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N. Accounting for the General Fund

N. Accounting for the General Fund

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Module 21: Governmental (State and Local) Accounting



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The account “Due from other funds (or Due from X fund)” is a current asset account. The “Transfers”

accounts are closed at the end of the year. It is important to note that the account “Transfers Out” is not an

expenditure account, but is an Other Financing Use, and that the account “Transfers In” is not a revenue

account, but is an Other Financing Source. (See the combined statement of revenues, expenditures, and

changes in fund balance shown previously.) There is a complete discussion of interfund transactions and

transfers later in this module (Section V).

c. The property tax levy is recorded as revenues, under the modified accrual basis, in the year for which the tax

levy is enacted by the governmental unit, if collections will be in time to finance expenditures of the current

period. The tax bills amount to $250,000, and $20,000 is estimated to be uncollectible.

Property Taxes Receivable—Current

Allowance for Uncollectible Taxes—Current

Revenues



250,000

20,000

230,000



Under the modified accrual basis, revenues should be recorded in the period in which they are both

measurable and available. The GASB requires that property taxes be recognized as a revenue if the taxes are







1. Available—collected by year-end or soon enough to pay liabilities of the current period (no more than

sixty days after the end of the fiscal year)

2. To finance the budget of the current period







To the extent the modified accrual criteria for recognition are not met, the property tax levy would be

recorded with a credit to Deferred Inflow of Resources Property Taxes, a liability, instead of Revenues.

If cash is needed to pay for expenditures before the property tax receivables are collected, it is not

uncommon for governmental units to borrow on tax anticipation notes. The property taxes receivable serves

as security for this loan and, as taxes are collected, the liability is paid (i.e., Tax Anticipation Notes Payable is

debited).

The treatment of the allowance for uncollectible accounts should be noted. Expendable funds account for

resource inflows (revenues) and resource outflows (expenditures). Expenses are not recorded. The Allowance

for Uncollectible Accounts (contra asset account) represents an estimated reduction in a resource inflow and,

accordingly, revenues are recorded net of estimated uncollectible taxes.

d. Revenues from fines, licenses, and permits amount to $40,000.

Cash



40,000

Revenues (detail posted)







Resource inflows from fines, licenses, permits, etc. are usually not measurable until the cash is collected.

Sometimes, it is possible to measure the potential resource inflow; however, because the availability is

questionable, revenues are recorded when cash is collected.

e. The state owes the city $25,000 for the city’s share of the state sales tax. The amount has not been received at

year-end, but it is expected within the first few months of the next fiscal year (in time to pay the liabilities as of

the current fiscal year).

State Sales Tax Receivable

Revenues (detail posted)







40,000



25,000

25,000



Sales taxes, income taxes, etc. may be accrued before collection by a governmental unit, if collection

is anticipated in time to pay for current year expenditures. Other firm commitments from the state or other

governmental units for grants, etc. are also recorded.

f. Incurred liabilities for salaries, repairs, utilities, rent, and other regularly occurring items for $200,000.

Expenditures (detail posted)

Vouchers Payable



200,000

200,000



Note that all resource outflows which are legally authorized appropriations are debited to Expenditures. It

makes no difference whether the outflow is for a fire truck or for rent. Remember, expendable funds do not have a

capital maintenance objective. Also, note that the encumbrance accounts were not used in this example. There is

usually no need to encumber appropriations for items that occur regularly, and which possess a highly predictable

amount (e.g., salaries, rent, etc.). It should be pointed out, however, that there is no hard and fast rule for when

to use encumbrances, and encumbrance policies do vary tremendously (i.e., from every expenditure being

encumbered to virtually no expenditures being encumbered).



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Module 21: Governmental (State and Local) Accounting

g. Ordered one police car; estimated cost is $17,000. One month later, ordered second police car; estimated cost is

$16,500.

Encumbrances

Reserved for Encumbrances

Encumbrances

Reserved for Encumbrances







16,500



17,000

17,000

16,800

16,800



i. Property tax collections amounted to $233,000, payments to other funds amounted to $50,000 (see item b.), and

payments of vouchers were $190,000.

