1-1

ssentio/s of 4ccountinq for

6overnmento/ ond
NotforProfit Orqonitotions
Chapter 1
Introduct|on to Account|ng and I|nanc|a| keport|ng
for Governmenta|
and Notforrof|t Crgan|zat|ons
Copyright 211 by 1he McCraw-Hill Companies, Inc. All rights reserved. McCraw-Hill/Irwin
1-2
Cvervlew of ChapLer 1
W Jhy sLudy Cn accounLlng
W ulfferences ln Lhe envlronmenL LhaL cause Cn
accounLlng Lo dlffer from buslness accounLlng
W Cn accounLlng sLandard seLLers
W lund 1ypes
W Cvervlew of flnanclal sLaLemenLs
1-3
Jhy SLudy Cn AccounLlng?
W Governments and NI organ|zat|ons h|re
accountants
W CA f|rms and states engage accountants to
perform the|r aud|ts
W As c|t|zens and donors we w|sh to better
understand how taxes and char|tab|e
donat|ons are used
1-4
1be ttotb ls tbot oll meo bovloq
powet ooqbt to be mlsttosteJ
ames Mad|son
W wwwSeethespend|ngorg
W US Attorney Southern D|str|ct
W Women embezz|e more than men
W Men fa|s|fy f|nanc|a| statements more than
women
1-5
1ypes of CrganlzaLlon page 2
W ub||c owned or conLrolled by governmenLs
W r|vate nC1 owned or conLrolled by
governmenLs
us|nesses owned by lndlvlduals and exlsL Lo
generaLe a prof|t for Lhose owners
Notforrof|t no owners" and Lhe
organlzaLlon's purpose ls someLhlng oLher Lhan Lo
provlde goods or servlces for a proflL
1-6
JhaL are noLforroflL LnLlLles?
W nt|t|es wh|ch ex|st so|e|y to prov|de
programs and serv|ces that are of pub||c
benef|t
rovlde servlces LhaL may noL be provlded by
local sLaLe or federal governmenL
lncorporaLed ln Lhe sLaLe ln whlch Lhey do
buslness
uo noL dlsLrlbuLe surplus funds Lo owners or
shareholders
1ax exempL
1-7
JhaL are CovernmenL LnLlLles?
W ub||c corporat|ons an lnsLrumenLallLy of
Lhe sLaLe founded and owned ln Lhe publlc
lnLeresL supporLed by publlc funds and
governed by Lhose derlvlng Lhelr auLhorlLy
from Lhe sLaLe
W od|es corporate and po||t|c sLaLe counLy
clLy
1-8
JhaL are CovernmenLal LnLlLles? conLlnued
W Genera| urpose
rovlde a wlde varleLy of servlces such as
hlghways pollce flre proLecLlon eLc
lederal governmenL SLaLe ClLy CounLy eLc
W Spec|a| urpose
rovlde a slngle or llmlLed number of servlces
ubllc colleges unlverslLles school sysLems
waLer sewer hosplLals eLc
1-9
ulfferences ln Lhe Cn LnvlronmenL
W Crgan|zat|ona| urposes CovernmenLs
exlsL for Lhe we|| be|ng of c|t|zens by
provldlng publlc servlces noL for Lhe
purpose of generaLlng reLurns Lo owners
ffect|veness and ff|c|ency
More deta||ed f|nanc|a| report|ng
1-10
ulfferences ln Lhe Cn LnvlronmenL
W Sources of kevenues CovernmenLs derlve
many of Lhelr resources from taxes and
other nonexchange transact|ons
lnvolunLary conLrlbuLlons
no expecLaLlon of proporLlonal share of
beneflLs
1lmlng of revenue recognlLlon may be a
problem
1-11
ulfferences ln Lhe Cn LnvlronmenL
W otent|a| for Longev|ty CovernmenLs very
rarely go ouLofbuslness
Long Lerm vlew of operaLlons
SusLalnablllLy of servlces and
AblllLy Lo meeL fuLure demand
1-12
ulfferences ln Lhe Cn LnvlronmenL
W ke|at|onsh|p w|th Stakeho|ders
Accountab|||ty for pub||c funds
Dse of Iund accounLlng A fund" ls a separaLe
reporLlng enLlLy wlLhln governmenLal accounLlng
sysLem used Lo demonsLraLe compllance wlLh
legal resLrlcLlons
FinanciaI reporting, guided by a set of
generaIIy accepted standards, is an
effective means to controI the actions of
those entrusted with pubIic resources.
