The General Fund and Special Revenue Funds. Chapter 3

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1 The General Fund and Special Revenue Funds Chapter 3

2 Learning Objectives Discuss similarities & differences between GF and SRFs Explain MFBA used for these funds Understand and prepare budgetary entries Analyze common journal entries for transactions, including interfund activity Prepare adjusting & closing entries Define special items and extraordinary items Prepare GF and SRF financial statements

3 General Fund Used to account for all financial resources that are not restricted to specific purposes or otherwise required to be accounted for in another fund. Only fund that all governments have.

4 Special Revenue Funds Used to account for general government financial resources that are restricted by law or contractual agreement to specific purposes other than debt service or major capital projects. Exist as long as the government has resources dedicated to specific purposes.

5 MFBA Measurement Focus (MF) is on current financial resources what is expendable Basis of Accounting (BA) is modified accrual recognition occurs for Revenues when measurable & available Expenditures when underlying liability is incurred, except for long-term debt principal and interest payments (when due)

6 Basic Accounting Equation Financial Assets Related Liabilities Fund Balance

7 Assumptions for this Chapter Transactions do not address budgetary accounting, reporting, & control issues Accounts maintained on GAAP basis during the year Second assumption rarely holds in practice, but makes instruction easier and more uniform

8 Illustrative Entries Property tax levy Other revenues Orders and contracts Salary expenditures Interfund activity Short-term borrowing Extraordinary and special items Other transactions and events

9 #1 Property Tax Levy [Page 72] Taxes Receivable Current Allowance for Uncollectible Current Taxes Revenues Property Taxes 200,000 3, ,000

10 Property Tax Levy Notice use of allowance account in entry No bad debts expense remember, a governmental fund does not use expenses Records revenue at the amount government expects to collect This form of entry assumes net amount will be available other options discussed in Chapter 5

11 Other Revenues Some revenues will be accrued when services are provided Other revenues may be recognized only when cash is received no allowance necessary since all of revenue received

12 #2 Other Revenues [Page 73] Accounts Receivable Allowance for Uncollectible Accounts Receivable Revenues 36,000 1,000 35,000

13 #3 Orders and Contracts [Page 74] Expenditures Vouchers Payable 29,900 29,900

14 Orders and Contracts Preceding slide showed the general journal entry However, the details are in the subsidiary ledger effects not demonstrated in slide show Most accounts are for current operating expenditures Last account affects capital assets, resulting in accounting in GCA-GLTL accounts

15 GCA-GLTL Accounts GCA (Equipment) GLTL Net Assets +$6,100 +$6,100

16 #5 Salary Expenditures [Page 74] Expenditures Vouchers Payable 29,900 29,900

17 Salary Expenditures Comprise about 75% of city General Fund expenditures and 85% of school board General Fund expenditures Effective control over these expenditures is essential

18 Interfund Activity Nonreciprocal transactions Interfund reimbursements Interfund transfers Reciprocal transactions Interfund services provided Interfund loans

19 Interfund Reimbursements Underlying event: Transaction initially recorded in one fund Should have been accounted for and reported in a different fund May also be used to distribute costs from one from to others Will not separately reported in financial statements

20 #6 Interfund Reimbursement Receiving fund [Page 75] Due from SRF Expenditures 1,500 1,500 Paying fund (not in textbook) Expenditures Due to General Fund 1,500 1,500

21 Interfund Transfers Usually involve moving assets (cash or inventory) from one fund to another Do not involve requirement or expectation or subsequent repayment May also result from one fund providing services to another without charging for those services

22 Common examples GF resources transferred to DSF for principal and interest payments GF resources transferred to CPF to pay for government s portion of capital project SRF resources transferred to GF to finance expenditures for which SRF resources are restricted GF resources transferred to EF to provide initial permanent financing Residual assets of CPF or DSF transferred upon completion of purpose of fund PF resources transferred to other funds to subsidize operations

