Accounting for Governmental & Nonprofit Entities

Transcription

1 Accounting for Governmental & Nonprofit Entities 17/e JACQUELINE L. RECK SUZANNE L. LOWENSOHN Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4-1

2 Accounting for Governmental Operating Activities Illustrative Transactions and Financial Statements C H A P T E R 4 4-2

3 Learning Objectives 4-1 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. 4-2 Prepare adjusting entries and a pre-closing trial balance. 4-3 Prepare closing journal entries and year-end General Fund financial statements. 4-3

4 Learning Objectives 4-4 Account for interfund and intra- and interactivity transactions. 4-5 Account for transactions of a permanent fund. 4-6 Distinguish between exchange and nonexchange transactions, and define the classifications used for nonexchange transactions. 4-4

5 The Town of Brighton Illustration 4-1 in the text presents the partial government-wide statement of net position, showing only governmental activities, and its General Fund balance sheet, both at the end of the 2016 fiscal year. Common transactions and events, as well as related recognition and measurement issues, arising from the operating activities of this hypothetical government are discussed in this chapter, and appropriate accounting entries and financial statements are illustrated. 4-5

6 Town of Brighton Measurement Focus and Basis of Accounting Government-wide Statement of Net Position Economic resources measurement focus Accrual basis Current and noncurrent assets and liabilities All governmental activities Net position format Governmental Fund Balance Sheets Current financial resources measurement focus Modified accrual basis Current assets and liabilities Governmental funds only Balance sheet format 4-6

7 Dual-Track Accounting Approach Operating activities and transactions have different effects on the Town of Brighton s government-wide financial statements and fund financial statements. Certain activities have no effect on the government-wide financial statements. Most operating activities affect both the General Fund and governmental activities at the government-wide level, but in different ways. Still other activities, such as recording depreciation expense, affect only the government-wide financial statements and are not recorded at all in the General Fund or in any other governmental fund. 4-7

8 Dual-Track Accounting Approach To capture the dual effects of transactions at the government-wide and governmental fund levels, this text adopts a dual-track approach to analyzing and recording transactions based on manual accounting procedures. Although this approach is designed to facilitate ease of learning, it also provides all the accounting information needed to prepare both government-wide and fund financial statements. 4-8

9 Recording the Budget General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund: 1. Estimated Revenues ,986,000 Budgetary Fund Balance ,000 Appropriations ,180,000 Estimated Revenues Ledger: Property Taxes ,600,000 Interest and Penalties on Delinquent Taxes ,000 Sales Taxes ,000 Licenses and Permits ,000 Fines and Forfeits ,000 Intergovernmental Revenue ,000 Charges for Services ,000 Miscellaneous Revenues ,

10 Recording the Budget General Ledger Subsidiary Ledger Debits Credits Debits Credits Appropriations Ledger: General Government ,000 Public Safety ,240,000 Public Works ,090,000 Health and Welfare ,000 Culture and Recreation ,000 Miscellaneous ,

11 Encumbrance Transactions General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund: 2. Encumbrances ,090 Encumbrances Outstanding ,090 Encumbrances Ledger: General Government ,500 Public Works ,000 Culture and Recreation ,590 Health and Welfare ,

12 Purchase Transactions General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund: 3. Encumbrances Outstanding ,415 Encumbrances ,415 Encumbrances Ledger: General Government ,300 Public Works ,600 Parks and Recreation ,415 Health and Welfare

13 Purchase Transactions General Ledger Subsidiary Ledger General Fund: Debits Credits Debits Credits 3a. Expenditures ,700 Vouchers Payable ,700 Expenditures Ledger: General Government ,300 Public Works ,500 Parks and Recreation ,800 Health and Welfare Governmental Activities: 3b. Expenses General Government.. 2,300 Expenses Public Works ,500 Expenses Parks and Recreation.. 11,800 Expenses Health and Welfare Vouchers Payable ,

14 Encumbrance Transactions General Fund: 4a. Encumbrances ,000 General Ledger Subsidiary Ledger Debits Credits Debits Credits Encumbrances Outstanding ,000 Encumbrances Ledger: Public Safety ,000 General Fund: 4b. Encumbrances Outstanding ,000 Encumbrances ,000 Encumbrances Ledger: Public Safety ,

15 Purchase Transactions General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund: 4c. Expenditures ,550 Vouchers Payable ,550 Expenditures Ledger: Public Safety ,550 Governmental Activities: 4d. Equipment ,550 Vouchers Payable ,

