Ipsas Exit

Wollega University , Department of Accounting and Finance 2022 G.
Chapter-1
The Nature of Government and Not for Profit Organization
Introduction
Organizations do exist to serve the public through provision of goods and services. Some of them embarked
in such activity with the aim of making more money, whereas some are with aim of only serving the
fundamental needs of the public for free or on cost reimbursement basis.
NFP organizations which usually arise to meet a need that society feels are very vital, but it is considered
that this particular needs could not or will not be met by profit seeking organizations, vital entities like;
Water supply, Public protection (police or defence), Religious Services, Infra-structures (like roads,.Etc). In
most instances NFP organizations provide goods or services which are not commercially feasible to produce
through private enterprise and/ or which are deemed so vital to the public well-being that it is felt that their
provision should be supervised by elected or appointed representatives of the populace. Non-profit
organizations and government agencies have special requirements to show, in financial statements and
reports, how money was spent, rather than how much profit was earned.
Government and NFP organizations do not have a product or service that is judged by the commercial
market place or bottom line profit to shareholders.
Types of Organization
Generally, any organization could be classified either based on their Objectives or their ownership.
1. Based on their objectives:
A. Commercial/for profit organization-which emphasize on making profit.
B. Non-commercial/not for profit organization-which does not give emphasis on the making of
profit.
2. Based on their Ownership
a. Non-governmental (Private organizations) – are operating for the benefit of an individual proprietor
or, as partners, a group of partners or shareholders.
b. Governmental organization – are operated for the benefit of the society as a whole with regardless any
isolation.
Objectives of Financial Reporting by Not-For-Profit Entities
FASB has issued seven concepts statements, including one dedicated to non-business entities. In its
Statement of Financial Accounting Concepts No. 4, the FASB identifies the information needs of the
users of non-business financial statements. These include providing information that is useful to present
and potential resource providers in the following:
 Making decisions about the allocation of resources to those organizations, assessing the services
that a non-business organization provides and its ability to
• continue to providing those services,
• Assessing management’s stewardship and performance, and
• Evaluating an organization’s economic resources, obligations, and effects of changes in those net
resources.
Objectives of Accounting and F/R for State and Local Gov.t
The Governmental Accounting Standards Board was established in 1984 as the successor to the
National
Council on Governmental Accounting (NCGA). In 1987 the GASB issued its Concepts Statement, i.e.
 No. 1, Objectives of Financial Reporting, for state and local governments. In this statement the
Board noted the following: Accountability requires governments to answer for the citizenry to
justify the raising of public resources and the purposes for which they are used.
1 Compiled by: Abdi D Student Lecture Notes for Public sector and civil society
Accounting.
Wollega University , Department of Accounting and Finance 2022 G.C
 Governmental accountability is based on the belief that the citizenry has a right to know, a right to
receive openly declared facts that may lead to public debate by the citizens and their elected
representatives. Financial reporting plays a major role in fulfilling government’s duty to be
publicly accountable in a democratic society.
Financial reports of state and local governments, according to the Governmental Accounting Standards
Board, are used primarily to:
(1) Compare actual financial results with the legally adopted/permitted budget;
(2) Assess financial condition and results of operations;
(3) Assist in determining compliance with finance-related laws, rules, and regulations; and (4) Assist in
evaluating efficiency and effectiveness.
Reporting Objectives
I. Financial reporting should assist in fulfilling governmental duty to be
publicly accountable & should enable users to assess that accountability by:
a) Providing information’s to determine whether current year revenues were sufficient to pay for
current year services.
b) Demonstrating whether resources were obtained & used in accordance with the entities legally
adopted budget & demonstrating compliance with other finance related or contractual
requirements.
c) Providing information to assist users in assessing the service efforts, costs & accomplishment of
the governmental entity.
II. Finical reporting should assist users in evaluating the operating results of governmental entities of the
year by:
a) Providing information about sources and uses of financial resources.
b) Providing information how it financed its activities and met its cash requirements.
c) Providing information necessary to determine whether its financial position improved or
deteriorated as a result of the year’s operations.
III. Financial reporting should assist users in assessing the level of services that can be provided by the
governmental entity and its ability to meet its obligations as it become due by.
a) Providing information about its financial position and condition
b) Providing information about its and other non-financial resources.
c) Disclosing legal or contractual restrictions on resources and the risk of potential loss of
resources.
It can be understood from the statement that Accountability is the cornerstone of all financial reporting in
government. Accountability requires governments to answer to the citizens, to justify the raising of public
resources and the purposes for which they are used. Governmental accountability is based on the belief that
citizenry has a ―right to know‖ a right to receive openly declared facts that may lead to public debate by the
citizens and their elected representatives. Financial reporting plays a major role in fulfilling government’s
duty to be publicly accountable in a democratic society.
GASB believe that inter-period (fiscal year) equity is a significant part of accountability and it is
fundamental to public administration. It therefore needs to be considered when establishing financial
reporting objectives.
In short financial reporting should help users to assess whether current year revenues are sufficient to
pay for services provided that year and whether future taxpayers will be required to assume burdens
for services previously provided.
Financial reports for Non-profit organizations
Accounting.
- like Voluntary health and welfare organizations, college and universities, Hospitals, religious organizations
and others- have similar uses but, in recognition of the fact that the financial operations of NFPs are
generally not subject to as detailed legal restrictions as are those of governments,
The financial accounting standards board (FASB) believes the financial reports for not-for-profit
organizations should provide
1. Information useful in making resource allocations decisions;
2. Information useful in assessing services and ability to provide services;
3. Information useful in assessing management stewardship and performance; and
4. Information about economic resources, obligations, net resources and changes in them.
GASB does not require supplementary/partial information, unless identified as RIS (reported
integrated system) as element of f/report.
Concepts Statement No. 4, Elements of Financial Statements provides key definitions, including:
• Assets are resources with present service capacity that the government presently controls,
• Liabilities are present obligations to sacrifice resources that the government has little or no discretion
to avoid,
• Net position is the residual of all other elements presented in a statement of financial position,
• Inflows of resources are acquisitions of net assets by the government that are applicable to the
reporting period, and
• Outflows of resources are consumption of net assets by the government that are applicable to the
reporting period.
Similarities & D/ces B/n Governmental & Commercial Entities
Similarities
1. Impact of legislative process;
The federal, state & local laws & regulations would have an impact upon both Governmental & commercial
entities. However the level of legislative impact is not as strong for commercial units as it is for
governmental entities. 2. Stewardship for Resources;
Since the resources of commercial entities are provided by the owners themselves, they are taking full
responsibility or the accountant along with the owner will be taking the responsibilities for the stewardship
of resources. In the same way, members of the governmental entities should demonstrate adequate
stewardship for resources.
3. Importance of Budget;
The overall nature of governmental & commercial entities requires a plan of expected expenditure and
income to be implemented for both entities. It is important to employ relative budgets as per their accounting
entities.
Differences
1. Profit motive- Commercial units have a presented profit motive as part of their objectives whereas
governmental units with some exceptions do not operate with the objective of earning a profit.
2. Governance;
The legislative and executive branches of a governmental unit share the responsibilities for their governance
where as in the case of commercial entities; it is governed by elected or appointed directors or managers.
3. Basis of accounting;
The modified accrual basis of accounting is mostly used by some governmental units but in case of
commercial entities the basis of accounting is the accrual basis.
4. Source of revenue in nature;
The primary source of revenue for commercial entitles is through sales or services they provide, whereas in
case of governmental units, with some exceptions, the main source of revenue is though fund or donations.
5. Beneficiaries;
Accounting.
Governmental units are operating for the benefit of the citizenry whereas commercial entities are operating
for the interest and benefit of the owners.
Distinguishing Characteristics of NFP Organization
Governmental units and other non-profit organizations would have the following common characteristics.
1. Organization to serve the society (citizens)
The basic principle of governmental philosophy is that governmental units exist to serve the citizens subject
to their jurisdictions. Thus the citizens as a whole establish governmental units through the constitutional &
charter process. In contrast, business enterprises are created by only a limited number of individuals.
2. General absence of profit motive
With few exceptions, governmental units render services to the citizenry without the objective of profiting
from those services. Business *enterprises are motivated to earn profit.
3. Society as a principal source of revenue
As with governmental units, most non- profit organization depend on the general population for a substantial
portion of their support. Because revenue from charges for their services is not intended to cover all their
operating cost exceptions are professional societies and the philanthropic foundations established by wealthy
individuals or families, whereas the citizenry contributions are mostly involuntary Taxes. Citizen’s
contribution to non-profit organizations is voluntary donations. There is no comparable source for business
enterprise.
Chapter Two
Principles of accounting and financial reporting of governmental Entity
Summary statements for 12 basic principles of IPSAS for state and local government
Governments must comply/agree with many and varied legal and contractual requirements, regulation,
restrictions and agreements that affect their financial management and accounting; and such compliance
must be demonstrable and reported upon regularly. Governments should also prepare financial statement in
conformity with IFRS ), which provide uniform minimum national standards and guidelines to financial
reporting.
Table 2.1Tabular presentations of principles
No Types of 12 GASB principles
Principle 1 Accounting and reporting capabilities

