ACFN512: Advanced Government and

Not-for-Profit Accounting

LECTURE PRESENTATION NOTES BY MESELE

SHIFERAW FOR MASTER OF SCIENCE IN
ACCOUNTING AND FINANCE IN REGULAR
&WEEKEND PROGRAMS
Wolaita Sodo University, P. O. Box 138, Wolaita Sodo, Ethiopia
Home: +251 982360444 • Cell: +251 964082933
Email: [email protected] Institutional Email:[email protected]
Office room: COBE, ACFN, B-42-19
CONSULTATION HOURS: SATURDAY,3:00-4:00 LT and SUNDAY, 3:00-
4:00 LT
CLASS TIME AND LOCATION: LH-ROOM-1
SET BY:MESELE SHIFERAW,ACFN,
1 DECEMBER,2021 04/17/24
 What is Your Expectations from the Course?

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SET BY:MESELE
2 SHIFERAW,ACFN,DECEMBER,2021 04/17/24
 Thoughts to Ponder: Chapter 1

"A democratic society depends upon an

informed and educated citizenry."
Thomas Jefferson

“Service to others is the rent you pay for your

room here on earth.”
Mohammed Ali

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University;2021
 Learning Objectives

After studying Chapter 1, you should be able to:

 Understand the characteristics that distinguish governments and not-
for-profit organizations from businesses (for-profit entities).
 Identify authoritative bodies responsible for setting GAAP and FRS
for different governmental and not-for-profit entities.
 Contrast and compare the objectives of financial reporting for state
and local governments, the federal government, and not-for-profit
organizations
 Explain the minimum requirements for of state and local
governments and how they relate to CAFR
 Explain and identify the required financial statements for state and
local governments, the federal government, and NFP
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Welcome to Accounting for Governmental
and Not-for-Profit Organizations
• Welcome to the strange new world of accounting and
financial reporting for governmental and not-for-profit
(NFP) organizations
• Why are accounting practices for these organizations
very different from those of business organizations?
– Different purposes in society
– Financed by resource providers who do not expect
benefits proportional to the resources they provide
– Management has a special duty to be accountable for
how resources are used in providing services
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 What are Governmental Organizations?
• General purpose governments-Provide a broad
array of services. Examples: Federal government,
state governments, cities, towns, townships,
villages, counties, boroughs, and parishes
• Special purpose governments-Usually provide only
a single or just a few services-Examples:
Independent school systems, public colleges and
universities, public hospitals, fire protection
districts, sewer districts, transportation authorities,
and many others
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 What are Not-for-Profit Organizations?
• Legally separate organizations
• Usually exempt from federal, state, and
local taxation
• Religious, community service, private
educational and health care, museums, and
fraternal and social organizations, among
many other kinds of
organizations
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 How Do Governmental Entities Differ
From Not-For-Profit Organizations?
• Power ultimately rests in the hands of the
people
• People delegate power to public officials
through the election process
• Empowered by and accountable to a
higher-level government
• Taxation powers

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 How Do Governmental and Not-For-Profit
Organizations Differ from Business Organizations?

• Resource providers do not expect to

receive proportional benefits
• Lack of a profit motive
• Absence of transferable ownership
rights

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 SOURCES OF FINANCIAL REPORTING
STANDARDS
• Federal level
 FASAB - Federal Accounting Standards Advisory Board
 GAO – Governmental Accountability Office
 OMB - Office of Management and Budget
• State and Local Government (SLG)
 GASB - Governmental Accounting Standards Board
 Private (non-governmental) Not-for-profits
 FASB - Financial Accounting Standards Board

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Why Governmental Financial Reporting Must
Differ from Business Financial Reporting?

