Chapter Three: General Fund & Special Revenue Funds 3.1 General Fund Is

RIFT VALLEY UNIVERSITY
2021
CHAPTER THREE: GENERAL FUND & SPECIAL REVENUE FUNDS
3.1 General Fund is
 Used for general governmental activities such as police, administration and the like.
 Account for all financial resources for which a separate fund is not required. All governmental
entities have a general fund (GF). Although it may be called the operating fund, the current fund
or something similar, the general fund will exist as long as the entity exists.
 Used to account for all financial resources except those required to be accounted for in another
fund.
3.2 Special Revenue Fund
Special revenue fund (SRF) in contrast to GF is used to account for resources, which are collected for a
specified purpose. Whenever a tax or other revenue source is authorized by legislative body to be used
for specific purpose, only a governmental unit availing itself of that source may create a Special Revenue
Fund in order to be able to demonstrate that all revenue from the source was used for the specified
propose, only separate special revenue funds are established by governmental units, as mandated by
legislative enactments to account for the receipts and expenditures associated with specialized revenue
sources that are earmarked by law or regulation to finance specified governmental operations.
Fees for rubbish collection, state taxes on diesel fuel that is required to be used only for road
maintenance, tax on hotel rooms to be used to improve tourist facilities, traffic violation fines are
examples of governmental units revenues that may be accounted for in a separate special revenue fund.
The general fund and the special revenue funds have different purposes, but they are both revenue
funds, and the accounting and reporting procedure is the same for both. They are similar in that all or
almost all of their resources are expended each year. They are then filled up (replenished) again for the
next year. The accounting principles for General and Special Revenue funds are based on the funds flow
concept rather than on the income determination concept of business accounting. This is due to the fact
that:
 Their revenues and expenditures are recurrent in nature
 There is a necessity of meeting current commitments from the currently expendable financial
resources.
3.3 ACCOUNTING CHARACTERISTICS
Fixed assets are not capitalized in either fund. Their purchase is considered as expenditure, the same as
for salaries or utilities. Such fixed assets are not accounted for by these funds, because, they are not
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normally converted into cash. Similarly the same categories of funds account for only those liabilities
incurred for normal operations that will be liquidated by use of fund assets.
GOVERNMENTAL FUND BALANCE SHEET AND OPERATING STATEMENT ACCOUNTS
General fund, special revenue funds, and all other governmental funds account for:-
 Only financial resources (cash, receivables, marketable securities and, if material, prepaid items
and inventories).
 Economic resources, such as land, buildings, and equipments utilized in fund operations, are not
accounted for by these funds because they are not normally converted in to cash.
 Similarly, these categories of funds account for only those liabilities incurred for normal
operations that will be liquidated by use of fund assets. General capital assets and general long
term liabilities are reported in the statement of net assets at the governmental wide level.
BALANCE SHEET ACCOUNTS
The Arithmetic Difference between the amount of financial resource and the amount of liabilities
recorded in the fund is the Fund Equity. Residents of the governmental unit have no legal claim on any
excess of liquid assets over current liabilities; there for, the fund equity not analogous to the capital
accounts of investors owned entity. Accounts in the fund equity category of general funds and special
revenue funds consists of reserve accounts established to disclose that portion of the equity are not
available for appropriations; the portion of equity available for appropriation is disclosed in an account
called Fund Balance (also referred to as Unreserved Fund Balance).
OPERATING STATEMENT ACCOUNTS
In addition to the balance sheet accounts, the General Fund and special revenue funds account for
financial activities during a fiscal year in operating statement accounts classified as Revenues, Other
Financing Source, Expenditures, and Other Financing Uses.
Revenue: - is the increase in the fund financial resources other than from inter fund transfers & debt
issue proceeds.
Other financing sources- are classified as an increase in the fund financial resources as a result of
operating transfers into a fund and debt issue proceeds received by a fund. It represents operating
transfers in from other funds and proceeds of long-term borrowing.
Expenditure is defined as decrease in fund financial resources other than through inter fund transfers,
operating transfers out of a fund that are classified as other financing uses. It is a term which replaces
both the terms costs and expenses used in accounting for profit seeking entities.
Other Financing uses - a decrease in the fund financial resources as a result of operating transfers out of
a fund. Budgeted inter fund transfers and debt issue proceeds may be recorded in Estimated Other
Financing Sources and Estimated Other Financing Uses control accounts supported by subsidiary
accounts as needed.
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BUDGETARY ACCOUNT
Budgetary Accounts include Estimated Revenues, Appropriation, Encumbrance, Estimated OFSs, and
Estimated OFUs
To Sum Up
 Balance Sheet Accounts are permanent accounts and include Fund Assets, Fund Liabilities and
Fund Balance Accounts.
 The Fund Balance Accounts are classified further into two accounts: Reserved Fund Balance and
Unreserved Fund Balance.
 Budgetary Accounts and Operating Statement Accounts are temporary accounts and closed at the
year-end to Unreserved Fund Balance Accounts.
 Operating Statement Accounts include Revenues, Expenditures, OFU and OFS (OFSs.
Comparison of Balance Sheet, Operating Statement, and Budgetary Accounts

Assets Liabilities Fund Equity
= +
Asset Accounts Liability Fund Equity

Cash Accounts Accounts
Receivables Accounts Payable Reserved Fund
Investments Accrued Liabilities
Prepaid Items Balances
Accrued Items
Inventory Unreserved Fund
Balances
Operating Statement Accounts Budgetary

Revenues Accounts Estimated
Expenditures Revenues
Other Financing Sources Appropriations
Other Financing Uses Encumbrances
Estimated Other Financing Sources
Estimated Other Financing Uses
3.3 Budget & Budgetary accounts

The two classifications of budget for governmental units are the same as those for business enterprises.
Annual budgets include the estimated revenues & appropriations for expenditures for a specific fiscal
year of the governmental unit. Annual budgets are appropriate for the general fund & special revenue
funds. They sometimes are used for other governmental funds. Expendable trust funds also may have an
annual budget, depending upon the terms, the terms of the trust indenture.
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Three general ledger control accounts are needed to provide budgetary control; Estimated Revenue,
Appropriations and Encumbrances.
1. Estimated Revenues – resources expected to be received
2. Appropriations – is both an authorization to spend and limitation of spending. Appropriation
could be further subdivided- by month or other periods; these subdivisions are called Allotments.
3. Encumbrances – Purchase orders(P.O.) in governmental entities have the function of keeping
track of coming expenditures so that the budget is not exceeded. This is done by actually
recording the P.O in the ledger account as an Encumbrance. An encumbrance differs from
expenditure in the following perspectives.
 The encumbrance is an estimate of liability to be incurred while expenditure is an actual
liability which has been incurred. The reason that encumbrance is only an estimate is that
invoiced amounts sometimes differ from purchase order amounts.
 Encumbrance denotes amount stated on the purchase order, which is subject to
change whereas, expenditure is the actual amount of money a governmental unit should
pay up on delivery. This may be equal or greater/less than the encumbered amount. For
example a particular item may be out of stock, and either backordered, or substituted by a
similar item.
3.3.1 Recording the Budget
The entry to record the budget is simple. It is normally done on the first day of the fiscal year. Estimated
revenue is debited, Appropriations is credited, and fund balance is debited or credited for the difference
and at the end of fiscal period the entry is reversed.
Estimated Revenue xxx

