advanced accounting 6e by jeter chaney chapter 17

Advanced Accounting

Jeter ● Chaney

Introduction to Fund Accounting

1

Prepared by Sheila Ammons, Austin Community College


Learning Objectives

•
•
•

Distinguish between a nonbusiness organization and a profit-oriented enterprise.

•
•

Understand the classification of revenues and other resource inflows for fund accounting.

Explain the role of fund accounting.
Distinguish among the concepts of revenues, expenses, and expenditures as used in profitoriented entities and as used for expendable fund entities.
Understand the classification of expenditures and other resource outflows for fund accounting.

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Learning Objectives

•
•
•
•

Describe the critical events in the use of financial resources of an expendable fund.
Explain how capital expenditures are recorded in an expendable fund.
Understand the role of a general fund.
Contrast the consumption and the purchases methods of accounting for inventories (and other
prepaid items).

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Fund Accounting
Fund Accounting
Accounting for nonbusiness organizations.

Nonbusiness Organizations
Economic Entities

Provide socially desirable service without regard to
financial gain.

Business Enterprises





Earn a return on investment.
Operate in a competitive market.
Face liquidity concerns.

4
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Classification of Nonbusiness Organizations
Five Major Classifications

– Governmental units.
– Hospitals and other health care providers.
– Colleges and universities.
– Voluntary health and welfare organizations.
– Other nonbusiness organizations (trade associations, professional associations, museums,
religious organizations, etc.)

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Distinctions between Nonbusiness Organizations and Profit-Oriented Enterprises

•

Distinctions

– Absence of primary goal to earn a profit.
– No equity interests.
– Seldom finance through charges to individuals who benefit from the service.
– Rely on political action or fund-raising campaigns.
– Income determination model generally not applicable.
– Restrictions or limitations on use of resources.

6
LO 1 Nonbusiness organizations versus profit-oriented enterprises.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Standards for Nonbusiness Organizations

LO 1 Nonbusiness organizations versus profit-oriented enterprises.
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Standards for Nonbusiness Organizations
GASB Conceptual Framework: Concept Statements
Number

Title

1

Objectives of Financial Reporting

2

Service Efforts and Accomplishments

3

Communication Methods

4

Elements of Financial Statements

5

Amendment of Statement Number 2

6

Measurement of Elements of Financial Statements

LO 1 Nonbusiness organizations versus profit-oriented enterprises.
8
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Fund Accounting

•Fund Accounting
–Designed primarily to meet internal reporting and control objectives.

–Provides a basis for determining the fiscal responsibility and status of the organization.
•Fund Entity Classification
– Expendable – Basic fund accounting concepts.
– Proprietary – Business type activity.
– Fiduciary - Agent or trustee.

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LO 2 The role of fund accounting.
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Fund Accounting
Expendable Fund Entities
Financial resources dedicated to a specified use.
Examples - Capital Projects or Debt Service fund.
Resources consist of cash and claims to cash.
Resources - Claims against resources = Fund balance.
Measurement focus is on flow of current financial resources.

Accounting Model

10
LO 3 Differences in applications of revenue, expense, and expenditures.
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Fund Accounting
Restricted and Unrestricted Fund Entities

•

•

Classification usually applicable to nonbusiness organizations other than governmental units.

•

“Unrestricted” refers to current financial resources that are available to carry out the primary or
general activities of the organization at the discretion of the governing board.

“Restricted” refers to resources that bear a legal restriction as to use imposed by parties outside
the organization.

11
LO 3 Differences in applications of revenue, expense, and expenditures.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Fund Accounting
Proprietary Fund Entities

•
•

Activities that are similar to business enterprises.
Examples:

– Electric or water utility by a municipality
– Rental of real estate by religious organization.
•

Focus on determination of net income, financial position, and cash flows.

12
LO 3 Differences in applications of revenue, expense, and expenditures.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Fund Accounting
Fiduciary Fund Entities
Trust and Agency funds:

•

Trust Fund – The government acts as trustee for an individual or organization.

– Pension trust fund.
•

Agency Fund – Accounts for resources of taxes, bonds, and other receipts held for individuals,
outside organizations, and/or other funds.

13
LO 3 Differences in applications of revenue, expense, and expenditures.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Fund Accounting
Budgetary Fund Entities (Governmental Funds)

•

•
•
•

Approved resource flows are incorporated into annual budgets.
Budgeted expenditures (that are enacted into law) are referred to as appropriations.
Approved budget may be recorded in the accounting records.
Budgetary account integration is useful in the control and administration of fund resources.