• Different financial report users with

different needs
• Governmental financial reporting focuses
on stewardship and accountability for how
public resources are raised and used to
provide services

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 Objectives of Financial Reporting—State
and Local Governments (SLG)

Governmental financial reports are used primarily to:

• Compare actual financial results with legally
adopted budget
• Assess financial condition and results of
operations
• Assist in determining compliance with finance-
related laws, rules, and regulations
• Assist in evaluating efficiency and effectiveness
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 Objectives of Financial Reporting—
SLG (Cont’d)

“ACCOUNTABILITY is the cornerstone of all

financial reporting in government,” (GASB
Concepts Statement No. 1, par. 56).
What do we mean by accountability?
Accountability arises from the citizens’ “right
to know.” It imposes a duty on public
officials to be accountable to citizens for
raising public monies and how they are
spent
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 Objectives of Financial Reporting—
SLG (Cont’d)
How does “inter-period equity” relate to
accountability?
• Inter-period equity is a government’s obligation
to disclose whether current-year revenues were
sufficient to pay for current-year benefits—or did
current citizens defer payments to future
taxpayers?

It is important to understand this concept of

“inter-period equity”!

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 Objectives of Financial Reporting—
Federal Government (Cont’d)

Federal government financial reporting

should assist report users in evaluating:
Budgetary integrity
Operating performance
Stewardship
Adequacy of systems and controls

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 Objectives of Financial Reporting—
Not-for-Profit (NFP) Organizations

NFP financial reporting should provide

information useful in:
 Making resource allocation decisions
 Assessing services and ability to provide services
 Assessing management stewardship and
performance
 Assessing economic resources, obligations, net
resources, and changes in them

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 Minimum Requirement for General Purpose External
Financial Reporting

Management’s discussion and analysis

Government-wide Fund financial statements

financial statements

Notes to the financial statements

Required supplementary information

(other than MD&A)
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 Government-wide Financial Statements
• Provide an aggregated overview of the
government’s net position and change in net
position, reported for the government as a whole
• Assist in assessing operational accountability—
whether government has used its resources
efficiently and effectively in meeting service
objectives
• Focused on flow of economic resources,
recognized on the accrual basis—similar to
business organizations
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 Fund Financial Statements
• For now, you should view a fund as a separate
set of accounts used to account for resources
segregated for a particular purpose (see Chapter
2 for the formal definition of “fund”)
• Funds that focus on the flow of current financial
resources are called governmental funds
• Governmental fund financial statements assist in
assessing fiscal accountability—whether the
government raised and spent financial resources
in accordance with budgetary, legal, and
regulatory constraints
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 Fund Financial Statements (Cont’d)
 Governmental fund revenues and expenditures are
recognized on the modified accrual basis revenues are
recognized when measurable and available for spending;
expenditures when an obligation is incurred that will be
paid from currently available financial resources
Other fund categories (see Chapter 2):
• Proprietary funds report on business-like activities of the
government
• Fiduciary funds report on fiduciary (trust and agency)
activities of the government
• Both categories follow accounting principles similar to
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Comprehensive Annual Financial Report
(CAFR)
The CAFR is the recommended annual
report of a governmental unit. It has 3
sections.
 Introduction section
 Financial section
 Statistical section

Every government should prepare interim

statements as needed for sound management
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 CAFR
A CAFR has
 Introduction section:
 Letter of transmittal – presents overview of financial and economical
conditions. General information about how the government is organized .
 Financial Section:
 MD&A – brief overview of financial performance of the government.
 Basic financial statements and Notes
 Required Supplementary Information
 Combining and individual fund financial statements.
 Statistical section:
 Contains current and historical data. Supplemental information
to the basic financial statements
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 Chapter Two

Principles of Accounting and

Financial Reporting for State and
Local Governments

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sodo University;2021
 Thought to Ponder: Chapter 2
“That government is best which governs the lea
st, because its people discipline themselves
”
Henry David Thoreau

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 Activities of Government
 Governmental Activities
 Core governmental services like police and fire
protection, streets, highways, etc. – Chapters 3-6.
These activities are accounted under governmental
funds.
 Proprietary Activities
 Public utilities, toll roads and toll bridges, airports–
Chapter 7. These activities are accounted under
proprietary funds.
 Fiduciary Activities: Sometimes known as Trust &
Agency Funds. Accounts for resources for which the
government is acting in a trustee capacity– Chapter 8.
These activities are accounted under fiduciary funds.
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What is a “fund” - as the term is used for state and
local government accounting?
• A fund
– Represents a part of the activities of some organization
– Is an accounting entity
• Self-balancing set of accounts, reflecting the assets,
liabilities, net assets, and changes in those balances
– Segregates resources for specific activities
• In such a way as to ensure compliance with appropriate
regulations or restrictions
 Each fund is like its own “entity”
--In other words, a fund is an entity with its own set of books (i.e.,
chart of accounts , general journal, general ledger, trial
balances, and financial statements)
 Fund accounting uses the equation:
04/17/24Assets = Liabilities + Fund balance
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6-27

Fund-Based Financial Statements Seek

to Answer Three Questions

How
How did
did the
the
government
government generate
generate
its
its current
current financial
financial
resources?
resources?

