Essentials of Accounting for Governmental and Not-for-Profit Organizations 10th Edition_3 pptx

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of fund (i.e., governmental funds) and then only to the fund-basis statements, this

does not mean it is inconsequential Recall that every general purpose government

will have (at least) a General Fund, and the General Fund is commonly the largest

fund when measured in terms of government expenditures Further, since most tax

revenue is received by the General and other governmental funds, these funds are

of particular interest to taxpayers

Before describing exactly what the modified accrual basis is, it may be useful

to describe what it is not The modified accrual basis is not equivalent to the cash

basis Governmental funds record receivables (e.g., taxes receivable) and recognize

revenues before collection, which is not true of a cash-basis system Similarly,

gov-ernmental funds record many liabilities (e.g., salaries payable) and accrue

expendi-tures when payable, rather than waiting until payment occurs The modified accrual

basis is also not merely a “light” version of the accrual basis, differing only in its

failure to recognize long-term assets and liabilities

The modified accrual basis is a distinct system of accounting that contains

finan-cial statement elements that appear nowhere else Among these are expenditures

and fund balances At the same time, the modified accrual basis contains other

ele-ments that are shared with the accrual basis, such as assets and liabilities Although

revenues appear in the financial statements of accrual and modified accrual funds,

revenues follow different recognition criteria between the two bases Finally, there

are no expenses in modified accrual funds The following sections describe the

count structure and recognition criteria for governmental funds The modified

ac-crual basis evolved from the demand for accountability over public resources and is

therefore closely tied to the budget function Budgetary accounting is illustrated in

the appendix to this chapter

MODIFIED ACCRUAL ACCOUNTS

Balance Sheet Accounts

Illustration 3–1 provides the typical account structure for a governmental fund

using modified accrual accounting Panel 1 displays the Balance Sheet accounts

Because governmental funds report under the current financial resources

measure-ment focus, long-term assets are not presented Generally speaking, the assets

rep-resent cash and assets that may be expected to be converted into cash in the normal

course of operations Similarly, these funds report only those liabilities that will

be settled with current financial resources Therefore, long-term liabilities are not

reported in governmental funds

The account category, Fund Balance , is unique to governmental funds Neither

property owners nor voters have a legal claim on any excess of fund assets over

lia-bilities; therefore, Fund Balance is not analogous to the capital of an investor-owned

entity However, Fund Balance serves a purpose similar to retained earnings, in that

activity accounts are closed to this account at the end of each accounting period

While mathematically comparable to retained earnings, fund balances are very

dif-ferent in interpretation Because only current financial resources and claims against

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Modified Accrual Accounting 57

those resources are recognized in these funds, the difference between assets and

liabilities (fund balance) represents the net resources of the fund that are currently

available for future spending However, even current financial resources vary in the

extent to which government managers have discretion over their future use, and this

is reflected by assigning fund balance to five categories (nonspendable, restricted,

committed, assigned, and unassigned)

A recent GASB pronouncement (GASB Statement 54 Fund Balance Reporting

and Governmental Fund Type Definitions ) establishes reporting requirements for

fund balances 2 GASB Statement 54 establishes five new categories of fund balance

2 GASB Statement 54 is required for fiscal years ending in June 2011 and later.

ILLUSTRATION 3–1 Account Structure of Governmental Funds

Panel 1 Accounts that are not closed at year-end (Balance Sheet) Assets Liabilities

Cash and cash equivalents Accounts payable

Taxes receivable

Due from other governments Nonspendable

Restricted assets (typically cash) Committed

Assigned

Unassigned

Panel 2 Accounts that are closed at year-end

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while eliminating the previous categories of reserved and unreserved The standard

affects only the equity section of the balance sheet of governmental funds It does

not change the reporting of net assets of proprietary and fiduciary funds or the

government-wide Statement of Net Assets

The new standard is GASB’s response to credit market participants who sought

greater information about the availability of reported fund balances In particular,

bond investors and rating agencies wish to understand the extent to which the net

