Government Name Statement of Revenues, Expenditures, and Changes in Fund Balance For the period ended 12/31/x0 Total Category Fund ... Fund Memo Only Revenues Expenditures Excess of revenues over (under) expenditures Other Financing Sources (Uses) borrowing transfers Excess of revenues and other sources over (under) expenditures and other uses Fund Balance (beginning of the period) Fund Balance (end of the period)The top section of this statement is similar to a business income statement in that expenditures are subtracted from revenues to produce excess of revenue over (under) expenditures. That is where the similarity ends. The statement of revenues, expenditures and changes in fund balance adds a major elements called other sources and uses. The sources can be borrowing and transfers. Although the borrowing is usually restricted to certain situations or funds (namely, the capital projects fund for the acquisition of large fixed assets), borrowing can occur to bolster the inflow of any fund. Also, any fund can benefit from transfers (called transfers in) originating from other funds. Other uses are basically transfers out of a one fund and into another. In this respect the statement really shows inflows and outflows of money, not just revenues and expenditures. No direct comments in the title of the statement shows that borrowing or transfers can be part of the statements. However, borrowing and transfers do change the fund balance and the changes in fund balance technically captures borrowing and transfers, but only technical readers would pickup that borrowing and transfers are indirectly included in the title. For instance, borrowing increases the fund balance and a transfer out decreases the fund balance of a given governmental fund.
Most of the borrowing is limited to one type of fund, the capital projects fund, but controversy has surrounded what constitute a capital project and when borrowing should be used. Thus, one government may borrow to pay for uniforms on the assumption that uniforms last longer than a year while another may consider uniforms to be an operating costs and covered only by revenues.
Transfers , as noted, are an important dimension of this statement of revenues, expenditures and changes in fund balance. Some funds do not generate much in the way of revenues. They get a considerable amount from other funds. Thus, the balance achieved in a fund may be a function of transfers from other funds, not revenues in excess of expenditures. Also, since the statements are based essentially on a cash logic, the transfer may only cover cash outlays and not the investment and savings needed to meet future obligations. As a result the balance achieved may be artificial. A school operating as a special revenue fund may receive sufficient transfers to operate for the year but not sufficient transfers (or revenues) to save for future construction, major maintenance, or pension obligations.
In the official language of governmental accounting, the focus for what to include is called a flow of current financial resources or funds , that is, what money flows in and what money flows out for the current period or shortly thereafter. Business has more of an economic or income determination focus, that is, show all the uses and promises that it took to earn the revenue of the period in order to assess success. As a result, a flow of money approach can show a successful fund operation by covering expenditures with revenues, or borrowing, or transfers . The business approach is sometimes called flow of economic resources to indicate that both short and long term items are included not just cash or current financial resources.
Government Name Balance Sheet -- All Funds and Account Groups 12/31/x0 Funds Account Groups Assets cash x investments, at cost x fixed assets ...................... x amount available in debt service fund ...................... x amount to be provided for retirement of general long term debt ...................... x Total Assets Liabilities and Fund Equity voucher payable x due to other taxing units x mature bonds payable x mature interest payable x general obligation bonds ...................... x Total Liabilities Fund Equity Fund balance reserve for encumbrances undesignated Total Fund Equity ...................... x Total Liabilities and Fund Equity xSome unique and important features for a governmental balance sheet are the differences between funds and groups and the off balance sheet character of the groups. The funds handle the current items while the groups handle the long term items. An "x" under account group is used for items handled by the account groups. The same holds for funds. For example, cash would go into the funds and so would vouchers payable; but fixed assets and general long term obligations would go into the groups.
For the funds, it would be important to have enough liquid assets to pay for the outstanding short term payables or short term debt. If short term liabilities (vouchers payable, e.g.,) were greater than short term assets (such as cash and temporary investments) and sufficient new revenue was not projected for early in the year, then the government would have to engage in short term borrowing. Thus the balance sheet can be helpful for judging and projecting short term financial health. Much more on how to analyze the financial statements to judge financial compliance, success, and health is covered in the lesson on using the financial statements (lesson 4, this chapter) .
The account groups constitute an unusual accounting devise. They are used to list (called memorandum only) the long term debt but not provide the money to pay for the debt. In fact, there is nothing mandatory in the balance sheet to show how well or poorly the government is planning to pay or retire long term debt. Note the two items "amount available " and "amount to be provided " under the group category in the above balance sheet. Amount to be provided is an artificial number that is used to create a balance between all long term debt and amount available. Thus, if total debt were $10,000,000 and amount available were $1,000,000 then amount to be provided would be made $9,000,000. The $9,000,000 does not exist anywhere. It will either have to be obtained from future revenue or borrowing.
The long term debt in the account groups of the balance sheet can include general obligation bonds , vested sick leave and vacation pay, any legal claims due in the future, and any pension benefits that have not been fully funded. Thus, this debt can be significant and the amount to be provided also very large. Governments often find they make promises that are very difficult to keep. The account group approach to governmental accounting can run counter to intergenerational equity since it allows promises to be made to current generations that must be paid for by future generations.