● Public sector Acc (Wollo Uv)

WOLLO UNIVERSITY
COLLAGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
ACCOUNTING FOR PUBLIC SECTORS AND CIVIL

SOCIETY (ACFN 3071)
PREPARED BY:
BIRTUKAN KASIYE (MSC)
EDITED BY:
HAYMANOT SIBBAHIE ( MSC)
2023
DESSIE, ETHIOPIA
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Course Information
Wollo University
Collage of Business and Economics
Accounting and Finance Program
Department Accounting and Finance
program BA degree in Accounting and Finance
Module Non-Profit Sector Accounting
Module No and AcFn-3071
Module Code
Course Title Accounting for Public Sector and Civil Society
Course Number AcFn3071
ETCTS Credits 5
Contact Hours 3
Course Objectives After successfully completing this course, the students should be able to:
&  Identify characteristics and types of government and Not-For-profit
Competences to be organizations (NFP);
Acquired  Understand the budgeting framework of governmental units and other non-
profit organizations and help senior budget officials of the same in developing
budgets
 Distinguish the legal and economic substance of transactions as opposed to the
nature of transactions in business organizations;
 Record the transactions and present fairly the financial statements of
governmental units and other non-profit organizations in conformity with legal
requirements and accepted accounting principles.
Course The course is intended to introduce the accounting and reporting concepts,
Description standards and procedures applied to governmental units and not –for –profit (NFP)
organizations. The course reflects the distinction between legal form of
transactions as opposed to the accounting system for business enterprises, and the
substance of transactions.
Assessment/ Evaluation Type weight
Evaluation Assignment 35%
Tutorial Attendance 5%
Final exam 65%
Total 100%
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Table of content
Contents
Table of content ........................................................................................................................................... iii
CHAPTER ONE: OVERVIEW OF GOVERNMENT ACCOUNTING AND NFP ACCOUNTING ............................... 1
1. Introduction .......................................................................................................................................... 1
1.1 Distinguishing characteristics of Governmental and Not- for- Profit entities .................................... 1
1.2. Sources of Accounting and FR Standards for G & NP Entities in Ethiopia ....................................... 5
1.2.1 Source of accounting standards ................................................................................................... 5
1.2.2 Uses and users of financial reports of governmental units ......................................................... 6
1.3. Objectives of financial reporting in NFP entities ............................................................................... 6
1.3.1 Definition of Financial Reporting ................................................................................................. 6
1.5 Conceptual Framework for General Purpose Financial Reporting By Public Sector Entities IPSASB
................................................................................................................................................................ 10
1.5.1 Objective of financial report ...................................................................................................... 10
1.5.2. Fundamental concepts Recognition, measurement, and disclosure .................................. 11
1.6 chapter summary .............................................................................................................................. 12
1.7 Self-Test Questions ........................................................................................................................... 13
CHAPTER TWO: Principles of Accounting and Financial Reporting of Governmental Entities ................... 15
2.1 Activities of Government .................................................................................................................. 15
2.2 Statement of the Principles .............................................................................................................. 17
2.3 Common Accounting Characteristics of the Fund Types. ................................................................. 28
2.5 Approaches to Budgeting.................................................................................................................. 31
2.6 Chapter summary.............................................................................................................................. 31
2.7 Self test questions ............................................................................................................................. 32
CHAPTER THREE: International Public Sector Accounting Standards [IPSAS] ............................................ 34
3.1 Activities of Government .................................................................................................................. 34
3.2 Summary Statement of Principles .................................................................................................... 34
3.3 Impairment of Non-Cash-Generating Assets [IPSAS 21] ................................................................... 36
3.4 Disclosure of Financial Information about the General Government Sector [IPSAS 22] .................. 38
3.5 Revenue from Non-Exchange Transactions (Taxes and Transfers) [IPSAS 23] ................................. 40
3.6 Presentation of Budget Information in Financial Statements [IPSAS 24] ......................................... 41
3.7 Cash Flow Statements [Cash Basis IPSAS] ......................................................................................... 42
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3.8 chapter summary .............................................................................................................................. 44
3.9. self –test questions .......................................................................................................................... 45
CHAPTER FOUR: Budgeting and Performance Reporting ........................................................................... 48
4.1. Budgeting in the Public Sector ......................................................................................................... 48
4.2 Classification of budget ..................................................................................................................... 48
4.3 Approaches to budgeting .................................................................................................................. 50
4.4 Presentation of Budgets Information in the Financial Statements (IPSAS 24) ................................. 50
4.5 Performance Budgeting and Reporting ............................................................................................ 51
4.6 chapter summary .............................................................................................................................. 53
4.7 Self-test questions ............................................................................................................................ 53
CHAPTER FIVE :ACCOUNTING FOR GENERAL FUND & SPECIAL REVENUE FUND ....................................... 55
5.1 Definition and purpose ..................................................................................................................... 55
5.2 budget and budgetary accounts ....................................................................................................... 57
5.3 Accounting for General Fund and Special Revenue Fund ................................................................. 58
5.4 chapter summary .............................................................................................................................. 65
5.5 self test questions ............................................................................................................................. 65
Chapter six: Accounting For Capital Project Funds ..................................................................................... 68
6.1 Definition and Purpose ..................................................................................................................... 68
6.2 ESTABLISHMENT & operation ........................................................................................................... 69
6.3. source and use of cash flow ............................................................................................................. 70
6.4 method of acquire general project fund........................................................................................... 70
6.5 alternative treatment of residual equity or deficits ......................................................................... 72
6.6 bond premiums, discount and accrued interest on bonds sold ....................................................... 73
6.7 Bond Anticipation Notes Payable ..................................................................................................... 74
6.8 Summary ........................................................................................................................................... 79
CHAPTER SEVEN: ACCOUNTING FOR DEBT SERVICE FUND ........................................................................ 82
7.1 GENERAL outline of Debt Service Fund............................................................................................. 82
7.2 types of long term debts ................................................................................................................... 84
7.3 Number of Debt Service Fund ........................................................................................................... 85
7.4 SOURCE AND USES OF CASH FLOWS ................................................................................................ 86
7.5 illustration on debt service funds ..................................................................................................... 87
7.6 Model examinations........................................................................................................................ 90
Chapter Eight: INTERNAL SERVICE FUNDS AND ENTERPRISE FUNDS ......................................................... 92
8.1 Internal Service Fund (ISF) ................................................................................................................ 94
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8.2 Illustrative Case ................................................................................................................................. 97
8.3 Accounting for enterprise fund and Related Issue ........................................................................ 101
8.4 Illustrative Case ............................................................................................................................... 101
8.5 chapter summary ............................................................................................................................... 107
8.6 Self model examination ...................................................................................................................... 107
CHAPTER Nine: ACCOUNTING FOR FIDUCIARY FUND (TRUST AND AGENCY FUNDS) .............................. 112
9.1 FEATURE OF FIDUCIARY FUNDS ...................................................................................................... 112
9.1.1 AGENCY FUNDS ........................................................................................................................ 113
9.1.2 Trust Funds................................................................................................................................... 115
9.2 SUMMARY ....................................................................................................................................... 116
Chapter ten:Accounting for Other Not-for-Profit Entities ........................................................................ 119
10.1 INTRODUCTION ............................................................................................................................. 119
10.2 MEANING AND DEFINITION .......................................................................................................... 119
10.3 CLASSIFICATION OF NOT-FOR-PROFIT ORGANIZATIONS .............................................................. 120
10.4 chapter summary .......................................................................................................................... 123
Chapter eleven :Accounting and Reporting for the Federal Government of Ethiopia ............................ 127
11.1. Historical overview of Ethiopian Government Accounting System ............................................. 127
11.2.1 Financial Administration ........................................................................................................ 128
11.3 FGE CHARTS OF ACCOUNTS ......................................................................................................... 131
11.4 Overview of IBEX and IFMIS ........................................................................................................ 134
11.5 Basis of accounting....................................................................................................................... 136
11.5. 1 Cash Basis .............................................................................................................................. 137
11.5.2 Modified Cash Basis ............................................................................................................... 137
11.5.3 Accrual Basis .......................................................................................................................... 138
11.5. 4 Modified Accrual Basis .......................................................................................................... 138
11.6 Legal Framework of FGE Financial Administration ....................................................................... 139
11.7 MONTHLY REPORTS ...................................................................................................................... 139
11.8 chapter summary .......................................................................................................................... 144
11. 9 Self model examinations .............................................................................................................. 144
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CHAPTER ONE: OVERVIEW OF GOVERNMENT ACCOUNTING AND NFP
ACCOUNTING
Learning Objectives:
After studying this chapter, you should be able to: Identify and explain the characteristics that
distinguish governmental and not-for-profit entities from for-profit entities.
 Distinguishing characteristics of Governmental and Not- for- Profit entities.
 Sources of financial reporting standards for Governmental and NFP entities in Ethiopia.
 Objectives of financial reporting in NFP entities,
 IPSAS versus IFRS
 The Conceptual Framework for Public Sector Accounting [The IPSASB]
o Objectives of financial reporting
o Fundamental concepts Recognition, measurement, and disclosure concepts.
1. Introduction
What Is a Not-For-Profit Entity? Any organization, which is established with objective other
than profit making is referred to as Not-for-Profit Entity. Not-for-profit entities include:
Government and Other Not-for-Profit (NFP) Entity or Non-Profit (NP) Entity. What is a
Government? A government is a body that has the power to make and the authority to enforce
rules and laws within a civil, corporate, religious, academic, or other organization or group. For
the purpose the course Government and NFP Accounting, Government can also be defined as an
entity that provides such major services as administrative, social, economic, and others
either free from charge or with a ―token‖ charge.
1.1 Distinguishing characteristics of Governmental and Not- for- Profit entities

A government is an organized entity which, in addition to having governmental
character, has sufficient discretion in the management of its own affairs to
distinguish it as separate from the administrative structure of any other governmental unit. To
be regarded as a government, an entity must possess all three of these critical attributes:
existence as an organized entity, governmental character, and substantial autonomy. Each is
explained below.
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1. Existence as an Organized Entity - Evidence of this attribute is provided by the presence of
some form of organization and the possession of some corporate powers, such as perpetual
succession, the right to sue and be sued, have a name, make contracts, acquire and dispose of
property, and the like. Designation of a class of governments in law as ―municipal corporations,‖
―public corporations, bodies corporate and public,‖ and the like indicates that such units are
organized entities.
2. Governmental Character - this characteristic is indicated where officers of the entity are
popularly elected or are appointed by public officials. A high degree of responsibility to the
public demonstrated by requirements for public reporting or for accessibility of records to public
inspection, is also taken as critical evidence of governmental character.
3. Substantial Autonomy - this requirement is met where, subject to statutory limitations and any
supervision of local governments by the state, an entity has considerable fiscal and
administrative independence. Fiscal independence generally derives from power of the entity to
determine its budget without review and detailed modification by other local officials or
governments, to determine taxes to be levied for its support, to fix and collect charges for its
services, or to issue debt without review by another local government. Some government
agencies having considerable fiscal autonomy are classified as dependent agencies of another
government rather than as governments because of one or more of the following
characteristics:
 Control of the agency by a board composed wholly or mainly of parent government officials.
 Control by the agency over facilities that supplement, serve, or take the place of facilities
ordinarily provided by the creating government.
 Provision that agency properties and responsibilities revert to the creating government after
agency debt has been repaid.
 Requirements for approval of agency plans by the creating government.
 Legislative or executive specification by the parent government as to the location and type of
facilities the agency is to construct and maintain.
 Dependence of an agency for all or a substantial part of its revenues on appropriations or
allocations made at the discretion of another state or local government.
 Provision for the review and the detailed modification of agency budgets by another local
government.
For Example: National Bank of Ethiopia is not a government
Example of Governments in Ethiopia:
 Federal government of Ethiopia and its agencies
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 The Nine Regional State Governments and Two Administrative City councils
 76 Zonal Level Local Governments
 587 District Level Local Governments
 Municipality and Town Governments
 Kebele level local governments i.e. Kebele is the lower level government in Ethiopia
The Special Purpose Government is a government that provides a single service or few services
to the citizenry. For Example: Transportation authorities can be taken as Special Purpose
Government Entity. The General purpose government provides a wide collection of services to
the citizenry. Examples: Federal government, state governments, zone government,
cities, towns, villages, etc what is Not-For-Profit (NFP) Entity or Nonprofit (NP) Entity?
NFP Entities are entities other than the government and that provides community services either
free from charge or with a ―token‖ charge. According to Australian Accounting Standards Board,
essentials to classify an entity as a not-for-profit are:
 Legally separate organizations
 Its operating purpose is other than to provide goods or services at a profit.
 It may not distribute surpluses
 Generating profit is not an objective outlined in its legislation, regulations or constitution
 It does not pay income tax or income tax equivalents – usually exempt from federal, state,
and local taxation
 It is not able to transfer ownership
Examples: Religious, community service, private educational and health care, museums,
and fraternal and social organizations, among many other kinds of organizations
In Ethiopia, there are about 660 Nongovernmental NFP entities registered by Ministry of Justice
as2006. Examples: Save the Children UK and Canada, Family Guidance Association of Ethiopia,
 Activity :
Question 1: what is the difference between governmental and Not- for- Profit entities
Questions2:What are Sources of Accounting and FR Standards for G & NP Entities
……………………………………………………………………………………………………………….
…………………………………………………………………………………………………………………
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1.2. Sources of Accounting and FR Standards for G & NP Entities in Ethiopia
1.2.1 Source of accounting standards
Accounting and financial reporting standards for state and local governmental units are
established by the governmental accounting standards board (GASB).Accounting and financial
reporting standards for profit seeking business are established by the financial accounting
standards board (FASB).
The GASB and the FASB are parallel bodies under the oversight of the Financial Accounting
Foundation. They are referred to as ―independent standard setting boards‖ in the private sector.
Before the creation of the GASB & FASB, financial reporting standards were set by groups
sponsored by professional organizations. Before 1934 in US, there was no governmental
accounting standard. But by 1934, to overcome this confusion & scandal especially in
municipality accounting, the Municipal Finance Officers Association (MFOA) formed, the
National Committee on Municipality Accounting (NCMA) to assure accounting standard for
municipalities. By expanding its scope, the NCMA in 1949 was reorganized as National
Committee on Governmental Accounting (NCGA) to establish accounting standards for states
and local governmental units. In 1974, the committee was again reorganized as a council and
formed the National Council of Governmental Accounting (NCGA). In 1984 the council was
again reorganized as a board parallel to FASB and was renamed as Governmental Accounting
Standards Board (GASB).
Authority to establish accounting principles (financial reporting standards for non profit
organizations) is split between the GASB and the FASB. Because a sizable number of non profit
organizations (particularly colleges, universities & hospitals) are governmentally related. But
many others are independent of governmental units. Accordingly the GASB has the
responsibility for establishing accounting & financial reporting standards for not for profit
organizations whose financial statements may be combined with the financial statements of state
and local governmental reporting entities, or which are considered governmentally owned.
The FASB has the responsibility for establishing accounting and financial reporting standards for
non-governmental non-for profit organizations. Both the GASB and the FASB have issued
concept statements, which are intended to communicate the framework within which the two
bodies strive to establish consistent financial reporting standards for entities within their
respective jurisdictions.
The financial accounting foundations appoints the members of the two boards & supports the
operating expenses of the boards by obtaining contributions from business corporations,
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professional organization of accountants, financial analysts, CPA firms and other groups
concerned with financial reporting.
The GASB establishes accounting and financial reporting standards for business
(For-Profit) organizations; the GASB establishes standards for governmental organizations.
Authority to establish accounting principles (accounting and financial reporting standards) for
not-for-profit organizations is split between the GASB and the FASB because a sizable
number of not-for-profit organizations(particularly colleges and universities, and hospitals)
are governmentally related, but many others are essential to understanding the unique accounting
and financial reporting principles that have evolved for governmental and not-for-profit
organizations.
1.2.2 Uses and users of financial reports of governmental units

Since financial reports are means of communicating the operation results & position, it is
required for both business & non-business organizations. Financial reports could either be for a
year (annual financial reports) or for a period less than a year (interim financial report). Every
states and local governmental units are required to prepare annual financial reports, which would
render information about the operation results & position to users. The users are categorized into
as:
i) Internal – who are the governing body of the states & local governmental
ii) External - who are the society /citizenry
The governmental accounting standards board (GASB), which is one of the responsible body in
developing a accounting & reporting standards for state & local governmental units in its
concepts statement no.1 ―objectives of financial reporting‖, it established the following
objectives.
1.3. Objectives of financial reporting in NFP entities

1.3.1 Definition of Financial Reporting
Financial Reporting involves the disclosure of financial information to the various stakeholders
about the financial performance and financial position of the organization over a specified period
of time. These stakeholders include – investors, creditors, public, debt providers, governments &
government agencies. In case of listed companies the frequency of financial reporting is
quarterly&annual.
Financial Reporting is usually considered an end product of Accounting. The typical components
of financial reporting are:
1. The financial statements – Balance Sheet, Profit & loss account, Cash flow
statement & Statement of changes in stock holder’s equity
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2. The notes to financial statements
3. Quarterly & Annual reports (in case of listed companies)
4. Prospectus (In case of companies going for IPOs)
5. Management Discussion & Analysis (In case of public companies)
The Government and the Institute of Chartered Accounts of India (ICAI) have issued various
accounting standards & guidance notes which are applied for the purpose of financial reporting.
This ensures uniformity across various diversified industries when they prepare & present their
financial statements. Now let’s discuss about the objectives & purposes of financial reporting.
Objectives of Financial Reporting
According to International Accounting Standard Board (IASB), the objective of financial
reporting is ―to provide information about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range of users in making economic
decisions.‖
Objectives of Financial Reporting for State and Local Governments (SLGs) Governmental
financial reporting objectives are influenced by the characteristics of the state and local
governmental operating environment and by the needs of those who use governmental
financial reports. GASB Concept Statement No. 1 set forth the following three financial
reporting (FR) objectives:
A. Financial Reporting should assist in fulfilling government's duty to be publicly accountable
and should enable users to assess that accountability by:
 Providing information to determine whether current-year revenues were sufficient to
pay for current-year services.
 Demonstrating whether resources were obtained and used in accordance with
the entity’s legally adopted budget, and demonstrating compliance with other
finance-related legal or contractual requirements.
 Providing information to assist users in assessing the service efforts,
costs, and accomplishments of the governmental entity.
B. 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.
 Providing information necessary to determine whether its financial position
improved or deteriorated as a result of the year's operations
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C. Financial Reporting should assist users in assessing the level of services that can be provided
by the governmental entity and its ability to meet its obligations as they become due by:
 Providing information about its financial position and condition.
 Providing information about its physical and other non-financial resources having
useful lives that extend beyond the current year, including information that can be
used to assess the service potential of those resources.
 Disclosing legal or contractual restrictions on resources and the risk of potential loss
of resources.
Accountability is the cornerstone of all financial reporting in government (GASB Concepts
Statement No.1, Par. 56). Accountability arises from the citizens’ ―right to know.‖ It imposes
duty on public officials to be accountable to citizens for raising public monies and how they are
spent. Inter period equity relates to accountability. Government officials are
accountable and have an obligation to disclose whether current-year revenues were sufficient
to pay for current-year benefits or not. If inter period equity is not achieved, the current
citizens are deferring payments to future taxpayers. In general, financial reports are used in
SLGs primarily to:
 Accounting for Governmental and Non profit Entities
 Compare actual financial results with legally adopted budget
 Assess financial condition and results of operations
 Assist in determining compliance with finance-related laws, rules, and regulations
 Assist in evaluating efficiency and effectiveness
An objective of Financial Reporting for Federal Government 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:
 FR should assist users in evaluating budgetary integrity
 FR should assist users in evaluating Operating Performance
 FR should assist users in evaluating Stewardship
 FR should assist users in evaluating adequacy of systems and control
The users of financial report include citizenry, legislative and oversight bodies, and
investors and creditor. NFP financial reporting should provide information useful in:
 Making resource allocation decisions
 Assessing services and ability to provide services
 Assessing management stewardship and performance
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 Assessing economic resources, obligations, net resources, and changes in them
 Activity :
Question 1: What are users of financial reports of governmental units
Question2: What is importance of preparing financial report ?

………………………………………………………………………………………………………………….
…………………………………………………………………………………………………………………
Key definition differences between IFRS and IPSAS
Outlined below are some key definition differences between the private and public sector
financial reporting frameworks.
The differences in financial reporting requirements between the public and private sectors are
due largely to the environment in which the entities operate. Private sector entities will tend to
seek profit maximization and operate at arm’s length, whereas public sector entities tend to focus
on service delivery, often at below market terms.
The public sector tends to have many intra-governmental transactions, which are not always
rooted in contracts. They can also have different trigger points as to what may constitute a past
event, such as ministerial directions. These and other factors often mean that definition and scope
need to be tweaked for IFRS standards to work for public sector financial reporting.
Accounting IFRS IPSAS

item
Asset A resource presently controlled by the entity as a A resource presently
result of a past event. controlled by the entity as a
result of a past event.
Resource Right that has the potential to produce economic An item with service potential
benefits. or the ability to generate
economic benefits.
Service N/A Service potential is the
potential capacity to provide services
that contribute to achieving
the entity’s objectives.
Non- N/A Transactions where an entity
exchange receives resources and
transactions provides no or nominal
consideration directly in
return.
Fair value is a key measurement basis in IFRS yet can cause some issues when applied in
Measurement a public sector context.
A fair value measurement of a non-financial asset takes into account a market participant’s
ability to generate economic benefits by using the asset to its highest and best use or by
selling it to another market participant that would use the asset to its highest and best use.
This is not always possible in the public sector.
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Scope/definitions IPSAS often need to change the scope and definitions of their IFRS equivalent to make
them work as intended for the public sector. For example, ―contracts‖ are replaced with
―binding arrangements‖ in the IFRS 15 revenue standard to widen the scope so as to
include transactions that are not necessarily underpinned by a contract.
Business Accounting for combinations under common control is outside the scope of IFRS. IPSAS
combinations recognize that this is a common transaction in the public sector and have adopted the
pooling of interest method (merger accounting). IPSAS differentiate between acquisition
and amalgamations; IFRS only considers acquisitions.
 Activity :
Question 1: What is the difference between IFRS and IPSAS
Question 2: What are Users of IFRS and IPSAS
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1.5 Conceptual Framework for General Purpose Financial Reporting By Public Sector
Entities IPSASB
The Conceptual Framework for General Purpose Financial Reporting by Public Sector
Entities (the Conceptual Framework) provides the International Public Sector Accounting
Standards Board™ (IPSASB™) with the concepts that will underpin the development of
International Public Sector Accounting Standards™ (IPSASs™) and Recommended Practice
Guidelines (RPGs) in the coming years.
It enables the IPSASB to further improve the consistency of its standard-setting by strengthening
the linkage between IPSASs. Additionally, the transparency of the concepts underpinning the
development of IPSASs and RPGs enhances the IPSASB’s accountability.
The Conceptual Framework also responds to key public sector characteristics in its approach to
elements (the building blocks of financial statements), the measurement of assets and liabilities,
and the presentation of financial reports, while focusing on service recipients’ and resource
providers’ needs for high-quality financial reporting information for both accountability and
decision-making purposes.
1.5.1 Objective of financial report

The following points sum up the objectives & purposes of financial reporting –
1. Providing information to the management of an organization which is used for the purpose of
planning, analysis, benchmarking and decision making.
2. Providing information to investors, promoters, debt provider and creditors which is used to
enable them to male rational and prudent decisions regarding investment, credit etc.
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3. Providing information to shareholders & public at large in case of listed companies about
various aspects of an organization.
4. Providing information about the economic resources of an organization claims to those
resources (liabilities & owner’s equity) and how these resources and claims have undergone
change over a period of time.
5. Providing information as to how an organization is procuring & using various resources.
6. Providing information to various stakeholders regarding performance management of an
organization as to how diligently & ethically they are discharging their fiduciary duties &
responsibilities.
7. Providing information to the statutory auditors which in turn facilitates audit.
8. Enhancing social welfare by looking into the interest of employees, trade union &
Government.
1.5.2. Fundamental concepts Recognition, measurement, and disclosure
Now that we have identified the various elements and underlying assumptions of the financial
statements, we discuss when the elements should be recognized (recorded) and how they should
be measured and disclosed. For example, an asset was previously defined as a probable future
economic benefit obtained or controlled by a company as a result of past transactions or events.
But when should the asset be recorded, at what amount, and what other important information
about the asset should be provided in the financial statements? SFAC 5 addresses these issues.
Recognition refers to the process of admitting information into the financial statements.
Measurement is the process of associating numerical amounts with the elements. Disclosure
refers to the process of including additional pertinent information in the financial statements and
accompanying notes.
General Recognition Criteria.
According to SFAC 5, an item should be recognized in the basic financial statements when it
meets the following four criteria, subject to a cost effectiveness constraint and materiality
threshold:
1. Definition. The item meets the definition of an element of financial statements.
2. Measurability. The item has a relevant attribute measurable with sufficient reliability.
3. Relevance. The information about it is capable of making a difference in user decisions.
4.Reliability. The information is faithful, verifiable, and neutral.
Revenue Recognition: Realization.

