Accounting for Governmental Operating Activities Illustrative Transactions and Financial Statements

Transcription

1 Chapter 4 Accounting for Governmental Operating Activities Illustrative Transactions and Financial Statements McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Governmental Funds Measurement focus: Governmental funds focus on the flow of current financial resources Includes cash, receivables, marketable securities, prepaid items, and supplies inventories Capital assets are not recorded in governmental funds, but are recorded in governmental activities at the government-wide level Basis of accounting: Modified accrual 4-2

3 Governmental Funds (Cont d) Dual-track approach Transactions have different effects on governmental funds and governmental activities at the government-wide level because of different measurement focuses and bases of accounting Using the dual-track approach each transaction is recorded separately in the general journals for the governmental fund and governmental activities 4-3

4 Governmental-Wide Financial Statements 4-4

5 Fund Financial Statements 4-5

6 Recording the Budget at the Beginning of the Year The budget for Town of Brighton authorizes expenditures of $4,180,000, other financing uses of $91,500 and forecasts revenues of $3,986,000 for FY The entry to record the budget (ignoring subsidiary detail) is: 4-6

7 Recording the Budget at the Beginning of the Year General Fund Journal: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits 1/1/2011 Dr.\Estimated Revenues Dr.\ Budgetary Fund Balance Cr.\ Appropriations Cr.\ Estimated other financing uses 3,986, ,500 4,180,000 91,500 Governmental Activities Journal: No Entry 4-7

8 Interfund transfer to create a new fund The town council approved the creation of a new Supplies Fund, an internal service fund, effective January 1, 2011, to provide most operating and office supplies used by departments accounted for in the General Fund. The new fund was created by transferring the current inventory of supplies and $30,000 in cash from the General Fund, general government function. 4-8

9 Interfund transfer to create a new fund General Fund Journal: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits 1/1/2011 Dr.\Other Financing Uses-Interfund transfers out Cr.\ Inventory of Supplies Cr.\ Cash 91,500 61,500 30,000 Other Financing Uses Ledger: General Government 91,500 1/1/2011 Dr.\ Reserve for Inventory of Supplies Cr.\ Fund Balance Governmental Activities Journal: 61,500 61,500 No Entry 4-9

10 Encumbrance Accounting Before a department can order materials and supplies or equipment, the department should verify that a sufficient unexpended appropriation exists to cover the items being ordered This process is sometimes referred to as preauditing 4-10

11 Encumbrance Accounting Assume Interdepartmental requisitions for supplies with an estimated cost of $247,360 were submitted to the Supplies Fund, and purchase orders for certain other supplies and contracts for services were placed with outside vendors in the amount of $59,

12 Encumbrance Accounting General Fund Journal: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\Encumbrances Cr.\ Reserves for Encumbrances 2011 Encumbrance Ledger: General Government Public Safety Public Works Parks and Recreation Health and welfare Miscellaneous Appropriations 306, ,450 28,000 72, ,000 36,000 10, Governmental Activities Journal: No Entry 4-12

13 Accounting for Expenditures Assume that goods and services ordered during 2011 by departments financed by the Town of Brighton General Fund were received as follows: All supplies ordered at an estimated cost of $247,360 from the internal service fund (Supplies Fund) were received at an actual cost of $249,750. (these supplies cost the internal service fund $185,000) Only a portion of the supplies and contracts with outside vendors were filled or completed during the year at an actual cost of $19,700, for which the estimated cost had been $22,

14 Accounting for Expenditures General Fund Journal: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\ Reserves for Encumbrances 2011 Cr.\ Encumbrances 2011 Encumbrance Ledger: General Government Public Safety Public Works Parks and Recreation Health and welfare Miscellaneous Appropriations 269, ,775 12,250 72, ,900 30,000 4,

15 Accounting for Expenditures General Fund Journal: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\ Expenditure-2011 Cr.\ Due to other Funds Cr.\ Vouchers Payable Expenditures Ledger: General Government Public Safety Public Works Parks and Recreation Health and welfare Miscellaneous Appropriations 269, ,750 19,700 12,300 72, ,600 30,000 4,

