SPPTChap 017

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 memberssimple 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
Measurement focus
The flow of all economic

resources
Changes in current financial

resources available to
provide services to the
public in accordance with the
budget
Method of
accounting
Accrual method
Modified accrual method
Balance sheet
Contains both current and

noncurrent assets and
liabilities, and the change in
retained earnings reflects
the companys ability to
maintain its capital
investment
Reports only current assets,

current liabilities, and a fund
balance
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:
Governmentalthese activities do not

resemble commercial activities.
Proprietarythese activities resemble
commercial activities. Can measure profitability
or capital maintenance.
Fiduciaryholding 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
fundrecords most routine transactions.
The difference between a funds assets and
liabilities is called:
Governmental Funds
Fund Balance
Proprietary and
Fiduciary-type Funds
Net Assets
17-20

Three Types of Funds
Governmental Funds
Proprietary 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
The objective is to recover the units 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
General fund
Accounts for all financial resources except for those

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
fund
Accounts for the proceeds of specific revenue sources

that are restricted for specified purposes.
Capital projects
fund
Accounts for financial resources for the acquisition or

construction of major capital facilities that benefit
many citizens, such as parks and municipal buildings.
Accounts for the accumulation of resources for, and the
payment of, general long-term debt principal and
interest.
Accounts for resources that are restricted such that
only earnings, but not principal, may be used in support
of governmental programs that benefit the government
or its citizenry.
Debt service fund
Permanent fund
17-25

Proprietary Fund Types
Enterprise fund
Accounts for operations of governmental units that charge for

services provided to the general public.
Internal service
fund
Accounts for the financing of goods or services provided by one

department or agency to other departments or agencies of the
governmental unit. Services are offered only to governmental
agencies.
Fiduciary Fund Types and Similar Component Units

Pension (and
other employee
benefit) trust fund
Investment trust
fund
Accounts for resources required to be held in trust for the

members and beneficiaries of pension plans, other postemployment benefit plans, or other EBPs.
Accounts for the external portion of investment pools
reported by the sponsoring government.
Private-purpose
trust fund
Accounts for all other trust arrangements under which the

funds resources are to be used to benefit specific
individuals, private organizations, or other governments.
Agency fund
Accounts for assets held by a governmental unit in an agency

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
Funds
Fund Balance
Non-spendable
Spendable:
Restricted
Limited
Assigned
Unassigned
Proprietary and
Fiduciary-type
Funds
Net Assets
Restricted
Unrestricted
17-30

Balance Sheet for Governmental Funds
Assets (financial resources available for current use;
presented in order of liquidity)
Total Assets
Liabilities and Fund Balances:
Liabilities (due and expected to be paid from current
financial resources; presented in order of due date)
Fund Balances
Nonspendable
Spendable:
Restricted
Limited
Assigned
Unassigned
Total Liabilities and Fund Balances
$X,XXX
$X,XXX
$ XXX
$ XX
XX
XX
XX
XX
XX
$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)
Expenditures (approved decreases in net financial resources; presented
by function and character)
Excess of Revenues over Expenditures
Other Financing Sources or Uses (other increases or decreases in net
financial resources available, such as bond issue proceeds and interfund
transfers)
Special Items and Extraordinary Items
Net Change in Fund Balance
Fund BalanceBeginning
Fund BalanceEnding (reconciles to total fund balance on balance sheet)
$XX,XXX
X,XXX
$ XXX
$
$
XX
(X)
XX
XXX
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 = Owners 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 longterm liabilities.
17-42

Recognition of revenue: how revenues are recognized
depends on the category
1.
Derived tax revenues, resulting from assessments on exchange

transactions
2.
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.
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 funds 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
4.
5.
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 funds use of the
resources exists.
Government-mandated nonexchange transactions, resulting from

one governmental units provision of resources to a governmental
unit at another level and the requirement that the recipient use the
resources for a specific purpose
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
encumbrancesthe 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. BudgetRecorded 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 funds accounting records
on this date is as follows:
July, 20X1
(1) ESTIMATED REVENUES CONTROL
APPROPRIATIONS CONTROL
BUDGETARY FUND BALANCEUNASSIGNED
900,000
850,000
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 BALANCEUNASSIGNED.
Some approved budgets have budget deficits in which
expected expenditures exceed anticipated revenue.
These budgets are recorded with a debit to BUDGETARY

FUND BALANCEUNASSIGNED.
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
APPROPRIATIONS CONTROL
BUDGETARY FUND BALANCEUNASSIGNED
900,000
850,000
50,000
2. Expenditures
Appropriation
Authorization of the expenditure (Annual Budget)

Person with authority (each expenditure authorized)
Encumbrance
ENCUMBRANCES
BUDGETARY FUND BALANCEASSIGNED FOR ENC.
15,000
15,000
17-53

