Governmental Entities: Introduction and General Fund Accounting

Chapter 17
Governmental Entities:
Introduction and
General Fund
Accounting
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 17-1
Understand and explain the

basic differences between
governmental and private
sector accounting.
17-2
Overview
 Governmental entities have operating

objectives different from those of commercial
entities.
 As a result, governmental accounting is
different from accounting for commercial
enterprises.
17-3
Overview
 Nature of governmental entities

1. Collect resources and make expenditures to fulfil
societal needs
2. Absence of profit motive except for some
activities
3. Have legal authorization for their existence,
conduct revenue-raising through the power of
taxation, and have mandated expenditures they
must make to provide their services
4. Control mechanism – Use of comprehensive
budgetary accounting
17-4
Overview
 Nature of governmental entities

5. Accountability for the flow of financial resources
is a chief objective
6. Typically are required to establish separate
funds to carry out various missions; each fund is
an independent accounting and fiscal entity
7. Many fund entities do not record fixed assets or
long-term debt in their funds
8. An important objective of governmental financial
reporting is accountability
17-5
History of Governmental Accounting
 History
 Before 1984, directed by the Municipal Finance
Officers Association (MFOA)
 In 1934, the first statement on local
governmental accounting published
 In 1968, Governmental Accounting, Auditing, and
Financial Reporting (GAAFR) was published
 The GAAFR is periodically updated to include the
most recent governmental reporting standards
17-6
 History
 1974 –The American Institute of Certified Public
Accountants (AICPA) published an industry audit
guide, in which it stated that “except as modified
in this guide, they [GAAFR] constitute generally
accepted accounting principles”
 March 1979 – The National Council on
Governmental Accounting (NCGA) issued its
Statement No. 1, “Governmental Accounting and
Financial Reporting Principles” (NCGA 1)
17-7
 History
 1984 – Governmental Accounting Standards
Board (GASB) established
 GASB Statement No. 1
 The GASB stated that all NCGA statements and
interpretations issued and in effect on that date were
accepted as generally accepted accounting principles
for governmental accounting
 GASB Statement No. 34
 Established government-wide financial statements to
be prepared on the accrual basis of accounting and an
array of fund-based financial statements
17-8
 History
 The GASB continues to issue new standards to
meet the information needs of users of the
financial reports of governmental units.
 Accounting for governmental entities is given the
general name of fund accounting.
17-9
The Governmental Accounting Standards
Board (GASB)
 GASB
 Created in 1984
 A sister organization to the FASB
 Establishes GAAP for state and local units
 No authority to establish GAAP for the federal
government
 Seven members—simple majority vote needed
(4 votes)
17-10
GAAFR: “The Blue Book”
 “Governmental Accounting, Auditing,

and Financial Reporting”
 Published by the Government
Finance Officers Association (GFOA).
 Neither prescribes nor
authoritatively interprets GAAP for
governmental units.
 Provides detailed guidance (many
examples) for applying
governmental GAAP.
 Widely used by governmental units. 17-11
Practice Quiz Question #1
Which of the following statements is correct?
a. The GASB is responsible to set standards
for governmental units and not-for-profit
entities.
b. The FASB was created in 1972 and sets
standards for governmental units.
c. The Blue Book contains financial
accounting standards for privately held
governmental agencies and companies.
d. The GASB is responsible for setting
standards for state and local governments
but not the federal government.
17-12
Understand and explain

major concepts of
governmental accounting.
17-13
Major Concepts of Governmental Accounting
 Elements of a Statement of Financial Condition

1. Assets are resources with present service capacity that
the entity presently controls.
2. Liabilities are present obligations to sacrifice resources
that the entity has little or no discretion to avoid.
3. A deferred outflow of resources is a consumption of net
assets that is applicable to a future reporting period.
4. A deferred inflow of resources is an acquisition of net
assets that is applicable to a future reporting period.
5. Net position is the residual of all other elements
presented in a statement of financial condition.
17-14
 Elements of a resource flows statements

1. An outflow of resources is a consumption of net assets
that is applicable to the current reporting period
2. An inflow of resources is an acquisition of net assets
that is applicable to the current reporting period
17-15
 Expendability of resources versus capital

maintenance objectives
Commercial Enterprises Government Entities
Changes in current financial
The flow of all economic resources available to
Measurement focus resources provide services to the public
in accordance with the
budget
Method of Accrual method Modified accrual method
accounting
Contains both current and

noncurrent assets and
liabilities, and the change in Reports only current assets,
Balance sheet retained earnings reflects current liabilities, and a fund
the company’s ability to balance
maintain its capital
investment
17-16
Which of the following statements is true?