June 1,2007 Appropriation xxx
Debit/credit Fund Balance xxx
To Record Budget at the beginning of the fiscal period
Note: Credit fund balance implies surplus of Budget and Debit fund balance indicate budget deficit.
Appropriation xxx
July Debit/credit Fund Balance xxx
31,2007 Estimated Revenue xxx
To Close Budget at the end of fiscal period
Example Assume a budget with Estimated Revenues of 500,000 Birr and Appropriations of 480,000 Birr
on june 1,2002
a) Record Budget on June1,2002
b) Record Budget on July 30,2002
Solution a)
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June1,2002 Estimated Revenues 500,000
Appropriations 480,000
Fund Balance 20,000
To Record Budget at the beginning of the fiscal period
b)
July 30,2002 Appropriations 480,000
Fund Balance 20,000
Estimated Revenues 500,000
To Close Budget at the end of fiscal period
Two Journal entries are needed for encumbrances:
1. When the order is paced, Encumbrances is debited and Reserve for Encumbrances (a fund
Balance account) is credited
2. When the goods/order is received, the above entry is reversed and another entry to account
actual liability would be recorder: a debit to Expenditure and a credit to Cash/ Accounts
Payable
Example 1- Adis Abeba city administration G.Fund places a purchase orders/ p.o no. 010/06/ for goods
to a supplier in an amount of 150,000.
Encumbrance 150,000
Fund Balance Reserved for Encumbrances 150,000
(To record encumbrances for p.o no. 010/06 to WABE company.)
The order is received from Adis Abeba city under purchase order no. 0010
Fund Balance reserved for Encumbrances 150,000
Encumbrances 150,000
/To reverse encumbrance for purchase order no. 0010 to WABE company
The suppliers Received 180,500 invoice price .
Expenditures 180,500
Vouchers payable 180,500
As indicated by the example above the invoice amount may differ from the amount of the governmental
units purchase order because of such items as shipping charges, Sales Taxes, and price changes.
Encumbrances are not necessary for every single expenditure. Expenditures that are regular and
predicable, such as payroll are not typically encumbered. However, if payroll has seasonal
fluctuations, then it is wise to encumber the estimated payroll
APPROPRIATION ENCUMBRANCE EXPENDITURE DISBURSEMENT
3.4 Accounting for General Fund and Special Revenue Fund

Illustration
Below is the Balance Sheet of Adis Abeba City General fund on June 30, 2005 and the annual budgets
adopted for the year ended June 30, 2006.
Adis Abeba City General Fund
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Balance Sheet June 30, 2005
Assets
Cash .................................................................... 1,600,000
Inventory of supplies............................................ 400,000
Total Assets 2,000,000
Liabilities and Fund Balance
Vouchers payable ................................................. 800,000
Fund balance:
Reserved for encumbrance 400,000
Unreserved and undesignated 800,000 1,200,000
Total liabilities and fund balance 2,000,000
Approved budgets by the town council for the fiscal year ended on June 30, year6.
Estimated revenues:
- General property taxes .......................... 7,000,000
- Licenses and permits .......................... 400,000
- Charges for services ......................... 500,000
- Fines and for fits ............................... 300,000
- Miscellaneous revenues ........................ 200,000 8,400,000
Estimated other financing sources (transfer from EF) 100,000
Appropriation:
- General government .......................... 4,700,000
- Public safety .......................... 1,900,000
- Health and welfare .......................... 1,100,000
- Culture and recreation ...................... 400,000 8,100,000
Estimated other financing uses (transfer to DSF) 100,000
* The journal entry to record the annual budget for the Adis Abeba City General fund on July 1, Year
2006 was as follows: General ledger
Estimated revenues 8,400,000
Estimated other financing sources 100,000
Appropriations 8,100,000
Estimated other financing uses 100,000
Budgetary fund balance 300,000
Assume that in addition to the budget illustrated earlier, the Adis Abeba City general fund had the
following summarized transaction and events for the fiscal year ended June 30, 2006
1. Property taxes were billed in the amount of 7,200,000 of which 140,000 was of doubtful collect
ability.
2. A total of 6,500,000 amount of Property tax were collected and a total of 1,020,000 amount of cash
from other revenue sources like licenses and permits, fines and forfeits, miscellaneous sources were also
collected
3. Property tax in the amount of 130,000 was identified to be uncollectible.
4. Purchase orders for office equipment were issued to outside suppliers in the total amount of 3,600,000.
5. Billings for services and supplies received from enterprise fund and internal service fund totaled
300,000 and 200,000 respectively.
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6. Cash payments on vouchers payable totaled 7,700,000. Cash payment to the Enterprise fund and the
internal service fund were 250,000 and 140,000 respectively.
Assuming that the total (Actual) revenue for the Adis Abeba city town is composed of the following
sources,
General Property Tax 7,060,000
Licenses and Permits 450,000
Charges for Services 470,000
Fines and Forfeits 310,000
Miscellaneous Revenue 190,000
Also assume that the total expenditures is composed of the following items.
General Government 4,590,000
Public safety 2,000,000
Health and Welfare 1,200,000
Culture and Recreation 210,000
Required
a) Prepare necessary journal entry
b) Prepare Financial statement for General fund
SOLUTION
a)
1. Property tax receivable- current 7,200,000
Allowance for uncollectible prop. taxes -current 140,000
Revenue 7,060,000
2. Cash 7,520,000
Property taxes receivable-current 6,500,000
Revenue 1,020,000
3. Allowance for uncollectable Property taxes – current 130,000
Property taxes receivable- current 130,000
4. Encumbrances 3,600,000
Reserved for Encumbrances 3,600,000
5. Expenditures 500,000
Payable (Due) to Enterprise fund 300,000
Payable (Due) to Internal Service fund 200,000
6. Vouchers payable 7,700,000
Payable to Enterprise fund 250,000
Payable to Internal service fund 140,000
Cash 8,090,000
Adis Abeba city town General fund
Trial Balance
June 30, 2006
Account title Debit Credit

Cash 1,420,000
Taxes Receivable- Delinquent 570,000
Allowance for Uncollectable Delinquent Taxes 10,000
Inventory of Supplies 500,000
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Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service Fund 60,000
Fund Balance Reserved for Inventory of Supplies 500,000
Fund Balance Designated for Replacement of Equipment 250,000
Unreserved and undesignated fund balance 450,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
Estimated Other Financing Uses 100,000
Revenues 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Encumbrances 50,000 .
Total 19,150,000 19,150,000
b) Adis Abeba City General fund