1-13
ulfferences ln Lhe Cn LnvlronmenL
W An annua| budget should be adopLed by
every governmenLal unlL
W ko|e of the udget CovernmenL budgeLs
ofLen carry Lhe author|ty of |aw prevenLlng
publlc offlclals from spendlng ouLslde Lhelr
budgeLary auLhorlLy
udgetary controI is refIected in
government financiaI reports through a
required comparison of actuaI amounts
with budgeted amounts.
1-14
DS S1AnuA8u SL11L8Spage 3
W Iedera| |eve|
IASA lederal AccounLlng SLandards Advlsory 8oard
CAC CovernmenLal AccounLablllLy Cfflce
DS 1reasury ueparLmenL
CM8 Cfflce of ManagemenL and 8udgeL
W State and Loca| Government (SLG)
GAS CovernmenLal AccounLlng SLandards 8oard
r|vate (nongovernmenta|) Notforprof|ts
IAS llnanclal AccounLlng SLandards 8oard
1-15
S1AnuA8u SL11L8S nootJ
State and Loca| GAS formed |n 1984
Covers baslc governmenLs and enLlLles owned or
conLrolled by governmenLs
redecessor nCCA naLlonal Councll on
CovernmenLal AccounLlng
Notforprof|ts IAS formed |n 1973
Covers noLforproflLs noL relaLed Lo governmenL
enLlLles prlvaLe nonproflL hosplLals colleges
museums eLc
redecessors
AccounLlng rlnclples 8oard (19391973) and
CommlLLee on AccounLlng rocedures (1939
1939)
1-16
AuLhorlLaLlve LlLeraLure
W SLaLemenLs lnLerpreLaLlons and 1echnlcal 8ulleLlns
are prlmary llLeraLure LhaL speclfles CAA (generally
accepLed accounLlng prlnclples)
W Powever ln absence of adequaLe guldance audlLors
may look aL oLher documenLs
W CAA hlerarchy (lllusLraLlon 12) guldes Lhe audlLor ln
Lhe prlorlLy of lmporLance for accounLlng guldance
1-17
SLaLe and Local CovernmenL CAA hlerarchy
Category
GASB (STATEMENT 55)
State and Local Governments
A.
O GASB Statements and
Interpretations
B.
O GASB %echnical Bulletins and,
O 1 cleared by the GASB, ICP
Industry udit and ccounting
Guides and Statements of
Position
C.
O AICPA Practice Bulletins that
have been cleared by the GASB
D.
O Implementation guides "As)
publshed by the GASB sta11,
and
O practces that are wdely
recogned and prevalent n
state and local governments.
