Governmental

Accounting
Chapter TWO
Introduction to accounting for
state and local government units

Lecturer: Abdirahman Awil

(MBA, BA in Finance & Accounting)

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The history of generally accepted
governmental accounting standards
• Currently both the GASB and the FASB are
responsible for setting standards for nonprofit
organizations.
• The GASB is involved in establishing standards
for governments, while the FASB has been
responsible since 1979 for setting standards for
all other nonbusiness organizations.

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Financial Accounting Standards
for Nonbusiness Organizations

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THE STRUCTURE OF GOVERNMENTAL
ACCOUNTING
• A governmental unit, although a separate legal
entity, consists of a number of separate fund
and other accounting entities.
• There are eleven broad categories of fund
entities and two account group entities.
• The eleven categories of fund entities fall
under three subheadings:
1. Governmental funds
2. Proprietary funds
3. Fiduciary funds
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1. Governmental Funds
• Governmental Funds (expendable)—reporting
focuses on the sources, use, and balances of
current financial resources.
• The accounting and reporting emphasis for
these types of funds is on the inflow, outflow,
and unexpended balance of net financial
resources.

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1. Governmental Funds
1. General Fund —to account for all financial
resources except those required to be
accounted for in another fund.
2. Special Revenue Funds —to account for the
proceeds of specific revenue sources (other
than trusts for individuals, private
organizations, or other governments or for
major capital projects) that are legally
restricted to expenditures for specified
purposes.

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1. Governmental Funds
3. Capital Projects Funds —to account for financial
resources to be used for the acquisition or
construction of major capital facilities (other than
those financed by proprietary funds or in trusts for
individuals, private organizations, or other
governments).
4. Debt Service Funds —to account for the
accumulation of resources for, and the payment of,
general long-term debt principal and interest.
• Debt service funds are required if they are legally
mandated and/or if financial resources are being
accumulated for principal and interest payments
maturing in future years.

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1. Governmental Funds
5. Permanent Funds —to account for
resources that are legally restricted to the
extent that only earnings, and not principal,
may be used for purposes that support the
government’s programs—that is, for the
benefit of the government or its citizenry.
• An example is a cemetery perpetual care fund,
which provides resources for the ongoing
maintenance of a public cemetery

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2. Proprietary Funds
• Proprietary Funds (nonexpendable)—reporting
focuses on the determination of operating
income, changes in net assets, financial
position, and cash flows.
• Government operations that are similar to
commercial business operations such as a
water utility, an electric utility, or a central
garage or central computer facility are
accounted for in the proprietary fund category.

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2. Proprietary Funds
• Proprietary Funds (nonexpendable)—reporting
focuses on the determination of operating
income, changes in net assets, financial
position, and cash flows.
• Government operations that are similar to
commercial business operations such as a
water utility, an electric utility, or a central
garage or central computer facility are
accounted for in the proprietary fund category.

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2. Proprietary Funds
1. Enterprise Funds —to account for any
activity for which a fee is charged to external
users for goods or services.
2. Internal Service Funds —to report any
activity that provides goods or services to
other funds, departments, or agencies of the
primary government and its component units,
or to other governments, on a cost
reimbursement basis.

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3. Fiduciary Funds
• Fiduciary Funds —reports assets held in a trustee or
agency capacity for others
and that cannot be used to support the government’s
own programs.
• Fiduciary fund reporting focuses on net assets and
changes in net assets. These include:
1. Pension (and Other Employee Benefit) Trust Funds
—used to report resources that are required to be held
in trust for the members and beneficiaries of defined
benefit pension plans, defined contribution plans, other
postemployment benefit plans, or other employee
benefit plans.
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3. Fiduciary Funds
2. Investment Trust Funds —used to report the external portion
of investment pools reported by the sponsoring government.
• Investment trust, also called closed-end trust, financial
organization that pools the funds of its shareholders and invests
them in a diversified portfolio of securities.
2. Private-Purpose Trust Funds — used to report unclaimed
property and to report all other trust agreements under which
principal and income benefit individuals, private organizations,
or other governments.
3. Agency Funds — used to report resources held by the
reporting government in a purely custodial capacity (assets
equal liabilities). Agency funds typically involve only the receipt,
temporary investment, and remittance of fiduciary resources to
individuals, private organizations, or other governments.

