Professional Documents
Culture Documents
Public Sector
Public Sector
Public Sector
WOLLO UNIVERSITY
COLLAGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
PREPARED BY:
BIRTUKAN KASIYE (MSC)
EDITED BY:
HAYMANOT SIBBAHIE ( MSC)
2023
DESSIE, ETHIOPIA
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Course Information
Wollo University
Collage of Business and Economics
Accounting and Finance Program
Department Accounting and Finance
program BA degree in Accounting and Finance
Module Non-Profit Sector Accounting
Module No and AcFn-3071
Module Code
Course Title Accounting for Public Sector and Civil Society
Course Number AcFn3071
ETCTS Credits 5
Contact Hours 3
Course Objectives After successfully completing this course, the students should be able to:
& Identify characteristics and types of government and Not-For-profit
Competences to be organizations (NFP);
Acquired Understand the budgeting framework of governmental units and other non-
profit organizations and help senior budget officials of the same in developing
budgets
Distinguish the legal and economic substance of transactions as opposed to the
nature of transactions in business organizations;
Record the transactions and present fairly the financial statements of
governmental units and other non-profit organizations in conformity with legal
requirements and accepted accounting principles.
Course The course is intended to introduce the accounting and reporting concepts,
Description standards and procedures applied to governmental units and not –for –profit (NFP)
organizations. The course reflects the distinction between legal form of
transactions as opposed to the accounting system for business enterprises, and the
substance of transactions.
Assessment/ Evaluation Type weight
Evaluation Assignment 35%
Tutorial Attendance 5%
Final exam 65%
Total 100%
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Table of content
Contents
Table of content ........................................................................................................................................... iii
CHAPTER ONE: OVERVIEW OF GOVERNMENT ACCOUNTING AND NFP ACCOUNTING ............................... 1
1. Introduction .......................................................................................................................................... 1
1.1 Distinguishing characteristics of Governmental and Not- for- Profit entities .................................... 1
1.2. Sources of Accounting and FR Standards for G & NP Entities in Ethiopia ....................................... 5
1.2.1 Source of accounting standards ................................................................................................... 5
1.2.2 Uses and users of financial reports of governmental units ......................................................... 6
1.3. Objectives of financial reporting in NFP entities ............................................................................... 6
1.3.1 Definition of Financial Reporting ................................................................................................. 6
1.5 Conceptual Framework for General Purpose Financial Reporting By Public Sector Entities IPSASB
................................................................................................................................................................ 10
1.5.1 Objective of financial report ...................................................................................................... 10
1.5.2. Fundamental concepts Recognition, measurement, and disclosure .................................. 11
1.6 chapter summary .............................................................................................................................. 12
1.7 Self-Test Questions ........................................................................................................................... 13
CHAPTER TWO: Principles of Accounting and Financial Reporting of Governmental Entities ................... 15
2.1 Activities of Government .................................................................................................................. 15
2.2 Statement of the Principles .............................................................................................................. 17
2.3 Common Accounting Characteristics of the Fund Types. ................................................................. 28
2.5 Approaches to Budgeting.................................................................................................................. 31
2.6 Chapter summary.............................................................................................................................. 31
2.7 Self test questions ............................................................................................................................. 32
CHAPTER THREE: International Public Sector Accounting Standards [IPSAS] ............................................ 34
3.1 Activities of Government .................................................................................................................. 34
3.2 Summary Statement of Principles .................................................................................................... 34
3.3 Impairment of Non-Cash-Generating Assets [IPSAS 21] ................................................................... 36
3.4 Disclosure of Financial Information about the General Government Sector [IPSAS 22] .................. 38
3.5 Revenue from Non-Exchange Transactions (Taxes and Transfers) [IPSAS 23] ................................. 40
3.6 Presentation of Budget Information in Financial Statements [IPSAS 24] ......................................... 41
3.7 Cash Flow Statements [Cash Basis IPSAS] ......................................................................................... 42
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1. Introduction
What Is a Not-For-Profit Entity? Any organization, which is established with objective other
than profit making is referred to as Not-for-Profit Entity. Not-for-profit entities include:
Government and Other Not-for-Profit (NFP) Entity or Non-Profit (NP) Entity. What is a
Government? A government is a body that has the power to make and the authority to enforce
rules and laws within a civil, corporate, religious, academic, or other organization or group. For
the purpose the course Government and NFP Accounting, Government can also be defined as an
entity that provides such major services as administrative, social, economic, and others
either free from charge or with a ―token‖ charge.
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The Nine Regional State Governments and Two Administrative City councils
76 Zonal Level Local Governments
587 District Level Local Governments
Municipality and Town Governments
Kebele level local governments i.e. Kebele is the lower level government in Ethiopia
The Special Purpose Government is a government that provides a single service or few services
to the citizenry. For Example: Transportation authorities can be taken as Special Purpose
Government Entity. The General purpose government provides a wide collection of services to
the citizenry. Examples: Federal government, state governments, zone government,
cities, towns, villages, etc what is Not-For-Profit (NFP) Entity or Nonprofit (NP) Entity?
NFP Entities are entities other than the government and that provides community services either
free from charge or with a ―token‖ charge. According to Australian Accounting Standards Board,
essentials to classify an entity as a not-for-profit are:
Legally separate organizations
Its operating purpose is other than to provide goods or services at a profit.
It may not distribute surpluses
Generating profit is not an objective outlined in its legislation, regulations or constitution
It does not pay income tax or income tax equivalents – usually exempt from federal, state,
and local taxation
It is not able to transfer ownership
Examples: Religious, community service, private educational and health care, museums,
and fraternal and social organizations, among many other kinds of organizations
In Ethiopia, there are about 660 Nongovernmental NFP entities registered by Ministry of Justice
as2006. Examples: Save the Children UK and Canada, Family Guidance Association of Ethiopia,
Activity :
Question 1: what is the difference between governmental and Not- for- Profit entities
Questions2:What are Sources of Accounting and FR Standards for G & NP Entities
……………………………………………………………………………………………………………….
…………………………………………………………………………………………………………………
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professional organization of accountants, financial analysts, CPA firms and other groups
concerned with financial reporting.
The GASB establishes accounting and financial reporting standards for business
(For-Profit) organizations; the GASB establishes standards for governmental organizations.
Authority to establish accounting principles (accounting and financial reporting standards) for
not-for-profit organizations is split between the GASB and the FASB because a sizable
number of not-for-profit organizations(particularly colleges and universities, and hospitals)
are governmentally related, but many others are essential to understanding the unique accounting
and financial reporting principles that have evolved for governmental and not-for-profit
organizations.
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C. Financial Reporting should assist users in assessing the level of services that can be provided
by the governmental entity and its ability to meet its obligations as they become due by:
Providing information about its financial position and condition.
Providing information about its physical and other non-financial resources having
useful lives that extend beyond the current year, including information that can be
used to assess the service potential of those resources.
Disclosing legal or contractual restrictions on resources and the risk of potential loss
of resources.
Accountability is the cornerstone of all financial reporting in government (GASB Concepts
Statement No.1, Par. 56). Accountability arises from the citizens’ ―right to know.‖ It imposes
duty on public officials to be accountable to citizens for raising public monies and how they are
spent. Inter period equity relates to accountability. Government officials are
accountable and have an obligation to disclose whether current-year revenues were sufficient
to pay for current-year benefits or not. If inter period equity is not achieved, the current
citizens are deferring payments to future taxpayers. In general, financial reports are used in
SLGs primarily to:
Accounting for Governmental and Non profit Entities
Compare actual financial results with legally adopted budget
Assess financial condition and results of operations
Assist in determining compliance with finance-related laws, rules, and regulations
Assist in evaluating efficiency and effectiveness
An objective of Financial Reporting for Federal Government Accountability is also the
foundation of Federal Government financial reporting. In addition to accountability,
Federal Accounting Standards Advisory Board (FASAB) identifies the following financial
reporting objectives for Federal Government and its agencies:
FR should assist users in evaluating budgetary integrity
FR should assist users in evaluating Operating Performance
FR should assist users in evaluating Stewardship
FR should assist users in evaluating adequacy of systems and control
The users of financial report include citizenry, legislative and oversight bodies, and
investors and creditor. NFP financial reporting should provide information useful in:
Making resource allocation decisions
Assessing services and ability to provide services
Assessing management stewardship and performance
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Scope/definitions IPSAS often need to change the scope and definitions of their IFRS equivalent to make
them work as intended for the public sector. For example, ―contracts‖ are replaced with
―binding arrangements‖ in the IFRS 15 revenue standard to widen the scope so as to
include transactions that are not necessarily underpinned by a contract.
Business Accounting for combinations under common control is outside the scope of IFRS. IPSAS
combinations recognize that this is a common transaction in the public sector and have adopted the
pooling of interest method (merger accounting). IPSAS differentiate between acquisition
and amalgamations; IFRS only considers acquisitions.
Activity :
Question 1: What is the difference between IFRS and IPSAS
Question 2: What are Users of IFRS and IPSAS
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1.5 Conceptual Framework for General Purpose Financial Reporting By Public Sector
Entities IPSASB
The Conceptual Framework for General Purpose Financial Reporting by Public Sector
Entities (the Conceptual Framework) provides the International Public Sector Accounting
Standards Board™ (IPSASB™) with the concepts that will underpin the development of
International Public Sector Accounting Standards™ (IPSASs™) and Recommended Practice
Guidelines (RPGs) in the coming years.
It enables the IPSASB to further improve the consistency of its standard-setting by strengthening
the linkage between IPSASs. Additionally, the transparency of the concepts underpinning the
development of IPSASs and RPGs enhances the IPSASB’s accountability.
The Conceptual Framework also responds to key public sector characteristics in its approach to
elements (the building blocks of financial statements), the measurement of assets and liabilities,
and the presentation of financial reports, while focusing on service recipients’ and resource
providers’ needs for high-quality financial reporting information for both accountability and
decision-making purposes.
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3. Providing information to shareholders & public at large in case of listed companies about
various aspects of an organization.
4. Providing information about the economic resources of an organization claims to those
resources (liabilities & owner’s equity) and how these resources and claims have undergone
change over a period of time.
5. Providing information as to how an organization is procuring & using various resources.
6. Providing information to various stakeholders regarding performance management of an
organization as to how diligently & ethically they are discharging their fiduciary duties &
responsibilities.
7. Providing information to the statutory auditors which in turn facilitates audit.
8. Enhancing social welfare by looking into the interest of employees, trade union &
Government.
1.5.2. Fundamental concepts Recognition, measurement, and disclosure
Now that we have identified the various elements and underlying assumptions of the financial
statements, we discuss when the elements should be recognized (recorded) and how they should
be measured and disclosed. For example, an asset was previously defined as a probable future
economic benefit obtained or controlled by a company as a result of past transactions or events.
But when should the asset be recorded, at what amount, and what other important information
about the asset should be provided in the financial statements? SFAC 5 addresses these issues.
Recognition refers to the process of admitting information into the financial statements.
Measurement is the process of associating numerical amounts with the elements. Disclosure
refers to the process of including additional pertinent information in the financial statements and
accompanying notes.
General Recognition Criteria.
According to SFAC 5, an item should be recognized in the basic financial statements when it
meets the following four criteria, subject to a cost effectiveness constraint and materiality
threshold:
1. Definition. The item meets the definition of an element of financial statements.
2. Measurability. The item has a relevant attribute measurable with sufficient reliability.
3. Relevance. The information about it is capable of making a difference in user decisions.
4.Reliability. The information is faithful, verifiable, and neutral.
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the financial statements. Therefore, the timing of revenue recognition is a key element of
earnings measurement. Not adhering to revenue recognition criteria could result in overstating
revenue and hence net income in one reporting period and, consequently, understating revenue
and net income in another period.
The realization principle requires that two criteria be satisfied before revenue can be recognized:
1. The earnings process is judged to be complete or virtually complete.
2. There is reasonable certainty as to the collectability of the asset to be received (usually cash).
These criteria help ensure that a company doesn’t record revenue until it has performed all or
most of its earnings activities for a financially capable buyer. Notice that these criteria allow for
the implementation of the accrual accounting model. Revenue should be recognized in the period
it is earned, not necessarily in the period in which cash is received. The timing of revenue
recognition also affects the timing of asset recognition. When revenue is recognized by crediting
a revenue account, the corresponding debit typically increases some asset, usually cash or an
account receivable.
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The GASB and the FASB are parallel bodies under the oversight of the Financial
Accounting Foundation. They are referred to as ―independent standard setting boards‖ in
the private sector. Before the creation of the GASB & FASB,
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Governments also incur costs for general administrative support such as data processing,
finance, and personnel. Core governmental services, together with general administrative
support, comprise the major part of governmental type activities or simply Governmental
Activities
b. Business-type Activities
Governments also engage in business type activities. These include:
Public utilities (electric, water, gas and sewer utilities)
Transportation system;
Toll roads and toll brides;
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Airports;
Hospitals;
Parking garages and lots;
Liquor stores;
Swimming pools;
Stadiums and arenas
Many of these activities are intended to be self-supporting by charging users for the services they
receive. Operating subsidies from general revenues are not uncommon, particularly for
transportation systems
c. Fiduciary Activities
Governments often act in a fiduciary capacity, either as an agent or trustee, for parties outside the
government. A government may serve as agent for other governments in the
administering and collecting of taxes. Governments serve also as trustees for amounts
placed in trust from private citizens for parks and other purposes, for escheat properties that
revert to the government when there are no legal claimants or heirs to a deceased individual’s
estate, and for assets being held for employee pension plans. Accounting and financial reporting
principles for the Governmental Activities have evolved to meet the legal budgetary and
financial compliance needs of government – Fiscal Accountability. Generally, these principles
involve segregating the accounting for the receipt and expenditures of restricted use resources
from general use resources. It emphasizes on reporting the inflows and outflows of current
financial resources (cash or items expected to be converted into cash during the current period, or
soon enough thereafter to pay current period liabilities).
Accounting and financial reporting principles for the Business-Type Activities of governments
are quite similar to those for commercial business entities. As in business, if government intends
to charge users for goods or services they receive; it needs to know the full cost of goods and
services in order to determine appropriate prices. Knowing the full cost is also
essential in deciding whether the government should continue to produce or provide
particular goods or services, or contract for them with an outside vendor. Thus, as in commercial
business accounting, accrual accounting is essential to measuring the full cost of providing
governmental business-type services, and reporting on the extent to which each business type
activity is self-sufficient or has to be subsidized. The principles of accounting for
business type’s activities are intended to measure and report on Operational
Accountability.
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Activity :
Question 1: What is the difference between Governmental Activities, Business-Type Activities, and
Fiduciary Activities?
Question 2:What type of basis of accounting apply on business type activities
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fund established. Some governmental units will have only a general fund. If any of the other
types of funds are needed, the governmental unit may have several of those funds as needed.
The general fund is used for general government services. It is basically used for a service
that does not require a separate fund.