1-18
ConcepLs SLaLemenLs
W ConcepLs pro[ecL began ln Lhe 1970s Lo
gulde Lhe sLandard seLLers ln esLabllshlng
CAA
W ConcepLs sLaLemenLs gulde Lhe developmenL
of new sLandards
1hese are noL lnLended as auLhorlLaLlve CAA
concepLs sLaLemenLs buL are used for guldance
only lf no oLher llLeraLure addresses an lssue
1-19
ConcepLs SLaLemenLs
W All Lhree sLandard seLLlng bodles have a
serles of ConcepLs SLaLemenLs
lASA8 federal governmenL
lAS8 prlvaLe enLlLles
CAS8 sLaLe and local governmenLs
1-20
lASA8 ConcepLs Cb[ecLlves for lederal
llnanclal 8eporLs
W udgetary Integr|ty demonsLraLe budgeL
regulaLlons were adhered Lo
W Cperat|ng performance help evaluaLe
servlce efforLs and accompllshmenLs
W Stewardsh|p show Lhe lmpacL on
operaLlons and lnvesLmenLs
W Systems and contro|s lndlcaLe wheLher
Lhey are adequaLe
1-21
lAS8 ConcepLs SLaLemenL no 6 Cb[ecLlves of
nl llnanclal reporLs
W Ma|n Cb[ect|ve of nl llnanclal SLaLemenLs
ls
@o prov|de |nformat|on usefu| to present and
potent|a| resources prov|ders and others |n
mak|ng dec|s|ons about a||ocat|ng resources to
the NI organ|zat|on
W Jhlch emphaslzes LhaL
uonors governmenL granLors and banks are
prlmary users
1-22
CAS8 ConcepLs SLaLemenLs SLaLemenL #1
Cb[ecLlves
W GAS #1 Cb[ect|ves of I|nanc|a| Statements
o Allow comparlson of actua| w|th budgeted resu|ts
o Pelp users assess f|nanc|a| cond|t|on and resu|ts of
operat|ons
o Accountab|||ty @o [ust|fy the ra|s|ng of pub||c resources and
the purposes for wh|ch they are used
o Users
o C|t|zens
o Leg|s|ature and overs|ght off|c|a|s
o Investors
o Cred|tors
o Show comp||ance wlLh laws rules and regulaLlons
o AsslsL ln evaluaLlng eff|c|ency and effect|veness
1-23
W Serv|ce fforts and Accomp||shments
keport|ng (covered ln ChapLer 13) and
amended by ConcepLs SLaLemenL 3
W Inc|udes both I|nanc|a| and Nonf|nanc|a|
measures of performance
nonflnanclal performance measures conom|c
Deve|opment Counc||
# of buslness prospecLs lnLeresLed ln locaLlng
# conLracLs made wlLh flrms lnLeresLed ln locaLlng
CAS8 ConcepLs SLaLemenLs SLaLemenL #2
1-24
W Commun|cat|on Methods |n Genera| urpose
I|nanc|a| keports that Conta|n as|c I|nanc|a|
Statements
W LsLabllshed Lhe framework for whaL
lnformaLlon ls presenLed ln
as|c I|nanc|a| Statements
Notes
kequ|red Supp|ementary Informat|on
Supp|ementary Informat|on
CAS8 ConcepLs SLaLemenLs SLaLemenL #3
1-25
W llnanclal reporLs are much more lncluslve Lhan
Lhose prepared under lAS8 sLandards
W Comprehens|ve Annua| I|nanc|a| keport (CAIk)
Introductory sect|on LlLle page conLenLs leLLer of
LransmlLLal descrlpLlon of governmenL eLc
I|nanc|a| sect|on
W AudlLors reporL
W MuA
W 8aslc flnanclal sLaLemenLs
W 8equlred supplemenLary lnformaLlon
Stat|st|ca| sect|on demographlc and economlc daLa
flnanclal Lrends flscal capaclLy eLc
CAS8 ConcepLs SLaLemenLs SLaLemenL #3
1-26
8aslc llnanclal SLaLemenLs
W Governmentw|de Statements
Statement of Net Assets
W Slmllar Lo buslness balance sheeL
Statement of Act|v|t|es
W Slmllar Lo buslness lncome sLaLemenL
W Iund I|nanc|a| Statements
ueLalled reporLs of governmenLal proprleLary and
flduclary acLlvlLles
lllusLraLed ln ChapLer 2
1-27
Fiduciary
Funds are not
incIuded in
government-
wide
III. 1-3
5,0
1-28
JhaL ls a fund" as Lhe Lerm ls used for sLaLe
and local governmenL accounLlng?
