Chapter

1. 2 Chapter Fund Accounting

2. Accounting Equation • Assets = Liabilities + Net Assets (Fund Balance) • Fund balance is a residual just like owner’s equity • Same double-entry system is utilized

3. Reporting Entity A reporting entity consists of: • A primary government and • Component units

4. Reporting Entity (Cont’d) • A primary government is: • A state government, • General purpose local government (e.g., a city, town, village, township, borough, county, etc.), or a • Special purpose government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments

5. Reporting Entity (Cont’d) • A component unit is • a legally separate organization for which the elected officials of a primary government are financially accountable • may also include another organization for which the nature and significance of its relationship with a primary government or its component units is such that exclusion would cause the reporting entity’s financial statements to be misleading

6. Reporting Entity (Cont’d) • The financial information of a component unit can be reported by: • Discrete presentation (i.e., in a separate column from the primary government’s financial information), or by • Blending (combined with financial information of the primary government) • Notes to financial statements should describe reporting entity

7. Required Financial Statements • Two sets of “basic” financial statements required (in addition to MD&A and other required supplementary information) • Government-wide 2 financial statements • Fund financial statements • 2 Governmental fund financial statements • 3 Proprietary fund financial statements • 2 Fiduciary fund financial statements • See previous days notes for specifics

8. Required Financial Statements Government-wide financial statements: • Are prepared on the accrual basis and use the economic resourcesmeasurement focus (i.e., similar to for-profit business entities) • Report the primary government’s financial information in two columns (governmental activities and business-type activities) • Internal service fund information usually reported in the governmental activities column; fiduciary activities not reported at all in the government-wide financial statements

9. Basis of Accounting and Measurement • Basis of accounting: Determines when transactions and events are recognized. • Accrual – recognition when substantive economic impact completed • Cash – recognize only when it relates the transaction to cash • Measurement Focus – Determines what is being reported upon. • Accrual accounting reports on all assets and liabilities and increases/decreases in net capital are recognized as revenues or expenses • Governments often adopt a modified accrual basis of accounting and a measurement focus on ST financial assets and liabilities

10. Basis of Accounting When are revenues and expenses/expenditures measured? • Modified accrual basis of accounting • Revenues recognized when available and measurable; expenditures when incurred • Accrual basis of accounting • Revenues when earned; expenses when incurred

11. Measurement FocusWhat is measured? • Economic resources measurement focus • Report on the determination of net income, financial position, and cash flows (i.e., capital maintenance) • To measure operational accountability • Current financial resources measurement focus • Report on the inflows and outflows of current financial resources (i.e., cash or other items expected to be converted into cash during the current period) • To measure fiscal accountability; meet the legal and budgetary needs of government

12. Fund Accounting • Fund accounting reports financial information for separate self-balancing sets of accounts, segregated for separate purposes or to account for resources restricted as to use by donors or grantors. • Funds are separate accounting and fiscal entities.

13. Definition of “Fund” • In other words, a fund is conceptually an entity with its own set of books (i.e., chart of accounts, general journal, general ledger, trial balances, and financial statements)

14. Major Funds • Financial statements for governmental funds must contain a separate column for each major governmental fund. • Financial statements for proprietary funds must contain a separate column for each major enterprise fund; financial information for all internal service funds is reported in a single column.

15. Types of Funds • Governmental Funds (5 types) General Fund; Special Revenue Funds; Capital Projects Funds Debt Service Funds; Permanent Funds • Proprietary Funds (2 types) Internal Service Funds and Enterprise Funds • Fiduciary Funds (2 types) Agency Funds and Trust Funds

16. Governmental Funds • General Fund (GF) • Only one per government • Most of general government operating activities are accounted for in the GF • Accounts for all unrestricted resources • Includes the following: • Police & fire • Sanitation • Administration • Street Maintenance

17. Governmental Funds (Cont’d) • Special Revenue Funds (SRF) • Used when required by law or by policy to account for financial resources earmarked for a specified operating purpose • Accounting and budgeting usually identical to GF • Includes the following • Gas tax for highway maintenance • Lottery fund for education • Donations to maintain Parks & Cemeteries

18. Governmental Funds (Cont’d) • Debt Service Funds (DSF) • Used to account for financial resources segregated to pay principal or interest on long-term general liabilities • Similar to a sinking fund • Get money from other funds or special taxes I.O.U.