2. An example of a special revenue fund might be ―The Unity and safety of the motherland
tax‖ that was collected during the derg regime. This fund was not for the general fund of the
government but was raised specifically for the armed forces. it would have needed to be
accounted for and reported on separately. An other example is the oil price contingency fund
which was established by the government specifically for the purpose of controlling the
fluctuation of oil prices in the country.
3. An example of Capital Projects Funds could be the construction of new building for the
city government Administration. the costs incurred in the construction of the building are
quite different from the operating cost of the city administration and would need to be
accounted for and reported on as an entity in itself.
4. If money has been borrowed from the construction of new building that would give rise to a
Debt service Fund. Assume that 10,000,000 birr was borrowed at 10 % simple interests and
is to be repaid in full in 10 years, each year 2,000,000 birr would be needed to be put in a
debt service fund- 1,000,000 for the payment of the principal plus 1,000,000 for the payment
of each year’s interest.
5. A public park could be an example of an Enterprise Fund. The park would charge a user
fee, from which it could pay the expenses (eg. Salaries) of operating the park. as a non-
expendable fund, it would not have to return unused money to its source at the end of the
year. Therefore, it might also accumulate money from year to year for the purchase of
equipment, furnishings and the like from its income from the user charges.
6. A shared garage is a common example of an Internal Service Fund in government ministry
offices. The garage would repair all the ministries` vehicles regardless of which project,
offices or funds use them. Charges are made to various funds for the repair cost. as a non
expendable fund, part of the charge made to the various funds could be intended to be
accumulated for future years for the purchase of tools and equipment.
7. Fiduciary funds are used to account for money which one branch of government has on
behalf of another fund, organization or individual. a common example of a fiduciary fund is a
central tax collection agency, such as the Inland Revenue Authority. the taxes it collects are
not for its own benefit, but are rather passed on to other ministries or departments. fiduciary
funds are expendable as well as non expendable depending upon the type of fund.
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N.B- one additional type of fund i.e. special assessment fund has been eliminated by GASB for
financial reporting purposes.
Activity :
Question 1: list and discuss the type of governmental fund?
Question 2: list and explains classification of proprietary funds
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1. General fixed assets include land, buildings, and improvements other than buildings, car
&equipments used by activities accounted by the four fund types classified as ―governmental
funds‖. Which belong to the governmental unit as wholes, rather than to a particular, fund
and are to be shared among the different funds e.g. A fleet of cars or office building that is
shared among the funds of the municipality. General fixed assets do not represent resources
available for expenditure, but rather are items for which resources have been used. Note that
the construction or purchase fixed assets is accounted for in a fund as the resource for those
assets is being expended. The two principles quoted below establish requirements that relate
to fixed asset accounting.
2. General long-term debt would be borrowings of the entire governmental entity rather than by
a specific fund. The money would be backed by the full faith and credit of the governmental
entity rather than by specific fund. They are to be paid from general tax levies, specific debt
service tax levies, or special assessments. The rationale for not including general long-term
debt in the general fund’s account is like that of general fixed assets. The general long-term
debt is not something will require current period resources for payment. These liabilities do
not constitute a fiscal entity either. But they do need accountability, so the general long term
debt account group is used to provide this.
Valuation of Fixed Assets (PRINCIPLE # 6)
Fixed assets should be accounted for at cost, or if the cost is not practically determinable, at
estimated cost, donated fixed assets should be recorded at their estimated fair value at the time
received.
Note: as with FP, Fixed assets should be recorded at their historical cost. But one difference
with profit making accounting is that fixed assets are not usually donated to profit making
entities. So they are not concerned with accounting for them.
Deprecation of Fixed Assets (Principle # 7)
A. Deprecation of general fixed assets should not be recorded in the accounts of governmental
funds. Depredation of general fixed assets may be recorded in cost accounting systems or
calculated for cost finding analysis; & accumulated depreciation may be recorded in the General
Fixed Asset Account group.
B. Deprecation of fixed assets accounted for in a proprietary fund should be recorded in accounts
of that fund. Deprecation also recognized in those trust funds where expenses, net income &/or
capital maintenance are measured.
1. Depreciation is not recognized in as expenditure in governmental funds because it is not a
decrease in fund financial resources. However, It should be calculated in the general fixed
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asset account group because knowing depreciation is helpful for good financial management
and helps in planning for the replacement of assets in the future.
2. Proprietary fund fixed assets- because a proprietary fund needs to know that it is covering all
its costs, it includes depreciation as an expense in its accounts. Remember that accounting in
a proprietary fund is similar to FP accounting.
Basis of Accounting (Principle # 8)
The Modified Accrual or accrual basis of accounting as appropriate should be utilized in
measuring financial position & operating results.
A. Governmental fund revenues & expenditures should be recognized on the modified accrual
basis. Revenues should be recognized in the accounting in which they become available &
measurable. expenditures should be recognized in the accounting period in which the fund
liability is incurred, if measurable, except for un matured interest on General Long-Term Debt
which should be recognized when due.
1. Revenues & other governmental fund financial resource increments (e.g.) bond issue
proceeds are recognized in the accounting period in which they be come susceptible to
accrual i.e. when they become both measurable & available to finance expenditures of the
fiscal period.
B. Proprietary fund revenues & expenses should be recognized on the accrual basis. Revenues
should be recognized in the accounting period in which they are earned & become measurable.
Expenses should be recognized in the period incurred, if measurable.
2. Proprietary fund account is virtually the same as for profit account.
C. Fiduciary funds revenue and expenses or expenditures (as appropriate) should be recognized
on the basis consistent with the fund’s accounting measurement objective. Nonexpendable trusts
and Pension Trust Funds should be accounted for on the accrual basis;
3. Expendable trust funds should be accounted for on the modified accrual basis. Agency fund
assets and liabilities should be accounted for on the modified accrual basis.
4. It is sufficient to say that the basis of accounting for Fiduciary funds depends on whether or
not the nature of the fund is expendable or non-expendable. Both kinds are possible in
fiduciary funds.
D. Transfers of financial resources among funds should be recognized in all funds affected in the
period in which the inter fund receivables & payable(s) arise.
1. Sometimes there are transfers made between funds. Because each fund is a separate
accounting and reporting entity, these transfers must be reported.
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In business enterprise accounting, the accrual basis is employed to obtain a matching of costs
against the revenues flowing from those costs, they producing a more useful Income Statement.
In governmental entities, however, even for those funds that do attempt to determine net income,
only certain trust funds have major interest in the largest possible amount of gain. Internal
service and enterprise funds are operated principally for service. They make use of revenue and
expense accounts to promote efficiency of operations and to guard against importance of ability
to render the services desired.
For these reasons, operating statement of proprietary funds, non-expendable trust funds &
pension trust fund are called statement of revenue and expenses rather them in come statement.
GASB standards require that modified accrual basis is appropriate for the four governmental
funds, for agency funds & for expendable trust funds while the accrual basis is used for the two
proprietary funds, non-expendable and pension trust funds.
The difference between Expenses and Expenditure must be known properly to understand the
distinction between NFP and FP accounting. In the dictionary these words have almost exactly
the same meaning. However in fund accounting, they have been given specialized meanings.
2. An Expense is a current period consumption of resources.
3. Expenditure a decrease in the fund financial resources.
For example in a profit making accounting a car would be considered as an asset and
depreciation would be recorded as an expense as the car is ―used up‖ or ―wears out‖. In a
governmental fund, the car would be considered as expenditure at the time of purchase.
Budget and Budgetary Accounting (Principle # 9)
A. An annual budget (s) should be adapted by every governmental unit.
B. The accounting system should provide the basis for appropriate budgetary control.
C. Budgetary comparisons should be included in the appropriate financial statement & schedules
for governmental units’ funds, for which an annual budget has been adapted. [Budget with
Actual]
1. Budgeting is the process of allocating of resource to meet unlimited demands.
There are three primary questions to ask when preparing a budget.
Q, How much will we spend?
Q, why will we spend it?
Q, where will we get the money?
2. Budgets are key elements of legislative control over governmental units. The executive
branch of a governmental unit proposes the budget, the legislative branch reviews, modifies
& enacts the budget and finally approves and the executive branch then carries out the
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provisions. Budgets have a greater role in governmental accounting than in profit making
business, because governmental budgets are fixed by law and are generally unchangeable, so
exceeding them may carry severe penalties. Budget in profit making enterprises are usually
more flexible & can change as conditions change during the year. A budget, when adopted
according to procedures specified in state laws is binding on the administration of a
Governmental unit. Accordingly, a distinctive characteristic of Governmental accounting
resulting from the need to demonstrate with laws governing the sources of revenues available
to governmental units, & lows governing the utilization of those revenues is the formal
recording of the legally approved budgets in the accounts of funds operated on an annual
basis.
Financial Reporting (Principal # 10)
Interim financial reports
A. Appropriate interim financial statements & reports of financial position, operating results &
other pertinent information should be prepared to facilitate management control of financial
operations, legislative oversight & where necessary or desired for external reporting purpose.
3. In NFP accounting interim reporting is used if it fulfils one of these three purposes:
1. for good management
2. for the legislature (legal compliance)
3. for external reporting (perhaps for those who have loaned money to it)
Comprehensive Annual Financial Reports (CAFR)
B. A comprehensive annual financial report covering all funds & account gropes of the
governmental unit including appropriate combined, combining & individual fund statements,
notes to the F.S, schedules, narrative explanations & statistical tables should be prepared &
published.
4. Combined statement would should the operations of the entire governmental entity
constituting all the individual funds in to one statement. Combining would candidate the
results of all funds of same type e.g. all special revenue funds. Individual fund statement
would be prepared for each individual fund.
General purpose Financial Statement (GPFS)
C. General Purpose F.S may be used separately from the comprehensive annual financial report.
Such statement should include the basic F.S & notes to the financial statement that are essential
to fair presentation of financial position and operating results (changes in financial position of
proprietary funds & similar funds)
1. The general purposes F.S are essentially the same as the combined statement.
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2. They are for a part of the government that is run like a private business where the
income & fees for services of the fund is expected at least to cover part of the expenses.
3. They are not subject to income taxation, nor do they have owners in the sense that
business enterprises do.
4. Their account is similar with profit making business.
1. Proprietary funds are established in accordance with enabling legislation & their operations
and policies are subject to legislative oversight.
1. The purpose of legislative oversight and served by proprietary fund account and
financial reporting that focuses on the matching of revenues &expenses(not
expenditures) on the full accrual basis recommended for business organizations.
2. Proprietary funds should prepare budget as an essential element in the management
planning & control process.
2. Proprietary funds do not have to adopt budgetary documents by law as governmental
funds do. Account systems of this fund do not need to provide the integrated budgetary
accounts.
3. Proprietary funds account for all assets used in fund operations- current assets, plant &
equipment & any other assets considered as belonging to the fund.
4. Proprietary funds account for current & long-term liabilities to be serviced from fund
operations &/or to be paid from fund assets.
1. They are non- expendable funds.
C. Accounting Characteristics Common to Funds of the Fiduciary Fund Category
1. All fiduciary funds are used to account assets held by governmental unit as a trustee or agent.
2. Agency fund & expendable trust funds are to be accounted in the same way as governmental
funds.
3. Non-expendable & pension trust funds are to be accounted in the some way as proprietary
funds.
4. Fiduciary funds can be expendable or non- expendable depending on the purpose of the fund.
2. An endowment (gift of income producing assets such as bonds) is a good example of
fiduciary funds. The principal of the endowment is to be kept intact but the income
(interest) may be used up. The income would then be accounted as expendable & the
principal non- expendable.
Classification of Budget
Federal, State and local governments prepare and utilize different budgets. Thus,
Budgets are classified differently considering dimensions such as Expenditure Program, Legal
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conformity with GAAP if it used a single fund, the general fund, to account for all events &
transactions. In addition to that one fund, however it would need two account groups.
Budgets are classified differently considering dimensions such as Expenditure Program,
Legal Status; Flexibility; Source on Finance; and Preparers. Budgets are classified
as Capital or Current based on the Expenditure Program;
reporting entity is the ability of governmental units, elected officials to excise oversight
responsibility over the organization in question the primary indication of oversight
responsibility is financial independency of the organization & other indicators are – the
ability of ducted officials to influence the operations
Generally, these principles involve segregating the accounting for the receipt and
expenditures of restricted use resources from general use resources. It emphasizes on
reporting the inflows and outflows of current financial resources (cash or items expected to
be converted into cash during the current period, or soon enough thereafter to pay current
period liabilities).
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11. Governmental funds account only for financial resources: cash, receivables, marketable
securities, and, if material, prepaid items & supplies inventories.
12. Proprietary funds have to adopt budgetary documents by law as governmental funds
Blank space
1. ----------the budgets of ―General Government‖ Activities which are commonly financed
through the General Funds
2. ---- is a process of preparing budget for future performed activities
3. --------------are used to account for money which one branch of government has on behalf of
another fund, organization or individual.
4. ------------------- may serve as agent for other governments in the administering and
collecting of taxes.
5. --------------------are used when maintenance of capital is desired, and the unexpended funds
are not meant to be returned.
6. ---------------------– budgets are also categorized by preparers. Budget preparation is
an executive function
7. ------------------- are those in which appropriation is fixed for total amount Br. and the
expenditure cannot be exceeded.
8. ---------------------- a report covering all funds & account gropes of the governmental unit
including appropriate combined, combining & individual fund statements,
Answers for self test questions
True or false question
1. False 2. True 3. False 4. True 5. True 6. False 7. False 8. True 9.True 10. True
11. True 12. False
Blank space
1. General or Special Budget 2. Budgeting 3. Fiduciary funds 4. A government
5. Non-Expendable Funds 6. Legislative Budget 7. fixed budget 8. comprehensive annual
financial report
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They were developed by referencing the International Accounting Standards (IAS), issued by
the International Accounting Standards Board (IASB), which have now been subsumed
within International Financial Reporting Standards (IFRS).
The accruals IP’SASs are based on the IFRS, where the requirements of those Standards are
applicable to the public sector.
They also deal with public sector specific financial reporting issues that are not dealt with in
IFRSs.
The adoption of IPSASs by governments will improve both the quality and comparability of
financial information.
The IPSASB recognizes the right of governments and national standard-setters to establish
accounting standards and guidelines for financial reporting in their jurisdictions.
The IPSASB encourages the adoption of IPSASs and the harmonization of national
requirements with IPSASs.
Financial statements should be described as complying with IPSASs only if they comply
with all the requirements of each applicable IPSAS.
Benefits of adopting IPSAS
1. Quality
Meets international standards.
Reliability and accuracy.
Guarantees ―true and fair view‖
1. Comparability between
Various government agencies, donor funded projects etc.
Different financial periods, even within the same institutions, hence facilitating
management decisions.
