Chapter 4

Accounting for General & Special Revenue Funds

Lecture Notes

Revenue Recognition

  • Modified accrual accounting recognizes revenue when it is available and measurable. Available means collectible in the current period or soon enough thereafter to pay liabilities of the current period, and measurable means that the government either knows or is able to reasonably estimate the amount.
  • Revenues that may be recognized prior to collection include property taxes, charges for inspection, intergovernmental grants, and sales and income taxes. Other revenues, such as fines and forfeits, are recognized when the cash is received.
  • Available for property taxes means collectible within 60 days of the end of the period. If property taxes have been received but the revenue cannot be recognized yet, then a liability account, Deferred Revenues, is to be credited.

Expenditure Recognition

  • Expenditures are decreases in net financial resources and are generally recognized when the related liability is incurred. Since governmental funds don’t have capital assets, all purchases of long-term assets, e.g., cars or buildings, are to be charged to expenditures.
  • Expenditures are to be recorded when goods or services are received, regardless of whether or not resources are available in the fund. An exception is debt service expenditures. Interest and principal on long-term debt is to be recorded in the period that the cash is due , i.e., maturity date, rather than as the expense is incurred. If, however, the entity has the resources available for the debt service payment and the payment is within one month of year end, then the entity is permitted to accrue the expenditure and fund liability if it cares to do so.
  • Expenditures for claims and judgments, compensated absences, special termination benefits, and landfill closure and post-closure care costs are to be recognized to the extent that the liabilities are going to be paid with current, available resources. Additional amounts are to be reported as long-term liabilities on the governmental-wide financial statements.
Interfund Transactions
  • Interfund transactions are between individual funds. They may be reciprocal or non-reciprocal.
  • Reciprocal transactions include (1) interfund loans and (2) interfund services provided and used.
  • Interfund loans are where one fund provides resources to another fund with the expectation of repayment.
  • Interfund services provided and used are where services are provided between funds and one fund recognizes revenue for providing the service and the other fund recognized either an expense or an expenditure. Quasi-External Transactions is a earlier term used for interfund transactions that if they were with an external organization would require the recognition of revenue, expenditures, or expenses.
  • Non-reciprocal transactions include interfund transfers and interfund reimbursements.
  • Transfers are where one fund transfers resources to another fund. Such transfers may be normally reoccurring transfers, such as from the General Fund to the Debt Service fund to pay yearly interest and principal, or they may be of a more permanent transfer, such as a transfer to establish a Capital Projects fund. All interfund transfers are to be classified as ‘Transfers In’ or ‘Transfers Out” in the Other Financing Sources/Uses section of the Statement of Revenues, Expenditures and Changes in Fund Balances.
  • Reimbursements are where one fund makes an expenditure for

another fund, and then is reimbursed by the other fund. The

reimbursement reduces expenditures by the first fund, and

increases expenditures of the second fund.

Proceeds of Debt Issues and Capital Leases

  • The governmental funds (General Fund, Special Revenue fund,

Capital Project fund, Debt Service fund, and Permanent fund)

only recognize current liabilities, and do not account for long-

term debt, which instead is recognized in the government-wide

financial statements. Accordingly, when governmental funds

receive the proceeds of the issuance of long-term debt, they would

not credit a liability account, but instead an Other Financing

Source account.

  • Governmental funds also do not account for long-term

assets. Capital assets are reported as fixed assets in the

government-wide financial statements, in which they are also

depreciated. Purchase of capital assets by governmental funds

are recognized as expenditures.

  • Capital leases are treated similarly. Acquisition of a capital lease

by a governmental fund would be reflected in a debit to an

expenditure account and a credit to Other Financing Uses account

for the amount of the capital lease. The government-wide

financial statements would reflect the asset and the liability on its

books of the capital lease.