Statement of Revenues, Expenditures and Change in Fund Balance
For the Year ended June 30, 2006
Budget Actual Variance- Favourable
Revenues: (Unfavourable)
General Property Tax 7,000,000 7,060,000 60,000
Licenses and Permits 400,000 450,000 50,000
Charges For Services 500,000 470,000 (30,000)
Fines and Forfeits 300,000 310,000 10,000
Miscellaneous Revenue 200,000 190,000 (10,000)
Total Revenues 8,400,000 8,080,000 80,000
Expenditures:
General Government 4,700,000 4,590,000 110,000
Public Safety 1,900,000 2,000,000 100,000
Health an Welfare 1,100,000 1,200,000 (100,000)
Culture and Recreation 400,000 210,000 190,000
Total Expenditures 8,100,000 8,000,000 100,000
Excess of Revenue over Expenditures-
Other Financing sources (Uses):
Operating Transfers In 100,000 100,000
Operating Transfers Out (100,000) (110,000) (10,000)
Excess of Revenue and O.F.S.-
Over Expenditures and O.F.U. 300,000 470,000 170,000
Add:
Add: Fund Balance, July 1, 2006 1,200,000 1,200,000 .
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Fund balance June 30, 2006 1,500,000 1,670,000 170,000
Adis Abeba City General Fund
Balance Sheet,
June 30, 2006
Assets
Cash 1,420,000
Prp.Taxes Receivable- Delinquent 570,000
Less: Allowance for Uncollectable Taxes 10,000 560,000
Total Assets 2,480,000
Liabilities
Payable to Enterprise Fund 50,000
Payable to Internal Service fund 60,000
Total Liabilities 810,000
Fund Balance:
Reserved for Encumbrance 50,000
Reserved for Inventory of Supplies 500,000
Designated for Replacement of Equipment 250,000
Unreserved and Undesignated 870,000 1,670,000
Total Liabilities and Fund Balance 2,480,000
Closing Entries for a General Fund
Estimated Other Financing Uses 100,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
/ To close budgetary ledger Accounts/
Revenue 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Unreserved and undesignated Fund Balance 470,000
/ To close Revenues, Expenditures, Other Financing Sources and Uses
Accounting for Special Revenue Funds
The distinguishing feature of a special revenue fund is that its revenues are obtained primarily from tax
and non-tax sources not directly related to services rendered or facilities provided for use. Separate
special revenue funds are established by governmental units as mandated by legislative enactments.
Illustration
To illustrate the accounting for a Special Revenue Fund, Assume that on July 1, 2006, The town council
of the Adis Abeba city town authorized the establishment of a special Revenue Fund- its first such fund-
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to account for Special Assessment against certain residents of the neighboring village of Gute.
Gute. Because
the property tax revenue of the Adis Abeba city town , which among other services financed street
cleaning and street light maintenance for residents of the town only, could not be used for such services
elsewhere, the town council authorized special assessment to finance comparable services for the
requesting residents of the village of gute. the town council adopted a budget for the special revenue
fund for the year ending June 30 2007, providing for estimated revenues (from the special Assessments)
of 800,000 and appropriations for reimbursement to the General fund for expenditures made by that fund
for the services provided to the village of gute residents) of 750,000.
Following are additional transactions or events of the Adis Abeba city town special revenue fund for the
year ending June 30 2007.
1. On July 1, 2006,
200 the town recorded the adopted budget in the books.
/ To record the annual adopted budget for fiscal year ending June 30 ,2007/
2. Special Assessments tax totaling 820,000 were levied which are to be paid in full in sixty days.
Special Assessment Tax Receivable- current 820,000
Revenues 820,000
/ To record special assessments billed, all of which are estimated to be collectable/
3. Cash Receipts from Special Assessment Taxes of 820,000 were collected in full.
Cash 820,000
Special Assessment Tax Receivable- current 820,000
/ To record collection of special assessment tax in full during the year/
4. Of the cash receipts, 630,000 was invested in Treasury bills with face amount of 650,000. The
treasury bills mature on June 30 , 2007 and were redeemed in full on that date.
Short Term Investments 630,000
Cash 630,000
=/To record acquisition of 65,000 face amounts of treasury bills/
Cash 650,000
Short Term investments 630,000
Revenues 20,000
/ To record receipts of cash for matured U.S treasury bills.
Maturity June 30, 2007/
5. Billings from the Adis Abeba City General fund, requesting reimbursement of expenditures of that
fund, totaled 760,000; of that amount, 620,000 was paid to the General Fund by June 30, 2007.
200
Expenditures 760,000
Payable to General Fund 760,000
/To record billings from general fund for reimbursement of expenditures for street cleaning and street
light maintenance for residents of the village of Gute
Payable to General Fund 620,000
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Cash 620,000
/ To records payments of general fund during the year/
Closing Entries
/ To close budgetary ledger accounts/

Financial Statements for a special revenue funds
The financial statements for a special Revenue funds is the same as that of a General fund-a statement of
Revenues, Expenditures and change in Fund Balance and a Balance sheet. Following are the financial
statements for the Adis Abeba city town Special Revenue fund for the year ended June 30, 2007:
Adis Abeba City Special Revenue Fund

Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, 2007
Favourable
Budget Actual Variance (Unfavourable)
Revenues:
Special Assessments 800,000 820,000 20,000
Other - 20,000 20,000
Total Revenues 800,000 840,000 40,000
Expenditures
Reimbursement of General Fund-
expenditures 750,000 760,000 (10,000)
Excess of Revenues over Expenditures . . .
(Fund Balance End of year)------------- 50,000 80,000 30,000
Adis Abeba citySpecial

citySpecial Revenue fund
Balance Sheet
June 30, 2007
Assets
Cash ----------------------------------------------------------------------- 220,000
Payable to General fund ------------------------------------------------- 140,000
Fund Balance Designated for Reimbursement of General fund ----- 80,000
Total Liabilities and Fund Balance ------------------------------- 220,000
TERMINOLOGY AND CLASSIFICATION FOR GOVERNMENTAL FUND BUDGETS

AND ACCOUNTS
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I. Classification of Appropriations and Expenditures
The budgeted appropriations are often called estimated expenditures, and the appropriation budget is
called expenditure budget..
According to GASB’s Principles, Expenditures should be classified by: -
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1. Fund 4. Activity
2. Function or program 5. Character (fiscal period)
3. Organization unit 6. Object
1. Classification by Fund
The primary classification of governmental expedition is by fund, since funds are the basics
fiscal & accounting entity of governmental unit.
Eg. G,F SRF CPF, DSF
2. Classification by Function or Program
Functions are group related activities that are aimed at accomplishing a major service or
regulatory responsibility..
E.g. The G.F. may –have the following programmes or functions.
-General Governmental -Health & welfare
-Public safety -Culture & recreation
3. Classification by organization unit
E.g. - Police dept - Public works dept
- Fire dept - Parks & recreation dept
4. Classification by activity
An activity is a specific & distinguishable line of work performed by an organizational unit to
fulfill the overall goals of the programme or function. For example, within the police dept,
activities such as the following may be performed.
- Crime control by -- Foot patrol
Car Patrol
- Traffic control by -- Traffic
5. Classification by character
This classification has to do with the expenditure itself than the department or fund in which
it is incurred. The character of expenditure is either.
 Current expenditure – meant to benefit the current period only.
 Capital expenditure – benefits the current period plus other periods the future.
 Debt service expend – includes payment of interest or debt & payment of debt
principal that arises from past period benefits which may also be expected to benefit
the current and future period.
6. Classification by object
Object of expenditure is the thing for which the expenditure was made. It is mainly a
concern of current period expenditures..
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Rift valley University, Burayu Campus NFP Lecture Note 2021
E.g. Personal services

Other services & charges
Supplies
Capital outlays
Adis Abeba City G.F
Public safety programmes /functions
Police dept organization unit
Crime control activity
Current expend. Character
Supplies object
II. Classification of Estimated Revenues & Revenues
Revenues are defined, as all increases in fund net Assets except those arising from inter fund transfers
and from proceeds of long-term debit. A governmental unit and the funds thereof, may Major revenue
source classes are: -
1. Taxes
2. Licenses & permits
3. Inter governmental revenues
4. Charges for services
5. Fines & forfeits
6. Miscellaneous revenues
1. Taxes
Taxes are a forced contribution imposed on the citizens by the government. There are a number of
different kinds of taxes possible, including property (land use) sales, excise, income, customs, and capital
gain etc….
 Taxes Receivables–Current: is used to accrue taxes which are due in the current Year. Taxes
which are expected to be collected within the current year are to be recorded in this
account.
 Taxes Receivable–Delinquent: is used to record any taxes which are past due. Taxes
which have been expected to be collected in the current year, but fail to do so are to be recorded
in this account.
 Tax Lien-Receivable: is used to record taking possession of goods on which an owed tax
has not been paid. This account is used to record the total amount of tax liability that a tax payer
fails to pay on the due date, including penalty and interest, for which the taxing agency seized
his/her/it‘s property.
 Interest and Penalties Receivable on Delinquent Taxes: is used, obviously, to record interest
and penalties due on unpaid taxes.
Liability Accounts
 Deferred Taxes: account of credited for taxes which are paid in a year before they may legally be
used for expenditure.
 Trust for Property Owners: If those possessed goods are sold in an attempt to cover
the tax any additional cost incurred in collecting it, the Trust for Property Owners
account is used to record any balance remaining from the selling price after the tax and collection
cost are deducted.
Contra Asset Account
Allowance for Uncollectible Taxes: is used for recording the estimate of taxes which the
government will not be able to collect. As there is no profit to determine, no expenses will
be recognized. Hence, Bad debt expense is not used for taxes. Rather any uncollectible
taxes are accounted for as a reduction in revenue and the balance is to be recorded in a
contra asset account called Allowance for Uncollectible Taxes. Note that this is different
from FP accounting
2. Licenses and permits
Licenses and permits may be divided into two categories.
a) Business - like merchants licenses, customs clearing Agency licenses, professional (physician,
attorney)
b) Non business - like driving licenses, hunting license, Residential permits
Revenue from licenses & permits are accounted on the cash basis.
3. Intergovernmental Revenue
Intergovernmental revenues include Grants, Entitlements & Shared Revenues.
a) Grant is money, which is given for a specific purpose & it should be classified according to both its
source & it purpose. A grant could be given from the federal governmental to regional state government
(called a subsidy) or from a foreign government to the federal government. Grants can be divided into
two types.
b) Shared revenues is a revenue levied by one government but shared on a predetermined basis, often
in proportion o the amount collected at the local level, with another government or class of government.
Entitlement is the amount of payment to which a state or local government is entitled as determined by
the federal government pursuant to an allocation formula
4. Charges for services
Charges for services include revenue from charges for all activities of a governmental unit, except the
operations of enterprise funds.
E.g. court costs, special parking meters.
It should be recognized as revenue when earned, if that is prior to the collection of cash.
5. Fines & forfeits
Fines & forfeits are penalties, which are paid to governmental unit, usually as punishment for violating
the law. It is accounted thorough cash basis.
6. Miscellaneous revenue
Any revenue types that do not fit one of the above five classifications
E.g. interest income on investments – should be accrued
 Sales of fixed assets
 Insurance claim
 Contribution from private individuals
Classes of Non-exchange Transactions