Principle 2 Fund accounting systems
Principle 3 Types of funds
Accounting.
Principle 4 Number of funds

Principle 5 Reporting Capital/Fixed Assets and Long-term Liabilities
Principle 6 Valuation of Capital Assets
Principle 7 Depreciation of Capital Assets
Principle 8 Measurement focus and basis of accounting
Principle 9 Budgeting, budgetary control and budgetary reporting
Principle 10 classifications of Transfers, revenues, expenses and expenditure
Principle 11 Common terminology, classifications and presentations of F/Ss
Principle 12 Financial reports of state and local governments
The next portion of this chapter discusses IFRS
Applicable to state and local governments, including those changed or added by statement no, 34 to afford
an understanding of the unique nature and complexity of governmental accounting and financial reporting.
Principle-1Accounting and Reporting Capabilities
GAAP and legal compliance dictates a governmental accounting system:
A) To present fairly and with full disclose the financial position and results of financial operations of the
funds and account groups of the governmental units in conformity with IFRS ; and
B) To determine and demonstrate compliance with finance related legal and contractual provisions. It
means that government financial reports are prepared averagely 75% - 80% by following IFRS and 20% -
25% by following finance related rules and regulations issued by, for example, ministry of finance and
economic development (MOFED) at 6-kilo.
Principle-2 Fund Accounting Systems

Governmental accounting systems should be organized and operated on a fund basis. Fund is a fiscal and
accounting entity with a self-balancing set of accounts recording cash and other financial resources together
with all related liabilities and residual equities or balances, and change there in, which are segregated for the
purpose of carrying on specific activities or attaining certain objectives in accordance with special
regulations; restrictions or limitations.
Note that the definition of the word fund requires that two conditions must be meeting for a fund, in a
technical sense, to exist:
i. A fiscal entity- assets set aside for the attainment of a certain objectives and purpose, ii. Double-
entry accounting- entity created to account for the fiscal entity or asset set aside for specific purposes
with a self-balancing set of accounts and separate books of records focusing on financial resources and
changes in them.
Principle-3 Types of Funds; State and local government use different fund types. These fund types are
organized in to three main categories;
1. Governmental (5)
2. Proprietary (2) funds.
3. Fiduciary (4)
The following 11types of funds should be used by state and local governments to the extent that they have
activities that meet the criteria for using those funds.
1. Governmental Funds (5)
Accounting.
Governmental fund is a fund which established to account for the activities of the government that are
carried out to serve the citizens. It is also maintained by governmental not-for profit entities, such as,
federal, state, townships, villages etc…. these fund types are elaborated as follows:
a. The general fund: - used to account for all financial resources except those required to be accounted
for another fund.
b. Special revenue fund: - to account for the proceeds of specific revenue source (other than expendable
trusts/ private-purpose trusts or for major capital projects.) those are legally restricted to expenditure
for special/specific purpose. Three things for special revenue fund
i. Resources are earmarked/isolated for specific purposes
ii. Resources are legally or contractually restricted iii. There must be a responsible body to follow
upon whether the resource is used for intended purposes.
c. Capital project fund: - to account for financial resources to be used for the acquisition or
construction of major capital facilities, but the capital asset is not recorded here.
d. Debt service funds: - used to account for the accumulation of resource for and the payment of, general
long- term debt principal and interest, but the debt is not recorded here.
e. Permanent funds- to account for legally restricted resources provided by trust in which the earnings
but not the principal may be used for purposes that support the primary government’s programs
(those that benefit the government or its citizenry).
2. Proprietary Funds (2)
The term indicates that the funds are used to account for government’s ongoing operations and activities
that are similar to private business enterprise. Proprietary funds are used for events that the governmental
body desires to compute revenues earned, costs incurred, or net income of certain activities. Generally
proprietary fund is classified in to two:
a. enterprise Funds:-
Funds used to account for operations (1) that are financed and operated in a manner similar to private
business enterprises where the intent of the governing body is that the costs (expenses, including
depreciation) of providing goods or services to the general public on a continuing basis be financed or
recovered primarily through user charges or(2) Where the governing body has decided that periodic
determination of revenues earned, expenses incurred and/or net income is appropriate for capital
maintenance, public policy, management control, accountability, or other purpose. E.g. Ethiopian airline,
Ethiopian Telecommunication Corporation, etc…
b. Internal Service Funds:-Used to account for financing of goods & services provided by one
department or agency to other departments or agencies of governmental unit, or to other
governmental units, on a cost reimbursement basis. It is called internal service, because one
government organization provides service to another government organization on cost recovery or
small amount of profit.
E.g.1. a government may establishes a central garage where all government organization vehicles obtain
garage service in this garage.
E.G.2. a government may establish a central supply store, where all governmental organization acquire
necessary supplies (such as papers, pens stables, photocopy, spare parts and other items) from this center at
cost or small amount of markup than at external market.
3.Fiduciary Funds (4)
These funds are used to account for assets held by a government in a trustee or agency capacity, whether
for individuals, private organizations, other governmental units, or other funds of the government. Here, the
government is acting as a collecting/disbursing agent or as a trustee for the benefit of other governments,
businesses or individuals. In a trustee the government exercise responsibility or stewardship for the
Accounting.
property or resources trusted to him in accordance with the provisions of the will, a trust document or state
laws
.There are 4 types of fiduciary funds, those are:-
a. Agency funds: - are used to account for institutions in which the government is acting as a collecting/
disbursing agent. An example would be a value added tax in Ethiopia ,a federal tax , where the states
acts as an agent collects and disburses tax for other taxing units federal government within the country.
b. Pension (and other employee benefit) trust funds: - are used to account for pension and employees
benefit funds for which the governmental unit is the trustee.
c. Investment trust funds/Non-expendable trust fund:-account for the external portion of investment
pool reported by the sponsoring government.
E.g. used to record for example, the Chinese government investment in exploration and mining of oil and
sale to the Ethiopian government or outside party
d.Private- purpose trust funds/expendable trust fund:-report all trust arrangement under which principal
and income benefit individuals, private organizations, or other government.
E.g. one known rich person in Addis Ababa may provide thousands of birr to Addis Ababa University
where the principal and earnings are to be deposited at commercial bank of Ethiopia and both the principal
and earnings (interest) may be used to provide scholarships for students unable to finance themselves to join
the university. Now the principal and earnings are available at CBE for appropriation, but the earnings are
not used to benefit the government or the citizenry, but third parties. Such types of resources are recorded
expendable trust funds.
Funds are either expendable or non-expendable.
a. Expendable: the focus is on the receipt and expenditure of resources. All gov.t
funds are expendable; mean that any residual or remaining amount of resources
from legally adopted budgets must be returned to its original sources, just at the
end of a given fiscal year.
Cash + Other Resources - Liability = Fund Balance(C+OR-L=FB). There is no
ownership interest in NFP organizations and therefore, the mathematical difference
between current asset and current liability is not a capital account/owners equity, Rather
there is only a balance remaining (fund balance) to be used up for expenditure during the
next period.
b. Non- Expandable:
Asset - Liability = Capital (A-L=C/OE) that is resources are expended in an intention of
obtaining a profit or return on investment.
Principle-4 Number of Funds
Governmental units should establish and maintain those funds required by law and sound financial
administration. Only the minimum number of funds consistent with legal and operating requirements should
be established. However, since unnecessary funds result in inflexibility, undue/unnecessary complexity and
inefficient financial administration the government must establish and maintain those funds required by law
or contractual agreement.
Principle-5 Reporting Capital/Fixed Assets and Long-term Liabilities
State and local governments have two other groups of self-balancing accounts which are not considered
funds: general fixed assets and general long-term debts. These assets and liabilities belong to the
government entity as a whole, rather than any specific fund. Although general fixed assets would be part of
government-wide financial statements (reporting the entity as a whole), they are not reported in
governmental fund statements. Fixed assets and long-term liabilities assigned to a specific enterprise fund
are referred to as fund fixed assets and fund long-term liabilities.
A clear distinction should be made b/n Fund fixed assets and general fixed assets and
Accounting.

