CHAPTER THREE

EXPENDABLE FUNDS - GENERAL AND SPECIAL REVENUE

LEARNING OBJECTIVES
At the end of this chapter, you should be able to:
 Explain the difference and similarity of General Fund and Special Revenue Fund
 Explain what is budgetary accounting and why it is important
 Explain encumbrance accounting
 Differentiate appropriation, expenditure and encumbrance
 Explain tax and tax related accounts
 Explain inter fund transfers and transactions
 Describe how to close a fund
INTRODUCTION

Dear students, so far we have seen the theoretical foundations of Government and NFP‘s
accounting. From this chapter onwards we are going to see the accounting treatment for
each types of fund we discussed in principle 3 of chapter two. In this chapter accounting
treatments for both General fund and Special revenue funds are discussed. Specifically,
accountings for budget, expenditure, revenue, inter fund transfers and transactions are
discussed.

3.1. Budgetary Accounting

General and Special Revenue Funds are typically used to finance and account for most
government activities. As you may recalled from chapter Two, the general fund is used for
general government activities, such as police protection, fire protection, administration and
the like. To distinguish the general fund negatively, it can be said that the general fund
should account for all financial resources for which is a separate fund is not required. All
governmental entities have a General Fund (GF), although it may be called the operating
fund, the current fund or something similar. The general fund will exist as long as the
entity exists. A governmental entity will have only one general fund. Conversely, a
governmental entity may have several Special Revenue Funds (SRF) at any time, and these
funds are opened and closed according to need. SRFs, in contrast to the GF, are used to
account for resources which are collected for a specific purpose. They are established to
account for general government resources that are restricted by law or by contractual
agreement to the specific purposes. For example, tax on diesel fuel that is required to be
used only for road maintenance, or a tax on hotel rooms to be used to improve tourist
facilities, streets around historical sites, etc. Resources which are collected for a specific
purpose can be accounted for in the general fund. However, in order to be very sure that

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specific purpose revenues are used only as designated, sometimes a separate SRF is
required. SRF is really necessary only when required by law or by contract, or the
management suggests it for assuring good financial management. The General fund and the
special Revenue fund have different purposes, but they are similar in that both are
expendable, government and revenue funds, and the accounting and reporting procedure is
the same for both. They are very similar in that all or almost all of their resources are
expended each year. They are then filled up (replenished) again for the next year.

3.1.1. Budgetary Accounts

Only three general ledger budgetary control accounts are needed in the General Fund (and
other funds for which a budget is adopted) to provide adequate budgetary control:
Estimated Revenues, Appropriations, and Encumbrances. Subsidiary ledger accounts
should be provided in whatever detail is required by law or for sound financial
administration to support each of the three control accounts. Budgeted inter fund transfers
and debt proceeds may be recorded in two additional budgetary control accounts:
Estimated Other Financing Sources and Estimated Other Financing Uses. Again, these
control accounts should be supported by subsidiary detail accounts as needed.
 Other Financing Sources represent operating transfers in from other funds and
proceeds of long-term borrowing.
 Other Financing Uses represent operating transfers out to other funds.

Classification of Appropriations and Expenditures

The terms, appropriation and expenditure, both have to do with resources which are
used by a governmental entity. The relationship between the two is that an appropriation
is the authorization to make expenditure. In reality, an appropriation is actually both an
authorization to spend and at the same time, a limitation on spending. The appropriations
budget, therefore, refers to an administration‘s request for authorization to incur
liabilities for goods, services, and facilities for specific purposes related to each year‘s
revenues. Preparation of the appropriations budget is sometimes referred to as
expenditure planning. When preparing the appropriations budget, the fund from which the
expenditure may be made, the purposes, the maximum amount and the period of time for
which the expenditure authority is granted should be specified. Thus, budgeted
appropriations are often called estimated expenditures, and the appropriation budget is
sometimes called the expenditures budget.
In contrast to appropriation, Expenditures are actual liability that decreases fund net
assets (financial recourse). There are two types of decreases of fund financial
recourse: expenditures and other financing uses. The other financing uses are transfers
to other funds. Expenditures can be further classified into Current, Capital, and Debit
service. Current expenditures are expected to benefit the period in which the expenditure
is made. Capital outlays are expected to benefit not only the period in which the capital

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assets are acquired but as many future periods as the assets provide service. Debt service
includes payment of interest on debt and payment of debt principal; if the debt was wisely
incurred, residents received benefits in prior periods from the assets acquired by use of
debt financing, are receiving benefits currently, and will continue to receive benefits until
the service lives of the assets expire.
 Budgetary control of expenditures is achieved by:
 ensuring that a valid appropriation exists prior to recording an encumbrance
or expenditure, and
 Periodically comparing encumbrances and expenditures to appropriations.
 Comparison is enhanced by using a common classification scheme for
appropriations, encumbrances, and expenditures

