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6.0 Aims and Objectives
6.1 Introduction
6.2 General Fixed Assets Account Groups
6.2.1 Acquisition Cost
6.2.2 Cost After Acquisition
6.2.3 Reduction Cost
6.2.4 Accounting Procedures and Issues Related to GFAAG
6.3 General Long Term Debt Account Groups
6.3.1 Principal and Interest Payable in Future Years
6.3.2 Accounting Procedures and Issues Related to GLTDAG
6.4 Summary
6.5 Answers to Check Your Progress Questions


This chapter aims at explaining how Fixed Assets and Long Term Debts of governmental
units are accounted for and recorded separately in the account groups. This account groups
are not Funds and they are different by character and activity than the Funds discussed in
the previous topics. GASB’s standard requires governmental units to use account groups to
record Plant Assets and Long Term Debts of Governmental Unit not recorded in a fund.
Therefore, the main objectives of this topic is to give a clear description of these account
groups and how they are used as memorandum accounts.

After going through this topic, the student should,

1. explain how Fixed Assets and Long Term Liabilities are accounted for in the
account Groups
2. describe the use of the account groups and their activities in connection with
other funds
3. explain the principles and concepts of Fixed assets and long Term liabilities and
the related accounting issues and considerations

Proprietary fund (Internal service and Enterprise) routinely account for plant and
equipment in their books. Trust Funds that use Fixed Assets for the production of income
also account for property, plant and equipment. all the other funds (Governmental) account
only for financial (cash and other assets which are easily convertible into cash) resources.
There is no accounting control over non-financial assets in these funds. However, since
accounting control is thought better than just having memorandum records, the General
Fixed Assets Account Group (GFAAG) was created to provide accounting control for
property, plant and equipment.

Debt For Governmental entities are a serious matter. it essentially obligates the entire
population for its repayment. It may also result in severe consequences for the
administrator who authorizes the debt. If legal debt limits are exceeded, those with
accounting backgrounds are sometimes called on to manage the debt. Current GAAP says
that the General Fixed Assets Account Group (GLTDAG) should account for all long term
debt which are not being secured by revenues of Proprietary Funds or Non expendable
Trust Fund. it is worth noting before covering the accounting issues and principles related
to long term debt that management of debt requires more than good knowledge of the
accounting and finance principles related to it. Good legal advice should be sought as well.


General fixed assets are account are memorandum accounts used to record General Fixed
Assets not recorded a fund. The property, plant and equipment acquired by General,
Special Revenue and Capital Projects fund are brought under accounting control by the
creation of the GFAAG. General fixed assets may be thought of as those not used
exclusively in the operations of anyone fund nor belonging to anyone fund. They include
courfouses and city halls, public buildings in general, the land on which they are situated,
highways, streets, sidewalks, equipment and other tangible assets with a life longer than
one fiscal year that are not used by an enterprise. accounting control of Fixed Tangible
Assets is generally deemed superior to that provided by a record system. Not formally
integrated with the record system. Records of individual Assets of significant value or
groups of assets of lesser unit value should include all information needed for planning an
effective maintenance programme, preparing budget requests for replacement or additions,
providing an adequate insurance coverage, and fixing the responsibility of custody of
assets. In conformity with Generally Accepted Accounting Principles, General fixed Assets
are recorded at acquisition cost (or fair value at the time of receipt if assets are received by

donation). if the cost of the fixed assets was not recorded when the assets were acquired
and is know when accounting control over the assets is established, it is acceptable to
record them at estimated cost.

The General fixed asset account group is only an Accounting Entity, not a Fiscal Entity.
In other words, it is not capable of entering into transactions, only of recording, classifying,
summarizing, reporting etc. for them. It records no current assets of any kind. By definition
therefore, it is not a fund, but it is self balancing however. When fixed assets are recorded,
the entry is normally a debit to the fixed asset account and the offsetting credit will be an
account indicating the source from which the fixed assets were financed.- Investment in
General Fixed Asset-CPF- General Obligation bonds or Investment in GFA- GF-
Revenues are examples of these types of accounts. since the GFAAG is not a fiscal entity,
entries do not originate in it. Entries in the GFAAG therefore affect more than one set of
books, the GFAAG itself, plus the fund, which originates the entry. The exception to this
rule is Depreciation. The principles of governmental accounting discussed in earlier second
chapter indicates that, Depreciation of General Fixed Assets should not be recorded in the
accounts of governmental funds. Depreciation of general fixed Assets may be recorded in
cost accounting system or calculated for cost finding analysis; and accumulated
depreciation maybe recorded in the General Fixed Assets Account Group.