Cash

Property Taxes Receivable—Current

Due to Debt Service Fund

Cash

Vouchers Payable

Cash

Allowance for Uncollectible Taxes—Current

Revenues







17,000

16,500



Recording encumbrances prevents overspending line-item appropriations. In the case of the police cars,

assume that appropriations were authorized in the amount of $34,000 for police vehicles. After the first police

car was ordered, the unencumbered appropriation for police vehicles was reduced to $17,000. This placed a

dollar limit on what could be spent on the second car.

h. Police car ordered first was received; actual cost is $16,800. Note that the encumbrance is reversed in the first

journal entry in the amount of $17,000 which is the estimated cost of the police car. In the second entry the

expenditures account is debited for the actual cost of the police car.

Reserved for Encumbrances

Encumbrances

Expenditures

Vouchers Payable







17,000



233,000

233,000

50,000

50,000

190,000

190,000

3,000

3,000



The last entry above is made because the Allowance for Uncollectible Taxes—Current was overstated. Note

that the estimate was $20,000 in entry c. above. Tax revenues were estimated to be $230,000. Since property

tax collections exceeded $230,000 for the current year, an increase in revenues is recorded.

j. Recorded $5,000 inventory of materials and supplies, reduced the allowance for uncollectible property taxes to

$10,000, and reclassified uncollected property taxes to delinquent accounts.

Materials and Supplies Inventory3

Reserved for Inventory of Materials and Supplies

Allowance for Uncollectible Taxes—Current

Revenues

Property Taxes Receivable—Delinquent

Allowance for Uncollectible Taxes—Current

Allowance for Uncollectible Taxes—Delinquent

Property Taxes Receivable—Current



5,000

5,000

7,000

7,000

17,000

10,000

10,000

17,000



One of the reasons for recording the inventory of materials and supplies is to inform the preparers of the

budget that items purchased during the year and charged to expenditures (item f.) are still unused. The account

“Reserved for Inventory of Materials and Supplies” is a reservation of Fund Balance. In this respect, it is

similar to “Reserved for Encumbrances.”

The second entry adjusts the estimate of uncollectible property taxes to $10,000. This is the result of

collecting more property taxes than anticipated (see entries made in c. and i. above) and of an estimate that

$7,000 will now be collected.



3



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 he illustration covers the “purchases method” for materials and supplies. The “consumption method” is not covered in this

T

illustration. Consult an advanced or governmental textbook for coverage of the “consumption method.”



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The third entry reclassifies property taxes receivable from current to delinquent at the end of the year.

Generally, interest and penalty charges accrue on the unpaid taxes from the date they become delinquent. If

these items have accrued at the end of a fiscal period, they would be recorded in the following way:

Interest and Penalties Receivable on Delinquent Taxes

Allowance for Uncollectible Interest and Penalties

Revenues







xx

xx

xx



k. Appropriate closing entries are made.

Budgetary Fund Balance

Appropriations

Estimated Other Financing Uses

Estimated Revenues

The above entry reverses the entry to record the budget.

Revenues

Expenditures

Encumbrances

Other Financing Uses—Transfers Out

Fund Balance—Unreserved



10,000

240,000

50,000

300,000

305,000

216,800

16,500

50,000

21,700



The above entry indicates that the unreserved fund balance increased by $21,700 since actual revenues exceeded expenditures,

encumbrances and other financing uses.



Financial statements. Under the GASB Codification, individual fund statements should not be prepared

that simply repeat information found in the basic or combining statements but may be prepared to present

individual fund budgetary comparisons (not needed for the general or major special revenue funds), to present

prior year comparative data, or to present more detailed information than is found in the basic or combining

statements.

The balance sheet below would represent the general fund portion of the governmental funds balance sheet.

Note the following points from the balance sheet:











1. The total fund balance (equity) is $43,200, but only $21,700 is unreserved. This $21,700 represents the

appropriable component of total fund balance (i.e., the amount that can be used next period to help finance

a deficit budget). The $21,700 represents unreserved net liquid resources.

2. The reason for crediting “Reserved for Inventory of Materials and Supplies” in item j. previously should

now be more meaningful. The inventory of materials and supplies is not a liquid resource that can be used

to finance future expenditures. Consequently, if this asset is disclosed, it must be disclosed via a fund

restriction.