financial resources of governmental funds are constrained and how binding those

constraints are For example, fund resources can be restricted by creditors, donors,

or granting agencies Resources may also be formally committed by elected

of-ficials to specific activities Alternatively, constraints may merely be nonbinding

indications of management’s intent to use resources for a particular purpose

State-ment 54 establishes new fund balance classifications to reflect these varying levels

of constraint

Nonspendable Fund Balances Illustration 3–2 summarizes the reporting

require-ments for fund balances under Statement 54 The first step in applying Statement 54

is to identify those fund resources that are nonspendable (This is identified as

step 1 in the illustration.) Inventories and prepaid items typically appear in

govern-mental funds because they are current assets However, these resources are

non-spendable because they are used in operations rather than converted into cash The

principal (corpus) of a permanent fund that may not be spent but is required to

be maintained would also be classified as nonspendable Other examples include

assets held for sale and long-term receivables, which are sometimes reported in

governmental funds

The remaining resources (net of liabilities) of the fund include cash and items

expected to be converted into cash in the next period These “spendable” resources

are further classified according to the nature of any constraints imposed on their

use, using a hierarchy of constraints The hierarchy ranges from “restricted” for the

most constrained to “unassigned” for the least

Restricted Fund Balances Restricted fund balance (item 2a in the illustration)

represents the net resources of a governmental fund that are subject to constraints

imposed by external parties or law Restrictions arising from external parties include

debt covenants (such as a requirement for a sinking fund) or constraints imposed by

legislation or federal and state agencies on the use of intergovernmental revenues

Restrictions can also result from legally enforceable requirements that resources be

used only for specific purposes For example, some states permit cities and

coun-ties to propose taxes on the sale of prepared food and beverages If approved by the

voters, the referendum commonly restricts the use of the tax proceeds (typically

to capital projects) The unexpended resources derived from this tax would be

dis-played as restricted fund balance

The net position (i.e., equity) section of the government-wide Statement of Net

Assets (GASB 34) classifies net assets within three categories, including restricted

net assets With one exception, those resources classified as restricted net assets

Is the government required

to maintain a permanent fund principal?

Has the governing body formally committed net resources

to specific activities?

Are there contractual obligations outstanding?

Are there net resources with restrictions imposed by law

or as a result of requirements

by outside creditors, contributors, or granting agencies?

Report as

“Restricted Fund Balance”

Is the balance negative or positive?

Is the balance negative or positive?

Is the balance negative or positive?

Residual balance in General Fund

Are there residual balances in funds other than the General Fund?

Are there net resources in the General Fund that are intended for identified purposes?

Report as

“Assigned Fund Balance”

Report as

“Committed Fund Balance”

Report as

“Unassigned Fund Balance”

Reduce any assigned fund balances by the amount of the negative balance If a negative balance remains

Report as

“Nonspendable Fund Balance”

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in the government-wide statements would also be classified as restricted fund

bal-ance in the fund basis statements The exception is permanent fund principle These

resources are classified as restricted net assets under GASB 34 and nonspendable

fund balance under GASB 54

Committed Fund Balances Committed fund balance (item 2b in the

illustra-tion) represents the net resources of a governmental fund that the governing body

has specified for particular use To be classified as committed, the resources should

have been designated through ordinance or resolution by the government’s highest

level of authority (e.g., state legislature, city council, or county board of

supervi-sors) Committed resources differ from restricted in that the constraint is imposed

by a government upon itself GASB 54 also provides that amounts representing

contractual obligations of a government should also be classified as committed fund

balance, provided that existing resources in the fund have been specifically

com-mitted for use in satisfying the contractual obligation The statement offers no

ex-amples of such contractual obligations, but it seems reasonable that they would be

of sufficient significance to involve the formal action of the governing board For

example, board approval of large construction contracts would typically represent

commitment of the funds

Assigned Fund Balances Assigned fund balance (item 2c in the illustration)

represents the net resources of governmental funds that the government intends for

a specific purpose Assigned resources differ from committed in that the

commit-ted resources require a formal action by the governing body of the government

