Government Revenue and Expenses

Transcription

1 Government Revenue and Expenses Government has a variety of ways to generate revenue: levying taxes, issuing fees for licenses and permits, collecting fines and forfeits, and generating revenue for products and services. Accountants who are more familiar with the for-profit world of accounting may be unsure of how revenue is recognized and booked in the cases of taxes, permits, and fines. Take property taxes, for example. If you own a home or property, you may already be aware that this process begins with the tax assessor determining the value of the property. Taxpayers may agree or disagree with the amount assessed and are given the opportunity to appeal the assessment to have it revalued at a lesser amount. The Board of Equalization attempts to ensure that multiple properties are taxed at the same percentage of fair value. The legislative body determines the tax rate and enacts it through an ordinance. The amount due from taxpayers is then multiplied by the tax rate based on the assessed value of the property. Finally, the taxpayers are billed, and the amount that is owed by each taxpayer is entered into a tax roll. So, when exactly are the property taxes recorded on the government s books? At the point at which the taxes are billed to the taxpayers, one would record the following entry: There is an allowance for a 3% estimated uncollectible rate and a 1% estimated discount for those property taxes paid within the discount period. The government recognizes the revenue in the fiscal year that the taxes are levied as long as they are available. The term available means that the property taxes are due and collected within 60 days of the levy. So if the government s year end falls on December 31st, 20X8, and the tax bills are issued for a tax year that ends on December 31, 20X8, the government can recognize that tax levy as 20X8 revenue as long as the taxes are collected by February 28, 20X9. If all goes well, the next entry the government would make would be in regard to the collection of the property taxes. Assume that $158,000 of property taxes were collected within 60 days of issuance; the following entry would be recorded:

2 It is important that the government keep track of which taxes are collected and which are delinquent. Continuing with the previous example, the government has collected $158,000 and a now has a property tax receivable of $42,000 but expects to collect only $36,000 (42,000 6,000). At the point that the tax becomes delinquent, one would record the following entry: At the point that a portion of the property taxes are determined to be uncollectible, one then needs to write off those amounts. In this scenario, if it was determined that $2,000 of property taxes was uncollectible, one would make the following entry: Often, interest and penalties will be assessed to those taxpayers who fail to pay their tax bill on time. Late penalties and interest also become revenue to the government. The entry to record the late penalties would be the following:

3 In some states, property taxes are collected in advance of the year for which they are being levied. As you might suspect, the government cannot record these property taxes as revenue but rather needs to record them as deferred revenue until the point that the period for which they are levied is reached. The entry would be as follows: Once the point is reach for which the taxes are levied, one can then record the revenue in the following way: Unfortunately, the government finds that it must place a lien against a taxpayer s property. This type of transaction results in the following journal entry to record a tax lien against property that failed to pay 20X8 property taxes:

4 (Note, that the lien receivable includes the taxes receivable, interest, and penalties as well as court costs). The next accounting issue that government must address is when to recognize expenditures. Of course the timing of the recognition depends on the nature of the expense. Items like salaries and contract services are handled as they would be under the accrual method prescribed by GAAP. Other items like supplies, accounted for in the general fund, can choose between two recognition methods purchases method and consumption method. Under the purchases method, supplies are recorded as an expense at the point they are acquired. Consequently, the amount of supplies purchased during the year equals the amount expensed regardless of whether the supplies were used or not (Wilson, Reck, & Kattelus, 2007). This method is consistent with modified accrual accounting and is used in conjunction with a periodic inventory system. Use the following information to see how the purchase method is used to account for supplies purchased during the year: The entry for recording supplies under the purchase method would be as follows: At the end of the fiscal year, one has $40,000 of supplies remaining in inventory, consequently one needs to record the increase in inventory balance from the beginning of the year, and a reserve for inventory supplies is required at year end (AIPCA, 2008):

5 The consumption method is consistent with accrual-based accounting and is the method more commonly used for the general fund in accounting for supplies. This method is used in conjunction with perpetual inventory systems. Supplies are expensed as they are used. Under the consumption method, budgetary appropriations for supplies are based on the estimated consumption of supplies for the year as opposed to the estimated purchases of supplies during the year, as in the case of the purchases method. Under the consumption method, reporting a reserve for inventory supplies at year end is optional. The entry for recording supplies under the consumption method would be as follows: The adjusting entries at year end would be the following: Prepaid items such as insurance and rent are typically charged to expenditures at the time they are paid (Ives, Johnson, Razek, & Hosch, 2009). References American Institute of Certified Public Accountants (AICPA). (2008). State and local governments: Audit and accounting guide. New York: Author Ives, M., Johnson, L., Razek, J., & Hosch, G. (2009). Introduction to governmental and not-for-profit accounting (6th ed.). Upper Saddle River, NJ: Prentice Hall. Wilson, E., Reck, J., & Kattelus, S. (2007). Accounting for governmental and nonprofit

6 entities (14th ed.). New York: McGraw-Hill/Irwin.