Accounting for public Sector &civil Society Complied by

Gezahegn .L

All 3rd year accounting dep’t Night &weekend Degree Program

Course : Accounting for public Sector &civil Society

Chapter One: Introduction
Accountability is a key term that is highly found throughout the study of governmental and not
for government does not have customers who voluntarily choose to buy products or services.
Governments and not for profit organizations do not have a product or service that is judged by
the commercial market place or bottom line profit to share holders.
Governmental entities and not for profit organizations are organized by constituents to province
specific services.
Government are supported in large part by various taxes and not for profit organization are
supported by grant and donation in both instances accountability for how the financial resources
are used is the primary focus of financial reporting.
The three key factors in the governmental environment that influence accounting and financial
reporting standard are:-
1. The representative form of gov’t separation of power. There are three braches Gov’r
Executive, legislative and judicial
2. The federalist system of Gov’tal and intergovernmental revenue
3. The relationship of tax payers (or lack of) to services received.
1.1 Nature and Characteristics of Gov’tal NFP Organization
Definition: - Governmental Accounting is a complete activity of identifying, recording,
classifying, analyzing, interpreting, summarizing and communicating economic extents of
monetary nature for governmental organization.
The GASB concept statement No 1. Sets forth key characteristics for governmental unit that
impact financial reporting objectives.
1) Source of income
- Taxation is the principal source of income for gov’tal unit
- Tax payers are involuntary resource providers; they are not free to choose whether or not to pay
taxes they are legally required to provide these resources to the gov’t
2) The amount of tax paid seldom bears a direct relationship to the services received.
 Eg property taxes are based up on the value the home
 Income taxes are based up on income
 Individuals do not receive gov’tal services in proportion to the tax paid.

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3) Impact of law and regulation.

- Operations of Gov’tal entity are highly subject to gov’tal laws and regulations or legal
Enactment.
eg:- Budgetary compliance, Record keeping e. t. c
4) No “exchange” relationship exists because services received and resources provided
- Citizens who provide these resources do not receive coupons for a certain amount of
Gov’tal services e.g. fire protection, transportation, water supply, police, e. t. c
- There is no matching of revenue provided with services received.
5) Ownership and Management
-Under governmental organization ownership is not evidenced by separate share of stock,
but for business firms worship is evidenced by share of stock.
6) Government often monopolize Certain Services
A good example would be
- Police & fire protection
- Defense
- Telecommunication & water supply
- Electricity power supply
7) Difficulty to measure the optimal quality or quantity of service
8) Stewardship for resources.
- Since the main source of revenue for gov’tal unit is the citizen, the managers of gov’tal
unit are representative and expected to be loyal for the resources the reports of gov’tal
unit should reflect the way of raising and how it was allocated.
9) Organized to serve the society (absence of profit motive)
-The general objective of Gov’tal unit is to serve the society
i.e To increase the living standard of the society
1.2 Types of Governmental and not for profit Organization
What is not for profit organization?
A not for profit organization is one that has predominantly non business characteristics that
heavily influence the operation of the organization.

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 Not for profit Organization Can be classified in to

1. Governmental: - which includes Administrative gov’tal unit
2. Educational: - kindergartens, Elementary & 2nd school’s colleges and universities.
3. Health and welfare: hospitals clinics, nursing homes Established voluntarily by groups
or by government.
4. Religious Organizations Mosques, church, and organizations under church and mosques
5. Charitable and foundations: - it includes voluntarily established that serves the public
in the area of health, Social welfare community service
Eg. Red cross, diabetics association relive society e. t. c
N.B the above classification does not includes similar type of entities that operate profitably for
direct benefit of share holders.
Similarities Between Business and NFP Organization
Similarities:
a) Both are integral part of the same economic system and use similar scarce resources to
produce their respective goods or services.
b) Due to scarce resources both utilize cost benefit analysis and other evaluation techniques
to assure efficiently to the extent possible.
c) On some occasions both provide similar goods or services like:
- Educational - Transportation
- Health care - Construction e. t. c
d) Financial management processes including thoughtful preparation, appropriate
accounting, meaningful reporting and timely auditing are essential in both. So as to
provide relevant and timely information to users for making rational decision.
e) Both use double entry accounting system
Differences:
1. Profit motive: Commercial units have a presented profit motive as part of their objectives;
where as governmental units with some exceptions do not operate with the objective of earning a
profit.
2. Governance: The legislative and executive branches of a governmental unit share the
responsibilities for their governance where as in the case of commercial entities; it is governed
by elected or appointed directors or managers.
3. Basis of accounting: The modified accrual basis of accounting is mostly used by some
governmental units but in case of commercial entities the basis of accounting is the accrual basis.

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4. Source of revenue in nature: The primary source of revenue for commercial entitles is
through sales or services they provide, whereas in case of governmental units, with some
exceptions, the main source of revenue is though fund or donations.
5. Beneficiaries: Governmental units are operating for the benefit of the citizenry where as
commercial entities are operating for the interest and benefit of the owners.
6. Governmental fund accounting focuses on financial resources, whereas business enterprises
focus on economic resource
7. Treatment of fixed assets and long term liability: governmental funds do not account for their
fixed asset and long term liability under their fund financial statement. However, long term
assets and long term liabilities of governmental funds will be included under government wide
financial statement.
8. Budgetary accounts: budgetary accounts are integrated into the accounting system of the
governmental units. However; there is no record of debt and credits for budget in business
enterprises.
9. Encumbrance accounting: is used and integrated in the accounting system of governmental
units.
10. Flow of financial resources: in business enterprises is different from that of governmental
units.
1.3. Financial Reporting
Sources of Financial Reporting Standards
Accounting and financial reporting standards for state and local governmental units are
established by the governmental accounting standard boards (GASB). Accounting and financial
reporting standards for profit seeking enterprise are established by the financial accounting
standard board(FASB). The financial accounting foundation appoints the member of the two
boards and supports the operating expenses of the board by obtaining contributions from
business corporations, professional organization of accountants, financial analysts, and other
groups concerned with financial reporting; CPA firms, debt rating agencies and state and local
governments, authority to establish accounting principles (financial reporting standards) for not
–for –profit organizations are split between the GASB and FASB. Because, a sizable number of
NFP organizations (particular key colleges and universities and hospitals) are governmentally
related, but many others are independent of governmental units.
Accordingly, the GASB has the responsibility for establishing accounting and financial reporting
standards for NFP organizations which are considered to be governmental related; the FASB has
the responsibility of establishing accounting and financial reporting standards for non-
governmental NFP organization.

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What are the overall purpose of financial reporting?

How the external financial reports of governments and not-for-profits use vary from user to user.
For the most part, external financial reports should allow users to do the following:
 Assess financial position and economic condition. Users need to analyze the entities past
results and current financial position (assets compared with liabilities) and its overall
economic condition to determine the entity’s ability to meet its obligations and to
continue to provide expected services. By examining trends, users are better able to
predict future financial developments and foresee the need for changes in revenue
sources, resource allocations, and capital requirements.
 Compare actual results with the budget. Users want assurance that the entity adhered to
its adopted budget. Significant variations may signify poor management or unforeseen
circumstances that require an explanation.
 Determine compliance with laws, regulations, and restrictions on the use of the funds.
Users want to be assured of compliance with legal and contractual requirements, such as
bond covenants, donor and grantor restrictions, taxing and debt limitations, and
applicable laws. Violations can have serious financial repercussions and can jeopardize
the entities viability.
 Evaluate efficiency and effectiveness. Users want to know whether the entity is achieving
its objectives and, if so, how efficiently and effectively. They need to compare
accomplishments (outcomes) with service efforts and costs (resource inputs).
What are the specific objectives of financial reporting as set forth by the GASB and FASB?
The overall objective of financial reporting is to meet the information needs of report users. But
financial reports cannot possibly satisfy all requirements of all users. Therefore, the GASB and
the FASB have established objectives that circumscribe the functions of financial reports. These
objectives are the foundation for their financial reporting standards.
GASB OBJECTIVES Because of the unique characteristics of governments and their
environment, the GASB has established accountability as the cornerstone of financial reporting.
‘Accountability,’’ it says, ‘‘requires governments to answer to the citizenry to justify the raising
of public resources and the purposes for which they are used.’’ Accountability ‘‘is based on the
belief that the citizenry has a ‘right to know,’ a right to receive openly declared facts that may
lead to public debate by the citizens and their elected representatives.’’
The GASB has divided the objective of accountability into three sub objectives:

 Inter period equity. ‘‘Financial reporting should provide information to determine

whether current-year revenues were sufficient to pay for current-year services.’’
 Budgetary and fiscal compliance. ‘‘Financial reporting should demonstrate whether
resources were obtained and used in accordance with the entity’s legally adopted budget;
it should also demonstrate compliance with other finance-related legal or contractual
requirements.’’
 Service efforts, costs, and accomplishments. ‘‘Financial reporting should provide
information to assist users in assessing the service efforts, costs, and accomplishments of
the governmental entity.’’
FASB OBJECTIVES OF FINANCIAL REPORTING

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Financial reporting by non-business organizations should provide information that is

useful to present and potential resource providers and other users in making rational
decisions about the allocation of resources to those organizations.
Financial reporting should provide information to help present and potential resource
providers and other users in assessing the services that a non-business organization
provides and its ability to continue to provide those services.
Financial reporting should provide information that is useful to present and potential
resource providers and other users in assessing how managers of a non-business
organization have discharged their stewardship responsibilities and about other aspects of
their performance.
Financial reporting should provide information about the economic resources,
obligations, and net resources of an organization and about the effects of transactions,
events, and circumstances that change resources and interests in those resources.
Financial reporting should provide information about the performance of an organization
during a period, periodic measurement of the changes in the amount and nature of the net
resources of a non-business organization, and information about the service efforts and
accomplishments of an organization.
Financial reporting should provide information about how an organization obtains and
spends cash or other liquid resources, about its borrowing and repayment of borrowing,
and about other factors that may affect an organization’s liquidity.
Financial reporting should include explanations and interpretations to help users
understand financial information provided.

The two primary concepts that must guide the accounting and financial reporting standard are
1. Accountability 2. Inter period equity

1) Accountability: - is the “Cornerstone” of reporting

 It refers to (Requires) the demonstration to justify the raising of public resources and
the purpose for which they are used.
 It is based on believe that the citizen has the right to know and the right to receive
openly declared facts that may lead to public Debate.
 Legislative and governing bodies also check to ensure that the gov’t is accountable
for proper and efficient use of these resources.
2) Inter period Equity
The FASB Believes that the financial statements of NFP organization should provide.
a) Information useful in making resource allocation decision
b) Information useful in assessing services and the ability to provide services.
c) Information useful in management stewardship and performance
d) Information about economic resource, obligation net resource and changes therein
e) .

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Chapter Two
2.1. Principles of Accounting and Financial Reporting for Government Entities.
Governmental entities are organized to provide many different types of programs and services
which are referred to as Activities in gov’tal accounting Activities are further categorized as
1) Governmental Activities
2) Business type Activities
3) Fiduciary Activities
1) Core government services together with general administrative support is refried to as
government activity
2) Gov’t also engage in business type of activities which includes
- Transportation
- Public utility (water, electricity, gas)
- Seaware utility
- Sometimes production e. t. c
3) Fiduciary – Government often act in a fiduciary capacity, either as an agent, or trustee for
parties out side the government unit
E.g. pension and other benefits.
- The accounting and financial reporting principles for governmental activities evolved to meet
the legal budgetary and financial compliance needs of government.
* These principles involve segregating the accounting for receipt and expenditure of restricted
use resources from general use resources
- The accounting and financial reporting principles for business type activates is quite similar to
those commercial business entities.
- At the same time the accounting and reporting principles for fiduciary activity of government, it
uses the principles of accounting similar to business type activities.

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There are different types of principles among them the most common principles are:
1st Principle: - Accounting and reporting capability
 The financial statement of a governmental unit must provide information fully and
present fairly to users in conformity with GAAP
 Adherence to GAAP is essential to ensure a reasonable comparability among the
general purpose financial statement of governmental entities
 In some states low requires the state and local governmental to follow practice not
consistent with GAAP, in such case the financial statement prepared in compliance
with state low are considered as special report and they are not of general purpose
financial statement.
* Governmental unit may prepare two sets of financial statement
1) Incompliance with legal requirement (special report)
2) Incompliance with GAAP (financial statement).
2-nd Principle: - Fund and fund accounting
In business accounting, ‘‘funds’’ typically refers to working capital (current assets less current
liabilities) or selected elements of it (such as cash and investments). But in government and not-
for-profit accounting the term fund has a different meaning.
Fund accounting is a system in which a government’s or not-for-profit’s resources are divided
among two or more fiscal and accounting entities known as funds. As a fiscal (or financial)
entity, each fund accounts for resources, and the claims against them, What characteristics
fund has?
As suggested by the earlier reference to a ‘‘self-balancing set of accounts,’’ each fund of a
government or not-for-profit uses the accounting equation:

Assets = liabilities + fund balance

This is a variation of the business accounting equation (assets=liabilities + owners’ equity).

Basis of Accounting and Measurement Focus
Basis of accounting determines when transactions and events are given accounting recognition.,
and streetlights. Suppose, for example, that an organization purchases a vehicle for Br.35,000 by
giving a note for the entire amount. The following entry is appropriate:
Vehicles---------------------------------------------------Br.35, 000
Notes payable---------------------------------------------------- Br.35, 000
To record the acquisition of a vehicle
Because governments and not-for-profit organizations may be primarily concerned with the
assets needed to satisfy current-year obligations, they may adopt a modified accrual basis of
accounting and a measurement focus on mainly short-term financial assets and liabilities for
many of their funds. Modified accrual is between the cash and full accrual bases. Under the

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modified accrual basis used by governments, revenues and some expenditure are recognized on a
cash or near-cash basis; other expenditures are recognized on a full accrual basis. Because the
measurement focus is on current financial resources, capital assets and long-term liabilities are
excluded from the balance sheet, and net changes in short-term financial assets and liabilities are
recognized as revenues or expenditures. For example, if a government borrows Br.35, 000
(issuing a long-term note) and uses the proceeds to purchase a vehicle, the following entries are
proper:

Cash---------------------------------------------------- Br.35, 000

Proceeds from borrowing------------------------------------- Br.35, 000
To record the issuance of a long-term note
Expenditure for vehicles----------------------------- Br.35, 000
Cash------------------------------------------------------------ Br.35, 000
 State and local government financial reporting should be practiced based on fund
accounting
 Fund accounting and reporting permit gov’tal managers to demonstrate compliance with
legal and contractual requirement
*GASB states that
 Governmental accounting system should be organized and operated on a fund basis
 A fund is a fiscal and accounting entity with a self balancing set of accounts
recording cash and other financial resources (asset) together with related liabilities
and residual equities or balances and changes there in which are segregated for the
purpose of carrying on specific activities or attaining certain objectives in accordance
with special regulation, restriction, or limitation.
Two basic conditions must be met for a fund in a technical sense to exist
1) There must be a fiscal entity asset set aside for a specific purpose.
2) There must be a double entry accounting entry created to account for the fiscal
entity.
 State and local governments use 11 fund types these fund types are organized in to three
major categories in addition to the major categories and classifications we have also non-
fund account groups.
 The major classifications (categories) are based on the major type of activates
1) For governmental activity - governmental fund
2) For business type activity – proprietary fund
3) For fiduciary activity – fiduciary fund
1) Government funds accounts for the governmental activates of the entity and use the modified
accrual basis of accounting.
- The accounting equation governmental fund
Fund Asset = fund liability + fund balance

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Or Fund Asset - Fund liability = fund balance

Fund balance = reserved FB + unreserved FB

*Governmental funds category includes five types of fund

1. The General Fund
 It accounts almost all of the general operating activities of (the basic services) provided by
a governmental unit
 This is the fund where most of the actions takes place
E.g.:- The connection of tax revenue or
- Donation for gove’tal NFP organization
- The payment of most of governmental employees would be accounted for in this
Fund
 This is the fund used to account for any resources that are not required to be accounted for
in other funds governmental unit can establish only one general fund, however the
general fund can account for many different activities.
 It is sometimes caused a residual fund
2. Special revenue fund
 Used to account for resources that are legally restricted for current purposes. Except for
these
 Monies that are restricted to trust or capital project purpose.
 The GAAP standards do not require that special revenue funds be used unless they are
legally mandated.
Eg:- if a condition of grant requires that the monies be segregated in a separate fund
S.R.F must be used
The concept is that use of a separate fund will provide internal control and safekeeping of
the monies.
 The restriction that requires a S.R.F is from Law contract, grant or some external party.
 Resources that have internal restriction on their use are not generally set up in a special
revenue fund.
3. Capital Project Fund
 It is used to account for financial resources intended for major capital projects
(Renovation) construction & Acquisition of capital asset.
 E.g. – Construction of fire station
- Construction of road
- Construction of camping houses (condominium)

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4. Debt Service Fund

 It Accounts for the resources set – Aside for and the repayment of principal and
interest on general long term debt- - Obligation but, GAAP does not requires it,
however, legal requirements need the separation.
 A Separate fund creates a greater possibility for repayment of long term debt.
*The use of debt service fund is also required if the government unit accumulates fund to pay
Debt service, principal and interest in the future fiscal years.
5. Permanent fund:-
- Permanent funds contain the accounting for resources that are legally restricted resources.
So that only the earnings that are generated from investing the money can be spent, the
principal can not spent, and the income must be used to benefit the government of its
citizens.
E.g.) Sheh hussien Alamudin the owner of MIDROC co. Donated money to A.A town and
specifies that only the income from investment on treasury bill can be spent for the public
park and youth club in the town in such case a permanent fund would be established.
Proprietary Funds
 Are the 2nd major categories of funds to account for the business type activates of
governmental unit.
 The accounting equation for proprietor fund includes fund equity account.