Revenues are inflows of assets resulting from providing a product or service to a customer. An
income statement should report the results of these activities only for the time period specified in
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the financial statements. Therefore, the timing of revenue recognition is a key element of
earnings measurement. Not adhering to revenue recognition criteria could result in overstating
revenue and hence net income in one reporting period and, consequently, understating revenue
and net income in another period.
The realization principle requires that two criteria be satisfied before revenue can be recognized:
1. The earnings process is judged to be complete or virtually complete.
2. There is reasonable certainty as to the collectability of the asset to be received (usually cash).
These criteria help ensure that a company doesn’t record revenue until it has performed all or
most of its earnings activities for a financially capable buyer. Notice that these criteria allow for
the implementation of the accrual accounting model. Revenue should be recognized in the period
it is earned, not necessarily in the period in which cash is received. The timing of revenue
recognition also affects the timing of asset recognition. When revenue is recognized by crediting
a revenue account, the corresponding debit typically increases some asset, usually cash or an
account receivable.
1.6 chapter summary

 Government is classified as Special Purpose Government and General Purpose
Governments.
 The Objective of financial report includes Providing information to the management of
an organization, economic resources of an organization, various stakeholders, and
statutory auditors.
 The differences in financial reporting requirements between the public and private sectors
are due largely to the environment in which the entities operate.
 The annual report, including the financial statements, is likely to be a useful tool for the
entity producing it. It acts as a reference point and helps the entity explain how it
performs, especially if the annual reports link the objectives and key performance
indicators to the financial statements.
 Both the GASB and the FASB have issued concept statements, which are intended to
communicate the framework within which the two bodies strive to establish consistent
financial reporting standards for entities within their respective jurisdictions.
 The financial statements – Balance Sheet, Profit & loss account, Cash flow
statement & Statement of changes in stock holder’s equity
 The financial section of a comprehensive annual financial report (CAFR) are includes
Auditor’s Report, General purpose financial Statement (GPFS) and Combining and
individual fund and account group statements.
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 The GASB and the FASB are parallel bodies under the oversight of the Financial
Accounting Foundation. They are referred to as ―independent standard setting boards‖ in
the private sector. Before the creation of the GASB & FASB,
1.7 Self-Test Questions

Now, this unit is completed you must have to test your progress by doing the following self-test
and compare your answer with the answer key given at the end.
1. Which one of the following statement is false about entity as a not-for-profit are:
A. Legally separate organizations
B. Its operating purpose is other than to provide goods or services at a profit.
C. It may not distribute surpluses
D. Easily transfer owner ship
2. General Recognition According to SFAC 5, an item should be recognized in the basic
financial statements when it meets the four criteria except
A. Definition C. Relevance
B. Non Measurability D. None of the above
3. Which one the following statements is true about the objectives of financial reporting
A. Providing information to the management of an organization
B. Providing information to investors, promoters, debt provider and creditors.
C. Providing information to shareholders & public
D. ALL
4. ------------- Is key measurement basis in IFRS yet can cause some issues when applied in a
public sector context?
A. Fair value C. Market price
B. Historical cost D. ALL
5. The financial section of a comprehensive annual financial report (CAFR) should include
except
A. an Auditor’s Report
B. General purpose financial Statement (GPFS)
C. Combining and individual fund and account group statements and schedules.
D. presents tables and charts showing social and economic data,
6. Under Federal Accounting Standards Advisory Board (FASAB) identifies the following
financial reporting objectives includes
A. FR should assist users in evaluating budgetary integrity
B. FR should assist users in evaluating Operating Performance
C. FR should assist users in evaluating adequacy of systems and control
D. ALL
7---------------- Is one of the responsible body in developing a accounting & reporting standards
for state & local governmental units
13
A. The governmental accounting standards board (GASB),
B. International financial reporting standard ( IFRS)
C. Financial accounting standard board ( FASB)
D. None
Fill in the blank space
1. government, an entity must possess all three of these critical attributes: existence as---------,
-------------- and --------------------
2. ----------------are internationally recognized, widely adopted and are designed for large
profit-orientated companies.
3. ----------------- are designed for public sector entities whose main objectives are to provide
goods and services to benefit society and to redistribute wealth.
4. ----------- have issued various accounting standards & guidance notes which are applied for
the purpose of financial reporting.
5. ----------------involves the disclosure of financial information to the various stakeholders
about the financial performance and financial position of the organization over a specified
period of time.
Answer for self test questions
Multiple Choices
1. D 2.B 3.D 4.A 5. D 6. D 7. A
Blank space
1. An organized entity, governmental character, and substantial autonomy.
2. IFRS
3. IPSAS
4. Government and the Institute of Chartered Accounts of India (ICAI)
5. Financial Reporting
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CHAPTER TWO: Principles of Accounting and Financial Reporting of
Governmental Entities
After studying this chapter, you should be able to:
 Explain the nature of the three major activity categories of a state or local
government: governmental activities, business-type activities, and fiduciary activities.
 Discuss the basic accounting and financial reporting principles for SLGs.
 Explain the components of GASB’s integrated accounting and financial
reporting model, including the reporting entity, government-wide financial
statements, and fund financial statements.
 Define fund and principles of fund accounting
 Types of funds in each fund category and characteristics of each fund type
2.1 Activities of Government

There are three major activity categories of a state and local governments – Governmental
Activities, Business-Type Activities, and Fiduciary Activities.
a. Governmental Activities
Government provides certain core services called General Activities. General Activities
provided by most general purpose governments are related to:
 Protection of life and property, police and fire protection,
 Public works (streets and highways, bridges, and public building),
 Parks and recreation facilities and programs,
 Cultural and social services.
Governments also incur costs for general administrative support such as data processing,
finance, and personnel. Core governmental services, together with general administrative
support, comprise the major part of governmental type activities or simply Governmental
Activities
b. Business-type Activities
Governments also engage in business type activities. These include:
 Public utilities (electric, water, gas and sewer utilities)
 Transportation system;
 Toll roads and toll brides;
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 Airports;
 Hospitals;
 Parking garages and lots;
 Liquor stores;
 Swimming pools;
 Stadiums and arenas
Many of these activities are intended to be self-supporting by charging users for the services they
receive. Operating subsidies from general revenues are not uncommon, particularly for
transportation systems
c. Fiduciary Activities
Governments often act in a fiduciary capacity, either as an agent or trustee, for parties outside the
government. A government may serve as agent for other governments in the
administering and collecting of taxes. Governments serve also as trustees for amounts
placed in trust from private citizens for parks and other purposes, for escheat properties that
revert to the government when there are no legal claimants or heirs to a deceased individual’s
estate, and for assets being held for employee pension plans. Accounting and financial reporting
principles for the Governmental Activities have evolved to meet the legal budgetary and
financial compliance needs of government – Fiscal Accountability. Generally, these principles
involve segregating the accounting for the receipt and expenditures of restricted use resources
from general use resources. It emphasizes on reporting the inflows and outflows of current
financial resources (cash or items expected to be converted into cash during the current period, or
soon enough thereafter to pay current period liabilities).
Accounting and financial reporting principles for the Business-Type Activities of governments
are quite similar to those for commercial business entities. As in business, if government intends
to charge users for goods or services they receive; it needs to know the full cost of goods and
services in order to determine appropriate prices. Knowing the full cost is also
essential in deciding whether the government should continue to produce or provide
particular goods or services, or contract for them with an outside vendor. Thus, as in commercial
business accounting, accrual accounting is essential to measuring the full cost of providing
governmental business-type services, and reporting on the extent to which each business type
activity is self-sufficient or has to be subsidized. The principles of accounting for
business type’s activities are intended to measure and report on Operational
Accountability.
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 Activity :
Question 1: What is the difference between Governmental Activities, Business-Type Activities, and
Fiduciary Activities?
Question 2:What type of basis of accounting apply on business type activities
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2.2 Statement of the Principles

Accounting & Reporting Capabilities (principle #1)
A government accounting system must make it possible both
(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.
1. Adherence to GAAP is essential to answering a reasonable degree of comparability among
the general-purpose financial reports of state and local governmental units.
2. Sometimes the legal requirements might be contrary to GAAP; for instance, governmental
entities may require to keep books with a single entry ledger, or it may require to keep all
account on a strictly cash basis. In these cases since the legal requirements are contrary to
GAAP financial statements & reports prepared in compliance with state laws are complied.
Sometimes legal requirements are also contrary to good financial management. For example
a purchase for 3 birr might require the same amount of paper work as a purchase of 10,000
birr. In this case the cost of the forms, the labour to complete them and the storage space to
keep them might actually exceed the 3 birr. It is the law. But it is good management of
resources.
In some governmental units however Under such circumstances where the laws require to
follow 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
Fund Accounting System (Fund defined) (principle # 2)
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
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activates or attaining certain objectives in accordance with special 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 Damn 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.
Types of Funds (Principle # 3)
There are seven types of funds, which are subdivided into three categories:
I. GOVERNMENTAL FUNDS
1. The General Fund- to account for all financial resources except those required to be
accounted for in another funds.
2. Special Revenue Funds- 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.
3. Capital Project Fund- to account for financial resources to be used for the acquisition or
construction of major capital facilities (other them those financed by proprietary & trusts funds)
4. Debt Service Funds- to account for the accumulation of resources for & the payment of
general long term debt principal & interest.
II. PROPRIETARY FUNDS
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5. Enterprise Funds- to accounts for operations
1. That are financed and operated in a manner similar to private business enterprises-where the
intention of the governing body is that the costs (expenses, including depreciation) of
providing goods or services to the general public on a continuing basis be financed or
recovered primarily through user charges; or
2. Where the governing body has decided that periodic determinations of reveries earned,
expenses incurred and/or net income is appropriate for capital maintenance, public policy,
management control, accountability, or other purposes.
6. Internal Service Funds- to account for the financing of goods or services provided by one
department or agency to the department or agency of the governmental unit, or to the other
governmental units on a cost reimbursement basis.
III. FIDUCIARY FUNDS
7. Trust And Agency Funds- To account for assets held by governmental unit in a trustee
capacity or as an agent for individual private organizations, other governmental units & or funds.
These include:
1. Expandable trust funds
2. Non-expendable trust funds
3. Pension trust funds
4. Agency funds
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. As a practical matter, any
money that remains in an expendable fund at the end of the year typically must be returned to its
source. Therefore managers of expendable funds normally try to ensure that all their funds are
used up within one time period. if they are not used up, the manager is often perceived as being a
poor budget planner. This course deals primarily with accounting for expendable funds. 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 used when maintenance of capital is desired, and the unexpended
funds are not meant to be returned. All proprietary funds are non-expendable funds
1. The general fund is the first one mentioned. All governmental units should have a general
fund except if the resources are to be accounted in other funds. There will be one general
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fund established. Some governmental units will have only a general fund. If any of the other
types of funds are needed, the governmental unit may have several of those funds as needed.
The general fund is used for general government services. It is basically used for a service
that does not require a separate fund.
2. An example of a special revenue fund might be ―The Unity and safety of the motherland
tax‖ that was collected during the derg regime. This fund was not for the general fund of the
government but was raised specifically for the armed forces. it would have needed to be
accounted for and reported on separately. An other 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.
3. 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. If money has been borrowed from the construction of new building that would give rise to a
Debt service Fund. 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. 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 (eg. Salaries) of operating the park. as a non-
expendable fund, it would not have to return unused money to its source at the end of the
year. Therefore, it might also accumulate money from year to year for the purchase of
equipment, furnishings and the like from its income from the user charges.
6. 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 funds use them. Charges are made to various funds for the repair cost. as a non
expendable fund, part of the charge made to the various funds could be intended to be
accumulated for future years for the purchase of tools and equipment.
7. Fiduciary funds are used to account for money which one branch of government has on
behalf of another fund, organization or individual. a common example of a fiduciary fund is a
central tax collection agency, such as the Inland Revenue Authority. the taxes it collects are
not for its own benefit, but are rather passed on to other ministries or departments. fiduciary
funds are expendable as well as non expendable depending upon the type of fund.
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N.B- one additional type of fund i.e. special assessment fund has been eliminated by GASB for
financial reporting purposes.
 Activity :
Question 1: list and discuss the type of governmental fund?
Question 2: list and explains classification of proprietary funds
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Number of Funds (Principle # 4)

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.
In rare instances the use of a certain fund type is required by GASB standards. If legal
requirements GASB standards or sound financial administration do not require the use of a given
fund type, it should not be used. In the simplest possible situation, a governmental unit could be
in conformity with GAAP if it used a single fund, the general fund, to account for all events &
transactions. In addition to that one fund, however it would need two account groups.
This principle is especially important in NGOS, who intend to do a number of limited life
projects, each of which is accounted for as a separate fund. When the project is finished the fund
should be closed. As long as the fund remains open, financial statements continue to be produced
for it. Wasting paper, ink, labour and time.
Accounting for fixed assets & long-term liabilities (Principle #5)
A clear distinction should be made between Fund fixed assets & general fixed assets & Fund
long-term liabilities & General long-term debt
A. Fixed assets related to specific property funds & trust funds should be accounted for through
those funds. All other fixed assets of governmental units should be accounted for through the
general fixed asset account group.
B. Long term liabilities of proprietary funds & trusts fund should be accounted for through those
funds. All other un matured general long-term liabilities of governmental unit including special
assessments debt for which the government is obligated in some manner should be accounted for
through the general long-term debt account group.
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1. General fixed assets include land, buildings, and improvements other than buildings, car
&equipments used by activities accounted by the four fund types classified as ―governmental
funds‖. Which belong to the governmental unit as wholes, rather than to a particular, fund
and are to be shared among the different funds e.g. A fleet of cars or office building that is
shared among the funds of the municipality. General fixed assets do not represent resources
available for expenditure, but rather are items for which resources have been used. Note that
the construction or purchase fixed assets is accounted for in a fund as the resource for those
assets is being expended. The two principles quoted below establish requirements that relate
to fixed asset accounting.
2. General long-term debt would be borrowings of the entire governmental entity rather than by
a specific fund. The money would be backed by the full faith and credit of the governmental
entity rather than by specific fund. They are to be paid from general tax levies, specific debt
service tax levies, or special assessments. The rationale for not including general long-term
debt in the general fund’s account is like that of general fixed assets. The general long-term
debt is not something will require current period resources for payment. These liabilities do
not constitute a fiscal entity either. But they do need accountability, so the general long term
debt account group is used to provide this.
Valuation of Fixed Assets (PRINCIPLE # 6)
Fixed assets should be accounted for at cost, or if the cost is not practically determinable, at
estimated cost, donated fixed assets should be recorded at their estimated fair value at the time
received.
Note: as with FP, Fixed assets should be recorded at their historical cost. But one difference
with profit making accounting is that fixed assets are not usually donated to profit making
entities. So they are not concerned with accounting for them.
Deprecation of Fixed Assets (Principle # 7)
A. Deprecation of general fixed assets should not be recorded in the accounts of governmental
funds. Depredation of general fixed assets may be recorded in cost accounting systems or
calculated for cost finding analysis; & accumulated depreciation may be recorded in the General
Fixed Asset Account group.
B. Deprecation of fixed assets accounted for in a proprietary fund should be recorded in accounts
of that fund. Deprecation also recognized in those trust funds where expenses, net income &/or
capital maintenance are measured.
1. Depreciation is not recognized in as expenditure in governmental funds because it is not a
decrease in fund financial resources. However, It should be calculated in the general fixed
22
asset account group because knowing depreciation is helpful for good financial management
and helps in planning for the replacement of assets in the future.
2. Proprietary fund fixed assets- because a proprietary fund needs to know that it is covering all
its costs, it includes depreciation as an expense in its accounts. Remember that accounting in
a proprietary fund is similar to FP accounting.
Basis of Accounting (Principle # 8)
The Modified Accrual or accrual basis of accounting as appropriate should be utilized in
measuring financial position & operating results.
A. Governmental fund revenues & expenditures should be recognized on the modified accrual
basis. Revenues should be recognized in the accounting in which they become available &
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 due.
1. Revenues & other governmental fund financial resource increments (e.g.) bond issue
proceeds are recognized in the accounting period in which they be come susceptible to
accrual i.e. when they become both measurable & available to finance expenditures of the
fiscal period.
B. Proprietary fund revenues & expenses should be recognized on the accrual basis. Revenues
should be recognized in the accounting period in which they are earned & become measurable.
Expenses should be recognized in the period incurred, if measurable.
2. Proprietary fund account is virtually the same as for profit account.
C. Fiduciary funds revenue and expenses or expenditures (as appropriate) should be recognized
on the basis consistent with the fund’s accounting measurement objective. Nonexpendable trusts
and Pension Trust Funds should be accounted for on the accrual basis;
3. 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.
4. It is sufficient to say that the basis of accounting for Fiduciary funds depends on whether or
not the nature of the fund is expendable or non-expendable. Both kinds are possible in
fiduciary funds.
D. Transfers of financial resources among funds should be recognized in all funds affected in the
period in which the inter fund receivables & payable(s) arise.
1. Sometimes there are transfers made between funds. Because each fund is a separate
accounting and reporting entity, these transfers must be reported.
23
In business enterprise accounting, the accrual basis is employed to obtain a matching of costs
against the revenues flowing from those costs, they producing a more useful Income Statement.
In governmental entities, however, even for those funds that do attempt to determine net income,
only certain trust funds have major interest in the largest possible amount of gain. Internal
service and enterprise funds are operated principally for service. They make use of revenue and
expense accounts to promote efficiency of operations and to guard against importance of ability
to render the services desired.
For these reasons, operating statement of proprietary funds, non-expendable trust funds &
pension trust fund are called statement of revenue and expenses rather them in come statement.
GASB standards require that modified accrual basis is appropriate for the four governmental
funds, for agency funds & for expendable trust funds while the accrual basis is used for the two
proprietary funds, non-expendable and pension trust funds.
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.
2. An Expense is a current period consumption of resources.
3. Expenditure 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.
Budget and Budgetary Accounting (Principle # 9)
A. An annual budget (s) should be adapted by every governmental unit.
B. The accounting system should provide the basis for appropriate budgetary control.
C. Budgetary comparisons should be included in the appropriate financial statement & schedules
for governmental units’ funds, for which an annual budget has been adapted. [Budget with
Actual]
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?
2. Budgets are key elements of legislative control over governmental units. The executive
branch of a governmental unit proposes the budget, the legislative branch reviews, modifies
& enacts the budget and finally approves and the executive branch then carries out the
24
provisions. Budgets have a greater role in governmental accounting than in profit making
business, because governmental budgets are fixed by law and are generally unchangeable, so
exceeding them may carry severe penalties. Budget in profit making enterprises are usually
more flexible & can change as conditions change during the year. A budget, when adopted
according to procedures specified in state laws is binding on the administration of a
Governmental unit. Accordingly, a distinctive characteristic of Governmental accounting
resulting from the need to demonstrate with laws governing the sources of revenues available
to governmental units, & lows governing the utilization of those revenues is the formal
recording of the legally approved budgets in the accounts of funds operated on an annual
basis.
Financial Reporting (Principal # 10)
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.
3. In NFP accounting interim reporting is used if it fulfils one of these three purposes:
1. for good management
2. for the legislature (legal compliance)
3. for external reporting (perhaps for those who have loaned money to it)
Comprehensive Annual Financial Reports (CAFR)
B. A comprehensive annual financial report covering all funds & account gropes of the
governmental unit including appropriate combined, combining & individual fund statements,
notes to the F.S, schedules, narrative explanations & statistical tables should be prepared &
published.
4. Combined statement would should the operations of the entire governmental entity
constituting all the individual funds in to one statement. Combining would candidate the
results of all funds of same type e.g. all special revenue funds. Individual fund statement
would be prepared for each individual fund.
General purpose Financial Statement (GPFS)
C. General Purpose F.S may be used separately from the comprehensive annual financial report.
Such statement should include the basic F.S & notes to the financial statement that are essential
to fair presentation of financial position and operating results (changes in financial position of
proprietary funds & similar funds)
1. The general purposes F.S are essentially the same as the combined statement.
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2. NOTE: governmental reporting entity
3. The first thing that must be clear in accounting for governmental units is that what agencies,
commissions, institutions public authorities or other governmental organizations (called
component units) are to constitute the reporting entity for a governmental unit. The basic
criteria for inclusion in the reporting entity is the ability of governmental units, elected
officials to excise oversight responsibility over the organization in question the primary
indication of oversight responsibility is financial independency of the organization & other
indicators are – the ability of ducted officials to influence the operations.
Classification and Terminology (Principle # 11, 12)
Classification (principle # 11)
Transfer, Revenues, Expenditure and Expense account classifications.
I. Classification of Transfers
A. Inter fund transfers & proceeds of general long-term debt issues should be classified
separately from fund revenue and expenditures or expenses.
1. Inter fund transfers- a transfer from one fund within the unit to another fund within the same
unit.
2. E.g- suppose on NGO operates clinics, & these clinics charges to cover wages & medicines.
During the year one clinic had a surplus & another had a loss. The head of the organization
decides to transfer funds from one to another.
3. Proceeds of general long term debt issues- money that is received from borrowing.
4. Donation from outside – goes in to the general fund or into a particular project fund as the
donor indicates.
5. -There are basically fund types of inter fund transaction and transfers we commonly
encounter in state and local govt. these are: -
1. Quasi-external transactions- transactions that would be treated as revenues, expenditures, or
expenses if they organization external to the government unit.
2. Reimbursements- one fund pages a bill on behalf of another
E.g. An NGO operates a cline in A.A & southern Shoa,
The A.A clinic, for convenience, might pay a bill for medicine on behalf of the Southern Shoa
clinic. The Southern Shoa clinic would then reimburse the A.A clinic & it would be expenditure
for the Southern Shoa clinic.
3. Residual equity transfer- lifts over money at the end of a certain project given to another.
E.g. Funding for water project in dessie transferred to a water project in Shoa after the kobolcha
project is finished.
26
4. Operating transfers- all other inter fund transfers
E.g. legally authorized transfers from a fund receiving revenue to the fund through which the
resources are to be expended.
E.g. Transfers of fund from general fund to a special reserve fund.
N.B: 1&2 are merely transactions whereas 3&4 are transfers
II. Classification of Revenues and Expenditures
A. Governmental fund revenues should be classified by fund and source. Expenditures should be
classified by fund, function (or programmes), organization unit, activity, character & principal
classes of object.
III. Proprietary fund Revenues and Expenses
C. Proprietary fund revenues & expenses should be classified in essentially the same manner as
those of similar business organizations functions or activities.
Expense is a current period consummation of resources while expenditure is a decrease in fund
financial resources.
E.g. in profit making accounting, a car would be considered as an asset & depreciation would be
recorded as an expense as the car is used up on wears out, in a fund the car would be considered
as expenditure at the time of purchase.
Terminology (Principle #12)
A common terminology & classification should be used consistently through out the budget, the
accounts, and the financial reports of each fund.
The common terminology and classification principle is simply a statement of common sense
proposition that if the budgeting, budgetary control, and budgetary reporting principle is to be
implemented, persons responsible for preparing the budgets and persons responsible for
preparing the financial statements and the financial reports should work with the persons
responsible for designing and operating the accounting system. Agreement on a common
terminology and classification scheme is needed to make sure the accounting system produces
the information needed for budget preparation and for financial statement and report preparation
 Activity :
Question 1: What is the interim financial report and Comprehensive annual financial report?
Question2:what are Accounting characteristics common to funds of the proprietary fund?
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2.3 Common Accounting Characteristics of the Fund Types.
A. Accounting Characteristics Common to Funds of the Governmental Fund Category
The four governmental funds (i.e. general, special revenue, capital project & debt service funds)
have common characteristics that would distinguish them from that of the other two fund types
(i.e. proprietary & fiduciary)
1. Governmental funds are created in accordance with legal requirements.
 Each fund has only those resources allowed by law.
 Any governmental unit might or might not use the allowed resource but they should not
utilize unauthorized resources.
 The resources may be expended only for purposes & in amounts approved by the legislative
branch. So the measurement focus of governmental fund accounting is on the flow of
financial resources (as distinguished from business organization focus on determination of
net-income)
 Governmental funds are expendable i.e. resources are received & expended with no
exceptions, that they will be returned through user or departmental charges
 Revenues & expenditures (not expenses) of governmental funds are recognized on the
―modified accrual basis of account‖.
2. Legal constraints on the raising of revenue & the expenditure of revenue are, in most
jurisdictions, set forth by a legally adopted budget.
 Accounting systems of governmental funds should provide the basis for appropriate
budgetary control.
3. Governmental funds account only for financial resources: cash, receivables, marketable
securities, and, if material, prepaid items & supplies inventories.
- They do not account for plant & equipment.
4. Funds in the governmental category account for only those liabilities to be paid from fund
assets.
5. The arithmetic difference between fund assets & fund liability is called fund equity which
could either be reserved or not.
 The portion of fund equity that is not reserved is called fund balance. Residents of the
governmental unit do not have legal claim on any portion of it.
 It is not equivalent to the capital section of an investor owned entity.
B. Accounting characteristics common to funds of the proprietary fund category.
1. Proprietary fund provide services to users on a cost reimbursement basis.
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2. They are for a part of the government that is run like a private business where the
income & fees for services of the fund is expected at least to cover part of the expenses.
3. They are not subject to income taxation, nor do they have owners in the sense that
business enterprises do.
4. Their account is similar with profit making business.
1. Proprietary funds are established in accordance with enabling legislation & their operations
and policies are subject to legislative oversight.
1. The purpose of legislative oversight and served by proprietary fund account and
financial reporting that focuses on the matching of revenues &expenses(not
expenditures) on the full accrual basis recommended for business organizations.
2. Proprietary funds should prepare budget as an essential element in the management
planning & control process.
2. Proprietary funds do not have to adopt budgetary documents by law as governmental
funds do. Account systems of this fund do not need to provide the integrated budgetary
accounts.
3. Proprietary funds account for all assets used in fund operations- current assets, plant &
equipment & any other assets considered as belonging to the fund.
4. Proprietary funds account for current & long-term liabilities to be serviced from fund
operations &/or to be paid from fund assets.
1. They are nonexpendable funds.
C. Accounting Characteristics Common to Funds of the Fiduciary Fund Category
1. All fiduciary funds are used to account assets held by governmental unit as a trustee or agent.
2. Agency fund & expendable trust funds are to be accounted in the same way as governmental
funds.
3. Non-expendable & pension trust funds are to be accounted in the some way as proprietary
funds.
4. Fiduciary funds can be expendable or nonexpendable depending on the purpose of the fund.
2. An endowment (gift of income producing assets such as bonds) is a good example of
fiduciary funds. The principal of the endowment is to be kept intact but the income
(interest) may be used up. The income would then be accounted as expendable & the
principal nonexpendable.
Classification of Budget
Federal, State and local governments prepare and utilize different budgets. Thus,
Budgets are classified differently considering dimensions such as Expenditure Program, Legal
29
Status; Flexibility; Source on Finance; and Preparers. Budgets are classified as
Capital or Current based on the Expenditure Program; Tentative or Enacted based on legal
status; General or Special based on source of Finance; Flexible or Fixed budget based on
flexibility; and Executive or Legislative based on preparers of budget.
1. Current or Capital Budget
Current budgets, of course, are concerned with the current year’s operating expenditures,
sometimes called Recurrent Expenditures or Operating Budget, because similar sorts of
expenditures are needed year after year. Current Expenditures includes money spent to pay for
goods or services. The current expenditures include salaries, wages, repairs and maintenance,
telephones, petrol, stationery. Current Expenditures are categorized in two large groups: Salary
and Benefits and Non-salary. Non-salary is also called Operating and Maintenance. O&M
includes expendable materials and supplies, travel, repair and maintenance.
Capital budgets, obviously, deal with the acquisition of fixed assets. The legislature will likely
to plan for the acquisitions fixed assets several years in advance which is called the Capital
Program. This is very helpful to wise management of resources.
 The acquisition, reclamation, enhancement or laying out of land exclusive of roads,
buildings or other structures.
 The acquisition, construction, preparation enhancement or replacement of roads,
buildings or other structures.
 The acquisition, installation or replacement of moveable or immovable plant, machinery
and apparatus, vehicles and vessels.
 The making of advances, grants or other financial assistance to any person towards
expenditure incurred or to be incurred by him/her on the matters mentioned in the three
above paragraphs.
 The acquisition of share capital or loan capital in anybody corporate. Any
associated consultancy costs of all of the above
2. Tentative or Enacted Budget – As the name implies, tentative budget is a budget which is
instill in process. This budget has not yet been officially approved. An enacted budget has
been officially approved and is a binding legal document. The Enacted Budget creates
accountability for executives.
3. Fixed or Flexible Budget – A fixed budget are those in which appropriation is fixed for total
amount Br. and the expenditure cannot 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 circumstances or need, the dollar amount of a flexible budget can be increased.
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4. General or Special Budget – the budgets of ―General Government‖ Activities which
are commonly financed through the General Funds are referred to as General Budget. In
Ethiopia, the Consolidated Fund is a General Fund which finances general government activities.
"Consolidated Fund" means all public moneys that are on deposit at the credit of any public body
where the bank account has been opened by the Ministry of Finance under Proclamation No.
17/1995; all public moneys held in cash by any public body pending disbursement; and all aid in
kind. A budget prepared for any other fund is referred to as a Special Budget.
5. Executive or Legislative Budget – budgets are also categorized by preparers.
Budget preparation is an executive function, though the legislative may revise the budget prior to
approval. In some instances, however, the legislative branch prepares the budget, possibly
subject to executive vote; in other instances, the budget may originate with joint legislative-
executive committee (possibly with citizen representatives) or with a committee composed solely
of citizens or constituents. Such budgets are frequently referred to by terms such as ―Executive
Budget,‖ ―Legislative Budget,‖ ―Joint Budget,‖ and ―Common Budget,‖ respectively.
 Activity :
Question 4: list and explain the type of budget
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2.5 Approaches to Budgeting

