Chapter Revenue

Revenue Accounting:
Governmental Funds
Chapter 5
Learning Objectives
 Determine when to recognize and report various revenues
 Identify categories of nonexchange revenues and when to
recognize assets and revenues
 Identify most common deferred inflows of resources
 Discuss and apply modified accrual revenue recognition criteria
to simple and complex situations
 Understand accounting for levy, collection, and enforcement of
property taxes and other tax revenues
 Account for investment income
 Distinguish and account for intergovernmental revenues
 Understand classification and accounting for other types of
revenues and other financing sources
 Account for and report changes in revenue accounting
principles and error corrections
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Revenues in Governmental Funds
Increases in net assets of a governmental

fund that either:
 Result in a corresponding increase in net
assets of governmental entity as a whole
 Result from exchange-like interfund
services provided

Revenues: Operational Definition
All increases in fund net assets except those

arising from
 Interfund reimbursements
 Interfund transfers
 Sale (or compensation for loss) of capital
assets
 Long-term debt issues

Modified Accrual Revenue
Recognition
 Recognize only revenues susceptible to
accrual—others on a cash basis
 Requirements for susceptible to accrual
 Objectively measurable
 Available—collected in current period or soon
enough thereafter to be used to pay liabilities of
the current period
 Legally usable to finance current period
expenditures
Establishing Legal Claim
to Revenues
 Charges for services—performing the
service
 Taxes—levy establishes claims to
resources
 Sales taxes—business making a taxable
sale
 Income taxes—taxpayer earning taxable
wages

Revenue Recognition Issue
Asset recorded before meeting criteria to

recognize revenue—must report either:
 Liability for unearned revenues
 Deferred Inflow (such as deferred revenues)

Reporting Deferred Inflows
 Not available—not collected by year end

or soon enough thereafter
 An imposed tax revenue levied (or
otherwise imposed) to finance operations
of a future year
 Collected in advance, and there is no
performance obligation to earn the
revenue
Nonexchange Transactions
 Governed by GASBS #33

 Four classifications of transactions

 Governed by GASBS #33

 Four classifications of transactions
 Derived tax revenues
 Imposed tax revenues
 Government-mandated transaction
 Voluntary transaction

 May have significant liabilities or deferred

inflows due to timing of recognizing asset and
revenue from transaction
 Cash may be collected prior to meeting revenue
recognition criteria
 Receivable recognition criteria met prior to meeting
revenue recognition criteria
 Revenue cannot be recognized until meeting
both the asset recognition criteria and the
revenue recognition criteria

Recommended Classes
of Revenues
 Taxes
 Licenses and permits
 Intergovernmental revenues
 Charges for services
 Fines and forfeits
 Investment earnings
 Miscellaneous
Types of Tax Revenues
 Taxpayer assessed
 Income taxes
 Sales taxes
 Levied—property taxes

Taxpayer Assessed Taxes
 Must assure that tax base has been accurately
reported by taxpayer—may be very difficult to
do
 Should be recognized when susceptible to
accrual
 When underlying transaction takes place
 In practice, usually recognized when collected
 Revenue from tax stamps usually recognized
when stamps are sold
Administering Property Taxes
1. Tax assessor determines assessed value of property

2. Local assessment review board hears complaints
about assessments
3. Boards of equalization assign values to taxing
districts
4. Legislative body levies amount of tax needed to
cover expenditures
5. Tax levy distributed among taxpayers based on
assessed value
6. Taxpayers are billed
7. Tax collections are credited to taxpayers’ accounts
8. Collects enforced by penalties, interest, and sale of
property for taxes
1. Assessment of Property
 Valuing property for tax purposes

 Properties of other governments and
religious organizations exempt from tax
 Several governments may tax same
property—overlapping jurisdictions
No journal entries required at this point.

2. Review of Assessment
 Performed by local board

 May adjust individual assessments
 Taxpayers can still appeal in courts

3. Equalization of Assessments
 Assessments made by a number of

different assessors
 Equalization board attempts to make
sure multiple properties are taxed at the
same percentage of fair value

4. Levying the Tax
 Levy made through ordinance
 Levies may vary in level of restrictions as
to use or purpose of tax
 Determining tax rate—divide levy by total
assessed valuation—resulting
percentage is rate or mills per dollar

5. Distribution of Levy
to Taxpayers
Amount due from each taxpayer is
determined by multiplying rate times
assessed value of property

6. Taxpayers Are Billed
 Amount owed by each taxpayer entered
into Tax Roll
 Taxes recorded in the accounts
 Receivable is for gross levy
 Adjustments made for
 Allowance for uncollectible accounts
 Discounts on taxes

Journal Entry to Record Billing
Taxes Receivable—Current 100,000

Allowance for Uncollectible
Taxes—Current 5,000
Allowance for Discounts 3,000
Revenues—Property Taxes 92,000
Entry assumes gross billing of $100,000 with 5% estimated

to be uncollectible and 3% estimated to be paid within
discount period.

