Chapter Eleven

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Chapter Eleven
Accounting for State and Local Governments (Part
1)
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Governmental Accounting

• Focuses on financial reporting for non-profit
  governmental agencies.
• Many concepts are similar to financial
  accounting, but terminology and procedures
  differ.
• Governmental Accounting Standards Board (GASB)
  generates standards.

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Governmental AccountingUser Needs

• In Concepts Statement 1, GASB identified 3
  basic groups of users of governmental accounting
  information
• Citizenry
• Legislative and oversight bodies
• Investors and creditors

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GASB Statement No. 34
Requires the production of two sets of statements
Government-wide Financial Statements
Fund-Based Financial Statements
Reports all revenues and all costs of providing
services each year and all resources available to
the governmental unit.
Shows restrictions on the use of resources and
measures, in the short run, revenues and expenses
from certain activities.
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Reporting Diverse Governmental Activities - Fund
Accounting

• Governmental units have many different types of
  activities.
• No common motivation links these activities.
• Therefore, each activity operates
  quasi-independent, self-balancing sets of
  accounts called funds.

• Examples include
• Public Safety
• Sanitation
• Health Welfare
• Education
• Parks Recreation
• Judicial System
• Water and Sewer
• Employee Pensions

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Accountability and Governmental Accounting

• Governmental Accounting Statements attempt to
  answer 3 questions related to accountability

Where did the financial resources come from?
What amount of financial resources is presently
held?
Where did the financial resources go?
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Fund Accounting Classification

• All funds fall into one of three broad
  classifications.

Governmental Funds
Proprietary Funds
Fiduciary Funds
Accounting for activities related to serving the
public.
Accounting for business-type activities.
Accounting for financial resources held for
others in a trustee capacity.
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Fund Accounting ClassificationGovernmental Funds
Let's Talk About Each Fund
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Governmental FundsGeneral Fund

• Used to account for all financial resources
  except those accounted for in other funds.
• In 2001, 60 of Baltimores governmental funds
  were accounted for in the General Fund.

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Governmental FundsSpecial Revenue Fund

• Expenditures are legally restricted.
• Revenues that must be spent for specific
  purposes.
• St. Paul, MN, requires that money received for
  the sale of zoo animals, must be spent to acquire
  NEW animals for the zoo.

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Governmental FundsCapital Projects Fund

• Used to account for costs to acquire or build
  major governmental facilities.
• The asset is not recorded in this account, but
  the funds to acquire or build it are accounted
  for here.

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Governmental FundsDebt Service Fund

• Used to account for financial resources collected
  to pay long-term liabilities and interest.
• In 2001, Birmingham reported paying out 11
  million in principal payments and 15 million in
  interest from its debt service funds.

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Governmental FundsPermanent Fund (Endowments)

• Used to account for funds donated to the
  government by external donors.
• In 2001, Dallas reported nearly 8 million in
  funds donated to take care of city parks.

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Fund Accounting ClassificationProprietary Funds
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Proprietary FundsEnterprise Fund

• Used to account for any government activity that
  is financed by user charges.
• An activity MUST be accounted for here if any one
  of the conditions below are met . . .

The the law requires costs to be recovered from
user fees.
Net revenues provide the security for the
activitys debts.
Fees are set high enough to recover costs..
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Proprietary FundsInternal Service Fund

• Used for any unit that provides services to the
  OTHER governmental departments.
• Inter-departmental fees are charged.
• Tennessee Tech University charges the departments
  for the use of University vehicles.

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Fund Accounting ClassificationFiduciary Funds
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Coverage of Fund Accounting Procedures
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Coverage of Fund Accounting Procedures
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Coverage of Fund Accounting Procedures
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Lets look at an overview of the Government-Wide
Statements.
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Government-Wide Financial Statements
Two separate statements are required Statement
of Net Assets Statement of Activities
The economic resources measurement focus requires
reporting of ALL assets and liabilities.
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Statement of Net Assets
Exh. 11-1
Note that we keep the Governmental Activities
separate from the Business-Type Activities.
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Statement of Net Assets
Exh. 11-1
Also note that this statement does not give
information about Fiduciary Funds
This is consistent with the economic resources
management focus which only includes assets and
liabilities that are available to use for
governmental purposes.
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Statement of Activities
Exh. 11-2
The net for a given function is determined
horizontally, while the totals for expenses and
revenues are determined vertically.
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Statement of Activities
Exh. 11-2
The general revenues are shown separately at the
bottom of the statement.
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(No Transcript)
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Fund-Based Financial Statements
Two separate statements are required Balance
Sheet Statement of Revenues, Expenditures, and
Changes in Fund Balance
Fund-Based statements include information on
fiduciary funds.
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Fund-Based Financial Statements
These statements will differ from the
Government-Wide financial statements for three
reasons.

• The proprietary funds are reported in a separate
  statement.
• The current financial resources measurement basis
  is used.
• The modified accrual accounting approach is used.

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Fund Accounting Balance Sheet Example
Exh. 11-3
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Fund Accounting Balance Sheet Example
Exh. 11-3
Internal Service Funds are included in separate
statements for Proprietary Funds. The current
financial resources measurement is
used. Modified accrual accounting is used.
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Fund Accounting Balance Sheet Example
Exh. 11-3

• Two criteria determine whether a fund is
  classified as major
• Total assets, liabilities, revenues, or
  expenditures are at least 10 of the
  corresponding total for all funds of the same
  category.
• Total assets, liabilities, revenues, or
  expenditures are at least 5 of the corresponding
  for all other funds combined.

