Chapter Two

FUND ACCOUNTING

Chapter 2 1
 Learning Objectives

After studying Chapter 2, you should understand :

 The nature of funds
 The three major fund types of a state or local government:
-Governmental funds,
-Proprietary funds, and
-Fiduciary funds
 The main components of a CAFR
 The primary F/S issued by governments
 The difference between the “new” and the “old”
accounting models.

Chapter 2 2
 What is a Fund?

 Governments and Not-for- profit organizations establish their

accounting systems on a fund basis.

 A “fund” is a fiscal and an accounting entity with a self-

balancing set of accounts

 In other words, a fund is an entity with its own set of books (ie.,
chart of accounts , general journal, general ledger, trial balances,
and financial statements)
 Fund accounting uses the equation:
Assets = Liabilities + fund balance ( often referred to as net
assets)

 Fund balance = difference between fund’s assets and claims

against these assets
•

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 WHAT IS A FUND?
• Governments and Not-for- profit organizations usually

use several funds to account for their resources and

activities.

• Example: A church may use

• Fund 1 to account for its general operating revenues and
expenses,
• Fund 2 to account for resources set aside to construct a new
building, and
• Fund 3 to account for its religious school.
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 THE KEY ELEMENTS OF GOVERNMENT
FINANCIAL STATEMENTS (GASB)
• elements relating to financial position:
– Assets
– Liabilities
– deferred outflow of resources
– deferred inflow of resources
– Net position
• elements relating to resources flow:
– An inflow of resources
– An outflow of resources
– See pages 38-39 of the textbook for definitions
Chapter 2 5
 WHAT CHARACTERIZES A FUND?
• Fund accounting uses the equation:
Assets + deferred outflows- liabilities -deferred inflows =fund balance

Fund balance is the difference between fund’s assets

and the claims against those assets.
• Fund balance is the amount left to the parties with
rights to the assets after all other claims have been
liquidated.
• Fund balance is often referred to as net assets.
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 Classifications of Fund Balance
• Traditionally, fund balances used to classified into restricted and
unrestricted.
• Unrestricted Fund balances—The money in it can be used for any
purpose that the organization sees fit.
• Restricted Fund—The money must be used for a specific, stated
purpose.
• More recently, Under GASB Statement No. 54, governmental fund
balance information is reported in five different classifications:
1- Nonspendable fund balance
2-Restricted fund balance.
3- Committed fund balance
4- Assigned fund balance.
5-Unassigned fund balance (similar to unrestricted)
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Use of multiple funds to account for an
entity
• G & NP separate resources into funds to ensure that
they adhere to the restrictions placed upon them by
legislators, grantors, and donors, or other outside
parties.
• Example: when a public university receives a
donation that must be used only for scholarships, it
would account for the resources received in a special
scholarship fund.
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Use of multiple funds to account for an
entity
• G and NP use funds to account for certain activities
that are different in nature from their usual
activities. “business type activities”.
• For example: a G would account for its golf course
in a fund separate from general operations to assess
their performance separately.

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Use of multiple funds to account for an
entity

Fund accounting promotes both control and

accountability over restricted resources.

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Use of multiple funds to account for an entity
• To appreciate the relationship between the two or more
funds used to account for a single entity, one must
remember that each fund is a separate accounting
entity.
– Every transaction that affects a fund must be recorded by at
least one debit and one credit.
– Any transaction that affects two or more funds must be
accounted for as if it affected two or more independent
businesses and must be recorded individually in each fund.

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Use of multiple funds to account for an entity
Example: a city maintains two funds. a general fund
accounts for its unrestricted resources and general
operations, and a utility fund accounts for its electric
utility , which sells electricity to city residents and
other government departments.
The electric utility bills the other city departments, all
of which are accounted for in the general operating
fund, for $10,000. The following entries would be
recorded: 12
Use of multiple funds to account for an entity

Utility Fund books

Accounts Receivable (from general fund) $10,000
Revenue from sale of electricity $10,000
To record the sale of electricity to general fund

General Fund books

Electricity expenditure $10,000
Accounts Payable (to utility fund) $10,000
To record the use of electricity
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Basis of Accounting and Measurement Focus
 Basis of accounting determines when
transactions and events are recognised.

 The measurement focus of an entity determines

what is being reported upon. Which assets and
liabilities will be given accounting recognition and
reported on the balance sheet.

