The government in this illustration has the typical day-to-day functions which are accounted for in the general fund. Some of these include general administration, safety, education, sanitation, and recreation. Here the classification is along the functional lines (eg, education) as opposed to object (eg, travel).
The jurisdiction also has a special revenue fund for libraries. Historically, the government has emphasized providing for the library and is proud of the fine library that it has built. This year the citizenry has voted favorably to build an auditorium next to the library. The idea is to add a dynamic cultural element to the library. During construction, the auditorium will be accounted for via a debt service fund. In years to come, the jurisdiction envisions an entire cultural complex including the library, auditorium, and museum. Government leaders expect all these learning and cultural activities to eventually be operated out of the special revenue fund that now has responsibility for the library.
The reminder of the section shows the accounting cycle for the various funds, the transfers among the funds, and the financial statements for the funds. The accounting in lesson three will consist of these phases
In other words this government has many different types of activities and feels that to administer these efforts a multifund structure is needed, that is, one fund for each major set of activities. This way, ostensibly, the government can keep better track and control of activities. Recall that the idea of funds goes back to the progressive era that spanned 1890 to 1920. In the view of the reformers of the progressive era, funds were expected to exert control on the appointed administrators so that these administrators followed the dictates of elected officials.
The budget shows the estimated revenues, appropriations, transfers and projected surplus or budgetary fund balance.
Estimated revenues: property tax 250,000 intergovernmental revenues 50,000 fees 50,000 licenses 25,000 fines 25,000 Total revenues 400,000 Appropriations: general administration 100,000 safety 75,000 education 100,000 housing 3,000 sanitation 50,000 recreation 25,000 Total appropriations 353,000 Transfers out: library 45,000 debt service 625 (500, principle; 125, interest) pension 1,000 Total transfers 46,625 Total appropriations and transfers out 399,625 Projected surplus 375
Estimated revenues: donations 1,000 library tax 500 Total revenue 1,500 Appropriations: salary 15,000 computers 2,500 utilities 1,000 maintenance 2,500 books & periodicals 25,000 Total appropriations 46,000 Transfers in: general fund 45,000 Total transfers 45,000 Total revenues and transfers in 46,500 Projected surplus 500Notice the connect between the general fund and this special revenue fund via the transfer of the 45,000. In the general fund it was a transfer out Here it is a transfer in.
Special revenue funds are established to collect and spend revenues that are designated for a particular activity. In this case the library tax and the donations are in all likelihood earmarked for the library. Strong special interest in a community can also spurs instigation of such funds. Special interest often feel that a good way to garner continued support for an activity is to designate certain taxes or money for a special fund that promotes the activity supported by the interest group.
The bond was a 5 year serial bonds totalling $2,500. Thus, $500 of principal was to be paid back each year. The bond carried a 5.00% interest rate.
Principal and interest for the first two years would be:
Outstanding balance principal interest $2,500 $500 $125 $2,000 $500 $100In the initial year the entire $2,500 was outstanding so the interest on it was .05 times the $2,500. At the end of the first year, $500 of the $2,500 is paid leaving $2,000 of principal to be paid. With $2,000 remaining the interest in the second is $2,000 times .05 (i.e., 5%) or $100.
In short, the overall authorization allowed: bond proceeds 2,500 expenditures 2,500
The budget for the debt service fund would be: Transfers in from general fund 625 appropriations: payment of principal 500 interest expense 125
dr cr estimated revenue - property tax 250,000 estimated revenue - intergovernmental revenue 50,000 estimated revenue - fees 50,000 estimated revenue - licenses 25,000 estimated revenue - fines 25,000 appropriations - general administration 100,000 appropriations - safety 75,000 appropriations - education 100,000 appropriations - housing 3,000 appropriations - sanitation 50,000 appropriations - recreation 25,000 transfer out - library 45,000 transfers out -debt service 625 transfer out - pension 1,000 fund balance 375Different names are sometimes used for the items in the budgetary entry. For example, transfers out might be called other financing uses. If there were transfers in they might be called other financing uses. As noted fund balance called be referred to as budgetary fund balance.