There are two approaches to budgeting: Modern and Traditional. The modern approach to
budgeting is sometimes called Rational Approach to Budgeting. That is because they
all advocate thinking carefully about the relationship of inputs to outputs, with a special
concern for the outputs. Outputs are the goods or services actually provided, inputs are the
resources that go into to providing those goods or services. Thinking carefully also involves
analyzing the costs and benefits of alternative methods of achieving objectives. The idea that
law-making 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 three modern approaches to budgeting are Performance Budgeting;
Planning-Programming-Budgeting (PBB); and Zero-Base-Budgeting (ZBB).
2.6 Chapter summary

 GASB standards or sound financial administration do not require the use of a given fund
type, it should not be used. In the simplest possible situation, a governmental unit could be in
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conformity with GAAP if it used a single fund, the general fund, to account for all events &
transactions. In addition to that one fund, however it would need two account groups.
 Budgets are classified differently considering dimensions such as Expenditure Program,
Legal Status; Flexibility; Source on Finance; and Preparers. Budgets are classified
as Capital or Current based on the Expenditure Program;
 reporting entity is the ability of governmental units, elected officials to excise oversight
responsibility over the organization in question the primary indication of oversight
responsibility is financial independency of the organization & other indicators are – the
ability of ducted officials to influence the operations
 Generally, these principles involve segregating the accounting for the receipt and
expenditures of restricted use resources from general use resources. It emphasizes on
reporting the inflows and outflows of current financial resources (cash or items expected to
be converted into cash during the current period, or soon enough thereafter to pay current
period liabilities).
2.7 Self test questions

True or false questions
1. Capital Budgetare concerned with the current year’s operating expenditures and include
salaries, wages, repairs and maintenance, telephones, petrol, stationery.
2. All fiduciary funds are used to account assets held by governmental unit as a trustee or agent.
3. Governmental fund provide services to users on a cost reimbursement basis.
4. Quasi-external transactions treated as revenues, expenditures, or expenses if they
organization external to the government unit.
5. Inter fund transfers is a transfer from one fund within the unit to another fund within the
same unit.
6. Special revenue fund is a type of fund use for the construction of new building for the city
government Administration.
7. Depreciation is recognized as expenditure in governmental funds because it is decrease in
fund financial resources.
8. A capital budget used for acquisition, construction, preparation enhancement or replacement
of roads, buildings or other structures.
9. A comprehensive annual financial report covering all funds & account gropes of the
governmental unit.
10. Deprecation of general fixed assets should not be recorded in the accounts of governmental
funds.
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11. Governmental funds account only for financial resources: cash, receivables, marketable
securities, and, if material, prepaid items & supplies inventories.
12. Proprietary funds have to adopt budgetary documents by law as governmental funds
Blank space
1. ----------the budgets of ―General Government‖ Activities which are commonly financed
through the General Funds
2. ---- is a process of preparing budget for future performed activities
3. --------------are used to account for money which one branch of government has on behalf of
another fund, organization or individual.
4. ------------------- may serve as agent for other governments in the administering and
collecting of taxes.
5. --------------------are used when maintenance of capital is desired, and the unexpended funds
are not meant to be returned.
6. ---------------------– budgets are also categorized by preparers. Budget preparation is
an executive function
7. ------------------- are those in which appropriation is fixed for total amount Br. and the
expenditure cannot be exceeded.
8. ---------------------- a report covering all funds & account gropes of the governmental unit
including appropriate combined, combining & individual fund statements,
Answers for self test questions
True or false question
1. False 2. True 3. False 4. True 5. True 6. False 7. False 8. True 9.True 10. True
11. True 12. False
Blank space
1. General or Special Budget 2. Budgeting 3. Fiduciary funds 4. A government
5. Non-Expendable Funds 6. Legislative Budget 7. fixed budget 8. comprehensive annual
financial report
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CHAPTER THREE: International Public Sector Accounting Standards
[IPSAS]
3.1 Activities of Government
1. Governmental Activities [GASB CONCEPTS STATEMENT NO. 1]
 Encompass the executive, legislative, and judicial functions of the government as well as
major service functions such as public safety, public works, parks and recreation, health and
human services, and cultural activities.
2. Business Type Activities [GASB CONCEPTS STATEMENT NO. 1]
 Are largely self-supporting activities of a government that provide services to the public for a
fee.
 Typical examples are electric, sewer, and water utilities; transportation systems; airports; toll
roads and bridges; and parking facilities.
 Generally characterized by an exchange relationship, manifested by user charges that may be
based on the costs of providing a particular service.
 Regardless of their exercise, they are publicly accountable
3. Fiduciary Activities [GASB 84]
 Involves when a government is taking care of money that belongs to individuals or other
outside of the government itself.
 Governments often act in a fiduciary capacity, either as an agent or trustee, for parties outside
the government.
 Activity :
Question 1: what is the difference between governmental , business type, and fiduciary
activities
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3.2 Summary Statement of Principles

 First accrual basis International Public Sector Accounting Standards (IPSAS) were developed
in 1997.
 The IPSASB issues IPSASs dealing with financial reporting under the cash basis of
accounting and the accrual basis of accounting.
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 They were developed by referencing the International Accounting Standards (IAS), issued by
the International Accounting Standards Board (IASB), which have now been subsumed
within International Financial Reporting Standards (IFRS).
 The accruals IP’SASs are based on the IFRS, where the requirements of those Standards are
applicable to the public sector.
 They also deal with public sector specific financial reporting issues that are not dealt with in
IFRSs.
 The adoption of IPSASs by governments will improve both the quality and comparability of
financial information.
 The IPSASB recognizes the right of governments and national standard-setters to establish
accounting standards and guidelines for financial reporting in their jurisdictions.
 The IPSASB encourages the adoption of IPSASs and the harmonization of national
requirements with IPSASs.
 Financial statements should be described as complying with IPSASs only if they comply
with all the requirements of each applicable IPSAS.
Benefits of adopting IPSAS
1. Quality
 Meets international standards.
 Reliability and accuracy.
 Guarantees ―true and fair view‖
1. Comparability between
 Various government agencies, donor funded projects etc.
 Different financial periods, even within the same institutions, hence facilitating
management decisions.
2. Transparency
Disclosures:
I. Facilitate transparency.
II. Ease report interpretation in the right context
III. Results in better decision making processes.
4. Accountability
 Ease the audits of public institutions and hence:
 Timely audit reports, better information to donors and countries providing external
assistance,
 Better quality and credibility of financial reports.
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5. Consistency
 IPSASs improve consistency in preparation and reporting of financial information.
 This enable users draw consistent conclusions given similar sets of financial statements.
6. Governance
 IPSASs result in stronger governance procedures
 Provides a framework for the accounting practice in the public sector.
 Strengthens the financial management of public institutions.
 Activity :
Question 1: what is the benefits of adopted IPSAS
Question 2: What are the main objectives of IPSAS
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3.3 Impairment of Non-Cash-Generating Assets [IPSAS 21]

Impairment is a loss in the value of an asset, i.e., its carrying amount recognized in the statement
of financial position is greater than its recoverable amount. When testing an asset for
impairment, the total profit, cash flow, or other benefit that can be generated by the asset is
periodically compared with its current book value. If the book value of the asset exceeds the
future cash flow or other benefit of the asset, the difference between the two is written off, and
the value of the asset declines on the company's balance sheet.
The core principle in IAS 36 is that an asset must not be carried in the financial statements at
more than the highest amount to be recovered through its use or sale. If the carrying amount
exceeds the recoverable amount, the asset is described as impaired.
IPSAS 21 and 26 define impairment as 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.
In practice, assets are considered impaired when the book value, or net carrying value, exceeds
expected future cash flows.
Objectives of IPSAS 21
 To prescribe the procedures that an entity applies to determine whether a non-cash-
generating asset is impaired.
 To ensure impairment losses are recognized
 To specify when an entity would reverse an impairment loss, and prescribe disclosure.
o IPSAS 21commonly apply to assets such as:
36
Property, plant, and equipment accounted for in accordance with IPSAS 17 Property, Plant and
Equipment; and Intangible assets accounted for in accordance with IPSAS 31 Intangible Assets
(note that IPSAS 26 excludes intangible assets that are regularly revalued to fair value). The
standards also apply to some financial assets, namely investments in subsidiaries, associates, and
joint ventures.
Stages in the Impairment Process
1. Assess whether there is an indication that an asset may be impaired. An entity is required to
assess at each reporting date whether there is an indication of impairment. If such an
indication is identified, the asset’s recoverable amount should be calculated and compared
to its carrying amount.
2. If there is an indication of impairment, then measure the asset’s recoverable amount.
3. Reduce the asset’s carrying amount to its recoverable amount, usually by treating the loss
as a separately disclosed expense.
4. If Carrying amount > Recoverable amount, then impairment has taken place.There has
been a loss in the value of the asset.
Recognizing an Impairment Loss
• If the recoverable amount of an asset is less than its carrying amount, the asset should be
reduced to its recoverable amount.
• The difference is an impairment loss (IPSAS 21.52 and IPSAS 26.72). IPSAS 21 and IPSAS 26
do not apply to assets carried at revalued amounts.
• Following the recognition of an impairment loss, any depreciation charged in respect of the
asset in future periods will be based on the revised carrying amount, less any residual value
expected, over the remaining useful life of the asset as per IPSAS 17.
Reversing an Impairment Loss
• If the recoverable amount subsequently increases then in certain circumstances the impairment
is reversed.
• A reversal of an impairment loss reflects an increase in the estimated future economic benefits
or service potential of an asset or group of assets.
• The increased carrying amount, other than goodwill, attributable to a reversal of an impairment
loss should not exceed the carrying amount that would have been determined (net of
amortization and depreciation) had no impairment loss been recognized for the asset in prior
Years. Any increase above this amount other than goodwill is a revaluation.
Recognizing Non-Exchange Revenue
•If an asset can be recognized, the revenue is recognized,
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• If an entity receives an asset in a non-exchange transaction it recognizes revenue in the same
amount, provided that the asset can be measured reliably.
•Revenue is recognized when the public sector entity exercises control over these resources or
has reliable information on enforceable claims on these resources.
•Common sources of non-exchange revenue in the public sector include taxes and transfers.
Example: Exchange transaction: Public Sector Entity A provides dental services to a customer to
the value of ETB 1,000, which was paid by the customer. This is an exchange transaction as the
entity will receive ETB 1,000 from the customer in return.
Non-exchange transaction: Public Sector Entity A received ETB 2,000 from a customer for
property taxes. The customer does not receive any direct goods or services in exchange
For the ETB 2,000.This is a non-exchange transaction as the entity does not provide any services
directly to the customer.
 Activity :
Question 1: How to recognized and revising impairment of losses?
Question 2: what are Stages in the Impairment Process?
Question 3: what is Statistical Bases of Financial Reporting Accounting Policies ?
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3.4 Disclosure of Financial Information about the General Government Sector

[IPSAS 22]
A government that prepares and presents consolidated financial statements and elects to disclose
financial information about the general government sector in those statements shall do so in
accordance with the requirements of this Standard.
Statistical Bases of Financial Reporting Accounting Policies
 The objectives of financial statements prepared in accordance with PBE Standards are to
provide information useful for decision making, and to demonstrate the accountability of
the entity for the resources entrusted to it and which it controls.
 The purpose of financial statements prepared in accordance with statistical bases of
financial reporting is to provide information suitable for analyzing and evaluating fiscal
policy, especially the performance of the GGS and the broader public sector of any
country.
Accounting Policies
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 This Standard allows, but does not require, the disclosure of information about the GGS.
Whether or not disclosure of information about the GGS will be made in financial statements
will be determined by the government or other appropriate authority in each jurisdiction.
 Financial information about the GGS shall be disclosed in conformity with the accounting
policies adopted for preparing and presenting the consolidated financial statements of the
government, except as required by the below two points:
o In presenting financial information about the GGS, entities shall not apply the
requirements of PBE IPSAS 6 Consolidated and Separate Financial Statements in
respect of entities in the PFCs and public NFCS sectors.
o The GGS shall recognize its investment in the PFC and public NFCS sectors as an ass
set, and shall account for that asset at the carrying amount of the net assets of its
investees.
 General Government Sector (GGS): comprises all organizational entities of the general
government as defined in statistical bases of financial reporting.
 The Public Financial Corporation’s (PFC) Sector: comprises resident government-controlled
financial corporations, quasi-corporations, and non-profit institutions that primarily engage in
financial intermediation and the provision of financial services for the market. Included
within this sector are government-controlled banks, including central banks, and other
government financial institutions that operate on a market basis.
 The Public Non-Financial Corporation’s (PNFC) sector: comprises resident government-
controlled nonfinancial corporations, quasi-corporations, and non-profit institutions that
produce goods or non-financial services for the market. Included within this sector are
entities such as publicly owned utilities and other entities that trade in goods and services.
Disclosures
 Disclosures made in respect of the GGS shall include at least the following:
o Assets by major class, showing separately the investment in other sectors;
o Liabilities by major class;
o Net assets/equity;
o Revenue by major class;
o Expenses by major class;
o Surplus or deficit;
o Other comprehensive revenue and expense;
o Total comprehensive revenue and expense;
o Cash flows from operating activities by major class;
39
o Cash flows from investing activities; and
o Cash flows from financing activities.
 The manner of presentation of the GGS disclosures must be no more prominent than the
government’s financial statements prepared in accordance with PBE Standards.
 Entities preparing GGS disclosures must disclose the significant controlled entities that are
included in the GGS and any changes in those entities from the prior period, together with an
explanation of the reasons why any such entity that was previously included in the GGS is no
longer included.
 The GGS disclosures must be reconciled to the consolidated financial statements of the
government, showing separately the amount of the adjustment to each equivalent item in
those financial statements.
3.5 Revenue from Non-Exchange Transactions (Taxes and Transfers) [IPSAS

23]
Objective
Prescribe requirements for the financial reporting of revenue arising from non-exchange
transactions, especially taxes and transfers  deals with issues that need to be considered in
recognizing and measuring revenue from non-exchange transactions including the identification
of contributions from owners.
Revenue from Non-Exchange Transactions (Taxes and Transfers) [IPSAS 23]
In a non-exchange transaction, an entity either receives value from another entity without
directly giving approximately equal value in exchange, or gives value to another entity without
directly receiving approximately equal value in exchange.
Recognition of assets from non-exchange transactions an inflow of resources, other than services
in-kind, that meets the definition of an asset is recognized when, and only when: (a) probable
that the future economic benefits or service potential associated with the asset will flow to the
entity, and (b) fair value of the asset can be measured reliably.
Measurement of assets from non-exchange transactions According to IPSAS 23.42, an asset
acquired through a no exchange transaction is initially measured at its fair value as at the date of
acquisition.
Recognition and Measurement of revenue from non-exchange transactions An inflow of
resources from a non-exchange transaction recognized as an asset is recognized as revenue,
except to the extent that a liability is also recognized in respect of the same inflow. This is
generally the case if and for as long as the future inflow of resources is contingent on unsatisfied
conditions. When an entity satisfies a present obligation recognized as a liability in respect of an
40
inflow of resources from a non-exchange transaction recognized as an asset, it reduces the
carrying amount of the liability recognized and recognizes an amount of revenue equal to that
reduction. Revenue from non-exchange transactions is measured at the amount of the increase in
net assets recognized by the entity
Present obligations recognized as liabilities Present obligation is a duty to act or perform in a
certain way and may give rise to a liability in respect of any non-exchange transaction. Present
obligations may be imposed by stipulations in laws or regulations or binding arrangements
establishing the basis of transfers. A present obligation arising from a non-exchange transaction
that meets the definition of a liability is recognized when, and only when:
(a) Probable that an outflow of resources embodying future economic benefits or service
potential will be required to settle the obligation, and
(b) Reliable estimate can be made of the amount of the obligation
 Activity :
Question 4: what criteria used to recognized Revenue from Non-Exchange Transactions (Taxes and
Transfers)
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3.6 Presentation of Budget Information in Financial Statements [IPSAS 24]

IPSAS 24 applies to public sector entities that are required to or elect to make their approved
budget(s) publicly available. The Standard is applicable to entities irrespective of the applied
budgetary basis, i.e. irrespective of the fact whether an entity has adopted the accrual, cash, or
other basis of accounting in the budget that has been approved by the respective legislative body.
It has turned out that especially in cases where the cash or modified cash basis of accounting is
applied for budgeting purposes, there are difficulties in practice in how to present the comparison
of budget and actual amounts in the financial statements and the related reconciliation, given the
fact that the financial statements need to be prepared on an accrual basis. In the following, at
first, the general requirements of IPSAS 24 as well as its disclosure requirements are outlined,
and its practical implications explained. By using an illustrative example, it is shown how those
practical challenges imposed by IPSAS 24 could be overcome
General requirements of IPSAS 24
According to the requirements of IPSAS 24.14, a public sector entity has to present a comparison
of the budget amounts for which it is held publicly accountable and actual amounts either as a
41
separate additional financial statement or as additional budget columns in the financial
statements currently presented in accordance with IPSASs.
In general, IPSAS 24 provides that all comparisons of budget and actual amounts must be
presented on a comparable basis to the budget.4 This means that the applied budgetary basis is
decisive for the presentation of the comparison of budget and actual amounts in IPSAS financial
Statements. In case that an entity applies the full accrual basis of accounting for budgeting
purposes, then the comparison of budget and actual amounts is presented on the full accrual basis
of accounting.5 The other extreme would be that an entity prepares its approved budget on a
cash- or modified cash-basis. In such a situation, the comparison of budget and actual amounts
would have to be presented on cash- or modified cash basis in the entity’s IPSAS financial
statements. In this context it needs to be noted that, often, entities are already legally required to
prepare such comparisons for accountability purposes. Such comparisons are known as budget
execution or budget implementation reports. Thus, IPSAS 24 does not completely represent a
new requirement in terms of financial reporting by public sector entities.
3.7 Cash Flow Statements [Cash Basis IPSAS]

The cash flow statement identifies the sources of cash inflows, the items on which cash was
expended during the reporting period, and the cash balance as at the reporting date. Information
about the cash flows of an entity is useful in providing users of financial statements with
information for both accountability and decision making purposes. Cash flow information allows
users to ascertain how an entity raised the cash it required to fund its activities and the manner in
which that cash was used.
Definitions
The following terms are used in this Standard with the meanings specified:
 Cash comprises cash on hand and demand deposits.
 Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
 Cash flows are inflows and outflows of cash and cash equivalents.
Cash and cash equivalents
Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes. For an investment to qualify as a cash equivalent it must be
readily convertible to a known amount of cash and be subject to an insignificant risk of changes
in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a
short maturity of, say, three months or less from the date of acquisition. Equity investments are
excluded from cash equivalents unless they are, in substance, cash equivalents.
42
 A single transaction may include cash flows that are classified differently. For example,
when the cash repayment of a loan includes both interest and capital, the interest element
may be classified as an operating activity and the capital element is classified as a financing
activity.
Operating activities
The amount of net cash flows arising from operating activities is a key indicator of the extent to
which the operations of the entity are funded:
(a) By way of taxes (directly and indirectly); or
(b) From the recipients of goods and services provided by the entity. The amount of the net cash
flows also assists in showing the ability of the entity to maintain its operating capability, repay
obligations, pay a dividend to its owner and make new investments without recourse to external
sources of financing.
Examples of cash flows from operating activities are:
(a) Cash receipts from taxes, levies and fines;
(b) Cash receipts from charges for goods and services provided by the entity;
(c) Cash receipts from grants or transfers and other appropriations or other budgetauthority made
by national government or other entities;
(d) Cash receipts from royalties, fees, commissions and other revenue;
(e) Cash payments to other entities to finance their operations (not including loans);
(f) Cash payments to suppliers for goods and services;
(g) Cash payments to and on behalf of employees;
(h) Cash receipts and cash payments of an insurance entity for premiums and claims, annuities
and other policy benefits;
(i) Cash payments of local property taxes or income taxes (where applicable) in relation to
operating activities;
(j) Cash receipts and payments from contracts held for dealing or trading purposes;
(k) Cash receipts or payments from discontinued operations; and (l) cash receipts or payments in
relation to litigation settlements.
Investing activities
The separate disclosure of cash flows arising from investing activities is important because the
cash flows represent the extent to which cash outflows have been made for resources which are
intended to contribute to the entity’s future service delivery. Only expenditures that result in a
recognized asset in the statement of financial position are eligible for classification as investing
activities. Examples of cash flows arising from investing activities are:
43
(a) Cash payments to acquire property, plant and equipment, intangibles and other long-term
assets. These payments include those relating to capitalized development costs and self-
constructed property, plant and equipment;
(b) Cash receipts from sales of property, plant and equipment, intangibles and other
(c) cash payments to acquire equity or debt instruments of other entities and interests in joint
ventures (other than payments for those instruments considered to be cash equivalents or those
held for dealing or trading purposes);
(d) cash receipts from sales of equity or debt instruments of other entities and interests in joint
ventures (other than receipts for those instruments considered to be cash equivalents and those
held for dealing or trading purposes);
(e) Cash advances and loans made to other parties (other than advances and loans made by a
public financial institution);
(f) Cash receipts from the repayment of advances and loans made to other parties (other than
advances and loans of a public financial institution);
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts,
except when the contracts are held for dealing or trading purposes, or the payments are classified
as financing activities; and
(h) Cash receipts from futures contracts, forward contracts, option contracts and swap contracts,
except when the contracts are held for dealing or trading purposes, or the receipts are classified
as financing activities.
Financing activities
The separate disclosure of cash flows arising from financing activities is important because it is
useful in predicting claims on future cash flows by providers of capital to the entity. Examples of
cash flows arising from financing activities are:
(a) Cash precedes from issuing debentures, loans, notes, bonds, mortgages and other short- or
long-term borrowings;
(b) Cash repayments of amounts borrowed; and
(c) Cash payments by a lessee for the reduction of the outstanding liability relating to a finance
lease.
3.8 chapter summary

 They are generally interested in how the entity generates and uses cash and cash
equivalents. This is the case regardless of the nature of the entity’s activities and
44
irrespective of whether cash can be viewed as the product of the entity, as may be the
case with a public financial institution.
 Entities need cash for essentially the same reasons, however different their principal
revenue-producing activities might be. They need cash to pay for the goods and
services they consume, to meet ongoing debt servicing costs, and, in some cases, to
reduce levels of debt. Accordingly, this Standard requires all entities to present a cash
flow statement.
 The consolidated whole-of-government operating cash flows provide an indication of
the extent to which a government has financed its current activities through taxation
and charges. Information about the specific components of historical operating cash
flows is useful, in conjunction with other information, in forecasting future operating
cash flows.
 Cash flows from operating activities are primarily derived from the principal cash-
generating activities of the entity.
 The consolidated whole-of-government operating cash flows provide an indication of
the extent to which a government has financed its current activities through taxation
and charges.
 IPSAS 24.15 states in that context that: ―Presentation in the financial statements of
the original and final budget amounts and actual amounts on a comparable basis with
the budget that is made publicly available will complete the accountability cycle.
 The purpose of financial statements prepared in accordance with statistical bases of
financial reporting is to provide information suitable for analyzing and evaluating
fiscal policy, especially the performance of the GGS and the broader public sector of
any country.
3.9. self –test questions

choice
1. ------------ is self-supporting activities of a government that provide services to the public for
a fee.
A. Governmental activities C. Fiduciary activities
B. Business type activities D. None
2. Under cash flow statements which activities are included with the financing activities?
A. Cash payments by a lessee C. Cash receipts from taxes
B. cash payments to acquire equity D. Cash receipts from royalties
3. Which one of the following presented on cash flow statements under operating activities
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A. Cash receipts from futures contracts C. Cash precedes from issuing debentures
B. cash payments of an insurance entity D. Cash payment of local property taxes
4. Which one the following statement is true about the benefits of adopted IPSAS
A. Quality C. Accountability
B. Comparability D. All
5--------------comprises all organizational entities of the general government as defined in
statistical bases of financial reporting.
A. General Government Sector C. The Public Non-Financial Corporation’s sector
B. The Public Financial Corporation’s Sector D. All
6. Which one the following false about the Objectives of IPSAS 21
A. To prescribe the procedures that an entity applies to non-cash-generating asset
B. To ensure impairment losses are not recognized
C. To specify when an entity would reverse an impairment loss.
D. None of the above
7. Which one of the following was true about Stages in the Impairment Process
A. Assess whether there is an indication that an asset may be impaired.
B. If there is an indication of impairment, then measure the asset’s recoverable amount.
C. If Carrying amount > Recoverable amount, then impairment has taken place.
D. All are answers
8. A present obligation arising from a non-exchange transaction that meets the definition of
a liability is recognized when,
A. Probable that an outflow of resources embodying future economic benefits
B. Reliable estimate can be made of the amount of the obligation
C. A and B
9. Disclosures made in respect of the GGS shall include :
A. Assets by major class, showing separately the investment in other sectors;
B. Liabilities by major class;
C. Net assets/equity;
D. All
10. ------------------- is activities encompass the executive, legislative, and judicial functions
of the government as well as major service functions such as public safety, public works,
parks and recreation
A. Governmental activities C. Business type activities
B. Investing activities D. Operating activities
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Blank space
1. --------------- comprises resident government-controlled financial corporations, quasi-
corporations, and non-profit institutions
2. -------------- identifies the sources of cash inflows, the items on which cash was expended
during the reporting period, and the cash balance as at the reporting date.
3. -------------- disclosures must be reconciled to the consolidated financial statements of the
government, showing separately the amount of the adjustment to each equivalent
4. ----------------- recognizes the right of governments and national standard-setters to
establish accounting standards and guidelines for financial reporting in their jurisdictions.
1. B 2. B 3.D 4.D 5.A 6.B 7.D 8.C 9.D 10. A
Blank space
1. The Public Financial Corporation’s (PFC) Sector 2. cash flow statement
3. GGS 4. IPSASB
47
CHAPTER FOUR: Budgeting and Performance Reporting
After studying this chapter, you should be able to Budgeting and Performance Reporting
activities:
 Budgeting in the Public Sector
 Classification of budget
 Approaches to budgeting
 Budgets and Outturn Reporting (IPSAS 24)
 Performance Budgeting and Reporting
4.1. Budgeting in the Public Sector