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 Basis of Accounting

 Full Accrual: Revenues recognized when

earned; expenses recognized when incurred
 Cash: Revenues recognized when
available; expenses/expenditures
recognized when paid
 Modified Accrual: revenues recognized
when available and measurable;
expenditures when incurred

Chapter 2 15
Basis of Accounting and Measurement Focus
If an entity adopted Full Accrual basis of accounting, then its measurement
focus will be on all economic resources.

 Its balance sheet will report on all assets and liabilities, both current and
noncurrent.

 Increases or decreases in net capital assets and long term obligations are
recognised as revenues or expenses. Example: an organization purchased
a vehicle by giving a note:

Dr. Vehicle $25,000

Cr. Notes Payable $25,000

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Basis of Accounting and Measurement Focus
• G & NP maybe concerned (focus) with the assets needed to
satisfy current year obligations, they may adopt a modified
accrual basis of accounting and a measurement focus on mainly
short term financial assets and liabilities.

• Capital assets and long term liabilities would be excluded

from the balance sheet, and net changes in short term financial
assets and liabilities would be recognized as revenues or
expenses.

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Basis of Accounting and Measurement Focus
• Example: if a government borrows $25,000 (issuing a
long term note) and uses the proceeds to purchase a
vehicle:

Dr. Cash $25,000

Cr. Proceeds from borrowings 25,000

Dr. Expenditure for vehicle 25,000

Cr. Cash 25,000 18

 Basis of Accounting and Measurement Focus
• The government would report neither the vehicle nor the long term note on its fund
balance sheet.

• Instead it would record both the increase and the decrease in a financial asset (cash) on the
funds’ statement of revenues and expenditures.

• From an accounting standpoint neither the vehicle nor the related liability would be
recognized.

– The vehicle would be written off (expensed) at the time acquired.

– The proceeds from the note would be recorded as proceeds from borrowing, an
increase in fund balance (like a revenue).

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 Basis of Accounting and Measurement Focus
• Under U.S. GASB standards, most government funds financial

statements focus only on current financial resources and,

accordingly, are prepared on a modified accrual basis.

However, some types of funds (e.g. Fiduciary funds), and

government-wide statements are prepared based on

Accrual Basis of Accounting.

• IPSAS encourages the use of Accrual Basis of Accounting

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 Fund Financial Statements (GASB)
• Funds use the same double entry system of bookkeeping.
• A balance sheet of a fund can detail the specific assets, liabilities
and the elements of funds balance that underlie the accounting
equation as of any point in time.
• A statement of revenue, expenditures, and other changes in
fund balance can explain the reasons for changes in fund
balance during a specified period of time.
• A statement of cash flows can reconcile the changes in cash
between the end and the beginning of a period.

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 Example: Fund Accounting in A District General
Fund (Modified Accrual Basis)
A newly district accounts for its operations on a modified accrual
basis.

1- The district imposed $9.0 m of general property taxes of which it

actually collected $8.8 m. it expects to collect the balance shortly
after year end.
Cash $8.8
Property Taxes Receivable 0.2
Property taxes revenue $9.0
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 Example: Fund Accounting in A District General
Fund (Modified Accrual Basis)
The district received a state grant of $0.2 m (unconditional).

Cash $0.2
Grant Revenue $0.2

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 Example: Fund Accounting in A District General
Fund (Modified Accrual Basis)
The district issued $12 m in long term bonds to construct a new
building. Because the district is on a modified accrual basis of accounting,
which excludes the recognition of both long term assets and long term
liabilities, the proceeds are recognised in a revenue type account.
– The district must maintain a record of both its long lived assets and
obligations in the ledgers or other off the balance sheet lists.

Capital Projects Fund

Dr. Cash $12.0

Cr. Proceeds from Borrowing- other financing source $12.0

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 Example: Fund Accounting in A District General
Fund (Modified Accrual Basis)
The district constructed the school building for $11m. The
construction of the school building must be accounted for as an
expenditure rather than a capital asset.

•The assets must be recorded in a supplementary ledger list.

