Governmental Accounting differs from Business enterprise accounting in three major respects: 1 Use a separate funds to accounts for its activities. 2. Use of current financial resources and modified accrual basis. 3. Incorporates Budgetary accounts into the financial Accounting System. The main objectives of accounting system in government are to provide accountability for resources and to ensure the compliance with budgetary requirements and limitations.

1. Chapter 2
The Use of Funds in Governmental
Accounting

2. Governmental Accounting differs from Business
enterprise accounting in three major respects:
1. Use a separate funds to accounts for its activities.
2. Use of current financial resources and modified accrual
basis.
3. Incorporates Budgetary accounts into the financial
Accounting System.
The main objectives of accounting system in government
are to provide accountability for resources and to ensure
the compliance with budgetary requirements and
limitations.

3. Types of Government Activities
• Governmental-type
– Day-to-day services of general-purpose governments
(states, counties, and cities)
• Police and fire protection
• Sanitation
• Parks and recreation
– Financed primarily by tax revenues, intergovernmental
grants, and general fees
– Controlled by legally adopted budget
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4. Types of Government Activities
• Business-type (Propretary-type)
– Specific services
• Mass transit
• Water utility
• Electric utility
– Financed primarily by user fees or charges that
cover both operating and capital costs
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5. Types of Government Activities
• Fiduciary-type
– Used when government provides fiduciary-type
services
• Holding segregated resources for others
• Examples
– Tax collection services for other governments
– Pension trust funds
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6. Fund Accounting
Entity Concept: is a separate unit whose assets, liabilities,
revenue, expenses and equities are included in its financial
report.
Reporting entity applies as well as to government, it called
Primary Government such as, New York City. It also
include activities for many separate legal organization like
hospitals, police department which are public authorities
called Component Units.

7. • Funds: Building blocks of governmental reporting
• Government divided into entities, called FUNDS
• Each fund has its own:
– Assets, liabilities, net position
– Inflows and outflows of resources
• 3 categories: Governmental, Proprietary,
Fiduciary
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Fund Accounting

8. Fund Definition
The primary government itself disaggregated and subdivided
into separate fiscal and accounting entities called funds. Each
fund has its own assets, liabilities, net assets, and inflow and
outflow of resources. Which are segregated for the purpose of
carrying on specific activities or attaining certain objectives in
accordance with special regulations, restrictions, and
limitations.

9. Why Governments Use Fund Accounting?
1. Needs to ensure compliance with budgetary spending limits that
provided by law.
2. Helps ensure that dedicated funds are used as intended. Funds
provide a basic control mechanism for ensuring compliance with
legal restrictions on the use of governmental resources. Ex. When
government use of revenue from sales tax to make roads.
3. Maintain Accountability objectives.
** Increasing in governmental operations leads to excessive use of
funds and more funds needed.

10. Fund Categories
The funds used by government are grouped into
three categories:
1. Governmental-type Funds.
2. Proprietary-type Funds.
3. Fiduciary-type Funds.
** There are several types of funds within each category.

11. 1. Governmental-type Funds
•Accumulation and spending of resources primarily from taxes and
intergovernmental grants
•Provide the public with day to day operation services, such as
police, fire, education, parks, and roads making.
•It also used to acquire or construction of capital assets. Ex. Fund
may use to account for the proceed from debts to construct
government buildings.
•Governmental funds have annual budget for day to day operations.
It is short-run in nature covered only one year.

12. 2. Proprietary-type Funds
- Accounts for activities in manner similar to private sector
business.
- Charges fees for service provided that cover cost and
expenses.
- Ex. Hospitals, Utilities.
- Many of these funds are self supporting because their
fees cover their cost other sometimes receive grants from
parent government.

13. 3. Fiduciary Funds
- Account for resources they held in trust or agency for
others. Others could be individual, government units, or
business.
- It cannot use the resources to support its own programs
because they are not own it.
-Ex. Held assets on behalf employees for pension plan.
Taxes collected on behalf of other governments, such as
sales taxes.

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Fund Accounting:
Financial Reporting
• Fund Financial Statements
– Each major fund gets a column
– Separate set of statements for each fund type
• Government-Wide Financial Statements
– Governmental and business-type only
– Adjustment to accrual basis

15. Measurement Focus and Basis of Accounting
1. Measurement Focus: refers to what is being measured in
reporting There are two measurement focus:
A. Economic Resources Measurement Focus
B. Current Financial Resources Measurement Focus.
2. Basis of Accounting: When resources are being measured, When
is an asset or liability recognized in the financial statements?
a. Accrual Basis.
b. Modified Accrual Basis.

16. Economic Measurement Focus with Accrual Basis
• It applies to Proprietary and Fiduciary Funds.
• Their accounting similar to business enterprise.
• Therefore, the accounting system need to take into
account of transactions and events that affect all the
economic resources available to activity i.e. Financial and
Capital Resources.