a. Governmental units use the modified accrual
basis of accounting and focus on the flow of
current economic resources.
b. Commercial enterprises use the modified
accrual basis of accounting and focus on the
flow of all economic resources.
c. The balance sheets of governmental units
contain long-term assets and liabilities.
d. The balance sheets of commercial entities
contain a fund balance.
17-17

differences between the
various governmental fund
types.
17-18
The Nature & Diversity of Governmental
Activities
 The operations of governmental entities are
classified into three categories:
 Governmental—these activities do not
resemble commercial activities.
 Proprietary—these activities resemble
commercial activities. Can measure profitability
or capital maintenance.
 Fiduciary—holding and managing assets owned
by others (e.g., pension assets).
17-19
Use of Fund Accounting
 Fund Accounting
 Accounting for certain activities separately from
all other operations.
 Fund definition: A fiscal and accounting entity
with a self-balancing set of accounts (like a
branch or a division of a commercial entity).
 The General Fund: The main and largest fund
—records most routine transactions.
 The difference between a fund’s assets and
liabilities is called:
Governmental Funds Proprietary and
Fiduciary-type Funds
Fund Balance Net Assets
17-20
 Three Types of Funds

 Governmental Funds
 Used to provide basic governmental services to the
public
 Each entity creates only one general fund, but it may
create more than one of each of the other types of
funds
 Proprietary Funds
 The objective is to recover the unit’s costs through
user charges
 Fiduciary Funds
17-21
Major Concepts : Types of Funds
 Governmental Funds
 General Fund: Accounts for all activities not
required to be accounted for in another fund.
 Special Revenue Fund: A clone of the General
Fund.
 Capital Projects Funds
 Debt Service Funds
 Permanent Funds
17-22
 Proprietary Funds
 Enterprise Funds:
 Provides services primarily to nongovernmental
users
 Examples: City-owned utilities or recreational
facilities
 Internal Service Funds:
 Provides services solely to governmental
departments.
17-23
 Fiduciary Funds
 Trust Funds
 Pension (and similar) Trust Funds
 Investment Trust Funds
 Private-Purpose Trust Funds (these activities
do not benefit the government unit)
 Agency Funds
17-24
Governmental Fund Types
Accounts for all financial resources except for those
General fund accounted for in another fund. Includes transactions
for general governmental services provided by the
executive, legislative, and judicial operations of the
governmental entity.
Special revenue Accounts for the proceeds of specific revenue sources
fund that are restricted for specified purposes.
Capital projects Accounts for financial resources for the acquisition or
fund construction of major capital facilities that benefit
many citizens, such as parks and municipal buildings.
Accounts for the accumulation of resources for, and the
Debt service fund payment of, general long-term debt principal and
interest.
Accounts for resources that are restricted such that
Permanent fund only earnings, but not principal, may be used in support
of governmental programs that benefit the government
or its citizenry.
17-25
Proprietary Fund Types
Accounts for operations of governmental units that charge for
Enterprise fund services provided to the general public.
Accounts for the financing of goods or services provided by one

Internal service department or agency to other departments or agencies of the
fund governmental unit. Services are offered only to governmental
agencies.
Fiduciary Fund Types and Similar Component Units
Pension (and Accounts for resources required to be held in trust for the
other employee members and beneficiaries of pension plans, other post-
benefit) trust fund employment benefit plans, or other EBPs.
Investment trust Accounts for the external portion of investment pools
fund reported by the sponsoring government.
Accounts for all other trust arrangements under which the
Private-purpose fund’s resources are to be used to benefit specific
trust fund individuals, private organizations, or other governments.
Accounts for assets held by a governmental unit in an agency

