Chapter 19: Accounting for State

and Local Governmental Units –

Governmental Funds
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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 Governmental Funds: Objectives
1. Prepare journal entries to record transactions in
governmental funds.
2. Learn about accounting methods unique to
governmental accounting – budgetary issues,
encumbrance accounting, and interfund
transactions.
3. Determine the appropriate governmental fund
to be used.
4. Prepare governmental fund financial
statements.
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 Objectives (cont.)
5. Convert governmental fund financial statements
to government-wide financial statements.

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Accounting for State and Local Governmental Units –
Governmental Funds
1: Record Transactions

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 General Fund Transactions
General fund entries
• Start of fiscal year
• During the year and adjustments
• Closing entries

Sample entries follow. These are neither complete,

nor self-reconciling.
Entries for interfund transfers and encumbrances are
shown later, with Objective 2.

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 Beginning of Year
Reserve for encumbrances 90
Reserve for encumbrances - prior year 90
Estimated revenues 3,500
Appropriations 3,320
Estimated other financing uses - transfers
out 115
Unreserved fund balance 65
• $90 in outstanding purchase orders were included on
last year's balance sheet. These are reclassified at the
start of the current year.
• This year's approved budget is recorded. The difference
between expected sources of funds and expected uses of
funds is credited to the unreserved fund balance. Debit
unreserved fund balance if expected uses exceed sources,.
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 Revenue and Collections
Taxes receivable - current 2,000
Allowance for uncollectibles – current 20
Revenues 1,980
Cash 1,900
Taxes receivable – current 1,760
Taxes receivable – delinquent 140
Allowance for uncollectibles – delinquent 10
Taxes receivable - delinquent 10
• Record revenues net of the estimated allowance.
• Separate receivable and allowance accounts are used
for this year's taxes and all prior years' taxes.
• Write-offs occur when the taxes are deemed
uncollectible. When they are late, they are simply
moved from current to delinquent (an adjustment).
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 Expenditures (Without Encumbrance)
and Payments
Expenditures 200
Vouchers payable 200
Vouchers payable 187
Cash 187
• For Expenditures that are not encumbered first
(no purchase orders are placed for wages, utilities,
and many other items), they are recorded as they
become due.
• These expenditures can be for current services
or capital outlays (like fixed assets)
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 Supplies (without encumbrance)
Supplies inventory 55
Vouchers payable 55
Expenditures 345
Vouchers payable 345
• For supplies, this is the consumption method, like most
businesses use. Adjustments will recognize supplies used
as Expenditures.
• For the purchase method, Expenditures would be
debited at the time of purchase. At year end, an
adjusting entry would record Supplies inventory and
Reserve for Supplies.
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 Expenditures – Prior Year
Expenditures - prior year 85
Vouchers payable 85

• When purchase orders for items are placed in

one year and received in the following year, the
expenditure is classified separately – for control
purposes.
• These "expenditures" are still included with
other expenditures from this year on the
Statement of revenues, expenditures and
changes in fund balance.
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 Adjustments (1 of 2)
Expenditures 30
Supplies inventory 30
Revenues 50
Deferred revenue 50
• Supplies inventory (consumption method) is adjusted to
its proper balance.
• Revenues that haven't been collected yet and are not
expected to be collected in the next 60 days are
reclassified. They will be revenue next period when
collected. A revenue item may be recorded as deferred
revenue initially, if the timing of the collection is known.
Grants might be recorded this way.
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 Adjustments (2 of 2)
Taxes receivable – delinquent 240
Allowance for uncollectibles – current 20
Taxes receivable – current 240
Allowance for uncollectibles –
delinquent 20
• At the end of the fiscal year (or tax year), amounts still
due from taxpayers are reclassified from current to
delinquent. The balance in the "current" accounts is
moved to the "delinquent" accounts. Prior
delinquencies may still be in the delinquent accounts.
• This does not write off any account or suspend
collection procedures. It empties the "current" accounts
so that new taxes can be recorded.
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 Closing the Budget
Appropriations 3,320
Estimated other financing uses - transfers out 115
Unreserved fund balance 65
Estimated revenues 3,500

• The current year's budget is removed from the

books at the end of the year. This entry is a
reversal of the initial entry putting the budget
on the books.

