Accounting For Public Sector and Civil Society

ADMAS UNIVERSITY 2022
ADMAS UNIVERSITY
FACILITY OF BUSINESS
DEPARTMENT OF ACCOUNTING AND FINANCE
Accounting for Public Sector and Civil Society (ACFN 4131)

4131
Compiled by: Zerai Hagos (BA, MA, MSc)
March,
March 2022
Addis Ababa
Prepared by Zerai Hagos Accounting for Public Sector and Civil Society
CHAPTER ONE
INTRODUCTION TO ACCOUNTING & FINANCIAL REPORTING FOR GOVERNMENTAL
AND NOT-FOR-PROFIT ENTITIES
INTRODUCTION
Welcome to the strange new world of accounting for governmental and not-for-profit organizations!
Initially, you may find it challenging to understand the many new terms and concepts you will need to
learn. Moreover, if you are like most readers, you will question at the outset why governmental and
not-for-profit organizations find it necessary to use accounting practices that are very different from
those used by for-profit entities.
What Are Governmental and Not-for-Profit Organizations?
First it is necessary to know that Organizations are generally classified as
1) For profit (commercial, or business) organizations, and
2) Non profit (Not-for-Profit) organizations.
Generally speaking NFP entities are
 Organizations, which basically arise to provide goods, and services, which are not commercially
feasible or illogical to be provided by profit seeking organizations.
 an entity whose principal objective is not the generation of profit
 Organizations exist because the community or society considers it necessary to provide certain
goods or services to its group as a whole.
Non-Profit-Organization Is Also Classified as:-
1. Government organizations which include
 Federal Offices, Regional Offices, Municipalities, and other governmental
organizations
 Educational: Schools, Colleges and Universities
 Health and Welfare: hospitals, child protection agencies, clinics etc
 Religious: Associations and other religion related organizations
2. Nongovernmental organizations (NGOs) which include religious organization, voluntary health
and welfare organizations, charitable organizations, etc.
Different countries do have varying criteria so as how to count an entity as a non-for profit.
For Example
 In Canada, the criteria include lack of transferable ownership and lack of financial return from the
NFP entity by resource provider.
 In the U.S.A, the criteria include contributions of significant amounts of resources from resource
providers who do not expect commensurate or proportionate pecuniary return, operating purposes
other than to provide goods or services at a profit, and absence of ownership interests like those of
business enterprises. In New Zealand, it means organizations like charities, humanitarian trusts,
welfare agencies, churches and sports organizations are generally considered.
Distinguishing Characteristics of Governmental and Not-for-Profit Entities
In its Statement of Financial Accounting Concepts No. 4, the Financial Accounting Standards Board
(FASB) noted the following characteristics that it felt distinguished governmental and not-for-profit
entities from business organizations.
a) Receipts of significant amounts of resources from resource providers who do not expect to
receive either repayment or economic benefits proportionate to the resources provided. Those
contributing financial resources to the organizations do not necessarily receive a direct or
proportionate share of those organizations‘ services or goods:
b) Operating purposes that are other than to provide goods or services at a profit or profit equivalent.
c) Absence of defined ownership interests that can be sold, transferred, or redeemed, or that convey
entitlement to a share of a residual distribution of resources in the event of liquidation of
the organization.
d) General Absence of profit Motive
How Do Governmental Entities Differ From Not-For-Profit Organizations?
 Power ultimately rests in the hands of the people
 People delegate power to public officials through the election process
 Empowered by and accountable to a higher level government
1.3. Similarities between NFPs and For Profit Organization

NFPs are similar in many ways to profit seeking enterprises. These includes
I. IN TERMS OF ACTIVITY
 Both are the integral part of an economic system and use financial, capital and human resources to
accomplish their purpose
 Both must acquire and convert scarce resources into their respective goods and services to
provide good or service.
 In some cases, both produce similar products. Example, both governments and private enterprises
may own and operate transportation systems and electric or gas utilities
 Both use financial management processes
 Both need financial information systems
II. IN TERM OF ACCOUNTING SYSTEM

a) Both employ journals and ledgers, and then use those journals and ledgers as a basis to
produce financial reports which summarize the information in a meaningful way to guide
decisions.
b) Both use the same accounting principles such as Consistency principle,Objectivity,
Historical cost principles, adequate disclosure: Conservatism and unit of Measurement.
DIFFERENCES BETWEEN BUSINESSES AND G&NP ENTITIES
Nature of Differences Business Entities G & NFP Entities

1. Objectives  To maximize income from  To provide good and services
revenues and other sources.
2. Operational Focus  They focus on short-term and  They focus on short-term,

also look to long-term annualbudget
3. Sources of Financial  They raise resources from sales,  They raise resources from grants,
Resources debt transactions, and capital shared revenues, and members’
stock. contribution. Taxation is unique
source of revenue to government.
4. Accounting and Financial  Accounting and reporting  Accounting & reporting focus on
Reporting focuses on netincome budgets and appropriations and funds
and fund accounting, etc
5. Basis of Accounting  Accrual Basis  Accrual and Modified accrual basis
6. Financial Reporting  FASB

Standards  FASB
 GASB
7. Other Distinguishing  Perfect competition  Monopolistic services

Characteristics  All the services are provided  User charges based on cost or without
with profit profit
 Use of matching concept  Matching is a concept used only in
 Use of going concept business-type activities
 Ownership rights are  Going Concern is only for business-
transferrable from one owner to type activities
theother  Absence of transferable ownership
rights
1.5. Sources of Financial Reporting Standards

Illustration 1-1 shows the primary sources of accounting and financial reporting standards for
business and not-for-profit organizations, state and local governments, and the federal government.
 Specifically, the FASB sets standards for for-profit business organizations and
nongovernmental not-for-profit organizations;
 the GASB sets standards for state and local governments, including governmental
not-for-profit organizations; and the Federal Accounting Standards Advisory Board
(FASAB) sets standards for the federal government and its agencies and departments.
Thu, GASB has the responsibility for establishing accounting and financial reporting
standards for not-for-profit organizations that are considered to be governmental in
character.
OBJECTIVES OF FINANCIAL REPORTING FOR GOVERNMENT AND NFP
The objectives state that financial reporting by non business organizations should provide information
that is useful to present and potential resource providers and other users in making rational decisions
about the allocation of resources to those organizations.
Financial reporting should assist users in evaluating the operating results of the governmental entity for
the year by: Providing information about sources and uses of financial resources. Providing information
about how it financed its activities and met its cash requirements.
GASB Concepts Statement No. 1,“Objectives of Financial Reporting,” states that accountability.
“Accountabilityis the cornerstone of all financial reporting in government. Accountability requires
governments to answer to the citizenry—to justify the raising of public resources and the purposes for
which they are used.” The board elaborated: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.
Comparison of Financial Reporting Objectives—State and Local Governments, Federal Government, and
Not-for-Profit Organizations
Objectives of Financial Reporting For State and Local Governments
Financial reporting is used in making economic, social, and political decisions and in assessing
accountability primarily by:
 Comparing actual financial results with the legally adopted budget.
 Assessing financial condition and results of operations.
 Assisting in determining compliance with finance-related laws, rules, and regulations.
 Assisting in evaluating efficiency and effectiveness.
Objectives of Financial Reporting For FederalGovernment
Accountability is also the foundation of Federal Government financial reporting. In addition to
accountability, Federal Accounting Standards Advisory Board (FASAB) identifies the following
financial reporting objectives for Federal Government and its agencies:
 To assist users in evaluating budgetary integrity
 To assist users in evaluating Operating Performance
 To assist users in evaluating Stewardship
 To assist users in evaluating adequacy of systems and control
Objectives of Financial Reporting for NFPEntities
Financial reporting should provide information useful in:
 Making resource allocation decisions.
 Assessing services and ability to provide services.
 Assessing management stewardship and performance.
 Assessing economic resources, obligations, net resources, and changes in them.
Comprehensive Annual Financial Report (CAFR)
General purpose financial reporting includes not financial statements but also all other means of
communicating information that relate directly or indirectly to the information provided by the
accounting system. In addition to the minimum financial information, GASB Standards state: “Every
governmental entity should publish, as a matter of public record, a comprehensive annual financial report
(CAFR). A CAFR includes
CAFR: IntroductorySection
Introductory section includes such items as
 Title page
 Contents page
 Letter of transmittal – a letter from the chief finance officer addressed to the chief executive and
governing body of the governmental unit or it may be a narrative over the signature of the chief
executive. The letter or narrative material should cite legal and policy requirements for thereport
 Other (as desired by management)
1) CAFR: Financial Section (GASB Statement No.34)
The financial section of a CAFR should include:
 Auditor’s report
 management’s discussion and analysis (MD&A
 basic financial statements
 required supplementary information (other than MD&A
 Combining statements and individual fund statements and schedules.
2) CAFR: StatisticalSection
A CAFR should contain a statistical section. The statistical section typically presents tables and charts
showing and charts showing social and economic data, financial trends and the fiscal capacity of
thegovernment in detail needed by readers who are more than casually interested in the activities of the
government unit.
GENERAL PURPOSE FINANCIAL STATEMENTS
What are General Purpose Financial Statements? General purpose financial statements are
those financial statements released to a broad group of users. These statements include the income
statement, balance sheet, statement of cash flows, statement of shareholders' equity, and any
accompanying disclosures.This set of financial statements is called “general purpose” because it consists
of the basic financial statements that can be used by a broad group of people for a broad range of
activities
 GPFR are issued throughout the year to aid investors and creditors in their decision making
process. A set of general-purpose financial statements includes a balance sheet, income statement,
statement of owner’s equity/retained earnings, and statement of cash flows.
 Companies use this set of financial statements as a form of financial reporting to communicate
company performance with the people outside of the organization.
 More specific financial reports like production flow processes and market analyses are not
included in a set of general-purpose financial statements. These types of reports are only available
to company management.
 The primary users of general purpose financial reporting are present and potential investors, lenders
and other creditors, who use that information to make decisions about buying, selling or holding equity
or debt instruments, providing or settling loans or other forms of credit.
 Even though your GPFS is not required to be audited, we recommend you keep evidence to
demonstrate your GPFS has been prepared in accordance with Australian Accounting Standards
or CAAP where required
Users of Financial Reports
 Users of G&NP entity accounting information as both internal and external; Major external users
are:
 Resource provides (tax payers, donors and potential donors, investors and potential investors,
bond-rating agencies and grant providing organizations).
 Legislative and oversight bodies (higher-level governments and regulating agencies)
 Service recipients (citizen advocate groups)
THE CONCEPTUALFRAMEWORK FOR GENERAL PURPOSE FINANCIAL REPORTING
BY PUBLIC SECTOR ENTITIES (IPSASB)
TheConceptualFrameworkforGeneralPurposeFinancialReportingbyPublicSector:
 Exclusively to accounting information produced on an accruals basis and presented in the form of
“accounts” or “financial statements
 The conceptual framework does not apply to other documents including accounting information,
such as budget reports, management reports, cost accounting reports on the sustainability of
public policy or public sector performance indicators, even if these documents are based entirely
or partly on accrual accounting information..
 Establishesandmakesexplicittheconceptsthataretobeappliedindeveloping International Public
Sector Accounting Standards (IPSASs) and Recommended Practice Guidelines
(RPGs)applicable to the preparation and presentation of general purpose financial
reports(GPFRs)of public sector entities.
The Accrual Basis of Accounting
The Conceptual Framework deals with concepts that apply to general purpose financial reporting
(financial reporting) under the accrual basis of accounting.
Thus, IPSASB is currently in the process of developing the Conceptual Framework. Although all the
components of the Conceptual Framework are interconnected, the Conceptual Framework project is
being developed in 1 and 2 p h a s e s .Phase1 has now been completed. It comprises Chapters1–4of the
Conceptual Framework. These Chapters deal with:
Chapter1: Role and Authority of the Conceptual Framework
Chapter2: Objectives and Users of General Purpose Financial Reporting
Chapter3: Qualitative Characteristics
Chapter4: Reporting Entity
The other Phases of the Framework being developed deal with:
Phase2―The definition and recognition of the elements of financial statements
Phase3―The measurement of the elements that are recognized in the financial statements
Phase4―The presentation of information in general purpose financial reports
Chapter 1: Role and Authority of the Conceptual Framework
Role of the Conceptual Framework
 To establishes the concepts that under pin general purpose financial reporting (financial
reporting) by public sector entities that adopt the accrual basis of accounting. The International
Public Sector Accounting Standards Board (IPSASB) will apply these concepts in developing
International Public Sector Accounting Standards (IPSASs) and Recommended Practice
Guidelines (RPGs) applicable to the preparation and presentation of general purpose financial
reports (GPFRs)of public sector entities.
 Identifies the concepts that the IPSASB will apply in developing IPSASs and RPG s in tended to
assist preparers and others in dealing with financial reporting issues. IPSASs specify
authoritative requirements
 The Conceptual Framework under pin s the development of IPSASs. Therefore, it has
relevance for all entities that apply IPSASs. GPFRs prepared at the whole-of-government level
in accordance with IPSASs may also consolidate all governmental entities whether or riot those
entities have complied with IPSASs in their GPFRs.
 To assist IASB in setting and revising standards
Authority of the Conceptual Framework
 Does not establish authoritative requirements for financial reporting by public sector entities that
adopt IPSASs, nor does it override the requirements of IPSASs or RPGs. Authoritative
requirements relating to the recognition, measurement and presentation of transactions and
other events and activities that are reported in GPFR s are specified in IPSASs.
 To provide guidance in dealing with financial reporting issues not deal t with by IPSASs or RPGs
.In these circumstances, preparers and other scan refer to and consider the applicability of the
definitions, recognition criteria, measurement principles, and other concepts identified in the
Conceptual Framework.
Chapter 2: Objectives and Users of General Purpose Financial Reporting