Note that the statement has a separate column for
the General Fund and for each fund identified as
a major fund.
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Statement of Revenues, Expenditures, Changes in
Fund Balances - Example
Exh. 11-4
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Statement of Revenues, Expenditures, Changes in
Fund Balances - Example
Exh. 11-4
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Lets look at the accounting procedures for the
Governmental Accounts for both the Fund-Based and
Government-Wide Statements.
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Recording Budgetary Entries

• Purposes of the budget, per the GASB
• Expresses public policy.
• Serves as an expression of financial intent.
• Provides control by establishing spending limits.
• Offers a means of evaluating performance.

Budget information for the General Fund and for
each of the major Special Funds must be
presented.
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Recording Budgetary Entries
For example, assume a town enacts a motel excise
tax to promote tourism and conventions. For
2004, the tax is expected to generate 490,000
in Special Revenues. Of the total, 200,000 is
designated for salaries, 30,000 for utilities,
80,000 for advertising, and 90,000 for supplies.
Prepare the journal entry to record the Special
Revenue Fund budget.
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Encumbrances

• In a governmental unit, purchase commitments and
  contracts are recorded, even though they may not
  yet represent liabilities.
• A recorded commitment or contract is called an
  encumbrance.

Budget
Encumbrance
Actual
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Encumbrances

• For Fund-Based Financial Statements
• An entry is required to record the encumbrance.
• An entry is required when the bill is received.
• For Government-Wide Financial Statements
• No entry is required to record the encumbrance.
• An entry is required when the bill is received.

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Encumbrances ExampleFund-Based Statements

• Drye Township has budgeted office supplies for
  180,000 for 2004. On May 15, Drye Township
  places an order for 16,000 office supplies with
  Ye Olde Office Supplies.

Remember, this entry is only recorded for
Fund-Based Financial Statements.
Record the order in Drye Townships books.
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Encumbrances ExampleFund-Based Statements
On May 17, the supplies are received with a bill
for 15,680 (some of the items went on sale on
May 16, and the city was given the sale price).
Record the receipt of the supplies in Drye
Townships books for the Fund-Based Statements.
This is the account title typically used in
governmental accounting in place of Accounts
Payable.
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Encumbrances ExampleGovernment-Wide Statements
On May 17, the supplies are received with a bill
for 15,680 (some of the items went on sale on
May 16, and the city was given the sale price).
Record the receipt of the supplies in Drye
Townships books for the Government-Wide
Statements.
Note that with the Government-Wide Financial
Statements, no entry is necessary for the
encumbrances used with the Fund-Based Statements.
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Fund-Based StatementsFixed Assets

• While the expenditure for a fixed asset is
  usually recorded in the General Fund . . .
• . . . the fixed asset itself is recorded in
  the General Fixed Assets Account Group.
• Depreciation is not recorded in the
  governmental fund, since net income is not a
  concept relevant to governmental units.

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Government-Wide StatementsFixed Assets

• Historically, recording of fixed assets in the
  General Fixed Assets Account Group was optional.
• GASB Statement No. 34 requires a record of ALL
  capital assets in the Statement of Net Assets in
  the government-wide statements.
• Depreciation expense is recorded.
• Governments have 4 years to capitalize previously
  acquired assets.

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Recognition of RevenuesNonexchange Transactions

• Classifications
• Derived Tax Revenues
• Imposed Nonexchange Revenues
• Government-mandated Nonexchange Transactions
• Voluntary Nonexchange Transactions

For Government-Wide Statements, record the
revenues at the time of eligibility.
For Fund-Based Statements, record the revenues
when they become available for recognition.
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Issuance of Bonds

• Government-Wide Financial Statements
• Increase the Cash and the Debt.

• Fund-Based Financial Statements
• Increase Cash and Other Financing Sources.

Drye Township issues 50,000 in bonds for new
sidewalks.
Prepare the journal entry to record the bonds for
government-wide statements.
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Issuance of Bonds

• Government-Wide Financial Statements
• Increase the Cash and the Debt.

• Fund-Based Financial Statements
• Increase Cash and Other Financing Sources.

Drye Township issues 50,000 in bonds for new
sidewalks.
Prepare the journal entry to record the bonds for
fund-based statements.
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Payment of Long-Term Liabilities

• Government-Wide Financial Statements
• Record principle and interest as with GAAP.

• Fund-Based Financial Statements
• Record expenditures in the Debt Service Fund.

Drye Township makes a 10,000 payment on a loan
that includes 1,000 in interest.
Prepare the journal entry to record the loan
payment for government-wide statements.
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Payment of Long-Term Liabilities

• Government-Wide Financial Statements
• Record principle and interest as with GAAP.

• Fund-Based Financial Statements
• Record expenditures in the Debt Service Fund.

Drye Township makes a 10,000 payment on a loan
that includes 1,000 in interest.
Prepare the journal entry to record the loan
payment for fund-based statements.
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End of Chapter 11
Ms. Chairperson, what fund should we charge your
Paris trip to?
Since I voted for a balanced budget, lets charge
it to the Debt Service Fund.