Illustrative Journal Entries:

  • Recording the Budget

Estimated Revenue Control6,200,000

Appropriations Control5,200,000

Estimated Other Fin. Uses Control 800,000

Budgetary Fund Balance 200,000

(To record the budget for the coming year.)

  • Tax Anticipated Notes Payable

Cash200,000

Tax Anticipation Notes Payable200,000

(To borrow short-term from the bank.)

  • Payment of Liabilities Outstanding

Accounts Payable135,000

Due to Federal Government 30,000

Cash165,000

(Pay liabilities outstanding from year end.)

  • Encumbrances of Prior Year

Encumbrances45,000

Bud. Fund Balance-Resv for Encumb45.000

(To encumber for open encumbrances at previous year end.)

  • Encumbrances for Current Year

Encumbrance Control800,000

Bud Fund Bal. Resv for Encumb.800,000

(To encumber for goods ordered.)

  • Recording Prior Year Property Taxes as Revenue

Deferred Revenue-Property Taxes20,000

Revenue Control20,000

(Record property taxes from prior year received more than 60 days after year end as revenue in the current year.)

  • Recording Property Tax Levy

Taxes Receivable-Current3,265,306

Estimated Uncollectible Current Taxes 65,306

Revenues Control3,200,000

(Record property taxes for the current period.)

  • Collection of Delinquent Taxes

Interest and Penalties Receivable3,000

Revenue Control3,000

(Record additional interest and penalties on delinquent taxes.)

Cash353,000

Taxes Receivable-Delinquent 330,000

Interest and Penalties Receivable 23,000

(To record payment of delinquent taxes outstanding at year end and associated interest and penalties.)

  • Collection of Current Taxes

Cash2,700,000

Taxes Receivable-Current2,700,000

(To record collection of current property taxes.)

  • Revenue Recognized on Cash Basis

Cash2,800,000

Revenue Control2,800,000

(Recognize revenue from licenses and permits, fines, and forfeits.)

  • Repayment of Tax Anticipation Notes

Tax Anticipation Notes Payable200,000

Expenditures Control 5,000

Cash205,000

(To record payment of interest and note payable to the bank.)

  • Recognition of Expenditures for Encumbered Items

Bud. Fund Bal.-Resv for Encumb.750,000

Encumbrance Control (prior year) 45,000

Encumbrance705,000

(Record reversal when goods are received.

Expenditures Control (prior year) 45,000

Expenditure Control710,000

Accounts Payable755,000

(Record actual amount payable on the goods.)

  • Payrolls and Payroll Taxes

Expenditures Controls3,345,000

Due to Federal Government 686,000

Due to State Government 78,000

Accounts Payable2,581,000

(Record payroll checks of employees.)

Accounts Payable2,581,000

Cash2,581,000

(Deposit the money in the bank to cover payroll checks.)

Expenditures Controls423,000

Due to Federal Government256,000

Due to State Government167,000

(Record employer’s share of FICA & Medicare taxes.)

  • Payment of Vouchers and Other Items

Accounts Payable750,000

Due to Federal Government942,000

Due to State Government245,000

Cash1,937,000

(Record payment on encumbered goods received and for state and federal payroll taxes.)

  • Correction of Errors

Revenues Controls1,200

Taxes Receivable-Current1,200

(To adjust for an error on a property tax bill sent out.)

  • Amendment of the Budget

Estimated Revenues Control50,000

Budgetary Fund Balance50,000

Appropriations100,000

(To increase estimated revenues and appropriations.)

  • Interfund Transactions

Quasi-external transactions:

Expenditures Control80,000

Due to Water Utility Fund80,000

(To pay user costs to Water Utility Fund of city.)

Due from Water Utility Fund60,000

Revenues Control60,000

(To record a contribution from Water Utility Fund for fire, police and other services.)

Expenditures Control377,000

Due to Supplies Fund377,000

(To record supplies received from the Supplies Fund.)

Due to Supplies Fund322,000

Cash322,000

(To record payment to Supplies Fund.)

