An Introduction To Accounting For State and Local Governmental Units

An Introduction to
Accounting for State and

Local Governmental Units
Chapter 18
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
18 - 1
Learning Objective 1
Learn about the historical

development of accounting
principles for state and local
governmental units.
18 - 2
State and Local Governmental Units
With the exception of the federal

government, state and local
governmental units constitute
the largest single category
of nonprofit organizations.
18 - 3
Historical Development
1951 The Municipal Finance Officers
Association (MFOA) National Committee
on Governmental Accounting) issued
Municipal Accounting and Auditing.
1968 Governmental Accounting, Auditing,
and Finance Reporting (GAAFR, or Blue Book,
succeeded Municipal Accounting and Auditing.
18 - 4
1974 The AICPA issued its industry audit
guide, Audits of State and Local Governmental
Units, in which it noted that GAAFRs accounting
and reporting principles constituted GAAP
except when modified by the audit guide.
18 - 5
1979 The MFOA National Council on
Governmental Accounting issued
Governmental Accounting and
Financial Reporting Principles, Statement 1.
1980 AICPA issued Statement of Position
80-2 amending Audits of States and Local
Government Units to recognize the principles
of NCGA Statement 1 as GAAP.
18 - 6
Financial
Accounting
Foundation
FASB
(1984)
GASB
18 - 7
1985 Codification of Governmental Accounting
and Financial Reporting Standards was issued.
It integrated all NCGA and AICPA and all
subsequent GASB pronouncements.
It is revised annually.
18 - 8
GAAP Hierarchy for State

and Local Governmental Entities
1. GASB Statements and Interpretations
2. GASB Technical Bulletins
3. Consensus positions of GASBs
Emerging Issues Task Force (EITF)
4. Implementation Guides
5. Other accounting literature

18 - 9
Define fund accounting

and explain why it is used.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 10
Fund Definition and Categories
A fund is a self-contained accounting entity.
It records its own assets, liabilities, revenues,

expenditures, or expenses and fund balance.
The Proprietary Fund

Accounting Model
Current
Assets
Noncurrent
+
Assets
Noncurrent
=
Liabilities
Current
Liabilities
Net
Assets
The Governmental Fund

Accounting Model
Current
Assets
Current
Liabilities
Fund G
A = L + FB
Fund SR
A = L + FB
General
Fund
Assets
General
Long-Term
Debt
Fund
Balance
Perform transaction analysis using

proprietary and governmental
accounting models.
Applying the Models

Transaction Analysis
1. Incurred salary cost of $5,000.
2. Charges for services rendered, $2,500,
were billed and collected immediately.
3. Borrowed $30,000 on a one-year, 6%
note six months before year end.
4. Year-end accrual of interest on the note.
5. Borrowed $15,000 by issuing a three-year note.
Applying the Models

6. Purchased computer equipment costing $2,800 for cash.
7. Sold a truck for $1,000. It was originally purchased
three years ago for $18,000, had an estimated
residual value of $1,200, and is fully depreciated.
8. Computed depreciation on the computer equipment
for the year, $875.
Applying the Models

Proprietary Fund
No. 1
Current assets
Noncurrent assets
Current liabilities
+5,000
Noncurrent liabilities
Net assets
5,000
Government Fund
Current assets
Current liabilities
+5,000
Fund Balance
5,000
No. 2
No. 3
+2,500 +30,000
No. 4
+30,000
+900
900
+2,500
+2,500 +30,000
+30,000
+2,500
+900
900
Applying the Models

Proprietary Fund
No. 5
No. 6
Current assets
+15,000 2,800
Noncurrent assets
+2,800
Current liabilities
Noncurrent liabilities +15,000
Net assets
Government Fund
Current assets
+15,000 2,800
No. 7
+1,000
1,200
No. 8
200
875
875
+1,000
Current liabilities
Fund Balance
15,000 2,800
+1,000
Recognize various fund categories,

as well as their measurement
focus and basis of accounting.
Proprietary Fund Types
Internal service funds
Enterprise funds
Governmental Fund Types

Special
revenue funds
Permanent
funds
Debt
service funds
Capital
project funds
General
fund
Fiduciary (Trust and Agency)

Fund Types
Pension
trust funds
Investment
trust funds
Privatepurpose
trust funds
Agency
funds
Applying the Model Using

Specific Funds
1. Issued general obligation bonds, par value of
$3,000,000, at 101 to finance construction
of a government office building.
2. Transferred the premium on the bonds to
the fund used to account for payment of
principal and interest on the bonds.
3. Incurred and paid construction costs
of $12,500 on the building.

Specific Funds
4. Levied and collected sales taxes restricted
to use for economic development, $6,000.
5. Paid general government employees
salaries, $4,500. Another $500 of salaries
accrued but has not been paid.
6. Borrowed $7,500 on a six-month note to
finance general operating costs
of the government.