2. Transparency
Disclosures:
I. Facilitate transparency.
II. Ease report interpretation in the right context
III. Results in better decision making processes.
4. Accountability
Ease the audits of public institutions and hence:
Timely audit reports, better information to donors and countries providing external
assistance,
Better quality and credibility of financial reports.
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5. Consistency
IPSASs improve consistency in preparation and reporting of financial information.
This enable users draw consistent conclusions given similar sets of financial statements.
6. Governance
IPSASs result in stronger governance procedures
Provides a framework for the accounting practice in the public sector.
Strengthens the financial management of public institutions.
Activity :
Question 1: what is the benefits of adopted IPSAS
Question 2: What are the main objectives of IPSAS
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Property, plant, and equipment accounted for in accordance with IPSAS 17 Property, Plant and
Equipment; and Intangible assets accounted for in accordance with IPSAS 31 Intangible Assets
(note that IPSAS 26 excludes intangible assets that are regularly revalued to fair value). The
standards also apply to some financial assets, namely investments in subsidiaries, associates, and
joint ventures.
Stages in the Impairment Process
1. Assess whether there is an indication that an asset may be impaired. An entity is required to
assess at each reporting date whether there is an indication of impairment. If such an
indication is identified, the asset’s recoverable amount should be calculated and compared
to its carrying amount.
2. If there is an indication of impairment, then measure the asset’s recoverable amount.
3. Reduce the asset’s carrying amount to its recoverable amount, usually by treating the loss
as a separately disclosed expense.
4. If Carrying amount > Recoverable amount, then impairment has taken place.There has
been a loss in the value of the asset.
Recognizing an Impairment Loss
• If the recoverable amount of an asset is less than its carrying amount, the asset should be
reduced to its recoverable amount.
• The difference is an impairment loss (IPSAS 21.52 and IPSAS 26.72). IPSAS 21 and IPSAS 26
do not apply to assets carried at revalued amounts.
• Following the recognition of an impairment loss, any depreciation charged in respect of the
asset in future periods will be based on the revised carrying amount, less any residual value
expected, over the remaining useful life of the asset as per IPSAS 17.
Reversing an Impairment Loss
• If the recoverable amount subsequently increases then in certain circumstances the impairment
is reversed.
• A reversal of an impairment loss reflects an increase in the estimated future economic benefits
or service potential of an asset or group of assets.
• The increased carrying amount, other than goodwill, attributable to a reversal of an impairment
loss should not exceed the carrying amount that would have been determined (net of
amortization and depreciation) had no impairment loss been recognized for the asset in prior
Years. Any increase above this amount other than goodwill is a revaluation.
Recognizing Non-Exchange Revenue
•If an asset can be recognized, the revenue is recognized,
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This Standard allows, but does not require, the disclosure of information about the GGS.
Whether or not disclosure of information about the GGS will be made in financial statements
will be determined by the government or other appropriate authority in each jurisdiction.
Financial information about the GGS shall be disclosed in conformity with the accounting
policies adopted for preparing and presenting the consolidated financial statements of the
government, except as required by the below two points:
o In presenting financial information about the GGS, entities shall not apply the
requirements of PBE IPSAS 6 Consolidated and Separate Financial Statements in
respect of entities in the PFCs and public NFCS sectors.
o The GGS shall recognize its investment in the PFC and public NFCS sectors as an ass
set, and shall account for that asset at the carrying amount of the net assets of its
investees.
General Government Sector (GGS): comprises all organizational entities of the general
government as defined in statistical bases of financial reporting.
The Public Financial Corporation’s (PFC) Sector: comprises resident government-controlled
financial corporations, quasi-corporations, and non-profit institutions that primarily engage in
financial intermediation and the provision of financial services for the market. Included
within this sector are government-controlled banks, including central banks, and other
government financial institutions that operate on a market basis.
The Public Non-Financial Corporation’s (PNFC) sector: comprises resident government-
controlled nonfinancial corporations, quasi-corporations, and non-profit institutions that
produce goods or non-financial services for the market. Included within this sector are
entities such as publicly owned utilities and other entities that trade in goods and services.
Disclosures
Disclosures made in respect of the GGS shall include at least the following:
o Assets by major class, showing separately the investment in other sectors;
o Liabilities by major class;
o Net assets/equity;
o Revenue by major class;
o Expenses by major class;
o Surplus or deficit;
o Other comprehensive revenue and expense;
o Total comprehensive revenue and expense;
o Cash flows from operating activities by major class;
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A single transaction may include cash flows that are classified differently. For example,
when the cash repayment of a loan includes both interest and capital, the interest element
may be classified as an operating activity and the capital element is classified as a financing
activity.
Operating activities
The amount of net cash flows arising from operating activities is a key indicator of the extent to
which the operations of the entity are funded:
(a) By way of taxes (directly and indirectly); or
(b) From the recipients of goods and services provided by the entity. The amount of the net cash
flows also assists in showing the ability of the entity to maintain its operating capability, repay
obligations, pay a dividend to its owner and make new investments without recourse to external
sources of financing.
Examples of cash flows from operating activities are:
(a) Cash receipts from taxes, levies and fines;
(b) Cash receipts from charges for goods and services provided by the entity;
(c) Cash receipts from grants or transfers and other appropriations or other budgetauthority made
by national government or other entities;
(d) Cash receipts from royalties, fees, commissions and other revenue;
(e) Cash payments to other entities to finance their operations (not including loans);
(f) Cash payments to suppliers for goods and services;
(g) Cash payments to and on behalf of employees;
(h) Cash receipts and cash payments of an insurance entity for premiums and claims, annuities
and other policy benefits;
(i) Cash payments of local property taxes or income taxes (where applicable) in relation to
operating activities;
(j) Cash receipts and payments from contracts held for dealing or trading purposes;
(k) Cash receipts or payments from discontinued operations; and (l) cash receipts or payments in
relation to litigation settlements.
Investing activities
The separate disclosure of cash flows arising from investing activities is important because the
cash flows represent the extent to which cash outflows have been made for resources which are
intended to contribute to the entity’s future service delivery. Only expenditures that result in a
recognized asset in the statement of financial position are eligible for classification as investing
activities. Examples of cash flows arising from investing activities are:
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(a) Cash payments to acquire property, plant and equipment, intangibles and other long-term
assets. These payments include those relating to capitalized development costs and self-
constructed property, plant and equipment;
(b) Cash receipts from sales of property, plant and equipment, intangibles and other
(c) cash payments to acquire equity or debt instruments of other entities and interests in joint
ventures (other than payments for those instruments considered to be cash equivalents or those
held for dealing or trading purposes);
(d) cash receipts from sales of equity or debt instruments of other entities and interests in joint
ventures (other than receipts for those instruments considered to be cash equivalents and those
held for dealing or trading purposes);
(e) Cash advances and loans made to other parties (other than advances and loans made by a
public financial institution);
(f) Cash receipts from the repayment of advances and loans made to other parties (other than
advances and loans of a public financial institution);
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts,
except when the contracts are held for dealing or trading purposes, or the payments are classified
as financing activities; and
(h) Cash receipts from futures contracts, forward contracts, option contracts and swap contracts,
except when the contracts are held for dealing or trading purposes, or the receipts are classified
as financing activities.
Financing activities
The separate disclosure of cash flows arising from financing activities is important because it is
useful in predicting claims on future cash flows by providers of capital to the entity. Examples of
cash flows arising from financing activities are:
(a) Cash precedes from issuing debentures, loans, notes, bonds, mortgages and other short- or
long-term borrowings;
(b) Cash repayments of amounts borrowed; and
(c) Cash payments by a lessee for the reduction of the outstanding liability relating to a finance
lease.
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irrespective of whether cash can be viewed as the product of the entity, as may be the
case with a public financial institution.
Entities need cash for essentially the same reasons, however different their principal
revenue-producing activities might be. They need cash to pay for the goods and
services they consume, to meet ongoing debt servicing costs, and, in some cases, to
reduce levels of debt. Accordingly, this Standard requires all entities to present a cash
flow statement.
The consolidated whole-of-government operating cash flows provide an indication of
the extent to which a government has financed its current activities through taxation
and charges. Information about the specific components of historical operating cash
flows is useful, in conjunction with other information, in forecasting future operating
cash flows.
Cash flows from operating activities are primarily derived from the principal cash-
generating activities of the entity.
The consolidated whole-of-government operating cash flows provide an indication of
the extent to which a government has financed its current activities through taxation
and charges.
IPSAS 24.15 states in that context that: ―Presentation in the financial statements of
the original and final budget amounts and actual amounts on a comparable basis with
the budget that is made publicly available will complete the accountability cycle.
The purpose of financial statements prepared in accordance with statistical bases of
financial reporting is to provide information suitable for analyzing and evaluating
fiscal policy, especially the performance of the GGS and the broader public sector of
any country.
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A. Cash receipts from futures contracts C. Cash precedes from issuing debentures
B. cash payments of an insurance entity D. Cash payment of local property taxes
4. Which one the following statement is true about the benefits of adopted IPSAS
A. Quality C. Accountability
B. Comparability D. All
5--------------comprises all organizational entities of the general government as defined in
statistical bases of financial reporting.
A. General Government Sector C. The Public Non-Financial Corporation’s sector
B. The Public Financial Corporation’s Sector D. All
6. Which one the following false about the Objectives of IPSAS 21
A. To prescribe the procedures that an entity applies to non-cash-generating asset
B. To ensure impairment losses are not recognized
C. To specify when an entity would reverse an impairment loss.
D. None of the above
7. Which one of the following was true about Stages in the Impairment Process
A. Assess whether there is an indication that an asset may be impaired.
B. If there is an indication of impairment, then measure the asset’s recoverable amount.
C. If Carrying amount > Recoverable amount, then impairment has taken place.
D. All are answers
8. A present obligation arising from a non-exchange transaction that meets the definition of
a liability is recognized when,
A. Probable that an outflow of resources embodying future economic benefits
B. Reliable estimate can be made of the amount of the obligation
C. A and B
D. None of the above
9. Disclosures made in respect of the GGS shall include :
A. Assets by major class, showing separately the investment in other sectors;
B. Liabilities by major class;
C. Net assets/equity;
D. All
10. ------------------- is activities encompass the executive, legislative, and judicial functions
of the government as well as major service functions such as public safety, public works,
parks and recreation
A. Governmental activities C. Business type activities
B. Investing activities D. Operating activities
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Blank space
1. --------------- comprises resident government-controlled financial corporations, quasi-
corporations, and non-profit institutions
2. -------------- identifies the sources of cash inflows, the items on which cash was expended
during the reporting period, and the cash balance as at the reporting date.
3. -------------- disclosures must be reconciled to the consolidated financial statements of the
government, showing separately the amount of the adjustment to each equivalent
4. ----------------- recognizes the right of governments and national standard-setters to
establish accounting standards and guidelines for financial reporting in their jurisdictions.
Answer for self test questions
Blank space
3. GGS 4. IPSASB
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Learning Objectives:
After studying this chapter, you should be able to Budgeting and Performance Reporting
activities:
Budgeting in the Public Sector
Classification of budget
Approaches to budgeting
Budgets and Outturn Reporting (IPSAS 24)
Performance Budgeting and Reporting
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1. The principle of comprehensiveness requires that the budget cover all government entities
and institutions undertaking government operations, and present a consolidated and
complete view of these operations.
2. The principle of unity requires that the budget include all revenues and expenditures of all
government entities undertaking government operations. This principle is important to ensure
that the budget is effective in constraining total and sector government expenditure, and in
promoting greater efficiency in the allocation of resources.
C. The principle of internal consistency between different components of the budget requires,
in particular, that the current expenditure needed for the operations and maintenance of past
investment projects be fully reflected in the budget. Moreover, this principle implies that
there should be a unitary budget system in which responsibilities for preparing and
executing the budgets for current and capital (or development) spending are consolidated
within a single central fiscal agency, usually the ministry of finance.
Davina Jacobs, Jean-Luc Hélis, and Dominique Bouley (IMF, 2009)
A sound budget classification system should contain:
Revenues into various categories (tax and other than tax revenue)
Expenditures in to administrative, economic and functional
Economic
Classifies expenditure by economic categories (e.g. salaries, goods and services, transfers and
interest payments, or capital spending)
Administrative
Administrative classification identifies the entity that is responsible for managing the public
funds concerned, such as the ministry of education and health or, at a lower level, schools and
hospitals.
Functional
A 'functional' classification organizes government activities according to their purposes (e.g.
education, social security, and housing).
It is independent of the government’s organizational structure.
A functional classification is important to analyze the allocation of resources among
sectors.
Program
Classifies and groups expenditure by policy objective or outputs for the sector (e.g. maternal
health, primary health care, development of crop production) irrespective of their economic
nature.
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This standard applies to public sector entities which are required or elect to make their
approved budget(s) publically available.
An entity shall present a comparison of budget amounts either as separate additional financial
statements or as additional budget columns in the financial statements.
The comparison shall present for each legislative oversight:
The original and final budget amounts
The actual amounts on a comparable basis; and
By way of note disclosure, an explanation of material differences.
An entity shall present an explanation of whether changes between the original and final budget
are a consequence of reallocations within the budget, or of other factors:
By the way of note disclosure in the financial statements; or
In a report issued before, at the same time as, or in conjunction with, the financial
statements, and shall include a cross reference to the report in the notes to the financial
statements.
An entity in notes to the financial statements:
Shall explain the budgetary basis and classification basis adopted in the approved budget.
Shall disclose the period of the approved budget
Shall identify the entities included in the approved budget.
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Blank space
1.-----------------to place each program under a single ministry and align it with the functional
classification ensures clear assignment of responsibility for a program and accountability for
results.
2. ---------------- uses a specific mathematical formula to determine the amount of funding per
budget item.
3. ------------------------ focuses on ensuring that the collection and use of resources are
consistent with the budget laws.
4. ------------------ is important to analyze the allocation of resources among sect
Answer for self test question
1. false 2. True 3.False 4. True 5.True 6. False 7.true
Blank space
1. Contemporary approach 2. Direct Performance Budgeting 3. Compliance budgeting
4. A functional classification
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- Comparison:
The general fund should account for all financing sources for which a separate fund is not
required. Special revenue funds are necessary when they are required by law or contract. A
governmental entity will have several special revenue funds at any time & these funds are
opened & closed according to need.
Fixed assets are not capitalized in either fund. Their purchase is considered as expenditure, the
same as for salaries or utilities. Such fixed assets are not accounted for by these funds. Because
they are not normally converted into cash. Similarly the same categories of funds account for
only those liabilities incurred for normal operations that will be liquidated by use of fund assets.
The arithmetic difference between the amount of financial resources and the amount of liabilities
recorded in the fund is called the fund equity. Residents of the governmental unit have no legal
claim on any excess of liquid assets over current liabilities. therefore the fund equity is not
analogous to the capital accounts of an investor owned entity. Accounts in the fund equity
category of general funds & special revenue funds consist of reserve accounts established to
disclose that portion of the equity are not available for appropriations. The portion of equity
available for appropriation is disclosed in an account called Fund Balance. General funds
&special revenue funds account for financial activates during a fiscal year in accounts classified
as Revenues, Other Financing Sources, Expenditures&Other Financing Uses.