2. Expenditures
Expenditure
BUDGETARY FUND BALANCEASSIGNED FOR ENC.
15,000
ENCUMBRANCES
Expenditures
15,000
14,000
Vouchers Payable
14,000
Disbursement
Vouchers Payable
Cash
14,000
14,000
17-54
Text Page 860
Assume that Angela City approves

the operating budget with $850,000
of expenditures on July 1, 20X1. As
of November 18, 20X1, total
expenditures to date amount to
$400,000. In addition, assume that
$30,000 of encumbrances are
currently on the books. How much
appropriating authority still
remains for the year?
Remaining
Appropriating
Ability (X)
$850,000
APPROPRIATIONS
$30,000
ENCUMBRANCES
$400,000
Expenditures
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 methodit 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
units 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
6,000
Inventory
BB 1,500
EB 2,500
Fund BalanceNS
1,500 BB
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
BB 1,500
Fund BalanceNS
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 governments 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:
2.
60 days.
Property Taxes
ReceivableDelinquent
BB 17,000
Allowance for
UncollectiblesDelinquent
NRV = 11,000
6,000 BB
12,000 Collected
Given 5,000
5,000
Write
off
5,000
1,000 Left over

Close out
17-72
Group Exercise:
Property Taxes
ReceivableDelinquent
Allowance for
UncollectiblesDelinquent
BB 17,000
6,000 BB
12,000 Collected
Given 5,000
5,000
Write
off
5,000
1,000 Left over

Close out
17-73
Group Exercise:
2.
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 Citys 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
BB 44,000
Expenditures
Inv. 75,000
EB 41,000
Fund Bal.Non-spendable
44,000 BB
41,000 EB
Fund BalanceUnassigned
17-86
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)
ENCUMBRANCES
40,000
BUGETARY FUND BALANCE

ASSIGNED FOR
ENCUMBRANCES
40,000
Fund BalanceUnassigned 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
Property Tax
Revenues
Entitlements
560,000 #2
44,000 #3
1,000 #2
6,000 #3
561,000
Revenues
Other
225,000 #4
50,000
Other Financing
SourcesTrans. In
Expenditures
22,000 #9 #5 58,000
#6 336,000
#7 270,000
#12 28,000
#14 3,000
22,000
695,000
225,000
Other Financing
UsesTransfers Out
#10 30,000
#11 20,000
50,000
17-91
Group Exercise:
Requirement 2 (Closing Operating Accounts)
RevenuesProperty Taxes
RevenuesEntitlements
RevenuesOther
Other Financing SourcesTransfer In
Expenditures
Other Financing UsesTransfer 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
Budget
Actual
Revenues:
Property taxes ($560,000 + $1,000)
Intergovernmental entitlement
Miscellaneous
Total Revenues
Expenditures:
Favorable
(Unfavorable)
$570,000)
44,000)
206,000)
$820,000)
$561,000)
50,000)
225,000)
$836,000)
$(9,000))
6,000)
19,000)
$16,000)
720,000)
$100,000)
695,000)
$141,000)
25,000)
$41,000)
$25,000)
$22,000)
$(3,000)
(35,000)
(20,000)
$(30,000)
(30,000)
(20,000)
$(28,000)
5,000)
0)
$2,000)
$70,000)
200,000)
$270,000)
$113,000)
200,000)
$313,000)
$43,000)
0)
$43,000)
Other Financing Sources (Uses):

Transfer in from Auto Repair Internal Service Fund
Transfers Out
to Electric Utility Enterprise Fund
to Capital Projects Fund
Total Other Financing Sources (Uses)

and Other Financing Uses:
Fund Balance 7/1/X7
Fund Balance 6/30/X8
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
Spendable:
Assigned for
Governmental Services
Unassigned
Total Fund Balance
$ 41,000
40,000
232,000
$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

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Chapter 17

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objective 17-1

Understand and explain the

Governmental entities have operating

Nature of governmental entities

Collect resources and make expenditures to fulfil

Absence of profit motive except for some

Have legal authorization for their existence,

Control mechanism Use of comprehensive

Nature of governmental entities

Accountability for the flow of financial resources

Typically are required to establish separate

Many fund entities do not record fixed assets or

An important objective of governmental

History of Governmental Accounting

Before 1984, directed by the Municipal Finance

In 1968, Governmental Accounting, Auditing,

The GAAFR is periodically updated to include the

History of Governmental Accounting

1974 The American Institute of Certified Public

History of Governmental Accounting

1984 Governmental Accounting Standards

The GASB stated that all NCGA statements and

GASB Statement No. 34

Established government-wide financial statements to

History of Governmental Accounting

The GASB continues to issue new standards to

The Governmental Accounting Standards

A sister organization to the FASB

Establishes GAAP for state and local units

No authority to establish GAAP for the federal

GAAFR: The Blue Book

Practice Quiz Question #1

Learning Objective 17-2

Understand and explain

Major Concepts of Governmental Accounting

Assets are resources with present service capacity that

Liabilities are present obligations to sacrifice resources

A deferred outflow of resources is a consumption of net

A deferred inflow of resources is an acquisition of net

Net position is the residual of all other elements

Major Concepts of Governmental Accounting

An outflow of resources is a consumption of net assets

An inflow of resources is an acquisition of net assets

Major Concepts of Governmental Accounting

The flow of all economic

Changes in current financial

Modified accrual method

Contains both current and

Reports only current assets,

Practice Quiz Question #2

Learning Objective 17-3

Understand and explain the

The Nature & Diversity of Governmental

Governmentalthese activities do not

Use of Fund Accounting

Accounting for certain activities separately from

Major Concepts of Governmental Accounting

Used to provide basic governmental services to the

Major Concepts : Types of Funds

General Fund: Accounts for all activities not

Special Revenue Fund: A clone of the General