Long term liabilities of proprietary funds and trust fund should be accounted for through those funds. All
other un-matured general long-term liabilities of governmental unit including special assessments debt for
which the government is obligated in some manner should be accounted for through the general long-term
debt account group.
General long-term debt would be borrowings of the entire governmental entity rather than by a specific
fund. The money would be backed by the full faith and credited of the governmental entity rather than by
specific fund. They are to be paid from general tax levies, or special assessments. The rationale for not
including general long-term debt in the general fund’s account is like that of general fixed assets. The
general long-term debt is not something will require current period resources for payment. These liabilities
do not constitute a fiscal entity either. But they need accountability, so the general long-term debt account
group is used to provide this. Like long- term liabilities, fixed assets for state and local government is
divided in to general fixed asset and fund fixed asset where by both finally reported in the statement of net
assets of government- wide financial statement. General fixed asset is for governmental fund and said to
be general fixed asset, because it is not recorded on specific funds of governmental type and is paid out of
general government resources; which mean the summation of fixed assets of governmental funds. To report
those assets on government wide financial statement of net asset a memorandum record or entry is
maintained about the cost and accumulated depreciation of general fixed assets.
 Capital assets of proprietary funds should be reported in the proprietary fund itself as well as on
government wide financial statements.
 Capital assets of fiduciary funds should be reported in only the statement of fiduciary net assets
and not on the statement of net assets of government wide financial statement, similar to the reason
of long- term debt of fiduciary fund.
Principle-6 Valuation of Capital Assets
Capital assets should be reported at historical cost, but if it doesn’t known actually estimation is possible.
Donated capital assets should be reported at their estimated fair value at the time of the acquisition
(gift).According to GASB statement No 34 capital assets are generally divided in to three:
1. Plant assets
2. Infrastructure assets
3. Collections
Principle-7 Depreciation of Capital Assets
Capital assets should be depreciated;
 Over their estimated useful lives unless they are either inexhaustible or are infrastructure assets
using the modified approach as set forth in GASB Statement No. 34. Inexhaustible assets such as
land and land improvements should not be depreciated.
 Depreciation expense should be reported only in the government wide statement of activities, as an
expense.
Principle-8 Measurement Focus and Basis of Accounting
Government-wide Financial Statements: this statement is used to record all types of state and local
government resources including both current financial resources and non- financial resources such as
fixed assets and long term liabilities that were previously recorded on account groups.
The government-wide financial statement includes statement of net assets and statement of activities
which should be prepared using the economic resources measurement focus and the accrual basis of
accounting. Revenues, expenses, gains, losses, assets, and liabilities resulting from the exchange and
exchange-like transactions should be recognized in the same manner similar to business accounting. Most
of the governmental fund types (general funds, special revenue funds, capital projects funds, and debt
service funds) are not concerned with income determination. These funds are concerned with matching
Accounting.
expenditures of legal appropriations, or legal authorizations, with revenues available to finance expenditures.
Although permanent funds are concerned with income determination and capital maintenance, GASB
statement No. 34 notes that, because financial resources are the dominant assets of permanent funds,
earnings measurements is, in most cases, substantially the same under modified accrual and accrual
accounting. Accordingly, even for permanent funds, GASB standards require that governmental fund types
use the modified accrual basis.
 The modified accrual basis requires recognition of revenues in the period in which they become
available and measurable. Measurable means capable of being expressed in monetary terms and
available is defined as ―collectible within the current period or soon enough thereafter to be used to
pay liabilities of the current period.‖
Principle-9 Budgeting, Budgetary Control and Budgetary Reporting
An importance of budgeting, budgetary control and budgetary accountability is recognized in this principle
as follows.
• An annual budget(s) should be adopted by every governmental unit whether not for profit or for
profit governmental organizations,
• The budget must be integrated in to the accounting system of state and local government with their
own accounts, double entry system and accounting cycles, for appropriate budgetary control,
• Budgetary comparisons should be included in the appropriate financial statements and schedules for
governmental funds for which an annual budget has been adopted even though no separate statement
is prepared for budgets. However, for interim purposes the budgetary accounts of a fund are
integrated with the financial statements of that specific fund.
Principle-10Classification of Inter-fund Transfers, revenues, expenses and expenditure
Inter-fund Transfers are included as non-exchange (non-reciprocal) transactions where by the transfer does
not give or receive something equal in values for the resources transferred and the transferee may not be
required for payment.
An Inter-fund Transfer refers to the flow of financial resources, cash and other assets between funds
without the requirement for repayment.
Classification of Revenue and Estimated revenue:
Revenues are classified either by fund or by sources, but revenue classification by source is an ideal and
appropriate classification of revenue.
General fund revenue
Special revenue fund revenue
1. By fund Capital project fund revenue
Enterprise fund revenue etc…
In revenue classification by fund, it is simply writing the fund and adding
revenue in front of it to imply that the revenue is the revenue of that fund.
Taxes
Licenses and permits
Fines and forfeits
2. By source charges for services
Intergovernmental revenues
Miscellaneous revenues
Classification of Expenditures and Estimated Expenditures (Appropriations)
Expenditures not expenses of governmental funds should be classified in the following manner.
General fund expenditures
By fund Special revenue fund expenditures
Capital project fund expenditures etc.
Accounting.
This is just specifying the fund and adding the word expenditure in front of each fund. From the different
ways of classifying expenditures, expenditures classification by program and functions are the appropriate
and ideal one and it is by this classification that expenditures are reported on financial statements.
General government
Public safety
By program or function Parking and recreation
Environmental protection
Safe guarding asset
Ministry of health
Ministry of defense
By organization unit Fire protection or
department School district
Ministry of education
Principle-11 Common Terminology and Classification
A common terminology and classification should be used consistently throughout the budget accounts and
the financial reports of each fund. The common Terminology and classification principle is simply a
statement of a commonsense proposition that is the Budgeting, Budgetary control and Budgetary Reporting
principle is to be implemented, persons responsible for preparing the budgets and persons responsible for
preparing the financial statements and financial reports should work with the persons responsible for
designing and operating the accounting system. Agreement on a common terminology and classification
scheme is needed to make sure the accounting system produces information needed for budget preparation