dr cr estimated revenue - donations 1,000 estimated revenue - library tax 500 transfers in - general fund 45,000 appropriations - salary 15,000 appropriations - computers 2,500 appropriations - utilities 1,000 appropriations - maintenance 2,500 appropriations - books & periodicals 25,000 fund balance 500Different nomenclature is used in these examples to show the various possibilities and categories of governmental accounting and reporting. In this case the appropriations are classified more along the lines of object, that is, detailed activities. In other cases appropriations were classified by function, such as, administration and safety.
transfer in - from general fund 625 appropriations - payment of principal 500 appropriations - interest expense 125No entries are needed for the employee pension fund since the legislature simply passed an act rather than generating a budget. Recall that $1,000 is being transferred to the employee retirement fund.
property tax receivable 250,000 revenue - property tax 250,000The entire amount of the property tax is accrued, meaning it is measurable and available. Remember that a receivable is an asset and since it is increased it is debited. Revenue is part of fund balance. Since the fund balance is increased by revenue, revenue is credited.
cash 125,000 property tax receivable 125,000Some (125,000) of the property tax receivable is collected in cash. As an asset, cash is debited since it is increased. The receivable is credited since it is an asset being decreased. That is, there is $125,000 less of the receivable.
cash 25,000 fees 25,000The general fund fees are collected in cash. Cash is debited since it is an asset and it is increased in this transaction. Fees are credited since a fee is a revenue and a revenue, as part of fund balance, is credited when increased.
encumbrance - supplies, education 25,000 reserve for encumbrance 25,000A purchase order was made for $25,000, so that amount was encumbered. Since the encumbrance reduces the amount available for expenditures, it is debited like an expenditure. The reserve for encumbrance is similar to a liability so it is credited.
reserve for encumbrance 25,000 encumbrance - supplies, education 25,000When the order is actually received the original encumbrance is reversed since the encumbrance was a temporary entry.
education supplies expenditure 25,000 vouchers payable 25,000The actual expenditure and liability are entered when the supplies arrive. The expenditure decreases fund balance so it gets a debit while the voucher payable is credited on the grounds that it increases the liability.
Recognizing the expenditure before the assets are used is typical of the modified accrual basis in government where governmental funds can assume usage in the budget period regardless of when the use actually occurs. Such an approach is called the purchase method, that is, the expenditure is recognized when goods or supplies are purchased not when used. Of course, an inventory should be taken at the end of the year to determine is some of the supplies have not been used. If so, the amount of supplies inventory is debited and the fund balance is credited to show assets (inventory in this case) available for the next period.
vouchers payable 25,000 cash 25,000The actual liability is paid, decreasing the liability (debit) and decreasing (credit) the asset cash.
salary expenditure, education 75,000 cash 75,000Salaries are generally not encumbered since they can usually be predicted. That is, while a $75,000 purchase order may come in at $76,000 and may be made on a nonroutine basis, salaries (and wages) are often paid on the same date each month and for know amounts. In this case the expenditure is debited and the payment in cash is credited. As usual check study aides under exercises and demonstrations for journalizing salary entries to get a more realistic picture of the details of salary expenditures. for a more realistic entry for salary expenditures.
cash 125,000 property tax receivable 125,000 Cash is collected on the previous property tax receivable.
cash 50,000 intergovernmental revenue 50,000Intergovernmental revenues in this case happen to be for educational expenditures in the general fund. The total authorized for education was $100,000 and half of this amount comes from intergovernmental revenues. Recording intergovernmental revenue can be complicated because in some cases the local governmental fund can record the revenue as soon as it knows the money is available or as soon as it receives the money. In other cases the fund must record a liability often called deferred revenue then record the revenue when the specific fund actually spends the money for the intended propose. In this case money was spent for education (see the salary expenditure, education for $75,000 above) so when the government received the intergovernmental money it could immediately record it as a revenue.
encumbrance - supplies, administration 25,000 reserve for encumbrance 25,000This and the next four entries are a repeat of the encumbrance process that has already been described. An amount is encumbered when a purchase order is made; the encumbrance is reversed when the goods arrive. Next, a payable is setup based on the bill and then paid according to the terms of the bill.
reserve for encumbrance 25,000 encumbrance - supplies, administration 25,000 administration supplies expenditure 25,000 vouchers payable 25,000 vouchers payable 25,000 cash 25,000 salary expenditure, administration 75,000 cash 75,000As noted salary is generally not encumbered. A more detailed entry for salary expenditure can be seen in the study aides under exercises and demonstrations,journalizing salary entries.
