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1 THE BASICS OF FUND ACCOUNTING Presented by: Darla Erickson Local Government Services Bureau State Accounting Division, Department of Administration 1 THE BASICS OF FUND ACCOUNTING Topics covered in this presentation: Overview of Governmental Accounting Basics Principles Fundamentals of Debits and Credits Fund Accounting/Basis of Accounting Using the BARS Chart of Accounts Funds Accounts Objects 2 1

2 THE BASICS OF FUND ACCOUNTING SOME OF THE ACRONYMS COMMON TO GOVERNMENTAL ACCOUNTING CAFR GASB GAAFR GAAP Comprehensive Annual Financial Report Governmental Accounting Standards Board Governmental Accounting, Auditing, and Financial Reporting Generally Accepted Accounting Principles 3 THE BASICS OF FUND ACCOUNTING PRINCIPLES OF GOVERNMENTAL ACCOUNTING Accounting and Reporting Capabilities Accounting systems should be maintained in accordance with generally accepted accounting principles (GAAP) and uniform in MT by using the BARS Chart of Accounts as prescribed by the Local Government Services Bureau Chart of Accounts: anuals/01_barschartofaccount Updates: Fund Accounting Systems Accounting systems should be organized and operated on a fund basis Fund Types Fund financial statements should report governmental, proprietary and fiduciary fund types if applicable Number of Funds Only maintain those funds required by law and sound financial management 4 2

3 THE BASICS OF FUND ACCOUNTING PRINCIPLES OF GOVERNMENTAL ACCOUNTING Special Revenue Funds (*recent change) g) Special Revenue Funds must meet the new definition of a special revenue fund according to GASB54: Used to account for proceeds of specific revenue sources that are committed or restricted to expenditures for specific purposes other than debt service or capital projects. Balances will be» Non spendable» Restricted» Committed» Assigned (but not only assigned fund balance)» Negative Unassigned Fund Balance *Existing funds that do not meet this fund balance type will report their balance in the General Fund at year end for reporting purposes. *Or Commit Revenues or Fund Balance to a major purpose by year end by taking the highest action of local government by year end. 5 THE BASICS OF FUND ACCOUNTING PRINCIPLES OF GOVERNMENTAL ACCOUNTING Reporting Capital Assets A clear distinction should be made between general capital assets and those of the proprietary and fiduciary funds. Capital Assets are different than an asset inventory listing Threshold Policy should be determined by cost and useful life Valuation of Capital Assets Assets should be reported at historic cost Donated assets at the estimated fair market value at the time of acquisition Depreciation of Capital Assets Capital assets should be depreciated over their estimated useful lives Use your entity s historical information to determine the useful life the life will vary according to use of the asset 6 3

4 THE BASICS OF FUND ACCOUNTING PRINCIPLES OF GOVERNMENTAL ACCOUNTING Reporting Long term Liabilities A clear distinction should be made between business type long term liabilities and general long term liabilities Measurement Focus/Basis of Accounting in the BFS The basic financial statements should display the government wide financial statements (full accrual) and the fund financial statements (modified accrual) 7 THE BASICS OF FUND ACCOUNTING PRINCIPLES OF GOVERNMENTAL ACCOUNTING Budgeting, Budgetary Control/Reporting Budgets should be adopted, controlled through monitoring and comparison statements included in reporting. The budgetary statements should present original budget, final budget, actual amounts and a comparison with actual to final Date change: Approved budget due to County by the later of 30 days after receipt of the certified taxable valuation or first Thursday in Sept Due to LGSB 60 days after receipt of the certified taxable valuation or Oct 1 Local Budget Act: MCA Transfer, Revenue, Expenditure/Expense Classifications Revenues should be maintained by fund, major source and other financing sources Expenditures of governmental funds by fund, function/activity and other financing uses (transfers, etc) Expenses of proprietary funds by fund/activity/object 8 4