7. Recording Tax Collections
 Must keep track of which year’s taxes

were collected—current and delinquent
 Taxes may be levied but not available
 Levied for next year’s operations
 Will not be collected in time to be available
 Taxes collected in advance—reported as
deferred inflow at time of collection

Journal Entry to Record
Collection (Page 186)
Cash 90,000
Taxes Receivable—Delinquent 20,000

Taxes Levied but Not Available
(Page 187)
Levy
Current Taxes 3,000
Deferred Revenues 97,000
Revenues become available


Taxes Collected in Advance and
Later Earned (Page 188)
Advance collection
Cash 2,500
Taxes Collected in Advance 2,500
Apply collection to receivable

Taxes Collected in Advance 2,500

Discounts on Taxes (Page 189)

Current Taxes 9,000
Allowance for Discounts on
Taxes 2,000

Discounts on Taxes (continued)
Collection within discount period

Cash 150,000
Allowance for Discounts on Taxes 1,500
Discount period expires

Allowance for Discounts on Taxes 500
Revenues—Property Taxes 500

8. Enforcing Tax Collections
 Interest and penalties—assessed for late

payment of taxes—subject to availability
requirement
 Tax sales
 Lien receivable created from taxes receivable,
interest and penalties, and court costs
 Allowances also converted
 Sales price > than receivable, difference goes to
taxpayer
 Sales price < than receivable, charge allowance
account

Recording Interest
and Penalties (Page 191)
Interest and Penalties Receivable—
Delinquent Taxes 15,000
Interest and Penalties 1,000
Revenues—Interest & Penalties 14,000

Accounting for Tax Sales (Page 190)
Reclassify assets to lien

Tax Liens Receivable 28,000
Taxes Receivable—Delinquent 25,000
Interest & Penalties Receivable –
Add court costs

Cash 1,000

Accounting for Tax Sales (continued)
Reclassify allowances (page 191)

Allowance for Uncollectible Interest
and Penalties 100
Allowance for Uncollectible Tax
Liens 2,100

Accounting for Tax Sales (continued)
Government keeps property (page 190)

Expenditures—Capital Outlay 4,000
Allowance for Uncollectible Tax Liens 2,000
Record related revenue


Licenses and Permits
 Categories
 Business—alcoholic beverages, health,
corporations, utilities, professional,
occupational, and amusements
 Nonbusiness—building, vehicles, driver
licenses, hunting and fishing, marriage,
burial, and animal
 Rates established by ordinance and
adjusted periodically
Intergovernmental Revenues
 Government-mandated nonexchange
transactions
 Voluntary nonexchange transactions

Government-Mandated
 Government at one level
 Provides resources to government at
another level, and
 Requires recipient to use them for a specific
purpose
 Provider government establishes
purpose restrictions and may set time
requirements and other eligibility
requirements
Voluntary Nonexchange
Transactions
 Legislative or contractual agreements between
two or more willing parties
 Examples: grants, certain entitlements, and
donations
 Parties not limited to governments but may
include individuals
 Provider may establish purpose restrictions
and eligibility requirements and may require
return of resources if requirements not met

Types of Grants
Operating
Capital Grants
Grants
 All
Solely
other
forgrants
capital purposes
 Examples
 Example—operation
 Airport improvementsof social welfare
programs
 Buses
 Subway systems
 Wastewater treatment plants

Entitlements and Shared Revenues
Shared revenues
Entitlements —portions
—varies
of appropriations
in amount in each
allocated
period
among governments
(depending on collections)
basedand
on relative
allocated
populations
based on
(or some
some formula
otherormeasure)
underlying transaction

Payments in Lieu of Taxes (PILOTs)
from Other Governments
 One government reimburses another for

lost revenues as governments don’t pay
taxes
 May be particularly significant near
military installations where Federal
government makes payments to school
districts or local governments

Intergovernmental Revenue
Accounting (IGR) Issues
 Fund Identification
 Pass-Through Grants
 Revenue Recognition