Objectives of Financial Reporting
 Provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to the
entity”
Users of General Purpose Financial Reports
Governments, The legislature (or similar body) and members of parliament(or a similar representative
body), service recipients, Citizens are primary users of GPFRs.
In addition to internal users, and citizens and their representatives, who are clearly primary users of
accounting information, information users are:
 Service recipients;
 Resource providers (taxpayers or lenders) ;
 Social partners ;
 Supervisory bodies ;
 Parties contracting with public entities;
 Foreign and international public entities that deal with French government units.
Chapter 3: Qualitative Characteristics
The qualitative characteristics of information included in GPFRs of public sector entities are
relevance,faithfulrepresentation,understandability,timeliness,comparability,andverifiability.
RELEVANCE
Relevance is the capacity of accounting information to make a difference to the external decision makers
who use financial reports. If certain information is disregarded because it is perceived to have no bearing
on a decision, it is irrelevant to that decision. Financial and non-financial information is capable of
making a difference when it has confirmatory value, predictive value, or both. Thus, Relevance can be
evaluated according to three qualitative criteria,
a) Timeliness – means available to decision makers before it loses its capacity to influence their
decisions. Accounting information should be timely if it is to influence decisions, like the news
of the world, state financial information has less impact than fresh information.
b) Predictive value – Accounting information should be helpful to external decision makers by

increasing their ability to make predictions about the outcome of future events. Decision makers
working from accounting information that has little or no predictive value are merely speculating.
For example, information about the current level and structure of asset holdings help users to
assess the entity’s ability to exploit opportunities and react to adverse situations
c) Feedback value: Accounting information should be helpful to external decision makers who are
confirming past predictions or making updates, or corrections to predictions.
RELIABILITY
Reliability means that users can depend on accounting information to represent the underlying economic
conditions or events that it purports to represent. Reliability of information is a necessity for individuals
who have neither the time nor the expertise to evaluate the factual content of financial statements. It is
especially important to the independent audit process. Like relevance, reliability must meet three
qualitative criteria.
a) Representational faithfulness – Accounting information should represent what it purports to
represent and should ensure that the selected method of measurement has been used without error
or bias. This attribute is sometimes called Validity: - Information must give a faithful picture of
the facts and circumstances involved. Accounting information must report the economic
substance of transactions, not just their form and surface appearance.
b) Verifiability:- Verifiability pertains to maintenance of audit trials to information source
documents that can be checked for accuracy. It also pertains to the existence of alternative
information sources as backing. Verification implies a consensus and implies that independent
measures using the same measurement methods would reach substantially the same conclusions.
c) Neutrality: - Accounting information must be free from bias regarding a particular view point,
predetermined result, or particular party. Accounting information cannot be selected to favor one
set of interested parties over another. Neutrality in financial reporting is the absence of bias.It
should be factual and truthful.
Completeness
The information in the financial statements must be complete, to the extent that an omission can
cause the information to be false or misleading.
Comparability: - Information that has been measured and reported in a similar manner for different
enterprise in a given year, or for the same enterprise in different years, is considered comparable.
Comparability is not a quality of an individual item of information, but rather a quality of the relationship
between two or more items of information.
For information to be comparable, it must be:
 Measured and reported in a similar manner for different enterprises.
 Useful in the allocation of resources to the areas of greatest benefit.
 Useful to users in identifying real differences between enterprises
Understandability
Understandability is the quality of information that enables users to comprehend its meaning.
Understandability is enhanced when information is classified, characterized, and presented clearly and
concisely. Comparability also can enhance understandability.
Chapter 4: Reporting Entity
 A public sector reporting entity is a government or other public sector organization, program or
identifiable area of activity (hereafter referred to as an entity or public sector entity) that prepares
GPFRs.Apublicsectorreportingentitymaycomprisetwoormoreseparateentitiesthatpresent GPFRs
as if they are a single entity—such a reporting entity is refer red to as a group reporting entity.
 It is an entity that raises resources from, or on behalf of, constituents and/or use resource
to undertake activities for the benefit of, or on behalf of, those constituents.
Phase 2 Elements of financial statements

Phase 3 Recognition
The conceptual framework distinguishes recognition criteria from those included in the definition of the
elements. Recognition is the second logical step in accounting. As it takes place after identification of an
element, it enables any related uncertainties to be considered:
An element is recognized when it meets the two following combined criteria:
1. The element satisfies definition
2. It can be reliably measured.
The recognizing event criterion varies according to the type of element.
Recognition of asset
An asset is recognized when the government unit obtains control.
Recognition of a liability
A liability specific to public action is recognized when it is enforceable by the creditor on the government
unit.
A non-specific liability is recognized when it is a present obligation which can only be settledby an
outflow of resources.
Recognition of revenue
Revenue is recognized in the surplus/deficit statement when it is earned by the government unit.
Recognition of an expense
The recognizing event for an expense is the performance of the service
In the case of intervention expense, the service is considered to be performed when the beneficiary has
fulfilled, or continues to fulfill during the current accounting period, all the conditions necessary to
establish entitlement to the benefits
Phase 4 Measurement
The measurement bases determine the amount at which elements are stated on initial recognition and at
each subsequent reporting date.
Measurement is the process of determining monetary amounts at which elements are recognised and
carried
Phase 5 presentation of financial statement
The conceptual framework is concerned with the separate financial statements of government units and
the possible combinations of these accounts. Financial statements prepared on an accruals basis are
presented at least once a year. They make up an in dissociable set comprising:
 A statement of financial position
 A statement of profit or loss / A surplus/deficit statement
 A statement of changes in equity for the period
 A statement of cash flows for the period
 Notes, comprising
 A summary of significant accounting policies
 Other explanatory information
CHAPTER TWO
PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE AND
LOCAL GOVERNMENTS (SLGS
Introduction
Principles are guidelines that should be followed by professionals in a particular field of study. In the
profession of accountancy there are financial accounting GAAPs such as valuation, matching, continuity,
monitory, revenue realization, and entity principles or concepts that are applied in profit seeking.
They are developed and monitored by Financial Accounting Standard Board (FASB). Similarly, there are
twelve GAAPs that are used by governmental units. Thus, to record, classify, summarize, and report
accounting data properly, governmental entities should follow or implement their GAAPs appropriately.
Activities of government are classified as:-
1. Governmental-type activities such as Core governmental services, together with general
administrative support, comprise the major part of what GASB Concepts Statement .Eg
Protection of life and property, police and fire protection, Public works (streets and highways,
bridges, and public building, etc
2. Business-type activities such as These activities include, among others, public utilities (e.g.,
electric, water, gas, and sewer utilities), transportation systems, toll roads, toll bridges, hospitals,
parking garages and lots, liquor stores, golf courses, and swimming pools
3. Fiduciary activities such as a government may serve as agent for other governments in
administering and collecting taxes. Governments may also serve as trustee for investments
of other governments in the government’s investment pool, and for assets being held for
employee pension plans, among other trustee roles.
The twelve GAAPs used by governmental units are developed by Governmental Accounting Standard
Board (GASB) and briefly discussed as follows:
Principle # 1 Accounting & Reporting Capabilities
A government accounting system must make it possible both to:
a) To present fairly & with full disclosure the financial operation of the funds & account groups of the
governmental unit in conformity with generally accepted accounting principles (GAAP)
b) To determine & demonstrate compliance with finance-related legal and contractual provisions.
In some governmental units however under such circumstances where the laws require following
practices not consistent with GAAP, Governmental units may prepare two sets of financial statements.
1. One set in compliance with legal requirements,

