Modified accrual accounting

Modified accrual accounting

 Shows financial statement elements that do not appear in the usual statements
 E.g. expenditures, fund balances
 Revenue is recognised differently
 No expenses (only expenditures)
 Balance sheet
o Assets = liabilities + fund balances
o Account structure for permanent accounts

o
o Account structure for nominal accounts

o
o Nominal accounts – temporary accounts (equivalent to income statement accounts),
closed at the end of the year.

Assets and liabilities

 Assets
o Represent cash and assets to be converted to cash during operations
o no long-term assets
 Liabilities
o will be settled/payed off using the current financial resources (using current assets)
o No long-term liabilities
 Fund balances
o Only present in governmental funds
 o Similar to retained earnings
o Temporary accounts are closed here
o Represents the net resources available for future spending
o Follows GASB 54
 Standard for reporting fund balances only for governmental type funds
 Does not affect reporting of net assets by proprietary/fiduciary funds or net
assets of government activities in government wide statements
o Divided into 5 categories (nonspendable, restricted, committed, assigned,
unassigned)

Categories of fund balances

 Nonspendable
o Two-step process
 Identify nonspendable resources
 e.g. inventory, prepaids, assets held for sale, long term receivables
 these are permanent funds
 Remaining net resources after removing nonspendable is spendable
resources
 Spendable resources further classified according to restraint:
o Restricted funds
 Constraints on use of funds externally imposed or imposed by law
o Committed funds
 Constraints on use of funds by the government itself, using its highest level
of decision making authority
 Rainy day funds
 Can be classified as committed or restricted or unassigned
 Funds reserved for emergencies (when revenues are not enough to cover
the expenditures)
o Assigned funds
 Constraint on how the resources are going to be used
 For specific purpose
 Imposed by any individual that provides the funds
o Unassigned
 Residual classification of general fund
 What is left after all the previous funds are classified
 Used to cover any negative balances of the other funds

Negative balances

 If there is a negative balance in restricted, committed or assigned balances, then the fund
balance is reduced by the amount of the negative balance
 If it is still negative after all balances have zeroed out, then the deficit/negative balance is
reported under the unassigned balance
 The unassigned balance is the only balance that can be negative

Activity accounts

 Sources of funds
o Transfers in from another fund
 o Proceeds from long term borrowing
o Revenues from services, donations, etc
 Uses of funds
o Transfers out from one fund to another (other financing uses)
o Funds used to cover expenditures
 Recognised when liability is incurred and will be paid with current assets
 E.g. salaries (current), PPE (capital), debt (debt service)

Classification of inflows and outflows

 Revenue classified by source and type

 Expenditures and encumbrances classified by
o Function
o Program
o Department
o Activity
o Object
o Character
 Current (also classified by function)
 Capital outlay
 Debt service

Encumbrances

 When a purchase order happens, but the amount has not yet been paid and the good not
yet received
 Recorded under the fund balance category it happens in
 They have an intended use and therefore should not be classified as unassigned

Budgetary accounting

 GASB 54 requires a comparison to be reported between budgeted and actual results

 Do not appear in financial statements
 Governmental accounting systems monitor budgets and spending
 Budgeted revenues are recorded as estimated revenues
 Budgeted liabilities are recorded as appropriations
 Commitment (purchase orders/contracts that have not been acted on yet) are recorded as
encumbrances:

Dr. Encumbrances control xxx

Cr. Budgetary fund balance – reserve for encumbrances xxx

After it has been paid, we record:

Dr. budgetary fund balance – reserve for encumbrances xxx
Cr. Encumbrances control xxx
When the good is received and payment has not been made, it becomes a liability that
needs to be paid off
Dr. expenditure xxx
Cr. Accounts payable xxx
  Encumbrances are recorded because governments recognize that purchase orders will
become expenditures and then a liability, so encumbrances must be recorded
 It helps to prevent over spending (allows expenditures to be monitored)
 Example:

Place an order for $150,000 which consists of three mini-buses costing $50,000 each. Recorded as:

Encumbrances 150,000

Budgetary Fund Balance -Reserve for Encumbrances 150,000

Assume two of the buses arrive, but with freight, they cost $102,000 instead of $100,000.