and for financial statement and report preparation.
Principle-12 financial reports of state and local governments
Types of financial reports for state and local government
GASB concept statement stresses that accounting and reporting standard for state and local government units
should meet the financial information needs of many diverse groups; accordingly, government financial
reporting standards are much more inclusive than FASB standards, which consider the needs of only
investors and creditors concerned with economic decisions. The word comprehensive in the Comprehensive
Annual Financial Report indicates that the report is in detail, because of the diverse nature of government
operations.
Basically there are two types of financial report in governmental units;
A. Interim Financial Reports
B. Comprehensive Annual Financial Report (CAFR)
B. Comprehensive Annual Financial Report (CAFR):
A comprehensive annual financial report covering all funds & account groups of the governmental unit
including appropriate combined, combining & individual fund statements, notes to the F.S, schedules,
narrative explanations & statistical tables should be prepared & published. CAFR Contains three Main
Sections,
I. An introductory
II. A Financial Sections;
III. A statistical
CHAPTER THREE
1. International Public Sector Accounting Standards [IPSAS]
Accounting.
Introduction IPSAS
The development of the IPSAS has its origins in the accounting profession as a way to improve the transparency and
accountability of governments and their agencies by improving and standardizing financial reporting
The IPSASB is an independent standard setting board supported by IFAC. The IPSASB issues IPSAS, guidance, and
other resources for use by the public sector, including not-for profit organs background to IPSAS . The development
of the IPSAS has its origins in the accounting profession as a way to improve the transparency and accountability of
governments and their agencies by improving and standardizing financial reporting.
The IPSASB is an independent standard setting board supported by IFAC. The IPSASB issues IPSAS, guidance, and
other resources for use by the public sector, including not-for profit organs. Around the world. The IPSASB (and its
forerunner, the IFAC Public Sector Committee) has been developing and issuing accounting standards for the public
sector since 1997. As transactions are generally common across both the private and public sectors, there has been an
attempt to have IPSAS converged with the equivalent International Financial Reporting Standards (IFRS). As a
general rule, the IPSAS maintain the accounting treatment and original text of the IFRS, unless there is a significant
public sector issue that warrants a departure.
The IPSAS are also developed for financial reporting issues that are either not addressed by adapting an IFRS or for
which no IFRS has been developed. The IPSASB considers the development of its own conceptual framework to
underpin its standard-setting activities to maintain its credibility in understanding the unique aspects of the public
sector and to meet the financial reporting needs of entities in the public sector. Therefore, The IPSASs are a set of
independently produced financial reporting standards: Designed to apply to Public Sector and not-for-profit entities
for preparation of GPFSs Based on IFRS developed for private sector profit-making organizations, which are
amended to reflect public sector and not-for profit specific financial reporting issues Developed based on a due
process  Issued by an independent standard setting body, the IPSAS Board (IPSASB), which was established by the
IFAC. The increasing importance of IPSAS .IPSAS) are being developed by the IPSASB, which focuses on the
accounting and financial reporting needs of governments and public sector entities and not-forprofit organizations
3.1.4 Accounts and Transactions
A. Revenues and Other Sources of Financing
Revenues represent increases in current financial resources. Proceeds from issuance of long-term debt and
receipt of inter-fund transfers are not classified as revenue. Instead, these items are classified as ―other
sources of financing.‖ General Fund revenues are susceptible to accrual when they are both measurable and
available. Revenues are measurable when they can be reasonably estimated. In order to be available,
revenues are estimated to be collected during the current budgetary period or after the end of the period, but
in time to pay liabilities outstanding at the close of the budgetary period. (a) Classification of Revenues
The primary classification of government revenues is by fund. Within specific revenue may be classified by
sources. Generally, there are seven sources. These are explained under:
i. Tax revenues
Tax revenues constitute the large portion of governmental revenues and are compulsory or obligatory.
ii. Special assessments
Are presumed to be of particular benefit to the properties against which special assessments are levied.
Special assessments are levied when routine services are extended to property owners outside the normal
service of the government.
iii. Licenses and permits
They include those revenues collected by the governmental unit from individuals or business concerns for
various rights or privileges granted to them, such as business license, driving license, building permit, etc. iv.
Intergovernmental Revenues
They include grants, entitlements, and shared revenues. A grant is a contribution or gift of cash or other
assets from other governmental unit to be used or expended for specific purpose, activity or facility. v.
Charges for services
They include revenues collected by the government from the public for the services rendered to them.
Accounting.
These include revenue from courts, receipts from parking lots, library use fees, tuition fees etc.
vi. Fines and forfeits
Forfeiture is the automatic loss of cash or other properties as a punishment for not complying with legal
provisions and as compensation forms the resulting damages, or losses. Fines and forfeits include; Fines and
penalties for commissions of statutory offences; Fines and penalties for neglect of office duties; Library
fines; Forfeitures of amounts held as a security against loss or damages and Penalty of any sort. Penalties
levied on delinquent taxes (past due taxes) are not considered as fines, rather are considered as tax revenues.
vii. Miscellaneous revenues
They include all revenues other than the above six categories of revenues, such as: Interest earnings on
temporary investments; Rent and royalties; Compensation for loss of fixed assets; Contributions from public
enterprises; Contributions from private sources; Contributions from donors, and others.
B. Expenditures and Other Financing Uses
Expenditures are decreases in fund financial resources. Inter fund transfers are not classified as
expenditures, but instead are reported as ―other financing uses.‖ Some examples of General Fund
expenditures are current operations and repayment of principal and interest on long-term debt. Depreciation
and amortization are not expenditures within the General Fund. Expenditures are generally accrued when
incurred if the transaction results in a reduction of the General Fund’s current financial resources. However,
expenditures for long-term debt principal and related interest are recognized when they are due. Do not
record expenditure if there is not a reduction in the fund’s current financial resources. For example, a
governmental unit may estimate a liability for compensated absences, but if the actual payments to
employees are expected to be made after the current fiscal year, the expenditure would not be reported in the
General Fund at year end. Expenditures are generally classified by function and object.
The Basic Entry Format for Expenditure should be:
Expenditure Account XXX
Cash or Accounts Payable XXX
Examples of Expenditure Items That Can Be Accrued:
1) Salaries and Benefits
Example 1: Assume that there are total salaries and benefits of Br.425,000 that were earned but not paid as
of Sene 30 of the budget year.
Expenditures – Salaries and Benefits 425,000