2. One set in conformity with GAAP
For, example the government regulation may state that revenue should be recognized either on cash basis.
Whereas GAAPs of governmental unit states that revenue should be recognized either on accrual or
modified accrual basis. But, if there are no difference between legal requirements and GAAP, one set of
financial statement satisfies both requirements. This option is generally true in business organizations.
Principle # 2 Fund Accounting System (Fund defined)
Governmental accounting systems should be organized & operated on a fund basis.
“A fund is defined as a fiscal & accounting entity with a self balancing set of accounts recording cash &
other financial resources, together with all related liabilities & residual equities and balances, & changes
there in, which are segregated for the purpose of carrying on specifies activates or attaining certain
objectives in accordance with special regulations, restrictions or limitations.”
- The word FUND is given special definition as it relates to Fund Accounting. The narrow definition of
Fund as used in ordinary conversation is a “resource of money”. However in this course it is given the
special definition above. It has key phrases indicating the following points; It is by itself is an entity,
having its own accounting existence and a self balancing set of books (double entry system). That set of
books is established for recording a specific financial activity. The establishment of the fund will attain
a specific objective and will have regulations, restrictions or limitations.
Example
Two examples follow to illustrate the concept of fund.
First the ministry of education operates several colleges. Although all are part of the MINISTRY as a
whole each one is treated as a fund. Each college will be given money that is specifically for its
operations, is not to be mixed up with other institutions. Therefore each college will keep its own set of
books, and issue its own Financial Reports, irrespective of the performance of other individual
institutions or the ministry as a whole.
Or take the case of Nongovernmental organizations. For instance, a single NGO will likely have several
projects; it may have the following different projects, which are funded by different donors.
1. Construction of a Dam in region 1
2. Water development project in region 2
3. Cattle development project in region 3
Under this case the donor for each project will not necessarily be given the financial statement of the
NGO as a whole. The donor for a cattle development project will want financial statements for only the
project, which he is funding. There for, each project will have its own set of books & produce its own
financial statements. So each project will be a separate distinct fund. The very reason of setting up of
funds accounting in governmental entity is that of legal requirement & good financial management.
Principle #3 Types of Funds
To accomplish different purposes of the government unit, the unit establishes a variety of funds. The
governing bodies or other internal parties may assess the financial performance of each fund in the
fulfilment of the specific purpose for which it was established.
Governmental entities use seven types of funds, which are generally classified in to three major
categories based on the similarity of accounting and reporting methods used.
I. Governmental funds: Includes
Governmental funds account for everything else. This is where the bread-and-butter services can be
found—police, fire, social services, sanitation, and so on. There are five types of governmental funds:
1. The General Fund
2. Special Revenue Funds
3. Capital Project Fund-
4. Debt Service Funds
5. Permanent Fund
II. Proprietary Funds: Includes

1. Enterprise Funds
2. Internal Service Funds-
III. Fiduciary Funds
1. Trust And Agency Funds
I. Governmental funds:
The General Fund- It is established to account for all financial resources except those required to be
accounted for in another fund. This fund includes transactions for general government services provided
by the executive, legislative, and judicial operations of the government unit.In addition, public services
such as fire and police protection and public cultural and recreation activities are included here.
Special Revenue Funds- It is maintained to accounts for the proceeds of specific revenue sources (other
than expendable trusts or for major capital projects) that are legally restricted to expenditure for specific
purposes. It implies that specific sources of financial resources to be used for specified purposes may be
accounted for in special revenue fund. How ever, special revenue fund accounted for resources and
expenditures for operations of such items as public libraries.An example of a special revenue fund
might be “The Unity and safety of the motherland tax” that was collected during the derg regime.
Another example is the oil price contingency fund which was established by the government specifically
for the purpose of controlling the fluctuation of oil prices in the country.
2. Capital Project Fund-
It is opened and used to account for financial resources to be used for the acquisition or
construction of major capital facilities other than those financed by proprietary & trusts funds.
Capital projects, such as public parks and municipal buildings that provide benefits to everyone
are accounted for by this fund. An example of Capital Projects Funds could be the construction
of new building for the city government Administration. The costs incurred in the construction of
the building are quite different from the operating cost of the city administration and would need
to be accounted for and reported on as an entity in itself
4. Debt Service Funds-It is opened to account for the accumulation of resources for & the payment of
general long term debt principal & interest. As its name implies, this fund is
responsible for servicing the long-term debt of the governmental unit.Assume
that 10,000,000 birr was borrowed at 10 % simple interests and is to be repaid
in full in 10 years, each year 2,000,000 birr would be needed to be put in a
debt service fund- 1,000,000 for the payment of the principal plus 1,000,000
for the payment of each year’s interest
5. Permanent fund-The fifth type of governmental fund is the permanent fund. A permanent fundis
used to account for permanent endowments created when a donor stipulates that the principal amount of a
contribution must be invested and preserved but earnings on amounts so invested can be used for some
public purpose. Public purposes include activities such as maintenance of a cemetery or aesthetic
enhancements to public buildings. If the earnings from a permanent fund can be used to benefit only
private individuals, organizations, or other governments, rather than supporting a program of the
government and its citizenry, a private-purpose trust fund—a fiduciary fund—is used instead of a
permanent fund.
II. PROPRIETARY FUNDS

Proprietary fund is used in governmental accounting to account for activities that involve business-
like interactions, either within the government or outside of it. These activities are similar to what would
be found in the private sector, so the reporting resembles what would be used by a private business.
1. Enterprise Funds-
 It is established to accounts for operations: A public park could be an example of an Enterprise
Fund. The park would charge a user fee, from which it could pay the expenses (e.g. Salaries) of
operating the park
 That are financed and operated in a manner similar to private business enterprises-where the
intention of the governing body is that the costs or 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
 Where the governing body has decided that periodic determinations of revenues earned, expenses
incurred and/or net income is appropriate for capital maintenance, public policy, management
control, accountability, or other purposes. Examples include sports stadium, Municipal electric
utilities, and municipal bus companies.
3. Internal Service Funds-

This fund is established to account for the financing of goods or services provided by one
department or agency to another department or agency of the governmental unit, or to the other
governmental units on a cost reimbursement basis. A shared garage is a common example of an
Internal Service Fund in government ministry offices. The garage would repair all the ministries`
vehicles regardless of which project, offices or a fund uses them
III. FIDUCIARY FUNDS
 Fiduciary funds contain resources held by a government but belonging to individuals or entities
other than the government. A prime example is a trust fund for a public employee pension plan.
 This fund is maintained to account for assets held by the government unit for other.
Example
Trusts and agency fund is one type of fund and may be further classified as trust fund and agency
fund. Trust Fund is used to account for assets held by a government unit in a trustee capacity
for individuals, private organizations , other government units , other funds in the same
governmental unit. And trust funds may be further classified as
1. Expandable trust funds
2. Non-expendable trust funds
3. Pension trust funds
4. Agency funds
Kinds of Funds – Expendable and Non-expendable

Expendable funds used to account resources which have to be expended (entirely used up), usually
within one year. All governmental funds are Expendable Funds; expendable funds are meant to be
expended or their resources are used up entirely usually within one fiscal year. The accounting equation
for an expendable fund is slightly different from an FP. recall the accounting equation for an FP: A - L =
C. The accounting equation for an expendable fund (from the definition of Fund above) is cash plus other
financial resources minus liabilities = fund balance. (C + OR - L = FB). There are no ownership interests
in an NFP. So there is no capital or owners equity. There is only a balance remaining to be used for
specific purpose.
Non-Expendable Funds are usedwhen maintenance of capital is desired, and the unexpended funds are
not meant to be returned. All proprietary funds are non-expendable funds
Principle #4 Numbers of Funds

Governmental units should establishes and maintain those funds require by law & sound financial
administration. Only the minimum number of funds in consistent with legal and operating requirements
should be established, however since unnecessary funds result in inflexibility, undue complexity &
inefficient financial administration.
The seven fund types are to be used if needed by Governmental unit to demonstrate compliance with
legal requirements or if needed to facilitate sound financial administration.
Principle #5 Reporting Capital Assets
A clear distinction should be made between general capital assets and capital assets of proprietary and
fiduciary funds. Capital assets of proprietary funds should be reported in both the government-wide and
fund statements. Capital assets of fiduciary funds should be reported in only the statement of fiduciary
net assets. All other capital assets of the governmental unit are general capital Assets. They should not be
reported as assets in governmental funds but should be reported in the Governmental Activities column in
the government-wide statement of net assets.
Principle #6 Valuation of Capital Assets
Capital assets should be reported at historical cost. The cost of a capital asset should include capitalized
interest (not applicable to general capital assets) and ancillary charges necessary to place the asset into its
intended location and condition for use. Donated capital assets should be reported at their estimated fair
value at the time of the acquisition plus ancillary charges, if any.
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 GASBS 34, pars. Inexhaustible
assets such as land and land improvements should not be depreciated. Depreciation expense should be
reported in the government wide statement of activities; the proprietary fund statement of revenues,
expenses, and changes in fund net assets; and the statement of changes in fiduciary net assets.
Principle # 8 Reporting Long-Term Liabilities
A clear distinction should be made between fund long-term liabilities and general long-term liabilities.
Long-term liabilities directly related to and expected to be paid from proprietary funds should be reported
in the proprietary fund statement of net assets and in the government-wide statement of net assets. Long-
term liabilities directly related to and expected to be paid from fiduciary funds should be reported in the
statement of fiduciary net assets. All other unmatured general long-term liabilities of the government
should not be reported in governmental funds but should be reported in the Governmental Activities
column in the government-wide statement of net assets.
Principle # 9 Measurement Focus and Basis of Accounting in the Basic Financial Statements
a) Government-wide Financial Statements
The government-wide statement of net assets and statement of activities 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 when the exchange takes place. Revenues, expenses, assets, and liabilities resulting from non-
exchange transactions should be recognized in accordance with Non exchange Transactions.”
a) Fund Financial Statements
In fund financial statements, the modified accrual or accrual basis of accounting, as
appropriate, should be used in measuring financial position and operating results.
1. Governmental Funds Basis of Accounting
Governmental fund revenues and expenditures should be recognized on the modified accrual basis.
Revenues should be recognized in the accounting period in which they become available and measurable.
Expenditures should be recognized in the accounting period in which the fund liability is
incurred, if measurable, except for Un matured interest on general long-term debt, which should
be recognized when paid.
Measurable means when the amount to be collected is known with some certainty.
2. Proprietary Fund Basis of Accounting
Proprietary fund revenues and expenses should be recognized on the accrual basis. Revenues
should be recognized in the accounting period in which they are earned and become measurable;
expenses should be recognized in the period incurred, if measurable. Proprietary fund accounting is
virtually the same as for-profit accounting. Note the difference in wording for recognizing revenues
– “period in which they are earned” as opposed to ―become “measurable and available”. And we
use the word expenses like profit making entities not expenditure. Why? The answer is these proprietary
types of funds provide service on charge basis as the for-profits do.
3. Fiduciary fund Basis of Accounting
Fiduciary fund revenues and expenses or (as appropriate) should be recognized on the basis consistent
with the fund‘s accounting measurement objective. Nonexpendable trust (investment trust funds) and
pension trust funds should be accounted for on the accrual basis, expendable trust funds should be
accounted for on the modified accrual basis. Agency fund assets and liabilities should be accounted for
on the modified accrual basis. From our discussions for governmental and proprietary funds basis of
accounting we can generalize that expendable fund (remember: all governmental funds are expendable)
should use modified accrual basis to measure and report their revenues and expenditures. Likewise,
proprietary funds (non expendable) used accrual basis.
4. Inter fund transfer Basis of Accounting
Transfers should be recognized in the accounting period in which the inter fund receivable and
payable arise. It is common for a fund with surplus resources to transfer the idle amount to other fund of
the same governmental entity but run in short. Transfers are shifting of resources from one fund to the
other with no return. Because each fund is a separate accounting and reporting entity, these transfers
must be reported. This principle is saying that the transfer should be recorded when the receivable and
payable arise, rather than when the cash is actually shifted from one fund another. This is the accrual
basis. For example, consider that on December 31, 1999, the General Fund of a governmental entity is
required to transfer money to the Capital Projects Fund to help pay for construction of a new office
building . The transfer would be recorded at that time, even if the cash did not actually change hands
until July 31, 2000.
The difference between Expenses and Expenditure must be known properly to understand the
distinction between NFP and FP accounting. In the dictionary these words have almost exactly the same
meaning. However in fund accounting, they have been given specialized meanings.
1. An Expense is a current period consumption of resources.
2. Expenditure is a decrease in the fund financial resources.
For example in a profit making accounting a car would be considered as an asset and depreciation would
be recorded as an expense as the car is “used up” or “wears out”. In a governmental fund, the car would
be considered as expenditure at the time of purchase.
Principle# 10 Budget and Budgetary Accounting
i. An annual budget (s) should be adopted by every governmental unit.
ii. The accounting system should provide the basis for appropriate budgetary control.
iii. Budgetary comparison schedules (statements) should be included (as a supplementary
information) in the appropriate financial statements and schedules for governmental funds
for which an annual budget has been adopted . The budgetary comparison should
present: (i) the original budget(s), (ii) the final appropriated budge t(s) for the reporting
period and (iii) the actual in and out flows and the balances
1. Budgeting is the process of allocating of resource to meet unlimited demands. There are three
primary questions to ask when preparing a budget.
Q, How much will we spend?
Q, Why will we spend it?

