Accounting For Public Sector Chap 4

CHAPTER -IV
ACCOUNTING FOR GENERAL AND SPECIAL REVENUE

FUNDS
Set by Yoseph T.
1
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Learning Objectives.
After studying this chapter, you should be able to:
 Understand the nature and purposes of general, and special
revenue funds.
 Differentiate among budgetary accounting, revenue accounting and
expenditure accounting in public sector entities.
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4.1.Nature and Purposes of General & Special Revenue Funds
 As we discussed in chap1, there are three categories of funds:
governmental, proprietary, and fiduciary funds whereby the

accounting characteristics and principles are unique to each fund
category.
 Governmental Funds consists of five types of funds: the general fund,
special revenue funds, debt service funds, capital projects funds,

and permanent funds in which every state and local government has
one and only one general fund and other governmental funds will
be created as needed.
By:Yoseph T 3/31/2022 3
 We have also noted that there are two basic types of governmental
financial statements: government-wide and fund f/ statements.

 Government-wide financial statements are intended to report an
aggregated government’s net assets and changes in net assets and

used to assessing operational accountability whether the
government has used its resources efficiently and effectively in
meeting operating objectives.
 Fund financial statements assist in assessing whether the government
has raised and spent financial resources in accordance with budget

plans and
By:Yoseph T in compliance with pertinent laws and regulations.
3/31/2022 4
 Certain funds, referred to as governmental funds, focus on the short-
term flow of current financial resources or fiscal accountability,

rather than on the flow of economic resources.
 Other funds, referred to as proprietary and fiduciary funds, account
for the business-type and certain fiduciary activities of the

government.
 Illustration 4.1 and Illustration 4.2 below shows format of
government-wide statement of activities and format of fund
statement respectively.
By:Yoseph T 3/31/2022 5
Illustration 4.1 format of government-wide statement of activities.
• The format prescribed for the government-wide statement of
activities displays the net expense or revenue of each function or

program reported for the governmental activities as shown below:
• Expenses – Program Revenues = Net (Expense) Revenue
• In Government-wide Statement except for extraordinary or special
item expenses, expenses generally are reported by function or

program and may direct expenditures or indirect expenditures and
Revenues should be distinguished between Program revenues and
General revenues.
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• Direct expenditures:-those associated with a function or program
• Indirect expenditures:-those that are not directly linked to an

identifiable
• Program revenues:- reported in the program/functions section of
the statement
• General revenues:- not directly linked to any program/function and
reported in a separate section at the bottom of the statement.
• Program revenues are reported in three categories:
Charges for services.
Operating grants and contributions.
Capital grants and contributions.

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• In the GASBS 34 reporting model, extraordinary items and special

items must be reported as separate line items below general
revenues in the statement of activities to distinguish these
nonrecurring items from normal recurring general revenues.
• Extraordinary items are defined in the same manner as in business
accounting: “transactions or other events that are both unusual in
nature and infrequent in occurrence.”
• Special items are items within management’s control that may be
either unusual in nature or infrequent in occurrence but not both.
• An example of a special item is one-time revenue from the sale of
a significant governmental asset.
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 General fund also called General Revenue Fund, General Operating
Fund, or Current Fund is a fund used to account for the ordinary

operations of a government that are financed from taxes and
other general revenues.
 The General Fund has long been the accounting entity of a state
or local government that accounts for current financial resources

raised and expended for the core governmental services provided
to the citizenry.
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• Whenever a tax or other revenue source is authorized by a

legislative body to be used for a specified purpose only, a source
may create a special revenue fund.
• Even though, the general fund and the special revenue fund have
different purposes, they are similar in that both are expendable
and they are then filled up (replenished) again for the next year
and thus have same accounting and reporting procedures.
• On other hand, when the fund is used create/construct fixed assets
create capital project fund.
• Capital Projects Fund (CPF):- A fund created to account for all
resources to be used for the construction or acquisition of
designated capital assets by a government except those financed
by proprietary or fiduciary funds.
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• It should be emphasized that the General Fund and all other funds
classified as governmental funds account for only current financial

resources (cash, receivables, marketable securities, and, if material,
prepaid items and inventories).
• Economic resources, such as land, buildings, and equipment utilized in
fund operations, are not recorded by these funds because they are
not normally converted into cash.
• Similarly, those liabilities incurred for normal operations that will be
liquidated by use of fund assets.

