COURSE DESCRIPTION

 This course presents an in-depth look at some of the basic principles of governmental accounting.  Understanding these principles provides the means for interpreting the concepts of governmental accounting and financial reporting.

 You will leave with a better understanding of why you do some of the things you do and a stronger knowledge base for handling financial transactions that come through your office.

COURSE OBJECTIVES

 Explain what GAAP is and how to comply with the standards.

 Understand the basic accounting concepts and the nature of assets and liabilities.

 Discuss in detail and understand practical use of the fundamentals and types of fund accounting.

CEU REQUIREMENTS

 You must sign in at the beginning of class.

 You must stay for the duration of the entire class (whether you want to or not).

 You must sign out at the end of class.

 Each participant will receive a certificate for completing the class.

 Each participant is responsible for sending in necessary documentation for earning the CEU.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 GAAP instructs the user how properly to account for transactions, balances, and disclosures in the financial statements.

 GAAP has developed from decades of common accounting practices.

 The phrase “generally accepted” means that an accountant cannot find specific accounting principles in any authoritative book.  Accounting rule makers issue accounting principles for treatment of transactions.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 GAAP is a set of authoritative principles that does not account for every single type of accounting situation government offices encounter.

*Sometimes there is more than one way to handle a transaction. (i.e. depreciation)  Legally governments are not required to follow GAAP-based financial statements.

 Ultimately it is up to the user to make the best choice in applying GAAP principles.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 Another GAAP concept that resides within the gray area is materiality.

 An item on the financial statements or a transaction is material “if its improper recording would have an impact on an informed reader of the financial statements”.

 Materiality has qualitative and quantitative aspects.

 Quantitative materiality refers to differences in numerical values, such as a 10 percent-unexpected difference in assets.

 Qualitative materiality refers to situations non-numerical such as recording expenses in the wrong fund that causes the fiscal year amount to be over or under budget.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 The private organization called GASB sets the GAAP rules for governments.

 The organization established in 1984 composed of seven board members.

 GASB determines the accounting principles, provides interpretations, and guidance for implementation.

 GASB Statement No. 55 “The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments” (GASBS 55) prioritizes the pronouncements and documents for accounting principles as follows:

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

    • •      Level A GASB Statements GASB Interpretations Level B GASB Technical Bulletins American Institute of Certified Public Accountants (AICPA) Audit Guides and Statement of Position Level C AICPA Practice Bulletins Level D Implementation Guides Practices widely recognized and prevalent in state and local governments

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 Legally governments are not required to follow GAAP-based financial statements; however, many local or state charters and state comptrollers do.

 To prepare financial statements any other way would require justification for departure.

GOVERNMENTAL ACCOUNTING STANDARDS BOARD

The GASB is the independent, not-for-profit organization formed in 1984 that establishes and improves financial accounting and reporting standards for state and local governments. Its seven members are drawn from the Board’s diverse constituency, including preparers and auditors of government financial statements, users of those statements, and members of the academic community. More information about the GASB can be found at its website www.gasb.org

.

GOVERNMENTAL ACCOUNTING STANDARDS BOARD

 GASB distinguishes the difference between government environments and governmental entities from other types of organizations  GASB Concepts Statement No. 1 (GASBCS 1) “Objectives of Financial Reporting” describes the differences as follows:

GOVERNMENTAL ACCOUNTING STANDARDS BOARD

    Governments derive their authority from the citizenry and on a separation of power commonly based on three branches (i.e., the executive, legislative, and judiciary).

Governments usually prepare a budget for all operating funds.

Users of governmental financial statements are accustomed to the government reporting information about its funds, particularly the major (or more important, larger) funds.

Dissimilarities between similarly designated governments, such as two counties may vary substantially in obtaining resources.

GOVERNMENTAL ACCOUNTING STANDARDS BOARD

 Governments have significant investments in non-revenue-producing capital assets, such as buildings, equipment, vehicles, and infrastructures.

 The nature of the political process inherently creates conflict in governments between citizens’ demand for services and the citizens’ willingness to pay for those services.

 The users and uses of governmental financial reporting and financial statements are different from those of commercial enterprises.

WHAT’S THE REASON FOR ALL OF THIS?

Measuring financial performance is important on many different levels. Users of financial information have different needs for specific information and having accurate, reliable information is crucial to their operation.

GAAP and GASB exist to help insure that users of financial information are looking at information that is presented fairly, uniformly (for comparison between entities) and accurately.

WHO USES THIS INFORMATION?

Inside Users 1. Management 2. Staff Outside Users 1. Citizens 2. Lending Institutions

Cash The basis of accounting is the determination of when the financial statements require recording of a transaction. There are three different methods.

Accrual Modified Accrual

BASIS OF ACCOUNTING

Cash Basis Accounting - Using this method, revenues are recognized/recorded when they are received. Expenses/expenditures are recorded/recognized when they are paid. GASB does not accept the cash basis of accounting for the government-wide financial statements. But understanding this method may facilitate your understanding of the others.

CASH BASIS OF ACCOUNTING

GASB does not accept the cash basis of accounting for the government financial statements, but explaining the concept assists in understanding the other accounting bases.

When a business receives cash, they record revenue immediately using the cash basis. When a business pays cash for a bill, they immediately record an expense.

For example, a county levies a tax on June 10 (just before the end of the current fiscal year) for the upcoming fiscal year, which begins July 1 and is due on July 15.

If the taxpayer pays their tax on June 20 in the current fiscal year, an entity under the cash basis of accounting records the revenue in the current fiscal year.

BASIS OF ACCOUNTING

Accrual Basis Accounting - Using this method, revenues are recognized/recorded when they are earned regardless of when they are received. Expenses/expenditures are recorded/recognized when they are incurred regardless of when they are paid. This is the basis used in the government-wide financial statements and by most commercial entities in preparing their financial statements.

ACCRUAL BASIS OF ACCOUNTING

This is the basis of accounting used in the government-wide, certain fund, and most commercial financial statements prepared in accordance with GAAP.

Revenues under the accrual basis of accounting record after earning the transaction or when the government is required. These types of transactions considered proprietary funds, bare close relationship to business-type activity.

ACCRUAL BASIS OF ACCOUNTING

Continuing with the previous example the tax transaction collected on June 10 requires recognition next fiscal year since it is the actual year the transaction relates.

Another example is a utility bill that covers June 15 to July 15. Revenue splits between the two fiscal years for recognition because earnings include both accounting periods.

BASIS OF ACCOUNTING

Modified Accrual Basis Accounting - Using this method, revenues and expenses/expenditures are recognized/recorded when they occur but can be affected by the timing of cash receipts or cash disbursements. When the revenue is measurable and available, it is recognized. Governmental funds my use this method for preparing fund financial statements but never for government-wide financial statements.

MODIFIED ACCRUAL BASIS OF ACCOUNTING

Governmental funds use modified accrual basis of accounting in the fund financial statements, but never used to prepare government-wide financial statements.

Modified accrual basis of accounting generally recognizes (i.e., recorded in the financial statements as revenue) transactions when they occur, but the timing of cash receipts or cash disbursements may affect timing of the transaction recording.

