This document discusses the principles of accounting and financial reporting for governmental activities. It outlines three types of services governments provide - government, business, and fiduciary - and the corresponding principles for each. For governmental activities, fund accounting is used with the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds. Proprietary funds use accrual accounting and include enterprise and internal service funds. Fiduciary funds account for assets held in trust and include pension, investment, private purpose, and agency funds. The key principles discussed are fund accounting, the basis of accounting and measurement focus, and budgetary accounting.

1. Principles of
accounting and
financial reporting of
governmental

2. Activities of government
• Governmental entities provide:
1. Government type services
2. Business type services
3. Fiduciary type services
1. Core government services together with general
administrative support is referred to as government
activity

3. 2. Gov’t also engage in business type of activities
which includes
Transportation, Public utility (water, electricity, gas),
Seaware utility, Sometimes production e. t. c
3. Fiduciary – Government often act in a fiduciary
capacity, either as an agent, or trustee for parties out
side the government unit
• E.g. pension and other employment benefits

4. • The accounting and financial reporting principles for
governmental activities evolved to meet the legal
budgetary and financial compliance needs of government
• The accounting and financial reporting principles for
business type activates is quite similar to those
commercial business entities
• At the same time the accounting and financial reporting
principles for fiduciary activity of government, it uses the
principles of accounting similar to business type activities.

5. PRINCIPLE 1: Fund and fund accounting
In business accounting, ‘‘funds’’ typically refers to working
capital (current assets less current liabilities). But in
government and not-for-profit accounting the term fund
has a different meaning.
Fund accounting is a system in which a government &
NFP organizations’ resources are divided among two
or more fiscal and accounting entities known as
funds.
There are different types of principles in relation to
these governmental activities

6. • As a fiscal (or financial) entity, each fund accounts for
resources, and the claims against them, that are
segregated in accord with legal or contractual
restrictions or to carry out specific activities
• As an accounting entity, each fund has its own self-
balancing set of accounts from which separate
financial statements can be prepared. Governments
and not-for-profits customarily use several funds to
account for their resources and activities

7. Funds uses the accounting equation
This is a variation of the business accounting equation
(assets=liabilities + owners’ equity)
The term fund balance replaces owners’ equity, because
governments and not-for-profits may not have owners. Fund
balance, like owners’ equity, is a residual and is often referred

8. BASIS OF ACCOUNTING & MEASUREMENT FOCUS
Basis of accounting determines when transactions and
events are given accounting recognition. For instance, if
an entity adopts the full accrual basis of accounting, a
transaction is recognized when it has its
substantive/permanent economic impact, irrespective of
when cash is received or paid. If, on the other hand, it
adopts the cash basis, the transaction is recognized only
as the related cash is received or paid

9. cont
• An entity’s measurement focus determines what is
being reported upon—which assets and liabilities
are given accounting recognition and reported on
the balance sheet

10. Governments and NFP organizations may be primarily
concerned with the assets needed to satisfy current-year
obligations,
So, they adopt a modified accrual basis of accounting and
a measurement focus on mainly short-term financial
assets and liabilities for many of their funds,
capital assets and long-term liabilities are excluded
from their balance sheet


11. Eg. A government borrows Br35, 000 issuing a long-term
note, and uses the proceeds to purchase a vehicle.
Cash……………………………….……………………Br35,000
Proceeds from borrowing ……………..………………… Br35,000
(To record the issuance of a long-term note)
Expenditure for vehicles ………………………… Br35,000
Cash ……………………………………………..…………….…… Br35,000
(To record the purchase of the vehicle)
 The government reports neither the vehicle nor the long-term note on its fund
balance sheet.
 The vehicle is written-off (expensed) at the time acquired, and the proceeds from
the note are recorded as increase in fund balance that (like revenue) is closed to
fund balance.