Q, Where will we get the money?
Principle #11 Budgetary Reporting
a. Budgetary comparison schedules should be presented for the General Fund and each major
special revenue fund that has a legally adopted budget as part of therequired supplementary
information (RSI). Governments may elect to presentthe budgetary comparisons as part of the
basic financial statements.
Principle #12 Classification and Terminology
Transfer, Revenue, Expenditure, and Expense Account Classification
a. Transfers should be classified separately from revenues and expenditures orexpenses in the basic
financial statements.
b. Proceeds of general long-term debt issues should be classified separately fromrevenues and
expenditures in the governmental fund financial statements.
c. Governmental fund revenues should be classified by fund and source. Expendituresshould be classified
by fund, function (or program), organization unit,activity, character, and principal classes of objects.
d. Proprietary fund revenues should be reported by major sources, and expensesshould be classified in
essentially the same manner as those of similar businessorganizations, functions, or activities.
e. The statement of activities should present governmental activities at least at thelevel of detail required
in the governmental fund statement of revenues, expenditures,and changes in fund balance—at a
minimum by function. Governmentsshould present business-type activities at least by segment.
Principle #13 Financial Reporting
Interim financial reports
A. Appropriate interim financial statements & reports of financial position, operating results & other
pertinent information should be prepared to facilitate management control of financial operations,
legislative oversight & where necessary or desired for external reporting purpose.
Comprehensive Annual Financial Reports (CAFR)
The five combined statements that comprise the GPFS and that must be included in the financial section
of a CAFR are
1. Combined balance sheet- all fund types and account groups
2. Combined statement of revenues, expenditures and changes in fund balances- all governmental fund
types.
3. Combined statement of revenues, expenditures and change in fund balances- budget and actual-general
and special revenue fund types
4. Combined statement of revenue, expenses, and changes in retained earnings (or equity)- all proprietary
fund types.
5. Combined statement of cash flows- all proprietary fund types and non-expendable trust funds. The
notes to the financial statement are also an integral part of the GPFS.
SUMMARY
1. Government –wide financial statements
 Statement of net asset
 Statement of activities
Fund Financial statement
1. Governmental funds
A. Balance sheet
B. Statement of Revenue, Expenditure and change in fund balance
2. Proprietary fund
A. Statement of net asset
B. Statement of Revenue, Expense and Retain Earning
C. Statement of cash flow
3. Fiduciary fund
A. Statement of fiduciary net asset
B. Statement of changes in fiduciary net asset
The Nature of Governmental Fund Information

The government-wide financial statements and the proprietary and fiduciary fund financial statements
report financial information on a full accrual basis. The governmental fund financial statements, however,
report what is commonly referred to as current financial resources on a modified accrual basis. Whereas
full accrual contains all inflows and outflows of economic resources, short- and long-lived assets, and
short- and long-term liabilities, the governmental fund financial statements generally have a short-run
perspective. Governmental fund assets generally are expected to be used or liquidated within a year and
governmental fund liabilities are normally expected to be repaid or satisfied with current resources.
Governmental fund revenues are those collected within the year or soon enough thereafter that they can
be used to finance current-year expenditures. Expenditures represent the use or expected use of current
financial resources.
The Balance Sheet
The governmental funds balance sheet presents first a government's assets, resources it controls that
enable it to provide services. Given the basis of accounting, these assets are generally current in nature—
cash, short-term investments, and short-term receivables. Most notably absent are capital assets.
However, some assets that are not current or not financial may still creep in. For instance, the
governmental funds may contain long-term receivables related to loans made from one fund to another.
They also often contain inventory. How do these items make their way into statements reporting current
financial resources? The answer lies in the meaning of modified accrual. Although the accounting
standards have been modified to remove capital assets and long-term debts from the governmental funds,
there are no specific modifications related to long-term receivables or inventory.
The "balance" in the balance sheet is between assets on the one hand and liabilities and fund
balances on the other. Liabilities are amounts owed (more precisely, virtually unavoidable obligations to
sacrifice resources). The liabilities generally are expected to be satisfied within a year. You will often
find deferred revenue here as well. Under accrual accounting, deferred revenues typically represent
resources a government has received that are attributable to a future period. For instance, a government
may receive a payment in the current year that is for the following year's property tax bills. That amount
would be reported as deferred revenue until the next year. However, under modified accrual, revenues
may be deferred because the resources are not available—they have not been received during the year or
soon enough thereafter to be used to finance current-period expenditures. If a given year's tax payments
were not received by the government in time to be considered available, then the revenue would be
deferred until the payments were received.
FUND BALANCE
Fund balance is the difference between assets and liabilities—in essence, what would be left over if
the assets were used to satisfy the liabilities. It is, quite literally, the balance of each fund. Fund balance
may be the most widely used information in the entire governmental financial report, but it is also highly
problematic because of inconsistencies in the way governments interpret the relevant standards.
Fund balance is reported in two basic components—reserved and unreserved. Fund balance may be
reported as reserved because it is related to resources that cannot be spent, like inventory, or because
there is a constraint on how the resources may be spent that limits them to use more specific than the
purpose of the fund.
Unreserved fund balance represents resources that are available to be used for the purposes of the fund
they are reported in. For the general fund, unreserved fund balance is legally available for any purpose
The Statement of Revenues, Expenditures, and Changes in Fund Balances
The statement of revenues, expenditures, and changes in fund balances is the governmental funds'
income statement, tracking the flow of resources in and out. It will contain the same major funds as the
balance sheet.
 Revenues are shown by source or type, such as various taxes, fees and charges,
intergovernmental aid, and so on.
 Expenditures generally are shown by function and object with the current operating
expenditures presented apart from debt service and capital expenditures.
 Revenues and expenditures are not the only inflows and outflows of resources reported in this
statement.
 Other financing sources and uses include the cash received when bonds are issued, as well as
transfers between funds. Apart from the fact that these resource flows are not revenues or
expenditures, they are shown apart to assist the reader of the statement in assessing the
balance between ongoing revenues and expenditures related to the basic operations of the
government.
CHAPTER 3
IMPAIRMENT OF NON CASH GENERATING ASSET [IPSAS 21]
Impairment in accounting is a permanent value reduction of a company's assets. Usually, intangible
assets or fixed assets undergo impairment.Therefore, it reflects a decline in the utility of an asset to the
entity that controls it.Impairment is a loss in the future economic benefits or service potential of an asset,
over and above the systematic recognition of the loss of the asset’s future economic benefits or service
potential through depreciation or Amortization.
Cash generating assets are assets held with the primary objective of generating a commercial return
where as Non-cash generating assets are assets other than cash-generating assets.
Assets that are held with the primary objective to provide public services are non-cash-generating
assets and therefore are subject to the provisions of the Accounting Policy on Non-Cash-Generating
Assets.
A non-cash generating asset is impaired when the carrying amount of the asset exceeds its recoverable
service amount.
Recoverable service amount is the higher of a non-cash-generating asset’s fair value less costs to sell
and its value in use.
 Impairment losses need to be recognized when the asset’s Book Value > asset’s Recoverable
amount.
Where Asset’s Recoverable Amount = higher of (Fair value – Selling costs) OR value in use.
The value in use is calculated by discounting future cash flows expected from the continued use of the
asset.
a) IFRS requires the companies to assess the indications of the impairment annually by keeping an
eye on the several indicators mentioned above.
b) For identifiable intangible assets that cannot be amortized and goodwill, the companies are
required to test these for impairment at least annually.
c) The impairment loss is allowed to be reversed if the asset’s value recovers later
In assessing whether there is any indication that an asset may be impaired,an entity shall consider, as a
minimum, the following indications:
External sources of information
 Cessation, or near cessation, of the demand or need for services provided by the asset;
 Significant long-term changes with an adverse effect on the entity have taken place during the
period, or
 will take place in the near future, in the technological, legal, or government policy environment
in which the entity operates;
Internal sources of information
a) Evidence is available of physical damage of an asset;
b) Significant long-term changes with an adverse effect on the entity have taken place during the
period, or are expected to take place in the near future, in the extent to which, or manner in
which, an asset is used or is expected to be used. These changes include the asset becoming idle,
plans to discontinue or restructure the operation to which an asset belongs, or plans to dispose of
an asset before the previously expected date;
c) decision to halt the construction of the asset before it is complete or in a usable condition; and
d) Evidence is available from internal reporting that indicates that the service performance of an
asset is, or will be, significantly worse than expected.
IPSAS 26 applies to cash-generating assets. These are assets held with the primary objective of
generating a commercial return. Holding an asset to generate a commercial return indicates that central
government entity intends to:
a) Generate positive cash inflows from the asset, and
b) Earn a commercial return that reflects the risk involved in holding the asset.
IPSAS 21 applies to what are referred to as non-cash-generating assets. Such assets are primarily held
for providing a public service.
An entity that prepares and presents financial statements under the accrual basis of accounting shall apply
this Standard in accounting for impairment of non-cash-generating assets, except:
Asset Relevant Standard

