Fund Accounting
Chapter two
OBJECTIVES
The nature of funds
Basic types of funds used by governments
The
main
components
of
governments
comprehensive annual financial report
How the fund structures and financial reports of
not-for-profits differ from those of governments.
How the financial reports of not-for-profits differ
2
from those of governments.
WHAT IS A FUND?
G
and NP organizations establish their
accounting systems on a fund basis.
A fund is a fiscal and accounting entity .
Each fund has its own self-balancing set of
accounts from which financial statements
can be prepared. (ie., chart of accounts ,
general
3
journal,
general
ledger,
balances, and financial statements)
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WHAT IS A FUND?
G
& NP 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.
WHAT CHARACTERIZES A FUND?
Fund accounting uses the equation:
Assets = Liabilities + Fund Balance
Fund balance is the difference between funds
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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WHAT CHARACTERIZES A FUND?
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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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 BZU 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 establish 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
gold 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.
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
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individually in each fund.
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:
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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)
To record the use of electricity
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$10,000
Basis of Accounting and
Measurement Focus
Basis
when
of
accounting
transactions
and
determines
events
are
recognised.
The measurement focus of an entity
determines
what
is
being
reported
upon. Which assets and liabilities will be
given
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accounting
recognition
reported on the balance sheet.
and
Basis of Accounting and
Measurement Focus
Modified
Accrual Basis
Full Accrual
Revenues
Basis
recognized
earned,
when
expenses
recognized
when
Revenues
recognized
available
Cash Basis
Revenues
when
and
recognized
when
available;
measurable;
expenses/expendit
expenditures when
ures
incurred.
when paid.
economic
Measurement focus
Measurement focus
resources.
on
is upon cash.
incurred.
Measurement focus
is
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upon
all
short
term
financial assets and
liabilities.
recognized
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:
15
Dr. Vehicle
$25,000
Basis of Accounting and
Measurement Focus
G & NP maybe primarily concerned 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 form the balance sheet, and net
changes in short term financial assets and
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liabilities would be recognized as revenues or
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
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Cr. Cash
25,000
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
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borrowing, an increase in fund balance (like a revenue).
Basis of Accounting and
Measurement Focus
For the purposes of internal management
and control, NP may adopt a modified
accrual basis of accounting, FASB requires
that
they
prepare
their
general-purpose
external reports on a full accrual basis.
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Example: Fund Accounting in A
School District
A newly school district accounts for its operations on a modified
accrual basis. It maintains four funds:
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A general fund: this fund accounts for taxes and other
unrestricted resources.
A capital projects fund: this fund accounts for the proceeds
of bonds that are restricted to the construction of buildings and
similar assets.
A debt service fund: this funds accounts for resources that
are to be set aside each year to ensure that the district has the
ability to make its required payment of interest and principal on
its long term debt.
A special revenue fund: it accounts for state grants that
must be used for specific purposes.
Example: Fund Accounting in A
School District
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.
These taxes are unrestricted general fund
General Fund
Cash
$8.8
Property Taxes Receivable
Property taxes revenue
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0.2
$9.0
Example: Fund Accounting in A
School District
The district received a state grant of $0.2 m to
purchase computers. This grant is restricted to a
specific purpose and therefore must be recorded in a
restricted fund the special revenue fund.
Special Revenue Fund
Cash
$0.2
Grant Revenue
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$0.2
Example: Fund Accounting in A
School District
The district issued $12 m in long term bonds to construct a new
building. The proceeds must be used for the intended purpose
and therefore must be recoded in the capital project fund.
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 $12.0
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Example: Fund Accounting in A
School District
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.
Capital Project Fund
Dr. Construction of building (expenditure)
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Cr. Cash $11.0
$11.0
Example: Fund Accounting in A
School District
The district incurred $6.0 m in general
operating expenditures of which it actually
paid $5.5 m.
General Fund
Dr. General Operating Expenditure$6.0
Cr. Cash
$5.5
Cr. Accounts Payable
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0.5
Example: Fund Accounting in A
School District
Using
its
state
grant,
the
district
purchased computers for $0.1 m.
