Advanced accounting 10th by a beams athony ch19

Chapter 19: Accounting for State
and Local Governmental Units –
Governmental Funds
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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Governmental Funds: Objectives
1. Prepare journal entries to record transactions in
governmental funds.
2. Learn about accounting methods unique to governmental
accounting – budgetary issues, encumbrance accounting,
and interfund transactions.
3. Determine the appropriate governmental fund to be used.
4. Prepare governmental fund financial statements.

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Objectives (cont.)
5. Convert governmental fund financial statements to
government-wide financial statements.

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Accounting for State and Local Governmental Units –
Governmental Funds

1: Record Transactions

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General Fund Transactions
General fund entries
• Start of fiscal year
• During the year and adjustments
• Closing entries
Sample entries follow. These are neither complete, nor selfreconciling.
Entries for interfund transfers and encumbrances are shown
later, with Objective 2.

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Beginning of Year
Reserve for encumbrances
90  
Reserve for encumbrances - prior year
 
90
Estimated revenues
3,500  
Appropriations
 
3,320
Estimated other financing uses  
115
transfers out
Unreserved fund balance
 
65
• $90 in outstanding purchase orders were included on last
year's balance sheet. These are reclassified at the start of
the current year.
• This year's approved budget is recorded. The difference
between expected sources of funds and expected uses of
funds is credited to the unreserved fund balance. Debit
unreserved fund balance if expected uses exceed sources,.
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Revenue and Collections

Taxes receivable - current
Allowance for uncollectibles – current
Revenues
Cash
Taxes receivable – current
Taxes receivable – delinquent
Allowance for uncollectibles – delinquent
Taxes receivable - delinquent

2,000
 
 
1,900
 
 
10
 

 
20
1,980
 
1,760
140
 
10

• Record revenues net of the estimated allowance.
• Separate receivable and allowance accounts are used for this year's taxes and all prior years' taxes.
• Write-offs occur when the taxes are deemed uncollectible. When they are late, they are simply moved from

current to delinquent (an adjustment).

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Expenditures (Without Encumbrance)
and Payments
Expenditures
Vouchers payable
Vouchers payable

200  
 

200
187  

Cash
 
187
• For Expenditures that are not encumbered first (no purchase
orders are placed for wages, utilities, and many other
items), they are recorded as they become due.
• These expenditures can be for current services or capital
outlays (like fixed assets)

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Supplies (without encumbrance)
Supplies inventory
Vouchers payable

55  
 

Expenditures
Vouchers payable

55
345  

 

345

• For supplies, this is the consumption method, like most
businesses use. Adjustments will recognize supplies used as
Expenditures.
• For the purchase method, Expenditures would be debited at
the time of purchase. At year end, an adjusting entry would
record Supplies inventory and Reserve for Supplies.
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Expenditures – Prior Year
Expenditures - prior year
Vouchers payable

85  
 

85

• When purchase orders for items are placed in one year and
received in the following year, the expenditure is classified
separately – for control purposes.
• These "expenditures" are still included with other
expenditures from this year on the Statement of revenues,
expenditures and changes in fund balance.

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Adjustments (1 of 2)
Expenditures
Supplies inventory

30  
 

Revenues

Deferred revenue

30
50  

 

50

• Supplies inventory (consumption method) is adjusted to its proper balance.
• Revenues that haven't been collected yet and are not expected to be collected in the next 60 days are reclassified. They will
be revenue next period when collected. A revenue item may be recorded as deferred revenue initially, if the timing of the
collection is known. Grants might be recorded this way.

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Adjustments (2 of 2)
Taxes receivable – delinquent
240  
Allowance for uncollectibles – current
20  
Taxes receivable – current
 
240
Allowance for uncollectibles –
 
20

delinquent
• At the end of the fiscal year (or tax year), amounts still due
from taxpayers are reclassified from current to delinquent. The
balance in the "current" accounts is moved to the "delinquent"
accounts. Prior delinquencies may still be in the delinquent
accounts.
• This does not write off any account or suspend collection
procedures. It empties the "current" accounts so that new
taxes can be recorded.
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Closing the Budget
Appropriations
Estimated other financing uses - transfers
out
Unreserved fund balance

3,320  
115  
65  

Estimated revenues
 
3,500
• The current year's budget is removed from the books at the
end of the year. This entry is a reversal of the initial entry
putting the budget on the books.