Accrued Salaries and Benefits 425,000
NOTE: Payroll expenditures under IFRS reporting include those payroll costs incurred within the fiscal
year. The actual disbursement of cash or payroll costs does not always occur in the fiscal year the costs
were incurred. Payroll costs must include all payroll charges incurred whether or not they are paid during
the same fiscal period.
2) Interest Expenditure Accrual
Record accrued interest expenditure/expense as a liability as the debt is due.
Example 2: Expenditures – Debt Service Interest 30,000
Interest Payable 30,000
Note that the following types of Expenditures may be deferred:
1) Insurance Premium
Example 3: Annual insurance premium of Br.12,000 paid on SENE 1, 2001.
(a) Expenditures 12,000
Cash 12,000
(To record payment of premium).
Accounting.
(b) Prepaid Insurance 11,000*

Expenditure 11,000
(*12,000*11/12)
(To record the amount paid in advance as of SENE 30, 2001)
There are a few transactions, however, that do not conform to the above basic expenditure format. They are:
2) Inventory
Governmental accounting requires that amounts spent for the purchase of goods be recorded as expenditures
at the time of the purchase. An exception is made for inventory. If the amount of inventory on hand at the
end of budget year is significant, the value of such inventory should be recorded on the balance sheet as an
asset. This inventory should be disclosed on the balance sheet and the method of accounting for inventory
should be disclosed in the footnotes to the financial statements.
Examples of inventory include: Consumable goods, such as office supplies, paper, computer supplies,
building and maintenance supplies, science lab supplies, etc.
IFRS permits two methods of expenditure recognition for inventories: purchase method and consumption
method.
The purchase method recognizes expenditures for inventory when supplies are purchased. An inventory
account and a fund balance reserve must be established at the end of the year.
The consumption method first records purchase transactions as supplies, then recognizes expenditures for
inventory as supplies are used. The remaining balance in the inventory account at year end is reported as an
asset. Since inventories do not finance current or future general fund expenditures, a portion of the fund
balance equal to the value of the inventory must be reserved.
Example 4: Purchase Method Vs Consumption Method
Transaction Consumption Method (Periodic Purchase Method
Inventory System)
Supplies of Supplies 75,000 Expenditures – Supplies 75 ,000
$75,000 are purchased. Cash 75,000 Cash 75,000
Based on a year end count, it is Expenditures – Supplies 60,000 No entry
determined that $60,000 of the Supplies
supplies was used during the 60,000
year.
Fund balance reserve is Fund Balance 15,000 Supplies 15,000
established at the end of the year. Fund Balance-Reserved Fund Balance- Reserved
for Supplies 15,000 for Supplies 15,000
3) Capital Outlays
The General Fund may purchase capital assets, such as land, buildings, and equipment. The general entries
for these transactions are:
GENERAL FUND: Expenditures – Capital Outlay XXX
Cash XXX
The asset obtained is accounted for in the government wide statement of net assets.
4) Debt Service Payments

Debt service payments made from the debt service fund should be recorded in the debt service fund. Debt
service transactions are described in detail in the duties addressing debt and debt service funds of this
module.
Accounting.
A state and local governmental unit can appropriate and make certain debt payments from their general fund.
Debt service payments made from the general fund are recorded in the general fund, not the debt service
fund.
Principal and interest payments are recorded when principal and interest payments become due and payable.
Example 5: Assume that Br.1,000,000 of 6% bonds are issued on January 1, 2XX1 and pay interest
semiannually beginning on July 1, 2XX1. A condition of this specific bond requires it to be maintained
within the general fund. The entry on July 1, 2XX1 in the general fund would be:
Expenditures – Interest 30,000*
Cash 30,000
(To record semi-annual interest payment *1,000,000*6%/2)
Example 6: Assume there is no requirement to maintain the bond within the general fund. Funds for the
interest payment are transferred from the general fund to the debt service fund on June 30, 2xx8.
GENERAL FUND
Transfer to Debt Service Fund 30,000
Cash 30,000
DEBT SERVICE FUND
(a) Cash 30,000
Transfer from General Fund 30,000
(b) Expenditures – Interest 30,000
Interest Payable 30,000
When the payment includes a principal portion, you should make an appropriate reduction of the liability in
the statement of net assets – noncurrent liabilities section.
C. Other Transactions Affecting the General Fund
1) Appropriations
An appropriation is an authorization for administrators to incur liabilities in the amounts specified in the
appropriation during the budget period. An appropriation is considered expended when the authorized
liabilities have been incurred. When determining the uncommitted balance of appropriations, simply
determining unrealized budgetary revenue is not sufficient. It is not enough to compare budgeted
expenditures or appropriations against actual expenditures, encumbrances must be considered also. 2)
Encumbrances
Encumbrance accounts allow for the recording of legal commitments issued against the appropriation of a
fund. Legal commitments include items such as purchase orders for goods and/or supplies and contracts
with suppliers. Recording encumbrances is essential to keeping expenditures within the approved budget.
An encumbrance reserves a part of the appropriation at the time of commitment to ensure that resources will
be available to cover the expenditure when the goods are delivered or the services rendered to the
governmental unit. It is essential for good management and budgetary control to record expenditure
commitments that will be paid later from fund resources. The accounting entry to record a commitment is
debit Encumbrances and credit Reserve for Encumbrances.
The encumbrance account does not represent expenditure for the period, only a commitment to expend
resources. Likewise, the account reserve for encumbrances is not synonymous with a liability account since
the liability is recognized only when goods are received or the services are actually performed.
Encumbrance Liquidation
An encumbrance may be liquidated in whole or in part or canceled when any of the following situations
occur:
- Satisfactory receipt or legal acceptance of a partial or complete shipment of goods or services;
- Notice from or failure of the vendor to fulfill terms of the order or contract;
Accounting.
- Cancellation of the order; and