Fund Identification
 Not always necessary to establish a separate
fund for grants
 Use GF whenever possible
 Use SRF only if legally mandated
 Resources for debt principal/interest payment
should be in DSF
 Use CPF for grants restricted for capital
acquisition/construction
 Grants for EFs or ISFs should be accounted for
in those funds

Pass-Through Grants
 Primary recipient (entity that first receives the
money) uses grant to support some other
program
 Primary recipient must pass grant along to
intended user (subrecipient)—cannot use for
own purposes
 Subrecipient uses grant for intended purpose—
or passes along to sub-subrecipient

Pass-Through Grants
 Primary recipient generally accounts for

grant as revenue upon receipt and
expenditure/expense when distributed
 Primary recipient may use Agency Fund
only if it acts as cash conduit—no
administrative or financial involvement
with grant

Revenue Recognition
 Unrestricted IGR recognized as revenues

immediately, if available
 Restricted IGR not recognized until all
eligibility requirements are met: generally
must be expended for allowable costs to
meet requirements—known as
“expenditure-driven” grant

IGR Recognition
 If grant received before earned,

recognize asset (cash), but defer
revenue until earned
 If grant earned before received,
recognize asset (receivable) and
revenue, if considered available

Grant Received Before Earned
(Pages 195–196)
Grant received
Cash 100,000
Unearned Revenue 100,000
Qualifying expenditures
Expenditures 40,000
Vouchers Payable 40,000
Recognize revenue
Unearned Revenue 40,000
Revenue 40,000

Grant Earned Before Received
Before Earned (Page 196)
Qualifying expenditures
Expenditures 75,000
Recognize revenue
Due from Grantor 75,000
Revenues—Intergovernmental 75,000

Charges for Services
 Result from goods and services provided to
public, other departments or other
governments
 When dealing with other departments, must
distinguish between reimbursements and
interfund service transactions
 Recognize revenue when service is provided
(earned), if available, or when cash is collected

Special Assessments
 Service provided in one year, collection

made in subsequent years
 Expenditures recognized for service
 Revenue deferred until collection

Special Assessments (Page 198)
Work done in current period

Expenditures 100,000
Revenue postponed until collection
Assessments Receivable—Deferred
100,000

Special Assessments (continued)
Annual payment comes due

Accounts Receivable—Current 20,000
Accounts Receivable—
Deferred 20,000
Revenue recognized
Revenues—Special Assess 20,000
Interest billed on entire
amount 6,000
Interest Receivable 6,000
Revenues—Interest 52
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Fines and Forfeits
 Usually not that big of a source of

revenue
 Revenue usually recognized on a cash
basis
 Large fines might be accrued

Investment Earnings
 GASBS #31 sets reporting requirements

for fair value
 GASBS #31 did for investments what
FASBS #115 did in the private sector—
only the GASB rules are much easier
 GASBS #31 identified types of
investments to adjust to fair value

Investments Carried at Cost
 Nonparticipating investment contracts

(fixed-rate CDs)
 Equity securities, option contracts, stock
warrants, and stock rights without
readily determinable fair values

Investments Carried at Fair
Value or Cost
 Participating interest-earning, investment
contracts (variable-rate CDs) purchased
one year or less before maturity
 Money market investments purchased
one year or less before maturity

Investments carried at
Fair Value
 Participating interest-earning, investment

contracts (variable-rate CDs) purchased
more than one year before maturity
 Money market investments purchased
more than one year before maturity
 Investment positions in external
investment pools (except 2a7-like pools)

Investments Carried at
Fair Value (continued)
 Open-end mutual funds

 Equity securities, option contracts, stock
warrants, and stock rights with readily
determinable fair values
 Debt securities

Essential Elements of Fair Value
Accounting for Investments
 Investments are carried at fair value

 Premiums and discounts on investments
need not be amortized, unless using
amortized cost
 Fair value accounting not used for
investments accounted for using equity
method

Reporting Interest Income
and Changes in Fair Value
 Investment income = cash interest and
dividends received or accrued ± realized gains
(losses) ± changes in fair value of investments
 Investment income may be reported on single
line or broken into components:
 Interest and dividends
 Net increase (decrease) in fair value of investments
(wording required by GASB)
 Realized and unrealized gains and losses
should not be reported separately in
statements but may be disclosed in the notes
Investment Entries (Page 201)
Investment (same for A & B)

