CHAPTER 4

ACCOUNTING
FOR
CAPITAL PROJECT FUNDS
by
Prof. SREENIVAS D L

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 INTRODUCTION
Governmental accounting systems are operated on a fund basis.
The general meaning of fund is Resource of money.
Where as in government accounting
A fund is a fiscal and accounting entity with a self balancing set of
accounts.
It indicates the following points;
It is fiscal – means it is having monitory or economic value,
it is an accounting entity – means it is a body of person,
having its own accounting existence and a self balancing set of
books.

Hence, a separate journal and ledger accounts are kept and

separate financial statements are prepared for each fund..
So each project will be a separate distinct fund. 2
 TYPES OF FUNDS
  There are seven types of funds, which are subdivided into three categories:
Governmental Funds, Proprietary Funds and Fiduciary Funds
 
I. GOVERNMENTAL FUNDS:
 
1. The General Fund - The general fund is used for general government
services. It is basically used for services that does not require a separate
fund. All governmental units should have a general fund, except if the
resources are to be accounted in other funds.
2. Special Revenue Funds - This fund was not for the general purpose of the
government but was raised specifically for specific purposes. It should be
accounted for and reported on separately.
3. Capital Project Fund - This fund is used for the acquisition or construction
of major capital facilities such as buildings for city administrations. Libraries,
museum etc.
4. Debt Service Funds - This fund is used for making the payment of principal
and interest for general long term debt or borrowings for capital projects.
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II. PROPRIETARY FUNDS
 1. Enterprise Funds- Used for operational purpose - the cost of
providing goods and services to the general public, is to be financed
or recovered through the revenues generated by that. Eg. Public
Park

 2. Internal Service Funds - To account for the financing of goods or

services provided by one department to another. Eg. Shared garage
for repair of vehicles regardless of which project, offices or ministers
it belongs to.
III. FIDUCIARY FUNDS
Trust and Agency Funds- To account for assets held by governmental
unit in a trustee capacity or as an agent to other governmental units.
These include:
• Pension trust funds -Investment trust funds - for pensions and other
benefits
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 GENERAL OUTLINE OF CAPITAL PROJECTS FUND
• Capital Projects Funds (CPF) are the funds used for
the acquisition or construction of major capital
facilities - other than those financed by proprietary
funds and trust funds.
• Examples of major capital facilities are Administration
Buildings, Civic Centers and libraries,
Streets,highways,bridges (Infrastructure) etc.
• These funds do not account for the acquisition of
smaller fixed assets, such as vehicles, machinery and
office equipment which are normally budgeted for
and recorded as expenditures in the General fund. 5
• Sometimes it is possible that a construction of
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.
• 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.
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• Usually all-governmental buildings constructed
by the governmental unit are mostly financed
by bond offerings.
• In commercial accounting, all activities such
as, expenditure on construction of building,
subsequent capitalization and servicing of debt
incurred to finance the construction of
building is accounted in one general ledger.
• Where as in governmental accounting, four
general ledgers are used, of which two are
funds and two are account groups.
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• The Capital Project Fund- meant for Acquisition of Project
• General Fixed Assets Account Group GFAAG-
The Fixed Assets constructed are accounted and transferred to GFAAG
from Capital Project Fund.
( It does not account for the repayment and servicing of any debt
obligations issued to raise money to finance the acquisition of capital
facilities)
• General Long Term Debt Account Group (GLTDAG)
The debt and debt related servicing activities are accounted for in the
General Long Term Debt Account Group.
• Debt Service Fund (DSF)
The debt and debt related servicing activities are transferred to Debt
Service Fund from General Long Term Debt Account Group.

Since the purpose of capital projects fund is to account for the

acquisition of capital assets for specific purpose, it contains only liquid
assets and those liabilities which is to be liquidated by those assets.8
 Relationship Between Governmental Fund and Accounting Group

General Fund / Special Reserve Fund Capital Project Fund

Acquisition and Construction

Capital Expenditure for of Projects and
minor Capital outlay Expenditures

General Fixed Assets Account General Long Term Debt

Group - GFAAG Account Group -GLTDAG

Acquired or Constructed Asset L T Liability Long term debt incurred for

Assets Acquisition or Construction
Asset L T Liability

Debt Service Fund

Principle and Interest payments on long
term debts incurred for acquisition or
Construction
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 Example
Issuance of bonds for 500,000 Br
Capital Projects Fund (CPF) - Receives cash from bond
offerings and uses cash to construct fixed assets.
In the Capital Projects Fund CPF the entry is

Cash Account Dr. 500,000

To Bond proceeds 500,000

( Being cash received on bond offerings for

construction )
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 Capital Projects Fund CPF – accounts for
fixed assets during construction.

* Constructing of new building

Capital Projects Fund CPF accounts as

Construction Expenditures Dr. 500,000

To Cash 500,000
( Being the amount spent for construction purpose)

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General Fixed Assets Account Group GFAAG –
accounts for fixed assets after construction.