1. Derived Tax Revenues – Examples: Sales taxes, Personal and Corporate income taxes excise taxes,
and similar taxes on earnings or consumption. In a derived tax revenue transaction, a tax assessment is
imposed because an underlying exchange takes place. When a sale occurs and a sales tax is imposed or
when income is earned and an income tax is assessed.
2. Imposed Non-Exchange Revenues – Examples: Property taxes, fines and penalties, forfeitures. These
are viewed as imposed non-exchange revenues because the government imposes an assessment without
existence of underlying transaction. Real estate or other property is owned and a property tax is levied
each period. Ownership is being taxed by the government and not a specific transaction.
3.Government Mandated Non-Exchange Transactions – grants that are conveyed from higher
government to lower government to help pay for the costs of required programs (e.g. certain education,
social welfare, transportation services mandated and funded by a higher level of government).
4. Voluntary Non-Exchange Transactions – in this final classification, money has been conveyed
willingly to the state or local government by an individual, another government, or an organization
usually for a particular purpose. Examples: grants and entitlements from higher level of government and
certain private donations
Inter-fund transactions and transfers
Inter fund transactions are transactions between different entities within the governmental unit. As such,
they need to be recorded in two different sets of books. The five types of inter fund transactions
commonly encountered in governmental accounting are listed, defined, and illustrated below
1) Inter fund loans & advances
Often funds sometimes loan or advance money to each other in order to use idle cash effectively. Short
Period (one year or less is commonly used), the borrowing is called a loan; The money is only
temporarily transferred and must be repaid. Since each fund is a fiscal entity, these inter fund
payables and receivables must be disclosed in the financial statement of each fund involved.
Interest is sometimes charged to or by proprietary funds; it is not normally charged on advances
and loans between governmental funds. For longer periods, the borrowing is called an advance.
advance
Due from SRF xxx
Cash xxx
Cash xxx
Due to the GF xxx
For example, if the general fund loaned 50,000 Birr to a special revenue fund, the entries required
would be:
On the books of the general fund
Due from the special Revenue fund 50,000
Cash 50,000
On the books of the special revenue fund
Cash 50,000
Due to the General fund 50,000
(To record a loan from the general fund)

Inter fund loans and advances are not increases or decreases in f und net assets. On the
creditor fund‘s books they only move resources from one current asset (cash) to another
(Due from…). On the debtor fund‘s books, they increase a current asset (cash) by increasing a
current liability (Due to..). In both cases, the effect on net assets is zero. As such inter fund loans
and advances are not closed at the end of the year
2) Quasi –external transaction
These are transactions that would be treated as revenues, expenditures, or expenses if they
involved organizations external to the governmental unit. They are the only type of inter fund
transaction which is considered as revenue and expenditure within the entity. These transactions
are typically between an internal service fund and the general or a special revenue fund. The fund
giving the service recognizes revenue; the fund receiving the service recognizes expenditure. An
example of a quasi-external transaction is a shared garage for the governmental unit which repairs any of
its cars regardless of which fund is responsible for it. The garage will charge the respective fund for
work done, and recognize revenue from it. The fund which is responsible for the vehicle recognizes
expenditure. The quasi-external transactions are recognized as revenue and expenditure only on the
individual and (sometimes) combining fund statements. These transactions are eliminated on the
combined statement of the government unit, and not included as revenue or expenditure for the unit as a
whole.
GF
Expenditure xxx
Due to ISF xxx
SRF
Due from GF xxx
Revenues xxx
If a car repair of 1,000 Birr was done to a vehicle the general fund was responsible, the following
entries would be needed
On the books of the General Fund
Expenditures 1,000
Due to Internal service Fund 1,000
On the books of the Internal service fund
Due from the General fund 1,000
Revenues 1,000
The revenues and expenditures arising from quasi-external transactions are closed simply as part of
closing the other revenues and expenditures for the year. Due From accounts are not closed, because they
are balance sheet accounts.
3) Reimbursements
Are transactions that reimburse a fund for expenditures made by it on behalf of another fund i.e. one
fund pays a bill on behalf of another & is then reimbursed.
Expenditure xxx
Cash xxx
= To record payment of bill on behalf of ---

Cash xxx
Expenditure xxx
= To record reimbursement
For example, the Ministry of Health operates clinic in Addis Ababa and South Omo. The Addis Ababa
Clinic, for convenience, might pay a bill of 3000 Birr for medicine on behalf of South Omo clinic. The
South Omo clinic would then reimburse the AA clinic. The AA clinic would charge expenditure at the
time of purchase, and then credit expenditures to zero (0). Payment of the reimbursement would then
create expenditure for the South Omo clinic.
On the books of the AA Clinic
Expenditure 3,000
Cash 3,000
(To record payment of bill on behalf of south Omo clinic)
Cash 3,000
Expenditure 3,000
(To record reimbursement from south Omo clinic)
On the books of the South Omo Clinic
Expenditure 3,000
Cash 3,000
(To reimburse the AA clinic for medicine purchase)
Any expenditures arising from reimbursement transactions are closed simply as part of closing the
other revenues and expenditures for the year. No special attention is given to reimbursements in the
year-end closing process.
4) Residual Equity transfers
Residual Equity transfers are non-recurring or non-routine transfers of equity between funds made in
connection with the formation, expansion, contract or discontinual of a fund. not only are they not
Revenues or Expenditures, they are not Other Financing Sources or Uses, even though they are
technically increase / decreases in fund financial resources.
resources
Equity transfer out xxx
Due to ISF xxx
Due from GF xxx
Equity transfer in xxx
For example, the GF might transfer the amount of 10,000 Birr to an internal service fund to open a
central supply store.
Equity Transfers Out 10,000
Due to Internal Service fund 10,000
On the books of the Internal Service Fund
Due from the General Fund 10,000
Equity transfers In 10,000
5) Operating transfers
Operating transfers are made in connection with the normal operation of the recipient fund. They are
legally authorized transfers from a fund, which receives revenue to the fund through which the resources
are to be expended. These transfers are other financing source of the receiving fund, other financing uses
of the paying fund.
fund
Other Financing Uses-Operating Transfers Out xxx
Due to DSF xxx
Due from GF xxx
Other Financing Sources-Operating Transfers In xxx
For example, the general fund may make an annual transfer of 8,000 Birr to a Debit service Fund for
payment of interest on a general long-term debit. At time the transfer is authorized, the following entries
are needed:
Operating Transfers Out 8,000
Due to Debt Service fund 8,000
(To record a transfer to the debit service fund)
On the books of the Debit service fund
Due from General fund 8,000
Operating Transfers In 8,000
(To record a transfer from the general fund)
These transfers are similar to (residual) equity transfers in that they increase the net assets of the
receiving fund, and decrease the net assets of the giving fund. Therefore, they also must be closed to
fund balance at the end of the year
- 4 & 5 are properly called transfers & 1,2,3 are merely transfers.
CHAPTER 4
CAPITAL PROJECT FUNDS
Capital Projects Funds (CPF) account for financial resources to be used for the acquisition or
construction of major capital facilities (other than those financed by proprietary funds & trust funds).
 CPF do not account for the fixed assets acquired only for the construction of the fixed assets. It
exists only for the period of acquisition or construction of the fixed assets. After the acquisition
or construction is completed, the Capital Projects Fund will be abolished.
 The Fixed Assets constructed are accounted for in the GFAAG. It does not also account for the
repayment & servicing of any debt obligations issued to raise money to finance the acquisition of
capital facilities. Such debt & debt related servicing activities are accounted for in the General
Long Term Debt Account Group (GLTDAG) & Debt service fund (DSF).
 Since the purpose of capital projects fund is to account for the acquisition and deposition of
revenues for specific purpose, it contains balance sheet accounts for only liquid assets and for the
liabilities to be liquidated by those assets.
Establishment & operation
 C.P.F are usually established on a project-by-project basis, because legal requirements may vary
from one project to another. So the existence of the C.P.F as any other fund will depend on the
legal requirement & the need for good financial management.
 The focus of the CPF is the entire life of the project. It is by definition an expendable fund, and
all its resources are expected to be used up. However, CPFs do not have the same year-by-year
focus as the G.F because of the multi-year focus of CPFs, some accountants prefer not to close a
CPF annually, but others do. Whether or not to close the CPF annually will depend on the unique
factors of each case & will be strongly influenced by the requirement of the financing source.
 The decision to use budgetary accounts will also depend on the features & financing source of the
particular CPF. The decision to use or not to use budgetary accounts is influenced by factors such
as.
- The number of projects in the C.P.F
- The amount of detail in the C.P.F budget
- The use of an annual budget (rather than a project life budget) in the CPF
Financing a capital project