Classification of Estimated Revenues and Revenues

Estimating the expected available resources for the governmental entity is the essential
first step to budgeting. This makes sense, because one needs to know how much is
available before he decides how much to spend. These revenue sources typically include
land taxes, property taxes, income taxes, sales taxes, excise taxes, licenses or permit, and
fines (traffic, etc.). Land taxes are generally the easiest to estimate, because the
amount of land in a jurisdiction doesn‘t normally change from one year to the next .
The next easiest to estimate are income taxes, followed by sales and excise taxes.
Licenses and permits are more difficult to estimate accurately, and fines are typically the
most difficult to estimate.
Appropriations budget can be financed by resources available under the laws of the
budgeting jurisdiction, a Revenues budget should be prepared. Revenue, in the sense in
which it is customarily used in governmental budgeting, includes all financial resource
inflows ” all amounts that increase the net assets of a fund” other than inter fund transfers
and debt issue proceeds, like, taxes, licenses and permit fees, fines, forfeits, and other
revenue sources described in the following sections of this chapter.
Major revenue source classes commonly used are these:
Taxes
Taxes are of particular importance because (1) they provide a very large portion of the
revenue of governmental units on all levels and (2) they are compulsory contributions to
the cost of government, whether the affected taxpayer approves or disapproves of the levy.
Ad valorem taxes are assessed on the value of underlying property - e.g. personal and real
property taxes. Self-assessing taxes are based on income or sales. Taxes due on sales or
earnings that have occurred but have not yet been reported at the end of an accounting
period are usually estimated and accrued.
Interest and Penalties on Delinquent Taxes
A penalty is a legally mandated addition to a tax on the day it becomes delinquent
(generally, the day after the day the tax is due). Penalties should be recognized as revenue

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when they are assessed. Interest at a legally specified rate also must be added to delinquent
taxes for the length of time between the day the tax becomes delinquent until the day it is
ultimately paid or otherwise discharged: interest revenue should be accrued at the time
financial statements are to be prepared.
Licenses and Permits
Licenses and Permits include those revenues collected by a governmental unit from
individuals or business concerns for various rights or privileges granted by the
government. Commonly found among licenses and permits are building permits, vehicle
licenses, amusement licenses, business and occupational licenses, animal licenses, and
street and curb permits. Regardless of the governmental level or the purpose of a license or
permit, the revenue it produces is ordinarily accounted for when received in cash.
Applicable rates or schedules of charges for a future period may be established well in
advance, and fairly reliable information may be available as to the number of licenses or
permits to be issued, but the probable degree of fluctuation in the latter factor is so great as
to prevent satisfactory use of the accrual basis.
Intergovernmental Revenue
Intergovernmental Revenues include grants and other financial assistance. Grants are
usually intended for either operating or capital purposes.
Charges for Services
Charges for Services of the governmental funds (and governmental activities at the
government wide level) include all charges for goods and services provided by a
governmental fund to enterprise funds, individuals and organizations, and other
governments. A few of the many revenue items included in this category are court costs;
special police service; solid waste collection charges.
Fines and Forfeits
Fines are amounts assessed by the courts against those guilty of statutory offenses and
neglect of official duties. On the other hand, Forfeits arise from deposits or bonds made by
contractors, accused felons, and others to assure performance on contracts or appearance
in court.
Miscellaneous Revenues
These are revenues that do not fall into one of the other categories, such as: proceeds from
the sale of government assets (if immaterially small in amount; other financing source
otherwise), and investment income. We can accrue if the amount is known prior to the
receipt of cash
3.1.2. Recording budget
It is extremely important in governmental accounting that expenditures do not exceed
appropriations. The budget is legally binding, and exceeding it usually results in severe
penalties. Therefore, two special accounting safeguards have been installed for
governmental entities:
1. Recording the budget at the beginning of the year