Revenue: - is the increase in the fund financial resources other than from inter fund transfers &
debt issue proceeds.
Other financing sources- are classified as an increase in the fund financial resources as a result
of operating transfers into a fund and debt issue proceeds received by a fund.
Expenditure is defined as decrease in fund financial resources other than through inter fund
transfers, operating transfers out of a fund and debt issue proceeds are classified as other
financing uses. It is a term which replaces both the terms costs and expenses used in accounting
for profit seeking entities.
Other Financing uses - a decrease in the fund financial resources as a result of operating
transfers out of a fund.
An example of the use of transfer accounts occurs in those jurisdictions where a portion of the
taxes recognized as revenue by the general fund of a unit is transferred to a debt service fund
which will record expenditures for payment of interest and principal of general obligation debt.
The general fund would record the amounts transferred as operating transfers out: the debt
service fund would record the amount received as operating transfers in. Thus the use of transfer
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accounts achieves the desired objective that revenues be recognized in the fund which levied the
taxes and expenditures be recognized in the funds which expends the revenue.
In few jurisdictions taxes must be collected in the year before the year in which they are
available for expenditure. In such jurisdictions tax collection should be credited, deferred
revenue should be debited &revenue should be credited.
Under accrual basis, expenditure is recognized when a liability to be met from fund asset is
incurred. It is important to note that an amount of a liability incurred whether the liability is for
salaries (an expense) for supplies ( a current asset) ,or for a long lived capital assets such as land
building or equipment.
Activity :
Question 1: what is the difference between general fund and special revenue fund
Question 2: what does mean fund equity , fund balance and other financing sources
Question 3. What is the difference between Other financing sources andOther financing use
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All the three must be supported by subsidiary ledger accounts whatever detail is required by law
or by sound financial administration. Budgeted inter fund transfers and debt issue proceeds may
be recorded in Estimated Other Financing Sources and Estimated Other Financing Uses
control accounts supported by subsidiary accounts as needed.
Activity
Question 2: what is the difference between Estimated Revenues ,Appropriations and
Encumbrances-----------------------------------------------------------------------------------------------------
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An analysis of each of the ledger accounts in the forgoing journal entry follows:
1. Estimated Revenues and Estimated Other financing Sources ledger account may be considered
Pseudo Asset controlling accounts because they reflect resources expected to be received by the
General Fund during the fiscal year. These accounts are
Not actual assets because they do not fit the accounting definition of an Asset as a probable
economic benefit obtained or controlled by a particular entity as a result of past transactions or
events. Thus the two accounts in substance are memorandum accounts, useful for control
purposes only, that will be closed after the issuance of financial statements for the General fund
for the fiscal year ending June 30 year 6.
2. The Estimated other Financing source ledger accounts includes the budgeted amounts of such
non Revenue items as proceeds from the disposal of plant assets and operating transfers from
other funds.
3. The Appropriations and Estimated Other Financing Uses Ledger Account may be considered
Pseudo Liability controlling accounts because they reflect the legislative body’s commitment to
expend General fund resources as authorized in the Annual Budget. These accounts are not
genuine liabilities because they do not fit the definition of a liability as a probable future sacrifice
of economic benefits arising from present obligation of a particular entity to transfer assets to
provide services to other entities in the future as a result of past transactions or events. The
appropriations and Other Financing uses are memorandum accounts, useful for control
purposes only, that will closed after issuance of yearend financial statements for the general
fund.
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4. The Estimated Other Financing Uses accounts include budgeted amount of operating transfers
out to other funds, which are not expenditures.
5. The Budgetary Fund Balance Ledger Account, as its title implies is an account that balances
the debit and credit entries to accounts of a budget journal entry. Although similar to the owners’
equity accounts of a business enterprise in this balancing feature, does not purport to show an
ownership interest in the General funds assets. At the end of the fiscal year, the budgetary fund
balance account is closed by a journal entry that reverses the original entry for the budget.
The journal entry to record the town of X general funds annual budget for the year ending June
30 year 6 is accompanied by detailed entries to subsidiary ledgers for Estimated Revenues,
Estimated other financing Sources, Appropriations and Estimated Other Financing Uses. the
budget of the town of X general fund purposely was condensed; in practice the general fund
estimated revenues and appropriations would be detailed by source and function, respectively
into one of the following widely used subsidiary ledger categories:
Estimated Revenues:Appropriations:
- Taxes - General government
- Licenses and permits - Public safety
- Intergovernmental revenues - Public works
- Charges for Services - Health and Welfare
- Fines and Forfeits - Culture - recreation
- Miscellaneous - Conservation of natural resources
- Debt service
- Intergovernmental expenditures
- Miscellaneous
Such details will be discussed in the next topic; Classification and terminology of governmental
funds budgets and accounts.
In summary, budgets of a governmental unit are often recorded in the accounts of the four
governmental funds. An expendable trust fund may also record a budget if required to do so by
the trust indenture. The recording of the budget initiates the accounting cycle of each for each of
the funds listed above. Recording the budget also facilitates the preparation of financial
statements that compare budgeted and actual amounts of revenues and expenditures.
Encumbrances and budgetary control- because of the need for expenditures of governmental
units to be in accordance with appropriations of governing legislative bodies, an a encumbrance
Accounting techniques are used for the general fund and the special revenue funds and
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sometimes for capital projects funds. The Encumbrance is a memorandum method for assuring
that total expenditures for a fiscal year do not exceed appropriations. The encumbrance technique
is used in accounting for governmental units have no counterpart in accounting for business
enterprises.
Assume that in addition to the budget illustrated earlier, the town of X general fund had the
following summarized transaction and events for the fiscal year ended June 30, 19x6
1. Property taxes were billed in the amount of 7,200,000 of which 140,000 was of
Doubtful collect ability.
Property tax receivable- current 7,200,000
Allowance for uncollectible current taxes 140,000
Revenue 7,060,000
= To accrue property taxes billed and to provide for estimated uncollectible portion.
Explanation- The modified accrual basis of accounting for a general fund permits the accrual of
property taxes, because they are billed to the property owners. The estimated uncollectible
property taxes are offset against the total assets billed in order to measure actual revenues from
property taxes for the year.
2. A total of 6,500,000 amount of Property tax were collected and a total of 1,020,000
Amount of cash from other revenue sources like licenses and permits, fines and forfeits,
miscellaneous sources were also collected.
Cash 7,520,000
Property taxes receivable-current 6,500,000
Revenue 1,020,000
= To record collection of property taxes and other revenues for the year.
Exp- Under the modified accrual basis of accounting, revenues not susceptible to accrual are
recognized on the cash basis like self-assessment basis tax revenue (Eg. Income tax, Sales Tax,
Gross receipts Tax, ) and miscellaneous revenues (Eg. Annual business licenses, construction
and home improvement permits, Fines and forfeits etc.)
3. Property tax in the amount of 130,000 was uncollectable.
Allowance for uncollectable current taxes 130,000
Property taxes receivable- current 130,000
= To write off receivables for property taxes that is uncollectable
Explanation- The forgoing journal entry represents a shortcut approach. in an actual situation ,
uncollectible property taxes first would be transferred together with estimated uncollectable
amounts, to the Taxes Receivable- Delinquent ledger account from the Taxes Receivable-
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Current account. Any amounts collected on these delinquent taxes would include revenues for
interests and penalties required by law. Any uncollected delinquent taxes would be transferred,
together with estimated uncollectible amounts to the Tax-Liens Receivable ledger Account. After
the passage of an appropriate statutory period, the governmental unit might satisfy its tax lien by
selling the property on which the delinquent taxes were levied.
4. Purchase orders for non recurring expenditures were issued to outside suppliers in the total
amount of 3,600,000.
Encumbrances -------------------------3,600,000
Fund Balance reserved for Encumbrances--------------3,600,000
= To record purchase orders for non-recurring expenditures issued during the year.
Explanation- encumbrance journal entries are used to prevent the over expending of an
appropriated amount in the budget. This journal entry to the encumbrances ledger account is
posted in detail to reduce the unexpended balances of each applicable appropriation in the
subsidiary ledger for appropriation. The unexpended balance of each appropriation is thus
reduced for the amount committed by the issuance of purchase orders.
5. Expenditures for the year totaled 7,600,000 of which 900,000 applied to the acquisitions of
supplies and 3,500,000 applied to 3,550,000 of the purchase orders in the total amount of
3,600,000 issued during the year.(assume consumption method).
a) Expenditures 6,700,000
Inventory of supplies 900,000
Vouchers payable 7,600,000
= To record expenditures for the year.
Explanation- the expenditure ledger account is debited with all expenditures regardless of
purpose except for Additions to the Inventory of Supplies, Principal and Interest Payments
on Debt, Additions to the Governmental Unit’s Plant Asset, Payments for Goods or
Services to be Received in the Future, - all are debited to expenditure or other financing uses
rather than to asset or liability ledger account. (Expenditure for debt principal and interest and
plant asset additions are also recorded on a memorandum basis in the general long-term debt and
general fixed assets account group respectively.
b) Fund Balance reserved for Encumbrance 3,550,000
Encumbrance 3,550,000
= To reverse encumbrances applicable to voucher expenditures,
Explanation- Recording actual expenditures of 3,500,000 (included in the 6,700,000 total in
entry 5a above) applicable to purchase orders totaling 3,550,000 makes this amount of the
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Explanation-amounts transferred to the general fund from other funds are recognized as
revenues if they are quasi-external transactions, such as payment in lieu of property taxes;
otherwise they are recognized as other financing sources if they are operating transfers, such as
subsidies.
10. Supplies at a cost of 800,000 were used during the year.
Expenditures 800,000
Inventory of supplies 800,000
= To record cost of supplies used during the year.
Unreserved and undesignated fund balance 100,000
Fund balance reserved for inventory of supplies 100,000
= To increase inventory of supplies reserve to 500,000 to agree with
Balance of inventory of supplies ledger account at end of year
(500,000 - 400,000= 100,000)
Explanation- the immediately preceding journal entry represents a restriction of the portion of
the fund balance account to or event its being appropriated improperly to finance a deficit annual
budget for the general fund for the year ending June 30,year 7. Only cash and other monetary
assets of a general fund are available for appropriation to Finance authorized expenditures of the
succeeding fiscal year.
11. All uncollected property taxes on June 30 year 6 were delinquent.
Taxes Receivable- Delinquent 570,000
Allowance for uncollectable Current Taxes 10,000
Taxes Receivable- Current 570,000
Allowance for Uncollectable Delinquent Taxes 10,000
= To transfer delinquent taxes and related estimated uncollectable amounts from the current
classification
Explanation- The forgoing journal entry clears the Taxes Receivable- Current ledger account
and the related contra account for uncollectable amounts so that they will be available for accrual
of property taxes for the fiscal year ending June 30,year 7.
12. The town council designated 250,000 of the unreserved and the undesignated fund balance
for the replacement of equipment during the year ending June 30, year 7.
Unreserved and Undesignated Fund Balance 250,000
Fund Balance Designated for -
Replacement of Equipment 250,000
= To designate a portion of the fund balance for the replacement
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C. Enterprise fund
D. General fund
4. General capital assets used by departments accounted for by the General Fund of a
governmental unit should be capitalized in
A. The General Fund.
B. The governmental activities journal.
C. The business-type activities journal.
D. The general capital assets fun
5. Which of the following statement(s) are not included in the governmental funds:
A. Statement of Revenues, Expenses, and Changes in Net Assets
B. Balance sheet C. Statement of Net Assets
D. All of the above are included
6. Which of the following General Fund accounts would not be closed at the end of the fiscal
year?
A. Appropriations
B. Other Financing Uses
C. Due to Debt Service Fund
D. Estimated Revenues
Answer for self examination
1. E 2. C 3.D 4.B
5. D 6.C
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8. Describe how expenditures are recorded and exceptions which are recorded separately.
___________________________________________________________________________
_______________________________________________________________________
9. Describe accounting for supplies in governmental entities general fund and special
Revenue
______________________________________________________________________________
____________________________________________________________________
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expenditures in the general fund. it is also possible that a construction project could simply have
a subsidiary ledger within the General Fund, rather than its own distinct fund. the existence of
the Capital projects fund, as any other fund will depend on the legal requirements and the need
for good financial management.
CPF do not account for the fixed assets acquired only for the construction of the fixed assets. It
exists only for the period of acquisition or construction of the fixed assets. After the acquisition
or construction is completed, the Capital Projects Fund will be abolished. The Fixed Assets
constructed are accounted for in the GFAAG. It does not also account for the repayment &
servicing of any debt obligations issued to raise money to finance the acquisition of capital
facilities. Such debt & debt related servicing activities are accounted for in the General Long
Term Debt Account Group (GLTDAG) & Debt service fund (DSF). Since the purpose of capital
projects fund is to account for the acquisition and deposition of revenues for specific purpose, it
contains balance sheet accounts for only liquid assets and for the liabilities to be liquidated by
those assets.
Virtually all-governmental buildings are constructed by the governmental unit & are mostly
financed by bond offerings. In commercial accounting, all the activities (the construction of the
building, the subsequent capitalization & accounting for the building & the servicing of the debt
incurred to finance the construction of the building is accounted using one general ledger. In
governmental, four general ledgers are used, of which two are funds & two are account groups.
Activity
Question 1: what is the definitions and the purpose of established capital project fund
Question 2: what are the factors affect the financial source of capital project fund
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Example
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The focus of the CPF is the entire life of the project. It is by definition an expendable fund, and
all its resources are expected to be used up. However, CPFs do not have the same year-by-year
focus as the G.F because of the multi-year focus of CPFs, some accountants prefer not to close a
CPF annually, but others do. Whether or not to close the CPF annually will depend on the unique
factors of each case & will be strongly influenced by the requirement of the financing source.
The decision to use budgetary accounts will also depend on the features & financing source of
the particular CPF. It will be based on the particular project & be strongly influenced by the
requirement of the financing source. The decision to use or not to use budgetary accounts is
influenced by factors such as.
- The number of projects in the C.P.F
- The amount of detail in the C.P.F budget
- The use of an annual budget (rather than a project life budget) in the CPF
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Costs Included
All expenditures for getting the project ready are put in the CPF, including architect fees,
transport costs, damages etc…. usually major capital facilities are constructed by contracted
labor. Construction costs incurred are charged to expenditures. At the completion of the project
the cost of the facility is recorded as a fixed asset in the GFAAG. Until then any costs incurred
are shown as construction work in progress in the GFAAG. Generally the year-end closing entry
in the CPF triggers the recording of an amount in the GFAAG equal to the credit to the
expenditures account.