Capital projects project obviously need large amount of financing. Typically source of financing include;
- Long term debit issue proceeds
- Grants from other governmental units
- Transfers from other funds with in the governmental entity
- Interest income from temporary investments.
- Gifts from individuals or foundations
- Special taxes or;
A combination of more than one of those Intergovernmental grants, gifts, special taxes & investment
interests are considered as Revenues, whereas Inter Fund Transfers & Long Term Debt issue proceeds
are not revenues and are presented as Other Financing Sources and are presented that way on the
statement of changes.
Accounting for Capital Projects Fund

The following illustration will show how the construction and related activities are accounted for in a
capital projects fund.
Illustration
The town of X wants to construct a new library on the site owned by the town. The construction is
expected to cost 50,000,000. It is expected to be completed within two years on June 30 year 7. In a
special meeting held on July 2 year 5, the members of the town council approved a 30,000,000 issue of
General Obligation Bonds maturing in 20 years. The proceeds of this sale will be used to help finance the
construction of the new library. The remaining 20,000,000 will be financed by an Irrevocable State Grant
that has been awarded.
The following transactions occurred during the fiscal year ended June 30 year 6.
1. The General fund loaned 500,000 to the library Capital Projects Fund for defraying
Engineering and other preliminary expenses by receiving a note which is later to be settled from the
bond issue proceeds.
Cash 500,000
Notes Payable 500,000
2. Out of the Irrevocable grant of 20,000,000, the state contributed 5,000,000 and the
Remaining is supposed to be susceptible to accrual
Cash 5,000,000
Due from State Grant 15,000,000
Revenue 20,000,000
3. Preliminary engineering and planning costs of 320,000 were paid to the contractor.
There had been no encumbrances for this cost.
Construction Expenditure 320,000
Cash 320,000
4. The Bonds were sold at 101 the bond indenture agreement requires that any premium to be set
aside in the related Debt Service Fund.
Cash 30,300,000
OFS-Bond proceeds 30,000,000

Due to DSF 300,000
5. The town of X library CPF invested its 10,000,000 bond proceeds on the Federal Government
treasury bills.
Short Term Investment-Treasury Bills 10,000,000
Cash 10,000,000
6. A construction contract for 44,270,000
44,27 is authorized and signed.
Encumbrances 44,270,000
Fund Balance Reserved for Encumbrances 44,270,000
7. Orders were placed for materials estimated to cost 550,000.
Encumbrances 550,000
8. The materials previously ordered (Transaction 7) were received at a cost of 510,000.
a) Fund Balance reserved for Encumbrance 550,000
Encumbrance 550,000
b) Construction expenditure 510,000
Construction Payable 510.000
9. In addition to the construction contract of transaction 6; 3,900,000 was incurred for the services of
the architects and engineers; of this amount 3,100,000 was paid.
Encumbrances 3,900,000
Fund Balance Reserved for Encumbrances 3,900,000
Fund Balance Reserved for Encumbrance 3,900,000
Encumbrance 3, 900,000
Construction Expenditure 3, 900,000
Construction Payable 3, 900,000
Construction Payable 3,100,000
Cash 3,100,000
10. Received cash of 1,000,000 from the General fund as an operating transfer.
Cash 1,000,000
OFS- Operating transfers in 1,000,000
11. A partial payment of 10,000,000 was received from the state irrevocable Grants and also
the General Fund loan was repaid with interest amounting to 10,000.
Cash 10,000,000
Notes Payable 500,000

Interest Expenditure 10,000
Cash 510,000
See transaction No 5 and 1 respectively
12. When the project was approximately half finished, the contractor submitted billing for a payment of
12,000,000.
Fund Balance Reserved for Encumbrance 12,000,000
Encumbrance 12,000,000
Construction Expéditeur 12,000,000
13. The contractors initial claim was fully verified and paid.
Cash 12,000,000
Town of X library Capital Projects Fund

Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, year 6
Revenues:
Irrevocable State Grant 20,000,000
Expenditures:
Construction Expenditures 16,730,000
Interest Expenditure 10,000 16,740,000
Excess of Revenue over Expenditure 3,260,000
Other Financing Sources(Uses)
OFS- Bond Issue Proceeds 30,000,000
OFS- Operating transfers in 1,000,000 31,000,000
Excess of Revenue and OFS over Expenditure 34,260,000
Add:
Add: Fund Balance - July 1, Year 5 -
Fund Balance - June 30, Year 6 34,260,000
Town of X Library Capital Projects Fund

Balance Sheet
June 30, year 6
Assets
Cash 20,870,000
Short Term Investment- Treasury Bills 10,000,000
Total Asset 35,870,000

Due to DSF 300,000
Fund Balance: 34, 260, 0000
Total Liabilities and Fund Balance 35,870,000
________________________________________________________________________
CHAPTER 5
DEBT SERVICE FUND
From time to time governmental entities have a shortage of cash to carry out their activities. In such
cases, governmental entities may turn to borrowing to supply the needed cash. GENERAL
CHARACTERISTICS OF DEBT SERVICE FUND
 Debt service fund is used to account for both the repayment of the principal and payment of
interest of the long-term debt when they are due.
 DSF is governmental funds and therefore is Expendable. Although, like a CPF, they have focus
more than a year.
 As expendable funds, DSF use the modified accrual basis of accounting. An application of
modified accrual, which is of special interest to DSF I.e. Interest payable is not accrued in the
DSF.
 Accounts recommended for use by a serial bond Debt service fund is similar with that of
General Fund and Special Revenue fund.
 The operations of DSF do not involve the use of purchase orders and contracts for goods and
services. So the Encumbrance accounting is not needed.
 The ledger accounts of a Serial Bond Debt Service fund include liquid assets and current
liabilities and Fund Balance Accounts.
TYPES OF LONG TERM DEBTS