Special Revenue Fund
Dr. Acquisition of computers (expenditure) $0.1
Cr. Cash
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$0.1
Example: Fund Accounting in A
School District
The district transferred $1.1 m from the general fund to the
debt service fun to make the first payment of both principal
and interest that are due in the following year. entries in
both funds
General Fund
Dr. Transfer-out to debt service fund
Cr. Cash
$1.1
$1.1
Debt Service Fund
Dr. Cash $1.1
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Cr. Transfer-in from general fund
$1.1
Example: Fund Accounting in A
School District
School Districts Fund Balance Sheet (in
millions)
Gener Specia Capita Debt
al
l
l
Servi
Reven Projec
ce
ue
ts
Assets
Cash
Property Taxes
Receivable
Totals
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$2.2
$1.0
$1.1
$0.1
$1.0
$1.1
0.2
$2.4
Liabilities and fund
balances
Accounts Payable
$0.1
$0.5
Example: Fund Accounting in A
School District
School Districts Statement of Fund Revenues,
Expenditures, and Other Changes in Fund Balances (in
millions)
General
Special
Revenu
e
Capital
Projects
Debt
Servic
e
$9.0
$0.2
9.0
0.2
Operating Expenditures
6.0
Construction of building
$11.0
Acquisition of computers
0.1
6.0
0.1
(11.0)
(1.1)
Property tax revenue
Revenue from state grant
Total Revenues
Total Expenditures
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Other increases and
decreases in fund
balances
Transfer in / (Out)
$1.1
How can funds be combined and
consolidated?
GASB mandates governments to prepare two sets of
financial statements:
Government-wide
statements: presented on a full
accrual basis and consolidates all of a governments
operations.
Fund financial statements: government and business
type funds are reported on separate schedules.
Government funds are prepared on a modified accrual
basis while business type fund is prepared on a full
30
accrual basis.
How can funds be combined and
consolidated?
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How can funds be combined and
consolidated?
FASB permits NP to consolidate the assets and liabilities
of funds into a single balance sheet. However, the net
assets of the entity must be reported in three categories
of restrictiveness: unrestricted, temporarily restricted,
permanently restricted.
FASB also requires that on its statement of activities
(similar to business income statement) the entity display
separately
those
revenues
that
are
unrestricted,
temporarily restricted, and permanently restricted.
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Main Types of Government
Funds
Governments engage in three broad categories of
activities:
1. Governmental activities are those financed
predominantly
through
taxes
and
intergovernmental grants.
2. Business
type
activities
those
financed
through user charges.
3. Fiduciary activities where the government
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acts as a trustee or agent for another party.
Main Types of
Government Funds
1.
1. Governmental
Governmental Funds
Funds
2.
2. Proprietary
Proprietary funds
funds
a. General fund
b. Special
revenue
funds
c. Debt Service fund
d. Capital
projects
funds
e. Permanent funds
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a. Enterprise funds
b. Internal service
fund
3.
3. Fiduciary
Fiduciary Funds
Funds
c. Trust funds
d. Agency Funds
1. Governmental Funds
Governmental funds
Governmental Funds are maintained to account
for G operating and financing activities.
There are five primary types of governmental
funds
35
1. Governmental Funds: General
Fund
General fund
This fund accounts for all unrestricted resources.
It embraces major governmental functions, police,
fire,
street
maintenance,
sanitation,
and
administration.
Government finance their general operations mainly
with unrestricted resources, such as property taxes.
General fund is accounted for on a modified accrual
36
basis.
1. Governmental Funds: General
Fund
Why does one single fund cover so many
functions?
A government fund structure rarely mirrors its
organizational structure.
Funds are established mainly to ensure that
governments adhere to resource restrictions.
Funds divide the government into categories of
resource
departments.
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restriction,
not
functional
1. Governmental Funds: Special
Revenue Fund
Special Revenue Fund
These funds account for resources that are legally
restricted to specific purposes. Examples:
Gasoline tax revenue that must be used for highway
maintenance.
Lottery
fund proceeds that must be used for
education.