5 THE BASICS OF FUND ACCOUNTING PRINCIPLES OF GOVERNMENTAL ACCOUNTING Common Terminology and Classification A common terminology and classification should be used consistently throughout the accounting software, budget, and financial report of each fund Annual Financial Reports Preparation of financial reports for the benefit of management should be prepared AnAnnualFinancial Annual Report should beprepared and made available to the public and the Local Government Services Bureau Due to LGSB by Dec 31 9 THE BASICS OF FUND ACCOUNTING Financial Statements: Balance Sheet (Governmental Funds) or Statement of Net Assets (Enterprise Funds) Consists of: Assets debit balance Liabilities credit balance Fund Balance (Governmental Funds) or Net Assets(Enterprise Funds) Fund Balance/Net Assets = Assets Liabilities Or Assets Liabilities = Fund Bal/Net Assets 10 5

6 THE BASICS OF FUND ACCOUNTING Assets Have a Debit Balance If an asset has a credit balance the account has a negative balance This is not normal 11 THE BASICS OF FUND ACCOUNTING To increase an asset account you debit the account To decrease an asset account you credit the account 12 6

7 THE BASICS OF FUND ACCOUNTING Liabilities Have a Credit Balance If a liability has a debit balance the account has a negative balance This is not normal 13 THE BASICS OF FUND ACCOUNTING To increase a liability account you credit the account To decrease a liability account you debit the account 14 7

8 THE BASICS OF FUND ACCOUNTING Fund Balance/Net Assets has a credit balance If it has a debit balance that is negative and isn t normal. Entries should rarely if ever debit or credit fund bal or net assets When you post a debit to an asset or liability account fund balance/net assets will automatically increase When you post a credit to an asset or liability account fund balance/net assets will automatically decrease 15 THE BASICS OF FUND ACCOUNTING Financial Statements: Statement of Revenues, Expenditures and Changes in Fund Balances (Governmental Funds) or Statement of Revenue, Expenses and Changes in Net Assets (Enterprise Funds) Consists of: Revenues credit balance Expenditures/Expenses debit balance Other Financing Sources (Uses) or Non Operating Revenue/Expense 16 8

9 THE BASICS OF FUND ACCOUNTING Revenues Have a Credit Balance If a revenue has a debit balance the account has a negative balance This is not normal 17 THE BASICS OF FUND ACCOUNTING To increase a revenue account you credit the account To decrease a revenue account you debit the account 18 9

10 THE BASICS OF FUND ACCOUNTING Expenditures/Expenses Have a Debit Balance If an expenditure/expense account has a credit balance the account has a negative balance This is not normal 19 THE BASICS OF FUND ACCOUNTING To increase an expense/expenditure account you debit the account To decrease an expense/expenditure account you credit the account 20 10

11 FUNDAMENTALS OF DEBITS & CREDITS BASIC ACCOUNTING FORMULA DR = CR Example: You receive $10 for a dog license $10 = $10 Cash (Asset) = Revenue (Pet Lic) = FUNDAMENTALS OF DEBITS & CREDITS EXPENSES/ BASIC ACCOUNTING FORMULA EXPENDITURES + REVENUES + ASSETS = LIABILITIES + EQUITY DR = CR 22 11

12 FUNDAMENTALS OF DEBITS & CREDITS ACCOUNTING FORMULA EXPENSES/ ASSETS + EXPENDITURES = REVENUES + LIABILITIES + EQUITY ASSETS = LIABILITIES + EQUITY DR = CR 23 FUNDAMENTALS OF DEBITS & CREDITS SELF-BALANCING SET OF ACCOUNTS ACCOUNTING FORMULA ASSETS + EXPENSE = REVENUES + LIABILITIES + EQUITY DR = CR 24 12

13 FUNDAMENTALS OF DEBITS & CREDITS RECAP Debits must equal credits An entry made within a fund should have equal debits and credits All debits and credits should be made to asset, liability, revenue, expenditure/expense, other financing sources/uses or restatement accounts Rarely, if ever, should fund balance/net assets accounts be debited or credited 25 Test our knowledge 1. Assets have a normal balance: 1C 1. Credit 2. Debit 2. Liabilities have a normal balance: 1. Debit 2. Credit 3. Debits should equal: 1. Revenues 2. Credits 26 13

