Chapter 20

Accounting for
State and Local
Governmental
Units –
Governmental
Funds
Governmental Funds: Objectives

1. Prepare journal entries to record

transactions in governmental funds,
including the new fund balance
classifications.
2. Learn about accounting methods unique to
governmental accounting: budgetary
issues, encumbrance accounting, and
interfund transactions.
3. Determine the appropriate governmental
fund to be used.

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Governmental Funds: Objectives
(cont.)

4. Prepare governmental fund financial

statements.
5. Convert governmental fund financial
statements to government-wide
financial statements.

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 Accounting for State and Local Governmental Units –
Governmental Funds

1: RECORD
TRANSACTIONS

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Fund Balance Classifications

There are five classifications of governmental fund

balances:
1. Nonspendable – amounts not in spendable form,
such as inventories, or endowment principal
2. Restricted – amounts may only be spent for
purposes designated by outside authority
3. Committed – amounts may only be spent for
purposes designated by government authority
4. Assigned – amounts to be used for a specific
purpose as determined by operating units
5. Unassigned – all other spendable fund balances

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General Fund Transactions
The General Fund holds all funds which are
not specifically designated to another fund.
Every governmental entity has one. The first
entry to prepare is the recording of the
budget.
Estimated revenues 3,500  
Appropriations   3,320
Estimated other financing uses - transfer
out   115
Fund balance - unassigned   65

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Revenue and Collections

Taxes receivable - current 2,000  

Allowance for uncollectibles – current   20
Revenues   1,980
Cash 1,900  
Taxes receivable – current   1,760
Taxes receivable – delinquent   140
Allowance for uncollectibles – delinquent 10  
Taxes receivable - delinquent   10

Revenues are recorded net of the estimated allowance.

Separate accounts are used for this year's taxes and
all prior years' taxes. Write-offs occur when the taxes
are deemed uncollectible. When they are late, they are
simply moved from current to delinquent (an
adjustment).
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Other Revenues and Collections

Accounts receivable 150  

Revenue   100
Deferred revenue   50
Cash 200  
Revenue   200

Taxes which are billed and are to be received within

60 days (and therefore available to pay current
liabilities) are recorded as Revenue. Amounts to be
received after that are recorded as Deferred
Revenue.
Revenue from licenses, permits, and fines is
recorded when received.

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Expenditures and Payments

Expenditures 200  
Vouchers payable   200
Vouchers payable 200  
Cash   200

For Expenditures that are not encumbered first (no

purchase orders are placed for wages, utilities, and
many other items), they are recorded as they
become due. These expenditures can be for current
services or capital outlays (like fixed assets).

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Supplies (without encumbrance)
Supplies inventory 60  
Vouchers payable   60
For supplies, this is the consumption method, like
most businesses use. Adjustments will recognize
supplies used as Expenditures.
Expenditures xxx  
Vouchers payable   xxx
For the purchase method, Expenditures would be
debited at the time of purchase. At year end, an
adjusting entry would record Supplies inventory
and Fund Balance - Nonspendable.

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Capital Lease

A fixed asset acquired by capital lease will result in the

recording of an Expenditure and an Other Financing Source.

Expenditures 50  
Other financing source – capital lease   50

Subsequent lease payments are recorded as Expenditures,

also. This appears to be recording the same expenditure
twice, but is correctly recording the source and use of
working capital in each reporting period. The asset, liability,
and related depreciation will be recorded in the government-
wide financial statements.

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Year-End Adjustments (1 of 2)
Expenditures 30  
Supplies inventory   30
Revenues 50  
Deferred revenue   50

Supplies inventory (consumption method) is

adjusted to its proper balance.
Revenues that haven't been collected yet and
are not expected to be collected in the next
60 days are reclassified. They will be revenue
next period when collected.

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Year-End Adjustments (2 of 2)

Taxes receivable – delinquent 240  

Allowance for uncollectible taxes – current 20  
Taxes receivable – current   240
Allowance for uncollectible taxes –
delinquent   20

At the end of the fiscal year (or tax year), amounts still
due from taxpayers are reclassified from current to
delinquent. Prior delinquencies may still be in the
delinquent accounts. This does not write off any
account or suspend collection procedures. It empties
the "current" accounts so that new taxes can be
recorded.
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Closing the Budget
Appropriations 3,320  
Estimated other financing uses - transfers out 115  
Fund balance - unassigned 65  
Estimated revenues   3,500

The current year's budget is removed from the

books at the end of the year. This entry is a
reversal of the initial entry putting the budget
on the books.

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Closing Current Year Accounts
Revenues 3,520  
Other financing sources – capital lease 50  
Expenditures   3,264
Encumbrances   50
Other financing uses - transfers out   164
Fund balance - unassigned   92

There may be multiple accounts for other financing

sources and uses (transfers in, proceeds from sales of
fixed assets, nonreciprocal transfers out). The Fund
Balance - Unassigned is adjusted for difference
between total fund sources and total fund uses.