16 Accounting for Governmental Activity Expenses Governmental Activities Journal: The expenses recorded in the governmental activities accounts at the government-wide level should be the cost of the goods to the Supplies Fund. The earlier budgetary entry for encumbrances has no effect at the governmentwide level Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\ Expenses General Government Dr.\ Expenses Public Safety Dr.\ Expenses Public Works Dr.\ Expenses Parks and recreation Dr.\ Expenses Health and welfare Cr.\ Vouchers Payable Cr.\ Inventory of Supplies 9,885 54, ,148 22,741 3,037 19, ,

17 Payment for Liabilities Checks were drawn to pay: Vouchers payable balance of $339,700 ($320,000 balance at the end of the $19,700 amount from current year) The 2010 year end amount due to the federal government ($90,000) The General Fund paid the Supplies Fund $249,750 for supplies purchased. 4-17

18 Payment for Liabilities General Fund Journal: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\ Vouchers Payable Dr.\ Due to Other funds Dr.\ Due to Federal Government Cr.\ Cash 339, ,750 90, ,450 Governmental Activities Journal: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\ Vouchers Payable Dr.\ Due to Federal Government Cr.\ Cash 339,700 90, ,

19 Accounting for Capital Assets Assume an purchase order for equipment needed for General Government with an estimated cost of $175,000 were submitted to vendors in15/1/2011 The Equipment received in 30/4/2011 at an actual cost of $180,

20 Accounting for Capital Assets General Fund Journal: Date Explanation General Ledger Subsidiary 15/1/2011 Dr.\Encumbrances Cr.\ Reserves for Encumbrances 2011 Debits Credits Debits Credits 175, ,000 Encumbrance Ledger: General Government 175,000 30/4/2011 Dr.\ Reserves for Encumbrances 2011 Cr.\ Encumbrances , ,000 Encumbrance Ledger: General Government 175,000 30/4/2011 Dr.\ Expenditure-2011 Cr.\ Vouchers Payable 180, ,000 Expenditure Ledger: General Government 180,

21 Accounting for Capital Assets Governmental Activities Journal: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits 30/4/2011 Dr.\ Equipment Cr.\ Vouchers Payable 180, ,

22 Accounting for Payroll Payroll accounting is similar for a governmental fund and a for-profit entity, except Expenditures rather than Expenses are recorded Debit Expenditures for full amount of payroll and credit liabilities for withholdings from employees pay; credit Cash for the amount paid to employees Record Expenditures for the employer s payroll costs, including employer s share of FICA and credit a liability to federal government Encumbrances usually are not recorded for recurring expenditures such as payroll 4-22

23 Accounting for Payroll (Cont d) Town of Brighton recognized its payroll for the most recent two week pay period for employees paid from the General Fund General Fund: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\ Expenditures 2011 Cr.\ Due to Federal Government Cr.\ Due to State Government Cr.\ Cash Expenditures Subsidiary Ledger: General Government Public Safety Public Works 948,000 86,000 49, , , , ,

24 Accounting for Payroll (Cont d) The journal entry to record the payroll in the governmental activities journal at the government-wide level is: Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\ Expenses General Government Dr.\ Expenses Public Safety Dr.\ Expenses Public Works Cr.\ Due to Federal Government Cr.\Due to State Government Cr.\ Cash Debits 178, , ,000 Credits 86,000 49, ,

25 Accounting for Payroll (Cont d) The employer s share of FICA is recorded in the General Fund General Fund: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\ Expenditures 2011 Cr.\ Due to Federal Government Expenditures Subsidiary Ledger: General Government Public Safety Public Works 88,000 88,000 16,523 44,557 26,

26 Accounting for Payroll (Cont d) The employer s share of FICA is recorded in the governmental activities journal Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\ Expenses General Government Dr.\ Expenses Public Safety Dr.\ Expenses Public Works Cr.\ Due to Federal Government Debits 16,523 44,557 26,920 Credits 88,

27 Accounting for Cash Revenue Revenues from sources such as licenses and permits, fines and forfeits, charges for services, and certain other sources are often not measurable until received in cash. However, under the modified accrual basis of accounting, if such revenues are measurable in advance of collection and available for current period expenditure, they should be accrued by recording a debit to a receivable and a credit to Revenues. Assume that Town of Brighton has collected revenues in cash from: Licenses and permits $100,000 Fines and forfeits 151,000 Charges for services 7,000 Miscellaneous Revenues 1,