In Budgetary accounting, budgets:
 Shows the amount and sources of anticipated Revenue or Transfers In.
 Also shows the amount and purposes of authorized expenditures.
Annual Budget is the budget for each fiscal year which comprises the Federal Government
revenue, expenditure and subsidy to the regional governments as well as the financing of the
budget shall be approved by the House of People’s Representatives. (Fin. Adm. Proc. 648-2009).
Government budgets often carry the authority of law, preventing public officials from spending
outside their budgetary authority.
o Budget determines the allocation of resources to various programs.
o Budget compliance is more important than income measurement.
o Budgetary comparisons should be presented for the general fund and all major special
revenue funds with legally adopted budgets
Uses of Budgetary Financial Reporting
 Users can have a better idea of evaluating performance
 Comparing actual results to budgeted provides information on entity’s financial situation
(Over or Under Spending)
4.2 Classification of budget

Budget should comply with three key principles of sound budget management:
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1. The principle of comprehensiveness requires that the budget cover all government entities
and institutions undertaking government operations, and present a consolidated and
complete view of these operations.
2. The principle of unity requires that the budget include all revenues and expenditures of all
government entities undertaking government operations. This principle is important to ensure
that the budget is effective in constraining total and sector government expenditure, and in
promoting greater efficiency in the allocation of resources.
C. The principle of internal consistency between different components of the budget requires,
in particular, that the current expenditure needed for the operations and maintenance of past
investment projects be fully reflected in the budget. Moreover, this principle implies that
there should be a unitary budget system in which responsibilities for preparing and
executing the budgets for current and capital (or development) spending are consolidated
within a single central fiscal agency, usually the ministry of finance.
Davina Jacobs, Jean-Luc Hélis, and Dominique Bouley (IMF, 2009)
A sound budget classification system should contain:
 Revenues into various categories (tax and other than tax revenue)
 Expenditures in to administrative, economic and functional
Economic
Classifies expenditure by economic categories (e.g. salaries, goods and services, transfers and
interest payments, or capital spending)
Administrative
Administrative classification identifies the entity that is responsible for managing the public
funds concerned, such as the ministry of education and health or, at a lower level, schools and
hospitals.
Functional
A 'functional' classification organizes government activities according to their purposes (e.g.
education, social security, and housing).
 It is independent of the government’s organizational structure.
 A functional classification is important to analyze the allocation of resources among
sectors.
Program
 Classifies and groups expenditure by policy objective or outputs for the sector (e.g. maternal
health, primary health care, development of crop production) irrespective of their economic
nature.
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 In contrast to the Classification of Functions of Government (COFOG), a classification by
program takes into account the government's policy objectives and how these policies will be
implemented.
 Program classification inherently disconnected from government’s organizational structure
Contemporary approach: to place each program under a single ministry and align it with the
functional classification ensures clear assignment of responsibility for a program and
accountability for results.
 Many countries use additional classification schemes to enhance transparency and
accountability and to better manage their finances (for further details, see Section IV below).
 However, it is necessary to be careful in expanding the different types of classification to be
used.
4.3 Approaches to budgeting

1. Compliance budgeting: focuses on ensuring that the collection and use of resources are
consistent with the budget laws, which in turn depend on having an accurate classification
of these transactions and the organizations responsible for receiving revenues or incurring
expenditures.
2. Policy formulation and allocative efficiency: concerns are the basis of a classification of
expenditure by function and program. A detailed classification of programs by activity or
output is required if operational performance is being assessed.
Fiscal control requires at least an economic classification based on clear concepts (e.g.,
separating borrowing from receipts). Meeting these different and sometimes conflicting
requirements calls for a pragmatic and flexible approach.
4.4 Presentation of Budgets Information in the Financial Statements (IPSAS

24)
There is no IFRS equivalent IPSAS24, as the private sector is not subject to the same accountability
demands as the public sector.
 This standard requires:
 A comparison of budget amounts and the actual amounts arising from execution of the
budget.
 Disclosure of an explanation of the reasons for material differences between the budgets
and actual amounts.
 An entity that prepares and presents financial statements under the accrual basis of
accounting shall apply this standard.
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 This standard applies to public sector entities which are required or elect to make their
approved budget(s) publically available.
 An entity shall present a comparison of budget amounts either as separate additional financial
statements or as additional budget columns in the financial statements.
 The comparison shall present for each legislative oversight:
 The original and final budget amounts
 The actual amounts on a comparable basis; and
 By way of note disclosure, an explanation of material differences.
An entity shall present an explanation of whether changes between the original and final budget
are a consequence of reallocations within the budget, or of other factors:
 By the way of note disclosure in the financial statements; or
 In a report issued before, at the same time as, or in conjunction with, the financial
statements, and shall include a cross reference to the report in the notes to the financial
statements.
An entity in notes to the financial statements:
 Shall explain the budgetary basis and classification basis adopted in the approved budget.
 Shall disclose the period of the approved budget
 Shall identify the entities included in the approved budget.
4.5 Performance Budgeting and Reporting

Performance Based Budgeting
Performance budgeting is a system that uses performance information for the allocation,
spending, and management of a government's financial resources. Governments adopt
performance-based budgeting to improve spending prioritization and to increase the efficiency
and effectiveness of public expenditure.
In performance-based budgeting, policy-makers allocate funds across sectors, ministries and
projects based on the results that will be delivered on each level. This link between funding and
results is crucial in PB. But there are three variants of performance budgeting based on how strict
this link is, namely:
1. Presentational Performance Budgeting presents performance information in the budget
documents. Indicators and targets do not influence the allocation of the budget. This is the
simplest form of performance budgeting.
2. Performance-Informed Budgeting indirectly links resource allocation to past and expected
results. Policy-makers use other factors alongside performance information in determining
the allocation.
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3. Direct Performance Budgeting uses a specific mathematical formula to determine the
amount of funding per budget item. This is the strictest form of performance based
budgeting.
What is performance reporting? It’s an important activity in project communication
management. It involves collecting and disseminating project information, communicating
project progress, utilization of resources, and forecasting future progress and status to various
stakeholders, as decided in the communication management plan.
During the process of performance reporting, the work results of other processes are also
analyzed and combined into performance reports. They are typically done in tabular or graphical
formats that may be text-based, visual-based (such as charts, graphs, or tables), or most often a
combination of both.
Overall, the elaborate reports may include:
 Analysis of past performance.
 Summary of changes approved in the reporting period.
 Current status of risks and issues.
 Results of variance analysis.
 Work completed during the reporting period.
 Work to be completed during the next reporting period.
 Forecasted project completion.
Key Terms:
Accounting Basis: means the accrual or cash basis of accounting as defined in the Accrual Basis
IPSAS and the Cash Basis IPSAS.
Budgetary Basis: means the accrual, cash or other basis of accounting adopted in the budget that
has been approved by the legislative body.
Comparable Basis: means the actual amounts presented on the same accounting basis, same
classification basis, for the same entities, and for the same period as the approved budget.
Approved Budget: means the expenditure authority derived from laws, appropriation bills,
government ordinances and other decision related to the anticipated revenue or receipts for the
budgetary period.
Annual Budget: means an approved budget for one year. It does not include published forward
estimates or projections for periods beyond the budget period.
Multi-year Budget: is an approved budget for more than one year. It does not include published
forward estimates or projections for periods beyond the budget period.
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Appropriation: is an authorization granted by a legislative body to allocate funds for purposes
specified by the legislature or similar authority.
Original Budget: is the initial approved budget for the budget period.
Final Budget: is the original budget, adjusted for all reserves, carry-over amounts, transfers,
allocations, supplemental appropriations, and other authorized legislative or similar authority
changes applicable to the budget period.
4.6 chapter summary

 Fiscal control requires at least an economic classification based on clear concepts (e.g.,
separating borrowing from receipts). Meeting these different and sometimes conflicting
requirements calls for a pragmatic and flexible approach.
 ―Budget classification is one of the fundamental building blocks of a sound budget
management system, as it determines the manner in which the budget is recorded,
presented, and reported, and as such has a direct impact on the transparency and
coherence of the budget.‖
 Annual Budget is the budget for each fiscal year which comprises the Federal
Government revenue, expenditure and subsidy to the regional governments as well as the
financing of the budget shall be approved by the House of People’s Representatives.
4.7 Self-test questions

1. Performance-Informed Budgeting presents performance information in the budget
documents.
2. Performance budgeting is a system that uses performance information for the allocation,
spending, and management of a government's financial resources.
3. The principle of unity requires that the budget cover all government entities and institutions
undertaking government operations.
4. Administrative classification identifies the entity that is responsible for managing the public
funds concerned, such as the ministry of education and health.
5. Budgetary comparisons should be presented for the general fund and all major special
revenue funds with legally adopted budgets.
6. Annual Budgetis approved budget for one year and it includes published forward estimates or
projections for periods beyond the budget period.
7. Final Budget is the original budget, adjusted for all reserves, carry-over amounts, transfers,
allocations and supplemental appropriations.
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Blank space
1.-----------------to place each program under a single ministry and align it with the functional
classification ensures clear assignment of responsibility for a program and accountability for
results.
2. ---------------- uses a specific mathematical formula to determine the amount of funding per
budget item.
3. ------------------------ focuses on ensuring that the collection and use of resources are
consistent with the budget laws.
4. ------------------ is important to analyze the allocation of resources among sect
Answer for self test question
1. false 2. True 3.False 4. True 5.True 6. False 7.true
Blank space
1. Contemporary approach 2. Direct Performance Budgeting 3. Compliance budgeting
4. A functional classification
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CHAPTER FIVE :ACCOUNTING FOR GENERAL FUND & SPECIAL REVENUE
FUND
INTRODUCTION
In this unit, the two type of funds in the governmental funds category i.e. general fund and
special revenue fund are discussed, it gives a clear detail how the two fund operate, how their
financial operations are accounted and recorded, theoretical as well as accounting illustrations
are given to give the reader a clear detail understanding of the two funds.
5.1 Definition and purpose

1 General Fund
As it can be recalled from chapter two, the general fund is used for general governmental
activities such as police, administration and the like. To distinguish the general fund adversely, it
can be said that the general fund should 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. A governmental entity will have only one general fund. The general
fund of a state or local government unit is the entity that accounts for all the assets & resources
used for financing the general administration of the unit & the traditional services provided to the
people.
2 Special Revenue Fund

Special revenue funds (SRF) in contrast to GF are used to account for resources, which are
collected for a specified purpose. Whenever a tax or other revenue source is authorized by
legislative body to be used for specific purpose, only a governmental unit availing itself of that
source may create a Special Revenue Fund in order to be able to demonstrate that all revenue
from the source was used for the specified propose, only separate special revenue funds are
established by governmental units, as mandated by legislative enactments to account for the
receipts and expenditures associated with specialized revenue sources that are earmarked by law
or regulation to finance specified governmental operations. Fees for rubbish collection, state
taxes on diesel fuel that is required to be used only for road maintenance, tax on hotel rooms to
be used to improve tourist facilities, traffic violation fines are examples of governmental units
revenues that may be accounted for in a separate special revenue fund.
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- Comparison:
The general fund should account for all financing sources for which a separate fund is not
required. Special revenue funds are necessary when they are required by law or contract. A
governmental entity will have several special revenue funds at any time & these funds are
opened & closed according to need.
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.
The arithmetic difference between the amount of financial resources and the amount of liabilities
recorded in the fund is called the fund equity. Residents of the governmental unit have no legal
claim on any excess of liquid assets over current liabilities. therefore the fund equity is not
analogous to the capital accounts of an investor owned entity. Accounts in the fund equity
category of general funds & special revenue funds consist 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. General funds
&special revenue funds account for financial activates during a fiscal year in accounts classified
as Revenues, Other Financing Sources, Expenditures&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.
Expenditure is defined as decrease in fund financial resources other than through inter fund
transfers, operating transfers out of a fund and debt issue proceeds 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.
An example of the use of transfer accounts occurs in those jurisdictions where a portion of the
taxes recognized as revenue by the general fund of a unit is transferred to a debt service fund
which will record expenditures for payment of interest and principal of general obligation debt.
The general fund would record the amounts transferred as operating transfers out: the debt
service fund would record the amount received as operating transfers in. Thus the use of transfer
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accounts achieves the desired objective that revenues be recognized in the fund which levied the
taxes and expenditures be recognized in the funds which expends the revenue.
In few jurisdictions taxes must be collected in the year before the year in which they are
available for expenditure. In such jurisdictions tax collection should be credited, deferred
revenue should be debited &revenue should be credited.
Under accrual basis, expenditure is recognized when a liability to be met from fund asset is
incurred. It is important to note that an amount of a liability incurred whether the liability is for
salaries (an expense) for supplies ( a current asset) ,or for a long lived capital assets such as land
building or equipment.
 Activity :
Question 1: what is the difference between general fund and special revenue fund
Question 2: what does mean fund equity , fund balance and other financing sources
Question 3. What is the difference between Other financing sources andOther financing use
----------------------------------------------------------------------------------------------------------------------------
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5.2 budget and budgetary accounts

The fact that budgets are legally binding upon administrators has led to the incorporation of
budgetary accounts in the general fund and in the special revenue funds and in all other funds
required by law to adopt a budget.
Budgeting is the process of allocating scarce resources to unlimited demands budgeting has a
great role in governmental accounting than in profit making business.
Budgeting is a key element of legislative control over governmental units. The two
classifications of budget for governmental units are the same as those for business enterprises.
In order to facilitate preparation of budgets and preparation of the combined statement of
revenues, expenditures and changes in fund Balance-Budget and Actual required for GAAP
conformity, accounting systems of funds for which budgets are required by law should
incorporate budgetary accounts. Only three general ledger control accounts are needed to provide
budgetary control; Estimated Revenue, Appropriations and Encumbrances.
1. Estimated Revenues – resources expected to be received
2. Appropriations – is both an authorization to spend and limitation of spending.
3. Encumbrances – Purchase orders (P.O.) in governmental entities have the function of
keeping track of coming expenditures so that the budget is not exceeded. this is done by
actually recording the P.O in the ledger account as an Encumbrance
57
All the three must be supported by subsidiary ledger accounts whatever detail is required by law
or by sound financial administration. 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.
Activity
Question 2: what is the difference between Estimated Revenues ,Appropriations and
Encumbrances-----------------------------------------------------------------------------------------------------
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------------------------
5.3 Accounting for General Fund and Special Revenue Fund

Illustration
Below is the Balance Sheet of town of X General fund on June 30, year 5 and the annual budgets
adopted for the year ended June 30, year 6.
Town of X General Fund
Balance Sheet June 30, year 5
Assets
Cash .................................................................... 1,600,000
Inventory of supplies............................................ 400,000
Total Assets 2,000,000
Liabilities and Fund Balance
Vouchers payable ................................................. 800,000
Fund balance:
Reserved for encumbrance 400,000
Unreserved and undesignated 800,000 1,200,000
Total liabilities and fund balance 2,000,000
Below is the approved budget by the town council for the fiscal year ended on June 30, year 6.
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:
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- General government .......................... 4,700,000
- Public safety .......................... 1,900,000
- Health and welfare .......................... 1,100,000
- Culture and recreation ...................... 400,000 8,100,000
Estimated other financing uses (transfer to DSF) 100,000
* The journal entry to record the annual budget for the town of X General fund on July 1,
Year 5 was as follows:
Estimated revenues 8,400,000
Estimated other financing sources 100,000
Appropriations 8,100,000
Estimated other financing uses 100,000
Budgetary fund balance 300,000
An analysis of each of the ledger accounts in the forgoing journal entry follows:
1. Estimated Revenues and Estimated Other financing Sources ledger account may be considered
Pseudo Asset controlling accounts because they reflect resources expected to be received by the
General Fund during the fiscal year. These accounts are
Not actual assets because they do not fit the accounting definition of an Asset as a probable
economic benefit obtained or controlled by a particular entity as a result of past transactions or
events. Thus the two accounts in substance are memorandum accounts, useful for control
purposes only, that will be closed after the issuance of financial statements for the General fund
for the fiscal year ending June 30 year 6.
2. The Estimated other Financing source ledger accounts includes the budgeted amounts of such
non Revenue items as proceeds from the disposal of plant assets and operating transfers from
other funds.
3. The Appropriations and Estimated Other Financing Uses Ledger Account may be considered
Pseudo Liability controlling accounts because they reflect the legislative body’s commitment to
expend General fund resources as authorized in the Annual Budget. These accounts are not
genuine liabilities because they do not fit the definition of a liability as a probable future sacrifice
of economic benefits arising from present obligation of a particular entity to transfer assets to
provide services to other entities in the future as a result of past transactions or events. The
appropriations and Other Financing uses are memorandum accounts, useful for control
purposes only, that will closed after issuance of yearend financial statements for the general
fund.
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4. The Estimated Other Financing Uses accounts include budgeted amount of operating transfers
out to other funds, which are not expenditures.
5. The Budgetary Fund Balance Ledger Account, as its title implies is an account that balances
the debit and credit entries to accounts of a budget journal entry. Although similar to the owners’
equity accounts of a business enterprise in this balancing feature, does not purport to show an
ownership interest in the General funds assets. At the end of the fiscal year, the budgetary fund
balance account is closed by a journal entry that reverses the original entry for the budget.
The journal entry to record the town of X general funds annual budget for the year ending June
30 year 6 is accompanied by detailed entries to subsidiary ledgers for Estimated Revenues,
Estimated other financing Sources, Appropriations and Estimated Other Financing Uses. the
budget of the town of X general fund purposely was condensed; in practice the general fund
estimated revenues and appropriations would be detailed by source and function, respectively
into one of the following widely used subsidiary ledger categories:
Estimated Revenues:Appropriations:
- Taxes - General government
- Licenses and permits - Public safety
- Intergovernmental revenues - Public works
- Charges for Services - Health and Welfare
- Fines and Forfeits - Culture - recreation
- Miscellaneous - Conservation of natural resources
- Debt service
- Intergovernmental expenditures
- Miscellaneous
Such details will be discussed in the next topic; Classification and terminology of governmental
funds budgets and accounts.
In summary, budgets of a governmental unit are often recorded in the accounts of the four
governmental funds. An expendable trust fund may also record a budget if required to do so by
the trust indenture. The recording of the budget initiates the accounting cycle of each for each of
the funds listed above. Recording the budget also facilitates the preparation of financial
statements that compare budgeted and actual amounts of revenues and expenditures.
Encumbrances and budgetary control- because of the need for expenditures of governmental
units to be in accordance with appropriations of governing legislative bodies, an a encumbrance
Accounting techniques are used for the general fund and the special revenue funds and
60
sometimes for capital projects funds. The Encumbrance is a memorandum method for assuring
that total expenditures for a fiscal year do not exceed appropriations. The encumbrance technique
is used in accounting for governmental units have no counterpart in accounting for business
enterprises.
Assume that in addition to the budget illustrated earlier, the town of X general fund had the
following summarized transaction and events for the fiscal year ended June 30, 19x6
1. Property taxes were billed in the amount of 7,200,000 of which 140,000 was of
Doubtful collect ability.
Property tax receivable- current 7,200,000
Allowance for uncollectible current taxes 140,000
Revenue 7,060,000
= To accrue property taxes billed and to provide for estimated uncollectible portion.
Explanation- The modified accrual basis of accounting for a general fund permits the accrual of
property taxes, because they are billed to the property owners. The estimated uncollectible
property taxes are offset against the total assets billed in order to measure actual revenues from
property taxes for the year.
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.
Cash 7,520,000
Property taxes receivable-current 6,500,000
Revenue 1,020,000
= To record collection of property taxes and other revenues for the year.
Exp- Under the modified accrual basis of accounting, revenues not susceptible to accrual are
recognized on the cash basis like self-assessment basis tax revenue (Eg. Income tax, Sales Tax,
Gross receipts Tax, ) and miscellaneous revenues (Eg. Annual business licenses, construction
and home improvement permits, Fines and forfeits etc.)
3. Property tax in the amount of 130,000 was uncollectable.
Allowance for uncollectable current taxes 130,000
Property taxes receivable- current 130,000
= To write off receivables for property taxes that is uncollectable
Explanation- The forgoing journal entry represents a shortcut approach. in an actual situation ,
uncollectible property taxes first would be transferred together with estimated uncollectable
amounts, to the Taxes Receivable- Delinquent ledger account from the Taxes Receivable-
61
Current account. Any amounts collected on these delinquent taxes would include revenues for
interests and penalties required by law. Any uncollected delinquent taxes would be transferred,
together with estimated uncollectible amounts to the Tax-Liens Receivable ledger Account. After
the passage of an appropriate statutory period, the governmental unit might satisfy its tax lien by
selling the property on which the delinquent taxes were levied.
4. Purchase orders for non recurring expenditures were issued to outside suppliers in the total
amount of 3,600,000.
Encumbrances -------------------------3,600,000
Fund Balance reserved for Encumbrances--------------3,600,000
= To record purchase orders for non-recurring expenditures issued during the year.
Explanation- encumbrance journal entries are used to prevent the over expending of an
appropriated amount in the budget. This journal entry to the encumbrances ledger account is
posted in detail to reduce the unexpended balances of each applicable appropriation in the
subsidiary ledger for appropriation. The unexpended balance of each appropriation is thus
reduced for the amount committed by the issuance of purchase orders.
5. Expenditures for the year totaled 7,600,000 of which 900,000 applied to the acquisitions of
supplies and 3,500,000 applied to 3,550,000 of the purchase orders in the total amount of
3,600,000 issued during the year.(assume consumption method).
a) Expenditures 6,700,000
Inventory of supplies 900,000
Vouchers payable 7,600,000
= To record expenditures for the year.
Explanation- the expenditure ledger account is debited with all expenditures regardless of
purpose except for Additions to the Inventory of Supplies, Principal and Interest Payments
on Debt, Additions to the Governmental Unit’s Plant Asset, Payments for Goods or
Services to be Received in the Future, - all are debited to expenditure or other financing uses
rather than to asset or liability ledger account. (Expenditure for debt principal and interest and
plant asset additions are also recorded on a memorandum basis in the general long-term debt and
general fixed assets account group respectively.
b) Fund Balance reserved for Encumbrance 3,550,000
Encumbrance 3,550,000
= To reverse encumbrances applicable to voucher expenditures,
Explanation- Recording actual expenditures of 3,500,000 (included in the 6,700,000 total in
entry 5a above) applicable to purchase orders totaling 3,550,000 makes this amount of the
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previously recorded encumbrances no longer necessary. Accordingly 3,550,000 of encumbrances
are reversed. Encumbrances of 50,000 (3,600,000 - 3,550,000) remain outstanding.
6. Billings for services and supplies received from enterprise fund and internal service fund
totaled 300,000 and 200,000 respectively.
Expenditures 500,000
Payable (Due) to Enterprise fund 300,000
Payable (Due) to Internal Service fund 200,000
= To record billings for services and supplies received from other funds.
Explanation- Billings from other funds of the governmental unit are not voucher for
Payment as are billings from outside suppliers. Instead billings from other funds are
Recorded in a separate liability ledger account. The related debit is to the expenditure accounts if
the billings are for Quasi- external transaction, such as providing services and supplies.
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.
Vouchers payable 7,700,000
Payable to Enterprise fund 250,000
Payable to Internal service fund 140,000
Cash 8,090,000
= To record payment of liabilities during the year
8. The town of X general fund made an operating transfer of 110,000 to the debt service
Fund for the matured principal and interests.
Other financing uses 110,000
Cash 110,000
= To record transfer to debt service fund for maturing principal and interest on
General obligation serial bond.
Explanation- The other financing uses ledger account is debited because the payment to
The debt service fund is an operating transfer rather than quasi- external transaction.
9. A payment of 400,000 in lieu of property taxes and a subsidy of 100,000 were
Received from the Enterprise fund.
Cash 500,000
Revenue 400,000
Other Financing Sources 100,000
= To record payment in lieu of property taxes (400,000) and subsidy (100,000)
Received from Enterprise fund.
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Explanation-amounts transferred to the general fund from other funds are recognized as
revenues if they are quasi-external transactions, such as payment in lieu of property taxes;
otherwise they are recognized as other financing sources if they are operating transfers, such as
subsidies.
10. Supplies at a cost of 800,000 were used during the year.
Expenditures 800,000
Inventory of supplies 800,000
= To record cost of supplies used during the year.
Unreserved and undesignated fund balance 100,000
Fund balance reserved for inventory of supplies 100,000
= To increase inventory of supplies reserve to 500,000 to agree with
Balance of inventory of supplies ledger account at end of year
(500,000 - 400,000= 100,000)
Explanation- the immediately preceding journal entry represents a restriction of the portion of
the fund balance account to or event its being appropriated improperly to finance a deficit annual
budget for the general fund for the year ending June 30,year 7. Only cash and other monetary
assets of a general fund are available for appropriation to Finance authorized expenditures of the
succeeding fiscal year.
11. All uncollected property taxes on June 30 year 6 were delinquent.
Taxes Receivable- Delinquent 570,000
Allowance for uncollectable Current Taxes 10,000
Taxes Receivable- Current 570,000
Allowance for Uncollectable Delinquent Taxes 10,000
= To transfer delinquent taxes and related estimated uncollectable amounts from the current
classification
Explanation- The forgoing journal entry clears the Taxes Receivable- Current ledger account
and the related contra account for uncollectable amounts so that they will be available for accrual
of property taxes for the fiscal year ending June 30,year 7.
12. The town council designated 250,000 of the unreserved and the undesignated fund balance
for the replacement of equipment during the year ending June 30, year 7.
Unreserved and Undesignated Fund Balance 250,000
Fund Balance Designated for -
Replacement of Equipment 250,000
= To designate a portion of the fund balance for the replacement
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of equipment during the year ending June 30, year 7.
Explanation- The fund balance designated for replacement of equipment ledger account
Is similar to a retained earnings appropriation of a business enterprise. It indicates that the annual
budget for the town of X General fund for the year ending June 30, year 7 must include an
appropriation of 250,000 for new equipment and estimated revenue for the proceeds from the
disposal of the replaced equipment. The designated Fund balance of 250,000 will be closed to
the unreserved and undesignated fund balance Ledger account on July 1, year 6, when the annual
budget for the year ending June 30 year 7 is recorded.
5.4 chapter summary