Specific Funds
No.
1
2a
2b
3
4
5
6
Fund
Capital projects
Capital projects
Debt service
Capital projects
Special revenue
General
General
Current
Assets
+ 3,030,000
30,000
+ 30,000
12,500
+ 6,000
4,500
+ 7,500
Current
Liabilities
+ 500
+ 7,500
Fund
Balance
3,030,000
30,000
+ 30,000
12,500
+ 6,000
5,000
Bases of Accounting
Accrual
Modified
Accrual
Measuring focus
Measuring focus
Economic resources
Flow of current
financial resources
Financial Reporting
In June 1999, the GASB issued
GASB Statement No. 34,
Basic Financial Statements and
Managements Discussion and Analysis
for State and Local Governments.
The statement establishes standards for
preparing government-wide financial
statements and fund-level financial statements.
Financial Reporting
Managements discussion and analysis
Government-wide financial statements
Statement of net assets (accrual basis)
Statement of activities (accrual basis)
Fund financial statements
Governmental funds
Statement of net assets (modified accrual basis)
Statement of revenues, expenditures, and
changes in fund balances (modified accrual basis)
Financial Reporting
Fund financial statements (contd.)
Proprietary funds
Statement of revenues, expenses, and changes in
net assets (accrual basis)
Statement of cash flows (accrual basis, direct method)
Fiduciary funds
Statement of changes in net assets (accrual basis)
Review basic governmental

accounting principles.
Revenue Recognition
Revenue recognition within governmental
entities is determined by the nature of
the underlying transaction.
GASB Statement No. 33,
Accounting and Financial Reporting
for Nonexchange Transaction,
characterizes revenue transactions.
Revenue Recognition
GASB Statement No. 33 established four
categories of nonexchange transactions.
Derived
Imposed
tax
nonexchange
revenues
transactions
Government-mandated
Voluntary
nonexchange
nonexchange
transactions
transactions
Expense and Expenditure

Recognition
Expenses reflect the cost of assets
or services used by an entity.
Expenditures typically reflect the use
of governmental fund working capital.
Expenditures normally reflect the cost of goods
or services acquired during a period and the
maturing of general long-term debt principal.
Interfund Activity
Loans
Transfers
Reimbursements
The Role of the Budget

Capital Program
2003
2004
2003
Capital
Budget
2003
Operating
Budget
2005
2006
2007
2003
Current
Budget
The Financial Reporting Entity

GASB Statement No. 14, The Financial
Reporting Entity, explains that the financial
reporting entity is made up of the primary
government and its component units.
Each state and general-purpose local
government is a primary government.
Primary Governments
Separately elected governing body

Legally separated
Fiscally independent
Component Units
These are legally separate organizations
for which the primary government
is financially accountable.
Blending
Discrete
Presentation
Learn about the contents of

a governmental entitys
comprehensive annual
financial report under
GASB 34.
Accountability
Operational accountability measures the extent
of a governments success at meeting operating
objectives efficiently and effectively and its
ability to meet operating objectives in the future.
Fiscal accountability is the responsibility of a
government to demonstrate compliance with
public decisions.
Prior to GASB 34
General purpose financial statements
were prepared using the appropriate
basis of accounting.
The combined balance sheet included
columns for each fund type.
CAFR Major Sections
Table of contents
Letter of transmittal
List of officers
Organizational chart
CAFR Major Sections
Managements discussion and analysis

Auditors report
Government-wide financial statements

Fund financial statements
CAFR Major Sections
Statistical tables
Financial Section
Managements discussion and analysis is

required supplementary information (RSI)
that is presented before the financial statements.
The Board requires that MD&A
precede the statements.
Financial Section
Governmental and proprietary funds

are consolidated and reported in a single
set of government-wide financial statements.
Statement of
net assets
Statement of
activities
Statement of Net Assets

City of Davie Statement of Net Assets
December 31, 2003
Primary Government
Governmental
Business
Activities
Activities
Total
Assets
(Liabilities)
Net Assets
Statement of Activities
Functions
Primary
Government
Governmental
Activities
Function 1
Function 2
Business Type
Activities
Activity 1
Expenses
Revenues
Net
Fund Financial Statements

Governmental funds
Proprietary funds
Fiduciary funds
Major Fund Reporting
General
fund
Each major
governmental
fund
All nonmajor
governmental
funds
Total
funds
Major Fund Reporting
Each major
enterprise
fund
All non-major
enterprise
funds
Total
All internal
service
funds
Conversion
Fund-based
statement
Government-wide
statements
Other Issues
Budgetary comparisons
Required supplemental information
Notes to the financial statements
Infrastructure
Combining and individual fund statements
End of Chapter 18

An Introduction To Accounting For State and Local Governmental Units

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An Introduction to

Accounting for State and

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Learn about the historical

State and Local Governmental Units

With the exception of the federal

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

GAAP Hierarchy for State

5. Other accounting literature

Define fund accounting

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 10

Fund Definition and Categories

A fund is a self-contained accounting entity.

It records its own assets, liabilities, revenues,

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 11

The Proprietary Fund

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 12

The Governmental Fund

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 13

Perform transaction analysis using

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 14

Applying the Models

5. Borrowed $15,000 by issuing a three-year note.

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 15

Applying the Models

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 16

Applying the Models

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 17

Applying the Models

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 18

Recognize various fund categories,

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 19

Proprietary Fund Types

Internal service funds

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 20

Governmental Fund Types

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 21

Fiduciary (Trust and Agency)

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 22

Applying the Model Using

Applying the Model Using

Applying the Model Using

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 25

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 26

Review basic governmental

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 30

Expense and Expenditure

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 34

The Role of the Budget

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 35

The Financial Reporting Entity

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 36

Separately elected governing body

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 37

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 38

Learn about the contents of

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 18 - 41

CAFR Major Sections

CAFR Major Sections

Managements discussion and analysis

Government-wide financial statements