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Overview. Governmental entities have operating objectives different from those of commercial entities. As a result, governmental accounting is different from accounting for commercial enterprises. Overview. Nature of governmental entities

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overview
Overview
  • Governmental entities have operating objectives different from those of commercial entities.
  • As a result, governmental accounting is different from accounting for commercial enterprises.
overview2
Overview
  • Nature of governmental entities
    • Collect resources and make expenditures to fulfil societal needs
    • Absence of profit motive except for some activities
    • 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
    • Control mechanism – Use of comprehensive budgetary accounting
overview3
Overview
  • Nature of governmental entities
    • Accountability for the flow of financial resources is a chief objective
    • Typically are required to establish separate funds to carry out various missions; each fund is an independent accounting and fiscal entity
    • Many fund entities do not record fixed assets or long-term debt in their funds
    • An important objective of governmental financial reporting is accountability
history of governmental accounting
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
history of governmental accounting5
History of Governmental Accounting
  • 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)
history of governmental accounting6
History of Governmental Accounting
  • 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
history of governmental accounting7
History of Governmental Accounting
  • 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.
major concepts of governmental accounting
Major Concepts of Governmental Accounting
  • Expendability of resources versus capital maintenance objectives
financial reporting of governmental entities
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
fund accounting
Fund Accounting
  • Specific General Ledger Accounts Used defined by GASB 54:
financial reporting of governmental entities14
Financial Reporting of Governmental Entities
  • Statement of revenues, expenditures, and changes in fund balance
    • Often called the operating statement of the governmental funds
measurement focus and basis of accounting
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
introduction budget expenditure process
Introduction: Budget / Expenditure Process
  • Budget—Recorded in the books
    • CAPITAL LETTERS (legally binding)
  • Expenditures
    • Appropriation (authorization of the expenditure)
    • Encumbrance (set aside or reserve part of the budgetary appropriation)
    • Expenditure
    • Disbursement
budgetary aspects of governmental operations
Budgetary Aspects of Governmental 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 BALANCE—UNASSIGNED.
  • Some approved budgets have budget deficits in which expected expenditures exceed anticipated revenue.
    • These budgets are recorded with a debit to BUDGETARY FUND BALANCE—UNASSIGNED.
two methods for accounting for outstanding encumbrances at fiscal year end
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 record the expenditure.
two ways to account for supplies inventories
Two Ways to Account for Supplies Inventories
  • Consumption Method
    • The preferred method—it parallels business practice.
    • The use of inventory is treated as an outflow of resources.
    • The expenditure = the amount “consumed”
  • Purchases Method
    • The acquisition of inventory is treated as an outflow of resources (debit Expenditures or Expenses).
    • The expenditure = the amount “purchased”
two ways to account for supplies inventories20
Two Ways to Account for Supplies Inventories
  • The specific method to follow depends on the governing unit’s 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.
group exercise requirement 2 statement of revenues expenditures and changes in fund balance
Group Exercise: Requirement 2 (Statement of Revenues, Expenditures, and Changes in Fund Balance)

Variance Favorable

Budget Actual (Unfavorable)

Revenues:

Property taxes ($560,000 + $1,000) $570,000) $561,000) $(9,000))

Intergovernmental entitlement 44,000) 50,000) 6,000)

Miscellaneous 206,000) 225,000) 19,000)

Total Revenues $820,000) $836,000) $16,000)

Expenditures: 720,000) 695,000) 25,000)

Excess of Revenues over Expenditures $100,000) $141,000) $41,000)

Other Financing Sources (Uses):

Transfer in from Auto RepairInternal Service Fund $25,000) $22,000) $(3,000)

Transfers Out—

to Electric Utility Enterprise Fund (35,000) (30,000) 5,000)

to Capital Projects Fund (20,000) (20,000) 0)

Total Other Financing Sources (Uses) $(30,000) $(28,000) $2,000)

Excess of Revenues over Expenditures

and Other Financing Uses: $70,000) $113,000) $43,000)

Fund Balance – 7/1/X7 200,000) 200,000) 0)

Fund Balance – 6/30/X8 $270,000) $313,000) $43,000))

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.