kepresents a part of the act|v|t|es of some
organ|zat|on
Is an account|ng ent|ty
W Selfbalanclng seL of accounLs reflecLlng Lhe
asseLs llablllLles neL asseLs and changes ln
Lhose balances
Segregates resources for spec|f|c act|v|t|es
W ln such a way as Lo ensure compllance wlLh
approprlaLe regulaLlons or resLrlcLlons
1-29
1ypes of lDnuS pages 1416
W Governmenta| Dsed Lo accounL for provlslon
of general clLlzen servlces
W ropr|etary Dsed Lo accounL for buslnessllke
acLlvlLles of Lhe governmenLal body
W I|duc|ary Dsed Lo accounL for resources for
whlch Lhe governmenL ls acLlng as an agenL or
a LrusLee
1-30
CovernmenLal lDnuS page 14
Genera| Iund flnanclal resources for baslc governmenL
servlces
W every government body must have one genera| fund
Cap|ta| ro[ects Iunds flnanclal resources resLrlcLed for
caplLal ouLlays bulldlng pro[ecLs lnfrasLrucLure
lmprovemenL pro[ecLs eLc
Debt Serv|ce Iunds flnanclal resources resLrlcLed Lo
expendlLure for prlnclpal and lnLeresL on governmenL debL
lssues
Spec|a| kevenue Iunds proceeds of speclflc revenue
sources LhaL are resLrlcLed for a speclfled purpose
ermanent Iunds Larnlngs on resources buL noL prlnclpal
may be used for purposes LhaL supporL governmenL
programs
1-31
roprleLary lDnuS page 14
W nterpr|se Iunds 8esources obLalned
prlmarlly Lhrough Lhe sale of goods and
servlces Lo parLles exLernal Lo Lhe
governmenL
A|rports C|ty oo| Water department
W Interna| Serv|ce Iunds Servlces provlded by
one governmenL deparLmenL Lo anoLher
governmenL deparLmenL
Motor poo|s r|nt shops
1-32
llduclary lDnuS page 13
W Agency Iunds CovernmenL acLs as a
collecLlng/dlsburslng agenL
CounLy Laxes Lo be dlsbursed Lo clLles wlLhln Lhe
counLy
W ens|on Iunds enslon and employee beneflL
funds
W Investment @rust Iunds LxLernal porLlon of
lnvesLmenL pools
W r|vatepurpose @rust Iunds all oLher LrusL
arrangemenLs under whlch prlnclpal and lncome
beneflL lndlvlduals prlvaLe organlzaLlons or oLher
governmenLs
1-33
Pow Many lunds Are needed?
W Must have one and on|y one Genera| fund
W May not need one of every fund type
no ouLsLandlng longLerm debL? uon'L need a debL
servlce fund
W More than one of some types of funds
lour bulldlng pro[ecLs? A governmenL mlghL use
four caplLal pro[ecLs funds or could posslbly
comblne some
W xact number depends on [udgment
Dse Lhe mlnlmum number LhaL wlll allow
compllance wlLh legal and oLher resLrlcLlons
1-34
Cvervlew of lund llnanclal SLaLemenLs
W Governmenta|
8alance SheeL
SLaLemenL of 8evenues LxpendlLures and Changes ln lund
8alance
W ropr|etary
SLaLemenL of neL AsseLs (8alance SheeL)
SLaLemenL of 8evenues Lxpenses and Changes ln lund neL
AsseLs
SLaLemenL of Cash llows
W I|duc|ary
SLaLemenL of llduclary neL AsseLs (8alance SheeL)
SLaLemenL of Changes ln llduclary neL AsseLs
1-35
8eporLlng erspecLlves
W lnLernal governmenL accounLlng sLlll Lends Lo
emphaslze lndlvldual funds (pools of money)
W CovernmenLwlde reporLs are an aLLempL Lo
aggregaLe daLa lnLo a formaL more famlllar Lo
