Ch06 governmental funds

Chapter 6: Accounting for State
and Local Governmental Units –
Governmental Funds


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.


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


Accounting for State and Local Governmental Units –
Governmental Funds

1: Record Transactions


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
self-reconciling.
Entries for interfund transfers and encumbrances are
shown later, with Objective 2.


Beginning of Year
90  

Reserve for encumbrances
Reserve for encumbrances - prior year
Estimated revenues
Appropriations

 

90

3,500  
 

3,320

Estimated other financing uses transfers out
115
 
• $90 in outstanding purchase orders were included on

Unreserved
fund balance
 
last
year's balance
sheet. These are reclassified
at the65
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,.


Revenue and Collections
Taxes receivable - current

2,000  

Allowance for uncollectibles – current

 

20

Revenues

 

1,980

Cash

1,900  

Taxes receivable – current

 

1,760

Taxes receivable – delinquent

 

140

Allowance for uncollectibles – delinquent

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).

Taxes receivable - delinquent

 

10


Expenditures (Without Encumbrance)
and Payments
200  

Expenditures
Vouchers payable
Vouchers payable

 

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)


Supplies (without encumbrance)
55  

Supplies inventory

Vouchers payable

 
345  

Expenditures
Vouchers payable

55

 

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.


Expenditures – Prior Year
85  

Expenditures - prior year
Vouchers payable

 

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.


Adjustments (1 of 2)
30  

Expenditures
Supplies inventory

 
50  

Revenues
Deferred revenue

30

 

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.


Adjustments (2 of 2)
Taxes receivable – delinquent

240  

Allowance for uncollectibles – current
Taxes receivable – current
Allowance for uncollectibles –

20  
 

240

• Atdelinquent
the end of the fiscal year (or tax year), amounts
still 20
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.


Closing the Budget
Appropriations
Estimated other financing uses - transfers
out
Unreserved fund balance
Estimated revenues

3,320  
115  
65  
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.


Closing Current Year Accounts
Revenues

3,520  
45  

Other financing sources - bond proceeds
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.

Closing Prior Year Accounts
90  

Reserve for encumbrances - prior year
Expenditures - prior year

 

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.


Special Revenue Funds
• Accounts for revenue sources restricted by law or
administrative action, other than those for:
• Permanent funds (endowment)
• Capital projects funds (construction)
• Debt service funds (repayment of debt)

• Example: education, highway maintenance
• Accounting is similar to the general fund
• Usually does not use encumbrances
• Budgetary accounts needed if the budget is legally
adopted


SRF - Grant Entries
Receive
cash

Cash

Meet
requirements

Expenditures

Deferred revenue – grant
Vouchers payable
Deferred revenue – grant

20  
 

20
18  

 

18
18  

• Special revenue funds are often used to account
18
 
forRevenue
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


Permanent Funds
Cash or Investments
Revenues – addition to permanent
endowments

500  
 

Cash
Revenues – investment income
Expenditures

500
12  

 

12
3  

• Used to account for funds on which only the earnings can be
expended.
Cash The earnings may or may not be restricted
 
3
• 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


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
• Generally no budgetary accounts
• Spending on the project is an Expenditure
• Its main source of funds may be Other financing
sources, such as proceeds from bonds
• Bond receipts are recorded at gross
• Any premium received is generally
transferred to the debt service fund

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  

280
 
• A contract for the project is signed for $280
• The signed contract is recorded as an Encumbrance
Reserve for encumbrances


CPF Entries (2 of 3)
CPF

Other financing uses – nonreciprocal
transfer to debt service fund
Cash

DSF

Cash

2  
 

2
2  

Other financing sources – nonreciprocal
transfer from capital projects fund
2
 
• 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


CPF Entries (3 of 3)
Encumbrances
Reserve for encumbrances
Expenditures

100  
 

100
100  

Contracts payable
 
90
• When
the contractor
the percentage
city, both entries are made
Contracts
payable – bills
retained
10
• 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%


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


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.


DSF Entries (1 of 2)
DSF

Other financing sources – nonreciprocal
transfer from general fund
GF

16  

Cash

Other financing uses – nonreciprocal
transfer to debt service fund

 

16
16  

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