Bond:- A written promises to pay a specified principal sum at a specified future date with interest. They
are typically issued in 1000 and 5000 denominations. All long term debts of governmental units consists
of one of the following two basic types of bonds;.
Term Bonds-
Bonds term bonds are bonds whose principal is repaid in lump-sum at their maturity date. Such
lump-sum payment is usually made possible through accumulation of money in the DSF on an actuarial
basis over the life of the bond issue in a sinking fund.
Serial Bonds - this are bonds, which have periodic maturities. The principal of a serial bond so repaid at
various ore determined dates over the life of the issue. There are four types of serial bonds;
1. Regular Serial Bonds- The total Principal amount of an issue is repayable in a specified number of
equal annual installments over the life of the issue.
2. Differed Serial Bond- The total principal amount of the issue is repaid in equal annual installments,
but the first installment is delayed for a period more than one year.
3. Annuity Serial Bond- if the amount of annual principal repayment is scheduled to increase each year
by approximately the same amount that interest payments decrease (interest decrease of course, because
the amount of outstanding bond decreases) so that the total DSF remains reasonably level over the term
of the issue, the bonds are called Annuity Serial Bonds.
4. Irregular Serial Bonds- these types of serial bonds may have pattern of repayment that does not fit
the other three categories..
ACCOUNTING FOR DEBT SERVICE FUNDS
Illustration
The town of X uses a Serial Bond Debt Service Fund to pay off matured bonds and - -Interest payable
amounts. Information about the Bond issue is as follows;
- Principal Amount ----------------- 1,000,000
- Interest Rate ---------------------- 10% semi annually
- Bonds Dated ---------------------- January 1, 20x6
- Interest Payable--------------------- January 1 and July 1, beginning July 1, 20x6
- Bonds mature serially at the rate of 100,000 a year starting January 1, 20x7.
- The Fiscal Period runs from July 1, 20x7 - June 30, 20x8.
1. The Revenue Budget for Serial Bond Debt Service Funds for 20x8 consists of estimated Revenues of
330,000 to be raised from Debt Service Tax Levy and Estimated Revenues of 50,000 from earnings on
investments.
Appropriation Budget includes matured interest payable and matured bonds payable i.e ;
Interest for July 1 and January 1 = 900,000 x 5% x 2 = 90,000
Bonds payable mature January 1 = 100,000
Estimated Tax Revenue 330,000
Estimated Investment Revenue 50,000
2. Taxes receivable amount of 340,000 and estimated uncollectable taxes in the amount of 10,000 are
recorded.
recorded
Taxes Receivable- current 340,000
Allowance for uncollectable current taxes 10,000
Revenues 330,000
3. Half of the gross levy of taxes is collected in cash.
Cash 170,000
Tax Receivable-current 170,000
4. Interest payable on July 1, 20x7 is recorded as a liability.
Expenditure 45,000
Interest Payable 45,000
5. Taxes in the amount of 160,000 are collected.
Cash 160,000
Tax Receivable- Current 160,000
6. Cash of 100,000 is invested in short term notes which bear interest of 10%
Short Term Investment- Note 100,000
Cash 100,000
7. Interest on investment is received for the four months.
100,000 x 10% x 4/12 = 3333.33
Cash 3333.33
Revenue 3333.33
8. Interest on Investment is received for three months.

100,000 x 10% x 3/12 = 2,500
Cash 2,500
Revenue 2,500
Town of X Serial Bond Debt Service Fund

Trial Balance
June30, 20x8
Account title Debit Credit
Cash 44,333.33
Short term Investment- Note 100,000
Interest Receivable 1,666.67
Tax Receivable 10,000
Allowance for Uncollectable Current Taxes 10,000
Unreserved and Undesignated Fund Balance -
Tax Revenue 330,000
Investment Revenue 7,500
Expenditure 191,500
Appropriation 190,000
Budgetary Fund Balance . 190,000
Total 727,500 727,500

Statement of Revenue, Expenditure and Change in Fund Balance
for the year ended June 30, 20x8
Favourable
Budget Actual Variance (Unfavourable)
Unfavourable)
Revenue:
Revenue:
Tax Revenue 330,000 330,000 -
Investment Revenue 50,000 7,500 (42,500)
Total Revenue 380,000 337,500 (42,500)
Expenditure 190,000 191,500 ( 1,500)
Excess of Revenue over Expenditure 190,000 146,000 (44,000)
Add: Fund Balance July 1, 20x7 - - -
Fund Balance June 30, 20x8 146,000

Balance sheet
June 30, 20x8
Assets
Cash 44,333.33
Short Term Investment- Note 100,000
Interest Receivable 1,666.67
Tax Receivable 10,000
Less: Allowance for Uncollectable current Taxes 10,000 -
Total Assets 146,000 .
Unreserved and Undesignated Fund Balance 146,000
Closing Entries
Budgetary fund Balance 190,000
CHAPTER 6
GENERAL FIXED ASSETS ACCOUNT GROUPS AND GENERAL LONG TERM DEBT
ACCOUNT GROUPS
GENERAL FIXED ASSETS ACCOUNT GROUP (GFAAG)
 General fixed assets are 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.
 In conformity with GAAP, General fixed Assets are recorded at acquisition cost (or fair value at
the time of receipt if assets are received by donation) and it is recorded estimated cost otherwise.
 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 principle 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.
 Since Depreciation expense cannot be recorded in the GFAAG, Credits to Accumulated
Depreciation Account must be offset by debits to those Investments in General Fixed Assets
Accounts that were credited when the depreciating asset was first recorded in the GFAAG.
Accounting Procedures and Issues related to the GFAAG
Illustration
1. An Equipment has been purchased From the GF at 100,000. The source of financing was revenues of
general fund
GFAAG
Equipment 100,000
Investment in GFA-GF-Revenue 100,000
Explanation-
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.
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..
GFAAG
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.
GFAAG
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 ndicates 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.
GFAAG
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..
GENERAL LONG TERM DEBT ACCOUNT GROUP (GLTDAG)

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 and debts secured by specific tax or
apportion of tax; which in contrast is called Limited Obligation Debt.
GLTDAG is
 An accounting entity not a fiscal entity. This means that, it cannot enter into transaction outside
itself. This also means that, it will not have Revenues or Expenditures. However, it will be self
balancing- in other words; its debits will equal its credits. 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. 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:
entries:
Entries on GLTDAG
Amount to be provided for payment of serial bonds xxx
Serial Bonds Payable xxx
Accounting Issues and Procedures related to GLTDAG
Illustration
1. Regular Serial bonds of 10,000,000 have been issued at par to finance the construction of a building in
CPF
GLTDAG
Amount To Be Provided for the payment of 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..
2. The DSF had Revenues/Transfers of 220,000 and 120,000 of that amount went to
pay interest
GLTDAG
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 100,000, that would be added to the sinking fund is entered into
GLTDAG. Payment of interest of 120,000 has 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 the GLTDAG.
CHAPTER SEVEN: ACCOUNTING FOR PROPRIETARY FUNDS

INTERNAL SERVICE FUNDS AND ENTERPRISE FUNDS
INTRODUCTION
Internal Service Fund (ISF) and Enterprise Fund (EF) are both classified by the GASB as Proprietary
funds. Internal service funds, as indicated on the principles of governmental accounting, are used to
account for services provided by one department or Agency of a governmental unit to other department
or agencies, or to other governmental units on a user charge basis. Enterprise Funds are used by
governmental units to account for services provided to the general public on a user charge basis.
Proprietary funds differ from Governmental funds in that they are not required by GASB standard to
record the budget in their accounting system, which is treated as a managerial control device rather than
a legislative control tool.
INTERNAL SERVICE FUND (ISF)