Balance Sheet of this account groups, (sometimes called Statement of General fixed Assets)
display to interested parties, the total cost of each category of general fixed assets(Land,
Building, Equipment etc) and the total amount contributed by each source used for the
acquisition of this assets. Customarily, a Balance Sheet is supplemented by a schedule
showing the description, acquisitions, disposals, amount of additions to and deductions
from each fixed assets category during the year. The cost of fixed assets used by funds that
are that are expected to cover their full cost by sale of products or services would be
depreciated just as done by a profit seeking business. General fixed assets are acquired for
the production of general governmental services, however, not for the production of
services that are sold.

The provision of the computation of depreciation for unit cost purposes is in recognition of
the fact that General fixed assets may be used for activities financed by grants form other
governmental units and that depreciation may be an allowable cost under the term of the
grant. In addition, unit costs stated on an accrual basis, including depreciation on general
fixed assets is concerned by some to be useful information to provide administrators and

legislators concerned with the allocation of resources to programmes, department and
activities. To a limited extent, a comparison of the accumulated depreciation on an asset
with the cost of the asset may be relevant to the process of budgeting of outlays for
replacement of Capital Assets. Since Depreciation expense cannot be recorded in the
GFAAG, Credits to Accumulated Depreciation Account must be offset by debits to those
Investment in General Fixed Assets Accounts that were credited when the depreciating
asset was first recorded in the GFAAG.

6.2.1 Acquisition Cost

Generally speaking, the GAAP for project seeking entities is applied in determining what
should be capitalized. One exception is that governments have the option of capitalizing
net interest cost during the period of construction of the general fixed assets. like profit
seeking entities, the test of materiality is applied.- items with long lives which have a small
costs are not considered. The cost of land acquired by governmental unit through
purchase should include not only the contract price but also such other related costs as
taxes and other liens assumed, title search costs, legal fees, surveying, filling, grading,
drainage and other costs of preparation for the use intended.

Machinery and equipment are most likely acquired by purchase. The cost of machinery and
equipment purchased should include items conventional under business accounting
practice: Purchase Price, Transportation Cost, installation cost, and other direct costs of
readying for use. Construction work in progress, as a fixed asset classification in the
GFAAG, is needed to account for construction expenditures accumulated to Balance Sheet
date on projects financed by Capital projects Fund.

6.2.2 Cost after Acquisition

Governmental accounting provisions should include clear-cut provisions for classifying cost
incurred in connection with fixed assets after the original cost has been established. Outlays
closely associated with fixed assets will regularly occur in amounts of varying size and
responsible persons will be charged with deciding whether these should be recorded as
additions to assets. The issue to be considered in GFAAG is whether a cost incurred
subsequent to acquisition should be added to the assets.
In general, any outlay that definitely adds to a fixed asset or enhances the value of an
integral part of it may be classified as a Fixed Asset. Eg- the addition of a room to a
building; the distinction is not always a clear cut. Some costs are part it replacements and

some costs are partly additions. Suppose when adding a room to a building, certain repair
work that is done at the same time to the existing building i.e; repainting, putting I new
wiring and new pluming, is included in the total price of the contract. The repair work is
not really a fixed asset and it may need to be subtracted before the cost of the contract in
capitalized. In that case, a management decision should be made about capitalization, with
consideration given to the materiality test. Outlays that are partly replacement and partly
additions or betterment occasion some accounting difficulty. The distribution of the outlay,
having been decided on, the estimated amount of addition or betterment might be added to
the asset. Perhaps better result might be obtained by crediting the appropriate asset account
for the cost of the replaced part, thus removing the amount and then debiting the asset
account for the total cost of the replacing item.

