Introduction to Governmental and

Not-for-Profit Accounting, 7e
Chapter 2: The Use of Funds in
Governmental Accounting

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Types of Government Activities

Governmental-type
Day-to-day services of general-purpose
governments (states, counties, and cities)
Police and fire protection
Sanitation
Parks and recreation

Financed primarily by tax revenues,

intergovernmental grants, and general fees
Controlled by legally adopted budget
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Types of Government Activities

Business-type
Specific services
Mass transit
Water utility
Electric utility

Financed primarily by user fees or charges

that cover both operating and capital costs

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Types of Government Activities

Fiduciary-type
Used when government provides fiduciarytype services
Holding segregated resources for others
Examples
Tax collection services for other governments
Pension trust funds

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Fund Accounting
Funds: Building blocks of governmental
reporting
Government divided into entities,
(different types of funds)
Each fund has its own:
Assets, liabilities, net position
Inflows and outflows of resources

3 categories: Governmental, proprietary,

fiduciary
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Formal Fund Definition

a fiscal and accounting entity with a selfbalancing set of accounts recording cash
and other financial resources, together
with all related liabilities and residual
equities or balances, and changes therein,
which are segregated for the purpose of
carrying on specific activities or attaining
certain objectives in accordance with
special regulations, restrictions, or
limitations.
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Why Are Funds Used?

Fund accounting facilitates compliance
with laws
Helps ensure that dedicated funds are
used as intended
Legislature may dedicate specific
revenues for specific purposes

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Fund Accounting:
Governmental Funds

Basic day-to-day public services

Inflows: Taxes, intergovernmental grants
Outflows: Police, education, sanitation
Acquisition/construction of general
governmental capital assets
Resources legally earmarked for specific
purpose
Controlled by legally adopted budgets
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Fund Accounting:
Proprietary Funds
Activities are run like private business
Charge fees for services
Measure whether revenues cover costs

Hospitals, utilities, mass transit, lotteries

Cover costs OR provide net revenues
OR get subsidized by parent unit

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Fund Accounting:
Fiduciary Funds
Resources held in trust (for others)
Cannot be used to support governments own
programs

Individuals, other governments, or private

organizations
Pension assets, investment pools
Taxes collected on behalf of other
governments
Example: sales taxes
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Fund Accounting:
Financial Reporting
Fund Financial Statements
Each major fund gets a column
Separate set of statements for each fund type

Government-Wide Financial Statements

Governmental and business-type only
Adjustment to accrual basis

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Measurement Focus and Basis

of Accounting
Measurement focus
Which resources are being measured
All assets (financial and capital resources) are
reported in proprietary-type funds, but only
financial resources available for spending are
reported in governmental-type funds.

Basis of accounting
When resources are being measured
When is an asset or liability recognized in the
financial statements?
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Measurement Focus and Basis of

Accounting: Proprietary and Fiduciary
Economic resources measurement focus
All transactions affecting financial/capital
resources

Accrual basis of accounting

Revenues when earned, expenses when
incurred
Regardless of cash
Depreciate capital assets, interest accrued
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Measurement Focus and Basis of

Accounting: Governmental
Current financial resources measurement
focus
Financial resources available for spending
(budget focused)
Capital assets/long-term debt not recorded
Records inflows and outflows of liquid assets

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Measurement Focus and Basis of

Accounting: Governmental
Modified accrual basis of accounting
Only accruals that affect near-term financial
resource inflows and outflows
Revenue recognition
Measurable and
Available
Resources must be collectible within current
period or soon enough thereafter to pay current
bills.

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Measurement Focus and Basis of

Accounting: Governmental
Modified accrual basis of accounting
Expendituresdecreases in financial
resources
3 types of expenditures
Operatingrecord when liability incurred
Capital outlayrecord when financial assets are
used to acquire capital assets
Debt servicerecord when long-term debt
principal or interest is due for payment

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Governmental Funds:
5 Types

General Fund
Special Revenue Funds
Debt Service Funds
Capital Projects Funds
Permanent Funds

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Governmental Funds:
Financial Statements
Fund level:
Balance Sheet
Statement of Revenues, Expenditures,
and Changes in Fund Balance
Operating Statement

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Governmental Funds:
Operating Statement Format
Revenues
- Expenditures
= Excess of revenues over expenditures
+/- Other financing sources and uses
+/- Special and extraordinary items
= Net change in fund balance
+ Fund balance at beginning of period
= Fund balance at end of period
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Governmental Funds:
General Fund
Every general-purpose government has
one
Used for most basic day-to-day operations
Residual fund
Used to account for financial resources not
accounted for in another governmental fund
Law/contract/manager may require use of
another fund
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Governmental Funds:
General Fund
Inflows from:
Taxes on real property, sales, and personal or
corporate income
Intergovernmental grants
Licenses, fees, forfeitures, and fines