Retained Percentages
It is common in construction contracts for the entity to hold back the portion of the last payment
of the contract and to require contractors on large Scale contracts to give performance bonds,
providing indemnity to the Governmental Unit for any failure on the contractors party to comply
with terms and specifications of the agreement to provide more prompt adjustment on
shortcomings not legal or convincing enough to justify legal actions and not recoverable under
contractor’s bond as well as those the contractor may admit but not be in a position to rectify, it
is a common practice to withhold a portion of the contractors remuneration until final inspection
& acceptance have come about.
Encumbrances
Some governmental units include annual capital budgets as part of their annual appropriated
budget in which case the annual capital is recorded in the general ledgers of the various CPFs.
However, since the amount involved in a capital project is usually large, an encumbrance
account is highly recommended & is very necessary in case of multiple subcontractors for a
project. Because of this, an encumbrance accounting procedures alone are usually deemed
sufficient for control purposes. So recording of the budget in the general ledger might not be
necessary. In capital projects fund, Encumbrance is also recorded by the same amount in which
the construction contract agreement is made between the governmental unit and the contractor
and also in the same manner as that of the general and special revenue fund when items are
ordered through purchase orders.
Re-establishment of Encumbrance- the year end closing procedures for use by capital projects
funds artificially chops the construction expenditures pertaining to each continuing projects into
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fiscal year segments rather than allowing the total cost of each project to be accumulated in a
single Construction Expenditures Account. Similarly closing the encumbrance account of each
project to fund balance at year-end creates some procedural problems in accounting in the
subsequent year. the procedures illustrated for general and special revenue funds (using separate
Encumbrance, Fund Balance Reserved for Encumbrances, and Expenditure Accounts for each
year) could be followed. The authorization (Appropriation) for a capital projects fund however
does not expire at the end of a fiscal year but continues over the life of the project. Accordingly,
it appears desirable to re-establish Encumbrance account at the beginning of each year in order to
facilitate accounting for expenditures for goods and services ordered in one year and received in
a subsequent year.
Activity
Question 2: list and explains method of acquire general project fund
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small an additional transfer will probably be requested from one or more other funds. If the
deficit is relatively large and/or intended transfers are not feasible, the governmental unit may
seek additional grants or shared revenues from other governmental units to cover the deficits if
no other alternative is available, the governmental unit would need to finance the deficit by
issuing bonds. And under these circumstances, a legal or disciplinary action might have been
sought against the project manager, since public money was being used.
1. The proceed including the premium could be recorded in the CPF as OFS-Bond proceeds
Cash 110,000
OFS- Bond precedes 110,000
2. Or, only the par value of the bond is considered as OFS of the CPF
Cash 110,000
OFS- bond proceed 100,000
Due to DSF 10,000
In the first case the transfer of the premium to the DSF is reported as an Operating Transfer Out
in the CPF and an Operating Transfer in the DSF.
C.P.F
Cash 10,000
OFS –operating transfer in 10,000
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Whereas in the second case, the bond premium is accounted as a liability of the CPF because it
must be remitted to the DSF. Similarly, when bonds are sold between interest payment dates the
amount of accrued interest is included in the total selling price. Conceptually accrued interest
sold is an offset to the interest expenditure on the first interest payment date.
Following the sale of the bonds generally in practice, however accrued interest sold is recorded
as revenue of the DSF.
Issuance of Bonds at a Discount
Bond discount are rare because the stated the interest rate is usually set enough set high enough
so that no discounts may result (many Governmental units are legally propitiated from issuing
bonds at a discount). If a discount does result, theoretically there should be a transfer from the
related DSF to the CPF to cover the shortfall. In practice such a transfer may not be possible
because money may not be available in the related DSF or because of legal restraints. In such
case, the project may be curtailed or the shortage may be covered by an operating transfer from
the GF. E.g.
Cash 100,000
Due from 10,000
OFS- bond proceed 110,000
Accrued Interest on Bonds Sold
When bonds are sold between the interest payment dates the amount of accrued interest is
included in the total selling price. Conceptually, accrued interest sold is an offset to the interest
expenditures on the first interest payment date following the sale of the bonds. Generally in
practice, however accrued interest sold is recorded as revenue of the Debt Service Fund.
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All the money necessary to pay for the capital project is usually raised near the inception of the
project, but contractors are paid as work progresses. Excess cash, therefore may be temporarily
invested in high quality interest bearing securities. Interest rates payable by the governmental
unit on general long term debt have been lower than interest rates the governmental units can
earn on temporary investments of high quality such as Treasury bills and notes, Bank notes,
Bank Certificates of deposit and government bonds with short maturities. Consequently, there is
considerable attraction to the practice of selling bonds as soon as possible after capital project is
legally authorized, and investing the proceeds to earn a net interest income. The interest earned
on the temporary investment is available for use by the CPF in some jurisdictions; in others, laws
a local practice require the interest income to be transferred to the DSF or to the GF. If interest
income is available to the CPF, it should be recognized on the accrual basis as a credit to
revenues. If it will be collected by the CPF but must be transferred, the credit for the income
earned should be Due to other funds. If the interest will be collected by the DSF or other fund
that will recognize it as Revenue, no entry by the CPF is necessary.
ILLUSTRATION ON CAPITAL PROJECTS FUND
Financial activities such as revenues earned expenditures incurred for the construction or
acquisition are recorded in almost the same manner as that of the General and Special Revenue
Fund. at the end of each fiscal year prior to a completion of a capital project, the Revenues,
Other Financing sources, Expenditures, Other Financing Uses and encumbrance ledger accounts
of the capital projects fund are closed to the unreserved and undesignated fund balance account.
upon completion of the project, the entire capital project fund is closed by a transfer of any
unused cash to the Debt Service Fund or to the General fund, as appropriate; the unreserved and
undesignated fund balance ledger account of the receiving fund would be for Residual Equity
Transfer. The following illustration will show how the construction and related activities are
accounted for in a capital projects fund.
Illustration
The town of X wants to construct a new library on the site owned by the town. The construction
is expected to cost 50,000,000. It is expected to be completed within two years on June 30 year
7. In a special meeting held on July 2 year 5, the members of the town council approved a
30,000,000 issue of General Obligation Bonds maturing in 20 years. The proceeds of this sale
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will be used to help finance the construction of the new library. The remaining 20,000,000 will
be financed by an Irrevocable State Grant that has been awarded.
The following transactions occurred during the fiscal year ended June 30 year 6.
1. The General fund loaned 500,000 to the library Capital Projects Fund for defraying
Engineering and other preliminary expenses by receiving a note which is later to be
Settled from the bond issue proceeds.
Cash 500,000
Bond Anticipation Notes Payable 500,000
2. Out of the Irrevocable grant of 20,000,000, the state contributed 5,000,000 and the
Remaining is deemed to be susceptible to accrual
Cash 5,000,000
Due from State Grant 15,000,000
Revenue 20,000,000
3. Preliminary engineering and planning costs of 320,000 were paid to the contractor.
There had been no encumbrances for this cost.
Construction Expenditure 320,000
Cash 320,000
4. The Bonds were sold at 101. The bond indenture agreement requires that any premium
To be set aside in the related Debt Service Fund.
Cash 30,300,000
OFS-Bond proceeds 30,000,000
Due to DSF 300,000
5. The town of X library CPF invested its 10,000,000 bond proceeds on the Federal
Government treasury bills.
Short Term Investment-Treasury Bills 10,000,000
Cash 10,000,000
6. A construction contract for 44,270,000 is authorized and signed.
Encumbrances 46,000,000
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12. When the project was approximately half finished, the contractor submitted billing for a
payment of 12,000,000.
Fund Balance Reserved for Encumbrance 12,000,000
Encumbrance 12, 000,000
Construction Expenditure 12, 000,000
Construction Payable 12, 000,000
13. The contractor’s initial claim was fully verified and paid.
Construction Payable 12,000,000
Cash 12,000,000
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6.8 Summary
In conclusion, it should be clearly known that the reason for creating a fund to account
for a capital project is the same as the reason for creating special Revenue funds; to
provide a formal mechanism to enable administrators to ensure Revenues
Dedicated to a certain purpose are used for that purpose and no other, and to enable
administrators to report to creditors and other grantors of capital projects.
Fund resources that their requirement regarding the use of the resources was met.
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1. Debt service fund is used to account for both the repayment of the principal and payment of
interest of the long-term debt when they are due. Often Debt service funds are legally
mandated. Other times, the government administrator might think a
Debt Service Fund is useful for management of resources being accumulated for Debt Service.
2. DSF is governmental funds and therefore are Expendable. Although, like a CPF, they have
focus more than a year. Debt service funds are for general long-term debt (GLTD), which has
been used to provide resources for one of the other governmental fund types. Often they arise
from the Capital projects. Proprietary funds also borrow on a long term basis, but their
repayment is accounted for in the proprietary fund itself rather than a separate debt service fund.
3. As expendable funds, DSF use the modified accrual basis of accounting. An application of
modified accrual, which is of special interest to DSF, has to do with interest payable. Interest
payable is not accrued in the DSF. It is only recorded as a liability in the period when it becomes
due. For example, interest due on January 31, 20x1 would not be accrued and recorded on
December 31, 20 x 0 Balance Sheet.
4. Accounts recommended for use by a serial bond Debt service fund is similar with
That of General Fund and Special Revenue fund. Even if it is not exactly the same
Such as budgetary accounts (Estimated Revenue, Estimated Other Financing
Sources, Appropriations, Estimated other financing Uses) or proprietary accounts
(Revenues, OFS, Expenditures, OFU)
5. The operations of DSF do not involve the use of purchase orders and contracts for
Goods and services. So the Encumbrance accounting is not needed.
6. The ledger accounts of a Serial Bond Debt Service fund include liquid assets and current
liabilities and Fund Balance Accounts. Liquid Assets of serial Bond Debt Service funds are held
for the purpose of paying interest or outstanding bonds and retiring the principal instalment s as
they fall due; for the convenience of the bond holders, the payment of interest and the and the
redemption of matured bonds is ordinarily handled through the Banking system. Usually the
government designate a bank as a ―Paying Agent‖ or a ―Fiscal Agent‖ to handle interest and
principal payments for each issue. The assets of a Debt service Fund may therefore include Cash
with paying Agent and the appropriations, Expenditures and liabilities may include Amounts
for the Services and Charges for Paying Agents.
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Generally, there are other types of long-term debts (bonds) which also arise because of different
activities of Governmental units. This long term debts may or may not be accounted for under
DSF for their repayment. They may be categorized as follows;
A. Revenue Bonds- are issued to finance the establishment or expansion of activities
Accounted for in Enterprise Funds (EF). These bonds are shown as liabilities of EF.
Because their repayment and servicing can only come from money generated from
The operations of those funds.
B. General Obligation Bonds- these bonds serviced from the enterprise funds are also
Issued to finance establishment or expansion of activities accounted for in EF. They bear the full
faith and credit of the governmental unit. When such bonds are to be repaid and serviced from
money generated from the operations of an EF, the bonds should be shown as liabilities of the EF
and as a contingent liability of the General Long Term Debt Account Group (GLTDAG).
D. All other long-term debt fitting into one of the two preceding categories is shown
As a liability of the GLADAG. DSF is created for long-term debt that is shown as
A liability of the GLTDAG which is a self balancing group of accounts that keeps
Track of all unmatured long term debt in group c above. DSF account for the Matured portion
and the repayment of such principal and interest on such long term debt.
In addition, to term bonds and serial bonds, debt service fund may be required to service debts
arising from the use of notes or warrants having a maturity period of more than a year after the
date of issue. Additionally, DSF may also be used to make periodic payments required by capital
lease agreements.
Activity
Question 1: list and explains a type of long term debt
Question 2: explains the basic characteristics of debt service fund
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4. Bond Premium and Accrued Interest on Bonds Sold- Depending upon the bond indenture
agreement, the DSF may be entitled to receive bond premium and Accrued Interest on Debt Issue
sold which are to be recognized as Revenues of DSF.
5. Residual Equity Transfers- If capital Projects are completed with Expenditures
Less than Revenues and Other Financing Sources, The Residual Equity is ordinarily
Transferred to the appropriate DSF.
Whether or not additions to Debt service Funds are required by the Bond indenture to be
approximately equal year by year, good politics and good financial management suggest that the
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Activity
Question 2: list and explains methods of financing debt service fund
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The town of X uses a Serial Bond Debt Service Fund to pay off matured bonds and - -Interest
payable amounts. Information about the Bond issue is as follows;
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Expenditure 45,000
Matured Interest Payable 45,000
5. Checks are written and mailed to the paying agent for the interest payment due on
July 1.
Cash with Fiscal Agent 45,000
Cash 45,000
6. Interest is paid by the Fiscal Agent and the Fiscal Agent fee of 500 is paid.
Mature Interest Payable 45,000
Expenditure 500
Cash with Fiscal agent 45,000
Cash 500
7. Taxes in the amount of 160,000 are collected.
Cash 160,000
Tax Receivable- Current 160,000
8. Cash of 100,000 is invested in a short term note which bears interest of 10%
Short Term Investment- Note 100,000
Cash 100,000
9. Interest on investment is received for the four months.
100,000 x 10% x 4/12 = 3333.33
Cash 3333.33
Revenue 3333.33
10. Checks are written and mailed to to the Fiscal Agent for the matured bonds and
Interests due on January 1.
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Cash 44,333.33
Short term Investment- Note 100,000
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___________________________________________________________________________
8 What does a ledger account of a debt service fund includes different from other
funds?
___________________________________________________________________________
9. Describe Refinancing and how it is used as a source of finance for a DSF.
___________________________________________________________________________
10. Explain one peculiarity of the accrual basis of accounting of governmental fund
types which only applies to DSF.
_________________________________________________________________________
1. Refer to the topic 7.2
2. Refer to the topic 7.2
3. Refer to the topic 7.3
4. Refer to the topic 7.5
5. Refer to the topic 7.5
6. Refer to the topic 7.5
7. Refer to the topic 7.6
8. Refer to the topic 7.2
9. Refer to the topic 7.5
10. Refer to the topic 7.5
Answer for choice
1. D 2. D 3. D 4. D 5. A 6. B
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be serviced from revenues generated from their operations as well as for all current assets and
current liabilities. the equity account of proprietary funds are composed of
1. Contributed equity
2. Retained Earnings
Proprietary funds differ from Governmental funds in that they are not required by GASB
standard to record the budget in their accounting system, which is treated as a managerial control
device rather than a legislative control tool.
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commercial basis and accounted for by governmental funds are now accounted for by proprietary
funds, ISF & EF. As discussed earlier in the introduction, Activities that produce goods or
services to be provided to department or agencies of a governmental unit or to other
governmental units, on a cost reimbursement basis are accounted for by ISF.