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 Exercise
• From the flowing departments indicate the type of
fund that most likely would be used for each
department by placing a G for governmental, P for
proprietary, or F for fiduciary by each department.
1. ______ Department of Aviation (Airport Authority)
2. ______ Police and Fire Departments
3. ______ Water and Wastewater System
4. ______ Agency Funds
5. ______ Sanitation
6. ______ Public Works
7. ______ Pension and Retirement Trust Funds
8. ______ Internal Service (e.g., Information Technology)
9. ______ Payment of General Obligation Debt

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Example
• The following transactions take place: Identify the Fund
1. A commitment was made to transfer general revenues to the
entity in charge of providing transportation for all government
agencies.
2. Construction bonds were issued at a premium. The premium is
to be included in funds accumulated to retire the debt.
3. Police salaries were paid.
4. Interest and principal were paid on general obligation serial
bonds.
• Required:
• Indicate the name of the fund(s) in which each of the transactions
or events should be
recorded.

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Identify the Fund
• The following transactions take place:
1. A cement mixer was purchased with resources
of the general fund.
2. A contract was signed for the construction of a
new civic center.
3. Bonds were issued to finance the construction
of the new civic center.
4. Construction of the civic center was completed.
• Required:
• Indicate the name of the fund(s) in which each of
the transactions or events should be
recorded.
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Example 1
Capital Projects Fund—Journal Entries
• On June 1, 2008, the City of Cape May authorized the construction of a
police station at an expected cost of $250,000. Financing will be provided
through transfers from a Special Revenue Fund.
• The following transactions occurred during the fiscal year beginning June 1,
2008, relating to the Capital Project Fund.
1. The $250,000 receivable from the Special Revenue Fund was recorded.
2. The Special Revenue Fund transferred $125,000 to the Capital Project
Fund to begin construction on the police station.
3. The Capital Project Fund invested the transfer of monies in a six-month
certificate, at 5%.
4. A contract in the amount of $250,000 was let to the lowest bidder.
5. Architect and legal fees in the amount of $3,125 were approved for
payment. There was no encumbrance for these expenditures.
6. Contract billings in the amount of $250,000 were approved for payment on
the completion of the police station and the encumbrance was removed.
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Example 1
Capital Projects Fund—Journal Entries
7. The six-month certificate was redeemed at maturity with interest
revenue.
8. The Special Revenue Fund transferred the final amount of $125,000
to the Capital Projects Fund.
9. All liabilities except for the retention of 5% of the contract price were
paid.
10. All requirements and obligations were completed; the final payment
of the contract price was made and all nominal accounts were
closed.
• Required:
• Prepare the journal entries necessary in the Capital Projects Fund to
record the transactions and events described above.

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Solutions

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Exercise
Exercise1
Capital Projects Fund—Journal Entries

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Exercise 8-2
Capital Projects Fund and Related Funds
• The Town of Green River authorized a municipal building to be constructed
at a cost of $175,000. The construction will be financed from the proceeds
from the issue of $175,000 of 6% bonds. Any difference between the par
value of the bonds and the proceeds from their sale is transferred to the
Debt Service Fund.
• Transactions and events relating to this project include the following:
1. The proceeds from the sale of the bonds were received and
included a premium on the bond issue in the amount of $15,000.
The premium was transferred to Debt Service Fund.
2. Encumbrances were recorded on signing of the construction
contract in the amount of $175,000.
3. Contract billings in the amount of $85,000 were approved for
payment.
4. Contract billings were paid in the amount of $85,000.
5. All nominal accounts were closed and construction in progress
was recorded in the appropriate account group in anticipation of
the preparation of financial statements.
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Exercise 8-2
Capital Projects Fund and Related Funds

6. Encumbrances that were closed in anticipation of the

preparation of financial statements are reestablished in the
Capital Projects Fund.
7. Contract billings in the amount of $90,000 were approved
on the completion of the municipal building.
8. Contract billings of $90,000 less a retention of 5% were
paid.
9. The building was accepted, all construction liabilities were
paid, and the building was recorded as an asset in the
appropriate account group.
• Required:
• Prepare the journal entries relating to the Capital Projects
Fund and the Debt Service Fund for the transactions and
events described above. Clearly identify the fund in which
each entry is recorded.
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Solution 8-2
Capital Projects Fund and Related Funds

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Solution 8-2
Capital Projects Fund and Related Funds

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Solution 8-2
Capital Projects Fund and Related Funds

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Special assessment
• A municipal bond is issued by a state or local
government to raise capital to fund projects
such as highways, sewage systems,
recreational parks, public schools and so on.
When a municipal bond is issued to sponsor
the improvement of properties in a specific
area of a city, town, or county, the bond is
referred to as a special assessment bond.