Fund Asset = Fund Liability + Fund Equity

Fund Asset – Fund Liability = Fund equity

 It contains two types of fund.

6. Enterprise Funds
 Are used when resources are provided primarily through the use of sales and service
charges to parties external to the government or if a fee is expected to be charged in the
near foreseeable future.
e.g. – Water & seaware utilities
- Electric power utilities
- Tele communication service utility
- Air ports

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- Transit system
- Swimming pools
- Museums etc
7. Internal Service Fund
- Accounts for services provided by one department of a government unit to another gov’tal unit
or used to record transactions relating to activities that provide goods or services to other
departments within the government or to other gov’tal unit on a fee basis for cost re-
imbursement.
e.g Central data processing or information tech service
- Motor pool (pool of vehicles)
- Print shop e. t. c
* The charges by the enterprise fund and internal service fund are usually on break even basis.

Fiduciary Fund Category

 Are sometimes known as trust and agency fund
 It is used to account for the monies held by the government on behalf of others in a trustee
or agency capacity
 In these funds government is acting as a coveting, disbursing agent or as a trustee.
 These resources can not be used to support the governments programs.

Fund Asset = Fund Liability

 There are four types of fiduciary funds

- Pension and other employee benefit trust fund
- Investment trust fund
- Private purpose trust
- Agency funds
8. Pension and other employee benefit trust fund
 Are used to account for pension and employee benefit funds for which the
governmental unit is a trustee

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 These resources represent monies set aside to finance future payments for the
beneficiaries.
9. Investment Trust Fund
 Accounts for external portion of investment pool reported by the sponsoring
government.
10. Private Purpose Trust Fund
 Reports all other trust arrangements under which principal and income benefit
individuals, private organization or other governments.
e.g Estate Property, bank book that has not been either deposited or
withdrawn for long period of time, property of children whose parents are dead…etc
11. Agency Fund
 Are used to account for situations in which the government is acting as a
collecting/disbursing agent.
e.g Property tax that are collected from homeowners are recorded in to a county’s
Agency fund and redistributed to the school district library, city e. t. c
Principle 3 Number of funds required
 This principle states that governmental unit should establish and maintain those funds
required by law and sound financial administration.
 To the minimum, if gov’tal laws or other agreements do not require establishing all funds,
should establish the general fund and also accepted as compliance with GAAP.
 Unnecessary funds result in inflexibility, undue complexity, and inefficient financial
administration.
 All the 11 types of funds are possible to be established if needed by a governmental unit to
demonstrate compliance with legal requirement or if needed to facilitate sound financial
administration.
Principle 4. Budget and Budgetary Accounts.
- The GASB contain the following three-part budgetary principle.
1. An annual budget should be adopted by every governmental unit
2. The accounting system should provide the basis for appropriate budgetary control.
3. Budgetary comparisons should be included in the appropriate financial statement and
schedules for governmental funds for which an annual budget has been adopted.
N. B * Part 1. Of this principle is not financial reporting or an accounting but it is a necessary pre
condition for part 2-3
Principle 5 Accounting for Capital asset including infrastructure

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All fixed asset (capital) asset should be recorded at (historical cost), if the historical cost is
not determinable at estimated cost.
Donated fixed asset should be recorded at the estimated fair value at the date of
acquisition (Donation)
* The term Capital Asset includes land, land improvement building improvement, vehicles
machinery equipment works of art and historical treasures, and all others tangible and intangible
asset that are used in operation and that have initial useful life beyond one reporting year.
Infrastructure asset are long lived asset and that mortally are stationary in nature and normally
can be used for significant number of years than most capital asset.
 Depreciation of General fixed asset should not be recorded in the accounts of
governmental fund; rather it should be recorded in the General Fixed Asset Account
Group (GFAAG).
 Depreciation of fixed asset (Depreciation) expense should be recorded in the account of
proprietary and some trust funds in the account itself. Since the N.I is the determinate for
capital maintenance & Accountability.
E.g to Record for G. F. A
Investment in GFAAG by Xfund ------------------------------------ xx
Allowance for Deprn of FA -------------------------------------- XX
Principle 6 Accounting for long term Debt and other long term liabilities
 Long term Debt of state and local government includes bonds, bond anticipated loans and
lease payable.
 A clear distinction should be made between fund long term liability and general long term
liability.
 Long term liabilities of governmental funds are not going to be reported under fund
financial statements rather they are required to be recorded specifically under General
Long term liability account group (GLTLAG), however, under governmental wide
financial statement they are going to be reported under governmental fund section.
 State and local gov’ts are required to report all long term Debt and long term liabilities in
the statement of net asset this includes debt that is to be paid out of general government
resources, such as general obligation debt which is paid out of tax revenue.
 This debt is reflected in the governmental type activities column of the statement.
 Long term Debt paid from proprietary fund revenue is reported as a liability in the
proprietary fund statement of net asset (Balance sheet).
 Governmental fund statements generally report debt service payments out of a debt service
fund, or in some cases the general funds

Principle 7:- Basis of Accounting:-

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 The financial statements (Stt of net asset & Sff of operation) are prepared by the modified
accrual or accrual basis of accounting as appropriate.
 The financial statements of gov’tal fund should be presented using the modified accrual
basis of accounting.
 Modified accrual basis recognizes revenue when they become available & Measurable and
expenditure when Liability is incurred.
- The basic financial statements of governmental unit
1. Government wide financial statement
2. Fund financial statement
3. Comprehensive annual financial report
1) Government wide statement
- Statement of net asset
- Statement of Activities
2) Fund financial statements: -
Gov’tal funds – statement of net asset /Balance Sheet/
- statement of Revenue, expenditure & change in fund balance including
reconciliation to gov’t wide statements.
Proprietary funds
- Statement net asset or balance sheet
- Statement of revenge, expense & change in fund net asset
- Statement of cash flows.
Fiduciary funds: -
-Statement of fiduciary net asset
- Statement of change in fiduciary net asset
Comprehensive Annual Financial Report (CAFR):- have three parts
Introductory section Statistical section
Financial section
 CAFR -Introductory Section
Title page Letter of transmittal
Contents page
Other (as desired by management)
 CAFR -Financial Section
Auditor’s report
Management’s Discussion and Analysis (MD&A)
Basic financial statement
-Gov’t wide statement
- Fund financial statements
- Notes to financial statement
Required supplementary information other than MD and A

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Combining statement and individual fund statements and schedules.