6.2.3 Reduction of Cost

Reductions in the cost of the fixed assets may relate to the elimination of the total amount
expended for a given item or items or they may consist only of removing the cost applicable
to a specific part. Thus, if an entire building is demolished, the total cost of the structure
should be removed from the appropriate accounts. but if the separation applies only to
awing or some other identifiable portion, the cost eliminated should be the amount
estimated as applying thereto reductions in the fixed assets maybe brought to by sale,
retirement from use, destruction by fire or other casualty, replacement of major part, theft
or loss from some other cause, and possibly other changes. The cost of the fixed assets
held by a fund or the GFAAG may sometimes be reduced by the of a unit to an other fund
or to the GFAAG. Governments sometimes trade fixed assets for new items in the general
fixed asset accounts. In such case, the total cost of the old item should be removed and the
total cost (not merely the cash payment) of the new one set up.

Accounting for cost reductions consisting of entire units is relatively simple matter if
adequate records have been kept. Suppose part of a building was destroyed in a fire and the
remaining was not seriously affected. The cost of part of the building destroyed would need
to be subtracted from the cost of the entire building. if good records have not been kept,
some estimates would have to be made. in either case, Investment in GFA would be debited
and the asset account would need to be credited.

6.2.4 Accounting Procedures and Issues related to the GFAAG


Below are a number of related and unrelated transactions which affect the records of
GFAAG or GLTDAG. None of the transactions so far have been recorded in those groups
or the related funds.

1. An Equipment have been purchased From the GF at 100,000. The source of financing
was revenues of general fund
GF (after passing of reversing the related encumbrance)

Expenditure 100,000
Vouchers Payable 100,000


Equipment 100,000
Investment in GFA-GF-Revenue 100,000

Explanation- Acquisition of General fixed assets requires a debit to an appropriate general
fixed asset general ledger asset account and a credit to an equity account indicating the
source from which the asset was provided. The transaction would initially be recorded in
the General fund as in dictated above. If the equipment is ordered through purchase orders
(which is common in governmental entities),the related encumbrance account should be
reversed by the amount initially ordered not by the invoiced amount)

2. A Building is acquired from the resources of the CPF at 100,000,000 which has been
financed half of which by issuance of bonds and the remainder by grant.


Building 100,000,000
Investment in GFA- CPF- Bonds 50,000,000
Investment in GFA- CPF- Grants 50,000,000

Explanation- General Fixed Assets (GFA) acquired by the use of a CPF would be recorded
in the same manner as if acquired from the general fund; the difference in entries being that
the credit should show not only that the investment in GFA come from a CPF, but also to
the extent practicable. The specific sources of CPF resources
(Tax Supported Bonds, Federal Grants, State Grants, Private Gifts etc...)

3. Assuming that the building acquired in transaction 2 is depreciated by the Straight

line method (SLM) with having estimated life of 20 years.


Investment in GFA- CPF- Bond 2,500,000

Investment in GFA- CPF- Grants 2,500,000
Accumulated Depreciation- Building 5,000,000

Explanation- the principles of governmental accounting indicates that Accumulated

Depreciation on GFA is considered to be useful information and should be recorded in the
GFAAG. For this reason recording accumulated depreciation in the GFAAG and reporting
it to the statement of general fixed assets is necessary. Since Depreciation Expense cannot
be recorded in GFAAG, credit entry to accumulated depreciation account must be offset by
debit entry to those Investments in GFA account that were credited when the depreciating
asset was first credited.

4. Assume that at year-end of construction of a building in a CPF, the progress till that date
shows a total construction cost of 2,000,000 that has incurred. The project was being
financed by the Federal Grant.


Construction Work in Progress 2,000,000

Investment in GFA-CPF- Federal Grant 2,000,000

Explanation- construction expenditure are by capital project funds are ordinarily closed to
fund balance at the end of each year. the amounts are not capitalized in the funds doing the
construction. the amounts are recorded as Construction Work in Progress in the GFAAG.
Construction expenditures to the date of the financial report should be capitalized as
Construction Work In Progress in the GFAAG.