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Exercise 18 – 4
Internal Service Fund
• The administrators of the City of Lyons have obtained
approval from the City Council to centralize the
computer facility as of January 1, 2008.
• An internal service fund is created to account for the
activities of the computer facility.
• The City Council has approved a contribution of
$25,000 from the General Fund for use as working
capital and an advance from the Electric Utility Fund of
$355,000 for the purchase of equipment and facilities.
• The $355,000 advance will be repaid by the internal
service fund in 20 equal annual installmentsz

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 Exercise 18 – 4
Internal Service Fund
• The following transactions relate to the establishment and
operation of the Internal Service Fund.
1. January 1 The computer facility received the contribution
from the General Fund and the advance from the Electric
Utility Fund.
2. January 4 Land and a building were purchased for
$175,000 of which $25,000 was assigned to land.
Hardware was purchased for $125,000 and equipment to
protect the hardware was purchased for $55,000.
3. April 10 The computer facility billed the Electric Utility Fund
for service provided. The service cost $200,000 and was
billed at a mark-up of 25% on cost.
4. April 29 Administrative expenses totaling $10,000 were
approved for payment.
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Exercise 18 – 4
Internal Service Fund
5. May 1 Payment of $37,750 was received from the Electric
Utility in partial payment of the April 10 billing.
6. May 1 The administrative expense was paid.
7. December 2 The first of 20 equal annual installments to the
Electric Utility Fund was paid.
8. December 30 Depreciation expense was recorded for the
year as administration expense. The building was estimated
to have a remaining useful life of 25 years; the hardware was
estimated to have a useful life of 5 years; the equipment to
protect the hardware was estimated to have a useful life of 10
years.
9. December 31 The nominal accounts of the internal service
fund were closed through a closing account, “Excess of
Billings to Departments over Costs,” which in turn was
closed to unrestricted net assets.

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Exercise 18 – 4

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Exercise 18 – 4

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 PROBLEM 18-6 Journal Entries—Identify the Fund
• Prepare journal entries to record each transaction and identify the
fund in which each entry is recorded.
A. The Greenville City Council passed a resolution approving a
general operating budget of $5,000,000 for the fiscal year 2008.
Total revenues are estimated at $4,900,000.
B. The Greenville City Council Passed an ordinance providing a
property tax levy of $6.25 per $100 of assessed valuation for
the fiscal year 2008. Total property valuation in Greenville City
is $204,800,000. Property is assessed at 25% of current
property valuation. Property tax bills are mailed to property
owners. An estimated 3% will be uncollectible.
C. Reed City sold a general obligation term bond issue for
$1,000,000 at 105 to a major brokerage firm. The stated
interest rate is 5%. Proceeds are to be used for construction of
a new Central Law Enforcement Building. (Note: Entries are
required in the Capital Project Fund).
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 PROBLEM 18-6 Journal Entries—Identify the Fund

D. The premium on bond sale in (C) above is transferred to the

Debt Service Fund.
E. At the end of fiscal year 2008, the Greenville City Council
approves the write-off of $52,550 of uncollected 2007 taxes
because of inability to locate the property owners. The tax bills
have been referred to the legal department for further action.
F. The Reed City Central Law Enforcement Building [(C) above]
is completed. Contracts and expenses total $989,000, and all
have been paid and recorded in the Capital Project Fund.
• Prepare entries to close this project and record the completion of
the project in all other funds or account groups affected. Any
balance in the Capital Project Fund is to be applied to payment
of interest and principal of the bond issue.

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PROBLEM 18-6 Journal Entries—Identify the Fund
G. On May 1, 2008, Hopi City supervised the issue of 6% serial
bonds at par to finance street curbing in an area recently
incorporated in the city limits. The face amount of the bonds
is $600,000; interest is payable annually, and bonds are to
be retired in equal amounts over five years from collections
from assessments against property owners. The City acts as
a collection agent and has given assurances to the debt
holders that it will guarantee payment of principal and
interest even though it is not obligated to do so.
(1) Record the issuance of the bonds on May 1, 2008.
(2) Record the payment to bondholders on May 1, 2009.