Most of the next several entries are presented without comment since they reflect entries that have already been explained.
cash 12,500 fines - revenue 12,500 encumbrance - parts, safety 10,000 reserve for encumbrance 10,000 salary expenditure, safety 65,000 cash 65,000 reserve for encumbrance 10,000 encumbrance - part, safety 10,000 parts expenditures, safety 10,000 voucher payable 10,000 voucher payable 10,000 cash 10,000 repairs expenditure, housing 3,000 cash 3,000 encumbrance - parts, sanitation 5,000 reserve for encumbrance 5,000 reserve for encumbrance 5,000 encumbrance - parts, sanitation 5,000 parts expenditures, sanitation 5,000 voucher payable 5,000 voucher payable 5,000 cash 5,000 transfer out - library 45,000 cash 45,000 The transfer out is debited since it reduces fund balance. It is like an expenditure. Later, the accompanying entry in the special revenue fund will be shown. cash 12,500 fines - revenue 12,500 cash 15,000 licenses- revenues 15,000 salary expenditures, recreation 20,000 cash 20,000 encumbrance - equipment, recreation 5,000 reserve for encumbrance 5,000 reserve for encumbrance 5,000 encumbrance - equipment, recreation 5,000 equipment expenditures, recreation 5,000 voucher payable 5,000 voucher payable 5,000 cash 5,000 cash 10,000 licenses- revenues 10,000 transfer out - debt service 625 cash 625Cash from the general fund is sent to debt service fund to pay for the principal and interest owed this year or period. The debt service fund will show entries to increase its cash and other sources. But the entries for the debt service fund will be in their own books. Remember that funds are separate entities and have their own books and financial statements.
transfer out - pension 1,000 cash 1,000This transfer goes to the employee retirement fund. Notice how the general fund often serves as a conduit for collecting revenue then transferring it to other funds.
The above entries would be all the journal entries for the general fund. In essence, the entries execute the budget and operate the fund activities. They are clearly very tedious and in practice would be more involved. The next step, which is also tedious, would be to post the entries to their appropriate accounts. Cash will be used here as an illustration.
cash 125,000 property tax receivable 125,000
Cash dr cr 125,000 25,000 25,000 75,000 125,000 25,000 50,000 75,000 12,500 65,000 12,500 5,000 15,000 45,000 10,000 20,000 10,000 3,000 20,000 5,000 625 1,000 Balance 375In short, the posting process is done for cash by going back to all the journal entries, finding those with cash, and placing them in the cash account to get the cash balance. Computers are obviously helpful in this process by automatically placing or posting the cash entries into the cash account.
All the other accounts (all the revenues, expenditures, receivables, etc) would have to be posted for the general fund. Each requires the same process shown for cash.
The connotation of the special revenue fund is that the legislature designated revenue to go to a special revenue fund and only that fund. Then, specified expenditures flow from that fund. In this case, the library special revenue fund, an amount of revenue (the library tax and donations) went directly (ie, were earmarked to the special revenue fund but money also came via a transfer from the general fund. In this manner the special revenue fulfills its objective -- money gets earmarked and spent for a particular purpose and set of activities. Since the budget has already been entered, the journal entries for the actual operation of the special revenue fund are presented.
cash 45,000 transfer in 45,000The special revenue fund receives $45,000 from the general fund. Cash is debited since an asset is increased and transfer in increases fund balance so it is credited.
Without showing the encumbrance process and simplifying the expenditures, the following are the journal entry is for spending the special revenue fund money.
computers - expenditure 2,500 utilities - expenditures 1,000 maintenance - expenditures 2,500 cash 6,000Using a coumpound entry, three of the expenditures are grouped and paid for at one time.
cash 1,500 donations - revenue 1,000 library tax - revenue 500 Another compound entry shows incoming revenue in the form of cash. books & periodicals - expenditure 25,000 cash 25,000 Books and periodicals are paid for with cash.As with the general fund all these transactions would have be posted to summarize the accounts. Readers can return to the posting example in lesson 2 of this chapter on the general fund to refresh their memories on posting.