Inventories IPSAS 12
Assets arising from construction contracts IPSAS 11
Financial assets within the scope of IPSAS IPSAS 29
Investment property measured at fair value IPSAS 16
Assets arising from employee benefits IPSAS 25
Biological assets related to agricultural activity measured at fair
value less costs to sell IPSAS 27
Non-cash-generating property, plant, and equipment IPSAS 17,

Non-cash-generating intangible assets IPSAS 31,
The following examples are presented to help illustrate the difference between cash generating and non-
cash-generating assets.
11.1 Example 1
The primary objective of a public school within the Education Department is toprovide educational
services to students with no fee. However, a dedicated sectionis used as a bookshop to sell educational
books and materials at current marketprices with the intention to generate profits.
Since the assets held by this bookshop are primarily employed to an activity thatgenerates a commercial
return, being cash inflows from the sale of educationalbooks and materials at current market prices,
IPSAS 26 will apply to these assetsof the dedicated section.
Example 2
Mater Dei Hospital is primarily used by non-fee paying patients who use its wards, services and
facilities. However, an MRI machine at Mater Dei can generate cash flows when used by non-EU
resident patients since they need to pay for using such service.
Since the primary objective of Mater Dei is not to generate profits, in this caseIPSAS 21 will apply in
the case of the MRI machine even if a fee is charged to nonEU resident patients.
Example 3
The Ministry for Finance has a hall used for events organized by governmentaldepartments. No fees are
charged for using such venue. However, occasionallysame hall is rented out to third parties for private
events since they specificallyrequest the use of such hall to enjoy its historical surroundings. In such case,
theministry charges a rental fee at a commercial rate for the use of this hall.
Given that this hall generates a commercial return in the form of rental income isincidental and it is
mainly used for administration purposes, thus IPSAS 21 willapply.
Example 4
The Government Printing Press meets all the printing requirements of Government, ministries,
departments and other entities. Prices charged to customers for printing work are intended to cover the
costs incurred by the press but not to generate profits.
Since the objective is not to earn a commercial return but to accommodate the printing needs of
government ministries/departments, and since the prices charge dare not at market rates, the assets of the
government printing press are non-cash generate in gussets. IPSAS 21 will apply
EFFECT OF IMPAIRMENT LOSS
Impairment loss indicates that the company has overstated its earnings by not recognizing
enough depreciation/amortization expense in past. The impairment loss has the following effect on
various financial statements and ratios:
Book value/carrying amount of the asset is reduced on the balance sheet.
Net income is reduced on the income statement.
Since it reduces the book value of the fixed assets, the fixed asset turnover ratio and the debt-to-total
assets ratio will improve.
Basis Impairment Depreciation
Meaning Permanent reduction/decline in value of Distributing the cost of the asset
Asset over its useful life.
Reason Due to customer preference, Natural Due to normal wear and tear or the
disaster, legal, economic or operational use of the asset for day-to-day
reasons operations or obsolescence
Treatment Treated As Loss Treated as Expense
Duration Not recurring in nature Recurring in nature
method Subtract the fair value of an asset from its There are many methods to
book value calculate depreciation, such as
straight-line method, diminishing
balance method.
Types of Asset Tangible, Intangible and natural resource Only Tangible asset
DISCLOSURE OFFINANCIAL INFORMATION ABOUT THE GENERAL

GOVERNMENT SECTOR (IPSAS22)
Introduction
The objective of this Standard is to prescribe disclosure requirements for governments that elect to
present information about the general government sector (GGS)in their consolidated financial statements.
The disclosure of appropriate information about the GGS of a government can enhance the transparency
of financial reports, and provide for a better understanding of the relationship between the market and
non-market activities of the government, and between financial statements and statistical bases of
financial reporting
A government that prepares and presents consolidated financial statements under the accrual basis of
accounting and elects to disclose financial information about the general government sectors shall do so in
accordance with the requirements of this Standard.
Segment Reporting
IPSAS18, Segment Reporting, requires the disclosure of certain information about the service
delivery activities of the entity and the resources allocated to support those activities for
accountability and decision-making purposes. Unlike the sectors reported under statistical bases of
financial reporting, segments reported in accordancewithIPSAS18 are not based on a distinction
between market and non market activities.
The disclosure of information about the GGS does not replace the need to make disclosures about
segments in accordance with IPSAS 18. This is because information about the GGS alone will
not provide sufficient detail to enable users to evaluate the entity’s past performance in achieving
major service delivery objectives, when those objectives are achieved through non- GGS entities.
Statistical Bases of Financial Reporting
The objectives of financial statements prepared in accordance with IPSASs and those prepared in
accordance with statistical bases of financial reporting differ in some respects. The objectives of
financial statements prepared in accordance wi t h IP S ASs are to provide information useful for
decision
Disclosure of information about the GGSis consistent with enhanced transparency of financial reporting,
and will assist users of the financial statements to better understand:
(a) There sources allocated to support the service delivery activities by the GGS, and the government’s
financial performance in delivering those services; and
(b) The relationship between the GGS and the corporation sectors, and the impact each has on overall
financial performance.
PRESENTATION OF BUDGET INFORMATION IN FINANCIAL STATEMENTS [IPSAS 24]
IPSAS 24, Presentation of Budget Information in Financial Statements, requires that financial
statements include a comparison of budget and actual amounts on a basis consistent with that adopted
for the budget. Where government budgets are prepared for the GGS rather than the government as
whole, financial information about the GGS disclosed in accordance with this Standard will be relevant
to the comparisons required by that IPSAS.
Definitions
The following term issued in this Standard with the meaning specified: The General Government Sector
comprises all organizational entities of the general government as defined in statistical bases of
financial reporting.
Accounting Policies
Financial information about the GGS shall be disclosed inconformity with the accounting policies adopted
for preparing and presenting the consolidated financial statements of the government, except as required
byparagraphs24 and25.
In presenting financial information about the GGS, entities shall not apply the requirements of IPSAS6,
Consolidated and Separate Financial Statements, in respect of entities in the PFCs and public NFCS
sectors.
The GGS shall recognize its investment in the PFC and public NFCS sectors as an asset, and shall
account for that asset at the carrying amount of the net assets of its investees.
Disclosures
Disclosures made in respect of the GGS shall include at least the following:
(a) Assets by major class, showing separately the investment in other sectors;
(b) Liabilities by major class;
(c) Net assets/equity;
(d) Total revaluation increments and decrements and other items of revenue and expense recognized
directly in net assets/equity;
(e) Revenue by major class;
(f) Expenses by major class;
(g) Surplus or deficit;
(h) Cash flows from operating activities by major class;
(i) Cash flows from investing activities; and
(j) Cash flows from financing activities.
CHAPTER 4
BUDGETING AND PERFORMANCE REPORTING
Budgeting is a process of looking at a business’ estimated incomes (the money that comes into the
business from selling products and services) and expenditures (the money that goes out form paying
expenses and bills) over a specific period in the future. It allows a business to see if they will be able to
continue operating at their expected level with these projected incomes and expenditures.
Budgeting is the process of allocating scarce resources to unlimited demands. More specifically, it can be
defined as a plan of financial operation embodying an estimate of proposed expenditures for a given time
and the proposed means of financing them. Budget is a statement that shows the financial plan for
accomplishment of an operation. It is plan stated in terms of money. When we assigned/estimate
resources required for a certain task on our plan that is called budgeting.
We might summarize the process of budgeting into three basic questions.
 Where will we get the money from?
 How much can we send?
 Why will we spend it?
Uses of Budgets
The purpose of a budget is to plan, organize, track, and improve your financial situation. In other
words, from controlling you’re spending to consistently saving and investing a portion of your income, a
budget helps you stay on course in pursuit of your long-term financial goals.
In FP, the primary usefulness of budgets is planning.
In governments –management plans and laws
Control the activities authorized to carry out plans
Prepare statement that permit comparison of actual results with budget and evaluation of variances
Planning is a special concern for the following reasons:
1. The type, quantity and quality of governmental goods and services provided are not normally
evaluated and adjusted through the open market mechanism
2. Governmental goods/services (education, health, police etc) are often among the most critical to the
public interest
3. The immense scope and diversity of modern government activities make comprehensive, thoughtful
and systematic planning a pre-requisite to orderly decision making
4. Government planning and decision making is generally a joint process involving its citizens
Assumptions about GF Budget
Annual budget adopted on modified accrual (GAAP) basis
Appropriations are made for operating expenditures by function and for capital outlay and debt service
expenditures made directly in GF
Budget does notinclude appropriations for interfund transfers –assumes interfund transfers are
separately authorized
Classifications of budgets
States and local governments typically prepare and utilize several types of financial plans. It is therefore
important to distinguish among the various types of budgets, to understand the phases through which
each may pass and to be familiar with commonly used budgetary terminology. There are five
classifications of budgets and two types within each classification.
Capital or Current
Sound governmental fiscal management requires continual planning for several periods in to the future.
Most governments are involved in programs to provide certain goods and services continuously and/or
for acquisition of capital items. Multi-year schedule for acquisition of capital items is called capital
program. At the beginning of each year the balance that fall in the current period will be included in the
capital budget.
Capital budgets deal with the acquisition of fixed assets. The legislature will likely approve the
acquisitions one year at a time. But planning for the acquisitions several years in advance (called the
Capital Program) is very helpful to wise management of resources.
Typically used for acquisitions requiring several yearsTypically contains portion for current year and for
future years
Current budgets are concerned with the current year‘s operating expenditures, sometimes called
recurring expenditures, because similar sorts of expenditures are needed year after year.
Also known as operating budget
Contains proposed expenditures for current operations, debt service, & estimates of expendable resources
to be available during the year
Tentative or enacted
One key distinction among budgets is their legal status. Various documents may be called budgets prior
to approval by the legislative body. As the name implies, the tentative budget is still in process. It has not
yet been officially approved. An enacted budget has been officially approved and is a binding legal
document.
General or Special
The names of this classification are not quite as they sound. Budgets of governmental activities
commonly financed through the General, Special Revenue, and Debit Service Funds are referred as
General budges.
General budget is typically used for general governmental activities financed through General Fund,
Special Revenue Funds, & Debt Service Funds
A budget prepared for any other fund is Special. Special budgets are commonly limited to Capital project
funds, though Enterprise and Internal service funds do sometimes formally budgeted.
Special Budget is a budget enacted for any other type of activity
Fixed or Flexible
Fixed budgets are for a fixed total dollar (or Birr) amount and cannot be exceeded. The allocated amount
should not be exceeded. A flexible budget, on the other hand, fixes the cost per unit of goods and services.
If more units of goods and services are desired because of a change in circumstance or need, the dollar
amount of a flexible budget can increase.
Approaches to Budgeting
There are different types of budgetary approaches which differ to each other in their emphasis on planning,
control and evaluation. These approaches fall in to two categories: Modern and Traditional Approaches
Modern (Rational) Approaches to budgeting
The modern approaches to budgeting are sometimes called rational. That is because they all advocate
thinking carefully about the relationship of inputs, with a special concern for the outputs. Outputs are the
goods or services actually provided; inputs are the resources that go in providing those goods or services.
Thinking carefully also involves analyzing the costs and benefits of alternative methods of achieving
objectives. The ―big-picture is the idea that lawmaking bodies should focus on broad policy objectives
rather than details of spending for particular departments is emphasized. Long term, ultimate goals are
stressed rather than annual budget requests. Attention is directed to continual evaluation of services
which are being performed. The different modern approaches are considered; each one is explained
briefly, below.
Performance Budgeting
Performance budget is a budget that bases expenditures primarily up on measurable performance of