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 Closing Current Year Accounts
Revenues 3,520
Other financing sources - bond proceeds 45
Expenditures 3,264
Encumbrances 50
Other financing uses - transfers out 164
Unreserved fund balance 87
• There may be multiple accounts for other financing
sources and uses (transfers in, proceeds from sales of fixed
assets, nonreciprocal transfers out).
• The unreserved fund balance is adjusted for difference
between total fund sources and total fund uses.
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 Closing Prior Year Accounts
Reserve for encumbrances - prior year 90
Expenditures - prior year 85
Unreserved fund balance 5
• "Reserve for encumbrances – prior year" is a
temporary account established at the start of
the year and closed at the end. The "reserve for
encumbrance" account is part of fund equity which
is on the balance sheet.
• $90 represents the purchase order that was
outstanding at the end of last year, whereas $85
is the actual bill on the goods received.
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 Special Revenue Funds
• Accounts for revenue sources restricted by law
or administrative action, other than those for:
• Permanent funds (endowment)
• Capital projects funds (construction)
• Debt service funds (repayment of debt)
• Example: education, highway maintenance
• Accounting is similar to the general fund
• Usually does not use encumbrances
• Budgetary accounts needed if the budget is
legally adopted
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 SRF - Grant Entries
Receive Cash 20
cash
Deferred revenue – grant 20
Meet Expenditures 18
require-
ments Vouchers payable 18
Deferred revenue – grant 18
Revenue 18
• Special revenue funds are often used to account
for federal or other grants
• Revenue is recognized when eligibility
requirements are met, usually when the
required expenditure is made
• Could be before or after cash receipt
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 Permanent Funds
Cash or Investments 500
Revenues – addition to permanent
endowments 500
Cash 12
Revenues – investment income 12
Expenditures 3
Cash 3
• Used to account for funds on which only the earnings
can be expended. The earnings may or may not be
restricted
• Its "Fund Balance" is a reserved fund balance.
• Unrestricted earnings are transferred to the general
fund
• Restricted earnings may be spent in this fund or
transferred to a special revenue fund
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 Capital Projects Funds
• Accounts for funds being used for major capital
projects, such as building new town offices
• Use encumbrance accounting for the
construction contract and for other purchase
orders and commitments
• Generally no budgetary accounts
• Spending on the project is an Expenditure
• Its main source of funds may be Other
financing sources, such as proceeds from bonds
• Bond receipts are recorded at gross
• Any premium received is generally
transferred to the debt service fund
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 CPF Entries (1 of 3)
Cash 302
Other financing sources – Proceeds from
bonds 302
• At the approval of the capital project, a memo entry is
made
• $300 of bonds are issued for the project, and sell at a
premium of $2
Encumbrances 280
Reserve for encumbrances 280
• A contract for the project is signed for $280
• The signed contract is recorded as an Encumbrance
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 CPF Entries (2 of 3)
CPF Other financing uses – nonreciprocal
transfer to debt service fund 2
Cash 2
DSF Cash 2
Other financing sources – nonreciprocal
transfer from capital projects fund 2
• The premium from the bonds is transferred out of the
capital projects fund to the debt service fund. There it
can be applied to the upcoming interest payment or
invested to use later in repaying the bonds.
• The debt service fund would record the receipt

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 CPF Entries (3 of 3)
Encumbrances 100
Reserve for encumbrances 100
Expenditures 100
Contracts payable 90
Contracts payable – retained percentage 10
• When the contractor bills the city, both entries are
made
• The encumbrance (a portion of the contract) is
removed
• An expenditure is recorded for that amount
• The payable is usually split between the amount due
now and the percent that waits until successful contract
completion, assumed to be 10%
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 CPF – Completing the Project
• Fixed assets:
– As construction continues, construction in
progress is recognized as part of fixed assets
in an amount equal to expenditures
– At completion, the construction in process
becomes the fixed asset, building, etc.
• Capital projects fund:
– Capital project fund closing entries and
statements are prepared each period with
ongoing construction
– At completion, any remaining cash is
transferred to debt service or general fund
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 Debt Service Funds
• Accounts for the funds set aside and being used
to repay debt principal and interest
• Most inflows are transfers from other funds
although there will be investment revenue
• Interest and principal are recorded as
expenditures and payables when due.

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 DSF Entries (1 of 2)
DSF Cash 16
Other financing sources – nonreciprocal
transfer from general fund 16
GF Other financing uses – nonreciprocal
transfer to debt service fund 16
Cash 16
• The debt service fund receives $16 from the general
fund for the upcoming amounts due on bonds: $2
interest and $14 principal
• The general fund would record the payment to debt service

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 DSF Entries (2 of 2)
Expenditures – principal 14
Expenditures – interest 2
Matured principal payable 14
Interest payable 2
Matured interest payable 14
Interest payable 2
Cash 16

• Principal on bonds, $14, is due along with $2 interest

• Interest and principal are recorded as expenditures and
liabilities on the date due
• Liabilities are removed when paid

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 DSF – Continuing Payments
• The debt service fund continues to accept
money (usually from general fund) and make
payments on the outstanding bonds or other
debt
• Use debt service for capital lease payments
• Legal requirements may dictate separate debt
service funds for separate debt, but some may
be combined
• Cash in debt service fund is usually invested to
provide earnings until needed
• Investments
• Investment Revenue
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Accounting for State and Local Governmental Units –
Governmental Funds
2: Governmental Accounting
Particulars