MODIFIED ACCRUAL BASIS OF ACCOUNTING

When the revenue is measureable and available, recognition of the transaction in the financial statements follows. Arriving at the measurability involves obtaining a reasonable estimate of the revenue. Availability comprises of revenues collectable during the current accounting period or soon after the fiscal year to pay for the liabilities of the current fiscal year.

GAAP defines susceptibility of accrual as 60 days after the close of the fiscal year.

MODIFIED ACCRUAL BASIS OF ACCOUNTING

Continuing with the previous tax transaction example, say the payment happened on September 15. Under the accrual basis of accounting, recognition of the revenue applies to the current fiscal year. Under the modified accrual basis of accounting it is not because the payment arises more than 60 days past the end of the current fiscal year, therefore the revenue recognized in the next fiscal year.

BUDGETARY BASIS OF ACCOUNTING

Preparation of the general and special revenue fund budgets sometimes requires the use of the budgetary basis of accounting. Local laws have the capability to allow the use of non-GAAP budgetary basis of accounting. Partially using the cash or modified accrual basis of accounting to account for certain types of transactions is a form of budgetary basis of accounting. Typically, supplementary information in the financial statements makes use of the budgetary basis of accounting.

Economic Resources Current Financial Resources

MEASUREMENT FOCUS

Whereas the basis of accounting describes when recording of transactions takes place, the measurement focus defines when recording of transactions come about. The two different styles of measurement focuses are:  Economic resources  Current financial resources. Arrangement of the government-wide financial statements and in the fund financial statements by proprietary funds that undertake business-type activities uses economic resources measurement focus. Governmental funds (general fund, special revenue, capital projects, and debt services are examples) use the current financial resources measurement focus.

MEASUREMENT FOCUS

Economic Resources Measurement Focus - This focus determines whether an entity is better or worse off resulting from transactions taking place during a fiscal year. This means recording transactions that affect the entity economically much like the commercial industry as a gain (revenue) or a loss (expenditure). This includes both current and long-term assets (such as capital assets) and liabilities (such as long-term bonds). This is generally used in the proprietary funds and is required in the presentation of the government-wide financial statements.

MEASUREMENT FOCUS

Current Financial Resources Measurement Focus - Any fund that is not a proprietary fund uses this measurement focus. This focus emulates resources available in the near future therefore “the operating statements and balance sheets of governmental funds in the fund financial statements reflect transactions and events that involved current financial resources”.

An example is assets turned into cash to satisfy current liabilities. Long-term assets, assets not used to pay current liabilities, and long-term liabilities are not on the governmental fund financial statements.

MEASUREMENT FOCUS

Current Financial Resources Measurement Focus An example of the two measurement focuses is a new computer purchase for $5,000 with an expected life of five years. Under the economic resource measurement focus there is no change in the statement of activities (like an income statement) during the cash and computer exchange. The next five years the entity is worse off as the computer gets older, accordingly there is a depreciation charge of $1,000 reflected in the statement of activities.

MEASUREMENT FOCUS

Current Financial Resources Measurement Focus Under the current financial resource measurement focus, the government spent $5,000 at the purchase date and has the same amount less in current financial resources. Computers are not a current financial resource because the equipment cannot pay for the resulting fund bill. The operating statement (like an income statement) shows expenditure for $5,000 because it is that much worse in the current financial resources. The governmental fund’s financial statements will not reflect the depreciation expense or any other transaction related to the computer purchase.

NATURE OF ASSETS

Nature of Assets - GASB Concepts Statement No. 4 “Elements of Financial Statements” (GASBCS 4) defines an asset as “resources with present service capacity that the government presently controls” (GASB, n.d.).

Measurement of the assets at a point reflects the statement of net assets (sometimes referred to as the balance sheet). The statement of net assets lists the assets in order of liquidity, which means how quickly the asset converts back into cash. Typical assets listed on the government’s statement of financial position are:

NATURE OF ASSETS

Cash - These are the book value (not bank statement’s) funds in the government’s bank accounts. Cash on the statement of net assets does not include restricted (like a debt service reserve account) or held (like a security deposit) cash.

NATURE OF ASSETS

Cash equivalents - GASB Statement No. 9, “Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Accounting” (GASBS 9) defines cash equivalents as “short-term, highly liquid investments that are both readily convertible to known amounts of cash and must mature within three months of being bought by the organization”.

Determination of the classification of the asset is according to the asset purchase date.

NATURE OF ASSETS

Investments - Recording of most stocks, bonds, and other debt instruments in the statement of net assets are at their fair value. The fair value changes from year to year and the stated earnings or losses from these investments are in the government’s statement of activities.

NATURE OF ASSETS

Taxes receivable - These receivables (sometimes estimates) reported on the statement of net assets are taxes owed to the government, such as “real estate taxes, personal or corporate income taxes, sales taxes, or personal property taxes due to the government on the date of its statement of net assets but that have not been paid”

NATURE OF ASSETS

Accounts receivable - These are funds owed to the government due to services rendered or goods sold to individuals or organizations. An example is a utility bill sent to the customer but not paid yet. The customer may not necessarily pay accounts receivable; therefore, GAAP requires the establishment of an allowance for uncollectible receivables. The government uses historical trends from the aging of receivables to estimate the amount dedicated to this account. The two accounts added together is the net realizable value, which is in accordance to GAAP.

NATURE OF ASSETS

Grants and other receivables - This represents nonexchange monies owed to the government other than revenues already mentioned, such as federal grants, fines and penalties, and expense reimbursements

NATURE OF ASSETS

Inventories - Inventory includes items for sell like books and medical supplies. Materials and supplies like those used in the office or the motor pool as commonly used parts add to the inventory value. Inventory valuation on the statement of net assets represents the lower of cost or market value.

NATURE OF ASSETS

Capital assets - These fixed assets listed as property, plant, and equipment (PP&E) on the statement of net assets are long-lived assets such as land, buildings, equipment, office furnishings, computers, vehicles, leasehold improvements, capitalized leases, and other similar assets. In addition, GASBS 34 requires governments to report infrastructure like roads, bridges, tunnels, and sidewalks as capital assets. Determination of whether a purchased item is an asset or an expense depends on the value and life of the purchase. The life generally is three to five years.

NATURE OF ASSETS

Capital assets. The set value threshold depends on the size of the government organization. The government records PP&E at cost minus accumulated depreciation on the statement of net assets. There are two exceptions to this rule, and the first is a work-in-progress involving a construction project lasting more than one fiscal year. The second exception called the modified approach deems that the assets do not depreciate in usefulness.

NATURE OF ASSETS

Capital assets. Assets sometimes lose value and become impaired. GASBS 42, “Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries” instructs governments when and how governments should revalue inventory in this manner.

NATURE OF ASSETS

Intangible assets - As the name implies these are assets not seen but are still resources of the government like internally developed software. GASBS 51, “Accounting and Financial Reporting for Intangible Assets” provides guidance to governments in determining intangible values

NATURE OF ASSETS

Prepaid expenses - Services paid for early that cover future benefits in fiscal years other than the current are assets called prepaid expenses. GASBCS 4 defines a prepaid expense as a “deferred outflow of resources”. Prepaid insurance, for example, of 1,000 dollars may cover a full calendar year (January to December). From January to June, the prepaid insurance expense asset reduces from 1,000 dollars to 500 dollars using the accrual basis of accounting.