activities and work programs. It focuses on the outputs generated by the department or organizational
unit, rather than looking primarily at the cost of the inputs. In this type budgets attempt will be made to
relate the input of governmental resources to the output of governmental services. To provide the
legislative body with a reasonable justification for its budget requests, each department must do some
clear thinking about what it is trying to do and how best to do it.
Under, PB, budgeted expenditures are based on a standard cost of inputs multiplied by the number of
units of an activity to be provided in that time period. The total budget for an organization is the sum of
all the standard unit costs multiplied by the units expected to be provided
The performance budget is mainly concerned with only one year at a time. Basically, the process of
making the budget may be summarized as follows:
1. The governmental entity decides what type of services to offer.
2. The entity decides how many units of the service to offer.
3. The cost of one unit of the service is calculated.
4. The budget is determined by multiplying units of service by the cost per unit.
Advantage
1. It emphasis on inclusion of narrative description of each proposed activity within the proposed budget
2. Organization of the budget by activities, with requests supported by estimates of costs and
accomplishments in the quantitative terms and
3. Its emphasis on the need to measure output and input

Limitations
This approach is fundamentally sound but has the following drawbacks
1. Many government services and activities do not appear readily measurable in meaningful output units
or unit cost terms
2. This style makes data gathering difficult and impossible

3. Need highly qualified skill man power.
PLANNING-PROGRAMMING-BUDGETING (PPB)
Program budgeting refers to a variety of different budgeting systems that base expenditures primarily on
programs of work and secondarily on objects
PPB emphasizes broad policy goals, strategies and objectives, rather than details of spending. In looking
at these broad goals and objectives, it considers long-range plans. In those longrange plans both ultimate
goals and intermediate objectives must be explicitly stated. After formulating the long-range plans, it
then evaluates costs and benefits of different ways of meeting the goals and objectives. It also
emphasized the government‘s overall program, rather than a specific department. For instance, both the
Ministry of Health and the Ministry of Education might have some sort of AIDS program – one for
treatment and one for education. If the idea of PPB were adopted, both of these programs would be
looked at together to see they complemented each other in meeting the government‘s overall objectives.
Distinctive characteristics of PPB
1.It focuses on identifying the fundamental objectives of the government and then relating all activities to
them
2. Future year implications are explicitly identified
3. All pertinent costs are considered
4. Systematic analysis of alternatives is performed
Advantages
1. Unlike performance and traditional budgeting which based principally on historical data and focus in
single period, PPB emphasizes on long range planning in which (i) ultimate goals and intermediate
objectives must be explicitly stated and (ii) the costs and benefits of major alternative courses to achieve
these goals and objectives are to explicitly evaluated
2. It assumes that all programs are to be evaluated annually, so that poor ones may be weeded out and
new ones added
3. It can be adapted to any level

Limitations
1. It is quite difficult to formulate a meaningful, explicit statement of a government‘s goals and
objectives that can be agreed by all the concerned
2. Official change matters on its effectiveness

3. Need highly qualified personnel
4. Objective measurement is difficult

Zero-Base-Budgeting (ZBB)
ZBB is one method of continually evaluating programs and services. The primary idea of ZBB is that
each program must justify its existence every year. No program is assumed to be continuing from one
year to the next. In this approach, the starting point for the budget each year is zero. First the program
itself must be justified, then different ways of carrying out the program are examined and the best is
chosen.
The basic tenet of zero-based budgeting (ZBB) is that program activities and services must be justified
annually during the budget development process. The budget is prepared by dividing all of a
government's operations into decision units at relatively low levels of the organization.
ADVANTAGES
It requires annual revision of all programs, activities and expenditures. This helps to
1. Save money by identifying outdated programs and unnecessary high levels of services
2. Concentrate the attention of officials on the costs and benefits of services 3. Cause a search for new
ways of planning and evaluation 4. provide better justification for the budget 5. Improve the decisions of
executives and legislative bodies
LIMITATIONS
1. It requires a great deal of paper work, staff time and effort to identify and rank decision units and
packages
2. It is difficult to obtain the data to compute costs of alternative methods of achieving objectives and of
alternative levels of services
TRADITIONAL APPROACH TO BUDGETING
For the reasons stated above, the modern approaches have not been adopted as widely as might be
expected. The traditional approach, called object-of-expenditure (OOE) is still the most widely used. The
objective of the OOE budget has an expenditure control orientation. It is to simply list expected
expenditures, and then say how much is required for each one. This approach involves three facets:
1. First, subordinate agencies submit budget requests to the chief executive in terms of the type of
expenditures to be made. These requests include the number of people to be hired in each specified
position and salary level and the specific goods or services to be purchased during the upcoming period.
2. Next, the chief executive compiles and modifies the agency budget requests and submits an overall
request for the organization to the legislature in the same object – of - expenditure terms
3. Finally, the legislative body usually makes line - item appropriations, possibly after revising the
requests, along object - of – expenditure lines.
Advantages
1. It is simple for preparation and understanding
2. It allows a great deal of control over expenditure, and
3. It fits with practical realities.
Limitations
1. It is overly control centered, to the detriment of the planning and evaluation process
2. It provides only list of proposed personnel to be hired or goods to be purchased for decision makers. It
is only decision makers that are familiar with the departments function and activities do understand the
justification
3. It is long range planning, program justification, and outputs achieved are not necessarily formally
considered. In other words, it doesn‘t encourage asking of the questions, “Why are we really spending
this money?” or, “What are we getting for the money we are spending?” or, “Could this objective be
better met by another means?”
BUDGETS AND OUTTURN REPORTING (IPSAS 24)
Outturn reports are used to report to the Department any variations between the reported cargo and
the cargo that was actually unloaded from the ship or aircraft including surplus or short landed
cargo.
Outturn Reports means a detailed report prepared by a terminal to record discrepancies in the form
of over, shortand damaged cargo as manifested, and cargo checked at a time and place
of handling of ship. Outturn Reports is a collective term used to refer to a number of specific reports
designed to track and control the movement of cargo throughout the supply chain.
Examples of Outturn Reports in a sentence
It is an abbreviated message that is based on Advance Cargo Notices received by SARS, but stripped of
all consignor/consignee data, which is sent to licensees of Container Depots and licensees of De-
grouping Depots to enable those parties to timeously complete the Outturn Reports that they must submit
to SARS in respect of the cargo received at their premises. The focus now moves on to the completion of
the Annual Accounts and the Final Out-turn Reports, which will be the main priority until June. The
range of projections are based on increases in fares of between 0% and 6.25%.20 Labor market statistics:
Scotland, Office for National Statistics, July 2011.21 Efficient Government Efficiency Outturn Reports,
Scottish Government, November 2009 and October 2010.22 Improving public sector efficiency, Audit
Scotland, February 2010
PERFORMANCE BUDGETING AND REPORTING
Budget Performance Report is the comparison of planned budget and actual performance. It allows
comparing the actual account transactions in a specific period with the budget figures of the same
periods.
A performance report is a report on the performance of something. They are routinely produced by
government bodies which, being financed by public money, are required to show that the money was
spent efficiently and usefully.
A performance report should compare results in relation to prior years' results in order to show whether
performance is stable, improving or declining. Purpose: To better contextualize the performance
information in relation to historical performance and targets or goals that might have been set.
CHAPTER FIVE
GENERAL FUND & SPECIAL REVENUE FUNDS
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.
 General fund refers to revenues accruing to the state from taxes, fees, interest earnings, and
other sources which can be used for the general operation of state government
Special Revenue Fund
 Special revenue funds are established to account for general governmental financial resources that
are restricted by law or contractual agreements to specific purpose (s) and special revenue funds
are exist for the life of restriction. For example, they may be used to account for federal (state)
grants which are restricted as to purpose or to account operating activities of libraries and other
services supported by special taxes. Another example might be when a tax or other revenue
source is restricted to a specific purpose by a legislative body; its use assists in demonstrating
compliance with that purpose.
 Special revenue fund (SRF) in contrast to GF is used to account for resources, which are collected
for a specified purpose. 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.
 A special revenue fund is an account established by a government to collect money that must
be used for a specific project.
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 differ in that the General fund accounts for revenues and other financing sources raised to
provide for all day-to-day-operating activities, whereas Special Revenue Funds are used to account for
a specific revenue source that must be used only to finance a specified activity
Special revenue funds provide an extra level of accountability and transparency to taxpayers that their tax
dollars will go toward an intended purpose.
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
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
BALANCE SHEETACCOUNTS
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.
 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 STATEMENTACCOUNTS
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.
OFS is amount of financial resources estimated to be received during the period from inter fund transfer.
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. It is an amount of financial resources estimated to be disbursed for other funds.
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.
Both revenues and other financing sources are temporary accounts that increase fund balance at year-
end when closing entries are made. Similarly, expenditures and other financing uses are temporary
accounts that decrease fund balance when closing entries are made. GASB standards emphasize,
however, that other financing sources (uses) should be distinguished from revenues and expenditures
BUDGETARY ACCOUNT
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.
Three general ledger control accounts are needed to provide budgetary control; Estimated Revenue,
Appropriations and Encumbrances.
Budgetary Accounts include Estimated Revenues, Appropriation, Encumbrance, Estimated OFSs, and
Estimated OFUs
Estimated Revenues– different sources revenue for the governmental unit expected to be collected
during the year. It is an account maintained to show the amount of revenue that will be collected in
future. Major revenue source classes commonly used are:
• Taxes
• Special Assessments
• Licenses and Permits
• Intergovernmental Revenues
• Charges for Services
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.
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.
Encumbrance is an account used to record the estimated amount of purchase orders or contracts
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.
The normal balance of Budgetary and Operating Statement Accounts can be summarized as follows.
Budgetary Accounts Normal Operating statement Normal
Balance balance
Estimated Revenues Debit Revenues Credit
Estimated Other Debit Other Financing Sources Credit
Financing Sources
Appropriations Credit Expenditures Debit
Estimated Other Credit Other Financing Uses Debit
Financing Uses
Encumbrances Debit
RECORDING THE BUDGET
The entry to record the budget is simple. It is normally done on the firstday 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 Revenuexxx
July 1,2007 Appropriationxxx
Debit/credit Fund Balancexxx
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
June 30,2007 Debit/credit Fund Balance xxx
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 July1,2002
b) Record Budget on June 30,2002
Solution a)
July 1,2002 Estimated Revenues 500,000
Appropriations 480,000
Fund Balance 20,000
To Record Budget at the beginning of the fiscal period
b)
june 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 cityadministration G.Fund places a purchase orders/ p.o no. 010/06/ for
equipment s 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 suppliersReceived 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 payrollare not typically encumbered.Correct sequence in the expenditure process in
governmental accounting is
APPROPRIATION ENCUMBRANCE EXPENDITURE DISBURSEMENT
3.4 Accounting for General Fund and Special Revenue Fund