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Closing Prior Year Accounts

Reserve for encumbrances - prior year 90  

Expenditures - prior year   85
Fund balance - unassigned   5

"Reserve for encumbrances – prior year" is a

temporary account established at the start of the
year and closed at the end. The "reserve for
encumbrance" account is part of fund equity which is
on the balance sheet.
$90 represents the purchase order that was
outstanding at the end of last year, whereas $85 is
the actual bill on the goods received.
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 Accounting for State and Local Governmental Units –
Governmental Funds

2: UNIQUE GOVERNMENTAL
ACCOUNTING ISSUES

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The Budget
Governmental entities formally record the budget
in the accounting records.
Budgets record approved amounts in functional
and object categories.
Budgetary accounts are easily compared to the
actual accounts to facilitate control
• Revenues (cr) and Estimated revenues (dr)
• Excess spending is easily monitored and must
be approved

Budget entries were presented earlier with general

fund beginning and closing entries

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Budget – Levels of Detail

Budgeted revenues are classified by source

• Taxes, licenses, fines, investment income

Appropriations, the budgeted expenditures,

are organized by
– Character class, current services, capital outlays
– And function, general government, public safety
– May also further classify
• Department, fire, police, zoning
• Object, supplies, salaries

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Encumbrance Accounting
Place
order Encumbrances 150  
Reserve for encumbrances   150
Receive Reserve for encumbrances 150
goods
Encumbrances 150
Expenditures 140  
Vouchers payable   140

When a purchase order is issued, an Encumbrance

is recorded. When the related goods or services are
received, the Encumbrance is reversed and the
Expenditure is recorded for the actual amount.

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Encumbrances from Prior Year
At
start Encumbrances 90  
of
year Reserve for encumbrances   90

If there were purchase orders outstanding from the prior

accounting period, they would need to be reinstated at the
beginning of the current year. This entry would then be
reversed when the goods or services were received, and the
expenditure would be recorded and classified as Prior Year
for control purposes.

Receiv Expenditures - prior year 85  

e
Goods Vouchers payable   85

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 Interfund Transactions -
Transfers
Interfund transfers may be reciprocal (expected to
be paid back) or nonreciprocal (no repayment is
expected – shown below).
GF Other financing use - nonreciprocal transfer to debt
service fund 14  
Cash   14
DS Cash 14  
F Other financing source - nonreciprocal transfer
from general fund   14

Example: General fund (first entry) transfers $14 to

the Debt service fund; Debt service fund (second
entry) receives funds from general fund

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Interfund Transactions - Other
In exchange (nonreciprocal) transactions, a city general fund
might be paying its water bill and the city water department
fund (enterprise fund) recording the receipt of revenue.

GF Expenditures 5  
Cash   5
EF Cash 5  
Revenues   5

In reciprocal transfers, we would record short-term receivables

and payables
• Due from other funds (basically, accounts receivable)
• Due to other funds (analogous to accounts payable)
• Advance to other fund (short-term loan receivable)
• Advance from other fund (short-term loan payable)

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 Accounting for State and Local Governmental Units –
Governmental Funds

3: WHICH FUND?

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Five Governmental Fund Types

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Special Revenue Funds
Accounts for revenue sources restricted by law
or administrative action, other than those for:
• Permanent funds (endowment)
• Capital projects funds (construction)
• Debt service funds (repayment of debt)
Example: education, highway maintenance
Accounting is similar to the general fund
• Fund balance can only be Unassigned if
there is a deficit
• Budgetary accounts needed if the budget
is legally adopted

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 SRF - Grant Entries

Receive Cash 20  
cash
Revenue collected in advance   20
Meet Expenditures 18.5  
require-
ments Vouchers payable   18.5
Revenue collected in advance 18.5  
Grant revenue   18.2

Special revenue funds are often used to account for

federal or other grants.
Revenue is recognized when eligibility requirements
are met, usually when the required expenditure is
made.
• Could be before or after cash receipt

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Permanent Funds
Used to account for funds on which only the earnings
may be expended. The earnings may or may not be
restricted in use. Its fund balance is a Nonspendable
Fund Balance.
Cash or Investments 500  
Revenues – addition to permanent
endowments   500
Cash 12.5  
Revenues – investment income   12.5
Expenditures 3  
Cash   3
Unrestricted earnings are transferred to the general
fund, but restricted earnings may be spent in this
fund or transferred to a special revenue fund.

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Capital Projects Funds
Accounts for funds being used for major capital
projects, such as building new town offices.
Use encumbrance accounting for the construction
contract and for other purchase orders and
commitments.
• Generally no budgetary accounts
Spending on the project is an Expenditure.
Its main source of funds may be Other Financing
Sources, such as proceeds from bonds.
• Bond receipts are recorded at gross
• Any premium received is generally
transferred to the debt service fund

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CPF Entries (1 of 3)

Cash 502  

Other financing sources – Proceeds

from bonds   502
At the approval of the capital project, a memo entry is
made. $500 of bonds are issued for the project, and
sell at a premium of $2.