NATURE OF LIABILITIES

Nature of Liabilities - GASBCS 4 defines liabilities as “present obligations to sacrifice resources that the government has little or no discretion to avoid” (GASB, n.d.). Present liabilities on the statement of net assets incurred as of the year-end and do consist of an obligation to another party. The more common liabilities listed on the statement of net assets are as follows:

NATURE OF LIABILITIES

Accounts payable and accrued expenses. Governments report these two liabilities listed together or separate. Accounts payable are bills for goods or services received before the end of the fiscal year. Accrued expenses are liabilities for goods or services for which the government has not received an invoice for yet or when accounting for invoices covering two fiscal years. For example, the government has a telephone invoice covering June 15 through July 15. The government accrues an expense liability for the portion that covers the next fiscal year.

NATURE OF LIABILITIES

Debt - The financial statements list government debts in many forms. Typically, governments deal in notes payable maturing five years or less. Repayment of unique loans to governments called bond anticipation notes arrives from the anticipation of grants and taxes revenues. Most often governments purchase long-term loans to finance construction or significant facilities.

The two types of bonds sell at either a premium or discount but the statement of net assets reflects the actual face value of the bond.

NATURE OF LIABILITIES

Deferred income - GASBCS 4 refers to this special type of liability as “a deferred inflow of resources”. The concept here is matching the recording of income to the period earned and sometimes the costs incurred to generate that revenue. A frequent example is grant monies advanced to the government entity. The entity cannot recognize the grant revenue until acquiring expenses and spending for the purpose of this grant.

NATURE OF NET ASSETS

Nature of Net Assets - Net assets are the difference between total assets and total liabilities. GASB 34 requires dividing the net assets up in the following three ways (GASB, n.d.):  Invested in capital assets, net of related debt  Restricted net assets  Unrestricted net assets

NATURE OF NET ASSETS

Invested in capital assets, net of related debt

.

This is the difference between capital assets reduced by any accumulated depreciation and outstanding balance of any debt used to purchase or constructs those capital assets.

NATURE OF NET ASSETS

Restricted net assets

-

These assets have constraints tied to them. Creditors or laws imposed upon the assets restrict them through debt covenants or enabling legislation for example. An example of this is the government’s debt service reserve funds. The government agrees to place a certain amount of monies in a special account not used for any purpose other than paying off the debt service in case there is a default. GASBS 46, “Net Assets Restricted by Enabling Legislation” clarifies that enabling legislation mandates the funds for future purposes in honor of restrictions placed upon the monies.

NATURE OF NET ASSETS

Unrestricted net assets

.

Monies that do not fall into the previous two categories fall into unrestricted net assets.

QUESTIONS

1. How does GAAP provide guidance for government financial statements?

2. What is the purpose of GASB?

3. When is accrual and modified accrual basis of accounting used?

QUESTIONS

4. What is the difference between economic and current financial resources measurement focuses?

5. Describe how GASB defines an asset. 6. Describe how GASB defines a liability.

ACCOUNT TYPES

Understanding account types and how debits/credits effect each

   The different account types:  Assets Liabilities Equities    Revenues Expenditures Deferred Outflows Deferred Inflows

ACCOUNT TYPES Assets

Assets are cash and cash equivalents They include:

    

Bank Accounts Savings/Investment Accounts Receivables Inventory “Due From” Other Funds

ACCOUNT TYPES Liabilities

Liabilities are obligations and debts They include:  Payables  Payroll Deductions  Short Term Debt  “Due To” Other Funds

ACCOUNT TYPES Equities

Equities are the difference between assets and liabilities They include:  Reserves  Fund Balance

ACCOUNT TYPES Revenues

Revenues are monies brought into a government through it’s activities They include:  Taxes  Fees    Fines Interest Grants  Fund Transfers  Sales

ACCOUNT TYPES Expenditures

Expenditures are payments or the promise of future payments They include:



Purchases



Wages



Payroll Taxes



Insurance

ACCOUNT TYPES Expenditures

Why are Expenditures the only account type that uses object codes?

 Only account type that is segregated by department  The Function defines the department  The Object Code defines the type of expenditure

ACCOUNT TYPES – GASB63 Deferred Outflows

Deferred Outflows are consumptions of assets that apply to a future reporting period

They include:



Grants Paid in Advance



Debt Refunds (debits)



Cost to acquire rights to future revenues



Deferred loss from sale-leaseback

ACCOUNT TYPES – GASB63 Deferred Inflows

Deferred Inflows are acquisitions of assets that apply to a future reporting period

They include:



Grants Received in Advance



Taxes Received in Advance



Debt refunds



Deferred gain from sales-leaseback

BASIC ACCOUNTING EQUATION

Assets =

Liabilities +

Equities/Fund Balance

GASB63 ACCOUNTING EQUATION

Assets

+

Deferred Outflows = Liabilities

+

Deferred Inflows

+

Equities/Fund Balance This is the basis for what we call “double entry accounting.” If you increase an account on the left you must increase an account on the right in order to stay in balance.

DOUBLE ENTRY ACCOUNTING

 Double entry accounting is a standard accounting method that requires each transaction to be recorded in at least two accounts.  Every debit balance must have an equal and off setting credit balance for each transaction.  It provides for quick accuracy checking .

ACCOUNT TYPES Assets

Normal Balance – Debit (positive) Debits = Increase Credits = Decrease

All Asset Function number s begin with 1 (one)

The Balance Sheet

Assets

- Bank Accounts - Investment Accounts - Receivables - Inventory/Supplies “Due From” other funds - Pre-paid Expenses

Asset Accounts

- Normally carry a positive (debit) balance - Debits increase ending balance - Credits decrease ending balance

ACCOUNT TYPES Liabilities

Normal Balance – Credit (negative) Debits = Decrease Credits = Increase

All Liability Function numbers begin with 2 (two)

The Balance Sheet

Liabilities

- Payroll deductions - Due To other funds - Payables - Short term debt

Liability Accounts

- Normally carry a negative (credit) balance - Credits increase ending balance - Debits decrease ending balance

ACCOUNT TYPES Equities

Normal Balance – Credit (negative) Debits = Decrease Credits = Increase

The Balance Sheet

All Equity Function numbers begin with 3 (three)

City Equity Accounts are included with Liabilities

Equities

- Reserves - Fund Balance Accounts

Equity Accounts

- Normally carry a negative (credit) balance - Credits increase ending balance - Debits decrease ending balance

ACCOUNT TYPES Revenues

Normal Balance – Credit (negative) Debits = Decrease Credits = Increase *Budget entries are reversed

ACCOUNT TYPES Expenditures

Normal Balance – Debit (positive) Debits = Increase Credits = Decrease Only account type that uses object codes *Budget entries are reversed

REVENUES/EXPENDITURE ACCOUNTS

Notice on the balance sheet that we didn’t include the revenues and expenditures. The balance sheet uses a summary line at the bottom to show the net activity of the revenue and expenditure account groups.

REVENUES/EXPENDITURE ACCOUNTS

Revenues and Expenditures are listed on the Trial Balance What’s wrong with this Trial Balance?