19. Governmental Funds (Cont’d) • Capital Projects Funds(CPF) • Used to account for financial resources segregated to pay for construction or acquisition of long-lived capital assets • Typically get resources from bond issuance

20. Governmental Funds (Cont’d) • Permanent Funds • Used to account for resources provided by trust in which the earnings but not the principal must be used for public purposes • Example someone dies and gives money to maintain a park

21. Governmental Funds Common Characteristics • Current financial resources measurement focus (cash, receivables, inventories) • Modified accrual basis of accounting used – (We will look at details in the next few chapters) • Account for expenditures of appropriations (not expenses) • Capital assets (land, building, equipment) and long-term liabilities are not accounted for within governmental funds

22. Governmental Funds Required financial statements • Balance Sheet • Statement of Revenues, Expenditures, and Changes in Fund Balances • Also must have a reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities at the government-wide level.

23. Proprietary Funds • Internal service funds (ISF) • Used to account for activities in which goods or services are provided to other departments of the same government or to other governments for a charge • Examples include central stores, central computing, motor pools, and printing • ISF are reported as governmental activities in the government-wide statements because they primarily benefit the government. (Page 42)

24. Proprietary Funds (Cont’d) • Enterprise Funds • Used to account for activities in which goods or services are provided to the general public for a charge • Examples include electric and water utilities, airports, parking garages, transportation systems, and liquor stores • EF are reported as business-type activities in the government-wide financial statements (page 42)

25. Proprietary Funds Common Characteristics • Accounting and reporting are essentially the same as those of for-profit entities, including full accrual accounting • Capital assets and long-term liabilities are accounted for in the funds • Depreciation expense is reported in the funds • Reports expenses not expenditures

26. Proprietary Funds (Cont’d) Required Financial Statements • Similar to those of for-profit entities • Statement of Net Assets • Statement of Revenues, Expenses, and Changes in Net Assets • Statement of Cash Flows

27. Fiduciary Funds • Agency Funds (often several) • To account for financial resources that the govt. holds temporarily for another party • Accounting is simple; assets = liabilities. • No revenue and expense accounts used, nor is there a fund/equity account • Examples are tax agency funds, special assessment debt service funds, and pass-through agency funds • Not consolidated into government-wide statements

28. Fiduciary Funds (Cont’d) • Trust Funds • Fund held by one person for the benefit of another – intended to benefit parties other than the government. • 3 Types • Pension Trust – benefit government employees (retirement, disability) • Investment Trust – (like mutual fund) • Private Purpose Trust – benefit people not associated with the government (escheated fund or historical society)

29. Reporting Capital Assets • General capital assets should be distinguished from capital assets of proprietary and fiduciary funds • General capital assets are reported in the government-wide financial statements but not in fund financial statements • Proprietary capital assets are reported in both the government-wide and fund financial statements • Fiduciary capital assets are reported only in the statement of fiduciary net assets, a fund financial statement.

30. Valuation of Capital Assets • Capital assets should be accounted for at historical cost, or estimated cost if actual cost is unknown. • Donated assets should be accounted for at estimated fair value at time of gift.

31. Depreciation of Capital Assets • Capital assets should be depreciated over their estimated useful lives, except inexhaustible assets such as land • A “modified approach” may be used for certain infrastructure assets instead of depreciation • Depreciation expense for general capital assets is reported only in the government-wide financial statements; for other capital assets it is also reported in the fund financial statements.

32. Reporting Long-term Liabilities • General long-term liabilities should be reported in the government-wide statements but not in the fund financial statements. • Long-term liabilities to be repaid from proprietary funds should be reported in the proprietary fund statements. • Long-term liabilities to be repaid from fiduciary funds should be reported in the fiduciary fund statements.

33. Measurement Focus and Basis of Accounting Summary !!!!!!!!