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 The Budget
• Governmental entities formally record the
budget in the accounting records
• Most limit expenditures in functional or object
categories
• Excess spending needs approval
• Budgetary and other accounts must contain
sufficient detail for control
• Only summary accounts are used here
• Budgetary accounts have normal balances in
contrast to the actual accounts to facilitate
control
• Revenues (cr) and Estimated revenues (dr)
Budget entries were already presented with general fund
beginning and closing entries
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 Budget – Levels of Detail
• Budgeted revenues are classified by source
• Taxes, licenses, fines, investment income
• Appropriations, the budgeted expenditures, are
organized by
– Character class, current services, capital
outlays
– And function, general government, public
safety
– May also further classify
• Department, fire, police, zoning
• Object, supplies, salaries
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 Encumbrance Accounting
Place Encumbrances 150
order Reserve for encumbrances 150
Receive Reserve for encumbrances 150
goods Encumbrances 150
Expenditures 140
Vouchers payable 140
• Encumbrances are recorded at the time a purchase
order is placed for the known or estimated amount
• When the item is received, the encumbrance is reversed
(using the amount originally recorded as an
encumbrance) and the expenditure recorded for the
actual amount
• Use for orders of supplies and capital assets, and for
construction contracts (in capital projects fund)
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 Interfund Transactions - Transfers
GF Other financing use … nonreciprocal transfer to
debt service fund 14
Cash 14
DSF Cash 14
Other financing source … nonreciprocal
transfer from general fund 14
• Involve entries in more than one fund account
• Example: General fund (first entry) transfers $14 to the
debt service fund; Debt service fund receives payment
from general fund
• Nonreciprocal transfers imply that it will not be paid
back; Reciprocal transfers used for long term loans
between funds
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 Interfund Transactions - Other
GF Expenditures 5
Cash 5
EF Cash 5
Revenues 5
• The above entries might be a city general fund paying
its water bill and the city water department fund
(enterprise fund) recording the receipt of revenue.
• Accounts used for short term receivables and payables
– Due from other funds (basically, accounts receivable)
– Due to other funds (analogous to accounts payable)
– Advance to other fund (short term loan receivable)
– Advance from other fund (short term loan payable)
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Accounting for State and Local Governmental Units –
Governmental Funds
3: Which Fund?

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 Five Governmental Fund Types

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Accounting for State and Local Governmental Units –
Governmental Funds
4: Fund Financial Statements

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 Fund Financial Statements
Required governmental fund financial statements
1. Statement of net assets or balance sheet
2. Statement of revenues, expenditures and
changes in fund balance
3. Budgetary comparison information
• General fund
• Special revenue funds with legally
adopted budget
1 and 2: Prepare statements columns for general
fund and other significant governmental fund
• Combine insignificant funds
• Show total (no interfund eliminations)
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 General Fund Balance Sheet
Assets $187
Taxes receivable- delinquent $240
Allowance for uncollectibles (20) 220
Accounts receivable 180
Supplies 90
Total $677
Vouchers payable $325
Deferred revenue 50 $375
Reserve for encumbrances $50
Unreserved 252 302
Total $677

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 General Fund Statement of Revenues,
Expenditures and Changes in Fund Balance
Total revenues $3,519
Less expenditures
Current services* (3,158)
Capital outlays (190)
Excess of revenues over expenditures $171
Other financing sources (uses)
Capital leases 45
Transfers out (164)
Excess of revenues and OF sources over
expenditures and OF uses $52
Fund balance, 10/1//06 250
Fund balance, 9/30/07 $302
Expenditures include those from "prior year" encumbrances.
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Accounting for State and Local Governmental Units –
Governmental Funds
5: Government-wide Financial
Statements

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 Government-wide Statements
• Governmental fund statements
– Modified accrual basis
• Government-wide statements
– Accrual basis
• Covert governmental funds to accrual basis for
inclusion government-wide statements

Adjustments are prepared on worksheet

• Individual fund records are not changed

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 Fixed Assets
• Add existing fixed assets with accumulated
depreciation to assets and net assets
• Current acquisitions
– Remove expenditures for capital outlays
– Add to fixed assets
• Current dispositions
– Remove other financing source – proceeds
from sale of fixed assets
– Reduce fixed assets, accumulated
depreciation and record gain or loss
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 Long Term Debt
• Add existing long term liabilities, reduce net
assets
• Current borrowings
– Remove other financing source
– Increase liability
• Current principal repayments
– Remove expenditures
– Decrease liability

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 Leases and Other Adjustments
• Capital leases have both fixed asset and long
term liability adjustments
• Revenues
• Deferrals based on 60 day availability may
be recognized
• Expenditures convert to expenses
• Interfund activities and balances
• Eliminate transfers and balances to/from
• Eliminate interfund internal service
activities
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