Overview

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

2. 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

3. 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

4. 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

5. 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)

6. 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

7. 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.

8. Major Concepts of Governmental Accounting • Expendability of resources versus capital maintenance objectives

9. Major Concepts of Governmental Accounting

10. Major Concepts of Governmental Accounting

11. 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

12. Fund Accounting • Specific General Ledger Accounts Used defined by GASB 54:

13. Financial Reporting of Governmental Entities

14. Financial Reporting of Governmental Entities • Statement of revenues, expenditures, and changes in fund balance • Often called the operating statement of the governmental funds

15. 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

16. 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

17. 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.

18. 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.

19. 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”

20. 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.

21. 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.

22. Interfund Activities

23. Overview of Accounting and Financial Reporting for the General Fund

24. Overview of Accounting and Financial Reporting for the General Fund