Three financial statements would be prepared for most of the various funds (general, special revenue, capital project, and debt service) discussed in this example. The statements are:
The term combined is used since this is the highest level of of aggregation for reporting fund activities. For instance, if there were several special revenue funds, rather than just one, the combined statement would be the summary statement.
Recall that the statement of revenues, expenditures, and changes in fund balances is designed to help assess financial success (ie, did inflows meet outflows); the balance sheet is suppose to gauge financial conditions (ie, liquidity or ability to pay short term bills); and the budget versus actual helps to measure compliance (ie, was the budget carried out as authorized?).
Since everything in this illustration was made to happen as budgeted, the financial statement will resemble the budgets. The three statements are presented below as they typically are in the Comprehensive Annual Financial Report, that is, in column form.
Government Name Combined Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Fund Types For the Fiscal Year Ended 12/31 19x0 (000) Governmental Funds Special Capital Debt Revenues: General Revenue Project Service property tax 250,000 intergovernmental 50,000 fees 50,000 licenses 25,000 fines 25,000 donations 1,000 other 500 Total revenues 400,000 1,500 0 0 Expenditures: general admin. 100,000 safety 75,000 education 100,000 housing 3,000 sanitation 50,000 recreation 25,000 library 46,000 Capital Outlays 2,500 Debt Service: principal 500 interest 125 Total expenditures 353,000 46,000 2,500 625 Excess of Revenues over(under) expenditures 47,000 (44,500) (2,500) (625) Other financing sources(uses) bond proceeds 2,500 transfers in 45,000 625 transfer out 46,625 Excess of revenues and other sources over(under) expenditures and other uses 375 500 0 0 Fund Balance 1/1 0 0 0 0 Fund Balance 12/31 375 500 0 0As noted, this statement of revenues, expenditures, and changes in fund balances is designed to show success, ie, whether enough money came in to cover money going out for the period. But remember that this statement in does not have an income approach for governmental funds. The statement of revenues, expenditures, and changes in fund balances is really a statement of financial inflows and outflows. Revenue is combined with transfers in and bond proceeds to obtain a total inflow and expenditures are combined with transfers out to get a total outflow. The inflow versus outflow is sometimes called flow of financial resources. With the business income approach only revenues are matched against expenses to calculate net income or loss.
In the above format, in order to distinguish different types of inflows and outflows, revenues are first compared against expenditures showing that several of the funds are not self sufficient to manage on revenues alone, but such a format comparing revenues against expenditures is not required by the Governmental Accounting Standards Board (GASB). Showing a comparison of only revenues against expenditures does in this case demonstrate that the special revenue fund relies predominantly on the taxes transferred from the general fund. Thus, in this case, the reader might be able to see that the library is supported almost totally by taxes from the general fund. Of course the reader would have to know or go to the notes to see that the special revenue fund was exclusively for libraries. Nothing in the statement mentions the purpose of the special revenue fund.
In fact, notice that only the general fund has sufficient revenues to cover expenditures. None of the other funds do. The special revenue fund relies on transfers from the general fund; the capital project fund relies on borrowing; and the debt service fund gets all its inflow from the general fund via a transfer.
Notwithstanding the fact that three of the four types do not have enough revenue to cover spending, all funds have enough inflows to cover outflows. So readers need to be very careful in examining where inflows originate. Borrowing means later repayment and transfers in require that the transferring fund have adequate money to continue the infusion.
The Comprehensive Annual Financial Review (CAFR) will also offer a set of what are called combining statements which show the individual funds, such as the library fund within the special revenue category or type. The combining funds provide an opportunity to obtained more detailed information on the funds within each fund type. No combining statements are presented here since neither the special revenue, capital projects, or debt service fund has more than one fund within the category.