By:Yoseph T 3/31/2022
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• The arithmetic difference between the amount of financial resources
and the amount of liabilities recorded in the fund is the fund equity,
usually referred to as fund balances.
• The General Fund accounts for financial transactions during a fiscal
year in operating statement accounts classified as

 Revenues,
 Other Financing Sources,
 Expenditures, and
 Other Financing Uses.
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• Revenue is defined as increases in fund financial resources other than

from financing sources such as inter-fund transfers and debt issue
proceeds.
• Other financing sources:- An operating statement classification in
which financial inflows other than revenues are reported, for
example, proceeds of long-term debt and transfers in.
• Expenditure is the cost to purchase a good or service, whereas
• Expense is the cost of a good or service consumed during the period.
• Other financing uses An operating statement classification in which

financial outflows (transfers-out) other than expenditures are
reported, the same effect on fund balance as expenditures.
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• Both expenditure and other financing uses decrease the fund balance
at year-end when the temporary accounts are closed.

• In fact, the word expenditure is defined as a decrease in a fund’s
current financial resources other than from inter-fund transfers.

• As an example, inter-fund transfers occur in those jurisdictions where
a portion of the taxes recognized as revenue by the general fund is

transferred to debt service fund that will recognize an expenditure
for the payment of interest and principal on general long-term debt.
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• The General Fund would debit Other financing uses-Inter-fund
transfers out in the appropriate amount and credit Cash.
• The debt service fund would debit Cash in the same amount and
credit Other financing sources-Inter-fund transfers in.
• Thus, the use of transfer accounts achieves the desired objective
that revenues be recognized in the fund that raises the taxes and
expenditures be recognized in the fund that expends the revenue.
• Total inflows and outflows for the operating statement accounts of
the governmental funds are ne presented in illustration 4.2. below.

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Illustrn4.2 format of governmental funds statement of revenues, expenditures, and changes in fund balances
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• Both revenues & other financing sources are temporary accounts that
increase fund balance at yearend when closing entries are made.
• Similarly, expenditures and other financing uses are temporary
accounts that decrease fund balance when closing entries are made.
• GASB standards emphasize, however, that other financing sources
(uses) should be distinguished from revenues and expenditures.
• The format of the operating statements shown in illustrations 4.2
above accomplishes this objective by reporting other financing
sources (uses) in a separate section below the revenues and
expenditures sections.
• The next section introduces the use of budgetary accounts in the
General Fund $ certain other governmental fund types.
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• Before beginning the discussion, it is recommended that you review

illustration 4.3, which displays the relationship between budgetary
accounts and the balance sheet and operating statement accounts
of the General Fund.
• Two points should be noted in reviewing illustration 4.3 below:
(1) Both the operating statement accounts and the budgetary accounts
are sub-fund equity temporary accounts that are closed to Fund
Balance at year-end.
(2) Each operating statement account has a budgetary counterpart:
• Revenues and Estimated Revenues; Expenditures and both
Appropriations and Encumbrances; Other Financing Sources and
Estimated Other Financing Sources; and Other Financing Uses and
Estimated Other Financing Uses.
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Illustn4.3 Comparison of balance sheet, operating statement, & budgetary accounts
3-20
4.2 Budgetary Accounting
• Used to record the budgetary inflows and outflows estimated or
authorized in the annual budget.

• Accounts
 Estimated Revenues
 Estimated Other Financing Sources: represent operating transfers
in from other funds and proceeds of long-term borrowing.

 Appropriations
 Estimated Other Financing Uses: represent operating transfers out
to other funds.
 Encumbrances.
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4.2. Budgetary Accounting
• A tip that may prove useful in understanding budgetary accounting
is that, with the exception of Encumbrances, the budgetary accounts
have normal balances that are the opposite of the corresponding
operating statement accounts.
• For example, since the Revenues account has a normal credit
balance, the Estimated Revenues account has a normal debit
balance.
• The use of opposite account balances facilitates budgetary
comparisons and makes it easy to determine whether actual
amounts are under or over the budgeted amounts.
• The Encumbrances account has the same normal debit balance as
the Expenditures account because an encumbrance represents a
commitment prior to an expenditure.(See illustration 4.4 below).
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Illustn4.4 Relationship between Budgetary and Operating Statement Accounts
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• In order to achieve budgetary control, only three general ledger
budgetary control accounts are needed in the General Fund:
• Estimated Revenues,
• Appropriations, and
• Encumbrances.
• Subsidiary ledger accounts should be provided in detail to support
each of the three control accounts.
• Budgeted inter-fund transfers and debt proceeds may be recorded
in two additional budgetary control accounts:
• Estimated Other Financing Sources and Estimated Other Financing
Uses.
• These accounts also supported by subsidiary detail accounts.
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• Estimated Revenues revenue accounts kept on an accrual basis,
revenue estimated to accrue during a given period regardless of
whether or not it is all to be collected during the period.
• For revenue accounts kept on a cash basis , the term designates the
amount of revenue estimated to be collected during a given period.
Under the modified accrual basis, estimated revenues are those that
are measurable and available.
• An appropriation is a legal authorization granted by the legislative
body to expend cash, incur liabilities or other financial resources
for goods, services, and facilities to be used for specified purposes,
in amounts not to exceed those authorized for each purpose.
• An appropriation is usually limited in amount and as to the time
when it may be expended.
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 The distribution made of a federal appropriation by the office of
budget management into amounts available for specified periods is