All Revenue Function numbers begin with 3 (three) All Expenditure Function numbers begin with 4 (four) or above

ACCOUNT TYPES– GASB63 Deferred Outflows

Normal Balance – Debit (credit) Debits = Increase Credits = Decrease

ACCOUNT TYPES– GASB63 Deferred Inflows

Normal Balance – Credit (negative) Debits = Decrease Credits = Increase

QUESTIONS

1. What account type would a short term debt be? What about a grant received in advance?

2. What is the normal balance for an asset? What about an expenditure?

3. Are individual revenue/expenditure accounts displayed on the Balance Sheet? If no, what report are they shown on?

WHAT IS A FUND?

The general purpose for developing fund accounting is so that each government is responsible for the collection and application of public monies.

Each fund balance is much like a financial statement whereas the assets equal the liabilities.

WHAT IS A FUND?

The National Council on Governmental Accounting (NCGAS 1) defines a fund as : “A fund is defined as a fiscal and accounting entity with a self-balancing 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. “

WHAT IS A FUND?

Statutes and management decisions establish each fund. Management to accomplish government objectives and specific programs in relation to regulations, restrictions, or limitations separates each activity and contractual agreement.

FUND TYPES

A. Governmental Funds - Generally, any fund that accounts for activities not businesslike is a governmental fund. Governmental funds are the general activities of a government.

1. General Fund 2. Special Revenue Funds 3. Capital Projects Funds 4. Debt Service Funds 5. Permanent Funds

FUND TYPES

B. Proprietary Funds - The two different types of proprietary funds use the accrual basis of accounting and the economic resources measurement focus. 1. Enterprise Funds 2. Internal Service Funds

FUND TYPES

C. Fiduciary Funds - Fiduciary funds account for monies that belong to other people and are not included in the government-wide financial statements. The fiduciary funds are included in the basic financial statements within the fund financial statements.

1. Pension Trust Funds 2. Investment Trust Funds 3. Private Purpose Trust Funds 4. Agency Funds

GOVERNMENTAL FUND

A. Governmental Funds - Generally, any fund that accounts for activities not businesslike is a governmental fund. Governmental funds are the general activities of a government.

1. General Fund 2. Special Revenue Funds 3. Capital Projects Funds 4. Debt Service Funds 5. Permanent Funds

GOVERNMENTAL FUND

General Fund. To account for all financial resources except those required to be accounted for in another fund.

This is the main fund for the government, which accounts for all current activities other than those in another fund. It is the “chief operating fund” and each government can have only one according to GAAP rules The asset side of the general fund balance sheets generally consists of cash, investments, receivables, and inventories.

GOVERNMENTAL FUND

General Fund. The two acceptable means for the accounting of inventories are:  Purchase - The purchase method means expensing purchased inventory immediately.  Consumption method - The consumption method means expensing inventory after consumption.

GOVERNMENTAL FUND

General Fund.

The liabilities are generally accounts payable and accrued expenditures, deferred revenues, and revenue or tax anticipation notes. Liabilities received before the end of the fiscal year are accounts payable. Receiving a bill for this fiscal year rendered service or goods after the end of the fiscal year are an accrued expense.

GOVERNMENTAL FUND

General Fund There are exceptions to the asset and liability recognition as incurred, such as reserved for inventories, compensated absences, judgments and claims, unfunded pension and other postemployment benefit contributions, special termination benefits, landfill closure and post closure costs, debt service, and operating leases with scheduled rent increases. Recording of these types of liabilities incurs when using current financial resources. For example, current fiscal year benefits owed to employees not paid until after the end of the fiscal year record as a liability.

GOVERNMENTAL FUND

General Fund Anticipated notes are another special type of liability. When the government needs to even out the cash flow during the fiscal year, they can purchase short-term notes using future tax and revenue collections as collateral.

GOVERNMENTAL FUND

A. Governmental Funds - Generally, any fund that accounts for activities not businesslike is a governmental fund. Governmental funds are the general activities of a government.

1. General Fund 2. Special Revenue Funds 3. Capital Projects Funds 4. Debt Service Funds 5. Permanent Funds

GOVERNMENTAL FUND

Special Revenue Funds. Account for the proceeds of specific revenue sources (other than expendable trusts or for major capital projects) that are legally restricted to expenditures for specified purposes Special revenue funds are used to account for the proceeds of specific revenue sources that are restricted or committed to be expended for specific purposes other than capital projects and debt service.

Special revenue funds are either optional or required legally by law. Funds needing special consideration to improve accountability for the fund assume special revenue status by the government.

Special Revenue Funds

GOVERNMENTAL FUND

Grant monies restricted by the federal or state government for special purposes are one example. After paying the bills from the grant monies, the government closes the special revenue fund. Another example is state imposed gasoline taxes restricted for construction and maintenance of highway roads.

GOVERNMENTAL FUND

A. Governmental Funds - Generally, any fund that accounts for activities not businesslike is a governmental fund. Governmental funds are the general activities of a government.

1. General Fund 2. Special Revenue Funds 3. Capital Projects Funds 4. Debt Service Funds 5. Permanent Funds

GOVERNMENTAL FUND

Capital Projects Funds - to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds and trust funds) The government sometimes restricts, commits, or assigns capital project funds for capital outlay expenditures. Examples include the “acquisition or construction of capital facilities and other capital assets”. Capital activities of proprietary funds or trust funds are not included in the capital projects funds.

Capital Projects Funds

GOVERNMENTAL FUND

Once a capital project fund is established, the government determines how many capital project funds needed. Proceeds from long-term debt, reported as other financing source, are typically the main resource for capital project funds.

The capital projects fund uses the modified accrual accounting basis and the current financial resources measurement focus, so the long-term assets and long-term liabilities appear on the government-wide statement of net assets.

Capital Projects Funds

GOVERNMENTAL FUND

Short-term liabilities use current financial resources for payment, so they appear on the capital projects fund balance sheet. Three types of short-term liabilities used for financing capital projects are:  Bond anticipation notes  Demand bonds  Special assessment debt

Capital Projects Funds

GOVERNMENTAL FUND

Bond anticipation notes

notes. . Repayment for this type of short-term note derives from the proceeds of long-term debt released after the issuance of the bond anticipation If a government cannot provide enough assurance for obtaining the long-term debt, the bond anticipation note appears on the capital project funds balance sheet as a liability.

Capital Projects Funds

GOVERNMENTAL FUND

Demand bonds

. Demand bonds “creates a potential call on a government’s current financial resources”. The bondholder has the right to demand (a put provision) the government issuer to redeem the bond within a specified period. This provision allows the investor the option to redeem the bond when the market bond interest rate is higher. This provision allows governments to issue bonds at a lower interest rate, therefore less liability.

Capital Projects Funds

GOVERNMENTAL FUND

Demand bonds

. Governments establish lines of credit or takeout agreements to provide means to pay for redeemed bonds. A takeout agreement is a contractual agreement with a financial institution to convert the demand bonds into installment loans.

Capital Projects Funds

GOVERNMENTAL FUND

Demand bonds

. GASB Interpretation No. 1, “Demand Bonds Issued by State and Local Governments” (GASBI 1) determines the accountability of the demand bonds as long-term or short-term. The demand bond usually appears on the capital projects fund balance sheet unless meeting all of the following conditions:

Capital Projects Funds

GOVERNMENTAL FUND

Demand bonds

. The government has takeout agreement with an unrelated third party to convert the demand bonds to long-term obligations.