The phrase cost- reimbursement basis is to be interpreted broadly. User charges need not cover
the full cost of providing the goods or services; transfers from other funds or units to subsidize in
part the operations of an ISF do not negate the use of this fund type. Being a proprietary fund,
ISF is accounted for in the same manner like an investor owned business enterprise. Accordingly
as mentioned earlier, it recognizes Revenues and Expenses (not expenditures) on the accrual
basis. it accounts for all fixed assets used in its operations. And for long term debt to be serviced
from revenues generated from its operations as well as for all current assets and current
liabilities. It has got two equity accounts; Equity contributed to the fund and, retained earnings
resulting from the operations of the fund.
Establishment and Operations
ISF arose to meet the need to offer services within the entity. ISFs are established to meet some
need within the entity, if it is believed that the entity can provide the service to itself in a more
reliable and/or less expensive manner than obtaining the same service outside. Although the
reason for establishment of an ISF is to improve financial management of scarce resources, it
should be stressed that a fund is a fiscal entity as well as an accounting entity; consequently
establishment of a fund is subject to legislative approval. The ordinance, or other legislative
action, that authorizes the establishment of an ISF should also specify the source or sources of
financial resources to be used for fund operations. the original allocation of resources to the fund
may be derived from a transfer of assets of an other fund, such as The GF or an EF, intended as
contribution not to be repaid, or a transfer in the nature of a long term advance to be repaid by
the Internal service fund over a period of years. Alternatively, or additionally the resources
initially allocated to an internal service fund may be acquired from the proceeds from the
proceeds of tax supported bond issue or transfer from other governmental units that anticipate
utilizing the services to be rendered by the ISF. Since the ISFs are established to improve the
management of resources, it is generally considered that they should be operated and accounted
for on a business basis. Application of this general truth to a specific case can lead to a conflict
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between managers who wish the freedom to operate the fund in accord with their professional
judgement, and legislators who wish to exercise considerable control over the decisions of ISF
managers.
Operation of an ISF- Generally the cost of an ISF should be less than the cost of purchasing the
same service from an external provider. in some cases the use of an ISF with higher cost can be
justified if it is thought that external service providers are unreliable. External conditions change
constantly and the cost of an ISF tends to increase from time to time good cost information from
the accounting system allows management to regularly review the ISF in comparison to External
providers. Sometimes subsidy might be given to the ISF by other funds so as to make the
services of ISF cheaper, under this case, a below cost charge should be made by the ISF to other
funds so that those other funds receive the service at a discount and thereby be able to operate
their own funds at a surplus.
The major challenge in operating in ISF is the determination of the cost of service, which is to be
charged to the user departments. Basically the pricing of the service to the other departments is
very important in the ISF. In a profit seeking business, the main determinant of price is ―what the
market will bear‖. However an ISF serves as a ‖captive‖ market and since it is ultimately meant
to save money for the entity as a whole. Pricing should be done according to the cost of
providing the service. The price charged to the user departments should be high enough to cover
all the cost of the ISF, while being less expensive than purchasing outside.
Activity
Question 1: explains the establishment and operation of internal service fund and enterprise fund
Question2; how to prepare financial statements under internal service fund
Questions 3: list the way of dissolution under internal service fund
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Exp- Transfer of this nature are initially are accounted for by the recipient fund as Equity
transfer in as shown in entry 1. The equity transfer in account is closed at the end of the fiscal
period to an appropriately named fund Equity account- Contribution from the General Fund, in
this case and reported in the changes in fund equity section of the operating statement.
2. Town of X Water Utility Fund advances cash of 100,000 so as to be used for acquisition of
building and equipment by the Supplies Fund. The advances are to be paid in 20 equal annual
instalments.
Cash 100,000
Advances from water Utility Fund 100,000
3. A Warehouse building is purchased for 70,000; 10,000 of the purchase price is considered the
cost of the land. Warehouse machinery and equipment is purchased for 20,000. Delivery
equipment is purchased for 10,000 (all for cash).
Land 10,000
Building 60,000
Machinery & Equipment- warehouse 20,000
Equipment- Delivery 10,000
Cash 100,000
Exp- If the purchases are made for cash, the acquisition of the assets would be recorded in the
books of the supplies fund in such manner
4. Supplies are acquired at cost of 179,800 and the invoices are approved for payment.
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Cash 51,000
8. Payments on vouchers during the year totalled 157,000.
Vouchers Payable 157,000
Cash 157,000
9. The Advance from the Water Utility Fund, first repayment has been made
Advance from Water Utility Fund 5, 000
Cash 5,000
10. Depreciation has been recorded based on the following information;
- Building used as a warehouse was estimated at the time of purchase to have a
Remaining useful life of 20 years;
- The warehouse machinery and Equipment was estimated to have a useful life of
10 years;
- The Delivery Equipment to have a useful life of 5 years;
- Warehouse building space occupied:
10% => the administrative and clerical office
10% => Purchasing Office
80% => Warehousing
- Warehouse Machine and Equipment is devoted to Warehousing
10% = 300
=>60,000 = 3,000 -- 10% = 300
20 yrs 80% = 2,400
20,000 = 2,000
10 yrs
10,000 = 2,000
5 yrs
Administrative Expense 300
Purchase Expense 300
Warehouse Expense 4,400
Delivery Expenses 2,000
Accumulated Depreciation- Building 3,000
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Original cost is regulatory concept that differs from historical cost. A concept commonly used in
accounting for assets of non-regulated business. In essence historical cost is the amount paid for
an asset by its present owner. In contrast, original cost is the cost to the owner who first devoted
the property to public service.
Since a governmental entity can’t really charge taxes to itself, it may have it’s EF pay some
agreed Contribution in lieu of Taxes to the governmental entity. This would be considered as an
operating expense for the EF, and Revenue for the receiving fund. (It is not an Interfund
Transfer). Efs may use functional division of Expenses. In other words, Expenses are classified
by what you get, rather than what you spent. Eg. The following expense categories may be used
for Water Supply Enterprise Fund: Source of Supply, Pumping, Transmission and Distribution
(pipes), Administrative etc..., rather than the natural expense categories such as Salary Expense,
Rent Expense, etc.
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Town of X water Utility fund revenues accrual has been credited to sales of water, the above
entry should be made.
2. During Year 1, the total bills to non-governmental customers amounted to 696,000. Bills to
the Town of X General Fund amounted to 30,000 and all Revenue was from sales of water
Customer Accounts Receivable 696,000
Due from General fund 30,000
Sales of Water 726,000
3. Collections from Nongovernmental customers for Water Billings totalled 680,000.
Cash 680,000
Customer Account Receivable 680,000
4. Materials and supplies in the amount of 138,000 were purchased during the year by
The Water Utility fund.
Materials and Supplies 138,000
Accounts Payable 138,000
5. Materials and supplies Chargeable to the accounts itemized below were issued during
The year.
- Source of Supply 18,000 - Transmission & distribution 13,000
- Pumping 21,000 - Construction work in progress 66,000
- Water Treatment 24,000
Source of supply Expenses 18,000
Pumping Expenses 21,000
Water Treatment Expenses 24,000
Transmission and Distribution Expenses 13,000
Construction work in progress 66,000
Materials and Supplies 142,000
6. Payrolls for the year were chargeable to the accounts given below. After deducting
The necessary tax collections, checks have been given to the employees’ net
Earnings.
- Source of Supply 8,200 - Sales 17,250
- Pumping 15,700 - Tax collected 51,750
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8. Bond Interest during the period of construction, net of any interest earned on temporary
investment of bond proceeds, amounted to 12,900; this amount was charged to construction.
(The town of X does not impute interest on its own resources used during the construction).
Construction work in Progress 12,900
Allowance for funds used-
During Construction 12,900
9. Construction projects on which costs totalled 220,000 were completed and the assets placed in
the service:
Utility plant in service 220,000
Construction work in progress 220,000
10. Collection efforts were discontinued on bills totalling 3,410. The customers owing the bills
had paid deposits to the water Utility totalling 2,140. The deposits were applied to the bills and
the unpaid remainder was charged to allowance for
Uncollectable accounts.
Customer Deposits 2,140
Accumulated Provision for-
Uncollectable Accounts 1,270
Customer accounts Receivable 3,410
11. Customer deposits amounting to 1,320 were refunded by check to customers discontinuing
service. Deposits totalling 2,525 were received from new customers.
Customer Deposits 1,320
Cash 1,320
Cash 2,525
Customer Deposits 2,525
12. Customer Advances for Construction in the amount of 14,000 were applied to their water
bills. In accordance with the agreement with the customers, the remainder of the advances were
transferred to contribution from Customers.
Customer Advances for Construction 21,000
Customer Accounts Receivable 14,000
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16. In accordance with the Revenue Bonds Indenture, 100,000 amounts of cash was transferred
to the Special Funds category. The transfer requires an appropriation of Retained Earnings of an
equal amount.
Special Funds 100,000
Cash 100,000
Unappropriated Retained Earnings 100,000
Appropriated Retained Earnings 100,000
17. Nominal accounts at the end of the year were closed.
Sales of Water 727,120
Allowance for Funds Used during Construction 12,900
Source of Supply Expenses 26,200
Pumping Expenses 36,700
Water treatment Expenses 41,500
Transmission and Distribution Expenses 89,250
Customer Account Expenses 100,530
Sales Expenses 17,250
Administrative and General Expenses 83,150
Interest on Long Term Debt 105,000
Amortization of Debt Discount and-
Expense 530
Contribution in lieu of Taxes 25,000
Depreciation Expenses 91,700
Amortization of Plant Acquisition-
Adjustment 11,050
Unappropriated Retained Earnings 112,160
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Generally, the standards developed by FASB and its predecessors, have been accepted by the
GASB as applying to ISFs and EFs. Consequently, many sections in this topic which discuss
Generally Accepted Accounting Principles (GAAP) applicable ti ISF (such as Acquisition of
assets by Contribution or grants, Depreciation of contributed assets or assets acquired from
Capital grant and assets acquired under lease agreement) apply equally to Efs accounting for
activities whose accounting is not regulated by Federal or state agencies.
There is a trend toward a belief that FASB standard should apply to General Purpose external
financial Reporting of Regulated Utilities also and that the requirement of regulatory bodies
should apply only to the reports submitted to the regulatory bodies.
As of the present time, however, the material presented in the previous sections of this topic in
regard to accounting and financial reporting for governmentally owned utilities is considered
authoritative.
Segment information that should be presented for EFs is that deemed essential to make the
General Purpose Financial statement not misleading. The following types of information are
specified
Materiality should be evaluated in terms of the individual Enterprise Fund, not in terms of the
total Enterprise Fund type taken as a whole.
1. Which of the following funds of a government would account for depreciation in the
accounts of the fund?
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A. General fund
B. Internal service fund
C. Capital projects fund
D. Special revenue fund
Internal service funds should be used only if
A. The reporting government is the predominant participant in the activity.
B. The reporting government provides services primarily to external participants
C. The reporting government provides services primarily to other departments of the same
government.
D. The reporting government provides services to other departments at a charge that covers the
full cost of operations.
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8. What is the relation between customer advances for Construction and Contribution from
customers?
___________________________________________________________________________
_________________________________________________________________
9. Explain the reason for the establishment of an ISF.
___________________________________________________________________________
_________________________________________________________________
10. Describe how the original allocation of resources is made during the establishment of an ISF.
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what cannot be done with the fund’s asset in accordance with laws and other pertinent
regulations? The name of a particular fund is not a reliable criterion for determining the correct
accounting basis for trust and agency funds merely, calling a fund by one name or another has no
influence on the transactions in which it may engage. In fact the word trusts and Agency funds
are frequently omitted from the titles of funds in this classification. Examples are ―Public
Employees Retirement System‖. And ―Condemnation and Grading Fund‖: the former, a Trust
fund, the later, an Agency Fund, each classified according to the circumstances under which its
assets are held. It is sometimes said that practical basis for distinguishing between the two types
is the length of time specific assets are held. But this is not a wholly reliable guide, since there is
no generally recognized pronouncement stating the maximum time restriction for holding assets
to constitute an Agency Fund; nor is there a minimum time to constitute a fund of the trust
variety. As suggested earlier if not explicitly stated, the exact name of designation of a given
fund is of little significance in establishing its accounting procedure and limitations. This
depends on the enactment that brought about creation of the Fund, plus all other regulations
under which it operates. Regulations include pertinent statutes, Ordinances, wills, Trust
Indentures, and other instruments of endowment, resolutions of the governing body, statement of
purposes of the fund, kinds and amounts of assets held and others. This aggregate of factors, or
such as are applicable to a given fund, determines the transaction in which it may and should
engage.
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accounted for within governmental or proprietary funds. Even if the nature of the case is
fiduciary, if the agency relationship is only incidental (not vital or essential), no agency fund is
needed. For example, Payroll tax withholdings from deductions from salary until payment to the
tax authority need no special agency fund, even though their nature is fiduciary.
Agency Fund for Special Assessment Debt Service - Special Assessments a compulsory levy
made against a certain property to defray part or all of the cost of a specific improvement or
service that is presumed to be of general benefit to the public and a particular benefit to the
property against which the special assessment is levied. GASB’s standard specify that a
governmental unit which has no obligation to assume debt service on special assessment debt in
the event of property owners’ default, but does perform the functions of billing property owners
for the assessments, collecting instalment of assessments and interest on the assessment, and
from the collections, paying interest and principal on the special assessment debt, should account
for those activities by use of an Agency Fund. if the special assessment debt is special-special
assessment debt, then the government acts only as an agent to collect the special assessment and
pay the creditors. The government as a whole does not take responsibility for the debt. The
collections and payments of it should therefore be accounted for in an Agency Fund.
Tax Agency Funds - An agency relationship that does, logically, result in creation of an agency
fund is the collection of Taxes, or other Revenues, by one governmental unit for the several of
the funds it operates and for other governmental units.
To record the assessment of the taxes, the collecting fund may deduct a fee (often a percentage of
the amounted collected) in order to cover its cost of collecting the taxes:
Mailing bills, Receiving Payments, bookkeeping, etc... (This is Revenue for the collecting fund).
If the fee deduction is assumed to be a certain percentage, the remaining percentage balance
amount will be payable to the funds for which the taxes are collected.
Cash and Investment Pools- Earnings on pooled investments and gains or losses on sales of
investments are allocated to the funds having an equity in the pool in proportion to their relative
contributions to the pool. To ensure an equitable division of earnings, gains and losses, it is
customary to revalue all investments in the pool, and all investment being brought into the pool
or removed from the pool, to market value as of the time that investments of a fund are being
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brought into or removed from the pool. (Some pools carry investments at market, revaluing them
daily).
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Pension Trust Funds on the other hand are expendable for a specified purpose in both principal
and income; retirees may be paid from both. They are account for like a proprietary fund.
Pension Trust Funds are sometimes called - Public Employee Retirement Systems (PERS) when
a pension trust fund is considered to be part of the governmental reporting entity, its financial
data are included in the combined financial statements and the combining financial statements
prepared for fiduciary funds accounted for on the full accrual basis.