28 Accounting for Cash Revenue General Fund Journal: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\Cash Cr.\ Revenues Revenues Ledger: Licenses and Permits Fines and Forfeits Charges for services Miscellaneous Revenues 259, , , ,000 7,000 1,

29 Accounting for Cash Revenue Governmental Activities Journal: Date Explanation General Ledger --/--/2011 Dr.\ Cash Cr.\ Program Revenues -General Government-Charges for services Cr.\ Program Revenues - Public Safety - Charges for services Cr.\ Program Revenues - Public Works - Charges for services Cr.\ Program Revenues - Parks & Recreation - Charges for services Cr.\ General Revenues Miscellaneous Debits 259,200 Credits 100,000 91,000 60,000 7,000 1,200 Note: The GASB decided to classify Fines and Forfeits as Charges for Services to avoid the need to add a fourth category of program revenues in the government-wide statement of activities. 4-29

30 Accounting for Property Tax Revenue The tax levy is the amount billed to taxpayers Initial determination of required tax levy: Levy = Revenues required (Estimated Revenue) Estimated collectible proportion 4-30

31 Accounting for Property Tax Revenue (Cont d) The tax rate is the measure that is actually set by legislative action, after the required size of the levy is determined. Tax rate (per $100 or per $1,000 of assessed valuation) = required tax levy assessed valuation (see next slide for definition of assessed valuation) If tax rate exceeds the statutory limit it will be necessary to reduce the required tax levy and readjust the budget accordingly 4-31

32 Accounting for Property Tax Revenue (Cont d) Assessed valuation is generally determined by an elected Tax Assessor Calculation: Assessed valuation = estimated true value of taxable property X assessment ratio In many jurisdictions the assessment ratio is 1.00 (i.e., full estimated market value); in other jurisdictions it might be some fraction of full value 4-32

33 Assume revenues of $495,000 are required and it is estimated that 1% will be uncollectible: Levy = $495,000/.99 = $500,000. (ignore subsidiary ledger entry) General Fund: Accounting for Property Tax Revenue (Cont d) Date Explanation General Ledger --/--/2011 Dr.\Taxes Receivable Current Cr.\Estimated Uncollectible Current Taxes Cr.\Revenues Debits 500,000 Credits 5, ,

34 Accounting for Property Tax Revenue (Cont d) The required entry at the government-wide level is similar except for that the credit is to General Revenues as follows: Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Taxes Receivable Current Cr.\Estimated Uncollectible Current Taxes Cr.\General Revenues-Property Taxes Debits 500,000 Credits 5, ,

35 Accounting for Property Tax Revenue (Cont d) Assume by the end of year $450,000 of current taxes have been collected, the entry is: General Fund and Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Cash Cr.\Taxes Receivable Current Debits 450,000 Credits 450,

36 Accounting for Property Tax Revenue (Cont d) The entry to reclassify uncollected current taxes to delinquent status at year-end: General Fund and Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Taxes Receivable Delinquent Dr.\Estimated Uncollectible Current Taxes Cr.\Taxes Receivable Current Cr.\ Estimated Uncollectible Delinquent Taxes Debits 50,000 5,000 Credits 50,000 5,

37 Interest and penalties of $500 are accrued on delinquent taxes, of which 10% is estimated to be uncollectible. General Fund: Accounting for Property Tax Revenue (Cont d) Date Explanation General Ledger Subsidiary --/--/2011 Dr.\Interest and Penalties Receivable on Taxes Cr.\Estimated Uncollectible Interest and Penalties Cr.\ Revenues Debits Credits Debits Credits Revenues Subsidiary Ledger: Interest and Penalties on Delinquent Taxes

38 Accounting for Property Tax Revenue (Cont d) The required entry to accrue interest and penalties at the government-wide level is similar, except for the revenues account: Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Interest and Penalties Receivable on Taxes Cr.\Estimated Uncollectible Interest and Penalties Cr.\General Revenues Interest and Penalties on Delinquent Taxes Debits 500 Credits

39 Accounting for Property Tax Revenue (Cont d) Write-off of uncollectible taxes. Assume property taxes of $500 are written off, on which accumulated interest and penalties amount to $80. The required journal entry is: General Fund and Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Estimated Uncollectible Delinquent Taxes Dr.\Estimated Uncollectible Interest & Penalties Cr.\Taxes Receivable Delinquent Cr.\Interest and Penalties Receivable on Taxes Debits Credits