The takeout agreement does not expire within one year of the current balance sheet.

The takeout agreement loan obligation is not callable or cancelable by the lender.

Capital Projects Funds

GOVERNMENTAL FUND

Demand bonds

. The third party lender is capable of meeting the financial needs of the takeout agreement.

This means that if a government does not have substantial means or loopholes to cover the demand loan, it appears on the governmental fund and government wide statement of net assets.

Capital Projects Funds

GOVERNMENTAL FUND

Special assessment debt

and gutters. . Special assessment debt is typically a capital projects fund debt providing improvements to sidewalks, streets, parking facilities, and curbs For example, the government provides improvements to a community, and charges a special assessment to the homeowners. The government issues long-term loans to the homeowners to fund the project and typically places a lien on their property.

Capital Projects Funds

GOVERNMENTAL FUND

Special assessment debt

. GASB Statement No. 6, “Accounting and Reporting for Special Assessments” (GASBS 6) discusses the accounting treatment for special assessment debt, which depends on whether the government is obligated for the debt.

If the government is obligated to assume the debt related to the special assessment debt due to homeowner default, the proceeds record in the other financing source on the capital projects fund balance sheet. The government records an accounts receivable and a deferred revenue account to maintain the payments made by the homeowner.

Capital Projects Funds

GOVERNMENTAL FUND

Special assessment debt

. If the government is not obligated to the homeowner debt, recognize the expenditures in the capital project funds. The identification of the source of the funds in the capital project fund is something other than the words “bond proceeds” such as “contribution from property owners”

GOVERNMENTAL FUND

A. Governmental Funds - Generally, any fund that accounts for activities not businesslike is a governmental fund. Governmental funds are the general activities of a government.

1. General Fund 2. Special Revenue Funds 3. Capital Projects Funds 4. Debt Service Funds 5. Permanent Funds

GOVERNMENTAL FUND

Debt Service Funds - to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest.

Debt service funds are “a type of governmental fund that is used to account for resources that are restricted, committed, or assigned for debt service”. This is essentially the government making payments on debt principle and interest payments. The resources collected in this fund cover the long-term debts, such as bonds, due to mature in the future. Using modified accrual basis of accounting and the current financial resources measurement focus, the debt service fund has three accounting issues.

Debt service funds.

GOVERNMENTAL FUND

1. Whether and when tax revenues should be recorded directly in a debt service fund.

Tax revenue restricted for debt service funds go one of two places. Either they record directly to the debt service fund or they first go to the general fund and transfer later into the debt service fund. Legal restrictions and budgets sometimes cause the tax revenues to record first in the general fund to make it easier for the reader of a financial statement see the entire monies collected in one place before splitting between two funds.

Debt service funds.

GOVERNMENTAL FUND

2. Expenditure recognition for debt service payments.

Generally, the unmatured long-term debt principle and interest payments do not record in liabilities and expenditures. A government uses the cash basis to record the payments as they happen even if for the previous six months. The exception to this rule occurs when the government is late on payments or if the government chooses to transfer resources into the debt service fund before the payments are due.

Debt service funds.

GOVERNMENTAL FUND

3. Advance refunding of debt issues.

A unique transaction of debt service funds explained in GASBS 7, “Advance Refundings Resulting in Defeasance of Debt” references advance refunding of debt issues. A government places a sufficient amount of proceeds from newly issued debt into a trust for eventual payment of the existing debt as the payments and interest become due.

Debt service funds.

GOVERNMENTAL FUND

Advance refunding of debt issues.

The escrow agent in charge of the trust satisfies the schedule principle and interest payment requirements. Legal defeasance occurs when the debt is legally satisfied based on the trust provisions. In-substance defeasance “occurs when the debt is considered defeased for accounting purposes even though a legal defeasance has not occurred”

Debt service funds.

GOVERNMENTAL FUND

Advance refunding of debt issues.

GASBS 7 states the rules for the removal of the debt from the statement of net assets because of the in-substance defeasement. The denominated currency of the monies in the trust is the same currency used to pay for the debt. Debts denominated in U.S. dollars are limited to direct U.S. government obligations, such as U.S. Treasury issues.

Debt service funds.

GOVERNMENTAL FUND

Advance refunding of debt issues.

The proceeds from new debt, reports in the government-wide statement of net assets as “other financing source – proceeds from refunding bonds”. Payments to the escrows, report as “other financing use – payment to the refunded bond escrow agent”

GOVERNMENTAL FUND

A. Governmental Funds - Generally, any fund that accounts for activities not businesslike is a governmental fund. Governmental funds are the general activities of a government.

1. General Fund 2. Special Revenue Funds 3. Capital Projects Funds 4. Debt Service Funds 5. Permanent Funds

GOVERNMENTAL FUND

Permanent funds. Permanent funds report restricted resources coming from interest earnings applied to programs and activities benefitting the government and its citizens. The principal is not spent. An example of programs and activities is a cemetery perpetual-care fund.

PROPRIETARY FUND

B. Proprietary Funds - The two different types of proprietary funds use the accrual basis of accounting and the economic resources measurement focus. 1. Enterprise Funds 2. Internal Service Funds

PROPRIETARY FUND

Proprietary Funds The GASB Statement No. 20, “Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting” sets the accounting rules for this fund (GASB, n.d.). The two different types of proprietary funds called enterprise funds and internal service funds use the accrual basis of accounting and the economic resources measurement focus. The balance sheets show the current and non-current assets and liabilities. Recognition of the revenues and expenses, unlike governmental funds, uses the accrual basis of accounting as well.

PROPRIETARY FUND

B. Proprietary Funds - The two different types of proprietary funds use the accrual basis of accounting and the economic resources measurement focus. 1. Enterprise Funds 2. Internal Service Funds

PROPRIETARY FUND

Enterprise funds. Enterprise funds account for operating and financing activities intended to finance or recover costs of providing goods or services to the public through user charges. An example is a Water and/or Sewer Fund operated by the government. GASBS 34 requires the establishment of an enterprise fund if one or more of the following criteria happen:

PROPRIETARY FUND

Enterprise funds.  A governmental activity secured by the pledged fees and charges of the activity, finances its own debt. Pledged proprietary fund revenue, such as water and sewer charges, provide for the annual debt service on revenue bonds used to finance the capital activities.

 Laws or regulations require the government activity to recover costs through activity fees and charges.  A government designs the activity to cover costs through fees and charges, including depreciation or debt service.

PROPRIETARY FUND

Enterprise funds. Two features of enterprise funds involve capital contributions and recording defeasances of debt.

1. Contributed capital.

The concept of capital is “how the funds obtain their resources for operations”. The proprietary fund accounts for net assets as 1) invested in capital assets, net of related debt, 2) restricted, 3) unrestricted.

The capital contributions flow through the statement of revenues, expenses, and changes in net assets.

Enterprise funds

2. Refundings of debt

.

PROPRIETARY FUND

Recording of proprietary fund refunded debt is different from advanced refunding of debt mentioned previously in debt service funds. GASB Statement No. 23, “Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities” (GASBS 23), sets the complex rules. A government recognizes an amortized gain or a loss for the exchange of old debt for new debt through an escrow. The gain or loss treated as an adjustment to interest expense each year amortizes for the life of the new or old debt, depending on which one is shorter.