H. The curbing project in (G) above was completed on

November 30 at a total of $590,000.
Record summary entries for expenditure transactions May 1–
November 30, 2008, and on
completion of the project.
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Solution 18-6

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Solution 18-6

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 PROBLEM 18-7 Journal Entries—Identify the
Fund
• The following transactions take place.
1. Bond proceeds of $1,000,000 were received to be used in
constructing a firehouse. An equal amount is contributed from
general revenues.
2. $800,000 of serial bonds matured. Interest of $120,000 was paid on
these and other serial bonds outstanding.
3. $8,000 was received as insurance proceeds from the accidental
destruction of a four-year old police car costing $24,000.
4. $120,000 in expendable funds was transferred from the City Parks
Endowment Fund to the City Parks Special Revenue Fund.
5. Equipment purchased from general revenues at a cost of $200,000
was sold for $40,000.
6. The City Water Company (an enterprise fund) issued a bill for $800
for water provided to the street department’s street cleaner.
7. The City Water Company transferred $400,000 in excess funds to the
General Fund
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 PROBLEM 18-7 Journal Entries—Identify the
Fund
8. A central motor pool was established by a contribution of
$120,000 from the General Fund, a long-term loan of
$80,000 from the City Parks Special Revenue Fund, and
general obligation bond issue proceeds of $200,000.
9. The Motor Pool Fund billed the General Fund $10,000
and the City Parks Fund $4,000 for the use of motor
vehicles.
10. Special Assessment Bonds in the amount of $400,000
were retired. The city has indicated a willingness to
guarantee the payment of principal even though it was not
obligated to do so.
11. Customers’ deposits of $8,000 for water meters were
received by the City Water Company during the year. The
monies are to be held in trust until the customers request
that their services be disconnected and the final bills are
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 PROBLEM 18-7 Journal Entries—Identify the
Fund
12. It is determined that the Service Fund will require an
annual contribution of $60,000 and earnings of $6,000 in
the current year to accumulate the amounts necessary to
retire general obligation term bonds.
Required:
Prepare entries in general journal form to record these
transactions in the proper fund(s). Designate the fund in
which each entry is recorded.

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Solution

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Solution

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Solution

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Assignment 1
• During 2008, the City of Greenfield engaged in the following financial
activities:
1. The City Council approved the budget for the general operating fund.
The budget shows estimated revenues of $1,900,000 and
appropriations for expenditures of $1,850,000.
2. Property tax assessments for 2008 were compiled and statements
mailed to property owners. Assessments total $955,000. Past
collection experience indicates that approximately 5% of assessed
property taxes are delinquent or uncollectible during the year of billing.
3. A low bid of $15,000 was accepted for a new vehicle for the fire chief.
A purchase order was issued providing for additional costs for painting
and ancillary equipment (negotiated after the bid) prior to delivery. The
estimate of additional costs is $1,400.
4. Additional purchase orders placed during the year amount to
$140,000.
5. City employees are issued paychecks for the month of April. The total
payroll amounts to $90,000.
6. The City received a statement from the State Treasurer that the City’s
portion of the state sales tax for the first half-year is $375,000.
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Assignment 1
7. Vouchers for expenditures totaling $135,000 are approved for
payment. Encumbrances against these vouchers were
recorded at a total of $137,000.
8. The vehicle for the fire chief was delivered and accepted. The
invoice in the amount of
$16,200 was approved for payment.
9. Property tax collections for the month of June amounted to
$450,000.
10.The City Treasurer issued checks in payment of the vouchers
totaling $135,000 and for the invoice for the fire chief’s vehicle.
11. A purchase order previously issued for an electric typewriter
(estimated price $650) was canceled when the vendor
indicated a three-month delay in delivery.
• Required:
• Prepare journal entries to record and account for the foregoing
transactions.
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C.A.T 3
• The following events relate typical activities in a municipality
that affect the General Fund.
1. The Meadville City Council passed an ordinance approving
a general operating budget of $580,000 for fiscal year 2008.
The city’s only source of revenue is from property taxes. For
2001, these revenues are estimated at $565,000.
2. A property tax levy of $1 per $100 assessed valuation (total
assessed valuation equals $60,000,000) is billed to property
owners. Taxes are due in the current fiscal year. Experience
indicates that 3% of taxes billed will be uncollectible.
3. A motorcycle for the Department of Public Safety is ordered
by the purchasing department on the basis of a low bid of
$4,200.
4. The motorcycle in (3) above is received and the invoice is
approved for payment. Extra accessories not included in the
bid
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C.A.T 3
6. Motorcycle and extra accessories billings were paid
in full amount
7. Salaries and wages in the amount of $20,000
are paid by check to city employees for the two-
week period ending on May 15.
8. The property division sold used typewriters and
other office equipment at a public auction. Total
receipts were $8,225.
9. Property taxes in the amount of $540,000 were
collected.
10. Required: Prepare the necessary journal entries
to record each event in the accounts of the
General Fund
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