40 Issuance of Tax Anticipation Notes (TANs) Revenues from property taxes are often collected during one or two months of the year Expenditure demands may occur more or less uniformly during the year A local bank may extend a line of credit in the form of TANs to meet short-term cash needs since the notes will be backed by the power of lien over taxable properties 4-40

41 Tax Anticipation Notes - TANs (Cont d) Assume on April 1, 2011, Town of Brighton signs a 60-day $300,000 tax anticipation note, discounted at 6% per annum. General Fund: Date Explanation General Ledger --/--/2011 Dr.\Cash Dr.\Expenditures-2011 Cr.\ Tax Anticipation Notes Payable Debits 297,000 3,000 Credits 300,000 Note: 0.06 X 60/360 X $300,000 = $3,000. The entry at the government-wide level would be the same, except the debit is to Expense Interest on Tax Anticipation Notes instead of Expenditures 4-41

42 Tax Anticipation Notes - TANs (Cont d) Town of Brighton repaid the 60-day $300,000 tax anticipation note on the due date. General Fund and Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Tax Anticipation Notes Cr.\ Cash Debits 300,000 Credits 300,

43 Interim Financial Reporting Interim financial reporting is used for internal management purposes; it is not required for external financial reporting At a minimum, interim budgetary comparison schedules such as those shown in next 2 slides 4-43

44 Interim Financial Reporting 4-44

45 Interim Financial Reporting 4-45

46 Special Topics 1. Correction of Errors 2. Receipts of Goods ordered in prior year 3. Revision of the General Fund Budget 4. Internal Exchange Transactions 5. Accounting for Inventories 6. Closing Entries 7. Year-end Financial Statements Many additional transactions are assumed to have occurred during 2011, the recording of which would have been redundant of the transactions already illustrated. 4-46

47 Special Topics 1) Correction of Errors Sometimes, even in a well-designed and well-operated system, errors occur and must be corrected. Assume the assessed valuation of a parcel of property were legally reduced but the tax bill erroneously issued at the higher valuation, the following correcting entry would be made when the error was discovered, assuming the corrected bill to be $364 smaller than the original bill. General Fund: Date Explanation General Ledger Subsidiary Debits Credits Debits Credits --/--/2011 Dr.\Revenues Cr.\ Taxes Receivables-current Revenues Ledger: Property Taxes

48 Special Topics 1) Correction of Errors Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\General Revenues-Property Taxes Cr.\ Taxes Receivables-current Debits 364 Credits

49 Special Topics 2) Receipt of Goods Ordered in Prior Year The Appropriations account for 2010, was closed at the end of that year, as were the other budgetary accounts for that year. The Balance Reserved for Encumbrances at the end of 2010 should be reestablished at the beginning of the current year 2011 When the goods on order at the end of fiscal year 2010 are received in 2011, their actual cost is considered an expenditure of the 2010 appropriations to the extent of the amount encumbered in 2010; any additional amount must be charged to the 2011 appropriations. Assume that all goods and services for which encumbrances were outstanding at the end of 2010 were received in 2011 at a total invoice cost of $127,

50 Special Topics 2) Receipt of Goods Ordered in Prior Year General Fund: Date Explanation General Ledger Subsidiary 01/01/2011 Dr.\Encumbrances Cr.\ Fund Balance (Goods received) --/--/2011 Debits Credits Debits Credits 127, ,000 Encumbrances Ledger: Parks & Recreation ,000 Reserve for Encumbrances 2010 Cr.\ Encumbrances , ,000 Encumbrances Ledger: Parks & Recreation ,000 --/--/2011 Dr.\ Expenditures 2010 Dr.\ Expenditures 2011 Cr.\ Vouchers Payable Expenditures Ledger: Parks & Recreation Parks & Recreation , , ,

51 Special Topics 2) Receipt of Goods Ordered in Prior Year Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Expenses Parks & Recreation Cr.\ Vouchers Payable Debits 127,250 Credits 127,

52 Special Topics 2) Receipt of Goods Ordered in Prior Year Assume that the actual cost of the goods received in early FY 2011 is only $126,500 rather than $127,250 General Fund: Date Explanation General Ledger Subsidiary --/--/2011 Reserve for Encumbrances 2010 Cr.\ Encumbrances 2010 Debits Credits Debits Credits 127, ,000 Encumbrances Ledger: Parks & Recreation ,000 --/--/2011 Dr.\ Expenditures 2010 Cr.\ Vouchers Payable 126, ,500 Expenditures Ledger: Parks & Recreation ,

