Governmental accounting
/What is Governmental Accounting?
Governmental accounting maintains tight control over resources, while also compartmentalizing activities into different funds in order to clarify how resources are being directed at various programs. This approach to accounting is used by all types of government entities, including federal, state, county, municipal, and special-purpose entities.
The Governmental Accounting Standards Board
Given the unique needs of governments, a different set of accounting standards have been developed for these organizations. The primary organization that is responsible for creating and updating these standards is the Governmental Accounting Standards Board (GASB). The GASB is tasked with the development of accounting and financial reporting standards for state and local governments, while the Financial Accounting Standards Board (FASB) has the same responsibility, but for all other entities not related to governmental activities.
Fund Accounting
A fund is an accounting entity with a self-balancing set of accounts that is used to record financial resources and liabilities, as well as operating activities, and which is segregated in order to carry on certain activities or attain targeted objectives. A fund is not a separate legal entity. Funds are used by governments because they need to maintain very tight control over their resources, and funds are designed to monitor resource inflows and outflows, with particular attention to the remaining amount of funds available. By segregating resources into multiple funds, a government can more closely monitor resource usage, thereby minimizing the risk of overspending or of spending in areas not authorized by a government budget.
Some types of funds use a different basis of accounting and measurement focus. To clarify the difference between these concepts, the basis of accounting governs when transactions will be recorded, while the measurement focus governs what transactions will be recorded.
Types of Government Funds
There are several types of funds used by governments to track incoming and outgoing funds. The main classifications are as follows:
Governmental fund. The governmental fund is the default fund to be used to account for all activities of a government, except for those required to be accounted for in a different fund. Thus, the governmental fund is a government’s primary operating fund. The governmental fund category includes the following funds:
Capital projects fund. Used to account for financial resources that have been set aside for capital outlays (usually major outlays). There is no requirement to use this type of fund. If a government decides to do so, another decision is whether to use a single capital projects fund for all capital projects, or to use a separate fund for each one. Capital projects funds should not be used when accounting for assets held in trust for individuals, other governments, or private organizations.
Debt service fund. Used to account for financial resources that have been set aside to pay for principal and interest. The use of this fund may be required by a government’s bond indentures. When there are debt service transactions associated with a special assessment for which there is no government obligation, the resources are instead accounted for in an agency fund.
General fund. Used to account for all financial resources not being reported in any other fund. This is the chief operating fund of a government; a government is only allowed to use one general fund.
Permanent fund. Used to account for financial resources for which only the earnings can be used for the support of government programs. This type of fund would typically be used when a government receives an endowment. Permanent funds should not be used in place of private-purpose trust funds, where resources are being used for the benefit of individuals, other governments, or private organizations.
Special revenue fund. Used to account for the proceeds from targeted revenue sources for which there is a commitment for expenditures other than capital projects or debt service. A common application is the proceeds from grants, since these revenues must be used for specific types of expenditures. The targeted revenue sources could be assigned directly to a special revenue fund, or are allocated to it from another fund. The revenue sources are recognized as special revenue when they arrive in the special revenue fund from which they will be expended. The use of this type of fund is not required unless there is a legal mandate for it. Special revenue funds should not be used when accounting for assets held in trust for individuals, other governments, or private organizations.
Proprietary fund. Proprietary funds are used to account for the business-type activities of a government. These funds emphasize operating income, financial position, changes in net position, and cash flows. The proprietary funds category includes the following funds:
Enterprise funds. These funds are used to account for any activity for which external users are charged a fee for goods and services, even when the government subsidizes a portion of the activity’s costs. An enterprise fund may be used to issue bonds, so that the revenue stream of user fees being collected by the fund can be pledged to the associated debt service. A government may want to set up an enterprise fund just so that it will have information about the total cost of providing a service. State unemployment compensation funds and public entity risk pools must be reported in enterprise funds.
Internal service funds. These funds are used to account for activities that provide goods or services to other funds, as well as departments or agencies of the primary government, or to other government entities on a cost-reimbursement basis. This fund should only be used when the reporting government is the primary participant in the activity. When this is not the case, set up an enterprise fund instead. If internal service funds are to be used, it is easier to track information about the services being provided if a separate internal service fund is maintained for each one. For example, there could be separate internal service funds for data processing, printing services, and purchasing. These funds are generally assumed to operate on a breakeven basis, so any ongoing fund surpluses or deficits might indicate the need to adjust the internal prices being charged to recipients.
Fiduciary fund. Fiduciary funds are used to report on assets held in trust for the benefit of organizations or other governments that are not part of the reporting entity. The fiduciary funds category includes the following funds:
Agency (custodial) funds. Used to report on resources held in a custodial capacity, where funds are received, temporarily invested, and remitted to other parties. For example, an agency fund may be used when a government collects taxes on behalf of another government.
Investment trust funds. Used to report the external portion of an investment pool that is reported by the sponsoring government.
Pension and employee benefit trust funds. Used to report on assets held in trust for pension plans, other postemployment benefit plans, and employee benefit plans.
Private-purpose trust funds. Used to report on trust arrangements where individuals, private organizations, and other governments are the beneficiaries. This type of fund should not be used to account for any grant programs that support a government’s own activities.
Related AccountingTools Courses
The Basis of Accounting
The accrual basis of accounting is adjusted when dealing with governmental funds. The sum total of these adjustments is referred to as the modified accrual basis. Under the modified basis of accounting, revenue and governmental fund resources (such as the proceeds from a debt issuance) are recognized when they become susceptible to accrual. This means that these items are not only available to finance the expenditures of the period, but are also measurable. The “available” concept means that the revenue and other fund resources are collectible within the current period or sufficiently soon thereafter to be available to pay for the current period’s liabilities. The “measurable” concept allows a government to not know the exact amount of revenue in order to accrue it.
The Focus of Governmental Financial Reporting
The key measurement focus in a government fund’s financial statements is on expenditures, which are decreases in the net financial resources of a fund. Most expenditures should be reported when a related liability is incurred. This means that a governmental fund liability and expenditure is accrued in the period in which the fund incurs the liability.
The focus of governmental funds is on current financial resources, which means assets that can be converted into cash and liabilities that will be paid for with that cash. Stated differently, the balance sheets of governmental funds do not include long-term assets or any assets that will not be converted into cash in order to settle current liabilities. Similarly, these balance sheets will not contain any long-term liabilities, since they do not require the use of current financial resources for their settlement. This measurement focus is only used in governmental accounting.