PROPRIETARY FUND

B. Proprietary Funds - The two different types of proprietary funds use the accrual basis of accounting and the economic resources measurement focus. 1. Enterprise Funds 2. Internal Service Funds

PROPRIETARY FUND

Internal service funds. These funds account for financing of goods or services provided predominantly between departments and agencies within the same government unit. Full costs of goods or services charge to the receiving department or agency. All internal service activity costs do not have to be recorded, but typically duplicating and printing services, motor pools, central garages, information processing, purchasing, and central stores and warehousing are allocated using separate funds. When the funds of both departments record expenditures and revenues, reversing journal entries correct the “doubling up” effect of internal service activities.

Internal service funds.

PROPRIETARY FUND

The goal of internal service funds is to break even without a profit or a loss. If there is a profit or a loss, it records in the government-wide statement of net assets instead of the business-type activities because it is a governmental type activity. An exception occurs when the enterprise fund is predominant, then the residual assets or liabilities records in the business-type activities column in the statement of net assets.

FIDUCIARY FUND

C. Fiduciary Funds - Fiduciary funds account for monies that belong to other people and are not included in the government-wide financial statements. The fiduciary funds are included in the basic financial statements within the fund financial statements.

1. Pension Trust Funds 2. Investment Trust Funds 3. Private Purpose Trust Funds 4. Agency Funds

FIDUCIARY FUND

Pension (and other employee benefit) trust funds. Pensions record in the pension trust funds if the government administers the pension plan or it is a component unit of the government. Separate pend trusts should be used for each pension plan. Pension trust funds use the accrual basis of accounting and the economic resources measurement focus.

FIDUCIARY FUND

Pension (and other employee benefit) trust funds. Supplement pension benefits, deferred compensation plans if they meet the Internal Revenue Code Section 457 pension administrative requirements, and a trust fund set up to accumulate resources to pay for postemployment benefits other than pensions are examples of other types of employee benefit and pension plans.

FIDUCIARY FUND

Investment trust funds. GASB Statement No. 31, “Accounting and Financial Reporting for Certain Investments and for External Investment Pools” (GASBS 31) governs establishment of investment trust funds. The government sponsors external investment pools and provides “individual investment accounts to other legally separate entities that are not part of the same financial reporting entity”.

FIDUCIARY FUND

Investment trust funds. The government invests in a portfolio of investments on behalf of the other legally separate entities in comingled funds. The external portion of each pool has its own investment trust fund. A government can provide individual investment accounts to other legally separate entities. The income from and changes in fair value of the investment affect the entity from which they were acquired. For example, a state pools the investment assets of a local government and invests in its behalf.

FIDUCIARY FUND

Private-purpose trust funds. Private-purpose trust funds are a fiduciary fund that reports all trust agreements whereas it benefits individual, private entities, or other governments. A government designs the trust for a non-public activity and uses the accrual basis of accounting and the economic resources measurement focus.

FIDUCIARY FUND

Agency funds. Agency funds account for assets held in a custodial capacity. The assets of the agency funds are always equal to the liabilities. School districts use this fund often to account for student activity funds, which legally belong to the students. Another example is one government collects the taxes of another government and then remitted to the other government on whose behalf one collected the taxes.

FIDUCIARY FUND

Agency funds GASB Statement No. 24, “Accounting and Financial Reporting for Certain Grants and Other Financial Assistance” (GASBS 24) requires use of an agency fund when a government “receives a grant and acts solely as a cash conduit to pass the funds along to others”. GASBS 24 requires an agency fund for collection of special assessment monies and passing it along to the agency that will make the principal and interest payments to the holders of the special assessment debt.

QUESTIONS

1. Why did GAAP develop fund accounting for governments?

2. What is the chief operating fund of a government?

3. What basis of accounting and measurement focus do proprietary funds use?

4. What do fiduciary funds account for?

TENNESSEE STATE CHART OF ACCOUNTS 110-42100-320-GRANT1-FED

Fund Function Object Cost Center Sub Object    TN State COA follows this format:  Fund - 3 digit  Function – 5 digit  Object Code – 3 digit  Cost Center – 5 digit  Sub Object – 3 digit Object Codes are only used on Expenditures Cost Centers and Sub Objects are:  Optional  Completely user defined

TRANSACTION TYPES

Understanding transaction types        The different transaction types:    AP – Accounts Payable (Accrual Only) BB – Beginning Balance CD – Cash Disbursements CR – Cash Receipts DP – Deposits EC – Encumbrances* IV – Invoice Entries (Accrual Only) JE – Journal Entries PA – Payroll   PO – PO Liquidations * BG – Budget BA – Budget Amendment

TRANSACTION TYPES - NEXTGEN

Manual Transactions are entered exactly the same way regardless of Transaction Type. Transaction Types are simply selected from the drop down.

TRANSACTION TYPES

Understanding transaction types and how they effect reporting    The transaction types do not control how the balances are reflected on the ledger They do determine how the transaction is reported The transaction type determines the Journal the transaction will be listed on  CD/AP Journal  General Journal  Cash Disbursement Journal  Cash Receipts Journal  Deposit Journal  Encumbrance Journal  Payroll Journal  PO Journal  Budget Journal

T - Accounts

 The simplest of account structures  Shaped like the letter T  Account title and account number appear above the T  Debits always go on the left side of the T  Credit always go on the right side of the T

1000.00

T - Accounts

Record the Receipt of a Tax Payment (Cash Basis) Cash Current Property Tax Revenue 1000.00

There are a couple of ways these transactions get recorded in your ledger. 1. Some of you are using manual daily cash reports to make manual CR (cash receipt entries to your ledger.

2. Some of you are using the automated features in the software to keep your ledger updated. This can be set up through utility billing, miscellaneous receipts, property tax, and business license.

NEXTGEN TRANSACTION PROCESS

To make manual transaction entries, from the

Financial Management

Menu select

Transactions

. Then select the sub menu option

Transactions

. Next, select

New

in the ribbon bar at the top.

NEXTGEN TRANSACTION PROCESS

Click the ellipsis to Add New Transaction Batch. The Batch ID field will be filled in with a default batch ID. Enter the Date for the batch. Enter any internal notes in the Internal Notes field if desired. Click “Save and Close” If the Post this transaction box is checked, the transaction does not have to be placed in a batch and will be automatically posted at the end of the transaction entry process.

NEXTGEN TRANSACTION PROCESS

  Enter the Transaction Date and Period to post your entries to Select the Transaction Type from the drop down  Enter the Description associated with the transaction  Click the “Next” button

NEXTGEN TRANSACTION PROCESS

  Cash is entered as a debit on the left side Property Tax revenue is entered as a credit on the right side  When all entries are entered and correct click on the “Next” button. This will open up the Transaction Summary Screen.