Agency fund capacity for employees or for other governmental units.
17-26
The three major categories of

governmental funds are:
a. Governmental, commercial, and
proprietary.
b. Governmental, trust, and fiduciary.
c. Enterprise, proprietary, and fiduciary .
d. Governmental, proprietary, and fiduciary.
e. Governmental Service, proprietary, and
commercial
17-27
Understand and explain basic

concepts for financial reporting
in governmental
accounting.
17-28
Financial Reporting of Governmental Entities
 Governmental funds – financial

statements
 Balance sheet
 Statement of revenues, expenditures and
changes in fund balance
 The five governmental funds use the current
financial resources measurement focus
17-29
Fund Accounting
 Specific General Ledger Accounts Used

defined by GASB 54:
Governmental Proprietary and
Funds Fiduciary-type
Funds
Fund Balance Net Assets
Non-spendable Restricted
Spendable: Unrestricted
• Restricted
• Limited
• Assigned
• Unassigned
17-30
Balance Sheet for Governmental Funds
Assets (financial resources available for current use; $X,XXX
presented in order of liquidity)
Total Assets $X,XXX
Liabilities and Fund Balances:
Liabilities (due and expected to be paid from current
financial resources; presented in order of due date) $ XXX
Fund Balances
Nonspendable $ XX
Spendable:
Restricted XX
Limited XX
Assigned XX
Unassigned XX XX
Total Liabilities and Fund Balances $X,XXX
17-31
 Statement of revenues, expenditures, and
changes in fund balance
 Often called the operating statement of the governmental
funds
Statement of Revenues, Expenditures, and Changes in Fund Balance
Revenues (recognized when both measurable and available; presented
by source of revenue) $XX,XXX
Expenditures (approved decreases in net financial resources; presented
by function and character) X,XXX
Excess of Revenues over Expenditures $ XXX
Other Financing Sources or Uses (other increases or decreases in net
financial resources available, such as bond issue proceeds and interfund
transfers) XX
Special Items and Extraordinary Items (X)
Net Change in Fund Balance $ XX
Fund Balance—Beginning XXX
Fund Balance—Ending (reconciles to total fund balance on balance sheet) $ XXX
17-32
Which of the following is true?
a. The operating statements of governmental
entities focus on revenues and expenses.
b. The balance sheets of governmental entities
focus on the normal accounting equation:
Assets – Liabilities = Owner’s Equity.
c. The operating statements of governmental
entities focus on revenues and liabilities.
d. The balance sheets of governmental entities
focus a modified accounting equation:
Assets – Liabilities = Fund Balance.
e. All governmental fund balances are
spendable.
17-33

basic differences in the
measurement focus and basis
of accounting between
governmental and private sector
accounting.
17-34
Measurement Focus And Basis Of Accounting
(MFBA)
 Measurement Focus
 What flows to measure for operations.
 Basis of Accounting
 When should transactions and events be recognized
in the financial statements.
17-35
MFBA: Governmental Activities
 Measure flow:
 Current financial resources
 Basis of Accounting:
 Modified accrual basis of accounting
Present a Statement of Revenues and

Expenditures and Changes in Fund Balance
 Shows financial resources received and spent.
 Shows change in net financial resources
 Available for spending in the near future.
17-36
MFBA: Current Financial Resources
 Current financial resources:

 Cash, property tax receivables, prepaids, and
supplies inventories.
 Claims against current financial resources:
 Wages, payroll taxes, payables to vendors, and
liabilities expected to be paid in the near future
(typically within 60 days after the year-end).
17-37
MFBA: Proprietary and Fiduciary Activities
 Measure flow:
 All economic resources
 Basis of Accounting:
 Accrual basis of accounting
Present a Statement of Revenues and Expenses

 Shows the change in the economic condition.
Also present a Statement of Cash Flows
17-38
Measurement Focus and Basis of Accounting
 The modified accrual basis is used in funds

that have a flow of current financial
resources measurement focus
 The five governmental funds have this focus
 The accrual basis is used in funds that have a
flow of economic resources measurement
focus
 Proprietary funds and fiduciary funds have this
focus
 The government-wide financial statements
are based on the accrual basis 17-39
 Modified Accrual Basis Funds

 Governmental funds
 General Fund
 Special Revenues Fund
 Capital Projects Funds
 Debt Service Funds
 Permanent Funds
17-40
 Accrual Basis Funds

 Proprietary funds
 Enterprise Funds
 Internal Service Funds
 Fiduciary funds
 Trust Funds (3 types)
 Agency Funds
 The two propriety funds and the three trust

funds have either a profitability or capital
maintenance orientation. 17-41
 Modified Accrual Basis