Constraints imposed on assigned resources are more easily modified or removed

For governmental funds other than the General Fund, this is the category for all

(positive) residual fund balances The rationale is that the act of recording resources

in special revenue, capital projects, debt service, or permanent funds is evidence of

the government’s intent to use the resources for a specific purpose Resources in the

General Fund may also be assigned to a specific purpose if that is the intent of the

government Intent may be expressed through the governing body by means other

than ordinance or resolution or by committees or individuals with the authority to

assign resources to specific activities Assignment within the General Fund implies

an intended use that is more limited than merely support of the general purposes of

the government

Unassigned Fund Balances Unassigned fund balance (item 2d in the

illus-tration) is the residual category for the General Fund Within the General Fund,

governments should not report assigned fund balance amounts if the assignment

for specific purpose results in a negative unassigned fund balance Negative fund

balances could occur if expenditures for a specific purpose exceed the resources

available in the fund However, Statement 54 does not permit the reporting of

nega-tive restricted, committed, or assigned fund balances If this occurs, the

govern-ment should reduce any assigned fund balances (in that fund) by the amount of the

negative balance If a deficit remains once all assigned fund balances are zero, the

remaining negative amount should be reported as unassigned fund balance

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Modified Accrual Accounting 61

Statement 54 also provides guidance on the classification of budget stabilization

or rainy day funds Rainy day funds are amounts set aside for future periods of

eco-nomic downturn Such stabilization amounts that meet certain criteria are classified

as committed or (less commonly) restricted, if imposed externally or by law Rainy

day funds are classified as committed only if they are created by a resolution or

ordinance that identifies the specific circumstances under which the resources may

be expended Rainy day amounts that are available “in emergencies” or in periods

of “revenue shortfalls” would not be classified as committed unless the emergency

or shortfall condition is specified and of a magnitude to distinguish it from events

that occur routinely Rainy day funds not meeting these conditions are reported as

unassigned fund balance in the General Fund

Illustration 3–3 provides an annotated example of fund balance reporting for the

City of Salem example used in Chapter 2 Note that the governmental funds balance

sheet is the only financial statement affected by Statement 54

Financial Statement Activity Accounts

Panel 2 of Illustration 3–1 presents activity and budgetary accounts for

govern-mental funds The activity accounts reflect sources and uses of funds; examples

are given in detail in Chapters 4 and 5 Revenues and Other Financing Sources are

sources (or inflows) of financial resources while Expenditures and Other Financing

Uses represent uses (or outflows) of financial resources Other Financing Sources

include transfers in from other funds and the proceeds of long-term borrowing

Rev-enues are defined as all other inflows and include taxes, charges for services, and

amounts provided by other entities such as the state or federal government Because

taxes and many other revenues do not involve exchange transactions, governments

cannot determine the point at which these revenues are earned Therefore, revenue

recognition occurs when the resulting resources are deemed to be both measureable

and available to finance expenditures of the current period Revenue recognition for

specific types of nonexchange transactions is described later in this chapter

Expenditure is a term that replaces both the terms costs and expenses used in

accounting for commercial businesses Expenditures are recognized when a

li-ability is incurred that will be settled with current financial resources in the fund

Expenditures may be for salaries (current), land, buildings, or equipment (capital)

or for payment of interest and principal on debt (debt service) Transfers out of a

fund to other funds are classified as Other Financing Uses An example of the use

of transfer accounts occurs when a portion of the taxes recognized as revenue by the

General Fund is transferred to a debt service fund that will record payments of

in-terest and principal on general obligation debt The General Fund would record the

taxes as Tax Revenue and the amounts transferred to the debt service fund as Other

Financing Uses—Transfers Out The debt service fund would record the receipt of

the transfer as Other Financing Sources—Transfer In and the subsequent payments

of interest and principal as Debt Service Expenditures Thus, use of the transfer

ac-counts achieves the desired objective that revenues are recognized in the fund that

levied the taxes (i.e., General Fund) and expenditures are recognized in the fund

that expends the cash (i.e., debt service fund)