Accounting for pension trust Funds should be distinguished from the governmental unit’s
responsibility as an employer to account for Expenditures, Expenses and liabilities related to
Pension plans, and to disclose in the notes to the financial statements a long list of items
specified in GASB’s statements. Reporting requirements are complex and are in a process of
change. Further, reporting requirements vary depending on whether the plan is administered by a
unit of the reporting entity or by another entity. The GASB’s disclosure standards are based on
the conclusions that the primary objectives of pension disclosures by Pension Trust Funds and
governmental employers is to provide users with information needed to assess:
A. Funding Status of a Pension Trust Fund on a Going-concern Basis,
B. Progress made in accumulating sufficient Assets to pay Benefits when due,
C. Whether Employers are making actuarially determined contributions.
9.2 SUMMARY
Full treatment of accounting and reporting requirements for both governmental
employers and pension trust funds particularly is considerably beyond the scope of this
course.
This unit is intended to introduce the topic and present a general overview of current
standards and concepts of fiduciary Funds.
Check Your Progress
Multiple choices
1. Which of the statements concerning agency funds is true?
A. Agency funds use the same basis of accounting as permanent funds.
B. Agency funds are reported only on the statement of fiduciary net assets.
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3. Describe how the collection of Taxes would be accounted for in Fiduciary Funds.
___________________________________________________________________________
_____________________________________________________________________
4. Discuss the similarities and differences between Expendable and nonexpendable
Trust Funds.
___________________________________________________________________________
_____________________________________________________________________
5. Explain the concept of an Endowment Fund as part of the Trust fund.
___________________________________________________________________________
_____________________________________________________________________
6. Explain the nature of the accounting characteristics of Fiduciary Funds and their
resemblance with that of Gov`Tal funds and Proprietary Funds.
___________________________________________________________________________
_____________________________________________________________________
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For not-for-profit organizations (N-F-P) however, these objectives are not as useful. Without a
good measure of effectiveness, measurement of efficiency becomes almost meaningless. If n-f-p
accounting system cannot measure effectiveness (as can profit seeking accounting systems),
what then is their use? They are most often employed to control public resources i.e. each person
given custody of or access to public resources should report back as to how they were used. The
public can then hold the person accountable for the proper use of the resources. This means that
the income statement is only limited to use in judging effectiveness. Both the nature of non profit
organizations and the objectives of their financial reporting have given rise to a particular
accounting method, i.e. the use of ―fund accounting‖
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It is very important to understand the meaning of fund in this context. in normal conversation
―fund‖ means simply, a resource of money. That is not the meaning ―fund‖ has in Fund
Accounting. In fund accounting, ―fund‖ means a distinct entity within a larger entity. A
separate journal entry ledger will be kept and separate financial statements will be kept for each
fund. The fund accounting concept can be used to define very clearly the purposes for which the
resources are to be used, and who is to be held accountable for the resources. Furthermore the
definition will be discussed along with the other principles in the next chapter.
Activity
Question 1: what does men not for profit organizations
Question2; what is the difference between business entities and Not-for-Profit Entities
Questions 3: what are the classification of not for profit organizations
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A non profit (not- for profit) organization is a legal accounting entity that is operated for the
benefit of society as a whole rather than for the benefit of an individual proprietor or a group of
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partners or shareholders. Thus, the concept of net income is not meaningful for non-profit
organization. A non-profit organization strives only to obtain revenue & support sufficient to
cover its expenses.
Non-profit organizations comprise a significant segment of the country’s economy.
Basically, the following are suggested way of classifying NFP organizations.
1. GOVERNMENTAL UNITS
When thinking of governmental units, one tends to focus upon the federal government, or on the
states within the federal government (state governments) or those major local governmental units
or organizations within those governments. The federal government of Ethiopia is comprised of
states & Local governmental units.
E.g.- Regions of the federal government of Ethiopia are:
Tigray South nations & nationalities
Despite the wide range in size and scope of governance, similarity & differences as the
accounting treatment as compared to business organizations, Governmental units and other non-
profit organizations would have the following common characteristics.
1. Organization to serve the society (citizens)
The basic principle of governmental philosophy is that governmental units exist to serve the
citizens subject to their jurisdictions. Thus the citizens as a whole establish governmental units
through the constitutional & charter process. In contrast, business enterprises are created by only
a limited number of individuals.
2. General absence of profit motive
With few exceptions, governmental units render services to the citizenry with out the objective
of profiting from those services. Business enterprises are motivated to earn profit.
3. Society as a principal source of revenue
As with governmental units, most non- profit organization depend on the general population for
a substantial portion of their support. Because revenue from charges for their services is not
intended to cover all their operating cost. Exceptions are professional societies and the
philanthropic foundations established by wealthy individuals or families, whereas the citizenry
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i) Self assessed taxes: - taxes, which are assessed and declared by the tax payer
e.g. Income tax, value added tax
ii) Government assessed taxes:- taxes determined and levied by the governmental authorities.
e.g. property tax , customs duty, Excise Tax
4. Importance of budget
Governmental accounting systems as we have seen are employed by government resources. That
is each person given custody of or access to resources should report back as to how they were
used. The government can then hold the person accountable for the resources. This means that
budget become highly important in governmental entities. Since expenditures are divorced from
revenue collections, the use of governmental resources is compared to the budget. The four-
proceeding characteristics of non – profit organizations also cause their annual budget to be as
important as for governmental units. Non- profit organizations may employ object budget,
programming budget or performance budget.
5. Stewardship for resources
A primary responsibility of governmental units in financial reporting is to demonstrate adequate
stewardship for resources provided by its citizenry. Non-profit organizations have a comparable
responsibility to their donors but not to the same extent as governmental units.
Activity
Question 4: Differncate governmental units and Not-for-Profit Entities
Question 5: what is the cash flow statement and Statement of Functional Expenses
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On top of that, federal, state, and local governments require these statements for ongoing
financial compliance. We are here to help you better understand the financial statements that
your organization should be keeping. These essential statements include the:
o Balance Sheet
o Income Statement
o Statement of Cash Flows
o Statement of Functional Expenses
Balance Sheet
Let's start with the basic component of every nonprofit accounting system: the balance sheet. For
tax-exempt organizations, the balance sheet is also known as the statement of financial
position. This statement shows what your company owns and what it owes at a specific date.
Think of it as a picture of your financial situation at one point in time. The IRS does ask for this
information when you are registering your organization, as well as when filling out your 990, so
it is best to have it updated before beginning on your yearly tax journey.
If you remember one thing from your accounting 101 class, it is likely that the balance sheet
equation: assets = liabilities + owner’s equity. This is the traditional equation that for-profit
businesses use to create their balance sheets.
As a nonprofit organization, you do not have owner’s equity because you are not a publicly-
traded company, so this equation is going to change a little bit.
For a nonprofit balance sheet, you will use the equation: assets = liabilities + net assets (instead
of owner’s equity). Let’s break this down into simpler terms.
Note that our template shows the Statement of Financial Position with assets on the left, and
liabilities and net assets on the right. Generally, these will all be listed one after the other, but we
recommend that you start out viewing it from left to right so you can understand the balance
sheet equation.
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Gross receipts are the amount of money your nonprofit has raised without any expenses
being taken out. It sounds very similar to gross sales, but there is one big difference.
Gross sales only include sales of products
Despite the wide range in size and scope of governance, similarity & differences as the
accounting treatment as compared to business organizations, Governmental units and
other non-profit organizations
The governmental units which undertake non-profit activates & the other indicated four
not-for-profit organizations are collectively known as Non-business organizations.
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5.An attorney prepared a contract free of charge for a not-for-profit. The not-for-profit would
have had to pay $500 for this service if not donated. What entry should the not-for-profit make?
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1. C 2. C 3. A 4. B 5. C 6. A 7. C 8. C 9. C 10 B
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The focus of budgetary control is on the BI. PB's budgetary compliance can be computed by
consolidating reports from all BIs included in its approved budget.
Accounting Unit
For cash management, another entity is created: the Bank Account (BA). The BA is not coded in
the chart of accounts and does not receive a budget. However, it is important for cash
Management and control. The FGE accounting system includes the BA in the accounting system.
A PB may administer many BIs and many BAs, or a PB may have only one BI and one BA.
Each BA:
Is managed by an accountant.
May:
• Have its own cashier,
Asset accounts.
Liability accounts.
Letters of credit.
Prepares a monthly expenditure report for each BI.
Prepares a consolidated monthly Trial Balance for the BA.
One general ledger is maintained for the BA. The only records maintained for each BI are
accounts in subsidiary ledgers for items of expenditure. Monthly, the subsidiary ledger
information is used to prepare an expenditure report for each BI. These reports are consolidated
with information from the general ledger into a monthly report for the BA.
The balances of cash in safe and cash in bank are maintained in ledger cards of general ledger for
the BA.
Reporting Entity
A reporting entity is the entity that sends monthly reports to MOFED. Although the accounting
unit prepares monthly reports, every accounting unit may not send monthly reports directly to
MOFED. The reporting entity may be the accounting unit or a higher level of authority (perhaps
a PB).
Each of the following may apply to a reporting entity:
A reporting entity may be an accounting unit, and an accounting unit may consist of only
one BI. Therefore, a single BI may be a reporting entity.
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A reporting entity may be a PB that receives the monthly reports from several accounting
units.
Whoever sends the reports to MOFED is the reporting entity. Therefore, the reporting entity is
not, necessarily, an accounting unit.
Activity
Question 1: what is an overview of federal government of Ethiopia ( FGE)
Question 2: what is the difference between litter of credit , asset account and liability account
Question 3: : what is the difference between cashier and accountant
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Cashier and Accountant
In the FGE accounting system of cash control, the cashier's function and the accountant's
function are distinct. Cash consists of currency and checks. The cashier's function is to maintain
and control cash in the safe. The accountant's function is to maintain and control cash at the
bank.
Only the cashier can receive currency and checks and make disbursements in currency. Daily,
the cashier should count cash on hand and reconcile ending cash on hand to the cash book.
The cash in safe is controlled by an impress system. When cash is received as per the budget or
other sources, the cashier will:
Issue a cash receipt,
Segregate the cash received from cash available to disburse,
Deposit the cash received intact in the bank as soon as practical, usually daily, and
Surrender copies of all cash receipts and a copy of the bank deposit slip to the accountant.
In the imprest system, a balance is established for cash in safe. The accountant issues this
amount of cash to the cashier using a check. When cash is disbursed to establish the Imprest
Fund, the cashier will issue a receipt voucher. If the amount of cash in safe is to be replenished,
the cashier will surrender all payment vouchers to the accountant. The accountant will replenish
the cash in safe by issuing a check to the cashier for the total amount of the payment vouchers
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that are surrendered. The replenishment should return the balance of cash in safe to the
established level.
The accountant's responsibility for cash is to maintain a record of the total cash position of the
entity, including cash at the bank and cash in the safe. The accountant records cash movements
that flow through the cashier and cash movements that flow directly through the bank. Direct
cash movements through the bank normally include bank transfers and charges, checks written,
and any other transactions that do not require cash handling by the cashier.
When a PB has more than one cashier, one cashier is designated as the main cashier. The other
cashiers are designated as assistant cashiers. Each PB is responsible for organizing assistant and
main cashiers. However, some general principles apply.
Assistant cashiers are responsible for:
Collection of Cash
Issuing deposit and/or receipt vouchers
Making deposits at Bank
The main cashier is responsible for:
Reconciling cash and vouchers for each assistant cashier
Depositing cash in the bank
Disbursing cash for the proper functioning of the PB
Managing the petty cash
A chart of accounts is a system used to identify and classify financial entities and events. The
classification of charts of accounts is structured in a systematic manner and facilitates the
recording of transactions and reporting of information in accordance with the budget.
The chart of accounts treats all detailed account codes as temporary accounts and permanent
accounts.
Temporary accounts are accounts that begin each year with a zero balance.
Permanent accounts are detailed account codes whose balance at the end of a year
becomes the balance in the account at the beginning of next year.
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Revenue, expenditure, and cash transfers are temporary account code categories. Account codes
in these categories
Assets, liabilities and net assets/equities are permanent account code categories.
Account code in these categories are always treated as permanent accounts &
Begin each year with account balance as long as they had at the end of previous year. In
other words, these accounts are not closed.
Generally, Revenue, expenditure and transfers are temporary accounts that begin each year with
a zero balance. Assets and liabilities are permanent accounts whose balance at the end of a year
becomes the balance in the account at the beginning of the next year.
Assets:
Assets are formally defined by the International Federation of Accountants - Public Sector
Accounting Standards (IPSAS) as "resources controlled by an entity as a result of past events and
from which future economic benefits or service potential are expected to flow to the entity.‖ The
categories of assets in the accounting system are:
o Receivables
Receivables are amounts owed( given to) a government unit by another government unit, a
person, or a non-government entity except public enterprises. Salary advances to employees
and advances to suppliers are two examples of receivables commonly occurring.
o Goods in Transit
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Goods in transit are goods that are owned by the government but not yet in its physical
possession.
o Stocks
Stocks are goods that are expected to be consumed within one year.
o Fixed Assets
Fixed assets are physical items that are expected to have a useful life of longer than one year
and have a certain minimum value.
o Loans Receivable
Loans receivable are amounts due from public enterprises over a period of time exceeding one
year.
o Investments
Investments are FGE investments in public enterprises and private organizations that are held for
more than one year.
o Liabilities
Liabilities are formally defined by the IPSAS as "present obligations of the entity arising from
past events, the settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits or service potential."
The categories of liabilities in the improved and expanded accounting system are:
o Payables
Payables are obligations to pay that are due in less than one year. Examples of FGE payables are
deposits, salary payable, grace period payables and treasury bills.
o Long-term Debt
Long-term debt is an obligation to pay that is due in more than one year.
o Net Assets/Equity
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Net assets/equity is formally defined by the IPSAS as "the residual interest in the assets of
the entity after deducting all its liabilities." Net assets/equity is the balance remaining after
liabilities are deducted from assets. This balance represents the equity interest of FGE.
To meet the government policy of implementing the accounts and budget reforms nationwide
and use the new information communications technology (ICT) infrastructure, the government
specified that the Budget Information System(BIS) / Budget, Disbursement and Accounts(BDA)
systems will be upgraded in to the Integrated Budget Expenditure(IBEX) System. Since 1998
EC.(2006 GC.)IBEX(Integrated Budget and Expenditure System) has began its operation by the
budget module then after the other 5 modules added to the system i.e
o Accounts
o Accounts Consolidation
o Budget Control
o Budget Adjustment
o Disbursement
What Is IBEX ?
It is an integrated budget and accounts financial application that provide the framework for core
public financial management functions. It Combines what were two previously separate
applications called Budget Information System(BIS) and Budget, Disbursement and Accounts
(BDA).