called apportionment, and
 Appropriations requested by departments or by the central
administration of a government for a budget period is known as

appropriations budget, and
 When the appropriations budget has been adopted in accordance
with procedures specified by relevant law, the budget becomes

legally binding on the administration of the government for which
the budget has been adopted.
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 A part of an appropriation that may be encumbered (obligated)
or expended during an allotment period is referred o as allotment.

• An encumbrance is the estimated liability to be incurred, amount of
purchase orders, contracts, or salary commitments chargeable to an
appropriation.
 The account is credited when goods or services are received and
the actual expenditure of the appropriation is known.

 Resources provided&used by current or prior-period appropriations
that are consumed during the current fiscal period is called

appropriations used .
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4.3. Classification of Appropriations and Expenditures
and Budgetary Control
 When liabilities authorized by an appropriation have been
incurred, the appropriation is said to be expended.
 Thus, budgeted appropriations are sometimes called estimated
expenditures. Expenditures, then, are expended appropriations.
 An expenditure is actual liability which has been incurred pursuant
to authority given in an appropriation.
 When the accounts are kept on the cash basis the term expenditure
designates only actual cash disbursements for these purposes.
 In most cases, budgetary control over expenditures follows the
logical flow depicted below:
• Appropriation Encumbrance Expenditure Disbursement
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 Budgetary control of expenditures is achieved by:
1. Ensuring that a valid appropriation exists prior to recording an
encumbrance or expenditure, and
2. Periodically comparing encumbrances and expenditures to
appropriations to prevent overspending.
• Comparison is enhanced by using the same account classification
scheme for appropriations, encumbrances, and expenditures.
• According to GASB standards, expenditures should be classified by
(1) Fund (4) Activity

(2) Function or program (5) Character
(3) Organization unit (6) Object
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• Fund- The primary classification of governmental expenditures is by
fund, since a fund is the basic fiscal and accounting entity of a
government.
• Function or Program-Assists in budgeting resources for carrying out
major areas of service activities or goals.
 Functions group related activities that are aimed at accomplishing
a major service or regulatory responsibility.
 Examples - General Government - Health and Welfare
- Public Safety - Culture and Recreation
- Highways and Streets
 Programs group activities, operations, or organizational units that
are directed to the attainment of specific purposes or objectives.
. Examples; Economic development, health care, Youth & Seniors etc
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• Organization Unit:- is considered essential to management control,
assuming the organizational structure of a given government
provides clear lines of responsibility and authority.
• Examples
- Police Department - City Attorney
- Fire Department - City Clerk
- Building Safety Department - Personnel Department
- Public Works Department - Parks and Recreation Department
• The key distinction between classification of expenditures by
organization unit and classification by program or function is that
responsibility for a department is fixed, whereas a number of
departments may be involved in the performance of a program or a
function.
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• Activity- Assists in assessing performance on specific lines of work
and determining cost of activities.
• For example, within the public works department, activities such as
the following may be performed:
 Solid waste collection-residential
 Solid waste collection-commercial
 Solid waste disposal-landfill
 Solid waste disposal-incineration
• Character-Assists in evaluating which period is benefited by an
expenditure: past, current, or future.
• A common classification of expenditures by character recognizes
three groups: current expenditures, capital outlays and debt service.
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• Object-The object of an expenditure is the thing for which the
expenditure was made.
• Object classes may be viewed as subdivisions of character
classifications.
• One scheme of object classification includes the following major
classes:
 Personal services,
 Capital outlays,
 Supplies ,
 Debt service and
 Other services and charges.