5. Assume that the construction of the Asset is completed in the next year, entailed
additional expenditures of 1,000,000 also provided by the Federal Grant.

Building 3,000,000
Construction work in progress 2,000,000
Investment in GFA-CPF-Federal Grant 1,000,000

6. A building carried on the books of Water Utility Fund (WUF- a type of Proprietary
Fund) at a cost of 2,000,000 is permanently surrendered to the GF after being used

till halfway of its useful life.(assume SLM).

Water Utility Fund

Accumulated Provision for Depreciation 1,000,000
Loss on Disposal of Equipment 1,000,000
Building 2,000,000

Building 1,000,000
Investment in GFA- WUF-WUF Revenues 1,000,000

Explanation- a question arises if fixed assets constructed or acquired by a proprietary fund

are later transferred to an activity accounted for by a governmental fund. If the asset if
depreciable nature; at what figure should it be recorded in the accounts GFAAG- Book
value, Original cost, or fair blue at the date of transfer. The answer would be Book value.
But in the event fair value differs greatly from book value, some authorities recommend
that fair value should be used.

7. A building is retired and demolished after it is heavily damaged by an earthquake.

The building was originally funded by a Federal Grant at a cost of 10,000,000. It has
been in service for 15 years out of its expected 20 years life. 10,000 was paid for the
removal of the rubble.


Expenditure 10,000
Cash 10,000

Investment in GFA- CPF- Federal Grant 2,500,000
Accumulated Depreciation 7,500,000
Building 10,000,000

Explanation- In the event cash is disbursed or received in connection with the disposal of
the GFA, the fact would have no bearing on the entry to be made in the GFAAG. Cash
disbursement in connection with the removal of an item from the GFAAG should appear
among transactions of the disbursing fund and be classified according to the nature of the

The balance sheet is also called the statement of General fixed Asset. The balance sheet
shows asset cost for each category of fixed assets (land, building, equipment, ect.) and the
amount financed from each source. it should be accompanied each year by a schedule
showing acquisitions and disposal for the year.

Examples of both the Statements of General Fixed Assets and Statement of Changes in
General Fixed Assets appear below;
City of X
Statement of General Fixed Assets- By Source
December 31, 20x4
General Fixed Assets:
Land 2,000,000
Buildings 3,000,000
Equipment 2,500,000
Total General Fixed Assets 7,500,000
Investment in General Fixed Assets From:
Capital Projects Fund
Tax Supported Bonds 1,500,000
Federal Grants 1,000,000
State Grants 100,000
General fund Revenues 4,700,000
Special Revenue Funds Revenue 200,000
Total Investments in General fixed Assets 7,500,000

Town of X
Statement of Changes in General Fixed Assets
For the Year Ending December 31, 20x4

Type of Beginning Additions Transfers Deletions Ending

Asset Balance Balance

Land 2,000,000 - - 2,000,000

Building 1,800,000 900,000 300,000 2,400,000
Equipment 2,000,000 700,000 - (200,000) 2,500,000
Total 5,800,000 1,600,000 300,000 4,200,000 2,500,000


Debt instruments backed by the “full faith and credit” of a governmental unit are known
as general obligation debts. They are obligations of the units and not of the individual
funds. In order to bring such debt under accounting control, the general long-term debt
Account Group (GLTDAG).

There are two basic kinds of governmental debt; General obligation debt mentioned earlier
and another debt which become common in the later years is to issue debts secured by
aspecific tax or apportion of tax; which in contrast is called Limited Obligation Debt.
(Note that proprietary fund debt is different). Debt which is secured by collection of taxes
is called tax supported debt. Even though this type of debt is not truly a general obligation,
it has been decided that it should be accounted for by the GLTDAG.