14 TYPES OF FUNDS GOVERNMENTAL FUNDS 1000 ~ General 2000 ~ Special Revenue 3000 ~ Debt Service 4000 ~ Capital Projects 8000 ~ Permanent 27 TYPES OF FUNDS PROPRIETARY FUNDS 5000 ~ Enterprise 6000 ~ Internal Service 28 14

15 TYPES OF FUNDS FIDUCIARY FUNDS 7000 ~ Pension Trust ~ Investment Trust ~ Private Purpose Trusts ~ Agency 29 TYPES OF FUNDS 9000 ACCOUNT GROUPS - For Governmental Funds! General Capital Assets ~ 9000 General Long-Term Debt ~ 9500 No longer required to be reported Can keep updated for your records 30 15

16 THE BASICS OF FUND ACCOUNTING BASIS OF ACCOUNTING Deals with the timing and recognition of transactions and events When recognized: Full Accrual Basis Modified Accrual Basis Cash Basis 31 THE BASICS BACK OF TO FUND THE BASICS ACCOUNTING Full Accrual Basis of Accounting Recognizes increases and decreases in economic resources (Net Assets) as soon as the underlying event or transaction occurs Revenues are recognized as soon as they are earned Expenses are recognized as soon as the liability is incurred Regardless of the time of related cash inflow and outflows 32 16

17 THE BASICS BACK OF TO FUND THE BASICS ACCOUNTING Modified Accrual Basis of Accounting Recognizes g increases and decreases in financial spendable resources only to the extent that they reflect near-term inflows and outflows of cash Amounts are recognized as revenues when earned, only so long as they are collectible within the period or soon enough thereafter to be used to pay liabilities of the current period. (60 days) In other words, when they are available to pay expenditures of the current period. 33 BACK TO THE BASICS The Cash Basis of Accounting Is the simplest to achieve and provides the least disclosure Only revenues received and expenses or expenditures disbursed are recognized The Balance Sheet of the Governmental Unit displays only a balance in cash and the fund balance accounts. The Operating Statement presents results of only the cash transactions for the reporting fund

18 Test our knowledge Governmental Funds are reported using which Basis of Accounting: 1. Full Accrual Basis 2. Modified Basis 3. Cash Basis Enterprise Funds are reported using which Basis of Accounting: 1. Full Accrual Basis 2. Modified Basis 3. Cash Basis 35 BASIS & MEASUREMENT FOCUS PRACTICAL DIFFERENCES: Receipt of long-term debt proceeds Repayment of the principal of long-term debt Capital acquisition (outlay) Depreciation of capital assets Deferrals and amortizations 36 18

19 BACK TO THE BASICS ILLUSTRATIVE ENTRIES RECEIPT OF LONG-TERM DEBT PROCEEDS: PROPRIETARY FUNDS: DR CR Cash $20,000 Bonds Payable $20,000 GOVERNMENTAL FUNDS: Cash $20,000 Other Financing Sources $20,000 (Proceeds of General Long-Term Debt) 37 BACK TO THE BASICS ILLUSTRATIVE ENTRIES REPAYMENT OF THE PRINCIPAL OF LONG-TERM DEBT: PROPRIETARY FUNDS: DR CR Bonds Payable $5,000 Interest Expense 300 Cash $5,300 GOVERNMENTAL FUNDS: Expenditure- Bond Principal $5,000 Expenditure-bond Interest 300 Cash $5,

20 BACK TO THE BASICS ILLUSTRATIVE ENTRIES CAPITAL ACQUISITION: DR CR PROPRIETARY FUNDS: Equipment $20,000 Cash $20,000 *If expense/capital outlay was used reverse as part of closing entries GOVERNMENTAL FUNDS: Expenditure-capital Outlay $20,000 Cash $20, BACK TO THE BASICS ILLUSTRATIVE ENTRIES PROPRIETARY FUNDS: DR CR Depreciation Expense $2,000 Accumulated Depreciation $2,000 GOVERNMENTAL FUNDS: Depreciation may be Recorded in the General Capital Asset Account Group *****Not in the Governmental Fund Itself! 40 20