53 Special Topics 3) Revision of the General Fund Budget Question: Why might a government need to revise its legally adopted budget during the year? Answer: An error may have been made in estimating revenues or expenditures, or changed conditions may have altered estimated revenues or caused unforeseen expenditure needs. Also, because the budget is legally binding on managers, it is important that the budget be revised to reflect changed conditions 4-53

54 Special Topics 3) Revision of the General Fund Budget Q: How are Budget Revisions Recorded? Answer: If estimated revenues is increased, debit Estimated Revenues and credit Budgetary Fund Balance. If appropriations are increased, debit Budgetary Fund Balance and credit Appropriations A decrease in either item would result in the reverse of the above entry Subsidiary ledger detail accounts would be adjusted accordingly 4-54

55 Special Topics 4) Internal Exchange Transactions Assuming the amount charged by the water utility to the General Fund for hydrants and water service is $30,000, and the fire department budget is a part of the Public Safety category in the Town of Brighton. General Fund: Date Explanation General Ledger Subsidiary --/--/2011 Dr.\ Expenditures Cr.\ Due to other Funds Debits Credits Debits Credits 30,000 30,000 Expenditures Ledger: Public Safety 30,

56 Special Topics 4) Internal Exchange Transactions Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Expenses Public safety Cr.\ Internal Balances Debits 30,000 Credits 30,

57 Special Topics 4) Internal Exchange Transactions An amount in lieu of taxes is often billed to the utility s customers; the aggregate amount so collected is simply passed on to the General Fund. Assume the water utility of the Town of Brighton agrees to contribute $25,000 to the General Fund in lieu of taxes and that amount fairly represents the value of services received from the general government 4-57

58 Special Topics 4) Internal Exchange Transactions General Fund: Date Explanation General Ledger Subsidiary --/--/2011 Dr.\ Due from Other Funds Cr.\ Revenues Debits Credits Debits Credits 25,000 25,000 Revenues Ledger: Miscellaneous Revenues 25,000 Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Internal Balances Cr.\ General Revenues-Payments in Lieu of Taxes Debits 25,000 Credits 25,

59 Special Topics 5) Accounting for Inventories It is generally recommended that the purchasing, warehousing, and distribution functions be centralized and managed by an internal service fund. Governments that account for their supplies within the General Fund can use either the purchases method or the consumption method. Purchases method: Expenditures for supplies equals the total amount purchased for the year, even if the amount of supplies consumed is less than or greater than the amount purchased. the purchases method is consistent with the modified accrual basis of accounting. The purchases method has traditionally been used by governmental funds. Use periodic inventory system. 4-59

60 Special Topics 5) Accounting for Inventories Consumption Method: Is consistent with the accrual basis of accounting, as supplies consumed in providing services is the essence of an expense. It must be used at the government-wide level and by proprietary funds. May use periodic or perpetual inventory system. Ex: Assume the following information for supplies purchases and usage of a certain city for its 2011 fiscal year. 4-60

61 Special Topics 5) Accounting for Inventories Purchases method: General Fund: Date Explanation General Ledger --/--/2011 Dr.\Expenditures Cr.\ Cash Debits 260,000 Credits 260,000 The adjusting entry at year-end accounts for the increase in inventory: Date Explanation General Ledger 31/12/2011 Dr.\Inventory of Supplies Cr.\ Reserve for Inventory of Supplies Debits 10,000 Credits 10,

62 Special Topics 5) Accounting for Inventories Purchases method: Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Expenses- Cr.\ Cash Debits 260,000 Credits 260,000 The adjusting entry at year-end accounts for the increase in inventory: Date Explanation General Ledger 31/12/2011 Dr.\Inventory of Supplies Cr.\ Expenses-. Debits 10,000 Credits 10,

63 Consumption method: General Fund: Special Topics 5) Accounting for Inventories Date Explanation General Ledger Debits Credits --/--/2011 Dr.\Expenditures Cr.\ Cash 260, ,000 The adjusting entry at year-end accounts for the increase in inventory: Date Explanation General Ledger Debits Credits 31/12/2011 Dr.\Inventory of Supplies Cr.\ Expenditures 10,000 10,000 31/12/2011 Dr.\ Fund Balance Cr.\ Reserve for inventory supplies 10,000 10,