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2. Recording of the purchase orders as placed
To keep from exceeding the budget, the government administrator needs a report that tells
him/her the following information. How much has been made available? How much has
been used? and how much has been committed (contracts, purchase orders, etc)? The
accounting records to be kept are based on these needs.
Recording the Budget at the Beginning of the Year
The entry to record the budget is simple. It is normally done on the first day of the fiscal
year. Estimated Revenues is debited, Appropriations is credited, and fund Balance is
debited or credited for the difference. Assume a budget with Estimated Revenues of
500,000 Birr and Appropriations of 480,000 Birr:
Estimated Revenues 500,000
Appropriations 480,000
Fund Balance 20,000
This entry tells us that the governmental unit is expecting to collect 500,000 birr in
the upcoming fiscal year and of this 480,000 birr is authorized to be spent. The remain
20,000 birr (recorded as Fund Balance) is kept as reserve to meet unexpected price
increases that might happen in the year
Recording Purchase Order (Encumbrance)
In a profit seeking entity, purchase orders (P.O.) are basically used to provide a check that
the quantity and price of the goods invoiced is the same as what was actually
ordered. In governmental entities also have this function. Additionally, in governmental
entities, they help to keep expenditures not exceeding the budget. This is done by
actually recording the P.O. in the ledger as an Encumbrance.
Recording encumbrances helps the one managing the finances to know that the money has
been committed to some purpose and is no longer available for expenditure. There is often
a delay between placing a purchase order and receiving the goods ordered.
Therefore, it is possible for administrators to forget about the purchase orders that have
been placed, and to think that the money is still available to be used. This is especially true
in a large entity where dozens of purchase orders are placed each week. To ensure that
outstanding purchase orders are not overlooked in the ongoing commitment o f resources,
purchase orders are recorded in the ledger in an account called Encumbrances.
An encumbrance differs from expenditure in that the encumbrance is an estimate of
liability to be incurred, while expenditure is an actual liability which has been incurred.
Encumbrance denotes amount stated on the purchase order, which is subject to
change. Whereas, expenditure is the actual amount of money a governmental unit should
pay up on delivery. This may be equal or greater/less than the encumbered amount. The
reason is that an encumbrance is only an estimate of the invoiced amounts. For
example, a particular item may be out-of-stock, and either backordered, or substituted by a
similar item.
Two Journal entries are needed for encumbrances:

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1. When the order is paced, and
2. When the goods are received.
When the order is paced, Encumbrances is debited and Reserve for Encumbrances (a fund
Balance account) is credited. When the order is received, the above entry is reversed
and another entry to account actual liability would be recorder: a debit to
Expenditure and a credit to Cash/ Accounts Payable.
To illustrate, office supplies of 12,000 Birr (paper 10,000, Computer printer Ink 1,000, and
Bic pens 1,000) are ordered. The entry to record the encumbrance is:
Encumbrances 12,000
Reserve for Encumbrances 12,000
One month later, the paper is received as ordered, the printer Ink was out-of stock and has
been backordered, and Luxor pens, which are slightly more expensive (1.30 each )
were substituted for the Bics (1.25 each). The Encumbrance for the paper (10,000)
and pens (1,000) should be reversed because it has been filled. The Encumbrance for
printer ink should remain outstanding. The reversing entry would be:
Reserve for Encumbrances 11,000
Encumbrances 11,000
At the same time expenditure account should be debited, because the actual liability
is incurred. The paper is purchased for its estimated price of 10,000. But the pen shows a
slight increment of birr 40 [($1,000/$1.25)*1.30]. Hence, actual expenditure for the pen is
1,040.
Expenditures 11,040
Accounts payable (or cash) 11,040
Remember: in the first entry the accounts are reversed for their balances recorded when
the purchases are ordered. In the second we used the actual price not the encumbered
balance. Encumbrances are not necessary for every single expenditure. Expenditures that
are regular and predicable, such as payroll are not typically encumbered. However, if
payroll has seasonal fluctuations, then it is wise to encumber the estimated payroll. If a
payroll of 50,000 Birr was not encumbered, its payment would simply appear as the
following entry:
Expenditures 50,000
Cash 50,000
3.2. Accounting for Revenues
Revenues are specifically defined as all increases in fund net assets except those arising
from inter fund transfers and from proceeds of long term debt. As was noted in the
principle 5 (chapter two), the GF and the SRF use the modified accrual basis of accounting
to measure and report their revenues and expenditures. This means that recognition is
made when the revenue is available and measurable
Taxes

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Taxes are a forced contribution imposed on the citizens by the government to meet public
expenditures. Citizens are given no choice but to pay. Taxes must be paid, regardless of
whether or not the citizen being taxed is receiving any direct benefit as a result of paying
the tax. There is no direct relationship between the tax liability to be paid and the
benefits received by the tax payer. Taxes which are not paid on time usually accrue
interest on any unpaid balance. These penalties and interest create an additional revenue
source for the government.
Since taxes constitute the primary revenue source for most governments, accounting
for them will be given the most coverage of the revenue types. Taxes may be levied in a
lump sum, or sub-divided according to the purpose for which they may (or must) be used.
Subdividing the levy according to purpose may also require the use of a special revenue
fund to account for it. Most taxes however, would be expected to go into the general fund.
In addition to revenue accounts, the following accounts may also be needed to account for
tax collections:
Assets Accounts
 Taxes Receivables–Current: is used to accrue taxes which are due in the current
Year. Taxes which are expected to be collected within the current year are to
be recorded in this account.
 Taxes Receivable–Delinquent: is used to record any taxes which are past
due. Taxes which have been expected to be collected in the current year, but fail to
do so are to be recorded in this account.
 Tax Lien-Receivable: is used to record taking possession of goods on which
an owed tax has not been paid. This account is used to record the total amount of tax
liability that a tax payer fails to pay on the due date, including penalty and interest,
for which the taxing agency seized his/her/it‘s property.
 Interest and Penalties Receivable on Delinquent Taxes: is used, obviously, to
record interest and penalties due on unpaid taxes.
Liability Accounts
 Deferred Taxes: account of credited for taxes which are paid in a year before they
may legally be used for expenditure.
 Trust for Property Owners: If those possessed goods are sold in an attempt
to cover the tax any additional cost incurred in collecting it, the Trust for
Property Owners account is used to record any balance remaining from the selling
price after the tax and collection cost are deducted.
Contra Asset Account
 Allowance for Uncollectible Taxes: is used for recording the estimate of
taxes which the government will not be able to collect. As there is no profit to
determine, no expenses will be recognized. Hence, Bad debt expense is not used for
taxes. Rather any uncollectible taxes are accounted for as a reduction in