NEXTGEN TRANSACTION PROCESS

  Verify the summary information is correct on both the Transaction and Entries tabs of the Transaction Summary Screen Click the "Finish" button to complete the transaction

NEXTGEN BATCH POSTING PROCESS

 From the

Financial Management

menu select T

ransactions

. Then select the sub menu option

Transaction Batches

 Click the Find button to display the unprocessed Transaction Batches  Select the batch by double clicking on the batch

NEXTGEN BATCH POSTING PROCESS

 Select Print Batch to print a report of the entries in the batch before posting  Select Close Batch (only closed batches can be posted to the NextGen GL)  Select Post Batch  Click on the “Next” button. (Summary screen will show the batch details)  Click the “Finish” button to post

T - Accounts

Record Tax Payment is Due (Accrual Basis) Property Tax Receivable Current Property Tax Revenue 1000.00

1000.00

There are a couple of ways these transactions get recorded in your ledger. 1. Create manual entries (JE) in your ledger to record these transactions. 2. Use the automated features in the software to keep your ledger updated. A common use of this would be in the Utility Billing system.

NEXTGEN TRANSACTION PROCESS

To make manual transaction entries, from the

Financial Management

Menu select

Transactions

. Then select the sub menu option

Transactions

. Next, select

New

in the ribbon bar at the top.

NEXTGEN TRANSACTION PROCESS

 Place a check in the Post this transaction box  Enter the Transaction Date and Period to post your entries to  Select the Transaction Type from the drop down  Enter the Description associated with the transaction  Click the “Next” button

NEXTGEN TRANSACTION PROCESS

  Property Tax Receivable is entered as a debit on the left side Property Tax revenue is entered as a credit on the right side  When all entries are entered and correct click on the “Next” button. This will open up the Transaction Summary Screen.

NEXTGEN TRANSACTION PROCESS

   Verify the summary information is correct on both the Transaction and Entries tabs of the Transaction Summary Screen Click the "Finish" button to complete the transaction Once you click “Finish” the transaction will be automatically posted

T - Accounts

Record the Payment of an Invoice for Gasoline (Cash Basis) Cash Gas, Oil, Etc. Expense 1000.00

1000.00

There are a couple of ways these transactions get recorded in your ledger. 1. When you create invoices in the AP/Purchasing system and let the system generate the vendor checks, the system creates the CD entries for the ledger.

2. When you write manual checks and then enter them in the AP/Purchasing system, the system creates the CD entries for the ledger.

CASH DISBURSEMENT JOUNAL

T - Accounts

Record an Invoice for Gasoline (Accrual Basis) Accounts Payable Gas, Oil, Etc. Expense 1000.00

1000.00

There are a couple of ways these transactions get recorded in your ledger. 1. When you create invoices in the AP/Purchasing system, the system will generate the accrual entries (AP or IV) for the ledger. This requires some additional set up. Be sure to contact LGC support or your field rep for assistance in setting this up.

2. You can also create manual entries to set up the accrual.

CD / AP JOUNAL

Cash

T - Accounts

Record Transactions for Employee Payroll (Cash Basis) Federal Tax Payable FICA Payable 848.50

75.00

76.50

Salary Expense 1000.00

FICA Matching Expense 76.50

There are a couple of ways these transactions get recorded in your ledger. 1. When you run a payroll or create a manual payroll check in the system, the system can create these entries for you. This requires some additional set up. 2. You can also create manual entries.

PAYROLL JOURNAL

A contingent liability, contract, purchase order, payroll commitment, tax payable, or legal penalty that is chargeable to an account. It ceases to be an encumbrance when paid-out or when the actual amount is determined and recorded as an expense.

THE IN’S & OUT’S OF ENCUMBRANCES

 An encumbrance is a special type of accounting transaction that anticipates a future expenditure  Amounts are encumbered, or set aside, in a particular expenditure account for a specific future purchase  The document used to record an encumbrance is a Purchase Order  Recording encumbrances is usually a part of an encumbrance approval system that includes approval of Requisitions for purchase before a purchase order is issued

THE IN’S & OUT’S OF ENCUMBRANCING

 When you create a purchase order in the system, an EC entry is made to the expenditure account(s).

 If you make a change to the purchase order, additional EC entries are made to the expenditure account(s).

 When the purchase order is liquidated either through payment or through liquidation without payment, a PO entry is made to the expenditure account(s). This removes the encumbered amount (releases it.)  The system can be set up to print purchase orders out of the system without actually making encumbrance entries to the ledger

The Statement of Expenditures & Encumbrances will show the total encumbrances for each account. See the excerpt below.

The Purchase Order Listing by GL Account will show you a detailed analysis of the total shown on the Statement of Expenditures & Encumbrances. In our example, the total is made up from one purchase order.

It is important that you reconcile these amounts periodically to be sure they agree. We recommend a monthly reconciliation.

QUESTIONS

1. What is the major difference between cash basis and accrual basis accounting?

2. In the software, does the transaction type selected have a direct impact on the balances on the ledger? If no, what do they control? 3. What type of transaction would you use to record daily cash revenues? What about a payment that is automatically withdrawn from your bank account?

4. Are there any transaction types that are one-sided (don’t require a balanced debit and credit?)

BASICS OF GOVERNMENTAL FINANCIAL STATEMENTS

The financial statements prepared under GAAP specifications includes:  Management’s discussion and analysis (MD&A)  Government-wide financial statements  Fund financial statements  Required supplementary information (RSI)  Comprehensive annual financial report (CAFR)

MD&A

MD&A is an introduction to the financial statements assisting the readers by summarizing the objective, analysis of the financial performance, and financial position at the end of the fiscal year. The MD&A analysis is based on currently known facts, decisions, or conditions. The currently known facts must be events or decisions that have already occurred, or have been enacted, adopted, agreed upon, or contracted.

MD&A

The minimum requirements for MD&A are as follows: The MD&A provides a description of the basic financial statements and explanations to the reader about the differences in measurements and results of the government-wide and fund financial statements.

GASBS 34 provides specific requirements for inclusion of condensed financial statement information for comparison of this year to the prior.

Analyze the overall government financial position and explain significant differences between this year and the prior.

Analyze the transaction and balance activities in each fund.

MD&A

Explain and analyze why there are variations between the beginning and the ending budget amounts.

Describe significant capital assets and long-term debt activities.

If a government does not record, depreciation (modified approach), then GASB requires descriptions of significant changes, comparison to established levels, and actual versus estimated preservation in the condition of infrastructure assets.

Explain the significant effects on the financial position or results of operations resulting from currently known facts, decisions, or conditions.

MD&A

Explain and analyze why there are variations between the beginning and the ending budget amounts.

Describe significant capital assets and long-term debt activities.

If a government does not record, depreciation (modified approach), then GASB requires descriptions of significant changes, comparison to established levels, and actual versus estimated preservation in the condition of infrastructure assets.

Explain the significant effects on the financial position or results of operations resulting from currently known facts, decisions, or conditions.

The primary financial essentials of the general-purpose financial statements are: Government-wide financial statements Fund financial statements Notes to the financial statements

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

The government-wide financial statements include the financial governmental activities accounted for in the governmental funds and the business-like activities in the enterprise funds. The primary government is comprised of the governmental activities and business-like activities. Fiduciary funds are not included in the government-wide financials.

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Component units Legally separated entities, are included in the government-wide financial statements and the primary government because of their relationship. Similar to commercial businesses, component units are as subsidiaries reported in the commercial consolidated statements.