Government Name Combined Balance Sheet all Governmental Funds and Account Groups 12/31/19x0 Governmental Funds Account Groups Special Capital Debt Fixed Long term General Revenue Project Service Assets Debt Assets: cash 375 500 0 0 buildings 2,500 Amount to be provided for retirement of bonds 2,000 Total assets 375 500 0 0 2,500 2,000 Liabilities: bonds payable 2,000 Total liability 0 0 0 0 2,000 Fund balance investment in fixed assets 2,500 undesignated 375 500 Total liability and fund balance 375 500 2,500 2,000For simplicity any excess of revenue and other sources over expenditures and other uses was placed in cash in this balance sheet illustration. In reality government would invest at least some of this money in interest bearing accounts or interest bearing instruments
. On the surface, this balance sheet does not indicate any financial problems. No column has an negative fund balance. In fact two of the columns, the general fund and the special revenue fund have positive fund balances as indicated by the amounts in undesignated. Undesignated means that these amounts can be appropriated by the legislature for future spending.
What is also interesting is the substantial amount for bonds payable, $2000. However, this amount due is placed in something called an account group, long term debt account group in this case. It is backed not by any financial assets but by something called amount to be provided, which is the full faith and credit of the government.
It is possible that some of the undesignated amount in the general fund could be transferred next year to debt service to cover the principal or interest on the $2,000 outstanding debt just discussed. Perhaps that is why there is a surplus in the first place although the legislature could use the surplus for any item.
Since the illustration was set up so that all the actual would be equal to the budget, the statement is not presented. Readers can look at prior presentation of budget and actual in this chapter in lesson 2 under the example of budget and actua].
Recall that closing entries get the fund ready for next year's operations. As such, all budget accounts are closed as well as all accounts on the statement of revenues, expenditures, and changes in fund balances.
appropriations - general admin. 100,000 appropriations - safety 75,000 appropriations - education 100,000 appropriations - housing 3,000 appropriations - sanitation 50,000 appropriations - recreation 25,000 transfer out - library 45,000 transfers out -debt service 625 transfer out - pension 1,000 fund balance 375 estimated revenue - property tax 250,000 estimated revenue - intergovernmental revenue 50,000 estimated revenue - fees 50,000 estimated revenue - licenses 25,000 estimated revenue - fines 25,000This entry closes the budget accounts by reserving the original entries. Now there is zero in all these accounts for the next period. Note that the artificial or target fund balance of $375 that was created by a credit in the budget entries is wiped out with the debit.
general administration exp. 100,000 safety expenditures 75,000 education expenditures 100,000 housing expenditures 3,000 sanitation expenditures 50,000 recreation expenditures 25,000 library transfer out 45,000 debt service transfer out 625 pension transfer out 1,000 property tax revenue 250,000 intergovernmental revenues 50,000 fees revenue 50,000 licenses revenue 25,000 fines revenue 25,000 fund balance 375This entry closes all the revenue and expenditure accounts as well as the transfers out from the general fund. Now all the accounts are zero and ready to measure activity for next year. The real fund balance is now shown by a credit as it should be. Again, recall that in this case the actual was made to equal the budgeted so the actual fund balance is $375 just like the target or budgetary fund balance.
In some respects the closing entries are simple -- return to the budget entry and reverse it as is done below.
dr cr appropriations - salary 15,000 appropriations - computers 2,500 appropriations - utilities 1,000 appropriations - maintenance 2,500 appropriations - books & periodicals 25,000 fund balance 500 estimated revenue - donations 1,000 estimated revenue - library tax 500 transfers in - general fund 45,000 The budget accounts for the special revenue fund are now zero, ready for next year's budget.
donations - revenue 1,000 other - revenue 500 transfers in - general fund 45,000 salary - expenditures 15,000 computers - expenditures 2,500 utilities - expenditures 1,000 maintenance - expenditures 2,500 books & periodicals - exp. 25,000 fund balance 500
bond proceeds - other sources 2,500 building - expenditures 2,500Here bond proceeds which were originally credited to show the increase in other sources is debited to close that account. Buildings expenditures is debited to zero or reverse the original entry.
cash 1,000 transfers in 1,000In all likelihood this fund would be investing the transfers from the general fund as well as having investment income from past investments. More details on pension funds will be given when business accounting methods are covered for governmental activities.