3. The “Reserved for Encumbrances” which is disclosed on the balance sheet relates to the second police car

that was ordered but not delivered at year-end. When the car is received in the next period, the following

journal entries could be made, assuming the actual cost is $16,600. It should be noted that the first journal

entry reverses the encumbrances which were closed at the end of the prior year. Also note the $100

difference between the estimated cost ($16,500) and the actual cost ($16,600) of the police car is charged to

current year expenditures.

Encumbrances—Prior Year

Fund Balance—Unreserved

Reserved for Encumbrances

Encumbrances—Prior Year

Expenditures—Prior Year

Expenditure

Vouchers Payable



16,500

16,500

16,500

16,500

16,500

100

16,600



The police car would not be recorded in the general fund as a fixed asset; rather it would be displayed as a

fixed asset in the government-wide Statement of Net Position.

The following would be the general fund portion of the Budgetary Comparison Schedule:



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Module 21: Governmental (State and Local) Accounting



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City of X

GENERAL FUND

BALANCE SHEET

At June 30, 2013

Assets



Liabilities and Fund Equity



Cash

Property Taxes Receivable—Delinquent

Less: Allowance for Uncollectible

Taxes—Delinquent

State Sales Tax Receivable

Inventory of Materials and Supplies



Total Assets



$17,000

10,000



$33,000 Liabilities:

Accounts Payable



$26,800



Fund Equity: (See note below)

Reserved for Inventory of Materials

  and Supplies

Reserved for Encumbrances

Unreserved Fund Balance

Total Fund Equity

Total

Liabilities and Fund Equity

$70,000

7,000

25,000

5,000



$ 5,000

16,500

21,700

$43,200

$70,000



NOTE: For financial reporting purposes, GASB Statement No. 54 would require the reserve for

inventory of material and supplies to be reported as nonspendable fund balance, the reserve for

encumbrance would be included in the assigned fund balance classification, unless it was restricted or

committed, and the unreserved fund balance would most likely be reported as unassigned fund balance.



City of X

BUDGETARY COMPARISON SCHEDULE

GENERAL FUND

For the Year Ended June 30, 2013

Budgeted amounts

Original

Final

Budgetary Fund Balance, July 1, 2012



Actual amounts

(Budgetary basis)



Variances with

final budget

positive (negative)



--



--



--



--



$300,000



$300,000



$305,000



$ 5,000



Amounts Available for Appropriation



300,000



300,000



305,000



5,000



Charges to Appropriations (Outflows)



240,000



240,000



233,300



6,700



50,000



50,000



50,000



--



Total Charges to Appropriations



290,000



290,000



283,300



6,700



Budgetary Fund Balance, June 30, 2013



$ 10,000



$ 10,000



$ 21,700



$11,700



Resources (Inflows)



Transfers to Other Funds



The Budgetary Comparison Schedule is included in Required Supplementary Information (RSI), presented

after the notes to the basic statements. The format may be in accord with the budget or in accord with the

Statement of Revenues, Expenditures, and Changes in Fund Balances (earlier in this module). The Budgetary

Fund Balance may or may not be the same as the Unreserved Fund Balance reported in the Balance Sheet for the

General Fund. (In this example, it is the same.)

One additional point needs to be covered before going to special revenue funds; that is, how to account for the

inventory of materials and supplies in the second or any subsequent year. Accordingly, assume that at the end of

the second year, $4,000 of materials and supplies were unused. The adjusting entry would appear as follows:

Reserved for Inventory of Materials and Supplies

Materials and Supplies Inventory



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1,000

1,000



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This entry, when posted, will result in a balance of $4,000 in the inventory and reserve accounts. Note the entry

at the end of the first year established a $5,000 balance in these accounts. Thereafter, the inventory and reserve

accounts are adjusted upward or downward to whatever the balance is at the end of the year.4





O. Accounting for Special Revenue Funds

Special revenue funds account for and report the proceeds of specific revenue sources that are restricted or

committed to expenditure for specified purposes other than debt service or capital projects. The specific revenue

is then used to finance various authorized expenditures. For example, a city might place its share of the state’s

gasoline tax revenues into a State Gasoline Tax Fund, which could then be used to maintain streets.