What
What amount
amount ofof
financial
financial resources
resources
Where
Wheredid
did is
is presently
presently held?
held?
those
thosefinancial
financial
resources
resourcesgo?
go?
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 Types of Funds
“Funds divide a government into units to control
resources or attain objectives, not functional
department or operations.”
 Governmental Funds (5):General Fund, Special
Revenue Funds, Capital Projects Funds, Debt
Service Funds and Permanent Funds
 Proprietary Funds (2):Internal Service Funds and
Enterprise Funds
 Fiduciary Funds (4):Agency Funds, Pension (and
other employee benefit) ,Investment Trust Funds
and Private purpose Trust Funds

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 Definition of Fund Types
 Governmental Funds
 A generic classification used by GASB to refer to all funds
other than proprietary or fiduciary
 No guarantee that the funds will be reimbursed for services
rendered
 Proprietary Funds
 Government generally makes initial contribution but
thereafter the fund is expected to “pay its own way” through
fees for services rendered. Also referred to as business-like
or commercial-type funds.
 Fiduciary Funds
 Any fund held by a government in a fiduciary capacity.
 Simply, the gov’t. holds someone else’s money
in trust and acts as a custodian. Since it is not the
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government’s own programs.
 (1) - General Fund (GF)
 The operating fund of the government-
embraces most major governmental functions
 Accounts for all resources that are not required
to be accounted for in other funds; in essence, it
accounts for all unassigned resources.
 Only one per government and is the most
significant single fund (e.g. police and fire, public
works, parks and recreation, culture, education,
and social services…etc

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 (2) - Special Revenue Funds (SRF)
 Accounts for financial resources that are restricted or
committed (does not include assigned) to expenditure
for specific purposes other than debt service or capital
projects.
 Accounting and budgeting usually identical to GF
-Examples include
 Public Safety Special Fund (9-1-1 Emergency Network)
 Public Works Special Fund
 Health and Housing Special Fund
 Parks and Recreation Special Fund
 Other Special Revenue Fund (Cable Television)

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 (3) - Capital Projects Funds (CPF)
 Accounts for financial resources that are
restricted, committed, or assigned to expenditure
for capital outlays.
 As such, it accounts for the purchase or
construction of major capital improvements,
except those purchased or constructed by a
proprietary (and less commonly, fiduciary) fund
 These projects typically involve major
construction of items such as buildings,
highways or bridges, or parks

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 (4) - Debt Service Funds (DSF)
Accounts for financial resources that are
restricted, committed, or assigned for the
payment of interest and principal on long-term
debt.
 Some governments account for all debt service
on general long-term debt in their General Fund

I.O.U.

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 (5) - Permanent Funds
Established in those cases in which the fund
principal must be preserved but that the income
from the permanent funds is required to be used
for the benefit of the government’s programs or
its general citizenry.
It include activities such as maintenance of a
cemetery or aesthetic enhancements to public
buildings.
.
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 Governmental Funds Common Characteristics
 Basis of Accounting: Modified Accrual
 Measurement Focus: Current Financial Resources
 Other names: “financial flow” focus or spending focus
 Only current assets and liabilities are generally included on their
balance sheet (i.e. Capital assets and long-term liabilities are not
included)
 Reports expenditures (not expenses) of appropriations
 Fund Balance (net current assets) measures “available
spendable resources”
Fund Balance = Current Assets – Current Liabilities
Increased by revenues and other financing sources
Decreased by expenditures and other financing uses
Governmental fund operating statements present
these increases and decreases in net current assets.
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 Government funds Required Financial
Statements

 Balance Sheet
 Statement of Revenues, Expenditures, and
Changes in Fund Balances
 Reconciliation of the Statement of Revenues,
Expenditures, and Changes in Fund Balances
of Governmental Funds to the Statement of
Activities at the government-wide level .