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 revenue and the balance is to be recorded in a contra asset account called
Allowance for Uncollectible Taxes. Note that this is different from FP accounting.
Example Journal Entries
Assume the following transactions did happen in the General Fund of the municipality of
Arba minch city.
1. Land use taxes, $100,000, were assessed in January 2013, and they are levied (formally
made due) in June 1, 2013 to be paid by July 31, 2013. The revenues are to be used to meet
the year 2014 expenditures. Ninety-nine percent (99%) of the taxes are expected to be
collected.
Total amount of tax to be collected in the fiscal year is $100,000. This amount represents
and is to be recorded as Tax Receivable –Current; an Asset account with normal side of
Debit. Of this amount 1% is expected to be uncollectible which is to be recorded in
Allowance for Uncollectible Taxes account; a contra asset account with normal side
of Credit. Hence, the journal entry for the above transaction would be:
2013 Taxes Receivable current 100,000
June 1 Allowance for Uncollectible Current tax 1,000
Revenues 99,000
(To record accrual of tax levy)
Note that the amount recorded as revenue is the net of the receivable less the allowance for
uncollectible taxes. This is different from for-profit accounting, where the gross is recorded
as income, and the estimated uncollectible amounts are charged to expense.
2. On the due date, only 80,000 birr was received
All taxes which are paid are credited to the current taxes receivable account. As the taxes
are collected in cash, Cash is debited and the Tax receivable–Current is credited.
July 31 Cash 80,000
Taxes Receivable-Current 80,000
(To record collection of taxes)
After the due date, there are more current tax receivables remained uncollected
which become past due. They no more represent current year‘s receivable. Therefore, they
should be cleared out from the Tax Receivable–Current account and the balance made zero.
Any taxes which are not paid by the due date become delinquent, and should be reclassified
from the current taxes receivable to the delinquent taxes account. In other words, instead
of Tax Receivable–Current, they should be recorded as Tax Receivable-Delinquent.
July 31 Taxes Receivable-Delinquent 20,000
Taxes Receivable-Current 20,000
(To record taxes becoming delinquent)
At the same time, the uncollectible allowance related to delinquent taxes should also
be reclassified to an allowance for uncollectible delinquent taxes account. This is because
we have turned the balance of Tax Receivable Current account in to zero: $80,000 and
$20,000 have been credited in the first and second entry respectively. Therefore, we have

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no current balance from which we are to claim uncollectible. Rather the expected
uncollectible might still remains with the delinquent balance. The entry to record such
reclassification is as follows:
July 31 Allowance for Uncollectible Current Tax 1,000
Allowance for Uncollectible Delinquent Tax 1,000
(To record reclassification of allowance of estimated losses on taxes)
3. Assume that one month late, some 75% of the delinquent taxes are paid. The
municipality has a rule to charge a flat penalty of 10% for not obeying the law and pay the
tax liabilities on the due date and simple interest of 12% per annum for money tied up.
When taxes become delinquent, there is usually some penalty and/or interest assessed.
Penalties usually are imposed for violating the law or not meeting obligation on the due
date and the interest is a compensation for opportunity forgone. The penalty and interest
for our case would be calculated as follows:
Delinquent tax = $20,000 * 75% = 15,000
Penalty = 15,000 * 10% = 1,500
Interest = 15,000 * 12%*1/12 = 150
Total to be collected from the tax payers = 16, 650
August 31 Cash 16,650
Taxes Receivable-Delinquent 15,000
Revenues (Penalties and Interest on Delinquent Taxes) 1,650
(To record collection of delinquent taxes plus penalties and interest)
The penalty and interest may be accrued, although sometimes it is not. Monthly, Quarterly,
some other interim period, or at year end, interest could be accrued. Assume interest
is accrued quarterly; the accrual entry for the above case is as follows
$20,000 (delinquent tax) * 10% + $20,000*12% *3/12 = $2,600
Penalties and Interest receivable on Delinquent Taxes 2,600
Revenues 2,600
(To record penalties and interest due on delinquent taxes)
4. After six months the taxing authority has seized the property of non payers.
Lien would come into effect when the property on which the tax was due could be seized by
the governmental unit. The entry would be recorded based on the total amount the taxing
agency needs from the tax payer, inclusive of penalty and interest; not the value of
the property seized. At the time of seizure the following entry would be necessary.
Delinquent tax = $20,000 * 25% = 5,000
Penalty = 5,000 * 10% = 500
Interest = 5,000 * 12%*6/12 = 300
Total amount to be claimed from the tax payers = 5, 800
2014 Tax Lien-Receivable 5,800
Feb 1 Taxes Receivable-Delinquent 5,000
Revenues (Penalties and Interest on Delinquent Taxes) 800