users buslnessLype flnanclal sLaLemenLs
W D|fferent perspect|ves requ|re d|fferent
account|ng bases and measurement foc|
"Account|ng bas|s" def|nes when transact|ons and
events are recogn|zed |n the f|nanc|a| statements
"Measurement focus" def|nes what |tems are to be
reported |n the f|nanc|a| statements
1-36
AccounLlng MeLhods pages 12 and 13
W Accrua| as|s]conom|c kesources Measurement
Iocus
Ceneral buslness concepLs of revenue and expense"
apply when recordlng exchangellke LransacLlons
8oLh currenL and longLerm asseLs and llablllLles are
recognlzed ln Lhe flnanclal sLaLemenLs
W Mod|f|ed Accrua| as|s]Current I|nanc|a|
kesources Measurement Iocus
kevenues recognlzed when funds are measurab|e and
ava||ab|e for expendlLures of Lhe currenL perlod
xpend|tures are recognlzed when a ||ab|||ty |s
|ncurred
uoes noL reporL longLerm asseLs
1-37
Lxpenses vs LxpendlLures
W Dnder accrual accounLlng expenses are
recognlzed when Lhe relaLed resource or
servlce ls used
urchase of 8ulldlng ls recorded as an asseL
uepreclaLlon expense on flxed asseLs ls
recognlzed over Lhe servlce llfe of Lhe asseL
1-38
Lxpenses vs LxpendlLures
W xpend|tures under modlfled accrual are
recorded when Lhe llablllLy ls lncurred
qu|pment purchases are treated as
expend|tures as soon as you are obllgaLed Lo
pay when Lhe goods arrlve
Longterm assets such as equlpmenL are not
||sted on the fund ba|ance sheet
1-39
More lmpllcaLlons of Modlfled Accrual
W lssuance of bonds ls LreaLed as a llnanclng
Source lnflow on acLlvlLy sLaLemenL
Long term debt |s not ||sted on the fund a|ance
Sheet
ayments of pr|nc|pa| on |ongterm debt are
treated as an expend|ture
1-40
Long1erm AsseLs and uebL ln
CovernmenLJlde vs lund SLaLemenLs
W Governmenta| fund balance sheeLs generally
show only shorLLerm asseLs and llablllLles
W ropr|etary fund balance sheeLs show boLh
shorLLerm and longLerm asseLs and llablllLles
W Governmentw|de statements musL reporL
shorLLerm and longLerm asseLs and llablllLles ln
Lhe SLaLemenL of neL AsseLs
@herefore tota| assets and ||ab|||t|es w||| d|ffer
between the two types of statements
Statements w||| |nc|ude a reconc|||at|on schedu|e
1-41
Summary of AccounLlng by SLaLe and Local CovernmenLs
Iund
as|s of Account|ng
] Measurement
Iocus
I|nanc|a| Statements
GovernmentW|de
Governmenta| and
us|ness@ype
Accrua|] conom|c
kesources
Statement of Net Assets
Statement of Act|v|t|es
Governmenta|
Iunds
Genera|
Spec|a| kevenue
Cap|ta| ro[ect
Debt Serv|ce
ermanent
Mod|f|ed Accrua| ]
Current kesources
a|ance Sheet
Statement of kevenues
xpend|tures and
Changes |n Iund a|ance
ropr|etary Iunds
nterpr|se
Interna| Serv|ce
Accrua| ] conom|c
kesources
Statement of Net Assets
Statement of kevenues
xpenses and Changes |n
Net Assets
Statement of Cash I|ows
I|duc|ary
Agency
ens|on @rust
Investment @rust
r|vate urpose
@rust
Accrua| ] conom|c
kesources
Statement of I|duc|ary
Net Assets
Statement of Changes |n
I|duc|ary Net Assets
1-42
ChapLer 1 lnLroducLlon Lo AccounLlng
and llnanclal 8eporLlng
@he nd