- If funds are not available due to lack of funds.
The appropriate control of encumbrances will assist administrators in avoiding over expended appropriations
and to plan for the payment of liabilities on a timely basis.
Example 1: Assume that a purchase order is written for Br.20,000 on TIKIMIT 20, 2002.
- Later, on HIDAR 10, 200
- 2, the actual invoice is received with the delivery in the amount of Br.18,250.
The entry to record this transaction is:
TIKIMIT 20, 2002: Encumbrance 20,000
Reserve for Encumbrances 20,000
(To record issuance of the purchase order)
HIDAR 10, 2002: Reserve for Encumbrances Br.20,000
Expenditure Control / Subsidiary Accounts Br.18,250
Encumbrances Br.20,000
Vouchers Payable Br.18,250
(to record acquisition of the goods order and to offset the encumbrance accounts using combined
entries)
If this should happen, the available balance at the end of the initial accounting period would be overstated.
Expenditures and the liability account must both be recorded in the actual amount due the supplier. The fact
that estimated and actual amounts differ causes no accounting difficulties as long as goods or services are
received in the same fiscal period.
Year-End Treatment of Encumbrances
At the end of the fiscal year, all remaining encumbrances are considered reservation of fund balance not
liabilities. They will become a liability when the goods and / or services are received in the following fiscal
year. The budgetary estimate should include an estimated Reservation of Fund Balance as part of the funds
available in the following fiscal year
3.2 Special Revenue Funds
The purpose of a special revenue fund is to account for the proceeds of revenue sources that are legally
restricted for specific purposes. Special Revenue Funds differ from enterprise funds in that the services
delivered by a Special Revenue Fund are not financed by user charges. NCGA Statement 1 states that
special revenue funds should be used only when legally mandated. Additionally, if resources are used to
support expenditures made from the General Fund, these resources should be accounted for in the General
fund. This task will discuss: the nature and purpose of Special Revenue Funds; and how Special Revenue
Funds are established.
5.2.1. Nature and Purpose
Special Revenue Funds are used to account for financial resources, which are restricted to expenditures for
specified purposes.
5.2.2. Basis of Accounting and Measurement Focus
As a governmental fund type, the focus of Special Revenue Fund accounting is on sources and uses of
―available expendable resources‖ rather than upon net income determination. Special Revenue Funds are
accounted for on a modified accrual basis of accounting as defined in this unit.
The Special Revenue Fund contains only current assets and current liabilities. Current meaning the asset is
expected to be received or the liability paid within one year from the Balance Sheet date. Liabilities should
be recognized as fund liabilities when the claims are scheduled or applicable for liquidation with existing
resources.
Accounting.
Note that accounting for Special Revenue Funds is similar to that of the General fund we have illustrated in
previous section of this unit.
CHAPTER 4
ACCOUNTING FOR CAPITAL PROJECTS FUND AND DEBT SERVICE FUNDS
4.1 Capital Project Fund
Capital project Funds 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). Examples of major capital
facilities are Administration Buildings, Civic Centers and libraries etc. These funds do not account for the
acquisition of smaller fixed assets, such as vehicles, machinery & office equipment which are normally
budgeted for & recorded as expenditure in the General fund. It is also possible that a construction project
could simply have a subsidiary ledger within the General fund, rather than its own distinct fund. The
existence of the capital project fund, as any other fund will depend on the legal requirement and the need for
good financial management.
4.1.1 Accounting for Capital Project Fund
Financial activities such as revenues earned and expenditures incurred for the construction or acquisition of
capital projects are recorded in almost the same manner as that of the General and Special Revenue funds
Illustration - 4.1: Assume the town of Chiro wants to construct a new library on the site owned by the town.
The construction is expected to cost Br.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
Br.30,000,000 issuance 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 Br.20, 000,000 will be financed by
an irrevocable/irreversible state Grant that has been awarded. The following transactions occurred during the
fiscal year ended June 30, year 6.
1. The General fund loaned Br.500, 000 to the library capital projects fund for Drafting, Engineering
and other preliminary expenses by receiving a note which is later to be settled from the bond issue
proceeds. The journal entry to record this will be:
Cash------------------------- 500,000
Bond anticipation Notes Payable----- 500,000
2. Out of the irrevocable grant of Br.20, 000,000, the state contributed Br.5, 000,000 and the remaining
is deemed to be susceptible to accrual. This will be recorded as
Cash ----------------------- 5,000,000
Due from state grant-------- 15,000,000
Revenue--------- ----------- 20,000,000
3. Preliminary Engineering and Planning costs of Br.320, 000 were paid to the contractor. There had
been no encumbrances for this cost.
Construction Expenditure--------- 320,000
Cash ---------------------------------- 320,000
Accounting.
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 [101%*30,000,000] ------------------ 30,300,000
Other Financing source- Bond proceeds --------------30,000,000
Due to debt service fund ----------------------------------- 300,000
5. The town of ABC library capital project fund invested its Br.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 Br.44, 270,000 is authorized and signed with the contractor.
Encumbrances ------------------------------44,270,000
Fund balance Reserved for Encumbrances ------ 44,270,000
7. Orders were placed for materials estimated to cost Br.550, 000.
Encumbrances -----------------------------------550,000
Fund Balance Reserved for Encumbrances------- 550,000
8. The materials previously ordered (transaction 7) were received at a cost of Br.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, Br.3, 900,000 was incurred for the services
of the architects and engineers; of this amount Br.3, 100,000 was paid.
No Encumbrance was recorded.
Construction expenditure -------------------- 3,900,000
Construction payable -------------------------------------800,000
Cash -----------------------------------------------------3,100,000
10. Received cash of Br.1, 000,000 from the General fund as an operating transfer.
Cash -----------------------------------------1,000,000
Other financing source- Operating Transfers In----1,000,000
11. A partial payment of Br.10, 000,000 was received from the state irrevocable grants and the General
fund loan was repaid with interest amounting to Br.10, 000.
Cash---------------------------10,000,000
Due from state grant------------------10,000,000
Bond anticipation notes payable-------500,000

Interest Expenditure --------------------- 10,000
Cash ---------------------------------- 510,000
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 Expenditure---------------------------12, 000,000
Construction payable ---------------------------------12, 000,000
The contractor’s initial claim was fully verified and paid. Construction
payable ---------------------------12,000,000
Cash--------------------------------------------------------12,000,000
Accounting.
4.2 Debt Service Fund

