The Accounting Cycle for Governmental Funds and Account Groups

Summary

This chapter focused on the accounting cycle for governmental funds and account groups. The accounting cycle is important because the financial statements and many of the financial reports are produced from the cycle. The cycle itself captures the details of day-to-day transactions and events within the fund, among funds and accounts, and between the government and external parties such as taxpayers and vendors.

The cycle, as the name indicates, repeats itself. It has a start and end; Then starts again. The start is often the budget authorization. The end comes with the financial statements and a closing process to get ready for the next cycle.

Traditional accounting textbooks frequently emphasize the accounting cycle. These books are sometimes referred to a taking a "preparer approach" or a debit and credit approach. They teach the how to or bookkeeping aspect of accounting. However, understand, the cycle is the mechanics. Concepts and theories shape the direction of the cycle and the resulting statements. For example, the modified accrual rules of the governmental funds will not produce the same results as an accrual approach even though the same cycle steps might be used for both approaches.

The chapter is divided into several major parts:

• What generally are the steps in the accounint cycle?
• The role of the accounting equation and debits and credits in the cycle are discussed.
• Then, simple illustrations of the accounting cycle will be offered.
• With this in hand, a more exhaustive discussion of the cycle will ensue.
• Examples of computer implementation of the accounting cycle will be offered.

1. The budget or financial action is authorized by the elected body.
2. The budget is entered into the accounting records to assist with compliance.
3. jounalized entries,ie, debits and credits, are made to record accrual and collection of revenues; the same for expenditures and any other transactions or events.
4. Expenditures are treated in a special fashion in that purchases are often encumbered, ie, subtracted from appropriations by category to avoid overspending.
5. Any adusting entries are made.
6. All entries are posted in order to summarize the accounts.
7. Financial statements are prepared.
8. Closing entries are made to include closing the budget entry, closing all the revenues and expenditures, and closing the encumbrance

The accounting equation plays an important role in understanding the workings of the accounting cycle. The equation describes the conditions of a fund at the start, end, and, in fact, any time during the cycle. The equation tells what resources the fund has and the sources of those resources. The cycle helps to keep track of changes, adjustments, ending status, and a closing process to start the cycle all over again. Formally, the equation for governmental funds is:

Current Assets = Current Liabilities + Fund balance
     CA        =        CL           +    FB

More generally, the accounting equation is:

Assets = Liabilities + Equity

Use of debits and credits are often referred to a journalizing. In reality, debits and credits are no more than a way to institute the accounting equation but on a simpler level. Thus, the rules for debits and credits derive from the accounting equation, namely,
If an asset is increase, debit; if a liability or fund balance is increase credit. The reverse holds too. An example of a journal entry for the collection of $10,000 in revenue fees would be:

                      debit     credit
cash                  10,000
     revenue - fees             10,000

Something called adjusting entries are also needed in the cycle. For a variety of reasons, a transaction or event may not be recorded. Adjusting entries are used to record these transactions or events that did not get put in the books. Adjusting entries are more common in accrual accounting than they are in the modified accrual used in governmental funds. But events such as accrued salaries might be needed in a governmental fund. Take the situation where the financial statements are to be prepared as of Wednesday but salaries are not paid until Friday. All the salaries that are owed but not yet paid must be accrued and journalized in an adjusting entry to make sure that all relevant events and transactions get into the financial statements.

Once the financial statements are prepared the books for that fund can be closed so that the fund is ready for the next year. {Closing} means zeroing all budget estimated revenue and appropriation accounts and all actual revenue and expenditure accounts to find out what the actual fund balance is. With these zeroed and the fund balance calculated the fund is ready to start a new cycle, often with a new budget.

Learning the accounting cycle will help with both the details of accounting and with a general understanding of reporting on the success, conditions, and compliance of a fund.