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 Dual Effects Of Capital And Related
Transactions
EXAMPLE. The City Addis Ababa issued a two-year note in the
amount of $2,000,000 to finance the acquisition of five new fire
trucks.
• Record the issuance of notes on both GF and governmental
activities general journal
General Fund: Debits Credits
1a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
Other Financing Sources—
Proceeds of Two-Year Note . . . . .. . . . . . ………2,000,000
Governmental Activities, Government-wide:
1b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
Notes Payable . . . . . . . . . . . . . . . . . . . . . . 2,000,000
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 DAUL EFFECTS…..
• Record the acquisition of fire truck on both GF and
government activities general journal
General Fund: Debits Credits
2a. Expenditures—Capital Outlay . . . .. . 2,000,000
Cash . . . . . . . . . . . . . . . . . . . . . . 2,000,000
Governmental Activities, Government-wide:
2b. Equipment . . . . . . . . . . . . . . . . . . . . .2, 000,000
Cash . . . . . . . . . . . . . . . . . .. . . . . . . . . 2,000,000

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 (1) - Internal Service Funds (ISF)
 Accounts for activities in which goods are services are
provided to
(1) other departments of the same government
(2) other governments for a charge on a cost
reimbursement basis
 Examples include central stores, central computing,
motor pools, and printing.
 ISF are reported as governmental activities in the
government-wide statements because they primarily
benefit the government.
--ex. City of Addis Ababa employees Health
Benefits and Long -Term disability.
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 (2) - Enterprise Funds (EF)
 Accounts for activities in which goods or services are
provided to the general public for a charge
 Reported as business-type activities in the government-
wide financial statements
 Examples include electric and water utilities,
airports, parking garages, transportation systems,
and liquor stores
 Ex. City of Addis Ababa EF
 Airport System
 Convention & Entertainment facilities
 Combined Utility system
 Non major Enterprise funds (Area Water Corporation,
Parking Management)
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 Proprietary Funds Common Characteristics
 Basis of Accounting:
 Full Accrual
Operated like a “normal for-profit” business
 Measurement Focus:
Economic Resources
 All assets and liabilities (both current and noncurrent) are included in
the balance sheet
 Accounts for expenses (not expenditures)
--Depreciation expense is reported
 Fund Equity (Total Net Assets)
 Net Assets = Assets – Liabilities
 Increased by revenues and other financing sources
 Decreased by expenses and other financing uses
 Segregated into contributed capital and retained earnings components
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 Proprietary Funds Required Financial
Statements

Similar to those of for-profit entities

 Statement of Net Assets
 Statement of Revenues, Expenses, and
Changes in Net Assets (i.e. operating
statement)
 Statement of Cash Flows

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 Fiduciary Funds - Agency Funds
 Accounts for financial resources in which the
government is acting in an “agency” capacity
 Agent - Government holds assets on behalf of another
government

 Accounting is simple: assets = liabilities.

 No revenue and expense to accrue

 No fund equity account

 Examples are tax agency funds, certain special

assessment funds, and pass-through agency funds

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 Trust Funds
 Each trust is classified for accounting measurement
purposes as either a governmental fund or a
proprietary fund (ex. Addis Ababa Firefighters
Relief and Retirement and Police Officers’
Funds).
 Funds can be either expendable or nonexpendable.
 Three types of trust funds
(i) Pension (and other employee benefits)
Trust Funds (one or more)
(ii) Investment Trust Funds
(iii) Private Purpose Trust Funds
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 Trust Funds
(i) Pension (and other employee benefits) Trust Fund

 Accounts for financial resources in which the

government (or other designated trustee) is
acting in a trustee capacity for the employees
of the government to provide retirement
benefits.
 Uses business-type accounting practices .