Governmental entities might face cash shortage while they carry their regular activities. In such a case, these
Governmental entities may issue general obligation debt in the form of liabilities usually bonds that are
secured by the full faith and credit of the governmental unit. The payment of the principal and interest
should be well planned in advance and made timely. Accounting for Debt service fund is similar to those of
the General funds and Special revenue funds. However, the budgetary account of encumbrance is not
necessary for Debt service funds.
4.2.2 Types of Long Term Debts
Bond is a written promise to pay a specified principal sum at a specified future date with interest. They are
typically issued in 1,000 and 5,000 denominations. Most long term debt of governmental units consists of
one of the following two basic types of bonds:
1. Term Bond: Term bonds are bonds whose principal is repaid in lump sum at their maturity date.
2. Serial bonds: These are bonds which have periodic maturities. The principal of a serial bond are
repaid at various or determined dates over the life of the issue.
4.2.3 Accounting for Debt Service Fund
As with all government type funds, the measurement focus of Debt service fund is available and spendable
resources. The following examples will illustrate the accounting for Debt service fund.
Illustration- 4.2: Assume that XYZ town administration issued Br 5,000,000 serial bonds on Jan 1,
2007 for the construction of recreational park. The bond bear semi- annual interest rate of 5% to be paid on
Jan 1 and August 1 and the face value of the bond is to be retired over 10 years by making equal installment
payments on Jan 1 of each year. Further, burden of servicing the debt on the tax payers were distributed
evenly throughout the life of bond. Accordingly, it is determined that tax payers should provide Br 625,000
as revenue in 2007. It is also agreed that the General fund will transfer Br 125,000 to the debt service funds
on July 1, 2007. Appropriations for the year include only one semi-annual interest payment to be made on
August 1, 2007.
The entry to record the legally adopted budget is as follows:
1. Estimated revenue ……..…………………………… 625,000
Estimated other financing source ……………………125,000
Appropriations (5%X 5,000, 000X0.5X2)………………….250, 000
Fund Balance …………………………………………….....500,000
During the year 2007, the debt service fund levied property tax of Br 650,000 of which 3.85% is estimated to
be uncollectible. The entry would be:
2. Property tax- receivable current ………………… 650,000 Allowance for uncollectible 3.85
%(650,000) ……… 25,000
Revenues ……………………………………………625,000
If cash in the amount of Br 575,000 is realized from the property tax during the current year, the entry in the
debt service fund should be:
3. Cash ……………………………………………575,000
Property tax receivable current……………………….575, 000
If Br 1,250 of uncollectible taxes is write-off, the following entries should be passed
4. Allowance for uncollectible property tax ……………………1,250
Property tax receivable current ………………………………1,250
To generate asset, in addition to those contributed by the tax payers and the General fund, the tax receipts are
invested in marketable securities. If Br. 500,000 is invested, the entry would be:
5. Investment-Marketable security………………500,000
Cash……………………………………………. 500,000
Accounting.
When some of the investments are sold for Br. 250,000 of which Br. 25,000 is interest earned on
investments, the following entry should be made:
6. Cash…………………….. …………250,000
Investment …………………………………225,000
Revenue (interest on investment)……………25,000
For investments due to the town bond holders, checks are issued in August after vouched for the amount of
the semiannual interest. The entries to record the due is as follows:
7. Expenditure- interest ………………………… 250,000
Interest payable………………………………………250,000 To
record the payment of the expenditure
8. Interest payable………………………………… 250,000
Cash……………………………………………….250, 000
To record the issuance of checks for payment of the transfer of Br. 125,000 from the General fund,
classified as an operating transfer in and recorded to the Debt service fund book as follows:
9. Cash …….……………………. 125,000
Operating Transfer-In ………………125,000
On Dec 31, 2007, the balance sheet date of the interest earned but not yet received on the investment
amounted to Br. 12,500. This transaction should be recorded as:
10. Interest receivable on investment……………… 12,500
Revenue-interest earned on investment……………..12,500
If the remaining Br. 275,000 of the marketable securities previously acquired and still held on Dec 31, 2007
had market value of Birr 287,500, the following journal entries should be passed to record the increase in
value.
11. Investments………………….. …………………………12,500
Revenue from increase in fair market value of investment.....12,500
CHAPTER FIVE
Proprietary Funds and Fiduciary funds
Two types of funds are classified as proprietary funds: Internal service funds and Enterprise funds. Internal
service funds provide, on a user charge basis, services to other government departments. Enterprise funds
provide, on a user charge basis, services to the general public.
5.1 Internal Service Fund
Purchasing, computer services, garages, janitorial services, and risk management activities are common
examples. Activities that produce goods or services to be provided to other departments or other
governmental units on a cost – reimbursement basis are accounted for by internal service funds.
Internal service funds recognize revenues and expenses on the accrual basis.
Illustration 5.1: Assume that the administrators of the town of Badesa obtain approval from the town
council in early 2007 to centralize the purchasing, Storing and issuing functions and to administer and
account for these functions in a supplies fund. A payment of Br. 596,000 cash is made from the General
fund which is not to be repaid by the supplies fund. Of the Br. 596,000, Br. 290,000 is to finance capital
acquisitions and Br. 306,000 is to finance non capital acquisitions. Additionally, a long – term advance of
Br.200, 000 is made from the water utility fund for the purpose of acquiring capital assets. The advance is to
be repaid in 20 equal annual installments, with no interest. The receipt of the transfer in and the liability to
the water utility fund would be recorded in the supplies Fund accounts in the following manner:
1. Cash …………………………………………….. 796,000
Transfers In ……………………………….. 596,000
Advance from water utility fund …………… 200,000
Accounting.
To provide some revenue on funds not needed currently, Br.50,000 is invested in marketable securities:
2. Investment 50,000
Cash 50,000
Assume that early in 2007, a satisfactory warehouse building is purchased for Br.350,000; Br.80,000 of the
purchase price is considered as the cost of the land. Necessary warehouse Machinery and Equipment is
purchased for Br.100,000. Delivery Equipment is purchased for Br.40,000. If purchases are made for cash,
the acquisition of the assets would be recorded in the books of the supplies fund as follows:
3. Land …………………………………………….. 80,000
Building ………………………………………… 270,000
Machinery and Equipment – Warehouse……….. 100,000
Equipment – Delivery ………………………….. 40,000
Cash …………………………………… 490,000
Supplies are ordered to maintain inventories at a level commensurate with expected usage. No entry is
needed because proprietary funds are not required to record encumbrances. During 2007, it is assumed
that supplies are received and related invoices are approved for payment in the amount of Br.523, 500; the
entry needed to record the asset and the liability is as follows:
4. Inventory of Supplies ………………………………… 523,500
Accounts Payable………………………………… 523,500
Governmental funds that maintain relatively minor inventories of supplies usually account for them on the
physical inventory basis. The supplies fund, however, should account for its inventories on the perpetual
inventory basis because the information is needed for proper performance of its primary function.
Accordingly, when supplies are issued, the Inventory account must be credited for the cost of the supplies
issued. Because the using fund will be charged an amount in excess of the inventory carrying value, the
Receivable and Revenue accounts must reflect the selling price. The markup above cost should be
determined on the basis of budgeted expenses and other items to be financed from net income. If the budget
for the town of Badesa supplies fund indicates that a markup of 30 percent on cost is needed, issuance to
General fund departments of supplies costing Br.290, 000 would be recorded by the following entries:
5a. Operating expenses – cost of sales and services … 290,000
Inventory of Supplies………………………………. 290,000
5b. Due from General fund (290,000*130%)………… 377,000
Operating Revenues – charges for Sales and Services ----- 377,000
During the year, it is assumed that purchasing expenses totaling Br19,000, ware – housing expenses totaling
Br.12,000, delivery expenses totaling Br.13,000, and administrative expenses totaling Br.11,000 are
incurred. The government has chosen to separate operating expenses into three categories: (1) costs of sales
and services, (2) administration, and (3) depreciation. If all liabilities are vouchered before payment, the
entry would be as follows:
6. Operating Expenses – costs of Sales and Service ………… 44,000
Operating Expenses – administration …………………… 11,000
Accounts Payable …………………………….. 55,000
If collections from the General Fund during 2007 total Br 322,000, the entry would be as follows:
7. Cash …………………………………… 322,000
Due from General fund …………………………… 322,000
Assuming that payment of vouchers during the year totals Br.567,500, the following entry is made:
8. Accounts payable …………………………………………….. 567,500
Cash ……………………………………………………… 567,500
Accounting.
The advance from the water utility fund is to be repaid in 20 equal annual installments; repayment of one
installment at the end of 2007 is recorded as follows:
9. Advance from water utility fund (200,000/20)…………10,000
Cash ………………………………………………………. 10,000
At the time depreciable assets are acquired, the warehouse building has an estimated useful life of 20 years;
the warehouse machinery and equipment have an estimated useful life of 10 years; the delivery equipment
has an estimated useful life of 10 years; and none of the assets is expected to have any salvage value at the
expiration of its useful life. Under these assumptions, straight – line depreciation of the building would be
Br 13, 500 per year; depreciation of machinery and equipment, Br 10,000 per year; and depreciation of
delivery equipment, Br.4, 000 per year. (Since governmental units are not subject to income taxes, there is
no incentive to use any depreciation method other than straight – line.)
10. Operating Expenses – depreciation ……………………. 27,500
Accumulated Depreciation – Building ……………… 13,500
Accumulated Depreciation – Machinery and equipment ------------ 10,000
Accumulated Depreciation – Equipment – Delivery …… 4,000
5.2 Enterprise Funds
Enterprise funds are used by governments to account for services provided to the general public on a user
charge basis.
The most common examples of governmental enterprises are public utilities, notably water and sewer
utilities. Electric and gas utilities, transportation systems, airports, ports, hospitals, toll bridges, municipal
golf courses, parking lots, parking garages, lotteries, municipal sports stadiums, and public housing projects
are examples frequently found.
Illustration 5.2: It is assumed that the town of Badesa is located in a state that permits enterprise funds to
operate without formal legal approval of their budgets.
In this example, the restricted assets include Br.55, 000 set aside for future debt service payments as required
by a revenue bond indenture agreement.
When utility customers are billed during the year, appropriate revenue accounts are credited, assuming that
during 2007, the total bills to nongovernmental customers amounted to Br. 975,300, bills to the town of
Badesa General fund amounted to Br.80, 000, and all revenue was from sales of water, the following entry
summarized the results.
1. Customer Accounts Receivable ………………………. 975,300
Due from General Fund……………………………….. 80,000
Operating Revenues – Charges for Sales and Services----- 1,055,300
If collections from non-governmental customers totaled Br. 968,500 for water billings, the following entry is
made:
2. Cash…………………………………………………… 968,500
Customer Accounts Receivable …………………. 968,500
Customers owing bills totaling Br.1, 980 left the town and could not be located. The unpaid balances of
their accounts receivable were written off to the accumulated provision for uncollectible accounts as follows:
3. Accumulated provision for uncollectible Accounts ………. 1,980
Customer Accounts Receivable……………………….. 1,980
Assume the town of Badesa imposes impact fees on commercial developers in the amount of Br. 12,500 and
that these fees are not associated with specific projects or improvements.
4. Cash ………………………………………………………. 12,500
Capital contributions…………………………………… 12,500
During 2007, the town of Badesa established a supplies fund, and the Water utility fund advanced
Br.200,000 to the supplies fund as a long – term loan.
Accounting.
5. Long Term Advance to Supplies fund ………………. 200,000