 Even though the General fund and the special Revenue fund have different Purposes, they
are both revenue funds and the accounting and reporting procedure is the same for both.
 They are very similar in that all or almost all of their resources are expended each year
and then filled up in the next year.
 Understanding the accounting and characteristics of General fund with an exception of
few points will enable us to have a clearer understanding of both funds.
 The general funds and the special revenue funds have different purposes, but they are
both revenue funds, and the accounting and reporting procedure is the same for both.
They are similar in that all or almost all of their resources are expended each year. They
are then filled up (replenished) again for the next year.
5.5 self test questions

1. When the budget for the General Fund is recorded, the required journal entry will include
A. A credit to Estimated Revenues.
B. A debit to Encumbrances.
C. A credit to Appropriations.
D. A credit to Budgetary Fund Balance E. C and D
2.Which of the following would appropriately be reported in a special revenue fund?
A. Bond proceeds used to construct a building
B. Payments of principal and interest on long-term debt
C. A tax levy restricted to operating the emergency 911 system
D. General revenues budgeted to support the police department
3.A city government sells police cars no longer in use. No restrictions have been placed on the
proceeds. Which fund should account for the receipt?
A. Debt service fund
B. Capital projects fund
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C. Enterprise fund
D. General fund
4. General capital assets used by departments accounted for by the General Fund of a
governmental unit should be capitalized in
A. The General Fund.
B. The governmental activities journal.
C. The business-type activities journal.
D. The general capital assets fun
5. Which of the following statement(s) are not included in the governmental funds:
A. Statement of Revenues, Expenses, and Changes in Net Assets
B. Balance sheet C. Statement of Net Assets
D. All of the above are included
6. Which of the following General Fund accounts would not be closed at the end of the fiscal
year?
A. Appropriations
B. Other Financing Uses
C. Due to Debt Service Fund
D. Estimated Revenues
Answer for self examination
1. E 2. C 3.D 4.B
5. D 6.C
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1. Compare and Contrast General Fund and Special Revenue funds.
___________________________________________________________________________
_______________________________________________________________________
2. Discuss the reservation and designation of the fund balance account of the governmental unit’s
General Fund and special Revenue fund.
______________________________________________________________________________
____________________________________________________________________
3. What are the principal differences between the financial statements of the governmental unit’s
general fund and the financial statements of a business enterprise?
______________________________________________________________________________
____________________________________________________________________
4. What does a budget include in a governmental units general fund and special revenue funds.
___________________________________________________________________________
_______________________________________________________________________
5. Describe the classification of Governmental funds revenue and expenditures?
___________________________________________________________________________
_______________________________________________________________________
6. What revenues of general fund generally accrue?
______________________________________________________________________________
____________________________________________________________________
7. Discuss the use of Encumbrance as a budgetary control account.
______________________________________________________________________________
____________________________________________________________________
8. Describe how expenditures are recorded and exceptions which are recorded separately.
___________________________________________________________________________
_______________________________________________________________________
9. Describe accounting for supplies in governmental entities general fund and special
Revenue
______________________________________________________________________________
____________________________________________________________________
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Chapter six: Accounting For Capital Project Funds
After going through this topic, the student should be able:
 understand clearly how governmental units account for construction or acquisition of major
capital facilities
 determine the sources of financing used in the construction and acquisition of such major
capital facilities
 the accounting and reporting procedures used in from the establishment to closure of the
 Closure of the capital project fund.
INTRODUCTION
The previous unit indicates that long lived assets such as office equipment, government vehicles
and other relatively minor items may be acquired by a governmental unit by expenditures of
appropriations of the general fund or one or more of its special Revenue funds. Long-lived assets
used by activities accounted for by a governmental fund types are called general fixed assets.
Acquisitions of General Fixed Assets that require major amounts of money ordinarily cannot be
financed from general fund or special revenue fund appropriations. Major acquisitions of general
fixed assets are commonly financed by issuance of long term debt to be repaid from tax
revenues, or by special assessments against property deemed to be particularly benefited by the
long lived asset. Other sources financing the acquisitions of long lived assets include grants from
other governmental units, transfers from other funds, gifts from individual or organizations or by
a combination of several of these sources. if money received from these sources is restricted,
legally or morally to the acquisition or construction of specified capital assets, it is recommended
that a capital projects fund be created to account for these resources to be used for major
construction or acquisition projects.
6.1 Definition and Purpose

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). Examples of major capital facilities are Administration Buildings, Civic Centers and
libraries etc. these funds do not account for the acquisition of smaller fixed assets, such as
vehicles, machinery & office equipment which are normally budgeted for & recorded as
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expenditures in the general fund. it is also possible that a construction project could simply have
a subsidiary ledger within the General Fund, rather than its own distinct fund. the existence of
the Capital projects fund, as any other fund will depend on the legal requirements and the need
for good financial management.
CPF do not account for the fixed assets acquired only for the construction of the fixed assets. It
exists only for the period of acquisition or construction of the fixed assets. After the acquisition
or construction is completed, the Capital Projects Fund will be abolished. The Fixed Assets
constructed are accounted for in the GFAAG. It does not also account for the repayment &
servicing of any debt obligations issued to raise money to finance the acquisition of capital
facilities. Such debt & debt related servicing activities are accounted for in the General Long
Term Debt Account Group (GLTDAG) & Debt service fund (DSF). Since the purpose of capital
projects fund is to account for the acquisition and deposition of revenues for specific purpose, it
contains balance sheet accounts for only liquid assets and for the liabilities to be liquidated by
those assets.
Virtually all-governmental buildings are constructed by the governmental unit & are mostly
financed by bond offerings. In commercial accounting, all the activities (the construction of the
building, the subsequent capitalization & accounting for the building & the servicing of the debt
incurred to finance the construction of the building is accounted using one general ledger. In
governmental, four general ledgers are used, of which two are funds & two are account groups.
Activity
Question 1: what is the definitions and the purpose of established capital project fund
Question 2: what are the factors affect the financial source of capital project fund
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Example
6.2 ESTABLISHMENT & operation

C.P.F is 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.
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The focus of the CPF is the entire life of the project. It is by definition an expendable fund, and
all its resources are expected to be used up. However, CPFs do not have the same year-by-year
focus as the G.F because of the multi-year focus of CPFs, some accountants prefer not to close a
CPF annually, but others do. Whether or not to close the CPF annually will depend on the unique
factors of each case & will be strongly influenced by the requirement of the financing source.
The decision to use budgetary accounts will also depend on the features & financing source of
the particular CPF. It will be based on the particular project & be strongly influenced by the
requirement of the financing source. 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
6.3. source and use of cash flow

Capital projects project obviously need large amount of financing. Typically source of financing
include;
- Long term debt issue proceeds
- Grants from other governmental units
- Transfers from other funds within the governmental entity
- Interest income from temporary investments.
- Gifts from individuals or foundations
- Special taxes or;
6.4 method of acquire general project fund

Means of Acquisition
Accomplishment of capital acquisition or construction project may be brought about in one or
more of the following ways:
1. Outright purchase from fund cash
2. by construction, utilizing the governmental units own force
3. By construction, utilizing the services of private contractors
4. by capital lease agreement.
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Costs Included
All expenditures for getting the project ready are put in the CPF, including architect fees,
transport costs, damages etc…. usually major capital facilities are constructed by contracted
labor. Construction costs incurred are charged to expenditures. At the completion of the project
the cost of the facility is recorded as a fixed asset in the GFAAG. Until then any costs incurred
are shown as construction work in progress in the GFAAG. Generally the year-end closing entry
in the CPF triggers the recording of an amount in the GFAAG equal to the credit to the
expenditures account.
Retained Percentages
It is common in construction contracts for the entity to hold back the portion of the last payment
of the contract and to require contractors on large Scale contracts to give performance bonds,
providing indemnity to the Governmental Unit for any failure on the contractors party to comply
with terms and specifications of the agreement to provide more prompt adjustment on
shortcomings not legal or convincing enough to justify legal actions and not recoverable under
contractor’s bond as well as those the contractor may admit but not be in a position to rectify, it
is a common practice to withhold a portion of the contractors remuneration until final inspection
& acceptance have come about.
Encumbrances
Some governmental units include annual capital budgets as part of their annual appropriated
budget in which case the annual capital is recorded in the general ledgers of the various CPFs.
However, since the amount involved in a capital project is usually large, an encumbrance
account is highly recommended & is very necessary in case of multiple subcontractors for a
project. Because of this, an encumbrance accounting procedures alone are usually deemed
sufficient for control purposes. So recording of the budget in the general ledger might not be
necessary. In capital projects fund, Encumbrance is also recorded by the same amount in which
the construction contract agreement is made between the governmental unit and the contractor
and also in the same manner as that of the general and special revenue fund when items are
ordered through purchase orders.
Re-establishment of Encumbrance- the year end closing procedures for use by capital projects
funds artificially chops the construction expenditures pertaining to each continuing projects into
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fiscal year segments rather than allowing the total cost of each project to be accumulated in a
single Construction Expenditures Account. Similarly closing the encumbrance account of each
project to fund balance at year-end creates some procedural problems in accounting in the
subsequent year. the procedures illustrated for general and special revenue funds (using separate
Encumbrance, Fund Balance Reserved for Encumbrances, and Expenditure Accounts for each
year) could be followed. The authorization (Appropriation) for a capital projects fund however
does not expire at the end of a fiscal year but continues over the life of the project. Accordingly,
it appears desirable to re-establish Encumbrance account at the beginning of each year in order to
facilitate accounting for expenditures for goods and services ordered in one year and received in
a subsequent year.
Activity
Question 2: list and explains method of acquire general project fund
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6.5 alternative treatment of residual equity or deficits

If necessary expenditures & O.F.U are planned carefully & controlled carefully so that actual
does not exceed plans. Revenues & O.F.S of the C.P.F should equal or slightly exceed the
expenditures and other financing uses leaving a residual equity (surplus) and if long term debt
had been incurred for the purposes of the capital projects fund and under this case, There are
three possible options;
1. The balance could be transferred to the DSF, as residual equity transfer for retiring the debt,
which has been incurred for the purpose of the project.
2. If the residual Equity is were deemed to have come from grants or shared revenues restricted
for capital acquisitions or constructions, legal advice may indicate that any residual equity
may return to its source in proportionate amount or;
3. The balance might be retained for future maintenance purpose.
In some situations, in spite of careful planning and cost control, Expenditures and OFU of a CPF
may exceed its revenues and OFS resulting in a negative fund balance (deficit). If the deficit is
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small an additional transfer will probably be requested from one or more other funds. If the
deficit is relatively large and/or intended transfers are not feasible, the governmental unit may
seek additional grants or shared revenues from other governmental units to cover the deficits if
no other alternative is available, the governmental unit would need to finance the deficit by
issuing bonds. And under these circumstances, a legal or disciplinary action might have been
sought against the project manager, since public money was being used.
6.6 bond premiums, discount and accrued interest on bonds sold

Issuance of Bonds at a Premium
Bond premiums arise because of adjustments to the interest rates. The bond indenture
agreements usually specify that any bond premium is to be set-aside in the related DSF. This is
desirable because it remains the incentive to spend more on a project than is authorized merely
by raising additional cash by increasing the interest rate in the CPF. There are two ways of
accounting the bond proceeds and the associated premium.
1. The proceed including the premium could be recorded in the CPF as OFS-Bond proceeds
Cash 110,000
OFS- Bond precedes 110,000
2. Or, only the par value of the bond is considered as OFS of the CPF
Cash 110,000
OFS- bond proceed 100,000
Due to DSF 10,000
In the first case the transfer of the premium to the DSF is reported as an Operating Transfer Out
in the CPF and an Operating Transfer in the DSF.
C.P.F
O.F.U- operating transfer out 10,000

Cash 10,000
DSF
Cash 10,000
OFS –operating transfer in 10,000
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Whereas in the second case, the bond premium is accounted as a liability of the CPF because it
must be remitted to the DSF. Similarly, when bonds are sold between interest payment dates the
amount of accrued interest is included in the total selling price. Conceptually accrued interest
sold is an offset to the interest expenditure on the first interest payment date.
Following the sale of the bonds generally in practice, however accrued interest sold is recorded
as revenue of the DSF.
Issuance of Bonds at a Discount
Bond discount are rare because the stated the interest rate is usually set enough set high enough
so that no discounts may result (many Governmental units are legally propitiated from issuing
bonds at a discount). If a discount does result, theoretically there should be a transfer from the
related DSF to the CPF to cover the shortfall. In practice such a transfer may not be possible
because money may not be available in the related DSF or because of legal restraints. In such
case, the project may be curtailed or the shortage may be covered by an operating transfer from
the GF. E.g.
Cash 100,000
Due from 10,000
OFS- bond proceed 110,000
Accrued Interest on Bonds Sold
When bonds are sold between the interest payment dates the amount of accrued interest is
included in the total selling price. Conceptually, accrued interest sold is an offset to the interest
expenditures on the first interest payment date following the sale of the bonds. Generally in
practice, however accrued interest sold is recorded as revenue of the Debt Service Fund.
6.7 Bond Anticipation Notes Payable

The ―bond anticipation‖ description of the debt signifies an obligation to retire the notes from the
proceeds of the proposed bond issue .The account is increased and decreased for the same reason
and in the same manner employed for Tax anticipation Notes Payable in General Fund.
INVESTMENTS
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All the money necessary to pay for the capital project is usually raised near the inception of the
project, but contractors are paid as work progresses. Excess cash, therefore may be temporarily
invested in high quality interest bearing securities. Interest rates payable by the governmental
unit on general long term debt have been lower than interest rates the governmental units can
earn on temporary investments of high quality such as Treasury bills and notes, Bank notes,
Bank Certificates of deposit and government bonds with short maturities. Consequently, there is
considerable attraction to the practice of selling bonds as soon as possible after capital project is
legally authorized, and investing the proceeds to earn a net interest income. The interest earned
on the temporary investment is available for use by the CPF in some jurisdictions; in others, laws
a local practice require the interest income to be transferred to the DSF or to the GF. If interest
income is available to the CPF, it should be recognized on the accrual basis as a credit to
revenues. If it will be collected by the CPF but must be transferred, the credit for the income
earned should be Due to other funds. If the interest will be collected by the DSF or other fund
that will recognize it as Revenue, no entry by the CPF is necessary.
ILLUSTRATION ON CAPITAL PROJECTS FUND
Financial activities such as revenues earned expenditures incurred for the construction or
acquisition are recorded in almost the same manner as that of the General and Special Revenue
Fund. at the end of each fiscal year prior to a completion of a capital project, the Revenues,
Other Financing sources, Expenditures, Other Financing Uses and encumbrance ledger accounts
of the capital projects fund are closed to the unreserved and undesignated fund balance account.
upon completion of the project, the entire capital project fund is closed by a transfer of any
unused cash to the Debt Service Fund or to the General fund, as appropriate; the unreserved and
undesignated fund balance ledger account of the receiving fund would be for Residual Equity
Transfer. 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
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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
Bond Anticipation Notes Payable 500,000
2. Out of the Irrevocable grant of 20,000,000, the state contributed 5,000,000 and the
Remaining is deemed 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 46,000,000
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Fund Balance Reserved for Encumbrances 46,000,000
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 expansé 510,000
Constr. Payable 510.00
9. In addition to the construction contract of transaction 6; 3,900,000 was incurred for
The services of the architects and engineers; of this amount 3,100,000 was paid.
Encumbrances 3,900,000
Fund Balance Reserved for Encumbrances 3,900,000
Fund Balance Reserved for Encumbrance 3,900,000

Encumbrance 3, 900,000
Construction Expenditure 3,900, 000
Construction Payable 3, 900,000
Construction Payable 3,100,000
Cash 3,100,000
10. Received cash of 1,000,000 from the General fund as an operating transfer.
Cash 1,000,000
OFS- Operating transfers in 1,000,000
11. A partial payment of 10,000,000 was received from the state irrevocable Grants and
The General Fund loan was repaid with interest amounting to 10,000.
Cash 10,000,000
Due from State Grant 10,000,000
Bond Anticipation Notes Payable 500,000
Interest Expenditure 10,000
Cash 510,000
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12. When the project was approximately half finished, the contractor submitted billing for a
payment of 12,000,000.
Fund Balance Reserved for Encumbrance 12,000,000
Encumbrance 12, 000,000
Construction Expenditure 12, 000,000
Construction Payable 12, 000,000
13. The contractor’s initial claim was fully verified and paid.
Construction Payable 12,000,000
Cash 12,000,000
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6.8 Summary
 In conclusion, it should be clearly known that the reason for creating a fund to account
for a capital project is the same as the reason for creating special Revenue funds; to
provide a formal mechanism to enable administrators to ensure Revenues
 Dedicated to a certain purpose are used for that purpose and no other, and to enable
administrators to report to creditors and other grantors of capital projects.
 Fund resources that their requirement regarding the use of the resources was met.

Multiple choice
1. The Fund Balance-Reserved for Encumbrances account is properly considered to be
a(an):
A. current liability if paid within a year; otherwise, long-term debt.
B. equity account; a reservation of fund equity.
C. budgetary account.
D. long-term liability.
2. A city government collects local option sales taxes legally restricted to pay for the
hiring of teachers for hearing impaired school children. Which fund should account for
the receipt of the sales taxes?
A. General fund C. Capital projects fund
B. Special revenue fund D. Private-purpose trust fund
3. Which of the following projects would normally be accounted for in a capital projects
fund?
A. The purchase of furniture for the mayor's office.
B. The construction of a parking lot for use by employees of the City Water Utility.
C. The construction of a police station addition.
D. Payment of interest on bonds issued to finance the construction of a new city hall.
4. Proceeds of tax supported bonds are recognized in a capital projects fund as a(an):
A. Revenue. B. Liability.
C. Other Financing Use. D. Other Financing Source.
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5. Which of the following is true regarding capital projects funds?
A. Capital projects funds are considered to be governmental funds.
B. Capital projects funds use the total economic resources measurement focus and
accrual basis of accounting.
C. Both of the above are true.
D. Neither of the above is true.
6. The liability for general obligation bonds should be recorded in
A. General Fund.
B. Governmental activities journal.
C. Capital projects fund.
D. Debt service fund.
7. If a City has an unpaid capital lease obligation at the beginning of their fiscal year, the
journal entry in the Debt Service Fund to record the lease payment at the end of that
fiscal year will include
A. A debit to ExpendituresPrincipal of Capital Lease Obligation.
B. A credit to ExpendituresPrincipal of Capital Lease Obligation.
C. A debit to Capital Lease Obligations Payable.
D. None of the above.
Discussion questions
1. Describe how and which kind of activities is accounted for in a Capital Projects Fund.
___________________________________________________________________________
_______________________________________________________________________
2. Explain the use of encumbrance and its re-establishment in CPF.
___________________________________________________________________________
_______________________________________________________________________
3. Discuss the concept of budgeting in CPF and its difference with that of GF and SRF.
___________________________________________________________________________
_______________________________________________________________________
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4. Describe the use of investment as a source of financing in CPF.
___________________________________________________________________________
_______________________________________________________________________
5. Explain the mechanism how construction process and the contractor is controlled from
Doing poor quality work?
____________________________________________________________________________
________________________________________________________________________
6. IF bonds sold to finance a project for the construction of general Fixed Assets are sold
At a discount, what legal questions arise? What about at a Premium? Discuss.

____________________________________________________________________________
________________________________________________________________________
7. Explain how financial reporting is made in that of CPF in contrast that of GF.
____________________________________________________________________________
________________________________________________________________________
8. Describe the sources of financing in a CPF by indicate the major and most common sources.
____________________________________________________________________________
________________________________________________________________________
9. Explain the treatments for the remaining residual balance or for a deficit after the
Construction of a major capital facility by a CPF.
____________________________________________________________________________
________________________________________________________________________
10. Describe the factors that influence the decision to use or not to use budgetary accounts
In a CPF.
____________________________________________________________________________
________________________________________________________________________
Answer for self examinations
1. B 2. B 3. B 4. D 5. A 6. B 7. A
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CHAPTER SEVEN: ACCOUNTING FOR DEBT SERVICE FUND
This chapter aims at how governmental units long-term liabilities are serviced and how such debt
servicing activities are accounted in a separate fund. Debt service funds accounts both payment
of interest and principal when due. Long term Debt incurred to provide money to pay for the
construction or acquisition of Fixed Assets or for any other purposes can be repaid only from
revenue raised in subsequent years to service the debt. Revenue raised from Taxes or special
assessments for debt service and expenditure for debt service are commonly accounted for by use
of debt service fund; the subject of this topic. After going through this unit, the student be able
to;
1. describe how General long Term debt is serviced through the Debt Service Fund
2. Understand the types of long term Debt and their character in Governmental Accounting.
3. describe the accounting and related issues in servicing governmental unit’s General long
Term Debt
INTRODUCTION
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. This
especially is true when cash is needed for capital projects. The size of the project typically means
that cash cannot be easily obtained by taxes or other means of generating revenue. When money
is borrowed therefore, there should be plan to repay it and the resources which have been
designated to repay the debt with its interest should not be used for any other purpose. For the
purpose of administering the repayment plan and to keep separate resources designated for the
payment of the debt and its interest, the debt service fund is created.
7.1 GENERAL outline of Debt Service Fund

Characteristics
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1. 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. Often Debt service funds are legally
mandated. Other times, the government administrator might think a
Debt Service Fund is useful for management of resources being accumulated for Debt Service.
2. DSF is governmental funds and therefore are Expendable. Although, like a CPF, they have
focus more than a year. Debt service funds are for general long-term debt (GLTD), which has
been used to provide resources for one of the other governmental fund types. Often they arise
from the Capital projects. Proprietary funds also borrow on a long term basis, but their
repayment is accounted for in the proprietary fund itself rather than a separate debt service fund.
3. As expendable funds, DSF use the modified accrual basis of accounting. An application of
modified accrual, which is of special interest to DSF, has to do with interest payable. Interest
payable is not accrued in the DSF. It is only recorded as a liability in the period when it becomes
due. For example, interest due on January 31, 20x1 would not be accrued and recorded on
December 31, 20 x 0 Balance Sheet.
4. Accounts recommended for use by a serial bond Debt service fund is similar with
That of General Fund and Special Revenue fund. Even if it is not exactly the same
Such as budgetary accounts (Estimated Revenue, Estimated Other Financing
Sources, Appropriations, Estimated other financing Uses) or proprietary accounts
(Revenues, OFS, Expenditures, OFU)
5. 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.
6. The ledger accounts of a Serial Bond Debt Service fund include liquid assets and current
liabilities and Fund Balance Accounts. Liquid Assets of serial Bond Debt Service funds are held
for the purpose of paying interest or outstanding bonds and retiring the principal instalment s as
they fall due; for the convenience of the bond holders, the payment of interest and the and the
redemption of matured bonds is ordinarily handled through the Banking system. Usually the
government designate a bank as a ―Paying Agent‖ or a ―Fiscal Agent‖ to handle interest and
principal payments for each issue. The assets of a Debt service Fund may therefore include Cash
with paying Agent and the appropriations, Expenditures and liabilities may include Amounts
for the Services and Charges for Paying Agents.
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Investment Management may be performed by governmental employees or by banks, brokers or
others who charge for the service, Investment management fees are legitimate charges against
Investment Revenues.
7. Timing of Debt Service payments - mostly due to both political and financial management
considerations, the payment should be kept consistent over the life of the issue. With serial bonds
this is easy but with term bonds, it takes planning (the type of long term bonds will be discussed
later in this topic).
7.2 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 consist 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 instalments over the life of the issue.
2. Differed Serial Bond- The total principal amount of the issue is repaid in equal annual
instalments, but the first instalment 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.
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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 may be 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- these 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).
D. 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 keeps
Track of all unmatured long term debt in group c above. DSF account for the Matured portion
and the repayment of such principal and interest on such long term debt.
In addition, to term bonds and serial bonds, debt service fund may be required to service debts
arising from the use of notes or warrants having a maturity period of more than a year after the
date of issue. Additionally, DSF may also be used to make periodic payments required by capital
lease agreements.
Activity
Question 1: list and explains a type of long term debt
Question 2: explains the basic characteristics of debt service fund
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7.3 Number of Debt Service Fund
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7.4 SOURCE AND USES OF CASH FLOWS
Sources of finances (resources)
1. 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.
2. 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.
3. 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. The process of issuing new bonds to pay of the old ones is
called Refinancing.
4. 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.
5. 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
Whether or not additions to Debt service Funds are required by the Bond indenture to be
approximately equal year by year, good politics and good financial management suggest that the
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Activity
Question 2: list and explains methods of financing debt service fund
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7.5 illustration on debt service funds

Illustration
The town of X uses a Serial Bond Debt Service Fund to pay off matured bonds and - -Interest
payable amounts. Information about the Bond issue is as follows;
- Principal Amount ----------------- 1,000,000