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General Revenue Renovation Service Governmental

FUND BALANCE Nonspendable

Restricted

Intergovernmental grants ——— 312,000 500,000 ——— 812,000 Bond sinking fund ——— ——— ——— 230,000 230,000

This amount equals the balance of plies inventories in the asset section of the balance sheet.

sup-These represent resources that are restricted by outside parties through grant agreements and bond covenants These represent resources that are re- stricted by City Council as a reserve for revenue shortfalls (General Fund) and

by contractual obligation (capital ects fund).

proj-These include the residual balance of the special revenue, and capital projects funds It also includes amounts assigned within the General Fund by expressed intent (e.g., by purchase orders) This is the residual balance of the General Fund.

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Modified Accrual Accounting 63

Budgetary Accounts

GASB standards require governments to present a comparison of budgeted and

actual results for the General Fund and special revenue funds with legally adopted

budgets Although GASB standards guide the format of this comparison, the GASB

does not prescribe budgetary accounting practices and does not require

govern-ments to maintain budgetary accounts Budgetary accounts do not appear in the

general purpose financial statements 3 Nevertheless, governments typically record

budgets, and governmental accounting systems are designed to assure compliance

with budgets

The accounts appearing in the left-hand side of Illustration 3–1, Panel 2 serve

this budgetary (rather than external reporting) function of the government A

gov-ernment may raise revenues only from sources allowed by law Laws commonly

establish the maximum amount of a tax or set a maximum tax rate Revenues to

be raised pursuant to law during a budget period are set forth in an Estimated

Revenues budget Resources raised by the government may only be expended for

purposes and in amounts approved by the governing body or legislature This is

known as the appropriations process An Appropriations budget, when enacted

into law, is the legal authorization for the government to incur liabilities for

pur-poses specified in the appropriations statute or ordinance The amount expended

may not exceed the amount appropriated for each purpose In this manner, a

gov-ernment budget has the effect of law by limiting spending to approved levels

Estimated Other Financing Sources and Estimated Other Financing Uses

are budgetary accounts reflecting anticipated inflows and outflows of resources

from sources other than revenues and spending When a purchase order or

con-tract is issued as authorized by an appropriation, the government recognizes this

commitment as an encumbrance An encumbrance is not a liability because the

goods or services have merely been ordered, not received The process by which

a government moves from budgetary authority to expending fund resources is

described in the following section

EXPENDITURE CYCLE

Illustration 3–4 depicts the expenditure cycle and corresponding journal entries

for the General Fund or a special revenue fund with a legally adopted budget

To save space, we demonstrate journal entries using control accounts for

activ-ity (revenues and expenditures) and budgetary accounts (estimated revenues,

ap-propriations, and encumbrances) Entries to control accounts would be supported

with detailed entries in subsidiary accounts These summarized postings are

ad-equate to demonstrate the accounting concepts addressed With the development

of drop-down menus and other technological improvements, many accounting

3 GASB Statement 54 eliminated the reporting of Budgetary Fund Balance—Reserve for Encumbrances

within the fund balance section of governmental fund balance sheets, removing the only instance of

budgetary accounts appearing in the general purpose financial statements.

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information systems have discontinued the use of control accounts You may wish

to use detailed accounts (for example revenues by source) when preparing

end-of-chapter exercises

The process begins with the governing board or legislature approving a budget

At first glance the budgetary accounts may appear to have balances opposite what

would be expected— Estimated Revenues have debit balances and Appropriations

have credit However, the entry is designed to reflect the anticipated effect on the

fund’s net resources ( Budgetary Fund Balance ) if everything went according to

expectations Because budgeted revenues and other financing sources exceed

bud-geted expenditures and other uses, fund balance is expected to increase (credit)

However, if budgeted expenditures and other uses are expected to exceed budgeted

revenues and other financing sources, Budgetary Fund Balance would be debited

in the entry The appendix to this chapter presents more detailed budgetary entries,

including budget amendments

A department (such as police or health) cannot commit the government to

ex-pend resources until it is granted budgetary authority through its appropriations