 Management’s Discussion and Analysis (MD&A)
Brief objective narrative providing management’s analysis of the government’s financial
performance
 Basic Financial Statements
Government-wide financial statements
 Statement of net assets
 Statement of activities
 Basic Financial Statements—Government-wide Financial Statements
Points of interest
􀂙Information is reported separately for the primary government and discretely presented
component units
􀂙Within the primary government, information is reported separately for governmental and
business-type activities
 All financial information in the government-wide financial statements is reported on the
accrual basis with an economic resources focus—similar to business financial reporting
 Assists in assessing operational accountability—how efficiently resources are being used
Basic Financial Statements—Fund Financial Statements
Governmental funds
Balance sheet
Statement of revenues, expenditures, and changes in fund balances
These statements report information separately for the General Fund and other major
funds
Governmental funds—points of interest
Focus on flow of current (i.e., short-term) financial resources recognized on the modified
accrual basis of accounting
Assist in assessing fiscal accountability—whether financial resources were raised and
expended in compliance with budgetary and other legal provisions
Reporting the same information about governmental activities in two different ways creates a
need to reconcile the information reported in the governmental fund financial statements to
that in the Governmental Activities Column of the government-wide statements
Proprietary funds
o Statement of net assets
o Statement of revenues, expenses, and changes in fund net assets
o Statement of cash flows

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Proprietary funds—points of interest

o Reports information for enterprise funds and internal service funds using an
economic resources focus and accrual basis of accounting
o Information is reported in separate columns for major enterprise funds. All
internal service fund information reported is combined in a single column
Fiduciary funds
o Statement of fiduciary net assets
o Statement of changes in fiduciary net assets
Fiduciary funds—points of interest
o Fiduciary activities relate to the government’s responsibility as an agent or trustee to
hold and/or manage resources for the benefit of private parties
o Since fiduciary resources cannot be used by the government, they are reported only in
the fiduciary fund financial statements—not in the government-wide statements
Financial Statements
 Both general purposes financial statements and specific purpose reports which may
include
o Statement of activities
reporting revenues and expenditures/expenses
revenues and other financial sources – expenditures/expenses and other
financial uses = net increase/decrease in fund balance
similar to income statement of business entity
o Statement of net assets
reporting assets, liabilities and fund balance
assets – liabilities = fund balance
similar to balance sheet of business entity
o Statement of cash flows
reporting sources and uses of cash
sources – uses + beginning cash balance = ending cash balance
o Note to financial statements
o Auditor’s report
 NGOs
o Statement of Activities
o Statement of Net Assets
o Statement of Cash flows

Summary
The basis and measurement focus in the basic fund types
Governmental funds proprietary funds fiduciary funds
Basis of acct Modified accrual basis accrual basis accrual basis
Measurement focus Current financial resource economic resource economic resource

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CHAPTER THREE
3. Accounting for the general and special revenue funds
3.1. Budgets and Budgetary Account
*Definition and Importance of Budget
*The budget serves as a master blueprint for planning control and evaluation of governmental,
proprietary and fiduciary fund financial operation.
- The GASB states, that every governmental unit (entity) should adopt an annual budget
that estimates revenue & expenditure and it states that consistent use of terminology and
classifications in the budget and financial report.
- When the executive branch develops a proposed budget, the legislative body adopts and
enacts the proposed budget with an appropriation of fund; this document becomes the
original budget.
- Long term budget is used to plan projects that span several fiscal years.
- Fixed budgets: - are budgets adopted for specific dollar amounts
-Used by governmental fund category.
- Flexible budget: - is a budget that can increase or decrease spending in response to the
demand for the goods and services they provide on a fee basis
-It is adopted by proprietary funds.

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-The final Budget: - it in corporate all of the changes of the original budget that are made
during the fiscal year.
- Budgets should be prepared with various levels of details
 Revenue should be reported in detail by fund & source
 Expenditure is reported in detail by fund & function or program.
 The fact that budgets are legally binding up on administrators led to the incorporation of
budgetary accounts in the general fund and special revenue funds for which annual
budget is adapted.
 Accounting system of governmental funds that are required to adopt budget by law
should incorporate budgetary accounts.
 The general ledger budgetary accounts are: -
- Estimated revenue is expected financial resources in the budget year. The normal
balance is debit
- Appropriation - authorized spending for the budget year. The normal balance is credit
- Encumbrance - Commitment to spend. Normal balance is debit
- Budgetary fund balance aggregate unreserved F.B. normal balance is credit
- Budgetary fund balance reserved for encumbrance. Normal balance credit
- Estimated other financing sources. Estimated revenues sources other than common
sources. Normal balance is debit
- Estimated other financing uses. Estimated expenditures that may come up during the
fiscal year out of plan. Normal balance credit
*All these controlling accounts are supported by subsidiary ledger accounts as needed.
E.g.1. Recording the Budget
-The government estimates that it will receive $ 5,000,000 in general revenue sources, it also
estimates that it will receives, $ 20,000 proceeds from sale of surplus equipment the legislative
body of the government decides to grant spending authority of $ 4.800,000 to executive body to
provide public service. In addition, the legislative unit estimates that it will spend 10,000 to settle
law suit. Record the Necessary journal entry.
a) Estimated revenue ----------------------------------------------- 5,000,000
Budgetary fund balance ------------------------------- 5,000,000
(To record estimation of revenue)
b) Estimated other financing source ------------------------------ 20,000
Budgetary fund balance ------------------------------ 20,000
(To record revenue from non-recording spruces)
c) Budgetary fund balance ------------------------------------------ 4,800,000

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Appropriation ------------------------------------------- 4,800,000

(To record authorization for expending)
f) Budgetary fund balance ------------------------------------------ 10,000
Estimated other finking use ---------------------------- 10,000
(To record estimation of expenditure for non-rearing)
Or
-Estimated revenue ------------------------------------------- 5,000,000
Estimated other financing source -------------------------- 20,000
Appropriation ------------------------------------- 4,800,000
Estimated other financing use ------------------- 10,000
Budgetary fund balance -------------------------- 210.000
(Combined journal entry).
3.2. Balance sheet and operating statement accounts.
 A governmental fund accounts only for cash and other assets that may be expected to be
converted into cash in the normal operation of the governmental unit.
 Fund balance is not similar to the capital of investor owned entity.
 Reserve accounts are established to disclose fund that are not available for appropriation.
 The portion of equity that is available for appropriation at the year end disclosed in an
account called fund balance un reserved
 Revenues are increase in fund financial resources other than from inter fund transfer and
debt proceeds it includes.
- Taxes
- Fees
- Charges for services by other government (donation, Grant, entailment)
- Shared revenues
- Fines and forfeits.
General fund account structure (Typical account balance)
Balance sheet accounts
- Current assets (debit)
- Current liabilities ( credit)
- Fund balances :
o Reserved for encumbrances
o Unreserved
 Designated ( credit)
 Undesignated ( credit)
Year end balances in these accounts are carried forward to become the subsequent year
beginning balances
Accounts that will be closed at year End

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Nominal (activity) accounts:

Revenue control (credit)
Expenditures control (debit)
Other financing sources control
- Transfer in (credit)
- Long term debt proceeds (credit)
Other financing uses control
- Transfers out (debit)
Budgetary accounts:
- Estimated revenues ( debit)
- Appropriation control (credit)
- Estimated other financing sources control (debit)
- Estimated other financing use control (credit)
- Encumbrance control (debit)
- Budgetary fund balance reserved for encumbrances (credit)
- Budgetary fund balance (debit or credit)
The General fund & special revenue fund and other fund types classified as governmental funds
accounts only current assets and current liabilities general fixed assets and long term debt are not
reported in governmental funds
The arithmetic difference between total fund assets and total fund liabilities is the fund
balance
Fund balance as of balance sheet date that is not available for appropriation, reserve accounts
are established; the portion of equity that is available for appropriation at year end is disclosed in
an account called Fund Balance- Unreserved.
Revenues is defined as an increases in fund financial resources other than inter-fund transfer and
debt proceeds It includes taxes, fees, charges for services and resources provided by other
governments.
Transfers received from other fund and debt proceeds received by a fund are classified as other
financing sources
Expenditure here is defined as a decrease in fund financial resource other than thorough inter-
fund transfers
Transfers out of a fund to other fund are classified as other financing uses
 Expenditure: - it includes both cost and expenses of business organization.