17. Economic Measurement Focus with Accrual Basis
• Both of Proprietary and Fiduciary funds use accrual basis
of accounting. This means that revenues are recognized in
the period they are earned even if cash has nor received.
Expense also recognized when assets are consumed or
when liabilities are incurred even if cash has not paid.
• Capital Assets are depreciated, unpaid interest are
incurred and also long term liabilities are recorded.

18. Current Financial Resources and Modified Accrual
Basis.
• This Basis apply to governmental type funds to manage the budget.
• Government budget officer needs to know the amount of Financial
Resources available for current spending and to monitor actual
performance against current year budget.
•The governmental budget process is spending oriented, cash
oriented, and short run in nature.
•Financial resources available for spending
• (budget focused)
• Capital assets/long-term debt not recorded
• Records inflows and outflows of liquid assets

19. Current Financial Resources and Modified
Accrual Basis.
To apply the current financial resources measurement
focus modified accrual basis used to provide data on the
amount of financial resources available for current
spending.

20. 1. Revenue Recognition:
Revenues such as taxation and grants recognized when they are
measurable and available.
Measurable means the ability to state the amount of revenue in
term of dollars.
Available means collectable within current period or not more than
60 days after the accounting period ends.

21. 2. Expenditures Recognition
•Three types of Expenditures are included in operating
statement:
1. Capital Assets Acquisition.
2. Current operating items, such as salaries and utilities.
3. Debt services include payment of debts and interest.

22. Expenditures vs. Expenses
Under economic resources measurement focus, Expense
are recognized when assets are consumed or liabilities are
incurred. Such as use of capital assets (Depreciation)
Under financial resources measurement focus,
Expenditures are recognized in decreasing the financial
resources. When capital assets acquired or when debt
settled this leads to decrease in financial resources it called
Expenditures.

23. Acquisition of Capital assets and bond
proceeds and repayment.
Under modified accrual basis:
Capital assets acquisition recognized as expenditures when
purchased with no depreciation recognized.
Bonds proceeds consider as inflow of current resources
and recorded in operating statement as other financing
sources (Like Revenues) and repayment of debts reported
as expenditures.

24. Funds Summary
Accounting
Basis
Measurement FocusCategoryFund Type
ModifiedCurrent FinancialGovernmentalGeneral
ModifiedCurrent FinancialGovernmentalSpecial Revenue
ModifiedCurrent FinancialGovernmentalDebt Services
ModifiedCurrent FinancialGovernmentalCapital Project
ModifiedCurrent FinancialGovernmentalPermanent
AccrualEconomic ResourcesProprietaryEnterprise
AccrualEconomic ResourcesProprietaryInternal Service
AccrualEconomic ResourcesFiduciaryPension Trust
AccrualEconomic ResourcesFiduciaryInvestment Trust
AccrualEconomic ResourcesFiduciaryPrivate Purpose
AccrualEconomic ResourcesFiduciaryAgency

25. 1. Governmental Type Funds
Description:
* Accounted for basic day to day governmental operations.
* Current Financial Resources Measurement Focus.
* Modified Accrual Basis.
* The governmental type funds Includes the following:
a. General Fund
b. Special Revenue Funds
c. Debt Service Funds
d. Capital Project Funds
e. Permanent Funds.

26. a. General Fund (GF)
Description:
- Every government body must at least have one general fund.
- Called residual fund because contains any activities are not
accounted for in other funds.
- Includes day to day governmental operations such as, taxation
activities, police department, and fire department.
Source of Revenue
- From taxes on real property, sales, corporate and personal income.
- Governmental Grants.
- Licenses, fees, and fines.

27. a. General Fund (GF) Cont.
Expenditures
- Basic operating programs such as, police, fire, trash removal,
parking, roads and traffic and cultural activities.
- Acquisition of capital assets such as for police and others.
- Transfer to other funds.
Assets
Only current assets according to current financial resources
measurement focus such as: Cash, investment, receivables (called
due from other funds) and advances to other funds.

28. a. General Fund (GF) Cont.
Liabilities
Currently due to be paid such as claims of various suppliers and
payables (called due to other funds).
Fund Balance
-Assets = Liabilities + Fund balance (no equity) so
-Assets – liabilities = Fund balance.
- Fund balance separated into two categories:
1. Unreserved portion: available for spending.
2. Reserved: for specific purpose and not available for spending.

29. a. General Fund (GF) Cont.
Financial Statement:
1. Balance Sheet:
* Only current assets and liabilities.
* Unclassified form.
* Fund balance rather than Equity( Reserved and Unreserved.
2. Statement of Revenue, Expenditures, and change in fund balance.
It also called operating statement.
It is similar to multiple step income statement.

30. a. General Fund (GF) Cont.
2. Statement of Revenue, Expenditures, and change in
fund balance.
 Format:
 Revenues
 Less Expenditures
 + or - Other Financing Sources or Uses
and Special Items
 = Change in Fund Balance
 + Beginning Fund Balance
 = Ending Fund Balance
No Statement of cash flows.

