Understanding Governmental Fund Expenditures and Expenses

1. 5 Chapter Recognizing Expenditures In Governmental Funds

2. Expenditures Vs. Expenses • Governmental funds are concerned with expenditures • Decreases in net financial resources • Generally recognized when an asset is acquired • Report only current liabilities • Governmental activities are concerned with expenses • Decreases in net economic resources • Generally recognized when consumed • Report both current & long term liabilities

3. Payroll Items • Wages see page 164 – Wages and salaries should be recognized in the period earned not paid! • No difference between fund and govt-wide • Vacation see page 166 – Vacation expenditures and related liability should be recognized in the period in which payments are due • Notice difference between fund entry and govt-wide entry • Sick – see page 168 Sick expenditures should be recognized in the period in which payments are made • Notice difference between fund entry and govt-wide entry

4. Accounting for Payroll • Payroll accounting is similar for a governmental fund and a for-profit entity, except Expenditures rather than Expenses are recorded • Debit Expenditures for full amount of payroll and credit liabilities for withholdings from employees pay; credit Cash for the amount paid to employees • Record Expenditures for the employer’s payroll costs, including employer’s share of FICA and credit a liability to federal government • Encumbrances usually are not recorded for recurring expenditures such as payroll

5. Accounting for Payroll (Cont’d) Macon City recognized its payroll for the most recent two week pay period for employees paid from the General Fund. GF General JournalDr.Cr. Expenditures—2005 948,000 Due to Federal Gov’t 86,000 Due to State Gov’t 49,000 Cash 713,000

6. Accounting for Payroll (Cont’d) The employer’s share of FICA is recorded. GF General JournalDr. Cr. Expenditures—2005 86,000 Due to Federal Gov’t 86,000

7. Sabbatical Leave • Two different types: • A) Sabbaticals that “enhance reputation or otherwise benefit the employer • Generally activities must be approved • Recognize expense in the period leave is taken • B) Sabbaticals for “compensated unrestricted time off” • Accrue a liability during the period that leave is earned • Would only appear in the governmental activities

8. Pension • See example on page 170 • The expenditure is the amount that will be liquidated with expendable available financial resources • However, notice the difference between the fund and governmental activities • Must recognize full expense in the governmental activities • A pension liability will be on the balance sheet for the difference between expense and what was paid

9. Claims & Judgements • See example on page 171-172 • The key question is when and in what amount should be recorded? • Usually monetary damages are incurred years prior to payment • Expenditures – should only be recognized in the governmental funds when amount is paid • Expenses – should be recognized in the governmental activities when • Probable that an asset has been impaired • Amount of the loss can be estimated

10. Prepayments/Materials/Supplies • 2 Methods – Consumption and Purchases • See example on page 173-176 • Purchases Method • Recognize expenditure when items are purchased • Make necessary adjustment to fund balance and asset account at year end • Consumption Method • Recognize an asset when items are purchased • Record expenditures when assets are consumed • Additional entry to fund balance at year end

11. Capital Assets • Capital assets or their corresponding depreciation cannot be recorded in the governmental funds • Example on page 177 – • Governmental fund entry would be: Expenditures 90,000 Cash 90,000 • Governmental activities entry would be: Truck 90,000 Cash 90,000

12. Accounting for General Capital Assets • General capital assets are: • Capitalized in the governmental activities accounts at the government-wide level • Depreciated at the government-wide level • Debited to Expenditures in the appropriate governmental fund.

13. Accounting for Acquisition of Capital Assets Example: Purchased office equipment for the Mayor’s office and paid $50,000 cash from the General Fund. Governmental Activities: Dr. Cr. Equipment 50,000 Cash 50,000 General Fund: Expenditures 50,000 Cash 50,000

14. Depreciation Accounting and Reporting • Depreciation on general capital assets, including infrastructure, is required at the government-wide level under GASBS 34. • Depreciation is not recorded on inexhaustible assets, such as land and noncapitalized collections of art. • The government can elect not to depreciate certain eligible infrastructure assets.

15. Installment Notes and Leases • Installment Notes: • Proceeds from long term debt should be called “other financing sources” in the governmental funds • Expenditures are recognized in the governmental funds when payment is made • See example on page 178 • What entry would you expect to see at the government activities level for this entry?

16. Installment Notes and Leases • Leases • Capital leases are similar to a purchase of an asset • Operating leases are conventional rental agreements • Capital lease accounting is similar to Installment Notes – See page 179 – 180

17. Accounting for Capital Leases • Follow SFAS No. 13 criteria to determine if the lease is a capital lease, rather than an operating lease • Record capital assets in the government-wide statements in the amount of the present value of minimum lease payments or fair value, if lower • Record an expenditure in the governmental fund that is using the asset and making the payments.

18. Accounting for the Disposition of General Capital Assets • Remove original cost of assets being disposed of. If only part of structure is demolished, remove a pro-rata share of the cost. • Record in both the governmental fund and the governmental activities general journals.

19. Accounting for the Disposition of General Capital Assets (Cont’d) Example 1: Assume a machine is sold for $500. The asset had originally been purchased for $8,000 using GF revenues. It was fully depreciated. General Fund:Dr.Cr. Cash 500 Revenues—Misc.(or OFS) 500 Governmental Activities: Cash 500 Accumulated Depreciation 8,000 Machine 8,000 Gain on Sale of Machine 500

20. Accounting for the Disposition of General Capital Assets Example 2: Assume a building with an original cost of $100,000 (from tax-supported bonds) is demolished; cost of demolition was $5,000. It was fully depreciated. General Fund:Dr.Cr. Expenditures 5,000 Cash 5,000 Governmental Activities: Loss on Disposal of Building 5,000 Accumulated Depreciation 100,000 Buildings 100,000 Cash 5,000