- Interest Rate ---------------------- 10%
- Bonds Dated ---------------------- January 1, 20x6
- Interest Payable--------------------- January 1 and July 1, beginning July 1, and 20x6
- Bonds mature serially at the rate of 100,000 a year starting January 1, 20x7.
- The Fiscal Period runs from July 1, 20x7 - June 30, 20x8.
1. The Revenue Budget for Serial Bond Debt Service Funds for 20x8 consists of
estimated Revenues of 330,000 to be raised from Debt Service Tax Levy and
Estimated Revenues of 50,000 from earnings on investments.
=> Appropriation Budget includes matured interest payable and matured bonds
Payable i.e ;
Interest for July 1 and January 1 = 900,000 x 5% x 2 = 90,000
Bonds payable mature January 1 = 100,000
Estimated Tax Revenue 330,000
Estimated Investment Revenue 50,000
Appropriations 190,000
Budgetary Fund Balance 190,000
2. Taxes receivable I the amount of 340,000 and estimated uncollectable taxes in the
Amount of 10,000 are recorded.
Taxes Receivable- current 340,000
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Allowance for uncollectable current taxes 10,000
Revenues 330,000
3. Half of the gross levy of taxes is collected in cash.
Cash 170,000
Tax Receivable-current 170,000
4. Interest payable on July 1, 20x7 is recorded as a liability.
Expenditure 45,000
Matured Interest Payable 45,000
5. Checks are written and mailed to the paying agent for the interest payment due on
July 1.
Cash with Fiscal Agent 45,000
Cash 45,000
6. Interest is paid by the Fiscal Agent and the Fiscal Agent fee of 500 is paid.
Mature Interest Payable 45,000
Expenditure 500
Cash with Fiscal agent 45,000
Cash 500
7. Taxes in the amount of 160,000 are collected.
Cash 160,000
Tax Receivable- Current 160,000
8. Cash of 100,000 is invested in a short term note which bears interest of 10%
Short Term Investment- Note 100,000
Cash 100,000
9. Interest on investment is received for the four months.
100,000 x 10% x 4/12 = 3333.33
Cash 3333.33
Revenue 3333.33
10. Checks are written and mailed to to the Fiscal Agent for the matured bonds and
Interests due on January 1.
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Cash 145,000
11. On January 1, 20x8 matured bonds and interests of 145,000 and the Fiscal Agents fee of
1,000 is charged as Expenditure.
Expenditure 146,000
Matured Bonds Payable 100,000
F.Agent fee payable 1,000
12. Matured Bonds and interests is paid by the Fiscal Agent and the Fiscal Agent Fee
Is paid.
Matured Bond Payable 100,000
Fiscal Agent Fee Payable 1,000
Cash 1,000
13. Interest on Investment is received for three months.
10,000 x 10% x 3/12 = 2,500
Cash 2,500
Revenue 2,500
14. June 30, 20x8- Interest on investment are accrued for two months.
100,000 x 10% x 2/12 = 1666.67
Interest Receivable 1666.67
Revenue 1666.67
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
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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
7.6 Model examinations

1. On the due date for bond interest, the debt service fund journal entry (or entries) will include:
A. A debit to Appropriations
B. A debit to OFS – Inter fund Transfers In.
C. A debit to Interest Expense.
D. A debit to Expenditures—Bond Interest.
2. Which of the following funds are governmental funds?
A. General Fund, special revenue funds, capital projects funds, debt service funds, and private-
purpose trust funds.
B. General Fund and special revenue funds, private-purpose trust funds.
C. General Fund, special revenue funds, capital projects funds, debt service funds, and
permanent funds.
D. General Fund, special revenue funds, capital projects funds, debt service funds, and internal
service funds.
3. Governmental funds like debt service fund use the:
A. Economic resources measurement focus and accrual basis of accounting.
B. Current financial resources measurement focus and accrual basis of accounting.
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C. Economic resources measurement focus and modified accrual basis of accounting.
D. Current financial resources measurement focus and modified accrual basis of accounting
4. Which one the following is true about the source of cash flows
A. Special tax B. Investment
C. Re-financing D. All
5. -----------------A written promises to pay a specified principal sum at a specified future date
with interest.
A. Bond B. Serial bond C. Term bond D. None
6---------- Is bond the total Principal amount of an issue is repayable in a specified number of
equal annual instalments over the life of the issue.
A. Regular Serial Bonds C. Annuity Serial Bond
B. Differed Serial Bond D. All
1. What basis of accounting is used for expenditures of a Debt Service Fund? What exceptions
is usually followed in recognizing Expenditures for matured Bonds principal and
interest?____________________________________________________________________
________________________________________________________________________
2. What Assets and liability accounts would you expect to find in a Balance Sheet statement of a
Debt Service Fund?
______________________________________________________________________________
______________________________________________________________
3. What are the different types of long-term debts that could be accounted for in a Governmental
unit’s DSF.
______________________________________________________________________________
4. What are the accounts to be made when a budget is prepared in a DSF?
___________________________________________________________________________
5. Describe considerations to be made in an appropriations budget of a DSF.
___________________________________________________________________________
6. Describe the sources of financing which could be used to service debts in DSF.
___________________________________________________________________________
7. Explain how the General Fund is used to account for Debt Service.
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___________________________________________________________________________
8 What does a ledger account of a debt service fund includes different from other
funds?
___________________________________________________________________________
9. Describe Refinancing and how it is used as a source of finance for a DSF.
___________________________________________________________________________
10. Explain one peculiarity of the accrual basis of accounting of governmental fund
types which only applies to DSF.
_________________________________________________________________________
1. Refer to the topic 7.2
Answer for choice
1. D 2. D 3. D 4. D 5. A 6. B
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Chapter Eight: INTERNAL SERVICE FUNDS AND ENTERPRISE FUNDS
This unit aims at explaining the two different type of funds under the proprietary funds category
i.e The Internal Service Fund and the Enterprise Funds. After going through this unit, you will be
able to:
1. understand The Establishment and operations of the Two Proprietary Funds
2. describe, compare and contrast the two funds with other Type of funds
3. explain how the financial activities are accounted for in this funds in the same manner
with that of a commercial entity
4. explain the accounting treatments and other related issues of both funds
INTRODUCTION
All of the funds discussed in the previous chapters (GF, SRF, CPF, DSF) owe their existence to
legal constraints placed on the raising of revenue and/or the use of resources for the provision of
services to the public or segments thereof, and for the acquisition of facilities to aid in provision
of services. It become apparent that efficiency should be improved if services used and given by
several governmental units were combined in a single administrative unit. 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.
Enterprise Funds may also be used to account for any operations ―where the governing body has
decided that periodic determination of revenues earned, expenses incurred and/or net income is
appropriate for capital maintenance, public policy, Management Control, Accountability or other
purposes. Proprietary funds are accounted for in the same manner to investor owned Business
Enterprise. Accordingly such funds recognize revenues and expenses (not Expenditures on the
accrual basis. they account for all fixed assets used in their operations and for long term debt to
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be serviced from revenues generated from their operations as well as for all current assets and
current liabilities. the equity account of proprietary funds are composed of
1. Contributed equity
2. Retained Earnings
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.
8.1 Internal Service Fund (ISF)

Various departments of a governmental unit usually require common services. Each department
may hire people to perform these services or it may control with outside vendors. it is usually
cheaper however for the governmental unit to establish one or more separate operations to
provide the services to its various departments. ISF account for each of these separate operations
in a manner that changes the total cost of an operation to the various user departments. 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. This is due the fact that governmental
units are becoming complex and also efficiency is improved if services used by several
departments or funds or even several governmental units were combined in a single
administrative unit like control purchasing department, common Garage, Printing service and
Data Processing Service. a logical name for a fiscal and accounting entity created to account for
resources used for providing centralized services is ISF. Traditionally, the reason for the creation
of funds in this category was to improve the management of resources. In recent years large
numbers of governmental units have experienced a shortfall of revenues with an increase in the
demand for governmental services. Consequently, many governmental units have turned to user
charges as a means of financing operations formerly financed by Tax Revenues and
intergovernmental Revenues. In order to determine whether user charges are commensurate with
operating costs, and to improve the ability of administrators and governing bodies to determine
that costs are reasonable in relation to benefits. It is desirable for the activities to be operated and
accounted for on a business basis. Thus many activities formerly operated on a purely non
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commercial basis and accounted for by governmental funds are now accounted for by proprietary
funds, ISF & EF. As discussed earlier in the introduction, Activities that produce goods or
services to be provided to department or agencies of a governmental unit or to other
governmental units, on a cost reimbursement basis are accounted for by ISF.
The phrase cost- reimbursement basis is to be interpreted broadly. User charges need not cover
the full cost of providing the goods or services; transfers from other funds or units to subsidize in
part the operations of an ISF do not negate the use of this fund type. Being a proprietary fund,
ISF is accounted for in the same manner like an investor owned business enterprise. Accordingly
as mentioned earlier, it recognizes Revenues and Expenses (not expenditures) on the accrual
basis. it accounts for all fixed assets used in its operations. And for long term debt to be serviced
from revenues generated from its operations as well as for all current assets and current
liabilities. It has got two equity accounts; Equity contributed to the fund and, retained earnings
resulting from the operations of the fund.
Establishment and Operations
ISF arose to meet the need to offer services within the entity. 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. Although the
reason for establishment of an 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. The ordinance, or other legislative
action, that authorizes the establishment of an ISF should also specify the source or sources of
financial resources to be used for fund operations. the original allocation of resources to the fund
may be derived from a transfer of assets of an other fund, such as The GF or an EF, intended as
contribution not to be repaid, or a transfer in the nature of a long term advance to be repaid by
the Internal service fund over a period of years. Alternatively, or additionally the resources
initially allocated to an internal service fund may be acquired from the proceeds from the
proceeds of tax supported bond issue or transfer from other governmental units that anticipate
utilizing the services to be rendered by the ISF. Since the 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. Application of this general truth to a specific case can lead to a conflict
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between managers who wish the freedom to operate the fund in accord with their professional
judgement, and legislators who wish to exercise considerable control over the decisions of ISF
managers.
Operation of an ISF- Generally the cost of an ISF should be less than the cost of purchasing the
same service from an external provider. in some cases the use of an ISF with higher cost can be
justified if it is thought that external service providers are unreliable. External conditions change
constantly and the cost of an ISF tends to increase from time to time good cost information from
the accounting system allows management to regularly review the ISF in comparison to External
providers. Sometimes subsidy might be given to the ISF by other funds so as to make the
services of ISF cheaper, under this case, a below cost charge should be made by the ISF to other
funds so that those other funds receive the service at a discount and thereby be able to operate
their own funds at a surplus.
The major challenge in operating in ISF is the determination of the cost of service, which is to be
charged to the user departments. Basically the pricing of the service to the other departments is
very important in the ISF. In a profit seeking business, the main determinant of price is ―what the
market will bear‖. However an ISF serves as a ‖captive‖ market and since it is ultimately meant
to save money for the entity as a whole. Pricing should be done according to the cost of
providing the service. The price charged to the user departments should be high enough to cover
all the cost of the ISF, while being less expensive than purchasing outside.
Activity
Question 1: explains the establishment and operation of internal service fund and enterprise fund
Question2; how to prepare financial statements under internal service fund
Questions 3: list the way of dissolution under internal service fund
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8.2 Illustrative Case
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. And to administer and account
for this functions in a Supply Fund.
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
Inventory of Supplies 61,500
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 cash of 100,000 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
instalments.
Cash 100,000
Advances from water Utility Fund 100,000
3. A Warehouse building is purchased for 70,000; 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.
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Inventory of Supples 179,800
Vouchers Payable 179,800
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 supplies that cost 170,000 to the GF. (A mark up of 35% on the cost
of the supplies that it purchases will be sufficient to cover its after cost. assume Perpetual
Inventory system)
Cost of Supplies Issued 170,000
Inventory of Supplies 170,000
=> (170,000 x 135% = 229500);
Due from GF 229,500
Billings to Departments 229,500
Exp-The Supplies fund should account for its Inventories on a Perpetual Inventory Basis since
the information is needed for proper performance of its primary function. Accordingly, when
supplies are issued, the inventory account must be credited for the cost of the supplies issued.
Since the using fund will be charged an amount in excess of the Inventory carrying value, the
receivable and revenue accounts must reflect the selling price. The mark up cost should be
determined on the basis of budgeted expenses and other items to be financed from net income in
relations to expected requisitions by using funds.
6. Collections from General fund during the year totalled 213,000.
Cash 213,000
Due from General fund 213,000
7. Payrolls and fringe benefits during the year were all paid in cash and were distributed as
follows in a functional Expense account:
Administration = 10,000 Purchasing = 18,000
Warehouse = 11,000 Delivery = 12,000
Administrative Expenses 10,000
Warehousing Expenses 11,000
Purchasing Expenses 18,000
Delivery Expenses 12,000
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Cash 51,000
8. Payments on vouchers during the year totalled 157,000.
Vouchers Payable 157,000
Cash 157,000
9. The Advance from the Water Utility Fund, first repayment has been made
Advance from Water Utility Fund 5, 000
Cash 5,000
10. Depreciation has been recorded based on the following information;
- Building used as a warehouse was estimated at the time of purchase to have a
Remaining useful life of 20 years;
- The warehouse machinery and Equipment was estimated to have a useful life of
10 years;
- The Delivery Equipment to have a useful life of 5 years;
- Warehouse building space occupied:
10% => the administrative and clerical office
10% => Purchasing Office
80% => Warehousing
- Warehouse Machine and Equipment is devoted to Warehousing
10% = 300
=>60,000 = 3,000 -- 10% = 300
20 yrs 80% = 2,400
20,000 = 2,000
10 yrs
10,000 = 2,000
5 yrs
Administrative Expense 300
Purchase Expense 300
Warehouse Expense 4,400
Accumulated Depreciation- Building 3,000
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Accumulated Depreciation- W.h Mach.& Equip 2,000
Accumulated Depreciation- Equipment delivery 2,000
* Organizations that keep perpetual Inventory records must adjust the records periodically to
reflect shortages, overages or out of condition stock disclosed by fiscal Inventories. Adjustment
to the inventory account is also considered adjustment to the warehousing expenses of the
period.
11. The operating Statement of Accounts are closed as of December 31, Year 2.
Billings to Departments 229,500
Cost of Supplies Issued 170,000
Administrative Expenses 10,000
Purchasing Expenses 18,300
Warehousing Expense 15,400
Excess of Net Billings to-
Department over Costs 1,500
Exp- ―Excess of net billings to departments over cost‖ (or ―Excess of Cost over Net Billings to
Departments,‖ if operations resulted in a loss) is the account title generally considered more
descriptive of the Fund’s result than ―Income Summary‖ or ―Current Earnings‖ - the titles
commonly found in profit seeking business. Whatever title is used for the account summarizing
the results of operations for the period, the account should be closed at year-end. The title of the
account that records earnings retained in an ISF is the same as the title commonly used in a profit
seeking business: Retained Earnings.
Excess of Net Billing to- 1,500
Departments over Cost
Retained Earnings 1,500
Equity Transfer In 86,500
Contributed Equity-GF 86,500
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8.3 Accounting for enterprise fund and Related Issue
A very common example of the EF is Public Utility, (Eg. Electricity, Water Sewerage etc...), the
accounting example discussed mostly in this topic would of the same. Most other Enterprise
Funds would be less complicated than utilities, so the principles learned taking utilities as an
example can easily be applied to any other types of Enterprise Funds.
Original cost is regulatory concept that differs from historical cost. A concept commonly used in
accounting for assets of non-regulated business. In essence historical cost is the amount paid for
an asset by its present owner. In contrast, original cost is the cost to the owner who first devoted
the property to public service.
Since a governmental entity can’t really charge taxes to itself, it may have it’s EF pay some
agreed Contribution in lieu of Taxes to the governmental entity. This would be considered as an
operating expense for the EF, and Revenue for the receiving fund. (It is not an Interfund
Transfer). Efs may use functional division of Expenses. In other words, Expenses are classified
by what you get, rather than what you spent. Eg. The following expense categories may be used
for Water Supply Enterprise Fund: Source of Supply, Pumping, Transmission and Distribution
(pipes), Administrative etc..., rather than the natural expense categories such as Salary Expense,
Rent Expense, etc.
8.4 Illustrative Case

The town of X has permitted the establishment of water Utility Enterprise Fund to operate
without legal formal approval of their budget and the following transactions have taken place as
of January 1, Year 1.
1. On January 1, year 1, billings from the town of X water Utility fund from sales of water
Utility services of the previous fiscal year amounting to 14,800 that accrued has been recorded.
Sales of water 14,800
Accrued Utility Revenues 14,800
Exp- It is not feasible when customers’ bills are prepared to determine whether the portion of the
bill has been accrued. And if so, how much? The simplest procedure therefore is to reverse the
accrual entry as of the start of the new fiscal year. Assuming that the entire December 31, year 0
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Town of X water Utility fund revenues accrual has been credited to sales of water, the above
entry should be made.
2. During Year 1, the total bills to non-governmental customers amounted to 696,000. Bills to
the Town of X General Fund amounted to 30,000 and all Revenue was from sales of water
Customer Accounts Receivable 696,000
Due from General fund 30,000
Sales of Water 726,000
3. Collections from Nongovernmental customers for Water Billings totalled 680,000.
Cash 680,000
Customer Account Receivable 680,000
4. Materials and supplies in the amount of 138,000 were purchased during the year by
The Water Utility fund.
Materials and Supplies 138,000
Accounts Payable 138,000
5. Materials and supplies Chargeable to the accounts itemized below were issued during
The year.
- Source of Supply 18,000 - Transmission & distribution 13,000
- Pumping 21,000 - Construction work in progress 66,000
- Water Treatment 24,000
Source of supply Expenses 18,000
Pumping Expenses 21,000
Water Treatment Expenses 24,000
Transmission and Distribution Expenses 13,000
Construction work in progress 66,000
Materials and Supplies 142,000
6. Payrolls for the year were chargeable to the accounts given below. After deducting
The necessary tax collections, checks have been given to the employees’ net
Earnings.
- Source of Supply 8,200 - Sales 17,250
- Pumping 15,700 - Tax collected 51,750
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- Water treatment 17,500 - Taxes Accrued 13,800
- Construction work in progress 30,400 - Customer account 96,550
- Administrative and General 83,150
- Transmission and distribution 76,250
Source of supply Expenses 8,200
Water treatment Expenses 17,500
Customer Account Expenses 96,550
Sales Expenses 17,250
Administrative and General Expenses 83,150
Taxes Accrued 13,800
Taxes collection Payable 51,750
Cash 279,450
Exp- Tax collections payable is the account provided to report the amount of taxes collected by
the Utility through payroll deductions or otherwise pending transmittal of such Taxes to the
Proper Taxing Authority. Taxes accrued are the account provided to report the liability for Taxes
that are the expenses of the utility, such as the employer’s share of social security taxes. In the
entry below it is assumed that employers share of social security Taxes is charged to the same
accounts that the employees’ gross earnings are.
7. Interest on bond in the amount of 105,000 was paid. The bonds were issued to
Finance the acquisition of Utility plant asset. Amortization of Debt discount and
Expense amounted to 530.
Interest on long term Debt 105,000
Amortization of Debt Discount and Expense 530
Unamortized Debt discount and expense 530
Cash 105,000
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8. Bond Interest during the period of construction, net of any interest earned on temporary
investment of bond proceeds, amounted to 12,900; this amount was charged to construction.
(The town of X does not impute interest on its own resources used during the construction).
Construction work in Progress 12,900
Allowance for funds used-
During Construction 12,900
9. Construction projects on which costs totalled 220,000 were completed and the assets placed in
the service:
Utility plant in service 220,000
10. Collection efforts were discontinued on bills totalling 3,410. The customers owing the bills
had paid deposits to the water Utility totalling 2,140. The deposits were applied to the bills and
the unpaid remainder was charged to allowance for
Uncollectable accounts.
Customer Deposits 2,140
Accumulated Provision for-
Uncollectable Accounts 1,270
Customer accounts Receivable 3,410
11. Customer deposits amounting to 1,320 were refunded by check to customers discontinuing
service. Deposits totalling 2,525 were received from new customers.
Cash 1,320
Cash 2,525
12. Customer Advances for Construction in the amount of 14,000 were applied to their water
bills. In accordance with the agreement with the customers, the remainder of the advances were
transferred to contribution from Customers.
Customer Advances for Construction 21,000
Customer Accounts Receivable 14,000
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Contributions from customers 7,000
13. Payments of account payable for materials and supplies used in operations totalled
67,200 and payment of Account Payable for material used in construction totalled
66,000. Payment of taxes accrued amounted to 13,500 and payments of Taxes
Collection Payable amounted to 50,000.
Accounts Payable 133,200
Taxes Accrued 13,500
Taxes Collection Payable 50,000
Cash 196,700
14. The water Utility fund agreed to pay 25,000 to the town General Fund as a
Contribution in lieu of Property Taxes.
Contribution in Lieu of Taxes 25,000
Due to General Fund 25,000
15. At year end entries to record Depreciation Expense in the amount of 91,700; The
Amortization of the Plant Acquisition Adjustment in the amount of 11,050; Allowance for
Uncollectable Accounts in the amount of 3,980; and Unbilled Customer Accounts in the
Amount of 15,920 have been made.
Amortization of plant acquisition adjustment 11,050
Depreciation Expense 91,700
Customer Account Expense 3,980
Accrued Utility Revenues 15,920
Accumulated provision for amortization-
Of plant Acquisition adjustment 11,050
Accumulated provision for depreciation-
of Utility Plant 91,700
Accumulated Provision for Uncollectable-
Accounts 3,980
Exp- in accordance with manuals of regulatory authorities, Customer Accounts Expenses, is
debited for the amount added to Accumulated Provision for Uncollectable Amounts.
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16. In accordance with the Revenue Bonds Indenture, 100,000 amounts of cash was transferred
to the Special Funds category. The transfer requires an appropriation of Retained Earnings of an
equal amount.
Special Funds 100,000
Cash 100,000
Unappropriated Retained Earnings 100,000
Appropriated Retained Earnings 100,000
17. Nominal accounts at the end of the year were closed.
Allowance for Funds Used during Construction 12,900
Source of Supply Expenses 26,200
Water treatment Expenses 41,500
Customer Account Expenses 100,530
Sales Expenses 17,250
Administrative and General Expenses 83,150
Interest on Long Term Debt 105,000
Amortization of Debt Discount and-
Expense 530
Contribution in lieu of Taxes 25,000
Depreciation Expenses 91,700
Amortization of Plant Acquisition-
Adjustment 11,050
Unappropriated Retained Earnings 112,160
_____________________________________________________________________
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8.5 chapter summary
It has been stressed that each governmentally owned Enterprise should follow the accounting and
financial reporting standard developed for investor-owned enterprises in the same industry.
Generally, the standards developed by FASB and its predecessors, have been accepted by the
GASB as applying to ISFs and EFs. Consequently, many sections in this topic which discuss
Generally Accepted Accounting Principles (GAAP) applicable ti ISF (such as Acquisition of
assets by Contribution or grants, Depreciation of contributed assets or assets acquired from
Capital grant and assets acquired under lease agreement) apply equally to Efs accounting for
activities whose accounting is not regulated by Federal or state agencies.
There is a trend toward a belief that FASB standard should apply to General Purpose external
financial Reporting of Regulated Utilities also and that the requirement of regulatory bodies
should apply only to the reports submitted to the regulatory bodies.
As of the present time, however, the material presented in the previous sections of this topic in
regard to accounting and financial reporting for governmentally owned utilities is considered
authoritative.
Segment information that should be presented for EFs is that deemed essential to make the
General Purpose Financial statement not misleading. The following types of information are
specified
a) Material Intergovernmental Operating Subsidies to an Enterprise Fund
b) Material Intergovernmental Operating Subsidies to or from an Enterprise Fund
c) Material enterprise Fund Tax Revenues.
d) A Material Enterprise Fund Operating Income or Loss.
e) A Material Enterprise Fund Net Income or Loss.
Materiality should be evaluated in terms of the individual Enterprise Fund, not in terms of the
total Enterprise Fund type taken as a whole.
8.6 Self model examination

Choice
1. Which of the following funds of a government would account for depreciation in the
accounts of the fund?
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A. General fund
B. Internal service fund
C. Capital projects fund
D. Special revenue fund
Internal service funds should be used only if
A. The reporting government is the predominant participant in the activity.
B. The reporting government provides services primarily to external participants
C. The reporting government provides services primarily to other departments of the same
government.
D. The reporting government provides services to other departments at a charge that covers the
full cost of operations.
2. In which of the following funds is it appropriate to record depreciation of capital assets?