64 Special Topics 5) Accounting for Inventories Consumption method: Governmental Activities: Date Explanation General Ledger --/--/2011 Dr.\Inventory of Supplies Cr.\ Cash Debits 260,000 Credits 260,000 The adjusting entry at year-end accounts for consumption of inventory: Date Explanation General Ledger 31/12/2011 Dr.\Expenses Cr.\ Inventory of Supplies Debits 250,000 Credits 250,

65 Special Topics 6) Closing Entries Assume that all illustrated journal entries for the transactions and events pertaining to the Town of Brighton s 2011 fiscal year have been posted to the general and subsidiary ledgers. As a result of all transactions and events recorded for the year, the balances of all balance sheet, operating statement, and budgetary accounts before closing entries are presented in the following trial balance. 4-65

66 Special Topics 6) Closing Entries 4-66

67 Special Topics 6) Closing Entries At fiscal year-end, all temporary accounts, both budgetary and operating, must be closed to the appropriate fund balance account. Budgetary accounts are closed by simply reversing the original budgetary entry (or entries) made at the beginning of the fiscal year, as well as any amended budget entries made during the year. Close any remaining balance in the Encumbrances account to the general ledger Fund Balance account. Close the operating accounts (revenues & expenditures) to the Fund Balance. 4-67

68 Special Topics 6) Closing Entries Date Explanation General Ledger 31/12/2011 Dr.\ Appropriations Dr.\ Estimated other financing uses Cr.\ Estimated Revenues Cr.\ Budgetary Fund Balance 31/12/2011 Dr.\ Revenues Dr.\ Fund Balance Cr.\ Expenditures-2011 Cr.\ Expenditures-2010 Cr.\ Other financing uses-interfund transfers out 31/12/2011 Dr.\ Fund Balance Cr.\ Encumbrances Debits 4,210,000 91,500 4,015, ,260 70,240 Credits 4,001, ,500 4,130, ,000 91,500 70,

69 Special Topics 7) Year-end Financial Statements Year-end financial statements for governmental fund include: 1. Balance sheet 2. Statement of Revenues, Expenditure, and Changes in Fund Balance 3. Schedule of Revenues, Expenditures, and Changes in Fund Balance Budget and Actual 4-69

70 Special Topics 7) Year-end Financial Statements 4-70

71 Special Topics 7) Year-end Financial Statements Notes for the Balance sheet: Note that the $25,000 receivable from the Water Utility Fund is offset against the $30,000 payable to that fund, so that only the $5,000 net amount payable to the Water Utility Fund is reported as Due to other funds in the Liabilities section of the balance sheet. It is not acceptable, however, to offset receivables or payables from one fund against those of a different fund. 4-71

72 Special Topics 7) Year-end Financial Statements 4-72

73 Special Topics 7) Year-end Financial Statements 4-73

74 Notes: Special Topics 7) Year-end Financial Statements The amounts in the Revenues section of the Actual column in Budgetary comparison schedule present the same information as shown in the Revenues section in Statement of Revenues, Expenditure, and Changes in Fund Balance. The amounts in the Expenditures section of the Actual column of the budgetary comparison schedule differ from the expenditures shown in Statement of Revenues, Expenditure, and Changes in Fund Balance. Because: Expenditures chargeable to 2010 appropriations of $127,000. are not included in budgetary comparison schedule. Expenditures of the 2011 appropriations of $4,130,760 are reported and encumbrances are not reported in the Expenditures section of the statement of Revenues, Expenditure, and Changes in Fund Balance. 4-74

75 Special Revenue Fund (SRF) Accounting Purpose: Created when revenues are received that must be expended for a specific operating purpose Examples: Motor fuel taxes earmarked for streets, roads, and bridges and Federal grant to operate a counseling program for troubled youths Accounting, budgeting, and financial reporting are essentially the same as for the General Fund 4-75

76 SRF - Accounting for Operating Grants Assume a grant of $100,000 is received at the beginning of the fiscal year from the federal government to operate a counseling program for troubled youths. Until the grant has been earned by meeting eligibility requirements related to service recipients, it is reported as Deferred Revenue a liability. The entry in the special revenue fund is: Special Revenue Fund: Date Explanation General Ledger --/--/2011 Dr.\Cash Cr.\ Deferred Revenue Debits 100,000 Credits 100,

