Chapter 5

Chapter 5: Accounting for Governmental Operating Activities

Overview

  • Focus on illustrative transactions and financial statements for governmental operations.

  • Importance of proper accounting practices in managing governmental resources.

Learning Objectives

  • Analyze operating transactions and prepare journal entries at both government-wide and fund levels.

  • Prepare adjusting entries, pre-closing trial balances, and closing journal entries.

  • Account for interfund and intra- and inter-activity transactions, as well as transactions of permanent funds.

  • Distinguish between exchange and nonexchange transactions, defining classifications for nonexchange transactions.

Governmental Funds

  • Measurement Focus:

    • Governmental funds emphasize the flow of current financial resources, which include:

      • Cash

      • Receivables

      • Marketable securities

      • Prepaid items

      • Supplies inventories

    • Capital assets not recorded in funds but in governmental activities at the government-wide level.

  • Basis of Accounting:

    • Modified accrual basis is utilized.

Dual-Track Approach

  • Transactions affect governmental funds and activities differently due to:

    • Distinct measurement focuses

    • Different accounting bases

  • Each transaction must be recorded separately in general journals for both governmental funds and governmental activities.

Budgetary Recording

  • Clark City Budget:

    • Authorizes expenditures: $11,360,000

    • Forecasted revenues: $10,972,000

    • Journal entry to record the budget:

      • Estimated Revenues: Dr. 10,972,000

      • Budgetary Fund Balance: Dr. 388,000

      • Appropriations: Cr. 11,360,000

Financial Management Concerns

  • A budgetary deficit can occur without indicating poor financial management.

    • Governments often maintain a target ratio of Unreserved Fund Balance to General Fund Revenues of 10-20%.

    • Intentionally budgeting a deficit may be used to reduce fund balances exceeding target levels.

Encumbrance Accounting

  • Preauditing ensures sufficient unexpended appropriations before ordering materials or supplies.

  • Example of purchase orders:

    • Total: $420,000

    • Journal entry:

      • Dr. Encumbrances—2011: 420,000

      • Cr. Reserve for Encumbrances—2011: 420,000

Expenditures Recording

  • Clark City recorded expenditures of $432,000.

  • Journal entry:

    • Dr. Reserve for Encumbrances—2011: 420,000

    • Dr. Expenditures—2011: 432,000

    • Cr. Encumbrances—2011: 420,000

    • Cr. Vouchers Payable: 432,000

Payroll Accounting

  • Similar to for-profit accounting but uses Expenditures instead of Expenses.

  • Payroll costs recorded as:

    • Dr. Expenditures

    • Cr. Liabilities for withholdings

    • Cash paid to employees.

  • Example for Clark City's payroll for a two-week period.

  • FICA contributions recorded in both General Fund and Governmental Activities journal entries.

Property Tax Accounting

  • Determining Tax Levy:

    • Formula: Levy = Revenues required / Estimated collectible proportion.

  • Tax Rate: Set by legislative action, calculated per assessed valuation.

  • Assessed Valuation: Calculated based on estimated true value of taxable property.

  • Journal entries for tax revenue recognition, collections, and adjustment of uncollectible taxes.

Tax Anticipation Notes (TANs)

  • Used for managing short-term cash needs based on future property tax receipts.

  • Example of transactions related to a 60-day TAN of $300,000 at 6% interest.

  • Entries for both General Fund and Governmental Activities.

Interim Financial Reporting

  • Not required for external reporting but used internally for management.

Budget Revisions

  • Reasons for revising a legally adopted budget include errors in revenue/expenditure estimates or changes in conditions.

  • Procedures for recording budget revisions involve debiting or crediting estimated revenues and appropriations accordingly.

Encumbrances of Prior Year

  • Different treatments based on state laws; appropriations may lapse or continue into the next year.

  • Example of prior-year encumbrances being recorded again in the current fiscal year.

Inventory Accounting

  • Two methods: purchases method and consumption method.

  • Purchases method is consistent with modified accrual, while consumption method aligns with accrual basis.

Special Revenue Funds

  • Account for contributions that must be expended for specific purposes.

  • Example: Federal grant for youth counseling services.

Internal Exchange Transactions

  • Transactions between two funds similar to external transactions, leading to revenue and expenditure recognition.

Interfund Activity

  • Types of transactions include interfund loans (receivable/payable) and interfund transfers (nonreciprocal).

Permanent Funds

  • Account for contributions where the principal cannot be spent, but earnings can be used for public benefit.

Exchange vs. Nonexchange Transactions

  • Exchange Transactions: Direct exchange of value; recognize revenue and expenses accordingly.

  • Nonexchange Transactions: Government receives/gives value without equal exchange; recognize based on eligibility and timing.

Classes of Nonexchange Transactions

  • Different types categorized based on characteristics (e.g., derived tax revenues, imposed revenues, government-mandated, voluntary).

Revenue Recognition Criteria for Nonexchange Transactions

  • Rules governing when various nonexchange revenues are recognized based on underlying events or eligibility criteria.

Conclusion

  • Mastery of these accounting principles is essential for understanding governmental fund accounting, applicable to General Fund and special revenue funds.