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5. On February 15, the seized property is sold for $7,000. Cost associated with the sale is
$0. When the seized property is sold, the taxes, plus interest and penalties, plus any cost of
the sale should be paid. Any excess is held in trust for the owner of the property. And at the
time of sale the following entry is needed:
Feb 15 Cash 7,000
Tax Lien Receivable 5,800
Trust for property owners 1,200
(To record sale of seized property)
6. On March 1, the property owners claimed back their $1,200 excess and get paid.
March 1 Trust for property owners 1,200
Cash 1,200
Licenses and permits
Governments have the right to permit, control or forbid many activities of individuals and
corporations. Governments issue licenses or permits to grant the privilege of
performing acts that would otherwise be illegal. Licenses and permits may be divided into
two categories: business and non-business. Under the business category comes Merchant‘s
Licenses, Customs Clearing Agency Licenses, Professional (physician, attorney, authorized
accountant) Licenses, etc. Included in the non-business category are Driving Licenses,
Hunting Licenses, Marriage Licenses, Residence permits for foreigners, etc.
Revenues from Licenses and permits are normally not accrued because they are not
recognized until received in cash because the amount is not known until the licenses
and permits are issued, and cash is collected up on their issuance. Hence, the
transaction for license and permits should be treated in cash base accounting.
Sample entry: Cash XXX
Revenue XXX
Grants
A grant is money which is given for a specific purpose, and it should be classified according
to both its source and its purpose. A grant could be given from the federal government to a
regional state government (called a subsidy), or as is also common in Ethiopia, from
a foreign government to the federal government. Grants can be divided into two types:
capital and operating. A capital grant is, of course, for the construction or acquisition of a
long -lived asset. An operating grant is for any purpose other than construction or
acquisition of a long lived asset. Grants should normally be accrued.
Accounting for a grant becomes slightly complicated when it has specific requirements for
spending or matching requirements, as grants often do. If it has specific requirements for
spending, revenue is recognized as qualifying expense is incurred. For example, imagine
that a grant of 500, 000 Birr has been given for building a new road from Arba Minch to
Jinka. When the money for the grant is promised, Deferred Revenue (a liability) is credited
Grants Receivable 500,000
Deferred Revenue 500,000

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Subsequently, assume that 100,000 Birr is received and spent for gravel for the road. The
following entries would be needed:
At the time of cash received
i) Cash 100,000
Grant receivable 100,000
ii) Deferred revenue 100,000
Revenue 100,000
At the time of spent
Expenditures 100,000
Cash 100,000

When the money is finally used up, Deferred Revenues should have a zero balance.
Accounting for Charges and Services
Some charges for services are collected when the services are rendered and are recorded
as revenue at that time. If not collected at the time services are rendered or
immediately thereafter, revenues should be recorded as the persons or governments
served are billed or, if not yet billed at year end, in adjusting entries. The journal entry is a
debit to Cash or Due from other governmental units (a receivable account) and a credit to
Revenues.
Fines and Forfeits
Fines are penalties imposed for the commission of statutory offenses or for violation
of lawful administrative rules. Penalties on delinquent taxes are not fines rather they
are tax revenues. Fines are impositions by court. Revenues from fines and forfeits are not
usually an important source of government income. Because they are not often susceptible
to accrual prior to collection, these accounts are usually accounted for on cash basis.
The journal entry is a debit to Cash and a credit to Revenues.
3.3. Accounting for Expenditures
Expenditures are operating statement accounts, as are revenues. In contrast to Revenues,
Expenditures are decreases in fund net assets (financial recourse). There are two
types of decreases of fund financial recourse: expenditures and other financing uses.
The distinction between expenditures and expenses should always be kept in mind when
doing governmental accounting. Expenditures are a measure of fund current liabilities
incurred during a period for operations, capital outlay, or debt service. These are
outlays which have no return. Expenses are costs which are expired or consumed in a
period. These are outlays made for generating additional revenue to the business. In
government Accounting, for example, the acquisition of a fixed asset is expenditure, it is not
an expense. Salary payment is expenditure not an expense. Repayment of long-term debt
principal is expenditure, it is not an expense. Pre-paid insurance is expenditure, it is
not an expense. For expenditures, the modified accrual basis means recognition is made
when a liability (e.g. accounts payable) to be paid from fund assets is incurred. There