The concept of GLTDAG has been revaluated during its life to keep up with the trends in
government financing. Current GAAP says that the GLTDAG should account for all long-
term debt not being secured by revenues of proprietary funds or a non-expendable trust
fund. This includes General-special assessment debt, which previously does not have been

Unlike Governmental Funds, an account group is an accounting entity not a fiscal entity.
This can be understood to mean that it cannot enter into transaction outside itself. This also
means that it will not have Revenues or Expenditures. Like funds however, the GLTDAG
will be self balancing- in other words; its debits will equal its credits. Liabilities offcourse
normally will have credit balances. It is therefore necessary to create a debit account to
balance the account group in much the same manner as GFAAG is balanced by the
“Investment in ...”. There are two categories of these debit accounts.

1. Amounts which have been accumulated in the DSF for repayment of General Long
Term Debt i.e the amount that the entity has,
2. Amounts that must be provided in future years for the repayment of long-term debt
accounted by the GLATAG, i.e the amount that the entity still needs.

Debt of an Enterprise fund (EF) is normally taken carried in the books of the particular
fund rather than the general long-term debt account group. However it should be noted
that sometimes, EF debt has the status of general obligation debt. Issuing general obligation
debt in some cases may have a lower cost than issuing debt backed only by the revenues of

the EF. (The potential creditors feel that general obligation issue has less risk). In this case
the debt should be shown on the financial statements of the EF. It should also be disclosed
in the to the statements of the GLTDAG as a contingent liability , because the entity as a
whole will have to service the debt if the EF is unable to make the payments for some
reason. if the government does eventually take over on EF’s debt, the EF will debit the debt
account(Bonds Payable or similar Liability Account), and Credit contribution form the GF.
It is also possible that the governmental unit as whole will issue debt on behalf of the
Enterprise fund, with no obligation from the beginning on the part of the enterprise fund to
repay the debt. This type of debt would be accounted for in the GLTDAG with the
enterprise fund recording a contribution from the GF. Entries to the GLTDAG will have
corresponding entries in other funds, like a DSF. Also note that the GLTDAG is concerned
only with the principal of the debt not the interest.

Sample entries:
=>Serial bonds issued to finance a building;

Entries in CPF
Cash xxx
OFS-Bonds proceeds xxx

Entries on GLTDAG
Amount to be Provided for payment of serial bonds xxx
Serial Bonds Payable xxx
6.3.1 Principal and Interest Payable in Future years

Some years ago, accounting standards for state and local governments provided a “General
Bond Debt and Interest Group.” the essential difference between the former
recommendation and the current one discussed in this topics that, in the General Bonded
Debt and Interest Group, interest on long term debt to date of maturity was computed and
recorded in a credit balance account called Interest Payable in Future Years. Offsetting the
credit balance accounts were two debit balance accounts: amount Available in DSF for
Repayment of Interest and Amount to be provided for payment of interest. The idea of
trying to emphasize to users of financial statements the magnitude of the claim on resources
resulting from interest that will become payable in future years is appealing to fiscal
conservatives. However disclosure of the total amount of future interest (not the present
value of the interest) in a manner that makes it appear to be a present liability is not
considered in accord with generally accepted accounting principles. In order to disclose the

future demand of resources resulting from the maturing of debt principal and the payment
of interest, a schedule showing this information is often included.

6.3.2 Accounting Issues and Procedures related to GLTDAG


1. Regular Serial bonds of 10,000,000 have been issued at par to finance the construction
of a building in CPF

Entry on CPF

Cash 10,000,000
OFS- Bond proceeds 10,000,000


Amount To Be Provided for-

the payment of Regular Serial Bonds 10,000,000
Regular Serial Bonds Payable 10,000,000

Exp- if there were no assets provided to the DSF for the payment of principal, no
additional entry would be needed in that year as the bond is repaid in instalments, the
opposite entry would be made as the amount of the debt reduces.
The initial entry for a term bond would be the same as that of a serial bond except for the
account titles as term bonds has the added complication of needing to record the addition
of resources to its sinking fund. Basically additions to a debt service fund (either in the
form of revenue or transfers from other funds) are meant to cover both the payment of
interest and to accumulate the resources to repay the issue at maturity. From the GLTDAG
‘s perspective, it is the net difference between revenues (tax collection and etc...) and
expenditures (the interest paid to bond holders) that will be transferred form the Amount to
be provided to the Amount Available.