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 Trust Funds
(ii) Investment Trust Funds
 Accounts for external investment pools in
which the assets are held for other
(external) governments, along with funds
of the sponsoring government
 Reports the assets, liabilities, net assets,
and changes in net assets corresponding
to the equity of the external participants

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 Trust Funds
(iii) Private-purpose Trust Funds
 Encompasses all trust funds other than
pension and investment trust funds
 Accounts for financial resources in which the
government is acting in a trustee capacity for
the benefit of individuals, other
organizations, or other governments (e.g., an
endowment in which the principal amount
must be kept intact)
 Accounting is virtually identical to that for an
enterprise fund.
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 Fiduciary funds common
characteristics
 Both Trust funds and Agency funds account for
assets held by the City in a trustee capacity or as an
agent for individuals, private organizations, other
governments, and/or other funds.
Therefore, the government cannot include these
funds in the government-wide statements.
 Basis of Accounting:
Full Accrual
 Measurement Focus:
Economic Resources

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 Required Financial Statements

 Statement of Fiduciary net assets

 Statement of Changes in Fiduciary net
assets
Only Trust Funds may have a change in net
assets

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 GASB Statement No. 34
Government-wide Statements
1)Statement of Net Assets
2)Statement of Activities
 Address questions that have not been easily answered
by fund accounting
 “What do government services really cost, e.g., public
safety or recreation?”
 “How much debt for current services are we shifting to
the next generation?”
 “ How much of the cost of government is borne by
citizens in the form of general revenues?”
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 Reporting Model-Statement 34
Fund Presentation
 Major funds
 Non-major funds presented in a single
column by category
 Concept does not apply to fiduciary funds
and internal service funds

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Comprehensive Annual Financial Report - CAFR

The CAFR is the recommended annual report of

a governmental unit. It has 3 sections.
 Introduction section
 Financial section
 Statistical section
The minimum requirements for general purpose
external reporting include:
 MD&A
 Basic financial statements
 RSI other than MD&A

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 Comprehensive Annual Financial Report -
CAFR
 Every government should prepare interim
statements as needed for sound management
 The Government Finance Officers
Association (GFOA) awarded a Certificate of
Achievement for Excellence in Financial Reporting
Note: Please also refer to Chapter 1 slides on
CAFR.

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 CAFR
Reviewing again, a CAFR has
 Introduction section:
 Letter of transmittal – presents overview of financial and economical
conditions. General information about how the government is organized .
 Financial Section:
 MD&A – brief overview of financial performance of the government.
 Basic financial statements and Notes
 Required Supplementary Information
 Combining and individual fund financial statements.
 Statistical section:
 Contains current and historical data. Supplemental information
to the basic financial statements
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 Importance of the Budget in
Governmental Accounting
• Every government should adopt an annual
budget
• Accounting system should make it possible to
compare actual and budgeted results
• Budget vs. actual comparisons are included in
the required supplemental information for the
general fund and special revenue funds for which
an annual budget is adopted

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 Chapter-3 Governmental Operating Statement
Accounts; Budgetary Accounting
After studying Chapter 3, you should be able to:
 Explain how operating expenses and revenues related to
governmental activities are classified and reported in the
government-wide financial statements
 Distinguish, at the fund level, between revenues and other
financing sources and between expenditures and other
financing uses
 Explain how revenues and expenditures are classified in the
General Fund
 Explain how budgetary accounting contributes to achieving
budgetary control over revenues and expenditures, including
such aspects as: Recording the annual budget, Accounting for
revenues, Accounting for encumbrances and expenditures
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 Government-wide Statement of Activities

Expenses should be reported by function or program

 Direct expenses-those associated with a function or
program
 Indirect expenses-those that are not directly linked to an
identifiable function
Revenues should be distinguished between
Program revenues-reported in the program/functions
section of the statement
General revenues-not directly linked to any
program/function and reported in the bottom section of
the statement
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 wide Statement of Activities (Cont’d)

• Program revenues are reported in three

categories:
 Charges for services
 Operating grants and contributions
 Capital grants and contributions

• A net expense or revenue format is used in the

top section of the statement of activities:
Expenses -Program revenues = Net (expense) Revenue
• Extraordinary items, special items, and transfers
are reported as separate line items near the
bottom of the government-wide statement of
activities
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58
 The General Fund
Purpose
• Used to account for the general administration
and most traditional services of government
Examples of traditional services: Public safety
(e.g., police and fire) ,Public works (e.g.,
maintenance of buildings, roads, and
bridges),Culture and recreation (e.g., promotion
of the arts, parks, and youth activities),Health
and welfare (e.g., public health, food facilities
inspection, and juvenile counseling)
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 Budgetary Accounts
Purpose: Used to record the budgetary inflows
and outflows estimated or authorized
in the annual budget
Accounts:
 Estimated Revenues, Estimated Other
Financing Sources
 Appropriations, Estimated Other
Financing Uses
 Encumbrances