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are two exceptions, however. One concerns supplies inventory, when it is recorded
initially as Asset. For supplies, an option is given. Either the full expenditure can be
recognized when the liability is incurred (purchase method) or an inventory account
can be debited, with amounts charged to expenditure as the supplies are consumed
(consumption method) more will said about accounting for a supplies inventory later.
The other exception concerns long- term debt. A liability is obviously incurred when the
money is borrowed. However, since the long term debt will not use up current period
resources, it is not recorded as expenditure when the liability is incurred. Rather, it
is recorded as expenditure when in the period when it matures and must be paid out of
that period‘s current resources.
Accounting for supplies
Since payroll and supplies tend to be the largest operating expenditures of a
government entity, accounting for them will be looked at more detail. There are three
methods of accounting for supplies inventory which conform to GAAP for governmental
entities.
The purchase method: this method is the simplest. When the correct invoice is received,
the following entry is made. The resources allocated for the purchase of supplies have been
used, so no further concern is taken for accounting for the inventory. There is no inventory
asset account. As the resources assigned for the supplies are paid, the supplies are to
be recognized as expenditure when received. This method is best if ending inventories
are immaterial. Assume the purchase of 15, 000 birr worth of office supplies.
Expenditures 15,000
Accounts (Vouchers) Payable 15,000
(To record the purchase of supplies)
The consumption method-periodic inventory: this method charges expenditures only
for those supplies which were actually used in the period. It is best when there is unused
balance remain on hand at the end of the period. The initial entry is the same as for
purchase method (See above). At the end of the period, however, inventory is
counted, and expenditures are reduced by the balance of ending inventory. Assume the
same purchase as above, with a beginning inventory of zero (0) and an ending inventory of
2,000 Birr. Fund Balance also needs to be reserved for the amount of the inventory to show
that the amount is not available for appropriation in the next year.
Expenditures 15,000
Accounts (Vouchers) Payable 15,000
(To record the purchase of supplies)
Inventory of Supplies 2,000
Expenditures 2,000
(Unreserved) Fund Balance 2,000
Reserve for Inventory 2,000
(To recognize left-over supplies as inventory)

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The consumption method-perpetual inventory: in this method supplies are to be
recorded as Asset when purchased and to be charged to expenditures as they are issued
from store. In this case the entry for the initial purchase is different from the purchase
method above. Since the supplies are recorded as Asset at the time of purchase, there is no
need to reverse the expenditure account at year end as we did to the consumption method
– periodic above. But the unreserved fund balance will be recorded to indicate the balance
is not part of the next year‘s appropriation.
Inventory of Supplies 15,000
Account (Vouchers) payable 15,000
(To record purchase of supplies)

Expenditures 10,000
Inventory of supplies 10,000
(To record the issuance of supplies from the storeroom)
Expenditures 3000
Inventory of Supplies 3000
To adjust inventory to the actual physical count (if necessary)
(Unreserved) Fund Balance 2,000
Reserve for Inventory 2,000
To reserve Fund Balance for leftover supplies
Accounting for inter fund transactions
Inter fund transactions are transactions between different entities within the governmental
unit. Transfers are different from transactions, because they are not exchanges. Rather
they are one side flow of resources with no return. As such, they need to be recorded in
two different sets of books. The five types of inter fund transactions commonly
encountered in governmental accounting are listed, defined, and illustrated below.
I. Inter fund loans and advances: Funds sometimes loan money to each other to use
idle cash effectively. The money is only temporarily transferred and must be repaid.
Since each fund is a fiscal entity, these inter fund payables and receivables must be
disclosed in the financial statement of each fund involved. Interest is sometimes
charged to or by proprietary funds; it is not normally charged on advances and loans
between governmental funds. For example, if the general fund loaned 50,000
Birr to a special revenue fund, the entries required would be:
On the books of the general fund
Due from the special Revenue fund 50,000
Cash 50,000
On the books of the special revenue fund
Cash 50,000
Due to the General fund 50,000
(To record a loan from the general fund)