Once that authority exists, departments can begin to commit resources by placing

purchase orders or signing contracts These commits are reflected in the budgetary

accounts through the recording of Encumbrances and the corresponding

Budget-ary Fund Balance—Reserve for Encumbrances GASB Statement 54 requires that

significant encumbrances be disclosed in the notes along with required disclosures

ILLUSTRATION 3–4 Expenditure Cycle

Journal Entries — Budgetary

Budgetary Fund Balance Cr

Record the budget

Encumbrances Control … Dr Budgetary Fund Balance - Reserve for Encumbrances Cr

To establish the encumbrance

Budgetary Fund Balance - Reserve for Encumbrances Dr Encumbrances Control … Cr

To reverse the encumbrance

Expenditures (Current) Dr Accounts Payable …… Cr

To record the liability

City departments issue purchase orders for goods and services

City Council approves the fiscal

year budget for the

General Fund

Goods and services are received and invoices are presented for payment

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Modified Accrual Accounting 65

about other commitments However, there is no separate reporting of encumbrances

within the fund balance section of the governmental funds balance sheet Rather,

encumbered resources should be reported within the restricted, committed, or

as-signed categories in a manner consistent with the criteria for those classifications

GASB Statement 54 provides no examples as guidance on how to classify

encumbered amounts At the very least, the existence of an encumbrance

sug-gests that the government has an expressed intent to use resources for a particular

purpose and therefore these resources should not be classified as unassigned

Encumbrance accounting may also be used in the case of contractual obligations,

such as construction contracts GASB Statement 54 requires that resources

obli-gated to contractual obligations be classified as committed We will examine the

relation of encumbrances to the classification of fund balances in more detail in

Chapters 4 and 5

Once goods or services are received, the government has a liability At this

point, two journal entries are necessary The first reverses the encumbrance at

its original amount Since the government has incurred an actual liability, it is

no longer necessary to reflect a commitment for the outstanding purchase orders

or contracts The second entry records the liability (Accounts Payable) and an

Expenditure in the amount of the invoice Recall that expenditures may be for

current operations, capital assets, or debt service, including payment of principal

on long-term debt

Governments can choose not to record encumbrances for all expenditures,

par-ticularly those that are relatively predictable in amount For example, salaries may

be initially recorded only as expenditures when due without having been formally

encumbered At the end of the budget period unencumbered, unexpended

appro-priations lapse, that is, administrators no longer have the authority to incur liabilities

under the expired appropriations In nearly all cases, administrators continue to

have the authority to disburse cash in payment of liabilities legally incurred (and

recorded as expenditures) in a prior period However, appropriations that are

en-cumbered may or may not carry forward to the next accounting period, depending

on the government’s policy If they do not carry forward and must be appropriated

again in the following year, the encumbrances are said to lapse The entry to record

a lapsed encumbrance is the same as the reversal entry when a good or service is

received (debit Budgetary Fund Balance—Reserve for Encumbrances and credit

Encumbrances—Control )

REVENUE RECOGNITION FOR NONEXCHANGE

TRANSACTIONS

Under modified accrual accounting, revenues are recognized when they are both

measurable and available to finance expenditures of the current period Many

governmental revenues result from nonexchange transactions Nonexchange

transactions are transactions in which a government receives resources without

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directly giving equal value in exchange These are in contrast to exchange

transac-tions, such as the purchase of goods or services The most common forms of

non-exchange transactions are tax revenues and intergovernmental grants Most of the

activities of governmental funds are supported by revenues generated through

non-exchange transactions Before a government may recognize revenue resulting from

nonexchange transactions, it must meet a number of eligibility requirements The

eligibility requirements are as follows:

Required Characteristics of Recipients.

char-acteristics specified by the provider For example, a state can provide funding on

a per student basis to public schools In order to recognize this revenue, the entity

must be a public school as defined by state laws

2 Time Requirement If time requirements (for expenditure) are specified by

the resource provider or legislation, those time requirements must be met For

ex-ample, a state can provide funding to support park districts for the next fiscal year