An upgrade of BIS/BDA
Is access through a web browser such as Internet Explorer
Functional Modules
Budget Module
o This module executes all the budget preparation activities performed by government
financial offices.
Account Module
o This module executes all the budget execution activities of government budgetary
institutions. More specifically, the accounts module records the financial transactions of
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the budgetary institutions, records the aggregated monthly accounting reports and
provides accounting reports for ledgers , financial statements, management reports,
transactions, expenditures and revenues.
Budget Adjustment Module
o This module provides the functionality to address changes to the approved budget during
budget execution. It specifically enables the recording of budget transfers and budget
supplements and the subsequent production of the adjusted budget.
Budget Control Module
o This module manages the activities of recording budget commitments and disbursement
payments in order to enable budgetary control over expenditures.
Account Consolidation Module
o This module consolidates the budget and accounting data for the entire country. This
module allows for the generation of regional and national consolidated reports.
Disbursement Module
o This module manages the public treasury functions associated with cash management and
disbursing funds between public financial institutions
Administration Module
o This module provides an interface to manage users and user’s profiles that interact with
the IBEX system.
What is IFMIS?
The introduction of Integrated Financial Management Systems (IFMIS) has become a core
component of financial reforms to promote efficiency, security of data management and
comprehensive financial reporting. IFMIS provide an integrated computerized financial package
to enhance the effectiveness and transparency of public resource management by computerizing
the budget management and accounting system for a government.
It consists of several core sub-systems, which plan, process and report on the use of public
resources. The scope and functionality of IFMIS can vary across countries, but sub-systems
normally include accounting, budgeting, cash management, debt management and related core
treasury systems. In addition to these core subsystems, some countries have chosen to expand
their IFMIS with noncore sub-systems such as tax administration, procurement management,
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asset management, human resource and pay roll systems, pension and social security systems
and other possible areas seen as supporting the core modules.
What are the Benefits of IFMIS?
There are a number of ways in which IFMIS can improve public finance management, but
generally IFMIS seek to enhance confidence and credibility of the budget through greater
comprehensiveness and transparency of information. They seek to improve budget planning
and execution by providing timely and accurate data for budget management and decision-
making. IFMIS allow a more standardized and realistic budget formulation across government,
while promoting better control over budget execution through the full integration of budget
execution data. They also allow for the decentralization of financial functions and processes
under the overall control of the Ministry of Finance, force financial discipline, decrease-
operating costs by reducing administrative tasks and civil servants’ workload.
In addition, IFMIS also seek to strengthen the efficiency of financial controls by making
comprehensive, reliable and timely financial information available to the Auditor General,
parliament, investigative and prosecutorial agencies, etc., as they improve accounting, recording
and reporting practices through the provision of timely and accurate financial data,
standardized integrated financial management reporting system and an upgraded computerized
accounting system. When they work well, they make bank reconciliation automatic and allow a
closer monitoring of outstanding bills and cash in bank accounts.
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Activity
Question 3: : what is the difference cash basis ,modified cash basis , accrual basis and
modified accruals basis of accounting
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o Transactions resulting from salary withholding are recognized in the absence of actual
cash movement where salary-withholding means the employment income tax collected
by collected by respective employer on behalf of tax authority.
o The FGE Accounting system employs the combination of temporary and permanent
accounts.
o All assets and liabilities are not recognized in modified cash basis accounting system.
Only those receivables and payables included in chart of accounts are included in the
system.
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1. Revenue/Assistance/Loan Report
4. Transfer Report
5. Receivables Report
6. Payables Report
7. Trial Balance
8. Bank Reconciliation
1. REVENUE/ASSISTANCE/LOAN REPORT
The Revenue/Assistance/Loan Report provides information on the year-to-date revenues of an
Accounting Unit from each source of finance. The purpose of the Revenue/Assistance/Loan
Report is to facilitate consolidation of the actual revenues, assistance and loan collected and
comparison of budgeted revenues to actual revenues by account category.
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The Accountant prepares a Revenue/Assistance/Loan Report for the Accounting Unit. The
source document to prepare the Revenue/Assistance/Loan Report is the General Ledger. Each
item of revenue, assistance or loan is identified by account code. The amount from the balance
column in the General Ledger Card is transcribed into the Revenue/Assistance/Loan Report. The
grand totals from each Revenue/Assistance/Loan Report are carried forward to the Trial Balance.
2. RECURRENT EXPENDITURE REPORT
The Recurrent Expenditure Report provides information on the year-to-date recurrent
expenditures of each BI managed by an Accounting Unit. The purpose of the Recurrent
Expenditure Report is to facilitate consolidation of the actual recurrent expenditures and
comparison of budgeted expenditure to actual expenditure.
The Accountant prepares the Recurrent Expenditure Report for each BI. The source document to
prepare the Recurrent Expenditure Report is the Subsidiary Ledger. The amount from the
balance column in each Subsidiary Ledger Card is transcribed to the appropriate account code in
the Recurrent Expenditure Report.
3. CAPITAL EXPENDITURE REPORT
The Capital Expenditure Report provides information on the year-to-date capital expenditures of
each BI managed by an Accounting Unit. The purpose of the Capital Expenditure Report is to
facilitate consolidation of the actual capital expenditures and comparison of budgeted
expenditure to actual expenditure.
The Accountant prepares the Capital Expenditure Report for each BI. The source document to
prepare the Capital Expenditure Report is the Subsidiary Ledger. The amount from the balance
column in each Subsidiary Ledger Card is transcribed to the appropriate account code in the
Recurrent Expenditure Report.
4. TRANSFER REPORT
The purpose of the Transfer Report is to serve as a control tool to verify cash transfers between
MOFED and an Accounting Unit and vice versa.
The Accountant prepares a Transfer Report for each Accounting Unit. The source documents to
prepare the Transfer Report are the General Ledger Cards. Balances in the Transfer Report are
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debits or credits depending on the nature of the transfer account, i.e. transfers received from
MOFED are credits & transfers of cash to MOFED are debits.
5. RECEIVABLES REPORT
The Receivables Report provides information on the year-to-date receivables owed to an
Accounting Unit. The purpose of the Receivables Report is to provide information on the year-
to-date receivables owed to an Accounting Unit and facilitate consolidation of receivables owed
to the FGE.
The Accountant prepares a Receivables Report for each Accounting Unit. The source document
to prepare the Receivables Report is the General Ledger. Each item of receivable is identified by
account code. The amount from the Balance Column in the General Ledger Card is transcribed
into the Receivables Report. The grand totals from each Receivables Report are carried forward
to the Trial Balance.
6.PAYABLES REPORT
The Payables Report provides information on the year-to-date payables owed by an Accounting
Unit. The purpose of the Payables Report is to provide information on the year-to-date payables
owed by an Accounting Unit and facilitate consolidation of the actual payables owed by the
FGE.
The Accountant prepares a Payables Report for the Accounting Unit. The source document to
prepare the Payables Report is the General Ledger. Each payable item is identified by account
code and the amount from the Balance Column in the General Ledger Card is transcribed into the
Payables Report. The grand totals from each Payables Report are carried forward to the Trial
Balance.
7.TRIAL BALANCE
The Trial Balance is the summary of the net cumulative year-to-date debit and credit balances
contained in the General Ledger at the end of each month for each account code represented by a
General Ledger Card.
The Trial Balance proves the arithmetical accuracy of the General Ledger. The total amount of
the Debit Column must equal the total amount of the Credit Column in the Trial Balance. The
Trial Balance serves as a basis to produce financial statements.
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The Accountant prepares the Trial Balance for each Accounting Unit. The source documents to
prepare the Trial Balance are:
Revenue/Assistance/Loan Report,
Transfer Report,
Receivables Report,
Example
Cash at bank balance as per Bank Statement ………………………………..br 2,350.70
Cash at bank balance as per Account records …………………………………br 2,051.96
The following errors are identified from both sides
1) Deposit in transit ………………………………………………………… br 1,355.20
2) Amount incorrectly charged by the Bank….……………………………..br 51.75
3) Outstanding check ………………………………………………………...br 1,037.49
4) Credit advice ………………………………………………………....…br 1,015.00
5) Understatement in recording deposits in book of accounts …………….br 54.00
6) Bank service Charge ……………………………………………………..br 18.10
7) Returned check ……………………………………………………………br 382.70
BANK RECONCILATION
Cash at bank balance as per Bank Statement ……………………..……..br 2,350.70
Addition
Deposit in transit ………………………………………………..…..br 1,355.20
Amount incorrectly charged by the Bank…...……………………....br 51.75
Total ………………….br 3,757.65
Deductions
Outstanding Check ………………………………………………..…br 1,037.49
Corrected Bank Balance ………………………..… br 2,720.16
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4. Effective management of cash and investments of individual funds may be enhanced by placing the
cash and investments in a pool under the control of the treasurer of the government or other
official.
Multiple choice
1. In accounting for state and local governments the modified accrual basis is required for
A. All the funds in the governmental entity
B. Governmental funds only.
11. The major funds only
12. Just the general fund
2. Under the modified accrual basis of accounting, there is an option that revenues should be
recognized when
A. Earned. C . None of the above
B. Collected in cash. D. Authorized by the budget ordinance.
3. Which of the following terms indicate or relate to the idea of the primary government and all
related units
A .Fund equity C. Reporting entity
B. Modified accrual basis D. Accrual basis
4. Which of the following is (are) an appropriate basis of accounting for an internal service
fund?
A. Modified accrual basis: Yes; accrual basis: No:
B. Modified; Accrual basis: No; accrual basis: Yes
C. Modified accrual basis: Yes; accrual basis: Yes
D. Modified accrual basis: No; accrual basis: No
5. Recognizing revenues when measurable and available is:
A. Accrual. C. Budgetary.
B. Modified accrual. D. None
6. The modified accrual basis of accounting applicable to governmental fund types requires that
revenues be recognized when
A. Earned.
B. Authorized by the budget ordinance.
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WOLLO UNIVERSITY
College of Business and Economics
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2. Agency fund & expendable trust funds are to be accounted in the same way as proprietary
funds.
3. Special revenue funds exist as long as the government has resources dedicated to specific
purposes.
4. The major source of income for the general fund and special revenue fund is the enacted
budget.
5. All general government fixed asset acquisitions are financed through capital project fund.
7.General fixed assets of the government are reported both in the government-wide financial
statements and the governmental fund financial statement
8. Comparison of the legally approved budget with actual results of the General Fund is included
as part of required supplementary information in the CAFR.
9. Fiduciary funds include agency, pension trust, investment trust, and permanent funds.
10. For most state and local governments, the budget, when adopted according to procedures
specified by state laws, is binding upon the administrators of a governmental unit.
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county's General Fund was billed Br. 100,000 for services provided. All revenue was from sewer
treatment services. The entry to record these transactions in the enterprise fund would be:
A. Debit: Customer Accounts Receivable Br. 1,100,000 Credit: Operating Revenues - Charges
for Services Br. 1,100,000
B. Debit: Customer Accounts Receivable Br. 1,000,000 Debit: Due from General Fund Br.
100,000 Credit: Operating Revenues - Charges for Services Br. 1,100,000
C. Debit: Cash Br. 1,100,000 Credit: Operating Revenues - Charges for Services Br. 1,100,000
D. Debit: Cash Br. 1,000,000 Debit: Due from General Fund Br. 100,000 Credit: Operating
Revenues - Charges for Services Br. 1,100,000
6. Under GASB rules for the financial reporting entity,
A. component units are included if the primary government is financially accountable for their
operations.
B. counties are component units of the State Government.
C. blended and discretely presented component units are to be reported in government-wide
financial statements but not in fund financial statements.
D. blended component units must be reported in columns for the primary government.
7. Which of the following is not true regarding major fund reporting for governmental funds?
A. the General Fund is always a major fund.
B. Each fund that is considered major must be reported in a separate column in the governmental
funds financial statements.
C.A government may designate any fund as major if it feels that reporting that fund in the basic
financial statements would be useful.
D. None of the above, all are true.
8. which of the following are the net asset classes required by the FASB for not-for-profit
organizations?
A. Reserved and Unreserved.
B. Invested in Capital Assets, Net of Related Debt, Restricted, and Unrestricted.
C. Permanently Restricted, Temporarily Restricted, Unrestricted.
D. None of the above.
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9. What are the financial statements required for all nongovernmental, not-for-profit
organizations?
A. Statement of Financial Position, Statement of Activities, Statement of Cash Flows.
B Statement of Financial Position, Statement of Activities, Statement of Functional Expenses.
B. Statement of Financial Position, Statement of Activities, Statement of Functional Expenses,
Statement of Cash Flows.
D. Statement of Activities, Statement of Cash Flows, Statement of Functional Expenses.
10. The ______ Fund accounts for all resources other than those required to be accounted for in
other funds.
A. Special revenue fund C. Enterprise fund
B. General fund D. Agency fund
Part III: Discussion point ( 2ponit each )
1. List and define the five classifications of governmental funds.
2. List and explains Classification of Revenues and Expenditures based on by fund and source.
3. Discuss the three major activity categories of a state and local governments
4. Identify the three basic fund categories, the funds that make up each of them, and the
category’s basis of accounting.
Part IV: Work out questions( total 7 mark)
1. X County had the following transactions related to the construction of a new courthouse.
Record all entries needed in the capital projects fund. X County uses encumbrance
accounting.
a) On January 2, 2005, 20 year, 6% General Obligation Serial Bonds with a face value of
Br. 5,000,000 are issued.
b) On February 2, 2005, architecture and engineering fees for the design of the new court
house are paid in the amount of Br. 300,000. This item is not encumbered.
c) On February 25, 2005, a contract is signed for construction of the new courthouse in the
amount of Br. 4,200,000.
d) On March 3, 2005, supplies for the project are ordered in the amount of Br.100,000.
e) On March 28, 2005, the supplies were delivered. The invoice amount was Br. 101,300
and was paid.
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f) On July 14, 2005, the county receives a billing for progress completed to date on the
courthouse construction project in the amount of Br. 1,200,000.
g) On July 29, 2005, the payment to the contractor was made.
Text Book:
Accounting for Governmental and Non-Profit Entities, 15th edition, by Wilson, Kattelus,
Hay. McGraw-Hill/Irwin Inc., USA, 2010.
Aggestam-Pontoppidan, C. (2015). Interpretation and Application of IPSAS. John Wiley &
Sons.
Freeman, R. J., Shoulders, C. D., Allison, G. S., Smith Jr, G. R., & Becker, C. J. (2014).
Governmental and nonprofit accounting: theory and practice. JPAEJOURNAL OF PUBLIC
AFFAIRS EDUCATION VOLUME 20 NUMBER 3, 441.
Reference Proclamations
A. Proclamation No. 847/2014, Financial Reporting Proclamation, 2014.
B. Proclamation No. 621/2009, Charities and Societies Proclamation, 2009.
C. Proclamation No. 648/2009 The Federal Government of Ethiopia Financial
Administration Proclamation
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