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Inter fund loans and advances are not increases or decreases in f und net assets. On
the creditor fund‘s books they only move resources from one current asset (cash) to
another (Due from…). On the debtor fund‘s books, they increase a current asset (cash) by
increasing a current liability (Due to..). In both cases, the effect on net assets is zero. As
such inter fund loans and advances are not closed at the end of the year.
II. Quasi-external transactions :These are transactions that would be treated as
revenues, expenditures, or expenses if they involved organizations external to
the governmental unit. They are the only type of inter fund transaction which
is considered as revenue and expenditure within the entity. These transactions
are typically between an internal service fund and the general or a special revenue
fund. The fund giving the service recognizes revenue; the fund receiving the
service recognizes expenditure. An example of a quasi-external transaction is a
shared garage for the governmental unit which repairs any of its cars regardless of
which fund is responsible for it. The garage will charge the respective fund for
work done, and recognize revenue from it. The fund which is responsible for the
vehicle recognizes expenditure. The quasi-external transactions are recognized as
revenue and expenditure only on the individual and (sometimes) combining fund
statements. These transactions are eliminated on the combined statement of the
government unit, and not included as revenue or expenditure for the unit as a
whole.
If a car repair of 1,000 Birr was done to a vehicle the general fund was responsible, the
following entries would be needed
On the books of the General Fund
Expenditures 1,000
Due to Internal service Fund 1,000
On the books of the Internal service fund
Due from the General fund 1,000
Revenues 1,000
The revenues and expenditures arising from quasi-external transactions are closed simply
as part of closing the other revenues and expenditures for the year. Due From accounts are
not closed, because they are balance sheet accounts.
III. Reimbursements: These are transactions that reimburse a fund for expenditures
made by it no behalf of another fund, i.e. one fund pays a bill on behalf of another
and is then reimbursed.
For example, the Ministry of Health operates clinic in Addis Ababa and South Omo. The
Addis Ababa Clinic, for convenience, might pay a bill of 3000 Birr for medicine on behalf
of South Omo clinic. The South Omo clinic would then reimburse the AA clinic. The AA
clinic would charge expenditure at the time of purchase, and then credit expenditures
to zero (0). Payment of the reimbursement would then create expenditure for the
South Omo clinic.

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On the books of the AA Clinic
Expenditure 3,000
Cash 3,000
(To record payment of bill on behalf of south Omo clinic)
Cash 3,000
Expenditure 3,000
(To record reimbursement from south Omo clinic)
On the books of the South Omo Clinic
Expenditure 3,000
Cash 3,000
(To reimburse the AA clinic for medicine purchase)
Any expenditures arising from reimbursement transactions are closed simply as part
of closing the other revenues and expenditures for the year. No special attention is given
to reimbursements in the year-end closing process.
IV. (Residual) Equity Transfers: These are nonrecurring transfers made in
compliance with special statues or ordinances that do not qualify as revenues or
expenditures to the receiving or disbursing funds. It is the transfer of fund balance
from one fund to another. Not only are they not revenues or expenditures, they are
not other financing sources or uses, even though they are technically
increases/decreases in fund financing resources.
For example, the GF might transfer the amount of 10,000 Birr to an internal service fund to
open a central supply store.
On the books of the General Fund
Equity Transfers Out 10,000
Due to Internal Service fund 10,000
On the books of the Internal Service Fund
Due from the General Fund 10,000
Equity transfers In 10,000
These transfers increase the net assets of the receiving fund, and decrease the net assets of
the giving fund. Therefore, they must be closed to fund balance at the end of the year. Both
funds involved in the transfer must close the equity transfer accounts. Refer back to
the example of residual equity transfers above. For those particular transfers, these are
closing entries needed.
On the books of the General fund
Fund Balance 10,000
Equity Transfers Out 10,000
On the books of the Internal Service fund
Equity transfers In 10,000
Fund Balance 10,000

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 V. Operating Transfers: Operating transfers are recurring periodic transfers made
primarily for the purpose of shifting resources from one fund to another. They are
legally authorized transfers from a fund which receives revenue to the fund through
which the resources are to be expended. These transfers are other financing sources
of the receiving fund, other financing uses of the paying fund.
For example, the general fund may make an annual transfer of 8,000 Birr to a Debit service
Fund for payment of interest on a general long-term debit. At time the transfer is
authorized, the following entries are needed:
On the books of the General Fund
Operating Transfers Out 8,000
Due to Debt Service fund 8,000
(To record a transfer to the debit service fund)
On the books of the Debit service fund
Due from General fund 8,000
Operating Transfers In 8,000
(To record a transfer from the general fund)
These transfers are similar to (residual) equity transfers in that they increase the net assets
of the receiving fund, and decrease the net assets of the giving fund. Therefore, they also
must be closed to fund balance at the end of the year. Both funds involved in the transfer
must close the operating transfer accounts. Refer back to the example of operating equity
transfers above. For those particular transfers, these are the closing entries needed.
On the books of the General fund
Fund Balance 8,000
Operating Transfers Out 8,000
On the books of the Debt service fund
Operating Transfers In 8,000
Fund Balance 8,000
Note that only numbers 4 & 5 above are called properly called transfers, 1, 2 & 3 are merely
transactions.
Year End Adjusting Entries
Regardless of the account structure and entry approach used, the accounts should be
reviewed at year end to determine whether any adjusting entries are needed to
properly reflect fund operating results and financial position. Among the type of revenues
that might be accrued in adjusting entries are interest on investment and delinquent
tax, unbilled charges for services and intergovernmental revenues that are due but have
not been received by year end. Expenditures that might require accrual entries include
interest on short term debt, accrued payroll and amounts recorded as encumbrances
that have become expenditures by year end.
To illustrate year end adjusting entries, look the following transactions for ABC
governmental entity