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4.4. Classification of Government Revenues
• In governmental budgeting, revenue, includes all inflows-financial
resource that increase the net assets of a fund and revenue can be
classified on the basis o the following sources:
 By fund (The primary classification of governmental revenue)
 By source
 Taxes (Ad-valorem and self-assessing)
 Debt i.e. bond issue proceeds
 Special Assessments i.e. street repair, street cleaning and etc.
 Licenses and Permits i.e. building permits, vehicle licenses,
 Inter-governmental Revenues i.e. grants &other financial assistance.
 Services charges i.e. for goods & services provided by government.
 Interest and Penalties, Fines and Forfeits i.e. neglect of official duties
 Miscellaneous Revenues i.e. contributions from private sources.
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4.5 Budgetary Accounting
4.5.1. Accounting for Expenditures
• It is extremely important in governmental accounting that
expenditures do not exceed appropriations.
• The budget is legally binding, and exceeding it usually results in
severe penalties.
• There are, three special accounting safeguards have been installed
for governmental entities:
1. Recording the budget at the beginning of the year.
2. Recording of the purchase orders as placed.
3. Closing the budget at the end of the year.
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1. Recording the budget at the beginning of the year
• Three control accounts: Appropriations, Encumbrances, and
Expenditures are used to control similarly named columns of the
detail budget accounts in the subsidiary ledger.
• The detail account totals for Appropriations, Encumbrances, and
Expenditure in the subsidiary ledger must equal the corresponding
general ledger control account balances.
• At the beginning of the budget period, the Estimated Revenues
control account is debited for the total amount of revenues expected
to be recognized, as provided in the operating budget and
appropriations and budgetary fund balance is credited as
presented below.
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1. Recording the budget at the beginning of the yea Cont.
1. Assume that the governmental unit is expecting to collect
$500,000 in the upcoming fiscal year and of this $480,000 is
authorized to be spent.
Estimated Revenues $500,000
Appropriations $480,000
Fund Balance $20,000
• This entry tells us that the governmental unit is expecting to

collect $500,000 in the upcoming fiscal year and of this
$480,000 is authorized to be spent.
• The remaining $20,000(recorded as Fund Balance) is kept as
reserve to meet unexpected price increases that might happen in
the year.
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1.Recording the budget at the beginning of the year Cont.
2. Recording Purchase Order (Encumbrance) Cont.
• Two Journal entries are needed for encumbrances:
1.When the order is paced, and
2.When the goods are received.
• When the order is paced, Encumbrances is debited and Reserve
for Encumbrances (a fund Balance account) is credited.
• When the order is received, the above entry is reversed and
a debit to Expenditure and a credit to Cash or A/ Payable
maintained to account actual liability incurred:
To illustrate, office supplies of $12,000 (paper 10,000, Computer
printer Ink $1,000, and Bic pens $1,000) are ordered.
The entry to record the encumbrance is
Encumbrances $12,000
Reserve for Encumbrances $12,000
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1. Recording the budget at the beginning of the year Cont.
• One month later, the paper is received as ordered, the printer Ink
was out-of stock and has been backordered, Luxor pens, which
are slightly more expensive ($1.30 each) were substituted for
the Bics ($1.25 each).
• The encumbrance for printer ink should remain outstanding and
encumbrance for the paper (10,000) and pens(1,000) should be
reversed as follows:
Reserve for Encumbrances $11,000
Encumbrances $11,000
• At the same time expenditure debited for$11,040 ( paper
$10,000, and for pens $1040 [(1,000/$1.25)*1.30]).
Expenditures $11,040
Accounts payable (or cash) $11,040
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1.Recording the budget at the beginning of the year Cont.
• Remember: in the first entry the accounts are reversed for their
balances recorded when the purchases are ordered.
• In the second we used the actual price not the encumbered
balance.
• Encumbrances are not necessary for every single expenditure.
Expenditures that are regular and predicable, such as payroll are
not typically encumbered.
• However, if payroll has seasonal fluctuations, then it is wise to
encumber the estimated payroll.
• If a payroll of $50,000 was not encumbered, its payment would
simply appear as the following entry:
Expenditures $50,000
Cash $50,000
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4.5.2. Accounting for Revenues
• In the GF and the SRF revenue recognized when the revenue is
available and measurable.

A.Taxes are the primary revenue source of revenue for most
governments, accounting for them will be given the most coverage
of the revenue types.
• Taxes which are not paid on time usually accrue interest and
penalties on any unpaid balance which is an additional revenue

source for the government.
• See the following illustration pertaining to the General Fund of the
municipality of XY City.
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•The municipality of XY City were assessed Land use taxes
$100,000, in January 2015, and they are levied (formally made

due) in June1, 2015 to be paid by July 31, 2015. The revenues are
to be used to meet the year 2016 expenditures and 99% of the
taxes are expected to be collected. However, on the due date, only
$80,000 was received. Assume that one month later, all of the
delinquent taxes are paid with penalty of 10% and 12% interest
per annum for money tied up.
1. What is the amount of allowance for uncollectible current tax?
2. What is the total amount cash collected from delinquent tax?
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4.5.2 Accounting for Revenues Cont.
2013 Taxes Receivable current 100,000