In that case, the revenue would not be recognized by the park districts until that

fiscal year If the resource provider does not specify time requirements, then no

condition exists and the revenue would be recognized as soon as other eligibility

requirements are met

3 Reimbursement For those grants and gifts that are payable only upon the

incurrence of qualifying outlays, revenues would be recognized only when the

ex-penditures have been incurred

4 Contingencies Resources pledged that have a contingency attached are not

recognized as revenue until the contingency has been met For example, if a donor

indicates that $100,000 will be donated to build an addition to the city library when

funds in an equal amount have been pledged by others, that revenue would be

rec-ognized only after the “matching” $100,000 has been raised from other donors

Illustration 3–5 identifies the four types of nonexchange transactions and

de-scribes when revenues resulting from these transactions are recognized under

the modified accrual basis of accounting The last column of Illustration 3–5

provides representative journal entries, illustrating the application of the

measur-able and availmeasur-able recognition criteria In some cases, revenues resulting from

nonexchange transactions are recognized in different periods in the fund basis

and government-wide financial statements For this reason, we will revisit this

illustration in Chapter 8, which deals with the preparation of government-wide

statements

Imposed nonexchange transactions are taxes and other assessments imposed

by governments that are not derived from underlying transactions Examples

in-clude property taxes, special assessments, and fines and forfeits A special rule

ap-plies to property taxes Property taxes collected within 60 days after the end of the

fiscal year may be deemed to be available and recorded as revenue in the year

as-sessed, rather than the year collected Amounts expected to be collected more than

60 days after year-end are not recognized as revenue when assessed, but as deferred

revenue (a liability)

Modified Accrual Basis (Governmental Fund Basis)

Representative Transactions

Example Journal Entry (Governmental Fund Basis Reporting) Imposed

Nonexchange Revenues

Taxes and other assessments that do not result from an underlying transaction

Examples include property taxes and special assessments imposed on property owners

Also includes fines and forfeits.

Record the receivable (and an lowance for uncollectibles) when

al-an enforceable claim exits.

Revenues should be recognized in the period for which the taxes are levied (i.e., budgeted), but are also subject to the availability rule

Property tax revenues expected to

be collected > 60 days after end are deferred.

year-1 Property taxes levied

2 Deferral of portion expected to be collected

> 60 days after year-end

1 Taxes Receivable Dr Estimated Uncollectible Taxes Cr Revenues Control Cr

2 Revenues Control Dr Deferred Revenues—Property Taxes Cr

Derived Tax Revenues

These are taxes assessed on exchange transactions conducted by businesses or citizens Examples include sales, income, and excise taxes.

Record the receivable when the taxpayer’s underlying transaction takes place.

Revenues should be recognized when available and measurable

Revenues not expected to be collected in time to settle current liabilities are deferred (i.e., available and measurable criteria).

1 Income tax ings are received.

withhold-2 Additional income taxes expected to be received after year end

Part of this will not be received in time to be available to settle current liabilities.

1 Cash Dr Revenues Control .Cr

2 Taxes Receivable Dr Revenues Control .Cr Deferred Revenues—Income Taxes Cr

mandated Nonexchange Transactions

Government-Grants from higher levels of government (federal or state) given to support a program

Since the program is required, the lower-level government has

no choice but to participate.

The recognition rules are the same for mandated and voluntary nonexchange grants Record the revenue when all eligibility requirements have been met.

In the case of reimbursement grants, revenue is recognized only when qualified expenditures have been incurred.

In the case of advanced funded grants, recognize revenues as qualified expenditures are incurred.

Reimbursement-type grant:

1 Incur qualified ditures.

expen-2 Recognize revenue.

Advance funded grant:

3 Receipt of advance funding.

4 Incur expenditures and recognize revenue in an equal amount.

1 Expenditures Control Dr Accounts Payable/Cash Cr

2 Due from grantor Dr Revenues Control .Cr

3 Cash Dr Deferred Revenues—Grants .Cr 4a Expenditures Control …Dr

Accounts Payable/Cash .Cr 4b Deferred Revenues—

Grants .Dr Revenues Control .Cr

Voluntary Nonexchange Transactions

Donations and grants given to support a program Since the program is not required, the receiving government volun- tarily agrees to participate.

