Untitled Flashcard Set

Chapter 3

 LO 1 Reporting of Expenses & Revenues at the Government-Wide Level

Format of Statement of Activities

• Displays functions/programs (major services) with their expenses and program revenues.

• Formula:
  Expenses – Program Revenues = Net (Expense) Revenue

• Right-hand column shows net expense or revenue per function.

• Bottom portion adds General Revenues, Transfers, and Unusual/Infrequent items → total Change in Net Position.

Functions vs Programs

• Functions = broad service responsibilities (e.g., Public Safety, Highways & Streets).

• Programs = specific activities achieving objectives (e.g., Highway Beautification, Youth Sports).

• Governments typically report at the function level.

Direct vs Indirect Expenses

• Direct = traced to a function → reported on that function’s line (e.g., police salaries, depreciation on fire trucks).

• Indirect = cannot be tied directly → often shown as a separate line (e.g., interest on long-term debt).

• Depreciation:

  • Direct if linked to function (roads, bridges, fire trucks).

  • Shared assets allocated (e.g., square footage of building use).

  • City hall or truly general assets → reported separately or under “General Government.”

Program vs General Revenues

• Program Revenues (3 categories):

  • Charges for Services → user fees, licenses, permits, fines, intergovernmental charges (e.g., prisoner care).

  • Operating Grants & Contributions → restricted for day-to-day operations of a function.

  • Capital Grants & Contributions → restricted for acquiring/constructing capital assets for a function.

• General Revenues:

  • All taxes (even if earmarked by law, like gas taxes for highways).

  • Unrestricted grants/contributions.

  • Investment earnings.

Unusual & Infrequent Items

• Shown separately below General Revenues.

• Unusual = abnormal for that government’s environment (e.g., volcanic eruption loss).

• Infrequent = unlikely to recur (e.g., sale of a rare historic asset).

• Purpose: Highlight nonrecurring events for transparency.

Contributions & Interfund Transfers

• Contributions to endowment/permanent fund principal → reported separately below general revenues.

• Interfund transfers:

  • Shown as inflows/outflows between governmental & business-type activities columns.

  • Eliminated in the Primary Government Total column.

  • If the transaction is for goods/services (e.g., water sold by utility to GF) → record as program revenue/expense, not transfer. 

LO2 

General Fund & Governmental Funds: Revenues vs. Other Financing Sources; Expenditures vs. Other Financing Uses

Nature of Governmental Funds

• General Fund = main operating fund, covers core services (police, fire, public works, etc.).

• Other Governmental Fund Types:

  • Special Revenue Funds

  • Debt Service Funds

  • Capital Projects Funds

  • Permanent Funds

All use modified accrual accounting (focus on current financial resources).

Balance Sheet Characteristics

• Assets recognized = current financial resources (cash, receivables, prepaids, short-term investments).

• Liabilities recognized = obligations requiring current resources (accounts payable, current debt service due).

• Not included = capital assets (land, buildings, equipment) and long-term liabilities.

• Equation:
  Assets + Deferred Outflows = Liabilities + Deferred Inflows + Fund Balances

Operating Statement (Governmental Funds)

Title: Statement of Revenues, Expenditures, and Changes in Fund Balances

• Revenues

  • Inflows from normal operations (e.g., taxes, intergovernmental grants, charges for services, licenses).

  • Increase financial resources without being debt/transfer related.

• Other Financing Sources

  • Inflows that are not revenues.

  • Examples:

    • Proceeds of debt issuance (bonds).

    • Proceeds from sale of government assets.

    • Transfers in (from other funds).

  • Increase fund balance, but must be shown separately.

• Expenditures

  • Outflows of current financial resources.

  • Reported when obligation is incurred and payable from current resources.

  • Expenditures ≠ Expenses:

    • Buying equipment = Expenditure (full cost now).

    • No depreciation in governmental funds (since it’s not a current resource outflow).

• Other Financing Uses

  • Outflows that are not expenditures.

  • Example: Transfers out (e.g., General Fund → Special Revenue Fund).

  • Reduce fund balance but reported separately.

Illustrative Example: Interfund Transfer

• General Fund transfers $10,000 to a Library Special Revenue Fund:

  • General Fund:

    • Debit Other Financing Uses—Interfund Transfers Out $10,000

    • Credit Cash $10,000

  • Special Revenue Fund:

    • Debit Cash $10,000

    • Credit Other Financing Sources—Interfund Transfers In $10,000

Placement in Operating Statement

• GASB requires separate sections to distinguish revenues/expenditures from financing sources/uses.

• Format (Illustration 3-2):

  1. Revenues

  2. Expenditures

  3. Excess (deficiency) of revenues over expenditures

  4. Other Financing Sources (Uses)

  5. Unusual or Infrequent Items (if any)

  6. Net Change in Fund Balances

LO 3

Why Budgetary Reporting Matters

• Governments handle public funds with legal restrictions.

• Budgets are legally binding on administrators → budgets function as a control mechanism.

• GASB requires a Budget-to-Actual Schedule for:

  • The General Fund, and

  • Major Special Revenue Funds with legally adopted budgets.

• Reported as Required Supplementary Information (RSI), not within the two main governmental fund statements.

Budgetary Schedule (Budget vs. Actual)

• Title: Schedule of Revenues, Expenditures, and Changes in Fund Balances—Budget and Actual.

• Must include:

  • Original Budget

  • Final Amended Budget

  • Actual Results (budgetary basis)

  • Variance columns (Original vs. Final; Final vs. Actual)

• Actual amounts include expenditures + outstanding encumbrances (commitments).

Budgetary Accounts in the Ledger

Governments integrate budgetary accounts into their General Fund and certain special revenue funds to track compliance.