June 1 Allowance for Uncollectible Current tax 1,000
Revenues 99,000
(To record accrual of tax levy)
• Note that the amount recorded as revenue is the net of the
receivable less the allowance for uncollectible taxes.
• This is different from for-profit accounting, where the gross is
recorded as income, and the estimated uncollectible amounts are

charged to expense.
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4.5.2.Accounting for Revenues Cont.
 On the due date, only $80,000 was received. All taxes which are
paid are credited to the current taxes receivable account.
 As the taxes are collected in cash, Cash is debited and the Tax
receivable Current is credited.
July 31 Cash 80,000

Taxes Receivable-Current 80,000
(To record collection of taxes)
 After the due date, there are more current tax receivables
remained uncollected which become past due.
 Any taxes which are not paid by the due date become delinquent,
and should be reclassified from the current taxes receivable to the
delinquent taxes account.
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4.5.2. Accounting for Revenues Cont.
• In other words, instead of Tax Receivable–Current, they should be
recorded as Tax Receivable-Delinquent.
July 31 Taxes Receivable-Delinquent 20,000
Taxes Receivable-Current 20,000
(To record taxes becoming delinquent)
• At the same time, the uncollectible allowance related to

delinquent taxes should also be reclassified to an allowance for
uncollectible delinquent taxes account.
• This is because we have turned the balance of Tax Receivable
Current account in to zero: $80,000 and $20,000 have been
credited in the first and second entry respectively.
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• Therefore, we have no current balance from which we are to claim
uncollectible, rather the expected uncollectible might still remains
with the delinquent balance.
• The entry to record such reclassification is as follows:
July31 Allowance for Uncollectible Current Tax 1,000

Allowance for Uncollectible Delinquent Tax 1,000
(To record reclassification of allowance of estimated losses on taxes)
• Assume that one month late, some 75% of the delinquent

taxes are paid.
• The municipality has a rule to charge a flat penalty of 10% for not
obeying the law and pay the tax liabilities on the due date and
simple interest of 12% per annum for money tied up.
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• The penalty and interest for this case would be calculated as
follows:
• Delinquent tax = $20,000 * 75% = 15,000
• Penalty = 15,000 * 10% = 1,500
• Interest = 15,000 * 12%*1/12 = 150
• Total to be collected from the tax payers = 16, 650
August 31 Cash 16,650

Taxes Receivable-Delinquent 15,000
Revenues (P&I on Delinquent Taxes) 1,650
(To record collection of delinquent taxes plus penalties & interest)
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4.5.2.Accounting for Revenues Cont.
• The penalty and interest may be accrued, although sometimes it is
not practical.
• Monthly, Quarterly, some other interim period, or at year end,
interest could be accrued.
• Assume interest is accrued quarterly; the accrual entry for the
above case is as follow:
• $20,000*10% + $20,000*12%*3/12 = $2,600
Penalties and Interest receivable on Delinquent Taxes $2,600

Revenues $2,600
(To record penalties and interest due on delinquent taxes)
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 After six months the taxing authority has seized the property of
non-payers and Lien would come into effect when the property on
which the tax was due could be seized by the governmental unit.
 The entry would be recorded based on the total amount the
taxing agency needs from the tax payer, inclusive of penalty
and interest; not the value of the property seized.
 At the time of seizure the following entry would be necessary.
Delinquent tax = $20,000 * 25% = 5,000
 Penalty = 5,000 * 10% = 500
 Interest = 5,000 * 12%*6/12 = 300
 Total amount to be claimed from the tax payers = 5, 800
2014 Tax Lien-Receivable 5,800
Feb 1 Taxes Receivable-Delinquent 5,000
Revenues (Penalties and Interest on Delinquent Taxes) 800
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 On Feb15, the seized property is sold for $7,000 with no cost
associated with the sale.
 When the seized property is sold, the taxes, plus interest and
penalties, plus any cost of the sale should be paid.
 Any excess is held in trust for the owner of the property and at the
time of sale the following entry is needed:
Feb 15 Cash $7,000
Tax Lien Receivable $5,800
Trust for property owners $1,200
(To record sale of seized property)
 On March1, the property owners claimed back their $1,200
excess and get paid.
March 1 Trust for property owners $1,200