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Derived tax revenues result from taxes assessed on exchange transactions

Examples include taxes on retail sales, income, and gasoline The amounts due are

recorded in the time period the underlying transaction took place For example,

revenues due from taxes on the sale of gasoline should be recorded along with a

receivable (from the retailers) in the month that the gasoline was sold The revenue

is recognized at the time of the exchange transaction provided the cash is expected

to be collected shortly after the current fiscal year If collection is expected to take

place after the period considered available to pay current period liabilities (e.g.,

60 days), it should be credited to deferred revenue of the current period

Government mandated and voluntary nonexchange transactions are

recorded as revenue when the eligibility requirements have been met Generally

this is when the receiving government has made qualifying expenditures under

the grant agreement Once qualifying expenditures have been made, the

govern-ment records the grant revenue The two types of grants differ in whether or not

the government has the ability to refuse to participate For example,

government-mandated grants are typically from higher levels of government (federal or state)

given to support a required program Because the program is required, the

lower-level government has no choice but to accept For example, a state may require

school systems to mainstream certain students in the schools and provide funds to

carry out this mandate

SUMMARY

The current financial resource measurement focus and modified accrual basis of

ac-counting are unique to the governmental funds of state and local governments The

focus is on the flow of financial resources rather than income measurement Key

elements include:

Revenues.

• Inflows of net financial resources from sources other than interfund

transfers and debt proceeds Revenues are recognized when they are both

mea-surable and available to finance current expenditures

• Expenditures Outflows of net financial resources from sources other than

in-terfund transfers that are recognized when a governmental fund incurs a liability

pursuant to budgetary authority provided by appropriation

• Fund balance The net position (assets less liabilities) of a governmental

fund and can be classified as nonspendable, restricted, committed, assigned, or

unassigned

The General Fund and many special revenue funds record budgets and their

counting systems are designed to assure compliance with budgets Budgetary

ac-counting is illustrated in the appendix to this chapter

Now that you have completed reading Chapter 3, complete the multiple choice

questions provided on the text’s Web site (www.mhhe.com/copley10e) to test your

comprehension of the chapter

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Modified Accrual Accounting 69

APPENDIX: BUDGETARY ACCOUNTING ILLUSTRATED

Budgets And Budgetary Accounts

The fact that budgets are legally binding upon administrators has led to the

incorpo-ration of budgetary accounts in the General Fund and in special revenue funds for

which annual budgets are adopted

As indicated earlier, governments are required to report budget-actual

com-parisons as schedules in Required Supplementary Information Governments

may elect instead to provide those comparisons as one of the basic statements

rather than as a schedule The schedule (or statement) must provide the original

budget; the final budget; and the actual amounts of revenues, expenditures, and

other financing sources and uses A variance column between the final budget

and actual amounts is encouraged but not required The format of the schedule

(or statement) may be that of the budget document, or in the form used for

the Statement of Revenues, Expenditures, and Changes in Fund Balances (see

Illustration 2–16)

Whichever approach is used, the amounts in the Actual column are to be reported

on the basis required by law for budget preparation, even if that basis differs from

the basis provided in GASB standards For example, in some states revenues must

be budgeted on the cash basis If the Budget and Actual columns of the

budget-actual comparison schedule differ from GASB standards, the heading of the

state-ment should so indicate Standards further require that, either on the face of the

budgetary comparison schedule or in a separate schedule, the amounts in the Actual

column of the budgetary comparison schedule must be reconciled with the amounts

shown in the Combined Statement of Revenues, Expenditures, and Changes in Fund

Balances prepared in conformity with GAAP

To facilitate preparation of the budgetary comparison schedule,

account-ing systems of governmental funds incorporate budgetary accounts The

general ledger accounts needed to provide appropriate budgetary control are

Estimated Revenues, Appropriations, Estimated Other Financing Sources

and Estimated Other Financing Uses control accounts, supported by subsidiary

accounts as needed

At the beginning of the budget period, the Estimated Revenues control account is

debited for the total amount of revenues expected to be recognized, as provided in