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 Accounting model for the General Fund
ASSETS = LIABILITIES + FUND BALANCE

Balance
Sheet Reserved (Nonspend + Unreserved (Unassig)
Accounts + Rest., Comm., & Assign) FB Fund Balance
(permanent)

Budgetary/
Operating Budgetary Accounts Operating Accounts
Statement
Accounts
(temporary)
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 Operating Statement Accounts
 Distinguish between Revenues and Other Financing
Sources and Expenditures and Other Financing Uses
 Other Financing Sources mainly represent operating
transfers in from other funds and proceeds of long-term
borrowing
 Other Financing Uses represent operating transfers out to
other funds
 Revenues and Other Financing Sources Increase fund balance
when closed Recognized on the Modified Accrual basis—when
measurable and available to pay current period obligations
 Expenditures and Other Financing Uses Decrease fund balance
when closed Recognized on the Modified Accrual basis—when
incurred, if expected to be repaid from currently available
resources
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 Budgetary Control—Expenditures
 An appropriation is a legal authorization granted by the
legislative body to incur liabilities for purposes specified in
the appropriation act or ordinance
 An encumbrance is an estimated amount recorded for
purchase orders, contracts, or other expected expenditures
chargeable to an appropriations
 Budgetary control of expenditures is achieved by: ensuring
that a valid appropriation exists prior to recording an
encumbrance or expenditure, and periodically comparing
encumbrances and expenditures to appropriations to
prevent overspending
 Comparison is enhanced by using the same account
classification scheme for appropriations, encumbrances,
and expenditure
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 Budgetary Control—Expenditures
(Cont’d)
Accounting control over expenditures
• Three control accounts (Appropriations,
Encumbrances, and Expenditures) are used
to control similarly named columns of the
detail budget accounts in the subsidiary
ledger
• The detail account totals for Appropriations,
Encumbrances, and Expenditure in the
subsidiary ledger must equal the
corresponding general ledger control account
balances
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 Classification of Expenditures
GASB suggestions classifying expenditures by any of the following:
 Fund
 Ex. general fund, special revenue fund, etc.
 Function or Program
 Def. Group of activities carried out with the same objective
 Ex. general government, public safety, sanitation, etc.
 Organization Unit
 Ex. police department, fire department, etc.
 Activity
 Def. Line of work contributing to a function or program
 Ex. highway patrol, burglary investigations, etc.
 Character
 Def. The fiscal period presumed to benefit
 Ex. Current, Capital, Debt Service
 Object
 Def. The types of items purchased or services obtained
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 Budgetary Control—Revenues
• Periodically compare actual revenues (or actual other financing
sources) to estimated revenues (or estimated other financing
sources)
• Use a common classification scheme for revenues and estimated
revenues
• Accounting control over revenues
• Two control accounts (Estimated Revenues and Revenues) are
used to control similarly named columns in the detail accounts in
the Revenue subsidiary ledger
• The sum of the Estimated Revenues and Revenues account
balances of the subsidiary ledger must equal the general ledger
control account balances for those accounts

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 Classification of Revenues and
Estimated Revenues
GASB Suggestion:
 1st classify by fund
 2nd classify by source

FUND
Sources include:
S  Taxes (Ad-valorem and self-assessing)
O  Special Assessments
U  Licenses and Permits
R  Intergovernmental Revenues
C  Charges for Services
E  Fines and Forfeits
 Miscellaneous Revenues

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 Recording Budgets
 Estimated revenues (DB) – Actual Revenues
(CR) = Remaining revenue to be recognized

 Appropriations (CR) - Actual

expenditures (DR) = Balance available for
expenditure

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 Example A
A city government incorporates its budget in its
accounting system and encumbers all
commitments. Prior to the start of the year, the
city council adopted a budget in which city
revenues were estimated at $500,000 and
expenditures of $450,000 were appropriated.
Record the budget using only the control
accounts.