A. Internal service fund.
B. Permanent fund.
C. General fund.
D. Capital projects fund.
3. Which of the following is a difference between enterprise funds and internal service funds?
A. The use of cost accounting by enterprise funds but not internal service funds.
B. The customers who primarily benefit from the fund's service.
C. The number of basic financial statements required.
D. The measurement focus on economic resources for enterprise funds and current financial
resources for internal service funds.
4. Depreciation on capital assets used by an enterprise fund of a government
A. Should not is recorded for infrastructure assets.
B. Should be recorded in the General Fund as expenditure.
C. Should be recorded in the governmental activities accounts.
D. Should is recorded in the enterprise fund as an expense.
5. The comprehensive annual financial report (CAFR) of a government should contain a
statement of revenues, expenses, and changes in net assets for
A. Both proprietary and governmental funds.
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B. Proprietary but not governmental funds.
C. Governmental but not proprietary funds.
D. Proprietary and fiduciary funds.
6. Which of the following activities or services would most likely not be accounted for by an
internal service fund?
A. Electronic data processing.
B. Central purchasing, warehousing, and issuing of supplies.
C. Municipal golf course.
D. Risk management.
7. Which of the following is (are) an appropriate basis of accounting for an internal service
fund?
A. Modified accrual basis: Yes; accrual basis: No:
B. Modified; Accrual basis: No; accrual basis: Yes
C. Modified accrual basis: Yes; accrual basis: Yes
D. Modified accrual basis: No; accrual basis: No
8. An internal service fund normally uses which of the following budgetary accounts?
A. Estimated Revenues.
B. Appropriations.
C. Encumbrances.
D. A. and B and C are all used
E. An internal service fund normally does not use budgetary accounts.
10. Which of the following accounts would least likely be found in the general ledger of an
internal service fund?
A. Cash.
B. Expenditures.
C. Billings to Departments.
D. Machinery and equipment.
E. All of these accounts would be found in the general ledger of an enterprise fund.
Check Your Progress
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1. Describe an ISF and EF as similar Investor Owned Business Enterprises
___________________________________________________________________________
_________________________________________________________________
2. What Information must be known about an activity or operation to determine whether it
should be accounted for as an EF, ISF or as a Governmental fund?
___________________________________________________________________________
_________________________________________________________________
3. What is the meaning of Original Cost as used in proprietary fund accounting? In your answer,
make clear how original cost differs from Historical Cost.
___________________________________________________________________________
_______________________________________________________________
4. Briefly describe proper EF accounting for debt service and Construction activities; compare
and contrast this treatment with governmental debt service and construction activities.
___________________________________________________________________________
_______________________________________________________________
5. Describe Customer Deposits in EF and also explain if whether governmentally owned Utilities
pay interest on customer deposit.
___________________________________________________________________________
_________________________________________________________________
6. What are the categories of cash flow in a proprietary Fund statement of cash flows prepared in
conformity with GASB standards? What kind of transactions reported in each category?
Compare and Contrast statements prepared by Proprietary Funds with that of the
Governmental Funds.
___________________________________________________________________________
_______________________________________________________________
7. What are the alternative methods of dissolving an ISF? What factors should be considered in
choosing the appropriate method?
___________________________________________________________________________
_______________________________________________________________
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8. What is the relation between customer advances for Construction and Contribution from
customers?
___________________________________________________________________________
_________________________________________________________________
9. Explain the reason for the establishment of an ISF.
___________________________________________________________________________
_________________________________________________________________
10. Describe how the original allocation of resources is made during the establishment of an ISF.
ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

2. Refer to the topic 8.2.1
3. Refer to the topic 8.2.1 & 8.3.1
Multiple questions
1. B 2. C 3. A 4.B 5.D 6.B 7. C 8. B 9. E 10. B
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CHAPTER Nine: ACCOUNTING FOR FIDUCIARY FUND (TRUST AND
AGENCY FUNDS)
This unit indicates the fiduciary funds and the different types of funds under this category. There
are 4 types of Fiduciary Funds:
1. Agency Funds
2. Expendable Trust Fund
3. Nonexpendable Trust Funds
4. Pension trust Funds
The four types of funds will be discussed in brief since a detail discussion of these Fund types is
beyond the scope of the course, but the student should at least be aware of their existence and
nature.
After completion of this unit, the student should be able to;
1. clearly understand the concept of Fiduciary funds
2. Determine and analyse between Trust and Agency funds.
3. Explain theoretical and other important issues related to these funds.
9.1 FEATURE OF FIDUCIARY FUNDS

The principle indicates that ―Fiduciary Funds account for assets held by governmental unit,
acting as trustee or an agent for individuals, organizations, other governmental units or other
funds of the same governmental unit‖. For that reason fiduciary funds are often identified in
governmental financial report as Trust and Agency Funds. 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
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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.
9.1.1 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 belong to the party or
parties for which the governmental unit acts as agent. Therefore Agency fund Assets are offset
by Liabilities equal in amount. No Fund Equity exists. Typically, there are no Revenues,
Expenditure or Expenses recognized by an Agency Fund. GASB’s standard require Agency fund
to use the modified accrual basis of accounting. As with Governmental Funds, unless an agency
fund is required law or administrative decision, the funds which are held maybe simply
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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 - Special Assessments 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 losses on sales of
investments are allocated to the funds having an equity in the pool in proportion to their relative
contributions to the pool. To ensure an equitable division of earnings, gains and losses, it is
customary to revalue all investments in the pool, and all investment being brought into the pool
or removed from the pool, to market value as of the time that investments of a fund are being
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brought into or removed from the pool. (Some pools carry investments at market, revaluing them
daily).
9.1.2 Trust Funds

Activity
Question 1: explains the features of fiduciary fund
Question2; what is the difference between trust and agency fund
Questions 3: what is the difference between expendable and non-expendable funds
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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 trust or’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.
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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.
9.2 SUMMARY
 Full treatment of accounting and reporting requirements for both governmental
employers and pension trust funds particularly is considerably beyond the scope of this
course.
 This unit is intended to introduce the topic and present a general overview of current
standards and concepts of fiduciary Funds.
Check Your Progress
Multiple choices
1. Which of the statements concerning agency funds is true?
A. Agency funds use the same basis of accounting as permanent funds.
B. Agency funds are reported only on the statement of fiduciary net assets.
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C. Agency funds use the temporary accounts Additions and Deductions.
D. Agency funds never receive cash.
2. Which of the following is a fiduciary fund?
A. Investment trust C. Enterprise
B. Permanent D. Internal service
3. Which of the following is nota fiduciary fund?
A. Agency C. Private-purpose trust
B. Permanent D. Pension trust
4. A city government makes its semiannual payment of interest on revenue bonds issued to pay
for the construction of additional public transit stations. Which fund would account for the
payment?
A. Debt service fund
B. Capital projects fund
C. Enterprise fund
D. Internal service fund
5. The ______ Funds are used when resources are provided primarily through the use of sales
and service charges to parties external to the government and it is the intent of the government to
measure net profit or loss.
A. Special revenue C. Agency
B. General D. Enterprise
6. The ______ Funds are used to account for situations in which the government is acting as a
collecting/disbursing agent.
A. Special revenue C. Enterprise
B. Agency D. General
1. Explain the concept of Fiduciary funds in relation to Governmental Accounting.
___________________________________________________________________________
_____________________________________________________________________
2. Compare and Contrast Agency and Trust funds
___________________________________________________________________________
_____________________________________________________________________
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3. Describe how the collection of Taxes would be accounted for in Fiduciary Funds.
___________________________________________________________________________
_____________________________________________________________________
4. Discuss the similarities and differences between Expendable and nonexpendable
Trust Funds.
___________________________________________________________________________
_____________________________________________________________________
5. Explain the concept of an Endowment Fund as part of the Trust fund.
___________________________________________________________________________
_____________________________________________________________________
6. Explain the nature of the accounting characteristics of Fiduciary Funds and their
resemblance with that of Gov`Tal funds and Proprietary Funds.
___________________________________________________________________________
_____________________________________________________________________
9.3 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

Answer to multiple choice
1. B 2. A 3.B 4. C 5. D 6. B
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Chapter ten:Accounting for Other Not-for-Profit Entities
10.1 INTRODUCTION
There are organizations whose object is not to make profit. these not-for-profit organizations
account their resources and financial activities under different accounting system. Every
organization wants to be successful. Of course. In order to know if it is successful, ―success‖
must be defined in terms of goals. And then it needs some means to measure its results against its
goals. Measuring success is often thought of in terms of effectiveness (achieving the goal at the
highest level) and efficiency (achieving the goal through using the least amount of resources. for
profit seeking organizations (F.P.) or
Organizations whose objective is to make profit, both efficiency and effectiveness can easily be
measured with financial statement. There are certainlynon financial criteria to judge success like
qualitative or quantitative measures. But regardless of what other measures are employed,
ultimately effectiveness will be measured by the income statement. Not only income statement
measures effectiveness, it also measures efficiency. As with efficiency, there may be non-
financial criteria for evaluating efficiency. But ultimately, efficiency is evaluated by the expense
section of the income statement. If expenses are less than revenue and the organization has
earned an ―acceptable‖ profit, then we can say it is successful in efficiency. We can therefore say
that the objective of the income statement is to demonstrate both the effectiveness and efficiency
of the organization.
For not-for-profit organizations (N-F-P) however, these objectives are not as useful. Without a
good measure of effectiveness, measurement of efficiency becomes almost meaningless. If n-f-p
accounting system cannot measure effectiveness (as can profit seeking accounting systems),
what then is their use? They are most often employed to control public resources i.e. each person
given custody of or access to public resources should report back as to how they were used. The
public can then hold the person accountable for the proper use of the resources. This means that
the income statement is only limited to use in judging effectiveness. Both the nature of non profit
organizations and the objectives of their financial reporting have given rise to a particular
accounting method, i.e. the use of ―fund accounting‖
10.2 MEANING AND DEFINITION
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It is very important to understand the meaning of fund in this context. in normal conversation
―fund‖ means simply, a resource of money. That is not the meaning ―fund‖ has in Fund
Accounting. In fund accounting, ―fund‖ means a distinct entity within a larger entity. A
separate journal entry ledger will be kept and separate financial statements will be kept for each
fund. The fund accounting concept can be used to define very clearly the purposes for which the
resources are to be used, and who is to be held accountable for the resources. Furthermore the
definition will be discussed along with the other principles in the next chapter.
Activity
Question 1: what does men not for profit organizations
Question2; what is the difference between business entities and Not-for-Profit Entities
Questions 3: what are the classification of not for profit organizations
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10.3 CLASSIFICATION OF NOT-FOR-PROFIT ORGANIZATIONS

Generally, organizations could be classified either based on their objectives or their ownership. if
Organizations are classified by their:
1. Objectives
a. Commercial / for profit organizations- which emphasize on the making of profit
b. Non commercial/ not –for – profit organizations- which do not give emphasis
on the making of profit
2. Ownership
a. Non-governmental (Private organizations) – are operating for the benefit of an
individual proprietor or, as partners, a group of partners or shareholders.
b. Governmental organization – are operated for the benefit of society as a
Whole.
A non profit (not- for profit) organization is a legal accounting entity that is operated for the
benefit of society as a whole rather than for the benefit of an individual proprietor or a group of
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partners or shareholders. Thus, the concept of net income is not meaningful for non-profit
organization. A non-profit organization strives only to obtain revenue & support sufficient to
cover its expenses.
Non-profit organizations comprise a significant segment of the country’s economy.
Basically, the following are suggested way of classifying NFP organizations.
1. GOVERNMENTAL UNITS
When thinking of governmental units, one tends to focus upon the federal government, or on the
states within the federal government (state governments) or those major local governmental units
or organizations within those governments. The federal government of Ethiopia is comprised of
states & Local governmental units.
E.g.- Regions of the federal government of Ethiopia are:
Tigray South nations & nationalities
Despite the wide range in size and scope of governance, similarity & differences as the
accounting treatment as compared to business organizations, Governmental units and other non-
profit organizations would have the following common characteristics.
1. Organization to serve the society (citizens)
The basic principle of governmental philosophy is that governmental units exist to serve the
citizens subject to their jurisdictions. Thus the citizens as a whole establish governmental units
through the constitutional & charter process. In contrast, business enterprises are created by only
a limited number of individuals.
2. General absence of profit motive
With few exceptions, governmental units render services to the citizenry with out the objective
of profiting from those services. Business enterprises are motivated to earn profit.
3. Society as a principal source of revenue
As with governmental units, most non- profit organization depend on the general population for
a substantial portion of their support. Because revenue from charges for their services is not
intended to cover all their operating cost. Exceptions are professional societies and the
philanthropic foundations established by wealthy individuals or families, whereas the citizenry
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contributions are mostly involuntary Taxes. Citizen’s contribution to non-profit organizations is
voluntary donations. There is no comparable source for business enterprise.
N.B it is important to know about types of taxes for the future topics. Tax is an involuntary
contribution from the society to the government. based upon their assessment, taxes could be
classified into -
i) Self assessed taxes: - taxes, which are assessed and declared by the tax payer
e.g. Income tax, value added tax
ii) Government assessed taxes:- taxes determined and levied by the governmental authorities.
e.g. property tax , customs duty, Excise Tax
4. Importance of budget
Governmental accounting systems as we have seen are employed by government resources. That
is each person given custody of or access to resources should report back as to how they were
used. The government can then hold the person accountable for the resources. This means that
budget become highly important in governmental entities. Since expenditures are divorced from
revenue collections, the use of governmental resources is compared to the budget. The four-
proceeding characteristics of non – profit organizations also cause their annual budget to be as
important as for governmental units. Non- profit organizations may employ object budget,
programming budget or performance budget.
5. Stewardship for resources
A primary responsibility of governmental units in financial reporting is to demonstrate adequate
stewardship for resources provided by its citizenry. Non-profit organizations have a comparable
responsibility to their donors but not to the same extent as governmental units.
Activity
Question 4: Differncate governmental units and Not-for-Profit Entities
Question 5: what is the cash flow statement and Statement of Functional Expenses
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On top of that, federal, state, and local governments require these statements for ongoing
financial compliance. We are here to help you better understand the financial statements that
your organization should be keeping. These essential statements include the:
o Balance Sheet
o Income Statement
o Statement of Cash Flows
o Statement of Functional Expenses
Balance Sheet
Let's start with the basic component of every nonprofit accounting system: the balance sheet. For
tax-exempt organizations, the balance sheet is also known as the statement of financial
position. This statement shows what your company owns and what it owes at a specific date.
Think of it as a picture of your financial situation at one point in time. The IRS does ask for this
information when you are registering your organization, as well as when filling out your 990, so
it is best to have it updated before beginning on your yearly tax journey.
If you remember one thing from your accounting 101 class, it is likely that the balance sheet
equation: assets = liabilities + owner’s equity. This is the traditional equation that for-profit
businesses use to create their balance sheets.
As a nonprofit organization, you do not have owner’s equity because you are not a publicly-
traded company, so this equation is going to change a little bit.
For a nonprofit balance sheet, you will use the equation: assets = liabilities + net assets (instead
of owner’s equity). Let’s break this down into simpler terms.
Note that our template shows the Statement of Financial Position with assets on the left, and
liabilities and net assets on the right. Generally, these will all be listed one after the other, but we
recommend that you start out viewing it from left to right so you can understand the balance
sheet equation.
10.4 chapter summary

 Usually, in an income statement, you will see gross sales, or the revenue from sales
before costs or taxes are taken out. For a nonprofit, gross receipt replace gross sales.
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 Gross receipts are the amount of money your nonprofit has raised without any expenses
being taken out. It sounds very similar to gross sales, but there is one big difference.
Gross sales only include sales of products
 Despite the wide range in size and scope of governance, similarity & differences as the
accounting treatment as compared to business organizations, Governmental units and
other non-profit organizations
 The governmental units which undertake non-profit activates & the other indicated four
not-for-profit organizations are collectively known as Non-business organizations.

1. Which of the following organizations would be subject to the accounting and reporting
requirements of FASB Statements 116 (Accounting for Contributions) and 117 (Financial
Reporting for Not-for-Profit Organizations)?
A. The Nebraska CPA Society.
B. St. Mary's Catholic Hospital.
C. Both of the above.
D. Neither (a) or (b) above.
2. Which of the following are the net asset classes required by the FASB for not-for-profit
organizations?
A. Reserved and Unreserved.
B. Invested in Capital Assets, Net of Related Debt, Restricted, and Unrestricted.
C. Permanently Restricted, Temporarily Restricted, Unrestricted.
3. What are the financial statements required for all nongovernmental, not-for-profit
organizations?
A. Statement of Financial Position, Statement of Activities, Statement of Cash Flows.
B. Statement of Financial Position, Statement of Activities, Statement of Functional
Expenses.
C. Statement of Financial Position, Statement of Activities, Statement of Functional
Expenses, Statement of Cash Flows.
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D. Statement of Activities, Statement of Cash Flows, Statement of Functional Expenses.
4. Which of the following is true regarding the Statement of Financial Position for
nongovernmental, not-for-profit organizations?
A. The Statement must display assets and liabilities separated between the categories of
unrestricted, temporarily restricted, and permanently restricted.
B. The Statement must display totals for net assets separated between the categories of
unrestricted, temporarily restricted, and permanently restricted.
C. Both of the above.
D. Neither of the above.
5.An attorney prepared a contract free of charge for a not-for-profit. The not-for-profit would
have had to pay $500 for this service if not donated. What entry should the not-for-profit make?
A. Wages Expense 500

Contributions-temporarily restricted 500
B. Cash 500
Contribution Expense 500
C. Wages Expense 500
Contributions-unrestricted 500
D. No entries are necessary for the transaction.
6. Which of the following pledges of support would not be recognized at the time the pledge
was made?
A. A pledge with no restrictions, but conditional on receiving matching pledges.
B. An unconditional pledge restricted to a particular purpose.
C. An unconditional pledge restricted to a particular year in the future.
D. None of the above – all would be recognized.
7. Tax-exempt organizations must complete a Form 990 and send it to the IRS
A. Only if they have unrelated business income.
B. Whether they are governmental or nongovernmental.
C. If they are nongovernmental (and not a church) and their gross receipts are greater than
$25,000.
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8. Which of the following nonprofit organizations are most likely to be tax-exempt under IRC
Sec. 501(c)(3)?
A. Shady Rest Cemetery Association.
B. National Association of Wood Floor Refinishers.
C. Pleasant City Free Medical Clinic.
D. All of the above.
9. The cornerstone of governmental accounting includes:
A. reliability
B. understandability
C. accountability
D. both reliability and accountability
E. reliability and accountability and understandability.
10. Which one of the following statements is not true about the common characteristics
Governmental units and other non-profit organizations
A. Organization to serve the society (citizens)
B. Both profit intensive organizations
C. Society is the principal source of revenue
Ansewer for self test questions
1. C 2. C 3. A 4. B 5. C 6. A 7. C 8. C 9. C 10 B
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Chapter eleven :Accounting and Reporting for the Federal Government
of Ethiopia
Introduction
Accounting is mainly governed by conventional concepts and principles. These conceptual
backgrounds are very important to study the structure and operations in accounting system. As
information processing system of an organization accounting is affected by various factors such
as its environment and characteristics. This is what is to be explained in the first unit of this
course.
Accounting provides critical information for good financial administration system of
organizations. Government money is a public resource which the government has to spend as per
clear directives and procedures. The accounting system has to control this resource through a
budget control. Thus, this course also deals with financial administration in FGE accounting
system in the assumed administrative structure and the roles and responsibilities of different
units of the government. The course also describes procedures in accounting for transaction and
budget control in FGE accounting system. It focuses on accounting for daily economic activities
and budget control that is the broad goal of the FGE accounting system and hence employs
mechanisms for budget control.
The overall objective of this course is therefore to capacitate students on understanding basic
concepts and principles of FGE accounting and reporting system, budget preparation financial
reporting and control mechanisms. In general, you are expected to apply appropriate accounting
and financial treatments capture government activities with financial effect as occurred, prepare
financial reports and ensuring control and transparency in using public financial resources, under
the statutory framework and applicable accounting principles.
11.1. Historical overview of Ethiopian Government Accounting System

The Federal Government of Ethiopia accounting system used up to GC 2002 was in service for
more than half a century. Government decided that there was a need to reform the accounting
processes as an integral part of the Civil Service Reform to achieve the following set of
objectives:
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11.2.1 Financial Administration
The financial administration in FGE mainly involves Ministry of Finance and Economic
Development (MOFED) and Regional Finance and planning offices and a Public Body. The
specific Federal and Regional government administrative authorities and the required
organizational structure in public bodies
The following are responsibilities of MOFED, Budgetary Institutions, Accounting unit,

Reporting Entity, Cashier and Accountant in the financial administration in the Budget process
and within the Public Body
Ministry of Finance and Economic Development (MOFED)
MOFED administers the financial system for the federal government and has the highest level of
administrative authority. MOFED consists of a:
 Budget Department that prepares and distributes notification of approved federal budgets
and administers the budget.
 Central Accounts Department that receives monthly reports and compiles financial
statements for the federal government.
 Central Treasury Department that receives and distributes cash from central treasury.
 Credit and Investment Department that manages the federal government's investments
and debt.
This is not a complete description of MOFED or its departments. This is description of their
roles and responsibilities within the accounting system.
Budgetary Institution (BI)
Budgetary Institutions are defined as those institutions that are fully or partially financed by
Government. The budget process assumes the appropriation of budgets. The appropriated budget
is the budget approved by the Council of people's Representatives (CPR). The appropriated
budget is broken down by:
 Recurrent and capital expenditure for the federal government, and
 Subsidy for each regional government
The federal government's portion of the appropriated budget is assigned to projects and sub-
agencies within PBs and broken down by sources of funding (domestic, assistance and loan).
This is called the approved budget. The approved and appropriated budget is published in the
NegaritGazeta.
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The focus of budgetary control is on the BI. PB's budgetary compliance can be computed by
consolidating reports from all BIs included in its approved budget.
Accounting Unit
For cash management, another entity is created: the Bank Account (BA). The BA is not coded in
the chart of accounts and does not receive a budget. However, it is important for cash
Management and control. The FGE accounting system includes the BA in the accounting system.
A PB may administer many BIs and many BAs, or a PB may have only one BI and one BA.
Each BA:
 Is managed by an accountant.
 May:
• Have its own cashier,
Asset accounts.
Liability accounts.
Letters of credit.
 Prepares a monthly expenditure report for each BI.
 Prepares a consolidated monthly Trial Balance for the BA.
One general ledger is maintained for the BA. The only records maintained for each BI are
accounts in subsidiary ledgers for items of expenditure. Monthly, the subsidiary ledger
information is used to prepare an expenditure report for each BI. These reports are consolidated
with information from the general ledger into a monthly report for the BA.
The balances of cash in safe and cash in bank are maintained in ledger cards of general ledger for
the BA.
Reporting Entity
A reporting entity is the entity that sends monthly reports to MOFED. Although the accounting
unit prepares monthly reports, every accounting unit may not send monthly reports directly to
MOFED. The reporting entity may be the accounting unit or a higher level of authority (perhaps
a PB).
Each of the following may apply to a reporting entity:
 A reporting entity may be an accounting unit, and an accounting unit may consist of only
one BI. Therefore, a single BI may be a reporting entity.
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 A reporting entity may be a PB that receives the monthly reports from several accounting
units.
Whoever sends the reports to MOFED is the reporting entity. Therefore, the reporting entity is
not, necessarily, an accounting unit.
Activity
Question 1: what is an overview of federal government of Ethiopia ( FGE)
Question 2: what is the difference between litter of credit , asset account and liability account
Question 3: : what is the difference between cashier and accountant
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Cashier and Accountant
In the FGE accounting system of cash control, the cashier's function and the accountant's
function are distinct. Cash consists of currency and checks. The cashier's function is to maintain
and control cash in the safe. The accountant's function is to maintain and control cash at the
bank.
Only the cashier can receive currency and checks and make disbursements in currency. Daily,
the cashier should count cash on hand and reconcile ending cash on hand to the cash book.
The cash in safe is controlled by an impress system. When cash is received as per the budget or
other sources, the cashier will:
 Issue a cash receipt,
 Segregate the cash received from cash available to disburse,
 Deposit the cash received intact in the bank as soon as practical, usually daily, and
 Surrender copies of all cash receipts and a copy of the bank deposit slip to the accountant.
In the imprest system, a balance is established for cash in safe. The accountant issues this
amount of cash to the cashier using a check. When cash is disbursed to establish the Imprest
Fund, the cashier will issue a receipt voucher. If the amount of cash in safe is to be replenished,
the cashier will surrender all payment vouchers to the accountant. The accountant will replenish
the cash in safe by issuing a check to the cashier for the total amount of the payment vouchers
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that are surrendered. The replenishment should return the balance of cash in safe to the
established level.
The accountant's responsibility for cash is to maintain a record of the total cash position of the
entity, including cash at the bank and cash in the safe. The accountant records cash movements
that flow through the cashier and cash movements that flow directly through the bank. Direct
cash movements through the bank normally include bank transfers and charges, checks written,
and any other transactions that do not require cash handling by the cashier.
When a PB has more than one cashier, one cashier is designated as the main cashier. The other
cashiers are designated as assistant cashiers. Each PB is responsible for organizing assistant and
main cashiers. However, some general principles apply.
Assistant cashiers are responsible for:
 Collection of Cash
 Issuing deposit and/or receipt vouchers
 Making deposits at Bank
The main cashier is responsible for:
 Reconciling cash and vouchers for each assistant cashier
 Depositing cash in the bank
 Disbursing cash for the proper functioning of the PB
 Managing the petty cash
11.3 FGE CHARTS OF ACCOUNTS
A chart of accounts is a system used to identify and classify financial entities and events. The
classification of charts of accounts is structured in a systematic manner and facilitates the
recording of transactions and reporting of information in accordance with the budget.
The chart of accounts treats all detailed account codes as temporary accounts and permanent
accounts.
 Temporary accounts are accounts that begin each year with a zero balance.
 Permanent accounts are detailed account codes whose balance at the end of a year
becomes the balance in the account at the beginning of next year.
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Revenue, expenditure, and cash transfers are temporary account code categories. Account codes
in these categories
 Are always treated as temporary accounts &
 Begin each year with a zero balance.
Assets, liabilities and net assets/equities are permanent account code categories.
 Account code in these categories are always treated as permanent accounts &
 Begin each year with account balance as long as they had at the end of previous year. In
other words, these accounts are not closed.
Generally, Revenue, expenditure and transfers are temporary accounts that begin each year with
a zero balance. Assets and liabilities are permanent accounts whose balance at the end of a year
becomes the balance in the account at the beginning of the next year.
A brief description of each accounts are:
Assets:
Assets are formally defined by the International Federation of Accountants - Public Sector
Accounting Standards (IPSAS) as "resources controlled by an entity as a result of past events and
from which future economic benefits or service potential are expected to flow to the entity.‖ The
categories of assets in the accounting system are:
o Cash and Cash Equivalents