16 Payment of Liabilities General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund and Governmental Activities: 5. Vouchers Payable ,250 Due to Federal Government ,000 Cash ,

17 Payroll and Payroll Taxes General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund: 6a. Expenditures ,000 Vouchers Payable ,482 Due to Federal Government... 44,478 Due to State Government ,040 Expenditures Ledger: General Government ,040 Public Safety ,120 Public Works ,160 Health and Welfare ,080 Culture and Recreation ,

18 Payroll and Payroll Taxes General Ledger Subsidiary Ledger Debits Credits Debits Credits Governmental Activities: 6b. Expenses General Government.. 35,040 Expenses Public Safety ,120 Expenses Public Works ,160 Expenses Health and Welfare... 19,080 Expenses Parks and Recreation. 12,600 Vouchers Payable ,482 Due to Federal Government ,478 Due to State Government ,

19 Payroll and Payroll Taxes General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund and Governmental Activities: 7. Vouchers Payable ,482 Cash ,482 General Fund: 8a. Expenditures ,278 Due to Federal Government ,278 Expenditures Ledger: General Government ,681 Public Safety ,943 Public Works ,230 Health and Welfare ,460 Culture and Recreation

20 Payroll and Payroll Taxes General Ledger Subsidiary Ledger Debits Credits Debits Credits Governmental Activities: 8b. Expenses General Government.... 2,681 Expenses Public Safety ,943 Expenses Public Works ,230 Expenses Health and Welfare ,460 Expenses Culture and Recreation Due to Federal Government ,

21 Property Tax Levies Recall that property tax levy amounts and rates must be adjusted upward for estimated uncollectible accounts so that the net revenue generated will cover the budgeted appropriations. Property tax revenue is an example of a nonexchange revenue one in which the government receives value without directly giving equal value in exchange. More specifically, it is classified under GASB standards as an imposed nonexchange revenue. For imposed nonexchange revenues, a receivable is debited when there is an enforceable claim, as in the case of a property tax levy, and a revenue is credited in the year for which the tax was levied, and available under modified accrual. 4-21

22 Recording Property Tax Levy General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund: 9a. Taxes Receivable Current.... 2,708,333 Allowance for Uncollectible Current Taxes ,333 Revenues ,600,000 Revenues Ledger: Property Taxes ,600,000 Governmental Activities: 9b. Taxes Receivable Current ,708,333 Allowance for Uncollectible Current Taxes ,333 General Revenues Property Taxes 2,600,

23 Collection and Reclassification of Current Taxes General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund and Governmental Activities: 10. Cash ,042,033 Taxes Receivable Current... 2,042,033 General Fund and Governmental Activities: 11. Taxes Receivable Delinquent ,300 Allowance for Uncollectible Current Taxes ,333 Taxes Receivable Current ,300 Allowance for Uncollectible Delinquent Taxes ,

24 Accrual of Interest and Penalties on Delinquent Taxes General Ledger Subsidiary Ledger General Fund: Debits Credits Debits Credits 12a. Interest and Penalties Receivable on Taxes ,320 Allowance for Uncollectible Interest and Penalties ,520 Revenues ,800 Revenues Ledger: Interest and Penalties on Delinquent Taxes ,

25 Accrual of Interest and Penalties on Delinquent Taxes General Ledger Subsidiary Ledger Debits Credits Debits Credits Governmental Activities: 12b. Interest and Penalties Receivable on Taxes ,320 Allowance for Uncollectible Interest and Penalties ,520 General Revenues Interest and Penalties on Delinquent Taxes... 10,

26 Collection of Delinquent Taxes General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund: 13a. Interest and Penalties Receivable on Taxes Revenues Revenues Ledger: Interest and Penalties on Delinquent Taxes Governmental Activities: 13b. Interest and Penalties Receivable on Taxes General Revenues Interest and Penalties on Delinquent Taxes

27 Collection of Delinquent Taxes General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund and Governmental Activities: 14. Cash ,200 Taxes Receivable Delinquent.. 440,000 Interest and Penalties Receivable on Taxes ,

28 Write-off of Uncollectible Delinquent Taxes General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund and Governmental Activities: 15. Allowance for Estimated Uncollectible Delinquent Taxes ,300 Allowance for Uncollectible Interest and Penalties ,315 Taxes Receivable Delinquent.. 26,300 Interest and Penalties Receivable on Taxes ,