21 41 BARS CHART OF ACCOUNTS Chart of Accounts is the framework of an accounting system Is a uniform system for Local Governments Provides the information needed for administration & reporting purposes Allows for comparisons Funds have of 4 digits Accounts have 6 digits Objects have 3 digits 42 21

22 BARS FUND CLASSIFICATIONS General Fund Special Revenue Funds Debt Service Funds Capital Projects Funds Enterprise Funds Internal Service Funds Fiduciary Funds (Trust & Agency) Permanent Funds General Capital Asset/Long-Term Debt 43 BARS FUND CLASSIFICATION CONT. Example of further breakdown of funds: Enterprise Funds 5010 Golf 5110 Hospital/Nursing Home 5210 Water Sewer 5410 Solid Waste 5415 Landfill 5510 Ambulance 44 22

23 BARS BALANCE SHEET ACCOUNTS Assets and Other Debits Liabilities, Equity and Other Credits Within these two groups, assets and liabilities are further defined dinto other logical lcategories depending upon the nature of the particular asset or liability. 45 BALANCE SHEET ACCOUNTS Principal groups of asset & other debit numbers: 10 / Cash/Investments Taxes/Assessments Receivable Other Receivables Due from and advance from Prepaid Expenses Inventories Restricted Assets Other Debits 46 23

24 BALANCE SHEET ACCOUNTS Example of further breakdown of an asset account: Taxes Receivable Mobile Home Taxes Receivable Real Taxes Receivable Personal Taxes Receivable Protested Taxes Receivable Special Assessments Receivable 47 BALANCE SHEET ACCOUNTS Liabilities, equity & other credits numbers: Short term t Payables Other Short term Payables/Due to Deferred Credits Long term Liabilities Other credits Fund Balance/Net Assets Investment in Capital Assets (Fund 9500) 48 24

25 BARS REVENUE ACCOUNTS Taxes Licenses and Permits Intergovernmental Revenues Charges for Services Fines and Forfeitures Miscellaneous Revenues Investment Earnings Other Financing Sources Internal Services 49 BARS EXPENDITURE ACCOUNTS General Government Public Safety Public Works Public Health Social/Economic Services Culture and Recreation Housing and Community Dev Conversation of Natural Resources Debt Service 50 25

26 BARS EXPENDITURE ACCOUNTS CONT Internal Services Miscellaneous Other Financing Uses 51 BARS OBJECT EXPENDITURE CLASSIFICATIONS Personal Services Supplies Purchased Services Building Materials Fixed Charges (Insurance, rent) 600 -Debt Service Grants, Contributions, Indemnities Other Objects, Transfers, Depreciation Capital Outlay 52 26

27 BARS OBJECT EXPENDITURE CLASSIFICATIONS Example of further breakdown of object codes: 200 Supplies 210 Offices Supplies 220 Operating Supplies 230 Repair& Maintenance Supplies 231 Fuel Gas, Oil, Diesel 232 Motor vehicle parts 233 Machinery & equipment parts 240 Other Repair & Maintenance Supplies Supplies for Resale BACK TO THE BASICS BUDGETARY, ACCOUNTING AND REPORTING SYSTEM (BARS) FOR MONTANA, CITIES, TOWNS AND COUNTIES BARS ACCOUNT STRUCTURE Asset & Liability Accounts - (Illustration 1) 1st Digit 1 = Assets & Other Debits 1st Digit 2 = Liabilities& Other Credits Fund Number XXXX Account Number XXXXXX 54 27