23 #7 Principal & interest [Page 76] Transfer to DSF Cash 5,000 5,000 Effect on DSF Financial Assets Related Liabilities Fund Balance +$5,000 +$5,000 (OFS)

24 #8 Routine unpaid transfer [Page 77] Transfer from SRF Due from SRF 10,000 10,000 Effect on SRF Financial Assets Related Liabilities Fund Balance +$10,000 +$10,000 (OFU)

25 #9 Transfer to EF [Page 77] Transfer to EF Cash 6,000 6,000 Effect on EF Assets Liabilities Net Assets +$6,000 +$6,000 (Transfer)

26 Interfund Services Defined as sales and purchases of goods and services between funds for a price approximating their external market value Accounting: Seller fund sells goods or services to external party (recognizes revenues) Buyer fund purchases same goods or services from external entity (recognizes expenditures or expenses)

27 #10 Interfund services [Page 78] Expenditures Due to ISF 30,000 30,000 Effect on Stores ISF Assets Liabilities Net Assets +$30,000 +$30,000 (Revenues)

28 Interfund Loans One fund loans cash to another Transaction does not change Fund Balance Reporting Lender fund recognizes a receivable Receiving fund recognizes a liability

29 Interfund Loan Terminology Lender Fund Short-term loan Due from Long-term loan Advance to (normally causes Reservation of Fund Balance) Receiving Fund Short-term loan Due to Long-term loan Advance from

30 #11 Payment of short-term loan [Page 78] Due from SRF Cash 1,250 1,250 Effect on SRF Financial Assets Related Liabilities Fund Balance +$1,250 +$1,250

31 #12 Loan repayment [Page 78] Cash Due from SRF 1,250 1,250 Effect on SRF Financial Assets Related Liabilities Fund Balance $1,250 $1,250

32 Short-term external borrowings Usually made with banks Receipt of loan and principal repayment do not affect Fund Balance; however, payment of interest does affect Fund Balance

33 #13 Short-term borrowing [page 79] Cash Short-Term Notes Payable 20,000 20,000

34 #14 Partial loan repayment [page 79] Short-Term Notes Payable Expenditures [Interest] Cash 5, ,600

35 Extraordinary & Special Items Extraordinary item Used by FASB & GASB Event is not under control of management and is both (1) unusual in nature and (2) infrequent in occurrence Special Item Unique to GASB Event is under control of management and is either unusual or infrequent

36 #15 Special item [Page 80] Cash Special Item Proceeds from Sale of Beach Property 8,000 8,000 Effect on GCA at historical cost GCA (Land) GLTL Net Assets $2,000 $2,000

37 #16 Extraordinary item [Page 80] Cash Extraordinary Item Insurance Recovery Proceeds 5,750 5,750 Effect on GCA at historical cost GCA (Land) GLTL Net Assets $6,000 $6,000

38 Other Transactions and Events Preceding entries were for events common to all governments Following entries may or may not occur for every government

39 #17 Collecting taxes and other receivables [Page 81] Cash Taxes Receivable Current Accounts Receivable 175, ,000 15,000

40 Reclassify taxes as delinquent [Page 81] #18 Receivable account Taxes Receivable Delinquent Taxes Receivable Current 40,000 40,000 #19 Allowance account Allowance for Uncollectible Taxes Current Allowance for Uncollectible Taxes Delinquent 3,000 3,000

41 #20 Other Revenues [Page 81] Cash Revenues 205, ,000

42 #21 Ordering goods & services [Page 81] No journal entry required until goods or services are received.

43 #22 Collecting delinquent accounts [Page 82] Cash Taxes Receivable Delinquent Revenues 20,200 20, Revenues are for interest and penalties not previously accrued.

44 #23 Purchase of investments [Page 82] Investments Cash 10,000 10,000 The GASB has issued two standards in the last few years addressing accounting for investments: #31 and #40. #31 addresses marking investments to fair value. #40 addresses risk issues related to the investment. These and related issues are discussed in Chapter 5.