Cash……………………………………………… 200,000
Materials and supplies in the amount of Br.291, 500 were purchased during the year by the water utility
fund, and vouchers in that amount were recorded as a liability:
6. Materialsand Supplies……………………………… 291,500
Account Payable ………………………………. 291,500
When materials and supplies are issued to the departments of the water utility fund, operating expenses are
charged for the cost of materials and supplies. Materials and supplies issued for use for construction projects
are capitalized temporarily as construction work in progress (Numbers are assumed).
7. Operating Expenses – costs of sales and Services …. 110,400
Operating expenses – administration …………… 60,000
Construction work in progress………………….. 127,600
Materials and supplies …………………… 298,000
Bond interest in the amount of Br.189, 000 was paid:
8. Non-operating expenses – interest……………………. 189,000
Cash ……………………………………………… 189,000
Construction projects on which costs totaled Br.529, 300 were completed and the assets placed in service.
Utility plant in service summarizes the investment in fixed assets used for utility purposes.
11. Utility plant in service ………………………………. 529,300
Construction work in progress …………………… 529,300
Payment of accounts totaled Br.275, 600, and payments of payroll taxes amounted to Br.81, 200.
12. Accounts payable …………………………………… 275,600
Payroll Taxes payable ………………………………. 81,200
Cash ……………………………………………… 356,800
Near the end of 2007, the water utility fund received Br.10, 000 cash from the supplies fund as partial
payment of the long – term advance.
13. Cash ………………………………………………… 10,000
Long term advance to supplies fund ……………. 10,000
During the year, the Water utility fund made a transfer of Br.200,000 to the fire station addition capital
projects fund.
14. Transfer out ………………………………………… 200,000
Cash……………………………………………… 200,000
At year – end, several adjustments are necessary. First, depreciation is recorded as an operating expense
(numbers are assumed)
15. Operating Expenses…………………………122,800
Accumulated provision for depreciation of utility plant…. 122,800
Provision is made for bad debts from utility customers. In accord with guides issued by GASB, the bad debt
provision is a revenue deduction, not an expense:
16. Operating Revenues – Charges for sales and services …… 2,200
Accumulated provision for uncollectible accounts ……. 2,200
5.2 TRUST AND AGENCY FUNDS
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.
5.2.1 Agency Funds
Accounting.
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. Assets accounted for in an Agency Fund belong 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.
Agency Fund for Special Assessment Debt Service - A Special Assessmentis 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.
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 losses 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).
5.2.2 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.
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
Accounting.
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.
Accounting.

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Wollega University , Department of Accounting and Finance 2022 G.

Principle 1 Accounting and reporting capabilities

Principle 4 Number of funds

Principle-2 Fund Accounting Systems

Expenditures – Salaries and Benefits 425,000

(b) Prepaid Insurance 11,000*

4) Debt Service Payments

- Cancellation of the order; and

Bond anticipation notes payable-------500,000

4.2 Debt Service Fund

5. Long Term Advance to Supplies fund ………………. 200,000

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