Private donation that must be used to repair parks.
38
1. Governmental Funds: Debt
Service Fund
Debt Service Fund
These funds are used to account for resources set
aside for the payment of interest and principal on
long term debt.
Debt service fund derive their resources from other
funds transfer from the general fund, or from taxes
or fees dedicated to debt service.
39
1. Governmental Funds: Debt
Service Fund
When G accumulate resources to service their
long term obligations, they commonly invest
them in commercial paper, treasury bills, and
other financial instruments provide reasonable
return.
Therefore, debt service fund transactions relate
to
the
purchase
and
sale
of
marketable
securities and the recognition of investment
40
earnings and related costs.
1. Governmental Funds: Capital
Projects Fund
Capital Projects Fund
These funds are used to account for resources
held for the acquisition or construction of major
capital facility.
Capital projects funds derive their resources from
the proceeds of bonds OR
may receive resources from other funds
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1. Governmental Funds: Capital
Projects Fund
The
assets
are
reported
only
in
the
government wide statements (full accrual)
and in supplementary schedule.
Governments may invest any excess cash
awaiting for capital projects.
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1. Governmental Funds:
Permanent Fund
Permanent
fund
are
used
to
report
resources provided by trust in which the
earnings but not the principal must be
used for public purposes; i.e. to benefit
the government and its citizenry.
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2. Proprietary Funds
Proprietary Fund
Proprietary
funds are used to account for
business type activities.
Government intend to recover costs through
user charges. (breakeven)
Proprietary funds employ a full accrual basis
and their measurement focus is on all economic
44
resources.
2. Proprietary Funds
The financial statements of proprietary finds are
different from those of the governmental funds.
The
statement of net assets (BS) and the
statement of revenues, expenses, and changes
in net assets (IS) look like those of business.
The statement of net assets reports capital
assets and long term debt and the statement of
revenues and expended include depreciation.
45
2. Proprietary Funds: Enterprise
Funds
Enterprise Funds
Governmental activities accounted for in enterprise
funds provide services to the public at large. Such as
Utilities (electricity, gas, and water)
Hospitals
Parking garages
Airports
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Transportation
2. Proprietary Funds: Enterprise
Funds
Government
enterprise does not issue
stock but issues bonds.
The principal and the interest of the bonds
are
payable
exclusively
out
of
the
revenues of the fund itself. NOT out of the
general fund.
47
2. Proprietary Funds: Internal
Service Funds
Internal Service Fund
Departments accounted for in internal service
funds provide goods or services to other
departments within the same government.
They bill the receiving departments at rates
intended to cover the cost of the goods or
48
services.
2. Proprietary Funds: Internal
Service Funds
Internal service funds are typically established with
contributions of resources from the general or
other fund. Thereafter, they are expected to be self
sustaining.
Because ISF sell their goods to other departments.
Most of their transactions are with other funds.
A vehicle repair service that maintains and services
the cars and trucks of the police department, fire
department, sanitation department.
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3. Fiduciary Fund
Fiduciary Funds
Fiduciary funds benefit parties other than the
government itself.
These include employees, other governments,
specific individuals, or corporations.
Their activities do not result in revenues or
expenses to the government.
50
3. Fiduciary Fund
Financial statements of fiduciary funds are
included
in
the
government's
comprehensive annual financial report,
they are not included in the governmentwide financial statements.
51
3. Fiduciary Fund: Trust Funds
Trust fund
Trust fund is a fund held by one person (trustee)
for the benefit of another, pursuant to the
provisions of a formal trust agreement.
The resources of the trust fund are intended to
benefit parties other than the G itself.
Trust funds are accounted for on a full accrual
52
basis.
3. Fiduciary Fund: Trust Funds
3.1.1 Pension trust funds:
Benefit
income,
the
employees
disability
insurance,
remuneration
beneficiaries.
53
and
to
income,
by
providing
health
related
forms
retirees
and
care
of
their
3. Fiduciary Fund: Trust Funds
3.1.2 Investment trust funds: similar to
mutual funds, benefit the parties that have
entrusted their resources to the fund.