NOTE: A governmental unit has some discretion in terms of how many special revenue funds it creates.

Sometimes separate funds are required by law or grant requirements. Many federal and state grants are

reported in special revenue funds.



The accounting for special revenue funds parallels that of the general fund. One type of transaction that often

takes place in a special revenue fund is a “reimbursement” grant from a federal or state government. GASB

Statement No. 33 lists reimbursement grant requirements as one of the conditions that must be satisfied before

a revenue can be recognized, either for accrual or modified accrual accounting. With a reimbursement grant,

the granting government will not provide resources unless the receiving government provides evidence that

an appropriate expenditure has taken place; GASB Statement No. 33 requires that the expenditure must be

recognized prior to the revenue being recognized.

For example, assume a government with a calendar fiscal year receives a grant award on November 1, 2012,

in the amount of $30,000. No entry would be recorded (either a receivable or revenue) until the expenditure takes

place.

Assume the expenditure takes place on March 1, 2013. The entries would be

Expenditures

Cash

Grants Receivable

Revenues—Grants



30,000

30,000

30,000

30,000



Assume cash is received on April 1, 2013; the entry would be

Cash

Grants Receivable



30,000

30,000



The budgetary comparison schedule in RSI must include “major” special revenue funds for which annual

budgets have been legally adopted.





P. Accounting for Capital Projects Funds

Capital projects funds account for and report financial resources that are restricted, committed, or assigned to

expenditure for capital outlay, including the acquisition and construction of capital facilities and other capital

assets. Capital projects funds exclude capital-related outflows which are financed by proprietary or fiduciary funds.

Resources for construction or purchase of capital assets normally come from the issuance of general long-term

debt, from government grants (federal, state, and local), and from interfund transfers.

Project budgets for estimated resources and expenditures must be approved before the project can begin.

However, unlike the budgets of general and special revenue funds, an annual budget for capital projects funds may

not be legally adopted and need not be recorded formally in the accounts.



 Again, this entry illustrates the “purchases method” of accounting for inventories. Consult a governmental or advanced textbook for

illustration of the “consumption method.”



4



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Module 21: Governmental (State and Local) Accounting



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The following transactions illustrate the entries encountered in a capital projects fund:





a. City Council approved the construction of a new city hall at an estimated cost of $10,000,000. General

obligation long-term serial bonds were authorized for issuance in the face amount of $10,000,000. (No

formal entries are required for approval of capital projects.)

b. $10,000,000 in 8% general obligation serial bonds were issued for $10,100,000. Assume that the premium

is transferred to a debt service fund for the eventual payment of the debt. (Premiums and discounts in

governmental funds are not amortized in the fund financial statements.)







Cash

Other Financing Sources—Proceeds of Bonds

Other Financing Uses—Transfers Out

Cash



10,100,000

10,100,000

100,000

100,000



Note the credit to Proceeds of Bonds. This is an Other Financing Source on the operating statement,

whereas the Transfers Out is an Other Financing Use. Both accounts are temporary accounts that are closed to

Unreserved Fund Balance at year-end.

The transfer requires an entry in the debt service fund.

Debt Service Fund

Cash

Other Financing Sources—Transfer In



100,000

100,000



This entry will be explained in more detail later.

c. The bond issue proceeds are temporarily invested in a Certificate of Deposit (CD) and earn $50,000. The

earnings are authorized to be sent to the debt service fund for the payment of bonds.







Capital Projects Fund

Investment in CD



10,000,000



Cash

Cash



10,000,000

50,000



Revenues—Interest



50,000

Debt Service Fund



Other financing uses—

Transfers out

Cash







Cash

50,000



50,000



Other financing sources—

50,000



Transfers in



50,000



d. The lowest bid, $9,800,000, is accepted from a general contractor.

Encumbrances

Reserved for Encumbrances5







9,800,000

9,800,000



e. $2,000,000 of the temporary investments are liquidated.

Cash

Investment in CD



2,000,000

2,000,000



As previously noted, Reserved for Encumbrances is a fund equity account used to segregate the portion of fund balance related to

outstanding encumbrances.



5 



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