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-is a decrease in fund financial resource other than through inter fund transfer.
 Other financing Uses: - it refers to transfer out of fund to other fund
3.3. Recording The budget
Example: Assume that the amounts appearing below have been legally approved as the budget
for General fund of a certain government for the fiscal year ending Dec 31, 2011. As of Jan 1,
2011 total estimated revenue is 1,350,000 (from taxes 882,500, Licenses and permits 125,500,
Intergovernmental revenues 200,000, Charges for services 90,000, Fines and forfeits 32,500, and
Misc. revenues 19,500), this total estimated revenue should be recorded in the General fund
general ledger accounts as follows
Entry 1. Estimated revenues control 1,350,000
Budgetary fund balance 1,350,000
And the amounts that are expected to be recognized during the year from each revenue
source specified in the budget should be recorded in the subsidiary ledger accounts as
follows:
Estimated Revenues Ledger Dr.
Taxes-------------------------------------------882,500
Licenses and permits-------------------------125,500
Intergovernmental revenues ----------------200,000
Charges for services -------------------------90,000
Fines and forfeits -----------------------------32,500
Misc. revenues -------------------------------19,500
The total appropriations legally approved for 2011 is 1, 225,500 and estimated other financing
uses control 74,500 (for General government 129,000, Public safety 277,300 High ways &
streets 84,500, Sanitation 50,000, Health 47,750, Welfare 51,000, Culture & recreation 44,500,
Education 541,450, and Transfers out 74, 500) for the General fund of the same governmental
unit should be recorded in the General fund general ledger accounts as follows.
2. Budgetary fund balance 1,300,000
Appropriations control 1, 225,500
Estimated other financing uses control 74,500
And the amounts that are appropriated for each functions itemized in the budget should be
recorded in subsidiary ledger accounts as follows:

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Appropriations Ledger:
General government 129,000
Public safety 277,300
High ways & streets 84,500
Sanitation 50,000
Health 47,750
Welfare 51,000
Culture & recreation 44,500
Education 541,450
Other financing uses ledger:
Transfers out 74,500
 It is acceptable to combine the two entries illustrated

3.4 Accounting for Revenues

During a fiscal year, actual revenues should be recognized in the general ledger accounts of
governmental funds by credits to the revenues control accounts. The general ledger revenues
control accounts supported by revenues subsidiary ledger accounts is kept exactly the same
details as kept for estimated revenues subsidiary accounts. Assume the actual revenue collated
during period is 1,314, 500 (Taxes 881,300, Licenses & permits 103,000, Intergovernmental
revenues 186,500, Charged for services 91,000, Fines & forfeits 33,200 and Miscellaneous
revenues 19,500)
3. Cash 1,314,500
Revenue control 1,314,500
Revenue ledger: Cr
Taxes 881,300
Licenses & permits 103,000
Intergovernmental revenues 186,500

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Charged for services 91,000

Fines & forfeits 33,200
Miscellaneous revenues 19,500
Periodically throughout the year, elected officials and governmental managers will want to
compare estimated revenues subsidiary accounts with actual revenues subsidiary accounts. If
revenues fails to reach the levels anticipated when the budget was enacted, budget revision may
be warranted to prevent the government from deficit spending.
3.5 Accounting for Encumbrance (load) & Expenditure
An appropriation is considered to be expended when authorized liabilities are incurred. Purchase
orders and contracts are commitments that will result in liabilities when the purchase orders are
filled and the contracts executed. Such expected liabilities are called encumbrances.
The following entries illustrate accounting for encumbrances and expenditures for the General
funds of the government: assume there is issue of purchase orders at 500,100 (for General
government 73,200, Public safety 115,100, Highways & streets 34,600, Sanitation 29,300,
Health 16,500, Welfare 18,700, Culture & recreation 14,800, and Education 197,900) the entry
to record this is:
4. Encumbrance control 500,100
Budgetary fund balance 500,100
Purchase orders issued on this data are shown in the debits to the encumbrance subsidiary
accounts as follows:
Encumbrance ledger: Dr
General government 73,200
Public safety 115,100
Highways & streets 34,600
Sanitation 29,300
Health 16,500
Welfare 18,700
Culture & recreation 14,800
Education 197,900

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When purchase orders are filled, the actual amount approved by the government for payment to
the suppliers is often different form the estimated amount recorded in the encumbrance control
account (and subsidiary ledger accounts). Since encumbrance control account was debited
estimated amount it must be credited for the same estimated amounts to the extent that purchase
orders are fives (or canceled). The balance remaining in the encumbrance control account,
therefore, is the estimated dollar amount of purchase orders outstanding. The following entry
shows the entry necessary on the assumption that most purchase order recorded in entry 4 have
now been filled but purchase orders for general & Education remain out standing, that is the
actual amount approved by the government is 492,300 (for General government 68,300, Public
safety 115,100, Highways & streets 34,600, Sanitation 29,300, Health 16,500, Welfare 18,700,
Culture & recreation 14,800, and Education 195,000), so the entry to record this is:
5a. Budgetary fund balance- Reserved for encumbrance 492,300
Encumbrance control 492,300
Encumbrance ledger: Cr
General government 68,300
Public safety 115,100
Highways & streets 34,600
Sanitation 29,300
Health 16,500
Welfare 18,700
Culture & recreation 14,800
Education 195,000
The encumbrance procedure is not always needed to make sure that appropriations are not over
expended. For example, wages of governmental employees must be chargeable against valid &
sufficient appropriations in order to give rise to legal expenditures; many governments do not fill
it necessary to estimate payrolls of recurring relatively predictable amounts
Example 2- when a purchase orders for goods or services is issued to a supplier by one of those
funds, a journal entry similar to the following is prepared for the fund.
Encumbrance 150,000
Fund Balance Reserved for Encumbrances 150,000
= to record encumbrances for purchase order no. 001 issued to X company.

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When the suppliers invoice for the ordered merchandise or services is received by the
governmental unit, it is recorded and the related encumbrance is reversed as seen below:
Expenditures 180,500
Vouchers payable 180,500
= to record an invoice received from Wilson company under purchase order no. 001
Fund Balance reserved for Encumbrances 150,000
Encumbrances 150,000
=To reverse encumbrance for purchase order no. 001 issued to X Company
financing sources of the budget exceed appropriations and other financing uses (as required by
law for many governmental units), there will be budgetary surplus, if vice-versa, there will be
budgetary deficit.
3.6. Budget revision and comparison
In most cases, governments will prepare and adopt budget revisions. Assume that government in
this example decided to revise the estimated revenues budget down ward by 36,000 and the
appropriation budget up word by 8,000
General ledger entries
- Budgetary fund balance 44,000
Estimated revenues control 36,000
Appropriation control balance 8,000
Estimated Revenues ledger: Cr.
Licenses and permits 22,500
Intergovernmental revenues 13,500
Appropriation ledger
Highways and streets 1,000
Sanitation 7,000
Budget compassion in necessary to identify the smokes of variances in revenues expenditure and
encumbrance and to take the necessary collective measures for the future Budgetary compassion
schedule:

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Name of the government with budgetary comparison schedule

For the year ended Dec 31,2011

Budget Amount Actual amount Variance with

Original Final Budgetary basis Final budget

Positive (negative)

Revenues:

Taxes 882,500 882,500 881,300 (1,200)

Licensed permits 125,500 103,00 103,000 -

Inter governmental transfers 200,000 186,500 186,500 -

License permits

Change for service 90,000 90,000 91,000 1,000

Fines and forfeits 32,500 32,500, 33,200 700

Miss. revenues 19,500 19,500 19,500 -

Sub. total 1,350,000 1,314,000 1,314,500 500

Expenditure and Encumbrance:

General Gov’t 129,000 129,00 121,805 7,195

Public safety 277,300 277,300 255,395 18,905

Highways and streets 84,500 85,500 85,400 100

Sanitarian 50,000 57,000 56,250 750

Health 47,750 47,750 44,500 3,250

Wealth 51,000 51,000 46,800 4,200

Culture and recreation 44,500 44,500 40,900 3,600

Education 541,450 541,450 509,150 32,300

1,225,500 1,233,500 1,163,200 70,300

Excess Deficiency ) of revenues cover 124500 80,500 151,300 79800

expenditure

(uses) 74500 74500 74500 -

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Net change in fund balance 50,000 6,000 76,800 79,800

Fund balance (beg.) 332,000 350,000 350,000 -

Fund Blanca End 382,000 356,000 426,800 70,800

Classification of Estimated revenues & Expenditure

A revenue budget is necessary for administration to determine whether proposed expenditure can
be financed by resources available to the budgeting jurisdiction. The budget should include all
sources including inter fund transfers and bond issue proceeds as well as taxes, licenses&
permits, fees & Forfeits & other revenue sources. It should be emphasized that the government
may raise revenues only from sources that are available by law.
The primary classification of governmental revenues is by Fund in American context but
source is the major basis for classification of revenues in Ethiopia. And expenditures are
classified as capital project expenditure & recurrent expenditure.
3.7. Accounting for non exchange transactions
Non exchange transactions are defined as transactions “in which a government gives (or
receives) value without directly receiving (or giving) equal value in exchange.’’ By their nature,
governmental funds including the general and special revenue funds are engaged in non
exchange transactions.
Classification and Recognition requirements for non-exchange transaction
- Based on their nature of underling transactions, they are classified in to four groups.
Accounting for each non exchange transactions is then determined by which of the four
classes applies.
1. Imposed non exchange transactions: are taxes and other assessment imposed by
governments that are not derived from underlying transactions e.g. property taxes, special
assessments, and fines and forfeits. Those transactions should be recognized when an
enforceable legal claims exist, or when the resources are received, which events occurs
first.
2. Derived tax revenues: Results from taxes assessed on exchange transactions. E.g. Sales
taxes, income taxes etc. Theses transactions are recognized when the tax is “imposed” or
when the underlying transaction takes place.
3. Government- mandated non exchange transactions- exist when the providing
government, such as federal governments requires the receiving government to expend
the funds for a program mandated by the providing government.