77 Accounting for Operating Grants (Cont d) Assume that during the year the Counseling Program expended $75,000 for costs related to youth counseling, while meeting eligibility requirements, the entries would be: Special Revenue Fund: Date Explanation General Ledger --/--/2011 Dr.\Expenditures Cr.\ Vouchers Payable --/--/2011 Dr.\Deferred Revenues Cr.\ Revenues Debits 75,000 75,000 Credits 75,000 75,000 This amount would also be recorded in the Revenue detail account in the Revenues subsidiary ledger 4-77

78 SRF - Required Financial Statements Report special revenue fund activity in the Governmental Activities column of the governmentwide financial statements Provide a column in the governmental funds balance sheet and statement of revenues, expenditures, and changes in fund balances, for the special revenue fund financial information if the fund meets the definition of a major fund; otherwise report the fund s financial information in the Other Governmental Funds column 4-78

79 Interfund Activity 1) Reciprocal Interfund Activity Interfund Loans 2) Nonreciprocal Interfund activity Interfund Transfers 3) Intra- versus Inter-Activity Transactions 4-79

80 Interfund Activity 1) Reciprocal Interfund Activity Transactions between two funds that are similar to those involving the government and an external entity Example: Billing from a City s water utility fund (an enterprise fund) to the City s General Fund for the Fire Department The two funds recognize a revenue and expenditure, respectively, rather than interfund transfers in and out 4-80

81 Interfund loans Loans made from one fund to another with the intent that they be repaid Classified as Interfund Loans Receivable Current (or Payable Current), if the intent is to repay during the current year; otherwise Noncurrent Ex: Interfund Activity 1) Reciprocal Interfund Activity Assuming that the General Fund makes a short-term loan in the amount of $100,000 to the Central Stores Fund, an internal service fund. 4-81

82 Interfund Activity 1) Reciprocal Interfund Activity-Interfund Loans General Fund: Date Explanation General Ledger --/--/2011 Dr.\Interfund Loans Receivable-Current Cr.\ Cash Special Revenue Fund: Debits 100,000 Credits 100,000 Date Explanation General Ledger --/--/2011 Dr.\ Cash Cr.\ Interfund Loans Payable-Current Debits 100,000 Credits 100,

83 Interfund Activity 1) Reciprocal Interfund Activity-Interfund Loans If this interfund loan did not require repayment for more than one year, the word Noncurrent would be used rather than Current to signify the noncurrent nature of the loan. Because the noncurrent interfund loan receivable represents assets that are not available for the current year s appropriation in the General Fund, the Fund Balance account should be reserved for this amount, as was done for encumbered amounts and ending inventories of supplies. 4-83

84 Interfund Activity 1) Reciprocal Interfund Activity-Interfund Loans General Fund: Date Explanation General Ledger --/--/2011 Dr.\Interfund Loans Receivable-Noncurrent Cr.\ Cash --/--/2011 Dr.\ Fund Balance Cr.\ Reserve for Noncurrent Interfund Loans Receivable Special Revenue Fund: Debits 100, ,000 Credits 100, ,000 Date Explanation General Ledger Debits Credits --/--/2011 Dr.\ Cash Cr.\ Interfund Loans Payable-Noncurrent 100, ,

85 Interfund Activity 2) Nonreciprocal Interfund Activity Interfund transfers Nonreciprocal activity in which financial resources are transferred between funds with no intention of repayment The receiving fund records Other Financing Sources Interfund Transfers In; the giving fund records Other Financing Uses Interfund Transfers Out 4-85

86 Interfund Activity 3) Intra- versus Inter-Activity Transactions Intra-activity transaction A transaction between two governmental funds (including an internal service fund) or between two enterprise funds Neither governmental activities nor business-type activities is affected at the government-wide level Inter-activity transaction Interfund loans or transfers between a governmental fund (including internal service fund) and an enterprise fund Report these as Internal Balances on the government-wide statement of net assets and Transfers on the statement of activities 4-86

87 Permanent Funds To account for contributions received under trust agreements in which the principal amount is not expendable, but earnings can be expended for a specified purpose. Specifically intended for a public purpose (i.e., to benefit a government program or function, or the citizenry, rather than individuals, private organizations, or other governments) 4-87