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Governmental Funds:
Basic Accounting Equation
Financial
Assets

Matured Short-Term
Liabilities + Fund Balance

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Governmental Funds:
Basic Accounting Equation
Financial Assets
Cash, investments, and receivables

Matured Short-Term Liabilities

Short-term has a shorter time frame than
current in business accounting, which
means payable in a year.
Accounts payable, salaries payable, and amounts
payable to other funds
Matured liabilities due for payment and expected to
be paid shortly after the accounting period ends
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Governmental Funds:
Special Revenue Funds

Used to account for proceeds of specific

revenue sources that are restricted or
committed to spending for specific
purposes (other than debt service or capital
projects)
Specific revenue sources must be a substantial
portion of funds resources.

Revenue from dedicated source, such as a

special tax, grant, or fee
Specific-purpose federal grant proceeds
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Governmental Funds:
Special Revenue Funds
Accounting same as general fund
May have more than one special revenue
fund

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Governmental Funds:
Capital Projects Funds
Used to account for financial resources
restricted or otherwise limited to spending for
capital outlays
Acquisition or construction of capital facilities or
other capital assets

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Governmental Funds:
Capital Projects Funds
Required to use CPF if capital outlays
financed from general obligation bond
proceeds
Many capital assets are acquired through the
General Fund when general obligations bonds
are not issued

Separate fund per project or bond

No long-term assets or debt reported in CPF
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Governmental Funds:
Debt Service Funds
Used to account for financial resources that
are restricted or otherwise limited to
spending for principal and interest on general
long-term debt
Resources in debt service funds
Transfers from other funds
Investment earnings
Taxes specifically assessed for debt service

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Governmental Funds:
Debt Service Funds
Required when
Legally mandated
Financial resources being accumulated for
principal and interest payments that come due in
future years

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Governmental Funds:
Permanent Funds
Assets held by government in a trust
Only earnings may be used
Not principal

Used to support government or citizens

Examples: Library endowment, cemetery
Same accounting as general fund
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Proprietary Funds:
Types and Statements
Enterprise Funds
Internal Service Funds
Statement of Net Position
Statement of Revenues, Expenses, and
Changes in Net Position
Statement of Cash Flows
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Proprietary Type Funds:

Measurement Focus
Economic resources measurement focus
Accrual basis of accounting
Provides accurate measure of revenues and
expenses to help determine user charges

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Proprietary Funds:
Operating Statement Format
Operating revenues
- Operating expenses
= Operating income (loss)
+/- Non-operating revenues and expenses
= Income before other revenues, expenses, gains,
losses, and transfers
+ Capital contributions
+/- Special and extraordinary items
+/- Transfers
= Increase (decrease) in net position
Reconciliation
+ Net position at beginning of period
= Net position at end of period
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Proprietary Funds:
Enterprise Funds

For products/services sold for a fee

Primarily to external users
Typically, separate fund for each activity
Examples
Municipal airport
Municipal electric utility
Municipal water and sewer utilities
Toll roads
Lotteries

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Proprietary Funds:
Enterprise Funds
Enterprise funds required if
Pricing intended to cover costs
Law requires costs of providing services be
recovered through fees and charges, OR

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Proprietary Funds:
Internal Service Funds
For products/services sold for a fee
Fee designed to recover cost

To internal users or other governments

Reporting government must be predominant
participant

Established for cost savings

To consolidate support activities performed by
several agencies
To obtain bulk discounts
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Proprietary Funds:
Internal Service Funds
Separate fund for each activity
Bill other funds for products/services
Revenue to Internal Service Fund
Expenditure/expense to fund receiving
products/services

Examples
Motor pool operations
Data processing
Printing services
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Fiduciary Funds
Assets held by government in a trust or
agency capacity for others
Cannot be used to support governments own
programs

Economic resources measurement focus

Accrual basis of accounting

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Fiduciary Funds:
Types and Statements
Pension (and other employee benefit) Trust
Funds
Investment Trust Funds
Private-Purpose Trust Funds
Agency Funds
Statement of Fiduciary Net Position
Statement of Changes in Fiduciary Net Position*
*Not used by agency funds
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Fiduciary Funds
Pension (and other employee benefit)
Trust Funds
Hold restricted resources
For pensions, health care, etc.

Investment Trust Funds

For investment pools
External portion only

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Fiduciary Funds
Private-Purpose Trust Funds
For all other trust arrangements
Example: escheat property

Agency Funds
For custody arrangements, example: sales
tax collections for other governments
No net assets

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