 General Fixed Assets Account Group GFAAG

Building Ac Dr. 500,000
To Investment in Fixed Assets – CPF 500,000
(Being the transfer entry of building to investment
in Fixed Account)

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 General Long Term Debt Account Group(GLTDAG)
Accounts for matured General Long Term Debt along
with interest at the maturity date, then the liability is
transferred to a Debt Service Fund (DSF) for payment

* Journal entry when the Bond matures in General

Long Term Debt Account Group(GLTDAG)

Interest expenditure Account Dr. 10,000

Bonds Payable Account Dr. 500,000
To Total Bond Amount Due 510,000
 
( Being the interest and bond amount due for payment)
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 General Long Term Debt Account Group transfers the
liability of Long Term Debt along with interest at the
maturity date, to Debt Service Fund (DSF) for payment
Journal entry when the Bond amount is payable in
Debt Service Fund DSF

Total Bonds Amount Payable Dr. 510,000

To cash 510,000

( Being the cash paid on the interest and the bond

amount.)

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 ESTABLISHMENT AND OPERATION
 

• C PF are usually established on a project-by-

project basis.
• Because legal requirements may vary from
one project to another.
• The focus of the CPF is the entire life of the
project.
• So the existence of the C P F like any other
fund will depend on the legal requirement and
the need for good financial management.

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• Use of budgetary accounts will depend on the
features and financing source of the particular
CPF.
• It will be based on the particular project and is
influenced by the requirement of the source of
financing.
• The decision to use budgetary accounts or not
to use is influenced by factors such as.
- The number of projects in the CPF
- The budgeted amount details in the CPF
- The use of an annual budget (rather than a
project life budget) in the CPF. 16
 FINANCING A CAPITAL PROJECT
Capital projects needs large amount of
financing. Typically source of financing include:
• Long term debit issue proceeds
• Grants from other governmental units
• Transfers from other funds with in the
governmental entity
• Interest income from temporary investments.
• Gifts from individuals or foundations
• Special taxes or
• A combination of one are more.
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• Intergovernmental grants, gifts, special taxes and
investment interests are considered as Revenues.

• Whereas Inter Fund Transfers and Long Term Debt

issue proceeds are not revenues and are presented
as Other Financing Sources.

• Whether to have a separate Capital Project Fund for

each project or to account all capital projects in
one fund depends on type of financing involved.

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• Sometimes, one bond issued is used to finance
several projects, a single fund is advisable.
• Whether to have a separate capital fund for
each project or to account all capital projects in
one fund depends on type of financing
involved.
• Issues of Different bonds,inter governmental
transfers well have different legal requirements
and each might require a separate C.P.F.
• Sometimes, one bond issued is used to finance
several projects, a single fund is advisable.
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 OTHER CONSIDERATIONS

Means of Acquisition
Accomplishment of capital acquisition or construction
of project may be in one or more of the following ways:
1. Outright purchase from available cash from fund
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 to be Included
• All expenditures for getting the project ready are
included in total cost. It may include architect fees,
Materials and transport costs, damages etc….
usually major capital facilities are constructed by
contracted labor.
• Construction costs incurred are charged to
expenditures.
• On 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. 21
 Retained Percentages
• It is required that all contractors to give performance
bonds, providing indemnity to the Governmental Unit for
any failure on the contractors obligation to comply with
terms and specifications of the agreement.
• It is common practice in construction contracts to hold
back the portion of each payment or the last payment of
the contract as a retention money until final inspection
and acceptance.
• The withheld portion is normally a contractual percentage
or the Retained Percentage of the amount due on each
segment of the contract, this is done in order to
compensate, in case of any failure on any contractual
obligation for the non performance or poor performance. 22
• This prevents the contractor from doing a poor
quality work, specially in a rush to finish at the
end.
• Usually the final amount will be paid only after
the inspection and certification of the
contractors work by the governmental in house
engineers.
• If the engineer finds poor quality or undone work,
the contractor must then correct the problem
before the final retained sum is paid.
• This amount withheld by the governmental entity
is known as retained percentage.
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 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 are usually large, an encumbrance account
is highly recommended and is very necessary in
case of multiple subcontractors of project.

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• Encumbrances – are the burdon, that is committed
expenditure as against the available amount. Purchase
orders in governmental entities have the function of
keeping track of coming expenditures so that the budget
should not exceeded. this is done by actually recording
the P.O in the ledger account as an Encumbrance.

• In capital projects fund, Encumbrance is recorded by the

same amount in which the construction contract
agreement is made between the governmental unit and
the contractor. Encumbrances are made for the items
which are ordered through purchase orders. To keep
track of overall expenses.
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 ACCOUNTING FOR CAPITAL PROJECTS FUND
• Financial activities such as revenues earned expenditures
incurred for the construction or acquisition are recorded in
Statement of Revenues, Expenditures, and Changes in
Fund Balances

• 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.
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 FINANCIAL STATEMENTS
Two annual statements required
◦ Balance Sheet
◦ Statement of Revenues, Expenditures, and
Changes in Fund Balances
Budgetary statement or schedule may be legally
or contractually required
If several projects are financed through one fund
◦ Financial statements are presented in a series of
separate fund statements or “combining
statements”
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Reading Materials

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