the Revenues budget The amount of revenue expected from each source specified

in the Revenues budget is recorded in a subsidiary ledger account so that the total of

subsidiary ledger detail agrees with the debit to the control account, and both agree

with the adopted budget If a separate entry is to be made to record the Revenues

budget, the general ledger debit to the Estimated Revenues control account is offset

by a credit to Budgetary Fund Balance The account title, Budgetary Fund Balance,

is used through the text to identify journal entries to establish or amend the budget

In practice, many governments make budget entries directly to Fund Balance Since

the budgetary accounts are closed at year-end, the choice of account title has no

financial statement effect

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The credit balance of the Budgetary Fund Balance account is the total amount

expected to be available to finance appropriations Consequently, the accounting

entry to record the legally approved appropriations budget is a debit to Budgetary

Fund Balance and a credit to Appropriations for the total amount appropriated

for the activities accounted for by the fund The Appropriations control account

is supported by a subsidiary ledger kept in the same detail as provided in the

appropriations ordinance, so that the total of the subsidiary ledger detail agrees

with the credit to the Appropriations control account, and both agree with the

adopted budget

Recording the Budget

Assume the amounts appearing below have been legally approved as the budget

for the General Fund of a city government for the fiscal year ending December 31,

2012 As of January 1, 2012, the first day of the fiscal year, the total Estimated

Revenues should be recorded in the General Fund general ledger accounts, 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

If the budget provided for other financing sources, such as transfers in, Entry 1

would indicate a debit to Estimated Other Financing Sources An appropriate entry

would be as follows:

Subsidiary ledgers provide for the capture of detailed data specific to a

busi-ness process With the development of drop-down menus and other technological

improvements, many accounting information systems have discontinued subsidiary

ledgers To save space throughout future chapters, we will demonstrate journal

en-tries using control accounts to summarize revenue, expenditure, encumbrance, and

General Ledger Subsidiary Ledger

1 Estimated Revenues Control 1,350,000

Estimated Other Financing Source Control 0

Budgetary Fund Balance 1,350,000

Taxes $882,500

Licenses and permits 125,500

Intergovernmental revenues 200,000

Charges for services 90,000

Fines and forfeits 32,500

Miscellaneous revenues 19,500

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Modified Accrual Accounting 71

budgetary accounts as if subsidiary ledgers are in use These summarized postings

are adequate to demonstrate the accounting concepts addressed

The total Appropriations legally approved for 2012 for the General Fund of the

same governmental unit should also be recorded in the General Fund general

led-ger accounts, and the amounts that are appropriated for each function itemized in

the budget should be recorded in subsidiary ledger accounts An appropriate entry

would be as follows:

General Ledger Subsidiary Ledger

2 Budgetary Fund Balance 1,300,000

Appropriations Control 1,225,500 Estimated Other Financing

Uses Control 74,500

Appropriations Ledger:

General government $129,000 Public safety 277,300 Highways and streets 84,500 Sanitation 50,000 Health 47,750 Welfare 51,000 Culture and recreation 44,500 Education 541,450

Other Financing Uses Ledger:

Transfers out 74,500

It is acceptable to combine the two entries illustrated and make one General

Fund entry to record Estimated Revenues, Appropriations, and Estimated Other

Financing Uses; in this case there would be a credit to Budgetary Fund Balance for

$50,000 (the amount by which Estimated Revenues exceeds Appropriations and

Estimated Other Financing Uses)

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 account (offset

by debits to receivable accounts for revenues susceptible to accrual or by debits to

Cash for revenues that are recognized when the cash is collected) The general

led-ger Revenues Control account supported by Revenues subsidiary ledled-ger accounts is

kept in exactly the same detail as kept for the Estimated Revenues subsidiary ledger

accounts For example, assume that the General Fund of the government for which

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