12. There are three categories of funds based on the
activities the government organizations undertake:
I. for governmental activities-Governmental Funds
II. for business type activities-Proprietary Funds
III. for fiduciary activities-Fiduciary Funds

13. I. Governmental Funds- accounts for the governmental
activities of the entity, and use the modified accrual basis of
accounting. The measurement focus is financial resources.
- The accounting equation governmental fund:
Fund Asset = Fund Liability + Fund Balance
Fund Balance = Fund Asset - Fund Liability
Fund balance = Reserved FB + Unreserved FB

14. I. Governmental Funds
There are five types of funds under Governmental funds:
1) The General Fund
2) Special revenue fund
3) Capital Project Fund
4) Debt Service Fund
5) Permanent fund

15. 1) The General Fund
• It accounts for all of the general operating activities (the
basic services) provided by a governmental unit
• This is the fund where most of the organizational actions
takes place
• It accounts for all resources that are not required to be
accounted for in other funds
• Governmental unit can establish only one general fund,
• However, the general fund can account for many different
activities

16. 2) Special Revenue Fund
• It accounts for the proceeds from specific revenue
sources other than expendable trusts or major capital
project
• SRF is a fund established by a government to collect
money that must be used for a specific project
• SRF is a fund that government entities use to record
receipts of resources for certain revenue sources
whose use is restricted

17. 3) Capital Project Fund
• It is used to account for financial resources intended
for major capital projects (Renovation) construction &
Acquisition of capital asset
E.g:-Construction of fire station
-Construction of road
-Construction of camping houses (condominium)

18. 4) Debt Service Fund
•to account for the accumulation of resources for & the
payment of general long term debt principal & interest
5) Permanent fund
• accounts for resources that are legally restricted, that
only the earnings from investing the money can be
spent

19. II. Proprietary Funds
• Is used to account for business type activities of
government unit.
The accounting equation for proprietary fund includes fund
equity account.
Fund Asset = Fund Liability + Fund Equity
Fund equity =Fund Asset – Fund Liability

20. • It contains two types of funds:
Enterprise & Internal Service Fund
6) Enterprise Fund
• Are used when resources are provided primarily
through sales of service or if a fee is expected to be
charged in the near foreseeable future.
• An EF is a self supporting government fund that sells
goods and services to the public for a fee

21. • Are used where the governing body has decided that
periodic determinations of revenues earned, expenses
incurred and/or net income is appropriate.
• EF is self-supporting fund that sells goods and
services to the public for a fee.
Principles of accounting and financial
reporting for state and local government

22. 6) Enterprise Fund
Examples of enterprise fund
Water & seaware utilities
Electric power utilities
Telecommunication service utilities
Air ports, Transit system
Swimming pools, Museums etc
Principles of accounting and financial
reporting for state and local government

23. 7) Internal Service Fund
• Is used to accounts for the financing of goods or
services provided by one department or agency to
another department or agency of the governmental
unit, or to the other governmental units on a cost-
reimbursement basis
Principles of accounting and financial
reporting for state and local government

24. III. Fiduciary Funds
• account for assets held by a government unit in a
trustee or agency capacity for individuals, private
organizations, other governmental units, and/or other
funds.
• is about acting as an agent or a trustee for property of
another person/organization.
• cannot be used to support government programs.
Principles of accounting and financial
reporting for state and local government

25. Fund Asset = Fund Liability
• There are four types of fiduciary funds:
1. Pension and other employee benefit trust fund
2. Investment trust fund
3. Private purpose trust
4. Agency funds
Principles of accounting and financial
reporting for state and local government

26. 8) Pension and other employee benefit trust fund
• Are used to account for pension and employee benefit
funds for which the governmental unit is a trustee
• These resources represent money set-aside to finance
future payments for the beneficiaries
Principles of accounting and financial
reporting for state and local government

27. 9) Investment Trust Fund
• Accounts for external portion of investment pool
reported by the sponsoring government.
• An investment trust is a company that raises money by
selling shares to investors and then pools that money
to buy and sell a wide range of shares and assets
Principles of accounting and financial
reporting for state and local government