45 #24 Accruing other expenditures [Page 82] Expenditures Vouchers Payable 300, ,000 Effect on GCA GCA (Equipment) GLTL Net Assets $23,000 $23,000

46 #25 Paying amounts owed [Page 82] Vouchers Payable Cash 360, ,000

47 #26 Interfund transaction: Payment to ISF of balance owed [Page 82] Due to Internal Service Fund Cash 22,500 22,500

48 #27 Collect accounts receivable [Page 83] Cash Accounts Receivable 13,000 13,000

49 #28 Write-off an account [Page 83] Allowance for Uncollectible Accounts Receivable Accounts Receivable

50 #29 Correcting an error [Page 83] Correction of Prior Year Error Vouchers Payable

51 Using the CPYE Account Some wonder about using the Correction of Prior Year Error Account (CPYE) Since the previous year s expenditure accounts have been closed, it can t be charged to that account The use of the Unreserved Fund Balance account is an option, but doing so would hide the error Besides, remember to where the CPYE account will be closed: Unreserved Fund Balance

52 Year-End Adjustments Revenue Adjustments Interest on investments and delinquent taxes Unbilled charges for services Unrestricted intergovernmental grants that are due but haven t been received Expenditure Adjustments Interest on short-term debt Accrued payroll

53 A1 Interest & Penalties [Page 83] Interest & Penalties Receivable Allowance for Uncollectible Interest & Penalties Revenues Interest & Penalties

54 A2 Accrued interest on investments [Page 84] Accrued Interest Receivable Revenues

55 A3 Accrued interest on short-term debt [Page 84] Expenditures Accrued Interest Payable

56 Closing Entry Process Close the operating accounts and update Unreserved Fund Balance Close subsidiary revenue and expenditure accounts

57 C Close the Actual [Page 85] Revenues Transfer from SRF Special Item Proceeds from Sale of Beach Property Extraordinary Item Insurance Recovery Proceeds Unreserved Fund Balance Expenditures Transfer to DSF Transfer to EF Correction of Prior Year Error 438,100 10,000 8,000 5,750 51, ,250 5,000 6,

58 Reserve for Encumbrances Reserves indicate that portion of Fund Balance not available for appropriation Reserve for Encumbrances indicates amount that must be appropriated next year for transactions started in current year

59 #30 Outstanding orders [Page 84] Unreserved Fund Balance Reserve for Encumbrances 20,000 20,000

60 General Fund Financial Statements Balance Sheet Statement of Revenues, Expenditures, and Changes in Fund Balance Revenues, Expenditures, and Changes in Fund Balance Budget-to-Actual Statement of..., if part of the Basic Financial Statements Schedule of..., if placed in Required Supplementary Information (RSI)

61 Balance Sheet Standard Report Format Current Assets = Current Liabilities + Fund Balance Fund Balance presented in two sections Reserved with specific reserves identified Unreserved which may be further divided into Designated with specific designations identified Undesignated

62 Reserves of Fund Balance Indicate that some amounts are not available for appropriation or expenditure Creation requires action by governing council Common reserves: Encumbrances Petty Cash Inventories Advances

63 Long-Term Loan [Page 91] The Loan Advance to SRF Cash 5,000 5,000 The Reserve Unreserved Fund Balance Reserve for Advance to SRF 5,000 5,000

64 Unreserved Fund Balance Available for appropriation and expenditure May be designated for some specific purpose Normally done by Finance Director Less formal than a reserve

65 Statement of Revenues, Expenditures, & Changes in Fund Balance May be referred to as the operating statement Format specified by the GASB (there had been optional formats prior to 1999)

66 Operating Statement Format

67 Notes on the Statement [Page 94] Beginning Fund Balance shown as previously reported and than corrected for error Transfers reported separately from revenues and expenditures Special item and extraordinary item reported between Other Financing Sources (Uses) and Net Change in Fund Balance Statement explains changes in fund balance for the year

68 Classification of Expenditures Function Organizational Unit (including Department and Subunit) Activity Object Class Character

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