2. The DSF had Revenues/Transfers of 220,000 and 120,000 of that amount went to
pay interest


Amount Available in DSF-

for payment of Term bond 100,000

Amount To Be Provided-
for Payment of Term Bond 100,000

Exp- In this case, the difference i.e 100,00, that would be added to the sinking fund is
entered into GLTDAG. Payment of interest of 120,000 have no effect on the GLTDAG.

The amount available in the DSF on the GLTDAG should always agree with the fund
balance of the respective DSF, unless the DSF is holding Assets for the payment of interest.
In that case, the net asset available for principal would agree with the Amount available in

Each year schedule should be included in the notes to the entity’s financial statements.
Which shows the changes in the GLTDAG. However, if all changes in GLTDAG are shown
in sufficient detail in the DSF or the CPF, then the reference can simply be made to those
statements without special schedule being prepared. In any given year, it is common for
debt issues to be authorized, for previously authorized debt to be issued and for older
issues to be retired. When a combination of events take place, a schedule detailing changes
in long term debt is desirable.

Required disclosures for long-term debt;

1. Description of individual bond issues and leases outstanding.
2. Changes in General Long Term Debt
3. Summary of Debt service requirements to maturity
4. Disclosure of legal debt margin
5. Bonds authorized but unissued
6. Synopsis of Revenue bond covenants

Town of X
Statement of General Long Term Debt
As of December 31, 20y4

Amount Available and To be Provided for

Payment of General Long Term Debt
Regular serial bonds:
Amount to be Provided 1,500,000
Amount available in DSF 600,000
Total Regular Serial Bonds 2,100,000
Term Bonds:

Amount Available in DSF 80,000
Amount to be Provided 1,200,000
Total Term bonds 1,280,000
Total available and to be provided 3,380,000

General Long Term Debt Payable

Regular Serial Bonds 2,100,000
Term Bonds 1,280,000
Total General Long Term Debt Payable 3,380,000

Town of X
Schedules of Change in Tong Term Debt
As of December 31, year 6

Beginning Additions Payments Ending

Balance Balance .
General Long Term Debt:
Term Bonds:
7%, 20 year general
Obligation Bonds due on
July 1, year 25 500,000

Serial Bonds:
10%, 10 year General
Obligation Bonds, final
instalment due,
January 1, Year 6 10,000 10,000 .
Total GLTD 10,000 500,000 10,000 500,000

Check Your Progress

1. Explain the differences between the Governmental Funds and the Account groups.
2. Describe the accounting characteristics of the account groups.


3. Explain the similarities and differences between fixed assets of governmental funds with
that of a commercial entity, especially in acquisition cost.
4. Describe how Reduction cost is recorded in GFAAG.
5. Explain the accounting entities and how they self balance in GFAAG
6. Discuss how long term debts are recorded in GLTDAG.
7. Discuss how the statement of account groups and the statement of changes are
prepared for GFAAG and GLTDAG
8. How are changes in long term debt and fixed assets are recorded in the GFAAG
9. What is the difference between Amount to be Provided Account and Amount
Available Accounts?
10. What should be capitalized in the accounts of GFAAG?


In conclusion, the management of state and local governmental debt requires good legal
advice and good understanding of the principles of public finance both backed by
competently designed and operated financial management information systems.
Additionally, cash received from the disposal of fixed assets, unless prescribed by law,
disposition of the result of the sale will be handled as decided by the legislative body having
jurisdiction over the asset and will be accounted for in a manner required by the accounting
system of the recipient fund.


1. Refer to the topic 6.1 & 6.2

2. Refer to the topic 6.2
3. Refer to the topic 6.2.1
4. Refer to the topic 6.2.3
5. Refer to the topic 6.2 & 6.2.4
6. Refer to the topic 6.3 & 6.3.2
7. Refer to the topic 6.2.4 & 6.3.2
8. Refer to the topic 6.3 & 6.3.2
9. Refer to the topic 6.3
10. Refer to the topic 6.2