3.1.3 Private purpose trust funds: all
other trust funds other than pension and
investment funds.
54
3. Fiduciary Fund: Agency
Funds
Agency funds
Agency funds are used to account for assets
held on behalf of other governments, funds, or
individuals.
Tax collected by one government for the benefit of
the another.
Balance sheet shown only assets and liabilities.
55
A=L
Comprehensive Annual
Financial Report
Annual
report
of
governments,
known
as
Comprehensive Annual Financial Report CAFR
The financial section of the CAFR contains
Government wide Statements: consolidates the entity's
governmental
funds
and
proprietary
funds
into
governmental activities and business type activities and
report both kinds on a full accrual basis.
Fund Statements
Governmental funds modified accrual basis
Proprietary funds full accrual basis
Fiduciary funds full accrual basis
56
Annual reports of not-for
profits
FASB
is
the
rule-making
authority
for
nongovernmental entities.
FASB established standards as to how NP
must aggregate and display their financial
information in general purpose, external
financial reports.
FASB standards are different from GASBs.
57
Annual reports of not-for
profits
GASB
mandates fund based reporting for
governments.
FASB did not oblige NP to use fund accounting.
NP need to distinguish between resources that
are restricted and unrestricted.
Nevertheless,
for
the
purpose
of
internal
accounting and control, most NP do employ
fund accounting.
58
Annual reports of not-for
profits
Not-for-Profit maintains
Current fund similar to governments general fund
Current restricted fund similar to G special revenue
fund
Plant funds related to capital assets and related debt
Unexpended plant fund capital projects fund
Retirement of indebtedness debt service fund
Investment in plant fund accounts for both capital
assets and long term debts.
59
Annual reports of not-for
profits
Financial reports of NP entities are more closely
resemble those of business than of governments.
Financial report consists of three statements:
Statement of position (Balance sheet)
Statement of activities (statement of revenues and
expenses)
Statement of cash flows
Unlike G, No need not prepare data on their major
funds or even funds type.
60
Annual reports of not-for
profits
Although
the FASB imposes some accounting and
reporting requirements that are unique to not-for
profits, not for profits are generally subject to business
standards.
FASB requires NP to classify their net assets into three
categories based on the restriction from donors:
Unrestricted
Temporarily restricted
Permanently restricted
61
Annual reports of not-for
profits
Temporarily restricted resources are those that
must be used from specific purpose or can not
be spent until some time in the future.
Permanently restricted resources are typically
endowments, only the income of which can be
spent.
FASB permits NP considerable flexibility as to
the form of primary statements.
62
End of Topic Two
63
Example: Funds of a University
Current Funds
Current
fund: funds available for day to day
expenditures and it is unrestricted
Current
restricted
funds: represent
resources
limited by outside parties (donors) for specific
purposes.
Current Designated funds: represent resources
set aside by the university own governing board
(board of trustees) designated fund is unrestricted.
64
Example: Funds of a University
Loan funds account for resources dedicated to
student loans.
Endowment funds are used to account for
gifts and donations specifying that the donated
amount be invested and that only the investment
income be expended.
The principal amount of an endowment is usually
permanently restricted but the revenue or income
from its investment could be restricted or unrestricted.
65
Example: Funds of a University
Quazi-Endowment funds it is like the current
designated funds, accounts for resources set aside
for specific activities by the university governing
board, only the income and not the principal is
expendable.
Annuity Funds are used to account for gifts that
provide
return
to
the
donor
or
person
designated by the donor for a specified term or for
the reminder of his life.
66
Example: Funds of a University
Plant funds
Unexpended
plant
fund
accounts
for
resources
reserved for the construction or purchase of plant assets.
Renewals
and
replacements
represent
resources
committed to the renewal and replacement for existing
plant and equipment.
Retirement of indebtedness: the assets of this fund
are held for the retirement of the dent and the payment
of the interest.
67
Example: Funds of a University
Agency funds are maintained to account
for resources that the institution holds as a
custodian for outsiders such as employees ,
student organization.
Accounting for business type activities are
accounted
funds.
68
for
in
separate
proprietary