First, reverse a part of the encumbrances:

Budgetary Fund Balance -Reserve for Encumbrances 100,000

Encumbrances 100,000

Second, record the actual amount of expenditure:

Capital Expenditure 102,000

Accounts Payable 102,000

Revenue recognition

 Revenue is recognised when it is measurable and available to cover expenditures

 Revenue form nonexchange transactions (government receives resources but does not give
back something of equal value) are recognised when eligibility requirements are met
o Required characteristics of recipient (the provider specifies certain characteristics
that the receiver must have)
o Time requirements (placed by provider)
o Reimbursement (For grants and gifts that are payable only when expenditures are
qualified, revenues would be recognized only when the expenditures have been
incurred)
o Contingencies (revenue from resources that have contingencies/circumstances
attached, are recognised when the contingency is met)

Types of nonexchange transactions

 Imposed nonexchange revenues

o Property tax, special assessments, fines
o Revenue is recognised when it is expected to be collected
o If they are expected to be collected 60 days after year end, then revenue is deferred
o Transactions:

Record tax receivable when there is a claim on the tax:

Dr. taxes receivable xxx

Cr. Estimated uncollectable taxes xxx

Cr. Revenues control xxx

Amount that is expected to be collected 60 days after year end:

Dr. revenues control xxx

Cr. Deferred revenue – property tax xxx

 Derived tax revenues

o Sales, income, excise tax
o Revenue recognised when it is available and measurable
o Revenues not expected to be collected in time to use to pay off current liabilities are
deferred
o Transactions:

Record when tax is paid:

Dr. cash xxx

Cr. Revenues control xxx

Revenue expected to be deferred:

Dr. taxes receivable xxx

Cr. Revenues control xxx

Cr. Deferred revenues – income tax xxx

 Government mandated nonexchange transactions

o Grants from government to support a program
 Voluntary nonexchange transactions
o Donations/grants from anyone to support a program
o Both government mandated and voluntary nonexchange transactions have the same
transactions recorded
o Many of them are reimbursements, so revenue is recognised when qualified
expenditures have been incurred
o Transactions:

Receivable recorded when eligibility requirements are met

Dr. expenditure control xxx

Cr. Accounts payable/cash xxx

Record money to be received from the grantor

Dr. due from grantor xxx

Cr. Revenues control xxx

Grants given in advance are deferred until expenditure is incurred (grant received but will not be
used yet)

Dr. cash xxx

Cr. Deferred revenues – grants xxx

When the expenditure occurs (grant is used)

Dr. expenditure control xxx

Cr. Accounts payable/cash xxx

Dr. deferred revenue – grants xxx

Cr. Revenues control xxx

Transaction to record accounts in the budget

 The transaction used to report the accounts in the budget is:

Dr. estimated revenue xxx

Dr. estimated other financing sources xxx

Cr. Appropriations xxx

Cr. Estimated other financing uses xxx

Cr. Budgetary fund balance xxx

 Budgetary fund balance is the difference between the dr. and cr. of the transaction,
therefore it is either recorded in the debit or credit side

Budget revisions

 The budget is revised and re-evaluated during the year and must be approved when a
change happens
 Transaction is recorded to report the change
 E.g. if there is an increase in appropriations, and a decrease in estimated revenues then,
o appropriations will be credited (since we credited it when we recorded the
transaction in the budget, so to increase it we have to credit it again),
o estimated revenues will be credited (since we debited it in the previous transaction,
so to decrease it we must credit it)
o budgetary fund balance is used to balance out the debit and credit in the transaction

Dr. budgetary fund balance xxx

Cr. Appropriations xxx

Cr. Estimated revenues xxx

Comparison schedule

 a schedule is drawn to compare the revised budget with the actual results
 Both the original and the final adjusted budget is shown
 The revised appropriations are compared to the Actual Expenditures for the current period
plus Outstanding Encumbrances
 A variance column is typically shown, but is optional
 The actual results must be recorded using the same accounting basis of the budget, even if it
is different than the GAAP basis