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LO 3 Differences in applications of revenue, expense, and expenditures.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Fund Accounting
Basis of Accounting
Basic Financial Statements

Government-Wide

Governmental Fund (expendable)



Nonfiduciary activities.



Current financial resources concept.



Short- and long-run information.



Modified accrual basis of accounting.



Economic resources measurement concept.



Revenues recognized when measurable and available.



Accrual basis of accounting.



Expenditures recorded when liability is incurred.

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LO 3 Differences in applications of revenue, expense, and expenditures.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Fund Accounting

Question
When used in fund accounting, the term “fund” usually refers to

a)
b)
c)
d)

A sum of money designated for a special purpose.
A liability to other governmental units.
The equity of a municipality in its own assets.
A fiscal and accounting entity having a set of self-balancing accounts.

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LO 3 Differences in applications of revenue, expense, and expenditures.
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Fund Accounting
Classification of Revenues
Classified by Fund and Major Revenue Source
Major Sources of Revenue











Property taxes

Income taxes
Sales and excise taxes
Gift and inheritance taxes
Fines and penalties
Gifts and donations





Sales of property
Charges for services
Interest earned on loans and investments

From federal, state, or local units:





Grants
Shared revenues
Payments in lieu of taxes

Forfeits
Licenses and permits

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LO 4 Classification of revenues.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Fund Accounting
Other Financing Sources

•

Debt issue proceeds are accounted for as “other financing sources.”

– Classify separately from revenue.
•

Interfund operating transfers are accounted for as “other financing sources,” or “uses.”

– These transfers do not represent an increase in expendable financial resources of the
organization as a whole.

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LO 4 Classification of other resource flows.
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Fund Accounting
Recognition of Revenue (Expendable Funds)

•
•

Revenue is ordinarily not recognized until it

1)
2)

can be objectively measured and
is available to finance expenditures of current period.

Property taxes usually meet both criteria when levied.

–)Available in the period levied
• Provide a basis for obtaining cash from tax anticipation notes
• Usually collected early in the subsequent period and thus are available to finance
current period operations.

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LO 4 Classification of revenues.
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Fund Accounting
Recognition of Revenue (Expendable Funds)
Revenue recognized when measurable and available.
When Recognized?
Property Taxes

Levied

Income Tax and Sales Tax

Returns are filed with payment

Fines and Forfeits

Collected

Sales of Property

Time of sale

Pledges

Time of pledge

Grants

May or may not at time authorized

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LO 4 Classification of revenues.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.


Fund Accounting
Classification of Expenditures and Other Resources Outflows

Match
Function

Drug Control

Character

Public Safety

Activity

Fire or Police Department

Object Class

Current Operating

Organizational Unit

Supplies or Salaries

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LO 5 Classification of expenditures.
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Fund Accounting
Transfers to Other Funds

•
•

Do not represent decreases in the expendable financial resources of the organization as a whole.

Classified separately from expenditures for financial reporting purposes.

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LO 5 Classification of expenditures.
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Fund Accounting
Fund Balance and Classification
GASB Statement No. 54:

–Significantly changed how fund balances are reported on

governmental fund financial

–Applies to all governmental funds: General, Special

Revenue, Debt Service, Capital

statements.

Projects, and Permanent.

–Does not affect the government-wide or accrual-based statements presentations.
–Does not change the amount of total fund balance on any fund statements.

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LO 6 Use of financial resources.
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.

Fund Accounting
Fund Balance and Classification
GASB Statement No. 54:

 Fund balance is reported from the perspective of the underlying resources within the fund.
 Fund balances are determined using a hierarchy of fund balance classifications
• based upon the extent to which governments are bound by constraints on resources
•

reported in the funds.

For all governmental funds other than the general fund, any remaining positive amounts are
classified as nonspendable, restricted, or committed.

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LO 6 Use of financial resources.
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Fund Accounting
Fund Balance and Classification

 Nonspendable: Includes amounts that cannot be spent
• Not in a spendable form (inventories or prepaid items)
• Legally or contractually required to be maintained intact

because they are either
(principal of a permanent fund)

 Restricted: Constraints placed on the use of resources are either
• Externally imposed by creditors (debt covenants)
• Grantors, contributors, or laws or regulations (of other governments)

25
LO 6 Use of financial resources.
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