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4. Voluntary non exchange transactions- include grants and entitlements from one
government to another where the providing government does not mandate a particular
program. It also includes contributions form individuals, other non governmental entities,
and governmental entities and may or may not have purpose restrictions.
Eligibility requirements
A number of eligibility requirements must be met before revenues and assets may be
recognized. The requirements are: -
1. Required characteristics of recipients. The recipient must have the characteristics specified by
the provider
2. Time requirements if time requirements (for expenditure) are specified by the recourse
provider or legislation, those time requirements must be met.
3. Reimbursements – for those grants and gifts that are payable only up on the incurrence of
qualifying outlays permissible under the grant, receivables and revenues would be recognized
only when the expenditures have been incurred.
4. Contingencies- Resources pledged that have contingency attached are not to be recognized
until the contingency has been met.
 If there is a difference between a provide governments fiscal year and the receipt
governments fiscal year, for the purpose of determining eligibility requirements, the
providing governments fiscal year applies.
3.8. Modified accrual accounting
Governmental fund financial statements are to be prepared on the modified accrual basis of
accounting. As the term implies certain modification are made to the accrual basis of
accounting and it can be described by looking at revenues recognition and expenditure
recognition.
Revenue recognition: -
Under modified accrual accounting, revenues are recognized when they become both measurable
and available to finance expenditures of the current period.
- Measurable- means the government is able to determine or reasonably estimate the
amount
- Available- means collectable within the current period or soon enough thereafter to be
used to pay liabilities of the current period.

Expenditure recognition: -
- Expenditures may be for current purposes, such as salaries supplies, for capital outlay, or
for debt service principal and interest.

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- Expenditures are recorded and fund liabilities are recognized when goods and services
are received, regardless of whether results are available in the fund. But expenditures for
claims and judgments, compensated absences, special termination benefits, and land fill
closures costs of governmental funds should be recognized to the extent that the liabilities
are going to be paid with available resources; additional amounts are reported as lay-term
liabilities in the government wide statements.
Debt service fund expenditure will be discussed in the next chapter.
3.9. Inter fund transactions
They are transactions between individual funds. They are classified in to two major and
two sub categories. Journal entries to record inter fund transactions are based on these
classifications.
I. Reciprocal inter fund activity: - is the internal counterpart to exchange and
exchange- like transactions and includes:
A. Inter fund loans: - are resources provided from one fund to another with the requirement
for repayment. The fund providing the resources records an inter fund receivable (Due
from other funds) and the fund receiving the resources record an inter fund payable (Due
to other funds). Long-term loans use the terms advance to and advance from. Inter fund
loans affect only assets and liabilities accounts.
B. Inter fund service provided and used: - represent transactions involving sales and
purchase of goods and services between funds. An example is the sale of water from a
water utility (enterprise) fund to general fund. In those transactions, one fund records
revenue (enterprise in this example) and the other fund records expenditure or expense
(the general fund). Earlier standard used the term quasi-external transactions, reflecting
that these transactions are reported as if they were transactions with parties out side the
government.
II. Non reciprocal inter fund activity- includes:
A. Inter fund transfers –represent flow of cash or other assets with out the requirement for
repayment. An example would be an annual transfer of resource from the general fund to
the debt service fund.
B. Inter fund reimbursements- represent repayments to funds that initially recorded
expenditure by the funds responsible. For example, assume the general fund had
previously debited expenditures to acquire some supplies, but the supplies should have
been charged to the special revenue fund. The reimbursement entry would have one fund
(the special revenue fund) debit an expenditure (expense) and the other fund (the general
fund) credit an expenditure or expense.

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General fund account structure

Illustrative case- general fund
Assume at the beginning of fiscal year 2011, the typical general fund had the following balances
in its accounts

Debt Credit

Cash 100,000

Tax receivable – delinquent 400,00

Estimated uncollectible delinquent taxes 49,000

Interest and penalties receivable on tax 25,000

Estimated uncollectible 10,000

Account payable 135,000

Differed revenues- property taxes 20,000

Due to federal government 30,000

Fund balance resource for encumbrance 45,000

Fund balance un reserved 245,000

Total 525,000 525,000

The fund balance reserved for encumbrance account represents the amount of purchase orders
and contracts, related to the period year, that are opened at the beginning of 2011.
Recording the budget

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At the beginning of the fiscal year 2011, it is necessary to record the budget (Assuming that all
legal requirements have been met). If the total estimated revenues budget is 6,200,000 total
appropriations are 5, 2000,000 the total planned transfer to debt service fund and internal service
fund is 204,000 and 596,000 respectively, the
1. Estimated revenue control 6,200,000
Appropriation control 5,200,000
Estimated other financing use control 800,000
Budgetary fund balance 200,000

Assume the appropriation ledger includes 45,000 to honor the purchase orders outstanding at the
beginning of the year. This might have been done
1. By adding 45,000 to the 2011 budgets of the departments involved or
2. By requiring the departments to cover the 45,000 out of the budgeted funds for
2011.
Re-establishment of encumbrance
Assuming the 45,000 in purchase orders at the beginning of the year will be honored, it is
necessary to re-establish the encumbrances.
2a Encumbrance control 45,000
Budgetary fund balance reserved for encumbrance 45,000
2b fund balance reserved for encumbrance 45,000
Fund balance un-reserved 45,000
Recording prior- year property taxes as revenues
GASB standards for property tax revenues recognition under the modified accrual basis of
accounting provide that revenue should not be recognized for property taxes expected to be
collected more than 60days beyond the end of fiscal year. In fact, some governments defer all of
their property taxes receivable at year –end. At the end of 2010, the typical general fund deferred
20,000 in property taxes and the amount is reflected in the beginning trial balance.
The following entry is to recognize that amount as revenues for 2011.
3. Differed revenues- property taxes 20,000
Revenues control 20,000
Tax anticipation notes payable

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In the trial balance of the typical general fund, liabilities (A/ payable, and due to federal
governments) total 165,000. Cash of the general fund on the date of the trial balance amounts to
100,000. Although some collections of delinquent taxes expected early in the year, payrolls and
other liabilities are incurred and must be paid before substantial amounts of cash will be
collected; accordingly, it is desirable to arrange a short-term lean: local banks customarily meet
the working capital needs of governmental units by accepting a “tax anticipation notes” (a short
term note) from the governmental officials. If the amount of 200,000 Br is borrowed at this time
the necessary entry as follows:
4. Cash 200,000
Tax anticipation payable 200,000
- Because the lean short-term it reflects as a liability of the fund.
-
Payments of liabilities as recorded
- Checks were drawn to pay the accounts payable and the amount due to federal
government as of the end of 2010:
5. A payable 135,000
Due to federal government 30,000
Cash 165,000
Encumbrance entry
In addition to the 45,000 outstanding at the beginning of the year, purchase orders, for materials
and supplies are issued in the amount of 800,000 Br. The general ledger entry to record the
encumbrances for the purchases order is as follows (subsidiary ledger detail is omitted from this
example but should be recorded by an annual governmental unit):
6. Encumbrance control 800,000
Budgetary fund balance reserved for encumbrance 800,000
Recording property tax levy
Assume that the budgeted revenue form real property taxes, included in the total estimated
revenues recorded in entry 1 was 3,200,000 excluding prior year property taxes (20,000 in entry
3). Assume further that 2% of these taxes are estimated to be uncollectible due to tax collection
policy and local economic conditions. In order to generate revenues of 3,200,000 the gross levy
must be in the amount of 3,265, 306 (3,200,000 ÷98%). Therefore, when the taxes are levied, the
following entry should be made:
7. Taxes receivable current 3,265,306

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Estimated uncollectible current Taxes 65,306

