Essentials of Accounting for Governmental and Not-for-Profit Organizations

1. Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 4: Accounting for the General and Special Revenue Funds

2. Overview of Chapter 4 • Accounting for Nonexchange Transactions • Modified Accrual Basis • Common Entries during the year • The closing process

3. Exchange vs Nonexchange Transactions GASB Statement No. 33 indicates the timing will be different for • Exchange and exchange-like transactions • These are like true sales — you pay a certain amount and receive equivalent value in return • nonexchange transactions • For taxes and certain other transactions you pay more or less than the value of services received

4. Revenue resulting from exchange transactions is recognized in the period(s) that it is earned For example, revenue from the rental of government property would be recognized over the term of the lease Exchange Transactions

5. Types of Nonexchange Transactions • Derived tax revenues sales, income, motor fuel taxes • Imposed nonexchange revenues property tax, special assessments, fines/forfeits • Government mandated (expenditures) federal requires lower level expenditures • Voluntary nonexchange transactions grants, donations

6. Revenue Recognition for Derived Taxes Derived Tax: Taxes assessed on exchange transactions. These include sales taxes, income taxes, and motor fuel taxes. • Tax revenue on derived tax revenues is recognized when the underlying transaction occurs (for example, record sales taxes as retail sales are made) or when the tax is received by the government, whichever is earlier.

7. Revenue Recognition for Imposed Taxes • Imposed Tax Revenues Taxes and fines imposed by governments but not related to specific transactions. These include property taxes, special assessment property taxes, and fines and forfeits. • Recognize the asset (generally a tax receivable) when an enforceable claim exists or when the tax is received by the government, whichever is earlier. • Revenues for property taxes should be recognized in the period for which the taxes are levied.

8. Revenue Recognition for Intergovernment Grants • Intergovernment Grants These revenues result from the Federal or State Government making grants to other governments. The grants are given to support specific activities. • Recognize the revenue when the eligibility requirements are satisfied.

9. Revenue Recognition for Voluntary Grants • Voluntary Grants: Typically these are resources provided by individuals to support specific activities (e.g. expanding the book holdings at the library). • Recognize the revenue when the eligibility requirements are satisfied.

10. Review: ModifiedAccrual vs. Accrual • Accrual • Recognize revenues when earned • Match expenses against the revenues • Modified Accrual • Recognize revenues when measurable and available (available to pay this year’s bills— for example, property taxes received within 60 days of year end) • Recognize expenditures when the liability is incurred — no attempt to match to revenues, match to period of occurrence only • Exception — recognize interest and principal payments as expenditures when DUE

11. Modified Accrual Revenue Cycle • Property tax for 2004 levied = $1,000,000; $800,000 is collected in calendar year 2004 $120,000 is collected in January and February 2005 $80,000 in collected in March and April 2005 • ENTRIES DURING 2004: • Record levy: Taxes receivable 1,000,000 • Revenue (tentative) 1,000,000 • 2004 collections Cash 800,000 • Taxes Receivable 800,000 • Year end adjustment: Revenue 80,000 • Deferred Revenue 80,000 • (Receipts of property taxes over 60 days after year end will be a 2005 revenue)

12. Modified Accrual Expenditure Cycle Supplies are ordered at an estimated cost of $ 3,000 Supplies are received with an actual cost of $ 3,000 plus shipping of $ 250 Invoice from the supplies is paid • Journal Entries • Place Order Encumbrances 3,000 Budgetary Fund Balance Reserve for Encumbrances 3,000 Receive Goods Expenditures 3,250 Accounts Payable 3,250 Budgetary Fund Balance Reserve for Encumbrances 3,000 Encumbrances 3,000 Payment Accounts Payable 3,250 Cash 3,250

13. Quasi-External Transactions • These are between funds but they are exchange-like transactions with an objective basis for determining the amount • Treated as revenue and expense or expenditure • Example, sale of electricity by the Electricity Enterprise fund to the General Fund • Would be treated as revenue for Enterprise Fund and expenditure for General Fund • GASB 34 calls these “Interfund Services Provided & Used” instead of quasi-external

14. Reimbursements • Assume the UPS delivers a $10,000 shipment of supplies which are initially recorded in the General Fund as follows: GF: Expenditures $10,000 Liability $10,000 • Later, it is discovered that $2,000 of these supplies were for the Electricity Enterprise fund, and the supplies are given to the Electricity fund. The following would be recorded: GF: Due from Electricity $2,000 Expenditures $2,000 EF: Expenditures $2,000 Due to General Fund $2000

15. Reimbursements do not show up separately on the Activity or Budget statement, but are internal balance corrections When the reimbursement is made, the expense or expenditure is recorded in the correct fund and the incorrect expense or expenditure is decreased Reimbursements Cont’d

16. Transfers • Any shifting of resources from one fund to another where there is no expectation that the amounts will be repaid. • Transfers In are considered Other Financing Sources • Transfers Out are considered Other Financing Uses • Recurring Transfers such as for debt service may be built into the budget

17. The Closing Process - Slide 1 • Background — the business closing process • Close revenues and expenses to income summary, close income summary and withdrawals to Retained Earnings or Capital

18. The Closing Process - Slide 2 • Closing process for government type funds needs to accomplish the following: • Get rid of budgetary accounts • Close Revenues, expenditures, encumbrances, and related other financing sources or uses to Fund Balance • Reclassify the Budgetary Fund Balance – Reserved for Encumbrances to Fund Balance – Reserved for Encumbrances