28 BACK TO THE BASICS BARS ACCOUNT STRUCTURE Asset & Liability Accounts - (Illustration 1) 1st Digit 1 = Assets & Other Debits 1st Digit 2 = Liabilities& Other Credits Fund Number Account Number GENERAL CASH 55 BACK TO THE BASICS BARS ACCOUNT STRUCTURE - CONT. Revenue Accounts - (Illustration 2) 1st Digit 3= Revenue Organization Fund Code Major Program Job Code (Department) ) Source Sub-Source Detail X XXX 1000 XXX Optional Optional GENERAL TAXES GENERAL PROPERTY TAXES REAL ESTATE TAXES 56 28

29 BACK TO THE BASICS BARS ACCOUNT STRUCTURE - CONT. Expenditure Accounts - (Illustration 3) 1st Digit 4 & 5 - Expenditures Organization Fund Code Sub Major Sub- Program Job Code (Department) Function Activity Activity Object Object Detail X XXX XXX Optional Optional SAFETY Optional GENERAL PUBLIC SUPPLIES LAW ENFORCEMENT SERVICES CRIME CONTROL & INVESTIGA- TION OPERATING SUPPLIES UNIFORMS

30 BACK TO THE BASICS 59 BACK TO THE BASICS 60 30

31 REVENUE QUIZ Identify the appropriate revenue code number for the following revenue items: Fund # Account # 1. Accruing monthly fees for garbage collections services 2. The receipt of real estate taxes in the general fund 3. The receipt of personal property taxes in general fund 4. The receipt of money from the Montana Treasure State Endowment program for a water project 5. The receipt of interest on a capital projects fund 6. The receipt of money from the state as an allocation from taxes on fuel 7. The receipt of a federal Community Development Block Grant 8. The receipt of money from the City Judge for fines 9. The receipt of proceeds from swimming pool collections 10. The receipt of fees collected by the clerk for copies 61 EXPENDITURE QUIZ Identify the appropriate expenditure/expense code number for the following items: Fund Account Object 1. Payment of wages to the Financial Clerk 2. The purchase of tires for a dump truck in the road and street department 3. The purchase of a garbage truck for use in collection 4. The purchase of envelopes for the City Judge 5. Payment for electricity for a building at the water plant 6. Payments for the rental of a backhoe paid for with gas tax monies 7. The purchase of a riding lawn mower for the park 8. Recording the depreciation of garbage equipment 9. Payment of the employer's contribution to Police Chief s retirement 10. Payment for the cost of the audit of the City 62 31

32 Questions 63 Local Government Services Bureau Website: Address: 301 S Park Ave ~ Room 340 PO Box ~ Helena, MT Phone:

33 Lincoln Flathead Glacier Toole Hill Blaine Phillips Valley Daniels Sherida n Roosevelt Lake Teton Chouteau McCone Richland Missoula Madison Cascade Gallati n Meagher Judit h Basin Park Sweet Grass Fergus Carbon Musselshell Garfield Big Horn Rosebud Dawson Fallon Custer Powder Carter River Kalispell Magda Nelson (406) mmnelson@bresnan.net Helena Jamie Cain (406) Jcain@MT.Gov Billings Darla Erickson (406) Derickson@MT.Gov Circle Tod Kasten (406) Tkasten@MT.Gov 65 Jamie Cain Area 1 Helena Phone: Jcain@mt.gov Area 1 Helena Anaconda-Deer Lodge Beaverhead Blaine Broadwater Butte-Silver Bow Cascade Chouteau Gallatin Granite Hill Jefferson Lewis & Clark Madison Meagher Powell Teton Darla Erickson Area 2 Billings Phone: derickson@mt.gov Area 2 Billings Big Horn Carbon Fergus Golden Valley Musselshell Park Petroleum Rosebud Stillwater Sweet Grass Treasure Wheatland Yellowstone 66 33

34 Tod Kasten Area 3 Circle Phone: TKasten@mt.gov Area 3 Miles City Carter Custer Daniels Dawson Fallon McCone Phillips Powder River Prairie i Richland Roosevelt Sheridan Valley Wibaux Magda Nelson Area 4 Kalispell Phone: mmnelson@bresnan.net Area 4 Kalispell Flathead Glacier Lake Liberty Lincoln Mineral Missoula Pondera Ravalli Sanders Toole