Revenues control 3,200,000
Collection of delinquent taxes
Delinquent taxes are subject to interest and penalties that most be paid at the time the tax bill is
paid. It is possible for a government to record the amount of the penalties at the time that taxes
become delinquent. Interest may be computed and recorded at the end of the year so that
financial statements report the account on the accrual basis. Interests must also be computed and
recorded for the period from the date of last recording to the date when a tax payer pays the
delinquent taxes. In the current year, the typical general fund collected delinquent taxes in the
amount of 330,000 on which interest and penalties of 20,000 had been accrued at the end of
2010, further 3,000 additional interest was collected for the period from the first day of 2011 to
the dates on which the delinquent taxes were collected. These events will be recorded as follows:

8a Interest and penalties receivable on taxes 3,000

Revenue control 3,000
8b. cash 353,000
Tax receivable diligent 330,000
Interest and penalties receivable on taxes 23,000
Payrolls and payroll taxes
The gross pay of employees of general fund departments amounted to 3, 345,000. The fund does
not use the encumbrance procedure for payrolls. Deductions from gross pay for the period
amounted to 256,000 for employees’ pension contribution and Medicare tax, 430,000 for
employees’ federal withholding tax; and 78,000 for employees’ for state withholding tax.
The first two has to be remitted to the federal government, and the last item has to be remitted to
the state government.
13.a Expenditures central 3,345,000
Due to federal Gov’t 686,000
Due to state Gov’t 78, 000
Account payable 2,581,000
Payment of the vouchers for the net pay results in the following entry

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b, A/ payable 2,581, 000

Cash 2,581,000
In as much as the recorder is liable for the employee’s share of the tax and Medicare tax
(256,000) and for contribution to additional retirement funds established by the state law,
assumed to amount 167,000 for the year, the liabilities for the contribution must be recorded:
14. Expenditure control 423,000
Due to federal gov’t 256,000
Due to state gov’t 167,000
Payment vouchers and other Items
Payment is made on 770,000 of the outstanding accounts payable, and the amounts due to the
state and federal government is 245,000 and 942,000 respectively.

15, A/ payable 770,000

Due to federal government 942,000
Due to state Government 245,000
Cash 1,957, 000
Amendment of the Budget
Comparisons of budgeted and actual revenues by sources and comparisons of departmental or
program appropriations with expenditures and encumbrance, as well as an interpretation that was
not available at the time the budgets were originally adopted, may indicate, the desirability or
necessity of legally amending the budget during the fiscal year. For example, asset that the
revenues budget increased by 50, 000 in the charges for services sources category and that the
appropriation for the public works department was increased by 100, 000.the amendments to the
budget would be record when they are legally approved, as follows:
16. Estimated Revenue control 50,000
Budgetary found Balance 50,000
Appropriation central 100,000
Inter fund Transactions
Inter found services provided and used are recognized as revenues or expenditures (or expense
in the case of proprietary fund) of the funds involved just as they would be recognized as

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revenue expenditure (or expenses) if the transaction involved organizations external to the
governmental unit. Assume that the amount charged by the water utility to the General fund was
80, 000 Br. The General fund entry would be
17. Expenditure central 80,000
Due to water utility fund 80,000
Another common transaction for the General fund is the receipt of supplies or services from an
internal service fund established to provide purchasing and distribution services to other
government departments. Assume the General fund received 377,000 in supplies from the
supplies fund and later made the partial payment of 322,000 in cash. The entries would be as
follows:
18a. Expenditure central 377,000
Due to supplies fund 377,000
18b, Due to supplies fund 322,000
Cash 322,000
Inter fund Transfers- Same transactions are labeled as “other financing sources (use)-transfers”
in order to avoid reporting revenues and expenditures more than once in the governmental unit.
Assuming that the General fund made the budgeted transfer to a debt service fund for the
payment of debt service, the General fund entry would be as follows:
19a- other financing uses- Transfers out central 204,000
Due to debit services fund 204,000
When the cash is transferred, the entry would be as follows:
19b, Due to debt service fund 204,000
Cash 204,000
Recognition of inventories in governmental funds
Generally, supplies inventories are insignificant relative to governmental fund balances. In any
case, GAAP permit two methods of accounting for inventories. Under the consumption method
of accounting for inventories, an asset is debited when inventories acquired, and the account
expenditure is debited and the asset credited when inventories are consumed, the same as in
business accounting. Under the purchase method of accounting of inventories, the expenditure
account is debited when supplies are received. If inventories are significant, GAAP require that a
year-end adjustment be made in which an asset account is debited and an equal amount set aside
as a fund balance reserve

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.
Chapter Four
4.1 Accounting for other governmental fund types
The following table summarizes governmental fund types

Fund Modified Financial Record Income- Fund description Fund term

name accrual
basis resources budget balance
focus

General     Accounts for all financial Indefinite life

fund resources not required to be
reported in another fund

Special     Accounts for legally restricted For each period

revenues revenue sources, other than the revenue is
these restricted for capital provided
projects or debt services

Capital    Accounts for financial From the period

projects resources to be used for resources are
acquisitions or construction of first provided
major capital facilities (other until the capital

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than those financed by facility is

proprietary or judiciary complete.
funds).

Debt   Accounts for financial From the period

service resources to be used for of funds are
payment of interest and first
principal on general long-term accumulated
debt (not needed for debt paid until the final
form proprietary or judiciary interest and
fund). principal
payment is
made.

4.1.1 Capital Projects Funds

A major source of funding for capital projects funds is the issuance of long-term debt. In addition
to proceeds of issues of long-term debt, capital projects funds may receive grants from other
governmental units, transfers from other funds; gifts form individuals, organizations or
combinations of several of these sources. Capital project fund may also be used to account for
the acquisition by a governmental unit of general fixed asset under capital leas agreements.
GASB- Standards requires modified accrual basis of accounting for capital projects funds as for
other governmental funds. Proceeds of debt issues should be recognized by capital projects funds
at the time the debt is actually incurred, rather than at the time it is authorized, because
authorization of an issue does not guarantee its sales. Proceeds of debt issues are recorded as
proceeds of bonds or proceed of long-term Notes rather than as revenue and are reported in
the other financing sources section of the statement of revenues, expenditures, and change in
fund balance. Similarly, revenues of general or special revenue funds that are transferred to a
capital projects fund are recorded as Transfer in and reported in the other financing sources
section of the operating statement..
Illustrative Case capital project fund
In the following illustration of accounting for representative transactions of a capital projects
fund, it is assumed that early in 2011 the municipality of a city authorized an issue of 1,200,000
8% 10 year regular serial tax-supported bond to finance constriction of additional fire station.
The total cost of the station was expected to be 2,000,000, with 600,000 to be financed by grants
from other governmental units and 200,000 to be transferred from an enterprise fund. The project
would utilize land already owned by the municipality and was to be done partly by private
contractor. Completion of the project was expected with in the year. Transactions and entries
illustrated as follows. For economy of time and space, vouchering of liabilities and entries in
subsidiary ledger account are not illustrated.

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The 1,200,000-bond issue, which had received referendum approved by taxpayers, was officially
approved by the city council. No journal entry is required a memorandum entry may be made to
identify the approved project and the means of financing it.
The sum of 100,000 Br. Was borrowed from the national Bank for defraying engineering and
other preliminary costs incurred bonds could be sold. The notes will be repaid in the current
period and are recorded as a liability in the capital project fund.
1. Cash 100,000
Bond anticipation notes payable 100,000
The receivables from the enterprise fund and other governmental units were recorded; a receipt
was expected during the current year.
2. Due from other funds 200,000
Due from other governmental units 600,000
Other financing sources- transfer in 200,000
Revenues control 600,000
Total purchase orders for supplies, materials, items of minor equipment, and labor required for
the project amounted to 245,698
3. Encumbrance control 245,698
Fund balance- reserved for encumbrance 245,698
A contract was issued for the major part of the work to be done by a private contractor in the
amount of 1,500,000
4. Encumbrance control 1,500,000
Fund balance reserved for encumbrance 1,500,000
Special engineering/ designing and miscellaneous preliminary cost that had not been encumbered
were paid in the amount of 97,500.