Encumbrances 475  
Reserve for encumbrances   475
A contract for the project is signed for $475, and like
a purchase order, the signed contract is recorded as
an Encumbrance.
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CPF Entries (2 of 3)

CPF Other financing uses – nonreciprocal

transfer to debt service fund 2  
Cash   2
DS Cash 2  
F Other financing sources –
nonreciprocal transfer from capital
projects fund   2

The premium from the bonds is transferred out of

the Capital Projects Fund to the Debt Service Fund.
There it can be applied to the upcoming interest
payment or invested to use later in repaying the
bonds.

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CPF Entries (3 of 3)
Reserve for encumbrances 475  
Encumbrances   475
Expenditures 475  
427.
Contracts payable   5
Contracts payable – retained
percentage 47.5
When the contractor bills the city, both entries are made
• The encumbrance (a portion of the contract) is
removed
• An expenditure is recorded for that amount
The payable is usually split between the amount due now and
the percent that waits until successful contract completion.

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CPF – Completing the Project

Fixed assets:
• As construction continues, construction in progress
is recognized as part of fixed assets in an amount
equal to expenditures
• At completion, the construction in process
becomes the fixed asset, building, etc.
• The fixed asset is not recorded for fund accounting
Capital projects fund:
• Capital project fund closing entries and statements
are prepared each period with ongoing
construction
• At completion, any remaining cash is transferred
to debt service or general fund

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Debt Service Funds
Accounts for the funds set aside and being
used to repay debt principal and interest.

Most inflows are transfers from other funds

although there will be investment revenue.

Interest and principal are recorded as

expenditures and payables when due, but
no long-term debt is recorded.

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DSF Entries (1 of 2)
DS Cash 16.25  
F Other financing sources –
nonreciprocal transfer from general
fund   16.25
GF Other financing uses – nonreciprocal
transfer to debt service fund 16.25  
Cash   16.25

The debt service fund receives $16 from the general

fund for the upcoming amounts due on bonds: $2
interest and $14.25 principal. Both funds record this
transfer.

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DSF Entries (2 of 2)

Expenditures – principal 14.25  

Expenditures – interest 2
Matured principal payable 14.25
Interest payable   2
Matured interest payable 14.25
Interest payable 2
Cash 16.25

Principal on bonds, $14.25, is due along with $2

interest. Interest and principal are recorded as
expenditures and liabilities on the date due.
Liabilities are removed when paid.

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DSF – Continuing Payments
The Debt Service Fund continues to accept money
(usually from General Fund) and make payments on
the outstanding bonds or other debt, including capital
lease payments.

Legal requirements may dictate separate Debt Service

Funds for separate debt, but some may be combined.

Cash in the Debt Service Fund is usually invested to

provide earnings until needed
 Investments
 Investment Revenue

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 Accounting for State and Local Governmental Units –
Governmental Funds

4: FUND FINANCIAL
STATEMENTS

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Fund Financial Statements
Required governmental fund financial statements
1. Statement of net assets or balance sheet
2. Statement of revenues, expenditures, and changes
in fund balance
3. Budgetary comparison information
• General Fund
• Special Revenue Funds with legally adopted
budget
1 and 2: Statements will have columns for general
fund and other significant governmental funds
• Combine insignificant funds
• Show total (no interfund eliminations)

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General Fund Balance Sheet

Assets   $187
Taxes receivable - delinquent $240  
Allowance for uncollectibles (20) 220
Accounts receivable   180
Supplies   90
Total   $677
Vouchers payable $325  
Deferred revenue 50 $375
Reserve for encumbrances $50  
Unassigned 252 302
Total   $677

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General Fund Statement of Revenues,
Expenditures, and Changes in Fund Balance

Total revenues $3,520

Less expenditures  
Current services (3,158)
Capital outlays (190)
Excess of revenues over expenditures $171
Other financing sources (uses)  
Capital leases 45
Transfers out (164)
Excess of revenues and OF sources over
expenditures and OF uses $52
Fund balance, 10/1/10 250
Fund balance, 9/30/11 $302

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 Accounting for State and Local Governmental Units –
Governmental Funds

5: GOVERNMENT-WIDE
FINANCIAL STATEMENTS

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Government-Wide Statements

Governmental fund statements

– Modified accrual basis
Government-wide statements
– Accrual basis

Covert governmental funds to accrual basis for

inclusion in government-wide statements.
• Statement of Net Assets
• Statement of Activities

Adjustments are prepared on worksheet

• Individual fund records are not changed

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Fixed Assets
Add existing fixed assets with accumulated
depreciation to assets and net assets. Include
Construction in Progress from the Capital Projects
Fund expenditures.

Current acquisitions
• Remove expenditures for capital outlays
• Add to fixed assets
Current dispositions
• Remove other financing source – proceeds
from sale of fixed assets
• Reduce fixed assets, accumulated
depreciation and record gain or loss

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Long-Term Debt

Add existing long-term liabilities, and reduce

net assets.

Current borrowings
• Remove other financing source
• Increase liability
Current principal repayments
• Remove expenditures
• Decrease liability

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Leases and Other Adjustments
Capital leases have both fixed asset and long-
term liability adjustments.
Revenues
• Deferrals based on 60-day availability
may be recognized
Expenditures convert to expenses.
Interfund activities and balances
• Eliminate transfers and balances to/from
• Eliminate interfund internal service
activities

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