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Governmental Funds:
General Fund
• Every general-purpose government has one
• Used for most basic day-to-day operations
• Residual fund
– Used to account for financial resources not
accounted for in another governmental fund
– Law/contract/manager may require use of another
fund

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Governmental Funds:
Basic Accounting Equation
Financial
Assets*
Matured Short-Term
Liabilities + Fund Balance=

33. Governmental Funds:
Basic Accounting Equation
• Financial Assets
– Cash, investments, and receivables
• Matured Short-Term Liabilities
– Short-term has a shorter time frame than “current” in
business accounting, which means payable in a year.
• Accounts payable, salaries payable, and amounts
payable to other funds
• Matured liabilities due for payment and expected to be
paid shortly after the accounting period ends
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34. b. Special Revenue Funds (SRF)
Description
- Used to account for the proceeds of special resources that are legally
restricted to be spent for particular purpose.
- The same as general fund but less scope.
- Restrictions come to maintain control over the collection and use of
funds.
- Examples: Sales tax revenue used for road maintenance. Special
grants to support education.
Sources of Revenues
Taxes, Rents, royalties, fees, and grants.
Sources of Expenditures
Identifiable services.

35. b. Special Revenue Funds (SRF) Cont.
In SRF assets, liabilities, and fund balance the same as
General fund.
Financial Statement also the same.

36. c. Debt Service Funds. (DSF)
- Accumulation of resources for paying principals and interest and
used when legally mandated.
- Most of Resources in debt services come from GF.
- Accounting procedures the same as GF.
Assets, liabilities, fund balance, revenue, expenditures, and financial
reporting are the same as GF.

37. d. Capital Projects Funds. (CPF)
- Accounts for receipts and disbursement of resources used to
acquire capital facilities through purchasing or constructions.
- Used to account for capital outlay financed from general obligation
bonds proceeds.
- Separate capital project fund for each project. These funds contains
construction work.
- Accounting procedures and financial reporting similar to GF, SRF,
and DSF.
- Neither long term assets and liabilities recognized in balance sheet.
- In Statement of Rev and Exp. Other financing sources will be
greater than operating revenue because of bonds proceeds and
transfer from other funds.

38. e. Permanent Funds. (PF)
- Used to report resources that are legally restricted to support and
benefit governmental programs.
- Example: Endowment to serve library.
- Revenue such as, investment income and dividend, Expenditures
include transfer out to special revenue.

39. 2. Proprietary type Funds
Description:
- Similar to business enterprise.
- Activity charges fees to cost of services provided.
- Example: Electric and Water Utilities, Airports.
- Economic Resources Measurement Focus. Accrual Basis.
This type of funds include:
a. Enterprise Funds.
b. Internal Service Funds

40. a. Enterprise Fund (EF)
Description
- Used to account for any activity whose products or
services and one of the following criteria should be met:
1. Activity financed with debts secured by pledge of
revenue.
2. Cost of providing services or goods should be covered.
3. Pricing policies set fees and charges to cover cost.
Examples: Utilities, parks, airport.

41. a. Enterprise Fund (EF) Cont.
Accounting Procedures and Reporting
- Economic resources measurement focus and accrual basis. Similar
to business enterprise.
Balance Sheet (Statement of Net Position): (1) Classified as
business (2) net assets used instead of equity and it classified to
restricted net assets for specific purpose such as capital assets or
debt payment. And unrestricted net assets.
Statement of Revenue, Expenditures and change in net position:
Also called operating statement and presented in multiple step
format.
Statement of cash flow: includes (1)cash flow from operating (2)
Cash flows from Investing (3) cash flow from capital and related
financing activities.

42. Ex. Operating Statement:
Operating revenue
Less: operating expense
= operating income (loss)
Non operating revenue and expense
income before other revenue, expenses, gains, losses, and transfer
+ capital contributions
+ or – extraordinary items
+ or – transfers
Increase or decrease in net assets
+ net assets at beginning of period
Net assets at end of period

43. b. Internal Service Fund (ISF):
- Used to account for providing goods or services within
governmental units.
- Reason to establish theses funds: (1) reduce cost of
obtaining goods or services. (2) improvement in the
distribution within governmental unit.
Example: data processing, information technology.
- Often bill the fund receiving goods or services often GF
and this amount treated as revenue.

44. Fiduciary Funds
• Assets held by government in a trust or agency
capacity for others
– Cannot be used to support government’s own
programs
• Economic resources measurement focus
• Accrual basis of accounting
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45. Fiduciary Funds:
Types and Statements
• Pension (and other employee benefit) Trust Funds
• Investment Trust Funds
• Private-Purpose Trust Funds
• Agency Funds
• Statement of Fiduciary Net Position
• Statement of Changes in Fiduciary Net Position*
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46. Fiduciary Funds
• Pension (and other employee benefit) Trust
Funds
– Hold restricted resources
– For pensions, health care, etc.
• Investment Trust Funds
– For investment pools
– External portion only
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47. Fiduciary Funds
• Private-Purpose Trust Funds
– For all other trust arrangements
– Example: escheat property
• Agency Funds
– For custody arrangements, example: sales tax
collections for other governments
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