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Closing Current Year Accounts
Revenues

3,520  

Other financing sources - bond proceeds

45  

Expenditures

 

3,264

Encumbrances

 

50

Other financing uses - transfers out

 

164

Unreserved fund balance

 

87

• There may be multiple accounts for other financing sources
and uses (transfers in, proceeds from sales of fixed assets,
nonreciprocal transfers out).
• The unreserved fund balance is adjusted for difference between
total fund sources and total fund uses.
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Closing Prior Year Accounts
Reserve for encumbrances - prior year
Expenditures - prior year

90  
 

85

Unreserved fund balance
 

5
• "Reserve for encumbrances – prior year" is a temporary
account established at the start of the year and closed at
the end. The "reserve for encumbrance" account is part of
fund equity which is on the balance sheet.
• $90 represents the purchase order that was outstanding at
the end of last year, whereas $85 is the actual bill on the
goods received.

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Special Revenue Funds
• Accounts for revenue sources restricted by law or
administrative action, other than those for:
• Example: education, highway maintenance
• Accounting is similar to the general fund
•
•
•

Permanent funds (endowment)
Capital projects funds (construction)
Debt service funds (repayment of debt)

•
•

Usually does not use encumbrances
Budgetary accounts needed if the budget is legally adopted

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SRF - Grant Entries
Receive
cash

Cash
20  
Deferred revenue – grant
 
20
Meet
18  
require- Expenditures
ments
Vouchers payable
 
18
Deferred revenue – grant
18  
Revenue
 
18
• Special revenue funds are often used to account for federal

or other grants
• Revenue is recognized when eligibility requirements are
met, usually when the required expenditure is made
•

Could be before or after cash receipt

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Permanent Funds
Cash or Investments
500  
Revenues – addition to permanent
 
500
endowments
Cash
12  
Revenues – investment income
 
12
Expenditures
3  
Cash
 
3
• Used to account for funds on which only the earnings can be

expended. The earnings may or may not be restricted
• Its "Fund Balance" is a reserved fund balance.
• Unrestricted earnings are transferred to the general fund
• Restricted earnings may be spent in this fund or transferred
to a special revenue fund
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Capital Projects Funds
• Accounts for funds being used for major capital projects,
such as building new town offices
• Use encumbrance accounting for the construction contract
and for other purchase orders and commitments
• Spending on the project is an Expenditure
• Its main source of funds may be Other financing sources,
such as proceeds from bonds
•

Generally no budgetary accounts

•
•

Bond receipts are recorded at gross
Any premium received is generally transferred to the debt service fund

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CPF Entries (1 of 3)
Cash

302  

Other financing sources – Proceeds from
bonds
 
302
• At the approval of the capital project, a memo entry is
made
• $300 of bonds are issued for the project, and sell at a
premium of $2
Encumbrances

280  

Reserve for encumbrances
 
280
• A contract for the project is signed for $280
• The signed contract is recorded as an Encumbrance
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CPF Entries (2 of 3)
CPF

DSF

Other financing uses – nonreciprocal
2  
transfer to debt service fund
Cash
 
2
Cash
2  
Other financing sources – nonreciprocal
 
2
transfer from capital projects fund
• The premium from the bonds is transferred out of the
capital projects fund to the debt service fund. There it can
be applied to the upcoming interest payment or invested to
use later in repaying the bonds.
• The debt service fund would record the receipt

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CPF Entries (3 of 3)
Encumbrances

100  
Reserve for encumbrances
 
100
Expenditures
100  
Contracts payable
 
90
Contracts payable – retained percentage
10
• When the contractor bills the city, both entries are made
• The encumbrance (a portion of the contract) is
removed
• An expenditure is recorded for that amount
• The payable is usually split between the amount due now
and the percent that waits until successful contract
completion, assumed to be 10%
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CPF – Completing the Project
• Fixed assets:

– As construction continues, construction in
progress is recognized as part of fixed assets in
an amount equal to expenditures
– At completion, the construction in process

becomes the fixed asset, building, etc.

• Capital projects fund:

– Capital project fund closing entries and
statements are prepared each period with
ongoing construction
– At completion, any remaining cash is
transferred to debt service or general fund
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Debt Service Funds
• Accounts for the funds set aside and being used to repay
debt principal and interest
• Most inflows are transfers from other funds although there
will be investment revenue
• Interest and principal are recorded as expenditures and
payables when due.

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DSF Entries (1 of 2)
DSF

GF

Cash
16  
Other financing sources – nonreciprocal
 
16
transfer from general fund
Other financing uses – nonreciprocal
16  
transfer to debt service fund
Cash
 
16
• The debt service fund receives $16 from the general fund
for the upcoming amounts due on bonds: $2 interest and
$14 principal
• The general fund would record the payment to debt service

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