Cash is cash on hand and at bank. Cash equivalents are short-term, highly liquid investments
that are readily convertible to known amounts of cash and which are subject to an insignificant
risk of change in value.
o Receivables
Receivables are amounts owed( given to) a government unit by another government unit, a
person, or a non-government entity except public enterprises. Salary advances to employees
and advances to suppliers are two examples of receivables commonly occurring.
o Goods in Transit
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Goods in transit are goods that are owned by the government but not yet in its physical
possession.
o Stocks
Stocks are goods that are expected to be consumed within one year.
o Fixed Assets
Fixed assets are physical items that are expected to have a useful life of longer than one year
and have a certain minimum value.
o Loans Receivable
Loans receivable are amounts due from public enterprises over a period of time exceeding one
year.
o Investments
Investments are FGE investments in public enterprises and private organizations that are held for
more than one year.
o Liabilities
Liabilities are formally defined by the IPSAS as "present obligations of the entity arising from
past events, the settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits or service potential."
The categories of liabilities in the improved and expanded accounting system are:
o Payables
Payables are obligations to pay that are due in less than one year. Examples of FGE payables are
deposits, salary payable, grace period payables and treasury bills.
o Long-term Debt
Long-term debt is an obligation to pay that is due in more than one year.
o Net Assets/Equity
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Net assets/equity is formally defined by the IPSAS as "the residual interest in the assets of
the entity after deducting all its liabilities." Net assets/equity is the balance remaining after
liabilities are deducted from assets. This balance represents the equity interest of FGE.
11.4 Overview of IBEX and IFMIS
To meet the government policy of implementing the accounts and budget reforms nationwide
and use the new information communications technology (ICT) infrastructure, the government
specified that the Budget Information System(BIS) / Budget, Disbursement and Accounts(BDA)
systems will be upgraded in to the Integrated Budget Expenditure(IBEX) System. Since 1998
EC.(2006 GC.)IBEX(Integrated Budget and Expenditure System) has began its operation by the
budget module then after the other 5 modules added to the system i.e
o Accounts
o Accounts Consolidation
o Budget Control
o Budget Adjustment
o Disbursement
What Is IBEX ?
It is an integrated budget and accounts financial application that provide the framework for core
public financial management functions. It Combines what were two previously separate
applications called Budget Information System(BIS) and Budget, Disbursement and Accounts
(BDA).
 An upgrade of BIS/BDA
 Is access through a web browser such as Internet Explorer
Functional Modules
 Budget Module
o This module executes all the budget preparation activities performed by government
financial offices.
 Account Module
o This module executes all the budget execution activities of government budgetary
institutions. More specifically, the accounts module records the financial transactions of
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the budgetary institutions, records the aggregated monthly accounting reports and
provides accounting reports for ledgers , financial statements, management reports,
transactions, expenditures and revenues.
 Budget Adjustment Module
o This module provides the functionality to address changes to the approved budget during
budget execution. It specifically enables the recording of budget transfers and budget
supplements and the subsequent production of the adjusted budget.
 Budget Control Module
o This module manages the activities of recording budget commitments and disbursement
payments in order to enable budgetary control over expenditures.
 Account Consolidation Module
o This module consolidates the budget and accounting data for the entire country. This
module allows for the generation of regional and national consolidated reports.
 Disbursement Module
o This module manages the public treasury functions associated with cash management and
disbursing funds between public financial institutions
 Administration Module
o This module provides an interface to manage users and user’s profiles that interact with
the IBEX system.
What is IFMIS?
The introduction of Integrated Financial Management Systems (IFMIS) has become a core
component of financial reforms to promote efficiency, security of data management and
comprehensive financial reporting. IFMIS provide an integrated computerized financial package
to enhance the effectiveness and transparency of public resource management by computerizing
the budget management and accounting system for a government.
It consists of several core sub-systems, which plan, process and report on the use of public
resources. The scope and functionality of IFMIS can vary across countries, but sub-systems
normally include accounting, budgeting, cash management, debt management and related core
treasury systems. In addition to these core subsystems, some countries have chosen to expand
their IFMIS with noncore sub-systems such as tax administration, procurement management,
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asset management, human resource and pay roll systems, pension and social security systems
and other possible areas seen as supporting the core modules.
What are the Benefits of IFMIS?
There are a number of ways in which IFMIS can improve public finance management, but
generally IFMIS seek to enhance confidence and credibility of the budget through greater
comprehensiveness and transparency of information. They seek to improve budget planning
and execution by providing timely and accurate data for budget management and decision-
making. IFMIS allow a more standardized and realistic budget formulation across government,
while promoting better control over budget execution through the full integration of budget
execution data. They also allow for the decentralization of financial functions and processes
under the overall control of the Ministry of Finance, force financial discipline, decrease-
operating costs by reducing administrative tasks and civil servants’ workload.
In addition, IFMIS also seek to strengthen the efficiency of financial controls by making
comprehensive, reliable and timely financial information available to the Auditor General,
parliament, investigative and prosecutorial agencies, etc., as they improve accounting, recording
and reporting practices through the provision of timely and accurate financial data,
standardized integrated financial management reporting system and an upgraded computerized
accounting system. When they work well, they make bank reconciliation automatic and allow a
closer monitoring of outstanding bills and cash in bank accounts.
11.5 Basis of accounting

A transaction is an economic event that affects the financial position of the government. The
basis of accounting is the basic set of principles and rules employed by the accounting system to
determine when & how to record transactions. Accordingly, basis of accounting classified as
Cash, Modified Cash, Modified Accrual and Accrual basis of Accounting.
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Activity
Question 1: what is the definitions of is IFMIS and IBEM system
Question 2: what is the benefits of IFMIS and IBEM system
Question 3: : what is the difference cash basis ,modified cash basis , accrual basis and
modified accruals basis of accounting
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11.5. 1 Cash Basis

The cash basis of accounting recognizes transactions and events only when cash is received or
paid. FGE changed its basis of accounting from cash basis to modified cash basis in the fiscal
year 1995.
11.5.2 Modified Cash Basis

The FGE accounting system employs modified cash basis of accounting. Modified cash basis of
accounting is a compromising basis of accounting between the two extreme basis of accounting.
It adopts features from both basis of accounting. Most transactions are recorded using cash basis
of accounting and some transactions are recorded using accrual basis of accounting. The
modified cash basis accounting in FGE means that cash basis applies except for the recognition
of the following transactions:
o Revenue and expenditures are recognized when aid in kind is received

o Expenditure is recognized when
 When payroll is processed
 At the end of the year when a grace period payable is recognized
 If goods are received or services are rendered and when payments are effected
for purchase of goods and services in advance
o Intergovernmental transfers are recognized in the absence of cash movement
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o Transactions resulting from salary withholding are recognized in the absence of actual
cash movement where salary-withholding means the employment income tax collected
by collected by respective employer on behalf of tax authority.
o The FGE Accounting system employs the combination of temporary and permanent
accounts.
o All assets and liabilities are not recognized in modified cash basis accounting system.
Only those receivables and payables included in chart of accounts are included in the
system.
11.5.3 Accrual Basis

The accrual basis of accounting recognizes transactions and events when they occur irrespective
of when cash is paid or received. Revenues reflect the amounts that came during the year,
whether collected or not. Expenses reflect the amount of goods and services consumed during
the year, whether or not they are paid for in that period. The costs of assets are deferred and
recognized when the assets are used to provide service.
11.5. 4 Modified Accrual Basis

However, the modified accrual basis of accounting recognizes transactions and events when they
occur, irrespective of when cash is paid. There is no deferral of costs that will be consumed in
future periods. Assets that will provide services in the future are expensed in the period acquired.
Therefore, under the modified accrual basis of accounting assets and stocks are considered
consumed and expensed off as soon as they are acquired.
Book keeping Method

The FGE accounting system uses double-entry bookkeeping. Double-entry bookkeeping means
that both aspects of each transaction are recorded in the accounting records with at least one
debit and one credit so that the total amount of debits and the total amount of credits are equal to
each other.
The advantages of double-entry bookkeeping are numerous, including:
 All aspects of the transaction are properly recorded in accounts.
 The accounts are self-controlling because the total of all debits must equal the total of all
credits; therefore, many errors are easily detected and corrected
 Modified cash basis of accounting can be introduced.
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11.6 Legal Framework of FGE Financial Administration
Legal frame work is one component Public Financial Management Reform Program with the
objective drafting & implementing various financial proclamation, regulation, & directives that
will have disciplined and well controlled public finance management in the country.
In legal public finance the following activities were implemented
o Federal Public financial management law (act) No.57/1996 is proclaimed by
NegaritGazeta on 19th day of December 1996 E.C in the above proclamation; Collection
and deposit of money, Budget function and management public disbursement,
procurement and control, public debt management are included.
o Public finance regulation No 17/1997 is issued by the council of ministers on 1st day of
July 1997 E.C
o Different financial guidelines are prepared
11.7 MONTHLY REPORTS

The purpose of this Chapter is to describe the monthly reports submitted by a Reporting Unit to
MOFED. I.e.
1. Revenue/Assistance/Loan Report
2. Recurrent Expenditure Report
3. Capital Expenditure Report
4. Transfer Report
5. Receivables Report
6. Payables Report
7. Trial Balance
8. Bank Reconciliation
1. REVENUE/ASSISTANCE/LOAN REPORT
The Revenue/Assistance/Loan Report provides information on the year-to-date revenues of an
Accounting Unit from each source of finance. The purpose of the Revenue/Assistance/Loan
Report is to facilitate consolidation of the actual revenues, assistance and loan collected and
comparison of budgeted revenues to actual revenues by account category.
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The Accountant prepares a Revenue/Assistance/Loan Report for the Accounting Unit. The
source document to prepare the Revenue/Assistance/Loan Report is the General Ledger. Each
item of revenue, assistance or loan is identified by account code. The amount from the balance
column in the General Ledger Card is transcribed into the Revenue/Assistance/Loan Report. The
grand totals from each Revenue/Assistance/Loan Report are carried forward to the Trial Balance.
2. RECURRENT EXPENDITURE REPORT
The Recurrent Expenditure Report provides information on the year-to-date recurrent
expenditures of each BI managed by an Accounting Unit. The purpose of the Recurrent
Expenditure Report is to facilitate consolidation of the actual recurrent expenditures and
comparison of budgeted expenditure to actual expenditure.
The Accountant prepares the Recurrent Expenditure Report for each BI. The source document to
prepare the Recurrent Expenditure Report is the Subsidiary Ledger. The amount from the
balance column in each Subsidiary Ledger Card is transcribed to the appropriate account code in
the Recurrent Expenditure Report.
3. CAPITAL EXPENDITURE REPORT
The Capital Expenditure Report provides information on the year-to-date capital expenditures of
each BI managed by an Accounting Unit. The purpose of the Capital Expenditure Report is to
facilitate consolidation of the actual capital expenditures and comparison of budgeted
expenditure to actual expenditure.
The Accountant prepares the Capital Expenditure Report for each BI. The source document to
prepare the Capital Expenditure Report is the Subsidiary Ledger. The amount from the balance
column in each Subsidiary Ledger Card is transcribed to the appropriate account code in the
Recurrent Expenditure Report.
4. TRANSFER REPORT
The purpose of the Transfer Report is to serve as a control tool to verify cash transfers between
MOFED and an Accounting Unit and vice versa.
The Accountant prepares a Transfer Report for each Accounting Unit. The source documents to
prepare the Transfer Report are the General Ledger Cards. Balances in the Transfer Report are
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debits or credits depending on the nature of the transfer account, i.e. transfers received from
MOFED are credits & transfers of cash to MOFED are debits.
5. RECEIVABLES REPORT
The Receivables Report provides information on the year-to-date receivables owed to an
Accounting Unit. The purpose of the Receivables Report is to provide information on the year-
to-date receivables owed to an Accounting Unit and facilitate consolidation of receivables owed
to the FGE.
The Accountant prepares a Receivables Report for each Accounting Unit. The source document
to prepare the Receivables Report is the General Ledger. Each item of receivable is identified by
account code. The amount from the Balance Column in the General Ledger Card is transcribed
into the Receivables Report. The grand totals from each Receivables Report are carried forward
to the Trial Balance.
6.PAYABLES REPORT
The Payables Report provides information on the year-to-date payables owed by an Accounting
Unit. The purpose of the Payables Report is to provide information on the year-to-date payables
owed by an Accounting Unit and facilitate consolidation of the actual payables owed by the
FGE.
The Accountant prepares a Payables Report for the Accounting Unit. The source document to
prepare the Payables Report is the General Ledger. Each payable item is identified by account
code and the amount from the Balance Column in the General Ledger Card is transcribed into the
Payables Report. The grand totals from each Payables Report are carried forward to the Trial
Balance.
7.TRIAL BALANCE
The Trial Balance is the summary of the net cumulative year-to-date debit and credit balances
contained in the General Ledger at the end of each month for each account code represented by a
General Ledger Card.
The Trial Balance proves the arithmetical accuracy of the General Ledger. The total amount of
the Debit Column must equal the total amount of the Credit Column in the Trial Balance. The
Trial Balance serves as a basis to produce financial statements.
141
The Accountant prepares the Trial Balance for each Accounting Unit. The source documents to
prepare the Trial Balance are:
 Revenue/Assistance/Loan Report,
 Recurrent Expenditure Report,
 Capital Expenditure Report,
 Transfer Report,
 Receivables Report,
 Payable Report, and
 The General Ledger

The account codes that are taken from the General Ledger directly to the Trial Balance are:
 Net Assets/Equity – balance could be debit or credit.
 Cash and Cash Equivalents – balances in each account should be debits.

BANK RECONCILATION
The process of comparing the bank statement with the books of account is known as reconciling
the bank account, and the schedule that is prepared to demonstrate the results of the comparison
is called bank reconciliation. The balance shown on the bank statement may not agree to the
bank balance in the general ledger. Causes of differences include:
 Checks issued but not presented to the bank
 Deposits made that do not appear on the bank statement
 Transactions that have not yet been recorded in the books
 Record keeping errors by either the Reporting Unit or the bank.

The bank reconciliation provides proof that all bank related transaction errors are identified and
provides the basis to take corrective action to eliminate errors.
The source documents to prepare the Bank Reconciliation are:
 Monthly Bank Statements received from the bank

142
 Drawing Limits Register/Transaction Register/General Ledger, and
 Detailed information in documents accompanying the bank statement, the checkbook
Example
Cash at bank balance as per Bank Statement ………………………………..br 2,350.70
Cash at bank balance as per Account records …………………………………br 2,051.96
The following errors are identified from both sides
1) Deposit in transit ………………………………………………………… br 1,355.20
2) Amount incorrectly charged by the Bank….……………………………..br 51.75
3) Outstanding check ………………………………………………………...br 1,037.49
4) Credit advice ………………………………………………………....…br 1,015.00
5) Understatement in recording deposits in book of accounts …………….br 54.00
6) Bank service Charge ……………………………………………………..br 18.10
7) Returned check ……………………………………………………………br 382.70
BANK RECONCILATION
Cash at bank balance as per Bank Statement ……………………..……..br 2,350.70
Addition
Deposit in transit ………………………………………………..…..br 1,355.20
Amount incorrectly charged by the Bank…...……………………....br 51.75
Total ………………….br 3,757.65
Deductions
Outstanding Check ………………………………………………..…br 1,037.49
Corrected Bank Balance ………………………..… br 2,720.16
Cash at bank balance as per Account records ………………………..…br 2,051.96

Additions
Bank credit Advice ……………………………………………..….br 1,015.00
Understatement in recording deposits in book of accounts…..…..br 54.00
Total……………… br 1,069.00
Deductions
143
Bank service Charge …………………..br 18.10
Returned Check ……………...………..br 382.70br 400.80
Corrected Accounts Records Balance ….... br 2,720.16
11.8 chapter summary

 The Accountant prepares a Payables Report for the Accounting Unit. The source
document to prepare the Payables Report is the General Ledger.
 Each payable item is identified by account code and the amount from the Balance
Column in the General Ledger Card is transcribed into the Payables Report.
 IFMIS also seek to strengthen the efficiency of financial controls by making
comprehensive, reliable and timely financial information available to the Auditor
General, parliament, investigative and prosecutorial agencies, etc., as
 They improve accounting, recording and reporting practices through the provision of
timely and accurate financial data.
 FGE accounting system, its operations, and roles and duties within the system, the
structure of financial administration and authority in the federal and regional
governments must be understood to the extent that it impacts the accounting system.
 Although the structure of financial administration is not standard across all units in the
Regional and Federal governments, a general pattern exists.
11. 9 Self model examinations

1. The basis of accounting under which revenues are recognized when measurable and
available for spending and expenses when resources are consumed is the modified accrual
basis of accounting.
2. Governmental activities fund statements may use modified accrual basis when preparing
government-wide financial statements’
3. Under the accrual basis of accounting, revenues are recognized when measurable and
available to finance expenditures of the current period.
144
4. Effective management of cash and investments of individual funds may be enhanced by placing the
cash and investments in a pool under the control of the treasurer of the government or other
official.
Multiple choice
1. In accounting for state and local governments the modified accrual basis is required for
A. All the funds in the governmental entity
B. Governmental funds only.
11. The major funds only
12. Just the general fund
2. Under the modified accrual basis of accounting, there is an option that revenues should be
recognized when
A. Earned. C . None of the above
B. Collected in cash. D. Authorized by the budget ordinance.
3. Which of the following terms indicate or relate to the idea of the primary government and all
related units
A .Fund equity C. Reporting entity
B. Modified accrual basis D. Accrual basis
4. Which of the following is (are) an appropriate basis of accounting for an internal service
fund?
A. Modified accrual basis: Yes; accrual basis: No:
B. Modified; Accrual basis: No; accrual basis: Yes
C. Modified accrual basis: Yes; accrual basis: Yes
D. Modified accrual basis: No; accrual basis: No
5. Recognizing revenues when measurable and available is:
A. Accrual. C. Budgetary.
B. Modified accrual. D. None
6. The modified accrual basis of accounting applicable to governmental fund types requires that
revenues be recognized when
A. Earned.
B. Authorized by the budget ordinance.
145
C. Measurable and available.
D. Collected in cash.
7. The measurement focus for the governmental funds is _____________________
A. Current financial resources
B. Economic resources
C. Generally accepted governmental auditing standards
D. Modified accrual
E. Fiscal accountability
1. False 2. False 3. False 4. True
1. B 2. A 3. C 4. B 5. B 6. C 7. A
WOLLO UNIVERSITY
College of Business and Economics
146
Department of Accounting and Finance
Accounting for public sectors and civil society (acfn 3071)
Assignment for distance students (35 %)
Name ___________________________Id.No ____ Section _____
Part I: If the statement is incorrect say false and if the statement is correct say True
(1 point each).
1. Non-expendable & pension trust funds are to be accounted in the same way as governmental
funds.
2. Agency fund & expendable trust funds are to be accounted in the same way as proprietary
funds.
3. Special revenue funds exist as long as the government has resources dedicated to specific
purposes.
4. The major source of income for the general fund and special revenue fund is the enacted
budget.
5. All general government fixed asset acquisitions are financed through capital project fund.
6. An encumbrance account is an account maintained to record in process expenditures.
7.General fixed assets of the government are reported both in the government-wide financial
statements and the governmental fund financial statement
8. Comparison of the legally approved budget with actual results of the General Fund is included
as part of required supplementary information in the CAFR.
9. Fiduciary funds include agency, pension trust, investment trust, and permanent funds.
10. For most state and local governments, the budget, when adopted according to procedures
specified by state laws, is binding upon the administrators of a governmental unit.
Part II: Multiple choice ( 1ponit each )
147
1. Which of the following funds are governmental funds?
A. General Fund, special revenue funds, capital projects funds, debt service funds, and
permanent funds.
B. General Fund, special revenue funds, capital projects funds, debt service funds, and
private-purpose trust funds.
C. General Fund, special revenue funds, capital projects funds, debt service funds, and
internal service funds.
D. General Fund, special revenue funds, public-purpose trust funds.
2. What are the fund-basis financial statements for each of the following fund categories?
A. Fiduciary C. Governmental
B. Proprietary D. None of the above
3. Which of the following is not a required financial statement of a proprietary fund?
A. Statement of Cash Flows
B. Statement of Revenues, Expenditures and Changes in Fund Balance
C. Statement of Net Assets (Net Position)
D. Statement of Revenues, Expenses and Changes in Fund Net Assets (or Net Position)
4. The county established an internal service fund to account for operation of the purchasing and
stores function. The fund received a transfer of Br. 500,000 from the General Fund. The fund
also received a long-term advance from the Sewer Utility Fund of Br. 250,000. The advance will
be repaid over a period of ten years in equal installments, with no interest. The entry to record
receipt of the initial sources of funding by the Supplies Fund would be:
A. Debit: Due from Other Funds Br. 750,000 Credit: Transfers In Br. 750,000
B. Debit: Due from Other Funds Br. 750,000 Credit: Transfers In Br. 500,000 Credit: Advance
from Sewer Utility Fund Br. 250,000
C. Debit: Cash Br. 750,000 Credit: Transfers In Br. 500,000 Credit: Advance from Sewer Utility
Fund Br. 250,000
D. Debit: Cash Br. 750,000 Credit: Advances from Other Funds Br. 750,000
5. The county operates a Sewer Utility Fund to account for wastewater services provided to
county residents. During the year nongovernmental customers were billed Br. 1,000,000 and the
148
county's General Fund was billed Br. 100,000 for services provided. All revenue was from sewer
treatment services. The entry to record these transactions in the enterprise fund would be:
A. Debit: Customer Accounts Receivable Br. 1,100,000 Credit: Operating Revenues - Charges
for Services Br. 1,100,000
B. Debit: Customer Accounts Receivable Br. 1,000,000 Debit: Due from General Fund Br.
100,000 Credit: Operating Revenues - Charges for Services Br. 1,100,000
C. Debit: Cash Br. 1,100,000 Credit: Operating Revenues - Charges for Services Br. 1,100,000
D. Debit: Cash Br. 1,000,000 Debit: Due from General Fund Br. 100,000 Credit: Operating
Revenues - Charges for Services Br. 1,100,000
6. Under GASB rules for the financial reporting entity,
A. component units are included if the primary government is financially accountable for their
operations.
B. counties are component units of the State Government.
C. blended and discretely presented component units are to be reported in government-wide
financial statements but not in fund financial statements.
D. blended component units must be reported in columns for the primary government.
7. Which of the following is not true regarding major fund reporting for governmental funds?
A. the General Fund is always a major fund.
B. Each fund that is considered major must be reported in a separate column in the governmental
funds financial statements.
C.A government may designate any fund as major if it feels that reporting that fund in the basic
financial statements would be useful.
D. None of the above, all are true.
8. which of the following are the net asset classes required by the FASB for not-for-profit
organizations?
A. Reserved and Unreserved.
B. Invested in Capital Assets, Net of Related Debt, Restricted, and Unrestricted.
C. Permanently Restricted, Temporarily Restricted, Unrestricted.
149
9. What are the financial statements required for all nongovernmental, not-for-profit
organizations?
A. Statement of Financial Position, Statement of Activities, Statement of Cash Flows.
B Statement of Financial Position, Statement of Activities, Statement of Functional Expenses.
B. Statement of Financial Position, Statement of Activities, Statement of Functional Expenses,
Statement of Cash Flows.
D. Statement of Activities, Statement of Cash Flows, Statement of Functional Expenses.
10. The ______ Fund accounts for all resources other than those required to be accounted for in
other funds.
A. Special revenue fund C. Enterprise fund
B. General fund D. Agency fund
Part III: Discussion point ( 2ponit each )
1. List and define the five classifications of governmental funds.
2. List and explains Classification of Revenues and Expenditures based on by fund and source.
3. Discuss the three major activity categories of a state and local governments
4. Identify the three basic fund categories, the funds that make up each of them, and the
category’s basis of accounting.
Part IV: Work out questions( total 7 mark)
1. X County had the following transactions related to the construction of a new courthouse.
Record all entries needed in the capital projects fund. X County uses encumbrance
accounting.
a) On January 2, 2005, 20 year, 6% General Obligation Serial Bonds with a face value of
Br. 5,000,000 are issued.
b) On February 2, 2005, architecture and engineering fees for the design of the new court
house are paid in the amount of Br. 300,000. This item is not encumbered.
c) On February 25, 2005, a contract is signed for construction of the new courthouse in the
amount of Br. 4,200,000.
d) On March 3, 2005, supplies for the project are ordered in the amount of Br.100,000.
e) On March 28, 2005, the supplies were delivered. The invoice amount was Br. 101,300
and was paid.
150
f) On July 14, 2005, the county receives a billing for progress completed to date on the
courthouse construction project in the amount of Br. 1,200,000.
g) On July 29, 2005, the payment to the contractor was made.
Text Book:
 Accounting for Governmental and Non-Profit Entities, 15th edition, by Wilson, Kattelus,
Hay. McGraw-Hill/Irwin Inc., USA, 2010.
 Aggestam-Pontoppidan, C. (2015). Interpretation and Application of IPSAS. John Wiley &
Sons.
 Freeman, R. J., Shoulders, C. D., Allison, G. S., Smith Jr, G. R., & Becker, C. J. (2014).
Governmental and nonprofit accounting: theory and practice. JPAEJOURNAL OF PUBLIC
AFFAIRS EDUCATION VOLUME 20 NUMBER 3, 441.
Reference Proclamations
A. Proclamation No. 847/2014, Financial Reporting Proclamation, 2014.
B. Proclamation No. 621/2009, Charities and Societies Proclamation, 2009.
C. Proclamation No. 648/2009 The Federal Government of Ethiopia Financial
Administration Proclamation
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WOLLO UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS

ACCOUNTING FOR PUBLIC SECTORS AND CIVIL

1.1 Distinguishing characteristics of Governmental and Not- for- Profit entities

1.2.2 Uses and users of financial reports of governmental units

1.3. Objectives of financial reporting in NFP entities

Question2: What is importance of preparing financial report ?

Accounting IFRS IPSAS

1.5.1 Objective of financial report

Revenue Recognition: Realization.

1.6 chapter summary

1.7 Self-Test Questions

2.1 Activities of Government

2.2 Statement of the Principles

Number of Funds (Principle # 4)

2.5 Approaches to Budgeting

2.6 Chapter summary

2.7 Self test questions

3.2 Summary Statement of Principles

3.3 Impairment of Non-Cash-Generating Assets [IPSAS 21]

3.4 Disclosure of Financial Information about the General Government Sector

3.5 Revenue from Non-Exchange Transactions (Taxes and Transfers) [IPSAS

3.6 Presentation of Budget Information in Financial Statements [IPSAS 24]

3.7 Cash Flow Statements [Cash Basis IPSAS]

3.8 chapter summary

3.9. self –test questions

1. B 2. B 3.D 4.D 5.A 6.B 7.D 8.C 9.D 10. A

1. The Public Financial Corporation’s (PFC) Sector 2. cash flow statement

4.1. Budgeting in the Public Sector

4.2 Classification of budget

4.3 Approaches to budgeting

4.4 Presentation of Budgets Information in the Financial Statements (IPSAS

4.5 Performance Budgeting and Reporting

4.6 chapter summary

4.7 Self-test questions

5.1 Definition and purpose

2 Special Revenue Fund

5.2 budget and budgetary accounts

5.3 Accounting for General Fund and Special Revenue Fund

5.4 chapter summary

5.5 self test questions

6.1 Definition and Purpose

6.2 ESTABLISHMENT & operation

6.3. source and use of cash flow

6.4 method of acquire general project fund

6.5 alternative treatment of residual equity or deficits

6.6 bond premiums, discount and accrued interest on bonds sold

O.F.U- operating transfer out 10,000

6.7 Bond Anticipation Notes Payable

a) Fund Balance reserved for Encumbrance 550,000

Fund Balance Reserved for Encumbrance 3,900,000

6.9 self test questions

At a discount, what legal questions arise? What about at a Premium? Discuss.

7.1 GENERAL outline of Debt Service Fund

7.2 types of long term debts

7.3 Number of Debt Service Fund

Budgeting for Debt Service Fund

7.5 illustration on debt service funds

- Principal Amount ----------------- 1,000,000

Account title Debit Credit

7.6 Model examinations

8.1 Internal Service Fund (ISF)

8.4 Illustrative Case

a) Material Intergovernmental Operating Subsidies to an Enterprise Fund