Advanced financial accounting by baker chapter 17

17
Governmental
Entities:
Introduction
and General
Fund
Accounting
McGraw-Hill/Irwin

© 2009 The McGraw-Hill Companies, Inc. All rights reserved.


Overview
•

Governmental entities have operating
objectives different from those of
commercial entities; therefore,
governmental accounting is different from
accounting for commercial enterprises

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Overview
•

Nature of governmental entities:
1. Collect resources and make expenditures to
fulfill societal needs
2. Absence of profit motive except for some

activities
3. 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

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Overview
•

Nature of governmental entities:
4. Control mechanism - Use of comprehensive
budgetary accounting
5. Accountability for the flow of financial
resources is a chief objective
6. Typically are required to establish separate
funds to carry out various missions; each fund
is an independent accounting and fiscal entity

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Overview
•

Nature of governmental entities:
7. Many fund entities do not record fixed assets
or long-term debt in their funds

8. An important objective of governmental
financial reporting is accountability

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History of Governmental Accounting
•

History
– Before 1984, directed by the Municipal
Finance Officers Association (MFOA)
– In 1934, the first statement on local
governmental accounting 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

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History of Governmental Accounting
– 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”
– March 1979 – The National Council on
Governmental Accounting (NCGA) issued its
Statement No. 1, “Governmental Accounting
and Financial Reporting Principles” (NCGA 1)
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History of Governmental Accounting
•

1984 – Governmental Accounting
Standards Board (GASB) established
– 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 34
•

Established government-wide financial statements to be prepared
on the accrual basis of accounting and an array of fund-based
financial statements

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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

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Major Concepts of Governmental
Accounting
•

Elements of financial statements
– Each definition uses the central focus of a
resource, which is an item having a present
capacity to provide, directly or indirectly,
services for the governmental entity

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Major Concepts of Governmental

Accounting
•

Elements of a statement of financial condition:
1. Assets are resources with present service capacity
that the entity presently controls
2. Liabilities are present obligations to sacrifice
resources that the entity has little or no discretion to
avoid
3. A deferred outflow of resources is a consumption of
net assets that is applicable to a future reporting
period
4. A deferred inflow of resources is an acquisition of net
assets that is applicable to a future reporting period
5. Net position is the residual of all other elements
presented in a statement of financial condition
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Major Concepts of Governmental
Accounting
•

Elements of the resource flows statements:
1. An outflow of resources is a consumption of
net assets that is applicable to the current
reporting period
2. An inflow of resources is an acquisition of net
assets that is applicable to the current
reporting period

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Major Concepts of Governmental
Accounting
•

Expendability of resources versus capital
maintenance objectives

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Major Concepts of Governmental
Accounting
•

Definitions and types of funds
– To accomplish the objectives of the
governmental unit, the unit establishes a
variety of funds as fiscal and accounting
entities of the governmental unit
– A fund is 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
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Major Concepts of Governmental
Accounting
•

•

Each governmental fund has its own asset
and liability accounts and its own revenue
and expenditures accounts
The term expenditures refers to decreases
in net financial resources available under
the current financial resources
measurement focus

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Major Concepts of Governmental
Accounting
•

Types of funds
– Governmental Funds:
•

Used to 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 funds

– Proprietary Funds
•

The objective is to recover the unit’s costs through user charges

– Fiduciary Funds

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Major Concepts of Governmental
Accounting

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Major Concepts of Governmental
Accounting

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Financial Reporting of Governmental
Entities
•

The financial statements of a governmental

entity are presented for the reporting entity:
– The primary government
– Component units
– Other organizations that have a significant
relationship with the primary government

•

GASB 34 reporting model
– Fund-based financial statements
– Government-wide financial statements
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The Government Reporting Model

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Financial Reporting of Governmental
Entities
•

Governmental funds – financial statements:
– Balance sheet
– Statement of revenues, expenditures and
changes in fund balance

•

The five governmental funds use the current
financial resources measurement focus

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Financial Reporting of Governmental
Entities

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Financial Reporting of Governmental
Entities
•

Statement of revenues, expenditures, and
changes in fund balance
– Often called the operating statement of the
governmental funds

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Measurement Focus and Basis of
Accounting
•

The modified accrual basis is used in funds
that have a flow of current financial

resources measurement focus
– The five governmental funds have this focus

•

The accrual basis is used in funds that have
a flow of economic resources measurement
focus
– Proprietary funds and fiduciary funds have
this focus

•

The government-wide financial statements
are based on the accrual basis
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Measurement Focus and Basis of
Accounting
•

Basis of accounting—governmental funds
– Revenue is recorded in the accounting period
in which it is both measurable and available to
finance expenditures made during the current
fiscal period
– Expenditures are recognized in the period in
which the liabilities are both measurable and
incurred and are payable out of current

financial resources

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