 Revenues: Recognize in period in which they
become available and measurable.
 Available means: Collectible within the current
period or soon enough thereafter to be used to pay
current period liabilities.
 Expenditures: Recognize in the accounting
period in which the liabilities are both
measurable and incurred and are payable out of
current financial resources.
 One exception exists for interest on general long-term
liabilities. 17-42
 Recognition of revenue: how revenues are recognized
depends on the category
1. Derived tax revenues, resulting from assessments on exchange
transactions
 The asset is recognized when the underlying transaction occurs or
resources are received, whichever comes first.
 Revenue recognition depends on the accounting basis used to measure
the transaction.
2. Imposed nonexchange revenues, resulting from assessments on
nongovernmental entities, including individuals
 The asset is recognized when the government has an enforceable legal
claim to the resources or the resources are received, whichever comes
first.
 Revenue recognition is made in the period when use of the resources
for current expenditures is first permitted or required, or at the time
the asset is recorded if no time restriction on the fund’s use of the
resources exists. 17-43
 Recognition of revenue: how revenues are recognized
depends on the category
3. Imposed nonexchange revenues, resulting from assessments on
nongovernmental entities, including individuals
 The asset is recognized when the government has an enforceable legal
claim to the resources or the resources are received, whichever comes
first.
 Revenue recognition is made in the period when use of the resources
for current expenditures is first permitted or required, or at the time
the asset is recorded if no time restriction on the fund’s use of the
resources exists.
4. Government-mandated nonexchange transactions, resulting from
one governmental unit’s provision of resources to a governmental
unit at another level and the requirement that the recipient use the
resources for a specific purpose
5. Voluntary nonexchange transactions, resulting from legislative or
contractual agreements, other than exchanges 17-44
The modified accrual basis of accounting:

a. recognizes revenues when earned and
expenditures when incurred.
b. recognizes revenues when they become
available and measureable and expenditures
when liabilities become measurable and
incurred.
c. recognizes revenues when earned and
expenses when incurred
d. recognizes revenues when they become
available and measureable and expenditures
when they become available and spendable.
17-45
Understand and explain basic

budgeting concepts in
governmental accounting.
17-46
Budgetary Aspects of Governmental
Operations
 Budgets
 Used in governmental accounting to assist in
management control and to provide the legal
authority to levy taxes, collect revenue, and make
expenditures in accordance with the budget
 Types of budgets:
 Operating budgets
 Capital budgets
17-47
Operations
 Appropriation: The statutory authorization for spending a
budgeted amount during a coming year.
 Annual Budgets for the General Fund and the Special
Revenue Funds are always recorded in the general ledger
for control purposes.
 Also done for Capital Projects Funds and Debt Service Funds if
useful.
 Encumbrances: Commitments related to unperformed
(executory) contracts for goods or services.
 Special general ledger accounts are used to record
encumbrances—the purpose is to prevent spending more
than has been appropriated.
 Budget entries have no effect on reported operations.
17-48
Introduction: Budget / Expenditure Process
1. Budget—Recorded in the books

 CAPITAL LETTERS (legally binding)
2. Expenditures
 Appropriation (authorization of the expenditure)
 Encumbrance (set aside or reserve part of the
budgetary appropriation)
 Expenditure
 Disbursement
17-49
Operations
 Recording the Operating Budget
Assume that at July 1, 20X1, the first day of the new fiscal period, the
city council of Angela City approves the operating budget for the
general fund, providing for $900,000 in revenue and $850,000 in
expenditures. Approval of the budget provides the legal authority to
levy the local property taxes and to appropriate resources for the
expenditures. The entry made in the general fund’s accounting records
on this date is as follows:
July, 20X1
(1) ESTIMATED REVENUES CONTROL 900,000
APPROPRIATIONS CONTROL 850,000
BUDGETARY FUND BALANCE—UNASSIGNED 50,000
Record general fund budget for year.
17-50
Operations
 The ESTIMATED REVENUES CONTROL account is an
anticipatory asset.
 The APPROPRIATIONS CONTROL account is an
anticipatory liability.
 The excess of estimated revenues over anticipated
expenditures is the budget surplus and is recorded to
BUDGETARY FUND BALANCE—UNASSIGNED.
 Some approved budgets have budget deficits in which
expected expenditures exceed anticipated revenue.
 These budgets are recorded with a debit to BUDGETARY
FUND BALANCE—UNASSIGNED.
17-51
Example: Budget / Expenditure Process
Assume the same budget from the previous example is
approved for Angela City as of July 1, 20X1 :
 $900,000 in Revenues
 $850,000 in Appropriations
In addition, assume a particular appropriation of $15,000 is