5. Construction expenditures 97,500

Cash 97,500
When the project was approximately half- finished, the contractor submitted billing for a
payment of 750,000. The following entry record conversion of a commitment (recorded in fund
balance- reserved for encumbrances) to a firm liability, eligible for payment upon proper

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authentication. Contracts payable records the status of a claim under a contract between the time
of presentation and verification for vouchering or payment.
6. Fund balance- reserved for encumbrance... ………………… 750,000
Constriction expenditures ………………………………… 750,000
Encumbrances control ……………………………………..……. 750,000
Contracts payable ………………………………………………... 750,000
The transfer was received from the enterprise fund, and 300,000 Br was received from other
governmental units.
7. Cash 500,000
Due from other funds 200,000
Due from other governmental units 300,000
The bond was sold at a premium of 12,000 Br. under modified accrual accounting; bond
premiums and discounts are not amortized. In this example, as is true, the premium must be used
for debt service and will not be available for use by the capital projects fund; therefore, it is
transferred to the debt service fund. Entry 8a, records the receipt by the capital projects fund of
the par value of the bond sold, and 8b records the transfer to the debt service fund.
8a, cash 1,212,000
Other financing sources- proceeds of bonds 1,200,000
Other financing sources- premium on bonds 12,000
8b other financing use- transfer out 12,000
Cash 12,000
If bonds were sold at discount, either the difference would be makeup by a transfer from another
fund, or the capital projects fund would have fewer resources available for the project. Generally,
bonds issue costs would be involved, and would be recorded as expenditures.
When bonds were sold between interest dates, the governmental unit would collect from the
purchaser the amount of interest accrued to date of sale, because a full six months’ interest would
be paid on the next interest payment date. Interest payments are made from debt service fund;
therefore, cash in the amount of accrued interest sold at the time of bond issuance should be
recorded in the debt service fund.
The municipality’s capital projects fund pays the bond anticipation notes and interest (assumed
to amount to 2,500) and records the following journal entry:

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9. Bond anticipation notes payable ……………………… 100,000

Interest expenditures …………………………………. 2,500
Cash …………………………………………………………. 102,500
The contractor’s initial claim (see entry 6) was paid, less 5% retention. Retention of a
contractually stipulated percentage from payments to contractors is common until the
construction is completed and has been inspected for conformity with specifications and plans.
10. Contracts payable 750,000
Cash 712,500
Contracts payable- retained parentage 37,500
.
Disbursements for items ordered at an estimated cost of 215,000 (included in the amount
recorded by entry 3) amounted to 216,500.
11. Fund balance-Reserved for encumbrance 215,000
Construction expenditures 216,500
Encumbrances control 215,000
Cash 216,500
Assume the contractor completes construction of the fire station and bill the municipality for the
balance on the contract:
12. Fund balance-Reserved for encumbrance. ………………. 750,000
Construction expenditures …………………………………750,000
Encumbrances control ………………………………………… 750,000
Contracts payable ……………………………………………… 750,000
Assume that the remaining amount from other governmental units was received.
13. Cash 300,000
Due from other governmental units 300,000
Invoices for goods and services previously encumbered in the amount of 30,698 were received
and approved for payment in the amount of 32,000. Additional construction expenditures, not
encumbered, amounted to 115,000. The entire amount was paid in cash.

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14. Fund Balance-Reserved for encumbrances 30,698

Construction expenditures 147,000
Encumbrances control 30,698
Cash 147,000
Assuming that inspection revealed only minor imperfections in the contractor’s performance, and
upon correction of these, the contractor’s bill and the amount previously retained were paid,
entry 15 should be made:
15. Contracts payable- Retained percentage 37,500
Contracts payable 750,000
Cash 787,500
After the final payment for the contractor is made, 36,500 Birr in cash remained in the capital
projects fund. That amount was transferred to a debt service fund for the payment of interest and
principal of the bond.
16. Other financing uses- Transfers out 36,500
Cash 36,500
Upon the completion of the project and dispersion of any remaining cash, the following clossing
entry will be made:
17. Revenue control 600,000
Other financing source- transfer in 200,000
Other financing sources- proceeds of bonds 1,200,000
Other financing sources- premium on bonds 12,000
Construction expenditure 1,961,000
Interest expenditure 2,500
Other financing uses- Transfer out 48,500
Financial statements for the fire station capital projects fund are presented as part of
governmental funds balance sheets and the governmental funds statements of revenues,
expenditures, and changes in funds balances.

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The addition to the fire station, excluding interest, will be capitalized and shown as an addition to
the capital assets in the government-wide financial statements. In addition the 1,200,000 Br in
bonds will be recorded as a liability in the government- wide statements.
4.1.2. Debt Service Funds
As we just observed, major capital additions are commonly financed through bond or other debt
issues. Another fund type, the debt service fund, is used to account for revenues and other
financing sources that are intended to service these debts, i.e. pay the interest and principal as
they come due. They are not created for debt issues where the activities of proprietary funds are
intended to generate sufficient cash to make interest and principal payments.
If taxes and/or special assessments are levied specially for payment of interest and principal on
long-term debt, those taxes are recognized as revenues of the debt service fund. More commonly,
general taxes are levied by the general fund and transferred to a debt service fund to repay debt.
In that case, the taxes are recorded as revenues by the general fund and as transfers to the debt
service fund.
GASB standards require debt service accounting to be on the same modified accrual basis of
accounting as general, special revenue, and capital projects funds. One peculiarity of the
modified accrual basis as applied to debt service accounting is that interest on long-term debt is
not accrued; it is recognized as expenditure in the year in which the interest is legally due. For
example, if the fiscal year of a government ends on Dec. 31,2010, and the interest on its bonds is
payable on April 1 and October 1 of each year, interest payable would not be reported as a
liability in the balance sheet of the debt- service fund prepared as of Dec. 31,2010. The rational
is that, since interest is not legally due until April 1, 2011, resources need not be expended until
2011. The same reasoning applies to principal amounts that mature in the next year, expenditures
and liabilities are recognized in the debt service fund in the year for which the principal is legally
due.
Additional use of debt service funds
Debt service funds may be required to service, in addition to term-bonds and serial bonds, debt
arising form the use of notes, capital leases a warrants having a maturity more than one year after
the date of issue. Although each issue of long-term debt is a separate obligation and may have
Debt Service accounting for serial bonds
The principal on serial bond is paid over the term of the bonds, rather than in a lump sum at the
end usually the government designates a bank as fiscal agent to handle interest and principal
payments for each debt issue. The assets of a fund may, therefore, include cash with fiscal agent,
and the appropriations, expenditures and liabilities may include amounts for the service charges
of fiscal agent.
There are four types of serial bonds: regular, differed, annuity and irregular. If the total
principal of an issue is repayable in a specified number of equal installments over the life of the
issue, it is a regular serial bond issue.

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If the installment is delayed for a period of more than one year after the issue date, but there
often installment fall due on a regular bases, the bonds are known as deferred serial bonds.
If the amount of annual principal repayment is scheduled to increase each year by approximately
the same amount that interest payment is decrease interest payment decreases, because the
outstanding balance of the bond decrease so that the total debt service remains relatively uniform
over the term of the bond, the bond is called annuity serial bonds.
Entry 16 of the capital projects fund reflected a transfer of 36,500 cash to the debt service fund,
representing the unused construction funds.
The corresponding entry is made in the debt service fund:
24. Cash 36,500
Other financing sources- Transfer in 36,500
At year-end, the debt service fund would reflect the following classing entry:
25. Other financing sources- transfer in 252,500
Expenditures - bond principal 120,000
Expenditures- bond interest 96,000
Fund balance reserved for debt service 36,500
4.3. Permanent Fund
Permanent funds are governmental funds that report resources that are legally restricted, so that
principal cannot be expended, earnings from investments are to be expended for purpose that
benefit the government and its citizen (similar funds whose earnings benefit individuals, private
organization, or other governments are private purpose trust funds).
• Permanent Funds are endowments or other nonexpendable trust funds where the donor
specifies that the earnings (& perhaps principal) are to be used to benefit the government;
for example, to buy library books for the city library or support a government-owned
museum.
• These are governmental funds, using modified accrual accounting.
• Earnings are often transferred to a Special Revenue Fund.
Journal Entries for a Permanent Fund
• Individual establishes an endowment of br. 900,000 in cash to buy library books for the
city library.

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Cash 900,000
Endowment Contributions 900,000
• Equity investments are bought, br. 900,000.
Common Stock (investment-bonds) 900,000
Cash 900,000
• Cash dividends are received, $18,000.
Cash 18,000
Revenue-Dividends 18,000
• Stock increase in value $12,000.
Common Stocks (investment bonds) 12,000
Revenue-Investments 12,000
Fund is closed out at year-end & earnings transferred to a Special Revenue Fund.
Revenue-Dividends 18,000
Revenue-Investments 12,000
Earnings Available to SRF 30,000
Transfer Out 30,000
Cash 30,000
Endowment Contributions 900,000
Earnings Available to SRF 30,000
Transfer Out 30,000
Fund Balance-Endowment 900,000

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