29 Other Revenue General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund: 16a. Cash ,000 Revenues ,000 Revenues Ledger: Sales Taxes ,800 Licenses and Permits ,000 Fines and Forfeits ,000 Charges for Services ,000 Miscellaneous Revenues ,

30 Other Revenues General Ledger Subsidiary Ledger Debits Credits Debits Credits Governmental Activities: 16b. Cash ,000 Program Revenues General Government Charges for Services. 100,000 Program Revenues Public Safety Charges for Services ,000 Program Revenues Public Works Charges for Services ,000 Program Revenues Culture and Recreation Charges for Services.. 7,000 General Revenues Sales Taxes ,800 General Revenues Miscellaneous.. 1,

31 Tax Anticipation Notes An analysis of cash receipt and disbursement patterns may reveal that cash available for payment of expenditures will not be sufficient at times to make all required payments. Chapter 12 contains more detail on cash budgeting. Banks customarily meet the working capital needs of a government by accepting a tax anticipation note from the government. These short-term loans are secured by the taxing authority of the government. 4-31

32 Issuance of Tax Anticipation Notes General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund and Governmental Activities: 17. Cash ,000 Tax Anticipation Notes Payable ,

33 Repayment of Tax Anticipation Notes General Ledger Subsidiary Ledger Debits Credits Debits Credits General Fund: 18a. Tax Anticipation Notes Payable ,000 Expenditures ,500 Cash ,500 Expenditures Ledger: Miscellaneous ,500 Governmental Activities: 18b. Tax Anticipation Notes Payable ,000 Expenses General Government.. 13,500 Cash ,

34 Special Topics: Correction of Errors Material errors should be corrected as soon as they are discovered. Errors related to current receivables and revenue or current expenditures should be corrected with adjustments to the affected accounts, crediting or debiting as required to correct the error. Errors related to prior period expenditures relate to accounts already closed to fund balance, so correction of these errors should be made the fund balance. 4-34

35 Special Topics: Receipt of Goods Ordered in Prior Year Purchase orders and other commitments may be issued in one year, while the goods and services are received in the following year. In this case, the encumbrance account is not closed at year end. When the goods or services are provided, they are considered an expenditure of the prior year, to the extent of the amount that was encumbered and did not lapse. Any excess over the encumbrance amount is considered an expenditure of the year in which the goods or services are received. 4-35

36 Special Topics: Revision of the General Fund Budget During the fiscal year, comparisons should be made of budgeted amounts to actual amounts. A review may be necessary to determine whether the budget appears realistic or whether changes should be made in light of current information about local economic conditions; possible changes in state or federal laws relating to grants, entitlements, or shared revenues; or other changes relating to license and permit fees, fines and forfeits, and charges for services. If the budget is legally amended, appropriate journal entries should be made to record the changes. 4-36

37 Special Topics: Exchange Transactions with Other Funds Internal exchange transactions are reciprocal exchange transactions that occur internally between funds and activities rather than between the government and an external entity or person. The funds that participate in internal exchange transactions should recognize revenues and expenditures or expenses, as appropriate, within each respective fund as if the transaction involved the fund and an external entity. At the government-wide level, however, if the interfund transaction occurs between two governmental funds (or between a governmental fund and an internal service fund) or between two enterprise funds, then neither the Governmental Activities column nor the Business-type Activities column is affected. 4-37

38 Special Topics: Adjusting Entries Inventory of Supplies Purchases Method Consumption Method Expenditures equals the total cost of supplies purchased during the year Consistent with modified accrual basis of accounting used by governmental funds The expense/expenditures reflect the amount consumed Consistent with the accrual basis of accounting used by government-wide and proprietary funds Periodic inventory system Expenditures and Inventory of Supplies must be adjusted at year end Perpetual inventory system No entry necessary at year end to adjust Expenditures and Inventory of Supplies 4-38

39 Special Topics: Pre-closing Trial Balance and Closing Entries A pre-closing trial balance is prepared at fiscal year end, listing all balance sheet, operating statement and budgetary accounts. 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, adjusted for any amended budget entries made during the year. Closing the operating accounts increases or decreases the balance of the general ledger Fund Balance Unassigned account by the difference between revenues and other financial sources over expenditures and other financing uses. 4-39