88 Permanent Funds Ex: Assume on November 1, 2010, Wilma Wexner died, having made a valid will that provided for the gift of marketable securities to the City of Concordia to be held as a nonexpendable trust. Income, so measured, is to be transferred to the City s Library Operating Fund, a special revenue fund. The gift was accepted by the City of Concordia, which established the Library Endowment Fund (a permanent fund) to account for operation of the trust. The following securities were received by the Library Endowment Fund: 4-88

89 Notes: Assuming semiannual interest was last received on July 1, As of January 1, 2011, semiannual interest of $19,200 is received on the AB Company bonds. Assuming dividends on the stock held by the Library Endowment Fund were received early in January 2011 in the amount of $9,

90 Permanent Funds Solution: Interest accrued on the bonds for the period 1/7/2010 1/11/2010 = $640,000 x 6% x 4/12 = $12,800 Date Explanation General Ledger 1/11/2010 Dr.\ Investment in Bonds Dr.\ Investment in Stocks Dr.\ Accrued Interest Receivables Cr.\ Revenues-Contributions for Endowment Debits 652, ,000 12,800 Credits 1,160,

91 Permanent Funds Interest revenue on bonds for the period 1/11/2010 1/1/2012 = $640,000 x 6% x 2/12 = $6,400 Date Explanation General Ledger 1/1/2011 Dr.\ Cash Cr.\ Accrued Interest Receivable Cr.\ Revenues Bond Interest --/1/2011 Dr.\ Cash Cr.\ Revenues Dividend Debits 19,200 9,800 Credits 12,800 6,400 9,

92 Permanent Funds As the bond interest and dividends on stock were received in cash, the Library Endowment Fund has sufficient cash to pay the amount to be transferred to the Library Operating Fund for interest and dividends earned since the endowment was created ($6,400 Interest + $9,800 dividend = $16,200) Date Explanation General Ledger --/--/2011 Dr.\ Other Financing Uses-Interfund Transfers Out Cr.\ Cash Debits 16,200 Credits 16,

93 Permanent Funds On the advice of an investment manager, 1,800 shares of M Company stock were sold for $99,000; this amount and cash of $7,000 were invested in 4,000 shares of LH Company common stock. Percentage of Shares sold = 1,800 / 5,400 = 1/3 Carrying amount of Investment Sold = $282,000 x 1/3 = $94,000 Gain (loss) of Investment sold = Selling price Carrying amount = 99,000 94,000 = $5,000 Cost of Investment Purchased = $99,000 + $7,000 = $106,

94 Permanent Funds Date Explanation General Ledger --/--/2011 Dr.\ Cash Cr.\ Investment in Stocks Cr.\ Revenues Change in fair value of Investments --/--/2011 Dr.\ Investment in Stocks Cr.\ Cash Debits 99, ,000 Credits 94,000 5, ,

95 Permanent Funds The fair value of the Library Endowment Fund investments as of June 30, 2011, the last day of the City of Concordia s fiscal year, is given below. Investment Carrying Amount Fair Value 30/6/2011 Bonds of AB Company $652,000 $674,000 Stocks: M Company (3,600 share) 188, ,000 S Company (22,000 share) 214, ,600 LH Company (4,000 share) 106, ,500 Total $508,000 $519,500 Change in Fair Value $22,000 6,400 6,600 (1,500) $11,

96 Permanent Funds Date Explanation General Ledger 30/6/2011 Dr.\ Investment in Bonds Dr.\ Investment in Stocks Cr.\ Revenues Change in fair value of Investments 30/6/2011 Dr.\ Accrued Interest Receivables Cr.\ Revenues Bond Interest 30/6/2011 Dr.\ Other financing Uses Interfund Transfers Out Cr.\ Due to Libarary Operating Fund Debits 22,000 11,500 19,200 19,200 Credits 33,500 19,200 19,

97 Permanent Funds Closing Entry: Date Explanation General Ledger 30/6/2011 Dr.\ Revenues Contributions for Endowment Dr.\ Revenues Bond Interest Dr.\ Revenues Dividends Dr.\ Revenues Change in F.V. of Investments Cr.\ Other Financing Uses Interfund transfers Out Cr.\ Fund Balance Reserved for Endowment Debits 1,160,800 25,600 9,800 38,500 Credits 35,400 1,199,