Dr. Construction of building (expenditure) $11.0

Cr. Cash $11.0

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 Example: Fund Accounting in A District General
Fund (Modified Accrual Basis)

• The district incurred $6.0 m in general operating expenditures of

which it actually paid $5.5 m.
Dr. General Operating Expenditure $6.0

Cr. Cash $5.5

Cr. Accounts Payable 0.5

• The district purchased computers for $0.1 M at year-end

Dr. Acquisition of computers (expenditure) $0.1

Cr. Cash $0.1 26

 Example: Fund Accounting in A School District

The district paid $1.1 as debt service (to make the first

payment of both principal of $1 M and Interest of $0.1

General Fund
Dr. Payments on debt service $1.1
Cr. Cash $1.1
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Example: Fund Accounting in A District General
Fund (Modified Accrual Basis)
District’s Statement of Fund Revenues, Expenditures, and Other Changes in
Fund Balances (in millions)
General
Property tax revenue $9.0
Revenue from state grant .20
Total Revenues 9.2
Operating Expenditures 6.0
Construction of building 11
Acquisition of computers 0.1
Total Expenditures 17.1
Excess (deficiency) of revenues (7.9)
over (under) expenditure
Other Financing sources (uses)
Proceeds from borrowings 12
Servicing of debts (1.1)
Total Financing $10.9
Net Increase (decrease) in Fund 3 28
Balance
Example: Fund Accounting in A District General
Fund (Modified Accrual Basis)
School District’s Fund Balance Sheet (in millions)
General

Assets
Cash $3.3
Property Taxes 0.2
Receivable
Totals $3.5
Liabilities and fund
balances
Accounts Payable $0.5
Fund Balances 3
Totals $3.5 29
 Example: Fund Accounting in A District General Fund
(Accrual Basis and IPSAS-Accrual)
A newly district accounts for its operations on a modified accrual
basis.

1- The district imposed $9.0 m of general property taxes of which it

actually collected $8.8 m. it expects to collect the balance shortly
after year end. (similar)
Cash $8.8
Property Taxes Receivable 0.2
Property taxes revenue $9.0
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 Example: Fund Accounting in A District General Fund
(Accrual Basis and IPSAS-Accrual)

The district received a state grant of $0.2 m (unconditional).

(similar)

Cash $0.2
Grant Revenue $0.2

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Example: Fund Accounting in A District General Fund
(Accrual Basis and IPSAS-Accrual)

The district issued $12 m in long term

bonds to construct a new building.

Dr. Cash $12.0

Cr. Bonds Payable $12.0

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 Example: Fund Accounting in A District General Fund
(Accrual Basis and IPSAS-Accrual)
The district constructed the school building for $11m.

Dr. Building $11.0

Cr. Cash $11.0

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 Example: Fund Accounting in A District General Fund
(Accrual Basis and IPSAS-Accrual)

• The district incurred $6.0 m in general operating expenditures of

which it actually paid $5.5 m.
Dr. General Operating Expenses $6.0

Cr. Cash $5.5

Cr. Accounts Payable 0.5

• The district purchased computers for $0.1 M at year-end.

Dr. Equipment $0.1

Cr. Cash $0.1 34

 Example: Fund Accounting in A District General Fund
(Accrual Basis and IPSAS-Accrual)
The district paid $1.1 as debt service (to make the first
payment of both principal of $1 M and Interest of $0.1 )

General Fund
Dr. Interest Expense $0.1
Dr. Bonds Payable $1.0
Cr. Cash $1.1
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 Example: Fund Accounting in A District General Fund
(Accrual Basis and IPSAS-Accrual)

• Depreciation for the building is $0.4 No

depreciation for computers as being
purchased at year-end.
Dr. Depreciation Expense $0.4

Cr. Accumulated Depreciation- Building $0.4

Chapter 2 36
Example: Fund Accounting in A District General Fund
(Accrual Basis and IPSAS-Accrual)
District’s Statement of Financial Performance (in millions)

General
Property tax revenue $9.0
Revenue from state grant .20
Total Revenues 9.2
Operating Expenses 6.0
Depreciation Expense 0.4
Interest Expense 1.0
Total Expenses 6.5
Surplus (Deficit) 2.7

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Example: Fund Accounting in A District General Fund (Accrual Basis
and IPSAS-Accrual)
School District’s Fund Balance Sheet (in millions)
General
Assets
Current Assets
Cash $3.3
Property Taxes 0.2
Receivable
Total Current Assets 3.5
Non-Current Assets
Building 10.6
Equipment 0.1
Total Non- Current Assets 10.7
Total Assets $14.2
Liabilities 38

Current Liabilities
Measurement Focus and Basis of Accounting

Measurement Basis of
Focus Accounting
Government-wide Economic Accrual
statements (GASB 34) resources
Governmental fund Current Modified
statements financial accrual
resources
Proprietary fund Economic Accrual
statements resources
Fiduciary fund Economic Accrual
statements resources

Chapter 2 39