28. 10) Private Purpose Trust Fund
• Reports all other trust arrangements under which
principal and income benefit individuals, private
organization or other governments.
• A private purpose trust fund results when a contributor
and a government agree that the principal and/or
income of trust asset is used for the benefit of
individuals, organizations, or other governments

29. 11) Agency Fund
• Are used to account for situations in which the
government is acting as a collecting/disbursing agent.
• An AF is an assemblage of funds that one
government agency holds on behalf of another
government agency

30. PRINCIPLE 2: Number of Funds Required
• Governmental units should establishes and maintain
those funds require by law & exercise sound financial
administration
• Unnecessary funds result in inflexibility, undue
complexity & inefficient financial administration
• But, to the minimum, it should establish the
and exercise sound financial administration over it

31. PRINCIPLE 3: Budget & Budgetary Accounting
According to GASB;
An annual budget should be adopted by every
governmental unit.
The accounting system should provide the basis for
appropriate budgetary control
Budgetary comparisons should be included in the
appropriate financial statement
Cont’d

32. PRINCIPLE 4: Accounting for Capital asset including &
depreciation
All fixed assets/capital assets should be recorded at
historical cost, or at estimated cost if the historical
cost is not determinable
Donated fixed asset should be recorded at the
estimated fair value at the date of Donation

33. • Depreciation of General fixed asset should not be recorded
in the accounts of governmental fund; rather it should be
recorded in the General Fixed Asset Account Group
(GFAAG).
• Depreciation of fixed asset (Depreciation) expense should
be recorded in the account of proprietary and some trust
funds in the account itself.
Cont’d

34. E.g. GF purchased a vehicle for birr 360,000.
General Fund Ledger
Expenditure for Vehicle......birr360,000
Cash...............................................birr360,000
General Fixed Assets Account Group Ledger
Vehicle..............................birr360,000
GF..................................birr360,000
Cont’d

35. PRINCIPLE 5: Accounting for Long-term Debts
Long term liabilities of proprietary funds & trust funds are
accounted for through those funds.
All other General Long-term Liabilities of governmental
unit are accounted for through the General Long-term
Debt Account Group (GLTDAG).
General Long-term Debt are borrowings of the entire
governmental entity rather than by a specific fund
They are to be paid from general tax levies, specific debt
service tax levies, or special assessments, through DSF.

36. E.g. General Fund issued a bond of birr 500,000 that
matures in 5 year to finance its activities.
Cash…………………………………500,000
Other Financing Source (Bond
proceeds)…500,000
Amount to be provided by GF …..……500,000
Cont’d

37. PRINCIPLE 6: Basis of Accounting
• The financial statements are prepared by the modified
accrual or accrual basis of accounting as appropriate.
• The financial statements of gov’tal fund should be
presented using the modified accrual basis of accounting.
• The financial statements of proprietary fund should be
presented using the accrual basis of accounting.
• The financial statements of fiduciary fund should be
presented using the accrual basis of accounting.

38. PRINCIPLE 7: Financial Reporting
• In Government Financial Reporting, Comprehensive
annual financial report (CAFR) is prepared in 3 sections:-
I. An introductory section
II. A Financial section
III. A statistical section
Introductory section includes such items as title page
and contents page, the letter of transmittal and other
material deemed appropriate by management.
Cont’d

39. The financial section of a comprehensive annual
financial report (CAFR) should include:
• Auditor’s Report
• General purpose financial Statement (GPFS)
• Combining and individual fund and account group
statements and schedules.
• Management’s Discussion and Analysis:
Cont’d

40. Statistical Section: presents tables and charts showing
social and economic data, financial trends and the fiscal
capacity of the government in detail needed by readers
who are more than casually interested in the activities of
the governmental unit.
Cont’d