Estimated revenues $500

Appropriations $450
Fund balance 50
Next slide shows what the detail might look like
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 Examples of Budgetary Journal Entries (A)

Budget Approved on 1-1-2010: Dr. Cr.

Estimated Revenues 500,000
Appropriations 450,000
Fund Balance 50,000
Revenues Ledger:
Taxes 300,000
Licenses and Permits 50,000
Intergovernmental Revenues 50,000
$500,000
Charges for Services 50,000
Fines and Forfeits 25,000
Miscellaneous Revenues 25,000
Appropriations Ledger:
General Government 120,000
Public Safety 150,000
$450,000
Public Works 100,000
Culture and Recreations 80,000

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Budgetary and Operating Statement
Accounts (cont’d)
An encumbrance is an estimated
amount recorded for purchase orders,
contracts, or other expected
expenditures chargeable to an
appropriation.

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 Encumbrance
 Prevents overspending the budget
 Entry to record encumbrance is made when
purchase order is issued, a contract is signed,
or a commitment is made.
 Entry that records encumbrance reduces the
budget available for expenditure.
 Outstanding encumbrances are reported in the
notes to the entity’s financial statements
No longer on face of balance
sheet per GASB 54.

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 Example B - Budgetary Control
Example: City Clerk's office orders a new multi-
purpose machine on January 2, 2010 which had a
list price in the vendor's catalog of $500.

General Fund General Journal:

Dr. Cr.
Encumbrances--2010 $500
Reserve for Encumb.--2010 $500

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 Example C
A government health care district incorporates its
budget in its accounting system and encumbers all
purchase orders and contracts. Prior to the start of
the year, the governing board adopted a budget in
which agency revenues were estimated at $5,600
and expenditures of $5,550 were appropriated.
Record the budget using only the control accounts.

JE 1: Estimated revenues $5,600

Appropriations $5,550
Fund balance 50

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 Example - C (cont’d)
JE 2: During the year, the government health care
district collected $5800 in fees, grants, taxes, and
other revenues. Prepare journal entries.

Cash $5,800
Revenues 5,800

JE 3: It ordered goods and services for $3,000.

Encumbrances $3,000
Reserve for encumbrances 3,000

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 Example – C (cont’d)
JE 4: During the year it received and paid for $2,800 of goods
and services that had been previously encumbered. It expects
to receive the remaining $200 in the following year.

a: Expenditures $2,800
Cash 2,800
b: Reserve for encumbrances $2,800
Encumbrances 2,800

JE 5: It incurred $2500 in other expenditures for goods and

services that had not been encumbered.

Expenditures $2,500
Cash 2,500

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 Example –C (cont’d)
Prepare end of year closing entries.

JE 6: Revenues $5,800
Estimated revenues 5,600
Fund balance 200

JE 7: Appropriations $5,550
Expenditures 5,300
Encumbrances 200
Fund balance 50

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 Supporting Computations – original style
Encumbrances
Reserve for Encumbrances (temporary acct)
dr cr balance dr cr balance
bal fwd $0 bal fwd 0
3 3,000 (3,000) 3 3,000 3,000
4b 2,800 (200) 4b 2,800 200
(200) 7 200 0
Fund balance
(unassigned, unreserved) Total fund balance at year end:
dr cr balance Fund balance –committed (Reserved
bal fwd 0 for encumbrances ) 200
1 50 (50) Fund Balance Unassigned
6 200 (250) (unreserved) 300
7 50 (300) Total 500
This should equal revenues – expenditures
(since bal fwd in FB was 0)

Revenue – Expenditures = 5,800 – 5,300 = $500

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 Example C (alternate style closing)
Fund= General Fund Debit Credit
JE 6 Reverse original budgetary entry:
Appropriations $5,550
Fund balance (unassigned) 50
Estimated revenues 5,600

JE 7 Close revenue, expenditure & encumbrance accounts

Revenues $5,800
Expenditures 5,300
Encumbrances 200
Fund balance (unassigned) 300

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 ! ! ! 3
! ! , 2 &
O U 1
Y TER
N K P
A H A
H
T F C
O
D
EN

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