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 i. Interest and penalty of $900, of which $100 is expected to be uncollectible,
had accrued at year end
Interest and penalty receivable on Taxes 900
Allowance for uncollectible Taxes 100
Revenues 800
ii. Accrued interest on investment at year end amounted to $600
Accrued interest receivable 600
Revenue 600
iii. Accrued interest on the short term note payable at year amounted $800
Expenditure 800
Accrued interest Payable 800
Year End Closing Entries
At the end of the fiscal year, entries are made to close the accounts. Closing the books in a
governmental entity is somewhat complicated by the existence of the budgetary
accounts and encumbrance accounts. The closing process summarizes the results of
operations in the fund balance account. The following are steps in closing process:
First, the budgetary accounts should be closed. Assuming there was no change is
appropriations or Estimated Revenues during the year, the opening entries are
simply reversed.
Appropriations 480,000
Fund Balance 20,000
Estimated Revenues 500,000
(To close the budgetary accounts)
Next, the actual Revenues and Expenditures are closed, in a manner similar to profit
seeking accounting. (Assumed numbers)
Revenues 510,000
Fund Balance 35,000
Expenditures 475,000
(To close actual Revenues and Expenditures)
Then, Equity or Operating transfers are closed
Fund Balance 5,000
Equity/Operating transfer out 5,000
(To close the transfer out accounts)
Or
Equity/Operating transfer out 5,000
Fund Balance 5,000
(To close the transfer in accounts)
Finally, the Encumbrances Accounts is closed, if necessary. (Assumed numbers)
Reserve for Encumbrances 12,000
Encumbrances 12,000

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(To close the encumbrance account)
Financial Statements
Similar to business concern, both the general fund and special revenue funds have
an operating statement and a balance sheet. In addition they have a statement of
revenues, expenditure, budget and actual.
1. The Operating Statement
The statement of revenues, expenditures and changes in fund balance shows revenues and
expenditures with perhaps as many as three classification schemes for t he general fund. As
special revenue funds are typically established for every earmarked revenue sources, only
the object of classification is used.
YY Town
Statement of Revenues, Expenditures and Change in Fund Balance
For the year ended Dec 31, 2014
Revenues
Property taxes $2,599,636
Revenue from Interest and penalty on delinquent taxes 11,400
License and permits 698,200
Service charges 82,464
Fines 310,800
Intergovernmental revenue 284,100
Miscellaneous Revenue 28,400
Total Revenue 4,015,000
Expenditures
General government 649,400
Public safety 305,435
Public works 778,300
Health and welfare 850, 325
Parks and recreation 292,500
Contribution to retirement plan 179,100
Miscellaneous Appropriation 14,200
Total Expenditures 3,069,260
Excess of Revenue over Expenditures 945,740
Other Financing Sources (Uses)
Fund Balance Jan 1 125,660
Fund Balance Dec 31 1,071,400
2. The Balance Sheet
With one major exception, the balance sheet for both general fund and special revenue
funds would look too much like a balance sheet for a business. It has current asset and
liabilities. Within the current asset and liability section, the most liquid items would
appear first, followed by those that are less liquid. It also has an equity section, but the
term fund balance is used instead of equity. Government balance sheets differ from
business enterprises‘ in one major respect: no long term asset or liabilities appear in the

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fund. General long term assets are shown in the general fixed asset group and general long
term liabilities are placed in general long term liabilities account group.
YY Town
General Fund Balance Sheet
As of Dec 31, 2008
Assets
Cash $190,000
Tax receivable current 420,000
Less: Estimated Uncollectible current taxes (20,000)
Tax receivable delinquent 150,000
Less: Estimated Uncollectible delinquent taxes (15,000)
Penalty and Interest on delinquent taxes 25,000
Total Assets $750,000
Liabilities and Fund Equity
Liabilities
Voucher Payable $350,000
Due to CPF 50,000
Total Liabilities $400,000
Fund Equity
Reserve for Encumbrance 250,000
Fund Balance 100,000
Total Fund Balance $350,000
Total Liabilities and Fund Balance $750,000

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