approved for the purchase of a chipper machine, but that the
actual list price turns out to be less than anticipated. As a result,
only $14,000 is paid for the final voucher.
17-52
1. Budget
ESTIMATED REVENUES CONTROL 900,000
APPROPRIATIONS CONTROL 850,000
BUDGETARY FUND BALANCE—UNASSIGNED 50,000
2. Expenditures
 Appropriation
 Authorization of the expenditure (Annual Budget)
 Person with authority (each expenditure authorized)
 Encumbrance
ENCUMBRANCES 15,000
BUDGETARY FUND BALANCE—ASSIGNED FOR ENC. 15,000
17-53
2. Expenditures
 Expenditure
BUDGETARY FUND BALANCE—ASSIGNED FOR ENC. 15,000
ENCUMBRANCES 15,000
Expenditures 14,000
Vouchers Payable 14,000
 Disbursement
Vouchers Payable 14,000
Cash 14,000
17-54
Text Page 860
$850,000
Assume that Angela City approves APPROPRIATIONS
the operating budget with $850,000 Remaining
Appropriating
of expenditures on July 1, 20X1. As
Ability (X)
of November 18, 20X1, total
expenditures to date amount to $30,000
$400,000. In addition, assume that ENCUMBRANCES
$30,000 of encumbrances are
currently on the books. How much $400,000
appropriating authority still Expenditures
remains for the year?
X = $850,000 – ($30,000 + $400,000) = $420,000
17-55
Why do state and local governments record

encumbrances?
a. To ensure that the entity earns sufficient
revenues to achieve profitability.
b. To ensure that the entity does not spend more
than has been appropriated.
c. To ensure that all sub-entities within the
organization are not encumbered.
d. To ensure that the entity spends at least as
much as has been appropriated.
17-56
Make calculations and record

journal entries for the general
fund.
17-57
Two methods for accounting for outstanding
encumbrances at fiscal year end
 Should governmental units honor outstanding
encumbrances from the previous year?
 They are not technically required to do so.
 In virtually all instances they re-budget and honor them.
 Option 1: Encumbrances lapse at year end
 At year end, outstanding encumbrances are closed and an
amount is set aside in assigned fund balance.
 The encumbrance is re-established at the beginning of the
new period to await the delivery of goods or services.
 Option 2: Encumbrances do not lapse at year end
 At year end, outstanding encumbrances are closed and an
amount is set aside in assigned fund balance.
 The encumbrance is not re-established in the new period.
 The entity awaits the delivery of goods or services to
17-58
record the expenditure.
Comparison of Accounting for Lapsing and
Nonlapsing Encumbrances at Year-End
17-59
Two Ways to Account for Supplies Inventories
 Consumption Method
 The preferred method—it parallels business practice.
 The use of inventory is treated as an outflow of
resources.
 The expenditure = the amount “consumed”
 Purchase Method
 The acquisition of inventory is treated as an outflow of
resources (debit Expenditures or Expenses).
 The expenditure = the amount “purchased”
17-60
Two Ways to Account for Supplies Inventories
 The specific method to follow depends on the governing
unit’s policy and how inventory expenditures are included
in the budget.
 Immaterial inventories need not be shown on the balance
sheet.
 If the inventory is material, it is presented as an asset on the
balance sheet.
 An amount equal to the inventory also should be shown as a
reservation of the fund balance, indicating that that amount is
no longer expendable.
17-61
Inventory Example:
Baker County, Iowa purchased $6,000 of supplies inventory on
7/1/X5, the first day of the fiscal year. Assume that the
beginning inventory balance was $1,500 and that the county has
a policy of initially recording all inventory purchases as
expenditures and then adjusting the balances at the end of the
accounting period based on the actual amount of inventory on
hand per the physical count. Assume the actual inventory on
hand on 6/30/X6 is $2,500.
REQUIRED
1. Assuming the consumption method, record the initial
inventory purchase on 7/1/X5. Then, record the adjusting entry
on 6/30/X6.
2. Assuming the purchase method, record the initial inventory
purchase on 7/1/X5. Then, record the adjusting entry on
17-62
6/30/X6.
Consumption Method
To record the purchase of $6,000 of inventory on 7/1/X5.
To adjust inventory balance per the physical count on 6/30/X6.
To adjust non-spendable fund balance to the actual on 6/30/X6.