Enterprise funds and internal service funds are distinguished primarily by the kinds of customers they
serve. Enterprise funds provide goods or services to the public, whereas internal service funds mainly
serve departments of the same government.
ISF (sometimes called Intergovernmental Service Funds, Working Capital Funds and Revolving Funds)
arose to meet the need to offer services within the entity in a more reliable or/and less expensive manner
than obtaining the same service outside.
Reason for ISF Establishment and Operations
 ISFs are established to meet some need within the entity, if it is believed that the entity can
provide the service to itself in a more reliable and/or less expensive manner than obtaining the
same service outside.
 ISF is to improve financial management of scarce resources, it should be stressed that a fund is a
fiscal entity as well as an accounting entity; consequently establishment of a fund is subject to
legislative approval.
 ISFs are established to improve the management of resources, it is generally considered that they
should be operated and accounted for on a business basis.
Accounting and Other Related Issues

 Under ISF, the donated fixed assets should be recorded at fair market value .If fixed assets are
purchased for cash; they should be recorded at historical cost.
 If a grant is given specifically for the purchase of fixed assets, it should be recorded as
Contributed Equity not as Revenue.
 Cost is the focus of an ISF rather than budgetary control.
 They also have retained earnings in their equity accounts and contributed equity should be kept
separate from retained earnings on the Balance sheet.
FINANCIAL STATEMENTS-
 It is far more like that of a profit business than that of an expendable fund.
 It is of a classified Balance Sheet type i.e Current Assets are segregated from Fixed Assets and
other assets and Current Liabilities are segregated from Long Term Debt.
 The main difference from that of a profit business is the Contributed Equity shown in the equity
section..
OPERATING STATEMENTS-
 The results of operations of an ISF should be reported periodically in a statement of Revenues,
Expenses and Changes in Retained Earnings and contributed equity, which is equivalent of an
Income Statement for a profit seeking entity.
 ISF operating Statement shows change in retained earnings and contributed equity rather than
change in fund balance.
 ISFs do not have Fund Balance rather than they have retained earnings like for a profit business.
 The other difference from a profit income Statement is that changes in equity are shown of the
face of the operating statement of an ISF (like that of a Governmental Fund)
STATEMENT OF CASH FLOWS--

GASB requires the preparation of the cash flows in the FS for all Proprietary funds and non-expendable
trust funds. The standard provides four categories of Cash Flows..
a. Cash Flow from operating activities- includes receipts from customers, receipts from
quasi-external operating transactions with other funds, payments to suppliers of goods or
services, payment to employees, payment of Quasi-External transactions with other funds
(including payment in lieu of Taxes) and other operating cash receipts and payments.
b. Cash flow from non capital financing activities- includes proceeds from debt not clearly
attributable to acquisition, construction of improvement of Capital assets, receipts from
grants, subsidies or taxes other than those specifically restricted for Capital Purposes, or
those for specific operating activities, payment of interest on and repayment of principal
of non capital financing debt, grants and Subsidies paid to other governmental funds or
organization except payment for specific operating activities of the grantor government..
c. Cash Flow from Capital and related Financing activities- includes proceeds of debt and
receipt from special assessments and taxes specifically attributable to acquisition,
construction or improvement of Capital Assets, Receipts from Capital grants, receipts
from the sale of capital assets, proceeds of insurance on Capital assets that are stolen or
destroyed, payment of interest and/or repayment of refunding of capital and related
financing debt..
d. Cash Flows from investing activities- includes receipt from collection of loan, interest and
dividends received on loans, debt instruments of other entities, Equity securities and cash
management and investment pools, receipt from the sale of debt on equity instrument,
withdrawals from investment pools not used as demand accounts, disbursement for loans,
payments to acquire debt on equity instruments and deposits into investment pools not
used as demand accounts.
DISSOLUTION OF AN ISF
When an ISF has completed the mission for which it was established, or when its activity is terminated
for any other reason, dissolution must be accomplished. Liquidation must be accomplished in any one of
the three ways or in combinations thereof. The three ways are::
1. Transfer of the fund assets to another fund that will continue the operation as a subsidiary activity.
2. Distribution of the fund’s assets in kind to another fund or to another governmental unit.
3. Conversion of all its noncash assets to cash and distribution of the cash to other funds..
ENTERPRISE FUND (EF)
 Enterprise funds provide services to the General Public. EF provide service on a user- pays
basis.
 Enterprise funds Provide services that are either should not be, cannot be, or otherwise are not
provided by for profit entities.
 The difference between Efs and Governmental Funds is that, Governmental funds typically
provide service to the citizens as needed (eg. the police) regardless of the citizens ability to pay,
while Efs provide services on the basis that the user of the service pay at least part of the cost.
The most common example of EF is public utilities, notably Water and Sewer Utilities. Electric and Gas
Utilities, Transportation system, Airports, etc. services of the kinds mentioned are generally accounted
for by EF because they are intended to be largely self supporting.. However, they are properly accounted
for by GF or SRF by those governments that support the activities largely from general or special
revenue sources other than user charges and are not concerned with measuring the cost of the activities..
Illustrative Case for Internal service fund
The administrators of the town of X obtain approval from the town council to centralize the purchasing,
storing and issuing functions as of January 1, year 2
1. The town’s General Fund transferred to the new Supplies Fund a cash of 25,000 and its Inventory of
supplies of 61,500 to be used for working capital and which are not to be repaid.
Cash 25,000
Equity Transfer In 86,500
Exp- Transfer of this nature are initially are accounted for by the recipient fund as Equity transfer in as
shown in entry 1. The equity transfer in account is closed at the end of the fiscal period to an
appropriately named fund Equity account- Contribution from the General Fund, in this case and reported
in the changes in fund equity section of the operating statement.
2. Town of X Water Utility Fund advances of br 100,000 long term debt so as to be used for acquisition
of building and equipment by the Supplies Fund. The advances are to be paid in 20 equal annual
installments.
Cash 100,000
Advance from Water Utility Fund 100,000
3. A Warehouse building is purchased for 70,000; of which 10,000 of the purchase price is considered
the cost of the land. Warehouse machinery and equipment is purchased for 20,000. Delivery equipment
is purchased for 10,000 (all for cash).
Land 10,000
Building 60,000
Machinery & Equipment- warehouse 20,000
Equipment- Delivery 10,000
Cash 100,000
Exp- If the purchases are made for cash, the acquisition of the assets would be recorded in the books of
the supplies fund in such manner
4. Supplies are acquired at cost of 179,800 and the invoices are approved for payment.
payment
Exp- encumbrances need not be recorded for purchase orders if issued and so information about the
value of purchase orders if any is omitted from being recorded.
5. The Supplies fund issued cost of supplies used 170,000 to the GF. (A mark up of 35% on the cost of
the supplies used was billing to Department to cover its after cost.
Supplies expense 170,000
=> (170,000 x 135% = 229500);
Due from General Fund 229,500
Billings to Departments 229,500
6. Collections from General fund during the year from customer totaled 213,000.
213,000
Cash 213,000
Due from General fund 213,000
8. Payments on vouchers during the year for customers totaled 157,000.
Cash 157,000
9. The Advance from the Water Utility Fund, first repayment has been made
Advance from Water Utility Fund 5,000