Cash $1,200
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B. Licenses and Permits
• Hence, the transaction for license and permits should be treated in
cash base accounting as
Cash XX
Revenue XX
C. Grants
 Accounting for a grant becomes slightly complicated when it has
specific requirements for spending or matching requirements, as
grants often do.
 If it has specific requirements for spending, revenue is recognized
as qualifying expense is incurred.
 For instance, imagine that a grant of $500, 000 has been given
for building a new road from AA town to BB town.
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• When the money for the grant is promised, Grants Receivable is
debited and Deferred Revenue (a liability) is credited.
Grants Receivable 500,000
Deferred Revenue 500,000
• Subsequently, assume that $100,000 is received and spent for
gravel for the road. At the time of cash received .
i) Cash 100,000
Grant receivable 100,000
ii) Deferred revenue 100,000
Revenue 100,000
At the time of spent
Expenditures 100,000
Cash 100,000
When the money is finally used up, Deferred Revenues should have a zero balance.
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D. Accounting for Charges and Services
• Some charges for services are collected when the services are
rendered and are recorded as revenue at that time.
• If not collected at the time services are rendered or
immediately thereafter, revenues should be recorded as the
persons or governments served are billed or, if not yet billed at
year end, in adjusting entries.
Cash / Account receivable xx
Revenues xx.
E. Fines and Forfeits
Cash xx
Revenues xx
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4.5.3.Accounting for Inter-fund Transactions
• Inter fund transactions are transactions between different entities
within the governmental unit.
• Transfers are different from transactions, because they are not
exchanges. Rather they are one side flow of resources with no return.
• As such, they need to be recorded in two different sets of books.
• The five types of inter fund transactions commonly encountered in