Expenditures Inventory Fund Balance—NS
6,000 BB 1,500 1,500 BB
EB 2,500 2,500 BB 17-63

Purchase Method
(Expenditure = Amount Purchased)
To record the purchase of $6,000 of inventory on 7/1/X5.
To adjust inventory and the non-spendable fund balance to the

actual inventory balance per the physical count on 6/30/X6.
Expenditures Inventory Fund Balance—NS

BB 1,500 1,500 BB
EB 2,500 2,500 BB
17-64
Accounting for Inventories
17-65
Accounting for Expenditures
 Accounting for fixed assets

 Governmental funds: Recognized as an expenditure in
the year the asset is acquired
 Proprietary funds: Account for acquisitions of capital
assets in the same manner as commercial entities
 Works of art and historical treasures

 For the purposes of government-wide financial
statements, governments should capitalize these assets
at their historical costs at acquisition or at their fair
values at the date of the contribution
17-66
 Long-term debt and capital leases

 The governmental funds record the proceeds from a
bond issue as a debit to Cash and a credit to Bond Issue
Proceeds, an other-financing source.
 Bond issue proceeds are not revenue because the bonds
must be repaid.
 Bonds are not reported on the governmental funds’
balance sheets but only on the government-wide
financial statements.
 Capital leases are accounted for in a manner similar to
long-term debt.
17-67
 Investments
 GASB 31 established a general rule of fair market
valuation for investments held by a government entity.
 Changes in the fair value of investments should be
recognized as an element of investment income in the
operating statement (or statement of activities) of each
fund.
 GASB 40 requires footnote disclosures of the policies
and the profiles of the government’s investment
portfolios.
17-68
Group Exercise:
Comprehensive General Fund Entries
The City of Cottersen, Texas is a small town with a population of
approximately 15,000. The city noted the following transactions
during fiscal 20X8.
REQUIRED
1. Prepare General Fund journal entries only for these items.
2. Prepare closing entries at 6/30/X8.
3. Prepare a Statement of Revenues, Expenditures, and Changes
in Fund Balance as of 6/30/X8.
4. Provide a summary of the fund balance by category as of
6/30/X8.
17-69
Group Exercise:
Requirement 1 (Journal Entries)
1. The Cottersen city council approved the following budget:
Estimated revenues $820,000
Authorized expenditures (including
$60,000 reappropriated for encumbrances
outstanding at 6/30/X7 that had lapsed) 720,000
Authorized transfers out to other funds
($35,000 and $20,000) 55,000
Estimated inflow from the discontinuance of
the Auto Repair Internal Service Fund 25,000
17-70
Group Exercise:
2. The city levied property taxes totaling $570,000. Of this amount, $10,000
was estimated to be uncollectible. Collections during the year totaled
$525,000, of which $12,000 were associated with property taxes levied in
the prior year that had been declared delinquent at the end of the prior
year. All of the remaining property taxes receivable at the beginning of the
current year, totaling $5,000, were written off as uncollectible. The net
realizable amount at 6/30/X7 ($11,000) is expected to be collected within
60 days.
17-71
Group Exercise:
60 days.
Property Taxes Allowance for

Receivable—Delinquent Uncollectibles—Delinquent
BB 17,000 NRV = 11,000 6,000 BB
12,000 Collected
Given 5,000 5,000 Write 5,000 1,000 Left over

off Close out
17-72
Group Exercise:
Property Taxes Allowance for

Receivable—Delinquent Uncollectibles—Delinquent
BB 17,000 6,000 BB
12,000 Collected
Given 5,000 5,000 Write 5,000 1,000 Left over