Illustration
Assume that in addition to the budget illustrated earlier, the Adis Abeba Citygeneral 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 ofdoubtful 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) 5. Invoice for services and supplies received from enterprise fund and internal service fund totaled
300,000 and 200,000 respectively.
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.
7) Previous orders were received and the invoice totaled $4000,000
8) 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
9) Assuming that the total (Actual) revenue and Expenditure for the Adis Abeba citytown is
composed of the following sources,
Revenues:
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
Expenditure
General Government 4,590,000
Public safety 2,000,000
Health and Welfare 1,200,000
Culture and Recreation 210,000
Estimated other financing uses 110,000
The following trail balance and balance sheet data is available for Adis Abeba city as of June30,2006
Adis Abeba city town General fund
Trial Balance
June 30, 2006
Account title Debit Credit
Cash 1,420,000
Taxes Receivable- Delinquent 560,000
Inventory of Supplies 500,000
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service Fund 60,000
Reserved Fund Balance 1,670,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
Appropriations 8,100,000
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
Required
a) Prepare necessary journal entry
b) Preparestatement of revenue expenditure and change in Fund balance
c) Prepare Balance sheet
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
7. Reserve for encumbrance 3,600,000
Encumbrance 3,600,000
Expenditure 4000,000
Vouchers payable 4000,000
Cash 8,090,000
8Estimated revenues 8,400,000
Estimated other financing sources 100,000
Budgetary fund balance 300,000
Closing Entries for a General Fund
Budgetary fund balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
9 Expenditures 8,000,000
Unreserved and undesignated Fund Balance 470,000
Revenue 8,480,000
/ To close Revenues, Expenditures, Other Financing Sources and Uses
Revenue 8,480,000

Expenditures 8,000,000
Unreserved and undesignated Fund Balance 470,000
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:
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 8,480,000 80,000
Operating Transfers In 100,000 100,000 0
Total of Revenue and O.F.S. 8,500,000 8,580,000 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
Other Financing sources (Uses): 100,000 110,000 (10,000)
Total of Expenditure and OFU 8,200,000 8,110,000 90,000
Operating Transfers Out
Excess of Revenue and O.F.S. over Expenditure and 300,000 470,000 170,000
OFU
Add: Fund Balance, July 1, 2006 0 0 .
Fund balance June 30, 2006 300,000 470,000 170,000
C.Adis Abeba City General Fund

Balance Sheet,
June 30, 2006
Assets Dr Cr
Cash 1,420,000
Property Taxes Receivable- Delinquent 560,000
Total Assets 2,480,000
Liabilities and Fund Balance
Liabilities
Payable to Enterprise Fund 50,000
Payable to Internal Service fund 60,000
Total Liabilities 810,000
Reserved Fund Balance 1,670,000
Total Liabilities and Fund Balance 2,480,000
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 citytown authorized the establishment of a special Revenue Fund- its
first such fund- to account for Special Assessment against certain residents of the neighboring
village of Gute.
1) 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.
2) Special Assessments tax totaling 820,000 were levied which are to be paid in full in sixty
days.
3) Cash Receipts from Special Assessment Taxes of 820,000 were collected in full.
4) Out 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.
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
REQUIRED
1. Prepare necessary Journal entry

2. Prepare statement of Revenue expenditure and change in fund balance
3. Prepare Balance sheet
SOLUTION
1. Journal entry
1. Estimated Revenues 800,000
To record the annual adopted budget for fiscal year ending June 30 ,2007/
2. 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 820,000
Special Assessment Tax Receivable- current 820,000
/ To record collection of special assessment tax in full during the year/
4. 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..
5. 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
Cash 620,000
/ To records payments of general fund during the year/
Closing Entries
Estimated Revenues 800,000
/ To close budgetary ledger accounts/
2. Statement of Revenue expenditure and change in fund balance
Adis Abeba City Special Revenue Fund

Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, 2007
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 50,000 80,000 30,000
Add beginning Fund balance 0 0 0
(Fund Balance End of year)------------- 50,000 80,000 30,000
3. Bance sheet
Adis Abeba citySpecial Revenue fund
Balance Sheet
June 30, 2007
Assets
Cash 220,000
Total Asset 220,000
Payable toGeneral 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
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: -
1. Fund
2. Function or program
3. Organization unit
4. Activity
5. Character (fiscal period)
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
-Public safety
-Health & welfare
-Culture & recreation
3. Classification by organization unit
E.g. - Police dept
- Fire dept
- Public works 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.
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,
mayMajor 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 agovernmental 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
REVENUE FROM NON EXCHANGE TRANSACTION(IPSAS 23)
An exchange or exchange-like transaction is one in which each party receives and sacrifices
something of approximate equal value.
This Standard addresses revenue arising from non-exchange transactions
Non-exchange transactions are transactions that are not exchange transactions. In a non-
exchange transaction, an entity/Governmentreceives or gives value from another entity
without directly giving or receiving value to another entity without directly receiving
approximately equal value in exchange.
While revenues received by public sector entities arise from both exchange and non-exchange
transactions, the majority of revenue of governments and other public sector entities is typically
derived from non-exchange transactions such as:
a. Taxes;
b. Transfers (whether cash or non-cash), including
 grants,
 debt forgiveness-lender forgives some or all of the debt you still owe on a
loan
 fines,
 bequests-gifts that are made as part of a will or trust
 Gifts, donations, and goods and services in-kind.
All these items have the common attribute that they transfer resources from one entity to another
without providing approximately equal value in exchange and are not taxes as defined in this
Standard
Classes of Non-exchange Transactions
Revenue from non exchange Revenue derived tax revenues; imposed non exchange
revenues; government-mandated non exchange transactions; and voluntary non exchange
transaction
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 isassessed.
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 specifictransaction.
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
ofgovernmentandcertainprivatedonations
Inter-fund transactions and transfers

Inter fund transactions are transactions between individual funds.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. For longer periods, the borrowing is called an 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.
Examples of quasi-external transactions include:
 Internal service fund billings to other funds for services provided
 Routine employer contributions from the general fund to a pension trust fund
 Routine service charges for services provided by an agency to another agency
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 by internal
service fund, 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
 Expenditures made by it on behalf of another fund i.e. one fund pays a bill on behalf of
another & is then reimbursed.
 Reimbursement is money you get back from a previous transaction you have made while
buying something for yourself or making a payment on behalf of a third party.
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
Cash 3,000
Expenditure 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.
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.
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 6
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).
 Capital projects funds differ from the General Fund and special revenue funds in that the
latter categories have a year-to-year life, whereas capital projects funds havea project-life
focus
 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.Fbecause 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.
Governmental Funds and Government-wide
Government Fund Government-wide Governmental

Activities
 General capital assets acquired are not recorded  General capital assets acquired Under
in the governmental Fund. Fixed asset is not government funds are recorded at the
capitalized government-wide level.
 depreciation Is not recognized  depreciation Is recognized as expense
 Recognize only current liabilities.  Recognize both current Long term
 Debit expenditure and credit cash/AP when liabilities.
fixed asset is acquired  Debit purchased fixed asset eg. Building
 Property Taxes Receivable is recorded and credit cash(A/P) when fixed asset is
 purchase orders are reported and recorded acquired
 Budget entries are t reported and recorded  Property Taxes Receivable is recorded
 Record Other Financing Uses and Other  purchase orders are not reported
Financing source  Budget entries are not reported
 Use Expenditure  did not Record Other Financing Uses and
Other Financing source
 Use expense
Table 1. Measurement Focus and Basis of Accounting for Financial Statements

Financial Statements Measurement Focus Basis of Accounting
Government wide Financial Statements Economic Resources Accrual
Governmental Funds Financial Current Financial
Modified Accrual
Statements Resources
Proprietary Funds Financial Statements Economic Resources Accrual
Fiduciary Funds Financial Statements Economic Resources Accrual
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 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
Fund Balance Reserved for 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 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
Construction Payable 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 10,00016,740,000
Excess of Revenue over Expenditure 3,260,000
Other Financing Sources(Uses)
OFS- Bond Issue Proceeds 30,000,000
OFS- Operating transfers in 1,000,00031,000,000
Excess of Revenue and OFS over Expenditure 34,260,000
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 7
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- 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.
Generally, there are other types of long-term debts (bonds) which also arise because of different
activities of Governmental units. This long term debts may or may not be accounted for under
DSF for their repayment. They maybe categorized as follows;
a. Revenue Bonds- are issued to finance the establishment or expansion of activities accounted
for in Enterprise Funds (EF). These bonds are shown as liabilities of EF because their repayment
and servicing can only come from money generated from the operations of those funds.
b. General Obligation Bonds- this bonds serviced from the enterprise funds are also issued to
finance establishment or expansion of activities accounted for in EF. They bear the full faith and
credit of the governmental unit. When such bonds are to be repaid and serviced from money
generated from the operations of an EF, the bonds should be shown as liabilities of the EF and as
a contingent liability of the General Long Term Debt Account Group (GLTDAG).
c. All other long-term debt fitting into one of the two preceding categories is shown as a liability
of the GLADAG. DSF is created for long-term debt that is shown as a liability of the GLTDAG
which is a self balancing group of accounts that keep track of all unmetered long term debt in
group c above.
BUDGETING FOR DEBT SERVICE FUND AND SERVICES OF FINANCE
Sources of finances (resources)
A. Special Taxes- Special Taxes are not unusual when levied for servicing general long-term
debts. Sometimes a special tax is authorized with the issuance of bond -this is more
common with City Governments. The Tax itself could be accounted for in a Special
Revenue Fund, with periodic transfers to the DSF. If there is also a sufficient resource
available in the General Fund, periodic transfers can be made from it to the DSF. If taxes
are directly raised by the DSF, they are recognized as Revenues of the DSF. If the Taxes
are to be raised by another fund and transferred to the DSF, they must be recorded in OFS-
Operating transfer-Out in other fund accounts and OFS-Operating Transfer-In in the DSF.
B. Investments- for a term bond issue the assets that accumulate in the DSF will be invested
in income producing securities. The investment income is to be accounted in the DSF as
Revenue.
C. Refinancing-The process of issuing new bonds to pay of the old ones is called
Refinancing.
it may be possible to use the proceeds of the Sinking Fund. (a means for accumulating
resources for a payment of a long Term Debt usually with Term Bonds) to periodically
purchase some of the outstanding bonds. If market interest fall later on, it may be advisable to
issue new bonds for the outstanding debt and use that money plus whatever is in the sinking
fund to retire the old Bonds.
D Bond Premium and Accrued Interest on Bonds Sold- Depending upon the bond indenture
agreement, the DSF may be entitled to receive bond premium and Accrued Interest on Debt Issue
sold which are to be recognized as Revenues of DSF.
E.Residual Equity Transfers- If capital Projects are completed with Expenditures less than
Revenues and Other Financing Sources, The Residual Equity is ordinarily transferred to the
appropriate DSF.
Budgeting for Debt Service Fund