governmental accounting are listed, defined, and illustrated below.
I. Inter-fund Loans and Advances
II. Quasi-external transactions
III. Reimbursements:
IV. Residual /Equity Transfers
V. Operating Transfers
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4.5.3. Accounting for Inter-fund Transactions Cont.
I. Inter-fund Loans and Advances are temporarily transferred
(money loans) to each other to use idle cash effectively and must
be repaid.
• Since each fund is a fiscal entity, these inter-fund payables and
receivables must be disclosed in the f/sts of each fund involved.
• Interest is sometimes charged to or by proprietary funds; it is not
normally charged on advances and loans between governmental
funds.
• For example, if the general fund loaned $50,000 to a special
revenue fund, the entries required would be:
On the books of the GF On the books of SRF
Due from SRF $50,000 Cash $50,000
Cash $50,000 Due to the GF $50,000
(To record a loan from the general fund)
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II.Quasi-external transactions:-These are transactions that would
be treated as revenues, expenditures, or expenses if they
involved organizations external to the governmental unit.
• These transactions are typically between an internal service fund
and the general or a special revenue fund.
• i.e. a shared garage for the governmental unit which repairs any of
its cars regardless of which fund is responsible for it.
• The garage will charge the respective fund for work done, and
recognize revenue from it.
• Example general fund is paid $1,000 for repair of cars.
On the books of the GF On the books of the ISF
Expenditures 1,000 Due from GF 1,000
Due to ISF 1,000 Revenues 1,000
Due From accounts are not closed, because they are balance sheet accounts.
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III. Reimbursements: Cash or other assets received as a repayment
of the cost of work or services performed or of other expenditures
made for or on behalf of another government or department or
for an individual, firm, or corporation.
 Example, the Ministry of Health operates clinic in AA town & BB
town The AA Clinic, for convenience, might pay a bill of $3000 for
medicine on behalf of BB clinic. The BB clinic would then reimburse
the AA clinic. Payment of the reimbursement would then create
expenditure for the BB clinic.
On the books of AA Clinic On the books of BB clinic
Expenditures $3,000 Expenditure $3,000
Cash $3,000 Cash $3,000
(To record payment of bill on behalf of BB clinic) (To reimburse the AA clinic for medicine purchase)
Cash $3,000
Expenditure $3,000
(To record reimbursement from BB clinic)
Expenditures arising from reimbursement transactions are closed at year end.
57
IV. Residual/Equity/Transfers:-These are non-recurring transfers
made in compliance with special statues or ordinances that do not
qualify as revenues or expenditures nor other financing
sources(uses), to the receiving or disbursing funds.
• Example the GF might transfer the amount of $10,000 to an
internal service fund to open a central supply store.
On the books of the General Fund On the books of Internal Service Fund
Equity Transfers Out 10,000 Due from the General Fund 10,000
Due to ISF 10,000 Equity transfers In 10,000
• These transfers increase the net assets of the receiving fund, and
decrease the net assets of the giving fund and they must be closed
to fund balance at the end of the year as shown below;
On the books of the General Fund On the books of Internal Service Fund
Fund Balance 10,000 Equity transfers In 10,000
Equity transfers out 10,000 Fund Balance 10,000
58
V. Operating Transfers:- are legally authorized recurring periodic
transfers from a fund which receives revenue to the fund through
which the resources are to be expended primarily for the purpose
of shifting resources from one fund to another.
• These transfers are other financing sources of the receiving fund,
other financing uses of the paying fund.
• Example, the general fund made an annual transfer of $8,000 to
a debit service fund for payment of interest on a general long-term
debit. At time the transfer is authorized, the entries are needed:
On the books of the General Fund On the books of the Debt Service Fund
Operating Transfers Out 8,000 Due from General fund 8,000
Due to Debt Service fund 8,000 Operating Transfers In 8,000
(To record a transfer to the debit servicefund) (To record a transfer from the general fund)
59
• These transfers are similar to (residual) equity transfers in that they
increase the net assets of the receiving fund, and decrease the net
assets of the giving fund.
• Therefore, they also must be closed to fund balance at the end of
the year as follows.
On the books of the General Fund On the books of the Debt Service Fund
Fund Balance 8,000 Operating Transfers In 8,000
Operating Transfers Out 8,000 Fund Balance 8,000
• Note that only numbers IV & V above are called properly called
transfers, I, II & III are merely transactions.
60
4.5.4 Accounting for Year End Adjusting Entries
• Regardless of the account structure and entry approach used,
the accounts should be reviewed at year end to determine
whether any adjusting entries are needed to properly reflect
fund operating results and financial position.
• Among the type of revenues that might be accrued in adjusting
entries are interest on investment and delinquent tax, unbilled
charges for services and intergovernmental revenues that are due
but have not been received by year end.
• Expenditures that might require accrual entries include interest on
short term debt, accrued payroll and amounts recorded as
encumbrances that have become expenditures by year end.
• To illustrate year end adjusting entries, look the following
transactions for ABC governmental entity.
61
4.5.4 Accounting for Year End Adjusting Entries
i. Interest and penalty of $900, of which $100 is expected to be
uncollectible, had accrued at year end.
Interest and penalty receivable on Taxes 900
Allowance for uncollectible Taxes 100
Revenues 800
ii. Accrued interest on investment at year end amounted to $600.
Accrued interest receivable 600
Revenue 600
iii.Accrued interest on the short term note payable at year amounted $800
Expenditure 800
Accrued interest Payable 800
62
4.5.5. Accounting for Year End Closing Entries
• At the end of the fiscal year, entries are made to close the accounts. Closing
the books in a governmental entity is somewhat complicated by the
existence of the budgetary accounts and encumbrance accounts.
• The closing process summarizes the results of operations in the fund
balance account.
• The following are steps in closing process:
• 1st the budgetary accounts should be closed. Assuming there was no
change is appropriations or Estimated Revenues during the year, the
opening entries are simply reversed as follows.
Appropriations 480,000
Fund Balance 20,000
Estimated Revenues 500,000
(To close the budgetary accounts)
63
• Next, the actual Revenues and Expenditures are closed, in a manner
similar to profit seeking accounting. (Assumed numbers).
Revenues 510,000
Fund Balance 35,000
Expenditures 475,000
(To close actual Revenues and Expenditures)
• Then, Equity or Operating transfers are closed
•
Fund Balance 5,000 or
Equity/Operating transfer out 5,000
(To close the transfer out accounts)
Equity/Operating transfer out 5,000
Fund Balance 5,000
(To close the transfer in accounts)
• Finally, the Encumbrances Accounts is closed, if necessary. (Assumed numbers)
Reserve for Encumbrances 12,000
Encumbrances 12,000
(To close the encumbrance account)
64
4.6. Financial Statements
• Similar to business concern, both the general fund and special
revenue funds have an operating statement and a balance
sheet.
• In addition they have a statement of revenues, expenditure, budget
and actual.
4.6.1.The Operating Statement
• The statement of revenues, expenditures and changes in fund
balance shows revenues and expenditures with perhaps as many as
three classification schemes for the general fund.
• As special revenue funds are typically established for every
earmarked revenue sources, only the object of classification is used.
• See the following operating statement XX Town
65
XX Town
Statement of Revenues, Expenditures and Change in Fund Balance
For the year ended Dec 31, 2014
Revenues
Property taxes $2,599,636
Revenue from Interest and penalty on delinquent taxes 11,400
License and permits 698,200
Service charges 82,464
Fines 310,800
Intergovernmental revenue 284,100
Miscellaneous Revenue 28,400
Total Revenue 4,015,000
Expenditures
General government 649,400
Public safety 305,435
Public works 778,300
Health and welfare 850, 325
Parks and recreation 292,500
Contribution to retirement plan 179,100
Miscellaneous Appropriation 14,200
Total Expenditures 3,069,260
Excess of Revenue over Expenditures 945,740
Other Financing Sources (Uses)
Fund Balance Jan 1 125,660
Fund Balance Dec 31 1,071,400
66
4.6. Financial Statements
4.6.2. The Balance Sheet
• With one major exception, the balance sheet for both general fund and
special revenue funds would look too much like a balance sheet for a
business.
• It has current asset and liabilities. Within the current asset and liability
section, the most liquid items would appear first, followed by those
that are less liquid.
• It also has an equity section, but the term fund balance is used instead of
equity.
• Government balance sheets differ from business enterprises in one major
respect: no long term asset or liabilities appear in the fund.
• General long term assets are shown in the general fixed asset group and
general long term liabilities are placed in general long term liabilities
account group.(See the following balance sheet of Xx town).
67
XX Town
General Fund Balance Sheet
As of Dec 31, 2014
Assets
Cash $190,000
Tax receivable current 420,000
Less: Estimated Uncollectible current taxes (20,000)
Tax receivable delinquent 150,000
Less: Estimated Uncollectible delinquent taxes (15,000)
Penalty and Interest on delinquent taxes 25,000
Total Assets $750,000
Liabilities and Fund Equity
Liabilities
Voucher Payable $350,000
Due to CPF 50,000
Total Liabilities $400,000
Fund Equity
Reserve for Encumbrance 250,000
Fund Balance 100,000
Total Fund Balance $350,000
Total Liabilities and Fund Balance $750,000
68
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Accounting For Public Sector Chap 4