40 Special Topics: Reclassification of Fund Balance Accounts Governments may have revenue sources that have constraints placed on the purposes for which they can be expended. As allowed by GASB standards, the government can establish a policy of spending its constrained resources before spending unconstrained resources for those purposes. Thus, restricted, then committed, and finally assigned resources may be spent in that order. Under this policy, constrained resources are generally consumed before the end of the year, leaving only a few amounts that require reclassification of fund balances at year-end. Amounts may need to be transferred between unassigned fund balance and restricted, committed or assigned fund balances. 4-40

41 Special Topics: General Fund Financial Statements In governmental fund financial statements, the General Fund is always considered to be a major fund, and so has a separate column. Although not required, separate financial statements may be prepared for the General Fund. These would include a balance sheet, a statement of revenues, expenditures and changes in fund balance, and a budgetary comparison statement (or schedule) of revenues, expenditures and changes in fund balance. 4-41

42 Special Revenue Funds Special revenue funds are needed when a significant revenue source is restricted or committed for a specific operating purpose, other than those served by proprietary or fiduciary funds. Street Fund Library Operating Fund Trust Fund 4-42

43 Accounting for Operating Grants Grants from other governments are often restricted for specific operating purposes. Some grants provide payment on a reimbursement basis. This is an example of an eligibility requirement, and revenues may not be recognized until qualifying expenditures have been incurred. Grants may also impose time requirements, indicating amounts are intended for future operating periods. 4-43

44 Special Revenue Fund Financial Accounting Special revenue fund accounting and financial reporting are essentially the same as for the General Fund. In addition to amounts for the General Fund, amounts for major special revenue funds would be included in the balance sheet and statement of revenues, expenditures, and changes in fund balances prepared for the governmental funds. A budgetary comparison statement or schedule is also provided for each major special revenue fund for which a budget is legally adopted. 4-44

45 Interfund Activity Interfund Loans May be current or noncurrent No journal entries are required at the government-wide level if between two governmental funds or two enterprise funds Interfund Transfers Nonreciprocal transactions May be periodic or one-time Intra- versus Inter-Activity Transactions Intra-activity: Between two governmental funds or two enterprise funds Inter-activity: Between a governmental fund (or internal service fund) and an enterprise fund 4-45

46 Trusts Governments often receive contributions under trust agreements in which the principal amount is not expendable but earnings are expendable. Most of these trusts are established to benefit a government program or function, or the citizenry, rather than an external individual, organization, or government. Trusts of the first type are called public-purpose trusts; trusts of the second type are called private purpose trusts. 4-46

47 Permanent Funds GASB standards require that public-purpose trusts for which the earnings are expendable for a specified purpose but the principal amount is not expendable (also referred to as endowments) be accounted for in a fund called a permanent fund. Public-purpose trusts for which both principal and earnings thereon can be expended for a specified purpose are accounted for in a special revenue fund. Accounting issues involving private purpose trusts, a type of fiduciary fund, are discussed in Chapter

48 Permanent Fund Transactions Debits Credits Permanent Fund: 1. Investment in Bonds ,000 Accrued Interest Receivable ,800 Revenues Contributions for Endowment.. 664,800 [Interest accrued on the bonds of Company AB ($640,000 x 6% x 4/12 = $12,800), assuming semiannual interest was last received on July 1, 2016] Permanent Fund: 2. Cash ,200 Accrued Interest Receivable ,800 Revenues Bond Interest ,

49 Permanent Fund Transactions Debits Credits Permanent Fund: 3. Other Financing Uses Interfund Transfers Out.. 6,400 Cash ,400 Permanent Fund: 4a. Accrued Interest Receivable ,200 Revenues Bond Interest ,200 4b. Investment in Bonds ,000 Revenues Change in Fair Value of Investments ,000 4c. Other Financing Uses Interfund Transfers Out. 19,200 Due to Library Operating Fund ,

50 Permanent Fund Transactions Debits Credits Permanent Fund: 5. Revenues Contributions for Endowment ,800 Revenues Bond Interest ,600 Revenues Change in Fair Value of Investments.. 22,000 Other Financing Uses Interfund Transfers Out. 25,600 Fund Balance Nonspendable Principal of Permanent Fund ,

51 Looking Forward In this chapter, the dual effects of accounting transactions were analyzed and appropriate journal entries were made in both the general journal for the General Fund (and other governmental funds) and the general journal used to record government activities at the government-wide level. Special Revenue Funds and Permanent Funds were also presented. Chapter 5 presents accounting for general capital assets and capital projects. 4-51