance:
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Nonspendable
Restricted
Committed
Assigned
Unassigned (General Fund residual)
4-28