ACC 460 Government and Non-Profit Accounting
ACC/460 Week Three
FUND ACCOUNTING PART II
Revenue recognition for a governmental entity is not the same as it is for a corporation. U.S. Generally Accepted Accounting Principles (GAAP) dictates when a corporation will recognize revenue. Siegel and Shim (2000) defined revenue for a corporation as an “increase in the assets of an organization or the decrease in the liabilities during an accounting period . . .” (p. 380). These same authors defined revenue for governmental accounting as “the gross receipts and receivables from taxes, customs, etc., without consideration of appropriations and allotments” (p. 380). Students learned in financial accounting that a corporation recognizes revenue when earned, realized, or realizable. In governmental accounting, one will learn that revenue recognition has two criteria: (a) Revenue must be measurable and available, and (b) timing of the revenue matters to avoid problems with interperiod equity. Major topics for the learner to master for this week include revenue recognition, budgetary resources, interfund transfers, internal service funds, and preparation of financial statements for a governmental entity.
This Week in Relation to the Course
This week’s discussion will focus on business-type activities, fiduciary funds, permanent funds, issues in disclosure and reporting, and financial analysis. This week completes the second part of fund accounting. In week two, the learner was introduced to fund accounting, and how encumbrances are used as a budgetary control mechanism to prevent over spending the budget of an SLG entity. Next week, learners will explore the world of Not-for-Profit (NFP) accounting, health care providers, colleges, and universities.
Discussion of Fund Accounting (Part II)
The definition of a fund first appeared on Statement 1 of the National Council on Governmental Accounting (NCGAS 1), (as cited in Ruppel, 2006):
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. (p. 80)
Why do governments use fund accounting? Governments use fund accounting because unlike a corporation, governments have to show accountability for the collection and use of public resources. Laws and regulations dictate the use of various funds and resources by a government entity. Without tight controls, governments would have to open and maintain separate checking accounts for each type of governmental fund. Instead, governments use fund accounting (Ruppel, 2006).
What are general capital assets? According to GASB Codification § 1400.101, general capital assets are “All capital assets other than those accounted for in proprietary funds or trust funds” (as cited in Freeman, Shoulders, & Allison, 2006, p. 348).
What is the proprietary fund accounting equation?
Current Capital Other Noncurrent Current Long-Term Net
+ + =++
Assets Assets Assets Liabilities Liabilties Assets
What are the fund and internal service fund accounting entries? To answer this question, the general fund will provide $100,000 to establish the internal service fund. Here are the required journal entries:
Transfer to Internal Service Fund$100,000
(To record capital provided to the Internal Service Fund)
Internal Service Fund
Transfer from General Fund$100,000
(To record receipt of capital from the General Fund)
What are interfund transactions? An interfund transaction is simply a transfer of funding between different government funds. Guidance provided by GASB statement 34 requires two categories accompanied by two subcategories. Accountants’ record interfund transaction based on the classifications of the two categories involved. While the example above provides the required journal entries to establish the internal service fund out of the general fund, the idea behind an interfund transfer is to avoid duplicate reporting of revenues and expenditures for the governmental unit (Copley & Engstrom, 2007).
What are Proprietary Funds? Proprietary funds focus on economic resources. These funds use the full accrual basis of accounting. An example of proprietary funds is the Internal Service Fund (Freeman, Shoulders, & Allison, 2006).
What are Fiduciary Funds? Fiduciary funds are excluded from government-wide financial statements because the assets benefit organizations or individuals other than the government. This is similar to off-balance-sheet transactions for a private-sector corporation. GASB Statement #34 requires fiduciary funds to appear in the fund statements (Freeman, Shoulders, & Allison, 2006, 2003).
What are Notes and Required Supplementary Information? Notes are an integral part of the basic governmental financial statement—just like the notes required by GAAP for a publicly held corporation. Required Supplementary Information (RSI) includes information mandated by GASB for presentation purposes, but is not a part of the basic financial statements. Examples of RSI:
- Includes GASB-mandated schedules and data
- Not considered part of the basic financial statements
- Subject to a lower level of audit-scrutiny
Practical Application and Questions for Thought
Learners should be able to apply governmental concepts regarding general capital assets, general long-term liabilities, permanent funds, enterprise funds, and internal service funds for a governmental entity.
- Which financial statements contain long-term liabilities?
- What are permanent funds?
- How do enterprise funds differ from governmental funds?
- What is the purpose of the internal service fund?
How Readings Solidify Concepts
The readings for this week provide learning materials on business-type activities, fiduciary funds, permanent funds, issues in disclosure and reporting, and financial analysis. It is important for learners to know the basis of accounting for each type of fund and the related measurement focus. The final chapter will cover issues of reporting, disclosure, and financial analysis techniques.
At this point in the course, learners might realize the complexities and uniqueness in governmental accounting when compared to financial accounting. Not only from the standpoint of working directly for a government entity, but also one may work indirectly for a government entity as a contractor to the government. Or in another possible scenario, one might work for a CPA firm hired on an engagement contract to audit a governmental entity. In either case, one would have to be familiar with governmental accounting, and understand the unique differences that exist, as well as the authoritative sources to use for guidance. Finally, in the computerized Uniform CPA examination, CPA candidates must have a fundamental understanding of governmental/NFP accounting principles and concepts as part of the testing requirements.
Copley, P. A., & Engstrom, J. H. (2007). Essentials of accounting for governmental and not-for-profit organizations. Boston: McGraw Hill Irwin.
Freeman, R. J., Shoulders, C. D., & Allison, G. S. (2006). Governmental and nonprofit accounting: Theory and practice (8th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
Granof, M. H. (2007). Government and not-for-profit accounting: Concepts and practices. Hoboken, NJ: John Wiley & Sons.
Ruppel, W. (2006). Wiley GAAP for governments 2006: Interpretation and application of generally accepted accounting principles for state and local governments. Hoboken, NJ: John Wiley & Sons.
Siegel, J. G. & Shim, J. K. (2000). Dictionary of accounting terms (3rd Ed.). Hauppauge, NY: Barron’s Educational Series.