off Close out
17-73
Group Exercise:
60 days.
17-74
Group Exercise:
3. The estimated revenues for the year include a $44,000
entitlement from the federal government. During the year,
the city received $50,000.
17-75
Group Exercise:
4. The City’s income taxes, sales taxes, permits, licenses, and
other miscellaneous revenues totaled 225,000.
17-76
Group Exercise:
5. Encumbrances outstanding at the beginning of the year
totaled $60,000. The goods and services related to these
encumbrances were received along with invoices for $58,000.
17-77
Group Exercise:
5. Encumbrances outstanding at the beginning of the year
totaled $60,000. The goods and services related to these
encumbrances were received along with invoices for $58,000.
17-78
Group Exercise:
6. Purchase orders and contracts totaling $380,000 were entered into
during the year. For $340,000 of this amount, invoices that totaled
$336,000 for services and goods were received. The city generally
allows encumbrances outstanding at year-end to laps but
reappropriates the amounts in the following year to honor the
encumbrances. Of the $336,000 invoiced, $75,000 relates to the
acquisition of supplies inventory. The city uses the consumption method
for accounting for supplies.
17-79
Group Exercise:
6. Purchase orders and contracts totaling $380,000 were entered into
during the year. For $340,000 of this amount, invoices that totaled
$336,000 for services and goods were received. The city generally
allows encumbrances outstanding at year-end to laps but
reappropriates the amounts in the following year to honor the
encumbrances. Of the $336,000 invoiced, $75,000 relates to the
acquisition of supplies inventory. The city uses the consumption method
for accounting for supplies.
17-80
Group Exercise:
7. Payroll and other items not involving the use of purchase
orders and contracts totaled $270,000. This amount does
not include interfund billings.
8. Cash disbursements (not including payments to other

funds) totaled $664,000.
17-81
Group Exercise:
9. The Auto Repair internal service fund was discontinued as
determined by the city council at the beginning of the year.
The actual amount disbursed to the General Fund when the
fund was discontinued was $22,000.
10. A payment was made for $30,000 to the Electric Utility

Enterprise Fund to make up its operating deficit, which had
originally been estimated to be $35,000.
17-82
Group Exercise:
11. A $20,000 payment was made to a Capital Projects fund to
cover a portion of street improvements (which was exactly
the amount budgeted).
17-83
Group Exercise:
12. The Electric Utility Enterprise fund billed the city for a total
of $28,000 for electricity used by the city and supplied by
the Electric Utility. The cash disbursements throughout the
year for periodic billings totaled $24,000.
17-84
Group Exercise:
13. The City disbursed $79,000 to the City Center for the
Performing Arts Enterprise Fund as a loan. The repayment
is expected in three years.
17-85
Group Exercise:
14. A physical count of the supplies inventory at year-end
indicates that the balance decreased from $44,000 to
$41,000 during the year.
Supplies Inventory Expenditures
BB 44,000 Inv. 75,000
EB 41,000
Fund Bal.—Non-spendable Fund Balance—Unassigned

44,000 BB
17-86
41,000 EB
Group Exercise:
14. A physical count of the supplies inventory at year-end
indicates that the balance decreased from $44,000 to
$41,000 during the year.
17-87
Group Exercise:
Requirement 2 (Encumbrances Closing Entries)
BUGETARY FUND BALANCE

ASSIGNED FOR
ENCUMBRANCES ENCUMBRANCES
40,000 40,000
Fund Balance—Unassigned Fund Bal.—Assigned for Enc.
17-88
Group Exercise:
Requirement 2 (Encumbrances Closing Entries)
To close encumbrances outstanding at year-end by reversing

the entry that previously recorded them (see #6).
To record the actual fund balance reserve account to indicate

the portion of year-end fund balance segregated for
expenditure upon vendor performance.
17-89
Group Exercise:
Requirement 2 (Budget Closing Entry)
To reverse the entry previously made to record the legally

adopted annual operating budget.
17-90
Group Exercise:
Requirement 2 (Closing Operating Accounts)
Revenues— Revenues— Revenues—
Property Tax Entitlements Other
560,000 #2 44,000 #3 225,000 #4
1,000 #2 6,000 #3
561,000 50,000 225,000
Other Financing Other Financing Uses

Sources—Trans. In Expenditures —Transfers Out
22,000 #9 #5 58,000 #10 30,000
#6 336,000
#7 270,000 #11 20,000
#12 28,000
#14 3,000
22,000 695,000 50,000
17-91
Group Exercise:
Requirement 2 (Closing Operating Accounts)
Revenues—Property Taxes
Revenues—Entitlements
Revenues—Other
Other Financing Sources—Transfer In
Expenditures
Other Financing Uses—Transfer Out
Unassigned Fund Balance
To close the actual revenues, expenditures, and other
financing uses into Unassigned Fund Balance.
17-92
Group Exercise: Requirement 2 (Statement of
Revenues, Expenditures, and Changes in Fund Balance)
Variance Favorable
Budget Actual (Unfavorable)
Revenues:
Property taxes ($560,000 + $1,000) $570,000) $561,000) $(9,000))
Intergovernmental entitlement 44,000) 50,000) 6,000)
Miscellaneous 206,000) 225,000) 19,000)
Total Revenues $820,000) $836,000) $16,000)
Expenditures: 720,000) 695,000) 25,000)