Cash 5,000
UNIT 8 TRUST AND AGENCY FUNDS

INTRODUCTION
The principle indicates that “Fiduciary Funds account for assets held by governmental unit, acting as
trustee or an agent for individuals, organizations, other governmental units or other funds of the same
governmental unit”. For that reason fiduciary funds are often identified in governmental financial report
as Trust and Agency Funds. Generally, the word agent indicate some body or a person who acts on
behalf of another. Trustee means someone holding legal title to property but is not its beneficial owner.
They may not profit from their position, but act for the benefit of the beneficiary, who is the real owner
of the property. The term fiduciary also means one who acts not for his own profit but to safeguard the
interest of an other. in law there is a clear distinction between an Agency relationship and a Trust
relationship. in accounting practice, the legalistic distinctions between Trust Funds and Agency Funds
are not of major significance. The important and perhaps the sole consideration from an accounting stand
point is: what can and what cannot be done with the fund’s asset in accordance with laws and other
pertinent regulations? The name of a particular fund is not a reliable criterion for determining the correct
accounting basis for trust and agency funds merely, calling a fund by one name or another has no
influence on the transactions in which it may engage. In fact the word trusts and Agency funds are
frequently omitted from the titles of funds in this classification. Examples are “Public Employees
Retirement System”. And “Condemnation and Grading Fund”: the former, a Trust fund, the later, an
Agency Fund, each classified according to the circumstances under which its assets are held. It is
sometimes said that practical basis for distinguishing between the two types is the length of time specific
assets are held. But this is not a wholly reliable guide, since there is no generally recognized
pronouncement stating the maximum time restriction for holding assets to constitute an Agency Fund;
nor is there a minimum time to constitute a fund of the trust variety. As suggested earlier if not explicitly
stated, the exact name of designation of a given fund is of little significance in establishing its accounting
procedure and limitations. This depends on the enactment that brought about creation of the Fund, plus
all other regulations under which it operates. Regulations include pertinent statutes, Ordinances, wills,
Trust Indentures, and other instruments of endowment, resolutions of the governing body, statement of
purposes of the fund, kinds and amounts of assets held and others. This aggregate of factors, or such as
are applicable to a given fund, determines the transaction in which it may and should engage.
AGENCY FUNDS
GASB standard provides as one of the four types of Fiduciary funds, Agency funds. Agency funds are
used to account assets held by a governmental unit acting as agent for one or more other governmental
unit or for individuals or private organizations. Similarly, if a fund of a governmental unit regularly
receives assets that are to be transmitted to other funds of that unit, an agency relationship exists. Assets
accounted for in an Agency Fund belongs to the party or parties for which the governmental unit acts as
agent. Therefore Agency fund Assets are offset by Liabilities equal in amount. No Fund Equity
exists. Typically, there are no Revenues, Expenditure or Expenses recognized by an Agency Fund.
GASB’s standard require Agency fund to use the modified accrual basis of accounting. As with
Governmental Funds, unless an agency fund is required law or administrative decision, the funds which
are held maybe simply accounted for within governmental or Proprietary funds. Even if the nature of the
case is fiduciary, if the agency relationship is only incidental (not vital or essential), no agency fund is
needed. For example, Payroll tax withholdings from deductions from salary until payment to the tax
authority need no special agency fund, even though their nature is fiduciary.
Agency Fund for Special Assessment Debt Service - A Special Assessment is a compulsory levy made
against a certain property to defray part or all of the cost of a specific improvement or service that is
presumed to be of general benefit to the public and a particular benefit to the property against which the
special assessment is levied. GASB’s standard specify that a governmental unit which has no obligation
to assume debt service on special assessment debt in the event of property owners’ default, but does
perform the functions of billing property owners for the assessments, collecting instalment of
assessments and interest on the assessment, and from the collections, paying interest and principal on the
special assessment debt, should account for those activities by use of an Agency Fund. if the special
assessment debt is special-special assessment debt, then the government acts only as an agent to collect
the special assessment and pay the creditors. The government as a whole does not take responsibility for
the debt. The collections and payments of it should therefore be accounted for in an Agency Fund.
Tax Agency Funds - An agency relationship that does, logically, result in creation of an agency fund is
the collection of Taxes, or other Revenues, by one governmental unit for the several of the funds it
operates and for other governmental units.
To record the assessment of the taxes, the collecting fund may deduct a fee (often a percentage of the
amounted collected) in order to cover its cost of collecting the taxes:
Mailing bills, Receiving Payments, bookkeeping, etc... (This is Revenue for the collecting fund). If the
fee deduction is assumed to be a certain percentage, the remaining percentage balance amount will be
payable to the funds for which the taxes are collected.
Cash and Investment Pools- Earnings on pooled investments and gains or loses on sales of investments
are allocated to the funds having an equity in the pool in proportion to their relative contributions to the
pool. To ensure an equitable division of earnings, gains and losses, it is customary to revalue all
investments in the pool, and all investment being brought into the pool or removed from the pool, to
market value as of the time that investments of a fund are being brought into or removed from the pool.
(Some pools carry investments at market, revaluing them daily).
TRUST FUNDS
Trust funds differ from agency funds primarily in degree. Frequently a trust fund is in existence over a
longer period of time than an agency fund; it represents and develops vested interest to a greater extent
and it involves more complex administrative and financial problems.
An important reasons as to why governmental units accept assets in trust is that the donation of assets to
be used to produce income for some cultural or educational purpose. The donations are sometimes made
at the death of a person, as part of the will. Other times, they are made while the person is still living. For
example, suppose a wealthy elderly person wants his name to be remembered long after his death, he
could make a large donation to an organization, insisting that the donation be invested in an income
generating Investment. Each year the income could be used for different humanitarian or other
developmental activity, while the principal is reinvested to earn income for the years, which follow.
These types of donations are called Endowment Funds.
The basic idea of an Endowment Fund is that the principal must be held intact, either forever or for a
predetermined length of time, so that it continually produces income for the desired purpose. The
principal is therefore Nonexpendable. The income generated by the principal is to be used according to
the trustor’s purposes, so it is Expendable. Since the nature of the principal and the income is different,
accounting treatment in separate fund is required. The Nonexpendable principal should be accounted
for like a Proprietary Fund, the Expendable income like a Governmental Fund.
Pension Trust Funds on the other hand are expendable for a specified purpose in both principal and
income, retirees may be paid from both. They are account for like a proprietary fund. Pension Trust
Funds are sometimes called - Public Employee Retirement Systems (PERS) when a pension trust fund is
considered to be part of the governmental reporting entity, its financial data are included in the combined
financial statements and the combining financial statements prepared for fiduciary funds accounted for
on the full accrual basis.
Accounting for pension trust Funds should be distinguished from the governmental unit’s responsibility
as an employer to account for Expenditures, Expenses and liabilities related to Pension plans, and to
disclose in the notes to the financial statements a long list of items specified in GASB’s statements.
Reporting requirements are complex and are in a process of change. Further, reporting requirements vary
depending on whether the plan is administered by a unit of the reporting entity or by another entity. The
GASB’s disclosure standards are based on the conclusions that the primary objectives of pension
disclosures by Pension Trust Funds and governmental employers is to provide users with information
needed to assess:
A. Funding Status of a Pension Trust Fund on a Going-concern Basis,
B. Progress made in accumulating sufficient Assets to pay Benefits when due,
C. Whether Employers are making actuarially determined contributions.

Chapter Three: General Fund & Special Revenue Funds 3.1 General Fund Is

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RIFT VALLEY UNIVERSITY

Comparison of Balance Sheet, Operating Statement, and Budgetary Accounts

Asset Accounts Liability Fund Equity

Operating Statement Accounts Budgetary

3.3 Budget & Budgetary accounts

Estimated Revenue xxx

3.4 Accounting for General Fund and Special Revenue Fund

Account title Debit Credit

b) Adis Abeba City General fund

/ To close budgetary ledger accounts/

Adis Abeba City Special Revenue Fund

Adis Abeba citySpecial

TERMINOLOGY AND CLASSIFICATION FOR GOVERNMENTAL FUND BUDGETS

E.g. Personal services

Classes of Non-exchange Transactions

(To record a loan from the general fund)

= To record payment of bill on behalf of ---

Financing a capital project

Accounting for Capital Projects Fund

OFS-Bond proceeds 30,000,000

Notes Payable 500,000

Town of X library Capital Projects Fund

Town of X Library Capital Projects Fund

Construction Payable 1,310,000

TYPES OF LONG TERM DEBTS

8. Interest on Investment is received for three months.

Town of X Serial Bond Debt Service Fund

Account title Debit Credit

Town of X Serial Bond Debt Service Fund

Town of X Serial Bond Debt Service Fund

GENERAL LONG TERM DEBT ACCOUNT GROUP (GLTDAG)

CHAPTER SEVEN: ACCOUNTING FOR PROPRIETARY FUNDS

INTERNAL SERVICE FUND (ISF)

Accounting and Other Related Issues

STATEMENT OF CASH FLOWS--

Advance from Water Utility Fund 5,000

UNIT 8 TRUST AND AGENCY FUNDS

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