Investments 496,000
Cash 496,000
Interest received (same for A & B)
Cash 30,000
Revenues—Interest 30,000

Investment Entries (continued)
Amortized cost—A
Change in fair value
No Entry
Amortize discount on investment

Investments 2,000
Revenues—Interest 2,000
Fair value—B—change in fair value

Investments 1,000
Revenues—Increase in Fair
Value of Investments 1,000
Miscellaneous Revenues
 Escheats
 Private Contributions

Escheats
 State law indicates when property of

people dying intestate, inactive checking
and other accounts, or other property
must pass to the state
 Property so received is a revenue to the
state
 Capital assets should be recorded in
General Capital Assets at fair value
Private Contributions
 Rare, but it does occur
 Unrestricted donations are revenue in the
General Fund
 Restricted donations
 For the benefit of the government are revenues in
SRF, CPF, or Permanent Fund
 For the benefit of others are revenues in a Private
Purpose Trust Fund
 Property received via contributions is recorded
at fair value (but not in fund)
Selected Nonrevenue
Fund Balance Increases
 Capital Asset Sales/Losses
 Internal PILOTs
 Collateralized borrowings

Capital Asset Sales/Losses
 Gains and losses on sales of capital

assets not reported in governmental fund
statements—would violate MFBA
 Net proceeds from sales reported as an
Other Financing Source
 For GCA, report proceeds in GF or SRF;
for EF or ISF assets, report in the
appropriate fund
Payments in Lieu of Tax
(PILOTs)
 External—Payment from one government to
another because payor does not pay taxes
 Recognized as miscellaneous revenue
 Federal government major payor
 Internal—Payments within government’s funds
 May qualify as PILOT if payor receives something in
return—otherwise it is a transfer
 Probably should be called interfund service
transaction

Collateralized Borrowings
GASBS #48 provides criteria for treating transfers

of receivable as a sale
 If criteria met, proceeds of sale reported on
operating statement
 If criteria not met, transaction is a borrowing
 Fund liability—balance sheet transaction
 Not fund liability—proceeds reported as OFS

Changes in Accounting
Principles
Two types
 Prospective—affects only current and
subsequent years
 Retroactive—requires restatement of
prior years or computation of cumulative
effect

Common Causes of Changes
 Management decides to change from one

acceptable method of accounting to another
acceptable method (not common)
 Change in circumstances (state) requires
change in method of applying acceptable
principle
 GASB issues new standard that requires
change in revenue recognition

Standard Practices
 Change is effective at beginning of the
year of the change
 Cumulative effect (if any) is reported as a
restatement of beginning fund balance
 Revenues reported under new policy for
each year presented
 Change is disclosed and explained in the
notes to the financial statements

Error Correction
Three Step Process

1. Recognize the erroneous entry that was
recorded
2. Determine what the correct entry should be
3. Fix the error by essentially combining steps 1
and 2

Error Correction Issues
 If error is caught in same year, fairly

simple process to reverse it and record
correction
 If error was made in a previous year,
must consider if accounts affected have
been closed—may result in a “Correction
of Prior Year Error”

Error Correction Example—1
Identify the error: government accountant

incorrectly calculated interest to be
accrued—amount recorded was $75; it
should have been $100.
Interest Receivable 75

Correct entry is fairly straight-forward


Correction will depend on which year the original error

occurred:
Current year—just add another $25

Revenue—Interest 25
Previous year—Revenue account closed
Correction of Prior Year Error 25

Chapter Revenue

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Revenue Accounting:

Increases in net assets of a governmental

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All increases in fund net assets except those

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Asset recorded before meeting criteria to

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 Not available—not collected by year end

 Governed by GASBS #33

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 Governed by GASBS #33

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 May have significant liabilities or deferred

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1. Tax assessor determines assessed value of property

 Valuing property for tax purposes

No journal entries required at this point.

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 Performed by local board

No journal entries required at this point.

 Assessments made by a number of

No journal entries required at this point.

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No journal entries required at this point.

No journal entries required at this point.

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Taxes Receivable—Current 100,000

Entry assumes gross billing of $100,000 with 5% estimated

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 Must keep track of which year’s taxes

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Revenues become available

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Apply collection to receivable

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Taxes Receivable—Current 300,000

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Collection within discount period

Discount period expires

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 Interest and penalties—assessed for late

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Reclassify assets to lien

Add court costs

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Reclassify allowances (page 191)

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Government keeps property (page 190)

Record related revenue

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 One government reimburses another for

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