• Operating statement accounts vs. budgetary accounts:

  • Revenues ↔ Estimated Revenues

  • Expenditures ↔ Appropriations (+ Encumbrances)

  • Other Financing Sources ↔ Estimated Other Financing Sources

  • Other Financing Uses ↔ Estimated Other Financing Uses

• Normal balances are opposite (except encumbrances).

  • Revenues (credit) ↔ Estimated Revenues (debit)

  • Expenditures (debit) ↔ Appropriations (credit)

  • Other Financing Sources (credit) ↔ Estimated OFS (debit)

  • Other Financing Uses (debit) ↔ Estimated OFU (credit)

  • Encumbrances (debit, like expenditures)

Closing Budgetary Accounts

• At year-end → budgetary accounts are closed by reversing original entries.

• Encumbrances:

  • If not honored → close them out.

  • If honored → either keep open or close and reopen in the next fiscal year.

GAAP vs. Budgetary Practices

• Governments may budget on a different basis than GAAP (e.g., cash vs. modified accrual).

• GASB requires a reconciliation if the Actual column is not GAAP-based.

• Budgetary comparisons must follow the same practices used to prepare the budget for true comparability.

LO 4

Required classification scheme for appropriations & expenditures

Classify within each fund:

1. Fund — the primary classification (the fund is the fiscal & accounting entity).

2. Function or Program — broad service areas (e.g., General Government, Public Safety, Public Works).

3. Organization Unit — departments/bureaus (e.g., Police Department, Finance Department).

4. Activity — specific lines of work (e.g., Residential solid waste collection).

5. Character — period benefited: Current, Capital Outlay, Debt Service.

6. Object — what was bought: Personnel Services, Supplies, Other Services & Charges, Capital Outlay, Debt Service (with useful subclasses like utilities, repairs, etc.).

How this shows up in reports

• Primary grouping on the face of statements is by fund (columns for major funds + nonmajor aggregate).

• Expenditure rows are commonly presented by function (e.g., General Government, Public Safety), and may be detailed further by character and object in notes/supplementary schedules.

Revenues & estimated revenues

• Recognized when measurable and available (modified accrual).

• Primary classification: by fund, then by source:

  • Taxes (property—60-day availability rule, sales/income recognized when underlying transaction occurs)

  • Special assessments

  • Licenses & permits

  • Intergovernmental revenues (recognized when eligibility & availability are met)

  • Charges for services

  • Fines & forfeitures

  • Miscellaneous (e.g., investment earnings, rents)

Other Financing Sources

• OFS (increase fund balance, not “revenues”): bond proceeds, asset sale proceeds, transfers in.

• OFU (decrease fund balance, not “expenditures”): transfers out, certain debt restructurings.

• Included in budgets as Estimated OFS/OFU; presented in a separate section below revenues/expenditures on the operating statement.

LO 5

Why use budgetary accounting?

• Budgets are legally binding → we must control operations against legal limits.

• Recording the budget in the ledger enables continuous comparison of actuals vs. budget at the same level of detail (via subsidiary ledgers).

The budgetary control toolkit (core accounts)

• Estimated Revenues (control; debit norm)

• Appropriations (legal spending authority; credit norm)

• Encumbrances (commitments/POs before expenditure; debit norm)

• Also used when relevant: Estimated Other Financing Sources/Uses (OFS/OFU)

Paired with operating accounts that have opposite normal balances (except encumbrances):
Revenues ↔ Estimated Revenues, Expenditures ↔ Appropriations (+ Encumbrances), OFS/OFU ↔ Estimated OFS/OFU.

Recording the budget (beginning of year)

• Debit Estimated Revenues (and Estimated OFS, if any)

• Credit Appropriations (and Estimated OFU, if any)

• Plug to Budgetary Fund Balance (surplus or deficit plan)

• Mirror the detail in subsidiary ledgers (by source for revenues; by function/department, etc., for appropriations).

Controlling revenues

• Actual inflows: Dr Cash/Receivable, Cr Revenues (operating).

• Compare Revenues (actual) vs Estimated Revenues (budget) by source in the revenues subsidiary ledger → investigate variances; amend budget if needed.

Controlling expenditures with encumbrances

Workflow:
Appropriation → Encumbrance → Expenditure → Disbursement

• At PO/contract issuance:

  1. Dr Encumbrances / Cr Encumbrances Outstanding (record the commitment; reduces available appropriation).

• When goods/services received & invoiced:

  1. Reverse encumbrance (at estimated amount): Dr Encumbrances Outstanding / Cr Encumbrances

  2. Record expenditure & liability (at actual invoice): Dr Expenditures / Cr Vouchers Payable

Available Appropriation = Appropriation − (Encumbrances + Cumulative Expenditures)

Encumbrances aren’t needed for every line (e.g., steady payroll), but are common for purchase orders and contracts.

Budget revisions (amendments)

• Update Estimated Revenues and/or Appropriations (and OFS/OFU) for new grants, changed tax outlook, or service demands.

• Use formal entries; keep subsidiary ledgers synchronized.

Closing budgetary accounts (year-end)

• Reverse the original (plus amended) budget entries to close Estimated Revenues, Appropriations, Estimated OFS/OFU to Budgetary Fund Balance.

• Encumbrances:

  • If honoring at year-end: either leave open or close & re-establish in next year.

  • Disclose encumbrance effects in notes; if tied to restricted/committed/assigned resources, show in those fund balance categories (word “encumbrance” won’t appear on the balance sheet).

Allotments (optional internal control)

• Split appropriations into periodic allotments to prevent front-loaded spending.

• Can be recorded via Unallotted Appropriations → Allotments entries and tracked in a dedicated ledger.