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

The government-wide financial statement presents using the accrual system and the economic resources measurement. The presentation of the governmental fund financial information convert to these same principles in the government-wide financials, thus the seemingly “two sets of books” appearance.

The enterprise funds use the accrual basis and economic resources measurement focus, so they do not need converting .

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

The two sets of financial statements in the government-wide financials are  Statement of net assets  Statement of activities

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Statement of net assets This fiscal year-end statement of net assets (balance statement) presents the assets and liabilities. The net assets are the difference between the assets and the liabilities. The statement of net assets divides into three required categories

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Statement of net assets

Invested in capital assets, net of related debt

. This is the amount representing the “capital assets net of accumulated depreciation, and reduced by the outstanding bonds, mortgages, notes or other borrowings that are attributable to the acquisition, construction or improvement of those assets”.

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Statement of net assets

Restricted net assets

. This is the amount representing net assets that have external “creditor, grantors, contributors, or laws or regulations of other governments” and internal “constitutional provisions or enabling legislation” constraints placed upon them. Permanent endowments or fund principle amounts divide into expendable and nonexpendable components according to required perpetuity (continuance).

Unrestricted net assets

. These net assets do not meet the requirements of the previous two.

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Sample Statement of Net Assets

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Sample Statement of Net Assets

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Statement of activities. The statement of activities is much like the income statement. It is a summary of the activities taking a person from the beginning net asset number to the ending asset number reported in the statement of net assets. The statement of activities uses the net (expense) revenue format, which reveals the “financial burden of each of the reporting government’s functions on its taxpayers”.

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Statement of activities. The statement of activities presents the governmental activity by functions and business-type activities by segment. Segments are defined as “identifiable activities reported as or within an enterprise fund or another standalone entity for which one or more revenue bonds or other revenue-backed debt instrument are outstanding”.

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Statement of activities.

Revenue presentation

. Revenue presentation divides into:  Program revenues  General revenues

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Statement of activities.

Program revenues

Program revenues derive from the program itself or parties outside of government taxpayers. Program revenues reduce the cost of the program financed by the government’s general revenues.

Exchange or exchange-like transactions, such as water use charges, classify as charges for services. Another example is a capital asset renovation grant associated with a specific program that reports separately from the other grants.

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Statement of activities.

General revenues

Taxes such as real estate taxes, sales tax, income taxes, and franchise taxes record as general revenues. Grants considered general revenue are different from program revenues because the government decides how the grant amounts are used using allocation tables.

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Sample Statement of Activities

GOVERNMENTAL-WIDE FINANCIAL STATEMENTS

Sample Statement of Activities

FUND FINANCIAL STATEMENTS

Another section of the basic financial statements is the fund financial statements. The fund financial statements divide into:  Governmental funds  Proprietary funds  Fiduciary funds

FUND FINANCIAL STATEMENTS

The governmental and proprietary funds also report in the government-wide financial statements but the fiduciary funds do not. GASBS 34 lists funds as either major or combined together into one column since some governments have a large number of funds to report. The general fund is always a major fund and other funds qualify as a major fund if meeting the following criteria: Total assets, liabilities, revenues, or expenditures of the fund are at least 10% for all funds in that category (i.e., either governmental or proprietary).

Total assets, liabilities, revenues, or expenditures of the fund are at least 5% of the total for all governmental and enterprise funds combined

FUND FINANCIAL STATEMENTS

Governmental funds

. The funds listed in the governmental funds are general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds. A balance sheet and a statement of revenues, expenditures, and changes in fund balances are the two required governmental fund financial statements. Both statements have major funds listed, a single column for the nonmajor funds, and a total for all governmental funds.

FUND FINANCIAL STATEMENTS

Governmental funds

.

Balance sheet.

The governmental fund balance sheet presents assets equaling the liabilities and the fund balances. The governmental funds use the modified accrual basis of accounting and current financial resources measurement focus, so the balance sheet does not show long-term assets or long-term liabilities.

The fund balances record as either nonspendable, restricted, committed, assigned, or unassigned.

FUND FINANCIAL STATEMENTS

Governmental funds

.

Balance sheet.

 Nonspendable is the portion of the fund balance “legally or contractually required to be maintained intact”.

 Restricted funds balances are listed as restricted because the funds have an imposed restriction from “creditors, grantors, contributors, or laws or regulations of other governments”.

FUND FINANCIAL STATEMENTS

Governmental funds

.

Balance sheet.

 Committed fund balances form from legislation, resolutions, or ordinances.

 Assigned fund balances are specific purpose amounts (e.g., a finance committee delegates assigned amounts for specific purposes).

 Unassigned fund balances are the remaining amounts of the general fund.

BALANCE SHEET

Balance Sheet displays ending balances for all asset and liability accounts (including fund balance/reserve accounts) Individual revenue and expenditure accounts are not listed. The total net difference between revenues and expenditures is displayed

BALANCE SHEET

Assets = Liabilities + Net Revenue/Expenditure $137,405.33 = $135,016.49 + $2,388.84

The main objective of the balance sheet is to show the assets balanced to the sum of liabilities and net revenues and expenditures

TRIAL BALANCE

The trial balance displays the same basic structure as the balance sheet, but includes beginning balances and YTD debits/credits as well as ending balances

STATEMENT OF REVENUE

Total Budget Month YTD Remain % Statement of Revenue lists the current revenue for the selected month. It also compares the YTD revenue to the budget along with a percentage of the budget that has been realized and how much is left to realize

STATEMENT OF EXPENDITURES

Total Budget YTD Remain % Month Statement of Expenditures and Encumbrance s has the same basic layout as the Statement of Revenue, but includes encumbrance information (if encumbrance accounting is utilized)

SUMMARY FINANCIAL STATEMENT

This is an excellent report for commission/council Summary Financial Statement compares revenues to summarized expenditures and displays the difference from the budget and ledger standpoints

MONITORING FINANCIAL REPORTS

 Your basic financial reports need to be reviewed frequently  At least monthly (before month end close)  This ensures your monthly and yearly financial reports are as accurate as possible  It is much easier to find and correct mistakes as they occur rather than months later  Just because it’s in the computer does not mean that it is correct

RECOGNIZING PROBLEM ACCOUNTS



Things to look for:

 Over expenditures that need budget amendments  Posting errors that need correcting  Payables and/or receivables that need adjusting  “Due to” and/or “Due from” accounts 

Some “Red Flags” are:

 Liability accounts with debit balances  Asset accounts with credit balances  Expenditure accounts greater than 100% of budget  Liability accounts with left over pennies

Odd debit balances Leftover pennies Major Problem

Recognizing Problem Accounts

A PROBLEM BALANCE SHEET

Recognizing Problem Accounts

OVER EXPENDITURE?

Recognizing Problem Accounts

POSTING ERROR?

QUESTIONS

1. Can you name two Government-Wide Financial Statements? 2. What are the basic Fund Financial Statements?

3. Is there a report in the software that compares revenues vs. expenditures on the same report?

QUESTION #4 – THE TRIAL BALANCE

There are two accounts in the asset group below that stand out.

Which two? And why?

These two accounts warrant investigation Assets normally have a debit balance

CONCLUSION

This concludes today’s presentation on Basic Governmental Accounting Any Questions?