Recurring transfers:

Other Financing Uses—Transfers Out Control204,000

Due to Debt Service Fund204,000

(To make budgeted contribution to Debt Service Fund.)

Due to Debt Service Fund204,000

Cash204,000

(To make payment to Debt Service Fund.)

Nonrecurring transfers:

Other Financing Uses—Transfers Out Control596,000

Cash596,000

(Permanent transfer to establish an Internal Service Fund.)

  • Write–Off of Uncollectible Delinquent Taxes

Estimated Uncollectible Delinquent Taxes30,000

Estimated Uncollectible Interest & Penalties 3,000

Taxes Receivable-Deliquent 30,000

Interest & Penalties Receivable on Taxes 3,000

(To record write-off of uncollectible delinquent taxes, interest,

and penalties.)

  • Reclassification of Current Taxes

Taxes Receivable-Delinquent564,106

Estimated Uncollectible Current Taxes 65,306

Taxes Receivable-Current564,106

Estimated Uncollectible Delinquent Taxes 65,306

(To transfer taxes not paid in current year to delinquent status

and the reclassify the related allowance account from current to

delinquent.)

  • Accrual of Interest and Penalities

Interest and Penalties Receivable on Taxes56,410

Estimated Uncollectible Interest & Penalties16,920

Revenues Control39,490

(To record interest and penalties on delinquent taxes and

establish a related allowance account.)

  • Deferral of Property Tax Revenue

Revenue Control40,000

Deferred Revenues-Property Taxes40,000

(To reclassify tax revenue to deferred revenue if expect to receive

it more than 60 days after year-end.)

  • Special Item

Cash300,000

Special Item-Proceeds from sale of land300,000

(To record a special item sale of land.)

Classified as unusual or infrequent, but not both.

  • Preclosing Trial Balance

Prepare a preclosing trial balance after all journal entries have been made during the year.

  • Closing Entries

Appropriations Control5,300,000

Estimated Other Fin. Uses Control 800,000

Bud. Fund Balance 150,000

Estimated Revenues Control6,250,000

(To close out budgetary entry.)

Revenues6,081,290

Special Items-Proceeds 300,000

Expenditures Control4,985,300

Other Fin. Uses-Transfer Out Control 800,000

Encumbrances Control 50,000

Fund Bal.-Unreserved 545,000

To close out all revenues and expenditures.)

  • After the closing entries are made the difference between assets and liabilities for government entity is included in Fund Balance and Budgetary Fund Balance Reserve for Encumbrances. This amount is disclosed in five different categories: (1) nonspendable, (2) restricted, (3) committee, (4) assigned, and (5) unassigned (see Ill. 4-4 for an example).
  • Year-End Financial Statements

Two financial statements are prepared for the General Funds, i.e., Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance.

ILLUSTRATIVE CASE---SPECIAL REVENUE FUND

  • Motor Fuel Tax Revenues

Cash575,000

Due from State Government 75,000

Revenues Control650,000

(To record motor fuel award from the state.)

  • Expenditures for Road Repair

Expenditures Control625,000

Cash560,000

Accounts Payable 65,000

(To record expenditures for road repair.)

  • Reimbursement Grant Accounting

Expenditures Control350,000

Cash280,000

Accounts Payable 70,000

(To record expenditures for grant.)

Due from State Government350,000

Revenues Control350,000

(To record related receivables from state as work is done.)

Cash350,000

Due from State Government350,000

(To record receive of receivables from state.)

  • Closing Entry

Revenues Control1,000,000

Expenditures Control975,000

Fund Balance 25,000

(To close out revenue and expenditures.)

  • Year-End Financial Statements

Special Revenue Funds have the same two financial statements as General Funds, i.e., a Balance Sheet and a Statement of Revenues,

Expenditures, and Changes in Fund Balance. The main difference is that the Special Revenue Fund is much more specialized in its activities, and so its range of activities recognized will be much narrower.

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