Excess of Revenues over Expenditures $100,000) $141,000) $41,000)
Other Financing Sources (Uses):

Transfer in from Auto Repair Internal Service Fund $25,000) $22,000) $(3,000)
Transfers Out—
to Electric Utility Enterprise Fund (35,000) (30,000) 5,000)
to Capital Projects Fund (20,000) (20,000) 0)
Total Other Financing Sources (Uses) $(30,000) $(28,000) $2,000)
Excess of Revenues over Expenditures

and Other Financing Uses: $70,000) $113,000) $43,000)
Fund Balance – 7/1/X7 200,000) 200,000) 0)
Fund Balance – 6/30/X8 $270,000) $313,000) $43,000) )
Note: The large favorable variance is attributable primarily to encumbrances of $40,000
outstanding at year-end that will be reflected as expenditures in the following year and a
decrease in supplies inventory of $3,000. 17-93
Group Exercise:
Requirement 4 (Fund Balance Summary)
Fund Balance:
Nonspendable:
Supplies Inventory $ 41,000
Spendable:
Assigned for
Governmental Services 40,000
Unassigned 232,000
Total Fund Balance $313,000
17-94
Make calculations and record

journal entries for basic
interfund activities.
17-95
Interfund Activities
17-96
Overview of Accounting and Financial
Reporting for the General Fund
17-97
Overview of Accounting and Financial
Reporting for the General Fund
17-98
Conclusion
The End

Governmental Entities: Introduction and General Fund Accounting

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Governmental Entities: Introduction and General Fund Accounting

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Chapter 17

Understand and explain the

 Governmental entities have operating

 Nature of governmental entities

 Nature of governmental entities

 “Governmental Accounting, Auditing,

Understand and explain

 Elements of a Statement of Financial Condition

 Elements of a resource flows statements

 Expendability of resources versus capital

Contains both current and

Which of the following statements is true?

Understand and explain the

 Three Types of Funds

Accounts for the financing of goods or services provided by one

Accounts for assets held by a governmental unit in an agency

The three major categories of

Understand and explain basic

 Governmental funds – financial

 Specific General Ledger Accounts Used

Understand and explain the

Present a Statement of Revenues and

 Current financial resources:

Present a Statement of Revenues and Expenses

Also present a Statement of Cash Flows

 The modified accrual basis is used in funds

 Modified Accrual Basis Funds

 Accrual Basis Funds

 The two propriety funds and the three trust

 Modified Accrual Basis

The modified accrual basis of accounting:

Understand and explain basic

1. Budget—Recorded in the books

In addition, assume a particular appropriation of $15,000 is

Why do state and local governments record

Make calculations and record

To record the purchase of $6,000 of inventory on 7/1/X5.

To adjust inventory balance per the physical count on 6/30/X6.

To adjust non-spendable fund balance to the actual on 6/30/X6.

EB 2,500 2,500 BB 17-63

To record the purchase of $6,000 of inventory on 7/1/X5.

To adjust inventory and the non-spendable fund balance to the

Expenditures Inventory Fund Balance—NS

 Accounting for fixed assets

 Works of art and historical treasures

 Long-term debt and capital leases

Property Taxes Allowance for

Given 5,000 5,000 Write 5,000 1,000 Left over

Property Taxes Allowance for

Given 5,000 5,000 Write 5,000 1,000 Left over

8. Cash disbursements (not including payments to other

10. A payment was made for $30,000 to the Electric Utility

Fund Bal.—Non-spendable Fund Balance—Unassigned

BUGETARY FUND BALANCE

Fund Balance—Unassigned Fund Bal.—Assigned for Enc.

To close encumbrances outstanding at year-end by reversing

To record the actual fund balance reserve account to indicate

To reverse the entry previously made to record the legally

561,000 50,000 225,000

Other Financing Other Financing Uses

Expenditures: 720,000) 695,000) 25,000)

Other Financing Sources (Uses):

Excess of Revenues over Expenditures