35 THE BASICS OF FUND ACCOUNTING QUIZ #1 Account Type & Normal Balance Accounts to use: * Asset * Debit * Liability * Credit * Equity * Revenue * Expenditure/Expense * Contra asset (use 2 times) Normal Balances: 69 THE BASICS OF FUND ACCOUNTING QUIZ #1 Account Type & Normal Balance TYPE OF NORMAL ACCOUNT NAME ACCOUNT BALANCE Depreciation Accounts Payable Deferred Revenue Interest Receivable Assigned Fund Balance 70 35

36 THE BASICS OF FUND ACCOUNTING ACCOUNT NAME QUIZ #1 - CONT. TYPE OF NORMAL ACCOUNT BALANCE Cash Amount To Be Provided Interest Earnings Allowance For Depreciation City Court Fines (Collected) 71 THE BASICS OF FUND ACCOUNTING ACCOUNT NAME QUIZ #1 - CONT. TYPE OF NORMAL ACCOUNT BALANCE Real Estate Taxes (Collected) Capital Outlay Warrants Payable Inventories Net Assets 72 36

37 THE BASICS OF FUND ACCOUNTING ACCOUNT NAME QUIZ #1 - CONT. TYPE OF NORMAL ACCOUNT BALANCE Due To Other Governments Accounts Receivable Debt Service Interest Judgments & Losses Prepaid Expense 73 THE BASICS OF FUND ACCOUNTING ACCOUNT NAME QUIZ #1 - CONT. TYPE OF NORMAL ACCOUNT BALANCE Bonds Payable Taxes Receivable Gas Tax Apportionment Deposits Payable Animal Licenses 74 37

38 THE BASICS OF FUND ACCOUNTING ACCOUNT NAME QUIZ #1 - CONT. TYPE OF NORMAL ACCOUNT BALANCE Supplies purchased Sale of Capital Assets Allowance For Uncollectible Accounts County Option Tax Federal Disaster Aid 75 THE BASICS OF FUND ACCOUNTING ACCOUNT NAME QUIZ #1 - CONT. TYPE OF NORMAL ACCOUNT BALANCE Street & Road Maintenance Due From Other Funds Machinery & Equipment Fund Balance Charge for Copying Services (collected) 76 38

39 THE BASICS OF FUND ACCOUNTING ACCOUNT NAME QUIZ #1 - CONT. TYPE OF NORMAL ACCOUNT BALANCE Jury Services Penalty & Interest on Delinq. Taxes Restricted for Revenue Bond Advance to other Funds

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41 THE BASICS OF FUND ACCOUNTING Quiz #2 Common entries Accounts to use for this quiz: Cash Supplies Gas Tax Apportionment Taxes Receivable Accounts Receivable Accounts Payable Interest Receivable Interest Revenue Prepaid Expense Expense (Enterprise Funds)/Expenditure (Governmental Funds) Depreciation Allowance for Depreciation Deferred Revenue Tax Revenue 81 THE BASICS OF FUND ACCOUNTING QUIZ #2 ENTRIES DEBIT Record Receipt of Gas Tax Apportionment from State Record Purchase of Supplies $ $ CREDIT $ $ 82 41

42 THE BASICS OF FUND ACCOUNTING QUIZ #2 ENTRIES CONT. Record the Receipt of Taxes Record dthe Accrual of fexpenditures DEBIT $ $ CREDIT $ $ 83 THE BASICS OF FUND ACCOUNTING QUIZ #2 ENTRIES CONT. DEBIT Record the Payment of the Expenditure Accrual $ Record the Accrual of Interest Revenue $ CREDIT $ $ 84 42

43 THE BASICS OF FUND ACCOUNTING QUIZ #2 ENTRIES CONT. DEBIT Record the Receipt of the Interest Revenue $ Record Annual Depreciation Expense $ CREDIT $ $

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