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CHAPTER -IV

ACCOUNTING FOR GENERAL AND SPECIAL REVENUE

 Understand the nature and purposes of general, and special

 Differentiate among budgetary accounting, revenue accounting and

expenditure accounting in public sector entities.

 As we discussed in chap1, there are three categories of funds:

governmental, proprietary, and fiduciary funds whereby the

 Governmental Funds consists of five types of funds: the general fund,

special revenue funds, debt service funds, capital projects funds,

financial statements: government-wide and fund f/ statements.

aggregated government’s net assets and changes in net assets and

has raised and spent financial resources in accordance with budget

 Certain funds, referred to as governmental funds, focus on the short-

term flow of current financial resources or fiscal accountability,

for the business-type and certain fiduciary activities of the

• The format prescribed for the government-wide statement of

activities displays the net expense or revenue of each function or

• In Government-wide Statement except for extraordinary or special

item expenses, expenses generally are reported by function or

• Direct expenditures:-those associated with a function or program

• Indirect expenditures:-those that are not directly linked to an

Charges for services.

Operating grants and contributions.

Capital grants and contributions.

• In the GASBS 34 reporting model, extraordinary items and special

 General fund also called General Revenue Fund, General Operating

Fund, or Current Fund is a fund used to account for the ordinary

or local government that accounts for current financial resources

• Whenever a tax or other revenue source is authorized by a

classified as governmental funds account for only current financial

liquidated by use of fund assets.

• The arithmetic difference between the amount of financial resources

year in operating statement accounts classified as

 Other Financing Sources,

 Other Financing Uses.

• Revenue is defined as increases in fund financial resources other than

• Expense is the cost of a good or service consumed during the period.

• Other financing uses An operating statement classification in which

at year-end when the temporary accounts are closed.

current financial resources other than from inter-fund transfers.

a portion of the taxes recognized as revenue by the general fund is

• The General Fund would debit Other financing uses-Inter-fund

transfers out in the appropriate amount and credit Cash.

credit Other financing sources-Inter-fund transfers in.

• Thus, the use of transfer accounts achieves the desired objective

• Total inflows and outflows for the operating statement accounts of

the governmental funds are ne presented in illustration 4.2. below.

• Before beginning the discussion, it is recommended that you review

authorized in the annual budget.

 Estimated Other Financing Sources: represent operating transfers

in from other funds and proceeds of long-term borrowing.

 Estimated Other Financing Uses: represent operating transfers out

 The distribution made of a federal appropriation by the office of

budget management into amounts available for specified periods is

administration of a government for a budget period is known as

with procedures specified by relevant law, the budget becomes

or expended during an allotment period is referred o as allotment.

the actual expenditure of the appropriation is known.

that are consumed during the current fiscal period is called

(1) Fund (4) Activity

 Debt service and

 Other services and charges.

• This entry tells us that the governmental unit is expecting to