Revenue Budget
If Taxes for payment of interest and principal on long term debt are to be raised directly by the
DSF, they are recognized as revenues of the DSF. If Taxes are to be raised by another fund and
transferred to the DSF, they must be included in the Revenues budget on the fund that will raise
the revenue (often the General Fund) and also budgeted by that fund as Operating transfer to the
DSF. Since the Debt Service fund is a budgeting and accounting entity it should prepare
Revenues and Other Financing Sources Budget that includes operating transfers from other fund.
As well as revenues it will raise directly from Earnings on its Investments. Although the items
may be difficult to budget accurately, DSF can often account on receiving Premium on Debt
Issues Sold and Accrued Interest on Debt Issues Sold. Premium and Accrued Interest on Debt
Issues Sold are considered Revenues of the recipient DSF. Similarly as indicated in the previous
chapter and on the shown on the services of finance previously, if Capital projects are completed
with expenditures less than Revenues and Other Financing Sources, the residual Equity is
ordinarily transferred to the DSF
The appropriations budget of a DSF must provide for the payment of all interest on General
long-term debt that will become legally due during the budget year, and for the payment of any
principal amounts that will become legally due during the budget year. GASB standard currently
require DSF accounting to be on the same basis as is required for general and Special Revenue
Funds. *** One peculiarity of the accrual basis used by the governmental fund types which only
relates to DSF is that, interests on long term debt is not accrued. For Example: If the fiscal year
of a governmental units ends on December 31, 20x5 and the interest on its bond is payable on
January 1 and July 1of each year, the amount payable on January 1, 20x6 would not be considered
a liability in the Balance sheet of The Debt Service Fund prepared as of December 31, 20x5. The
rationale for this recommendation is that the interest is not legally due until January 1, 19x6. The
same reasoning applies to principal amounts that mature on the first day of the fiscal year. They
are not liabilities to be recognized in statements prepared as of the day before. In the events 20x5
appropriations include January 1, 20x6 interest and /or principal payments, the appropriations
expenditures (and resulting liabilities) should be recognized in 20x5.
Persons budgeting and accounting for DSF should seek competent legal advice on the permit
table use of both premium on debt sold & residual equity transfer. In the some cases, one or both
of these items must be held for eventual debt repayment and may not be used for interest
payments. In other cases both Premium Revenue and Residual Equity Transfer- In may be used
for interest payments.
ACCOUNTING FOR DEBT SERVICE FUNDS

Illustration The Following information is Available Town of X Serial Bond Debt Service
Fund on June 30,2008
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
1) Taxes receivable amount of 340,000 and estimated uncollectable taxes in the amount of
10,000 are recorded.
2) Half of the gross levy of taxes is collected in cash.
3) Interest payable on July 1, 20x7 is recorded as a liability is birr 45,000
4) Taxes in the amount of 160,000 are collected.
5) Cash of 100,000 is invested in short term notes which bear interest of 10%
6) Interest on investment is received for the four months 100,000 x 10% x 4/12 = 3333.33
7) Interest on Investment is received for three months 100,000 x 10% x 3/12 = 2,500
REQUIRED
1. Prepare a necessary journal entry Under the book of debt service Fund
2. Prepare statement of Revenue, Expenditure and change in Fund Balance
3. Prepare Balance sheet
Solution
a) Journal entries
1. Estimated Tax Revenue 380,000
2.Taxes Receivable- current 340,000
Allowance for uncollectable current taxes 10,000
Revenues 330,000
3. Cash 170,000
Tax Receivable-current 170,000
4. Expenditure 45,000
Interest Payable 45,000
5. Cash 160,000
Tax Receivable- Current 160,000
6. Short Term Investment- Note 100,000
Cash 100,000
7. Cash 3333.33
Revenue 3333.33
8. Cash 2,500
Revenue 2,500
b) 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
Estimated Tax Revenue 330,000
Estimated Investment Revenue 50,000
Appropriation 190,000
Budgetary Fund Balance . 190,000
Total 727,500 727,500
C)Town of X Serial Bond Debt Service Fund

Statement of Revenue, Expenditure and Change in Fund Balance
for the year ended June 30, 20x8
Budget Actual VarianceFavorable
(Unfavorable)
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
C)
Town of X Serial Bond Debt Service Fund
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 0
Total Assets 146,000 .
Unreserved and Undesignated Fund Balance 146,000
CHAPTER 8: 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.
Proprietary funds use the economic resources measurement focus and the accrual basis of
accounting. Because revenues and expenses (not expenditures) are recognized on the accrual
basis, financial statements of proprietary funds are similar in many respects to those of business
organizations.
Fixed assets used in fund operations and long-term debt serviced from fund revenues are recorded
in the accounts of each proprietary fund. Depreciation on fixed assets is recognized as an expense,
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 asa 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 provides 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.
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.
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

Cash 5,000
Town of X Supplies Fund

Balance Sheet as of December 31, year 2
Assets
Current Asset
Cash 25,000
Due from GF 16,500
Inventory of Supplies at average cost 71,300
Total Current Asset 112,800
Fixed Asset
Land 10,000
Building 60,000
Less: Accumulated Depreciation 3,000 57,000
Machinery & Equipment - Warehouse 20,000
Equipment - Delivery 10,000
Total Fixed Assets 93,000

Total Assets 205,800
Liabilities and Fund Equity
Current Liabilities:
Long Term Debt:
Advance from Water Utility 95,000
Total Liabilities 117,800
Fund Equity:
Contributions from GF 86,500
Retained Earnings 1,500
Total Fund Equity 88,000
Total Liabilities and Fund Equity 205,800

Statement of Revenues, Expenses, and Changes in
Retained Earnings and Contributed Equity
For the year Ended December 31, Year 2
Billings to Departments ------------------------------- 229,500
Less: Cost of Supplies Issued ---------------------- 170,000

Gross Margin ------------------------------------------- 59,500
Less: Purchasing Expenses ------------------------- 18,300
Administrative Expenses --------------------- 10,300
Warehousing Expenses ----------------------- 15,400
Delivery Expenses ---------------------------- 14,000
Total Operating Expenses -------------------------- 58,000
Excess of Net Billings to-
Departments over Cost for the year------------------ 1,500
Retained Earnings, January, year 2------------------- 0
Retained Earnings, December 31, year 2 ------------ 1,500
Equity Transfer In from General Fund --------------- 86,500
Contributed Equity, January 1, Year 2 --------------- 0
Contributed Equity, December 31, year 2 ------------ 86,500

Statement of Cash Flows
For the Year ended December 31, Year 2
Cash flows from operating activities:

Cash received from customers 213,000
Cash paid to employees for services (51,000)
Cash paid to suppliers (157,000)
Net Cash provided by operating activities 5,000
Cash Flows from non Capital Financing Activities:
Equity Transfer From GF 25,000
Net Cash provided by non Capital-
Financing activities 25,000
Cash Flow from Capital and Related Financing activities
Partial repayment of advance from water utility fund (5,000)
Acquisition of capital assets (100,000)
Net cash provided by Capital and Related-
Financing activities (5,000)
Net Increase in cash and Cash Equivalents 25,000
Cash and Cash Equivalents January 1, Year 2 0
Cash and Cash Equivalents December 31, year 2 25,000
UNIT 9 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 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. 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.

Accounting For Public Sector and Civil Society

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Accounting For Public Sector and Civil Society

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ADMAS UNIVERSITY 2022

Accounting for Public Sector and Civil Society (ACFN 4131)

Compiled by: Zerai Hagos (BA, MA, MSc)

 Empowered by and accountable to a higher level government

1.3. Similarities between NFPs and For Profit Organization

II. IN TERM OF ACCOUNTING SYSTEM

Nature of Differences Business Entities G & NFP Entities

2. Operational Focus  They focus on short-term and  They focus on short-term,

5. Basis of Accounting  Accrual Basis  Accrual and Modified accrual basis

6. Financial Reporting  FASB

7. Other Distinguishing  Perfect competition  Monopolistic services

1.5. Sources of Financial Reporting Standards

OBJECTIVES OF FINANCIAL REPORTING FOR GOVERNMENT AND NFP

Chapter 2: Objectives and Users of General Purpose Financial Reporting

b) Predictive value – Accounting information should be helpful to external decision makers by

Phase 2 Elements of financial statements

1. One set in compliance with legal requirements,

II. Proprietary Funds: Includes

II. PROPRIETARY FUNDS

3. Internal Service Funds-

Kinds of Funds – Expendable and Non-expendable

Principle #4 Numbers of Funds

Principle #7 Depreciation of Capital Assets

Q, Why will we spend it?

The Nature of Governmental Fund Information

Asset Relevant Standard

Non-cash-generating property, plant, and equipment IPSAS 17,

DISCLOSURE OFFINANCIAL INFORMATION ABOUT THE GENERAL

Performance budget is a budget that bases expenditures primarily up on measurable performance of

2. The entity decides how many units of the service to offer.

3. The cost of one unit of the service is calculated.

3. Its emphasis on the need to measure output and input

2. This style makes data gathering difficult and impossible

3. It can be adapted to any level

2. Official change matters on its effectiveness

4. Objective measurement is difficult

GENERAL FUND & SPECIAL REVENUE FUNDS

3.3 ACCOUNTING CHARACTERISTICS

Two Journal entries are needed for encumbrances:

APPROPRIATION ENCUMBRANCE EXPENDITURE DISBURSEMENT

3.4 Accounting for General Fund and Special Revenue Fund

Other Financing Sources 100,000

Budget Actual Variance

Fund balance June 30, 2006 300,000 470,000 170,000

C.Adis Abeba City General Fund

ACCOUNTING FOR SPECIAL REVENUE FUNDS

1. Prepare necessary Journal entry

2. Statement of Revenue expenditure and change in fund balance

Adis Abeba City Special Revenue Fund

Budget Actual Variance

Other 20,000 20,000

Total Revenues 800,000 840,000 40,000

Excess of Revenues over Expenditures 50,000 80,000 30,000

Add beginning Fund balance 0 0 0

(Fund Balance End of year)------------- 50,000 80,000 30,000

I. Classification of Appropriations and Expenditures

Inter-fund transactions and transfers

Examples of quasi-external transactions include:

CAPITAL PROJECT FUNDS

 C.P.F are usually established on a project-by-project basis, because legal requirements

Financing a capital project

Governmental Funds and Government-wide

Government Fund Government-wide Governmental