Chapter Two

Principles of Accounting and Financial Reporting for

State and Local Governments (SLGs)

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 Activities of Government
1.Governmental Activities
As per GASB Concepts Statements No.1,
government provides certain core services called
General Activities. General Activities provided by
most general purpose governments are related to:
Protection of life and property, police and fire
protection,
Public works (streets and highways, bridges, and
public building),
Parks and recreation facilities and programs,
Cultural and social services
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CON;T
1.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;
Airports;
Hospitals;
Parking garages and lots;
Liquor stores;
Swimming pools;
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CON’T
1.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.
 Accounting and reporting for the Fiduciary Activities
of the government use principles similar to those of
business type activities. Certain fiduciary activities, those
related to defined benefit pension plans and similar post-
employment health care plans use unique recognition
standards prescribed by GASB.
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GASB Statement of Principles of Accounting and FR for SLGs

At its inception in 1984, the GASB adopted 12

accounting and financial reporting principles for
state and local governments that had been
established by its predecessor standards-setting
body. The standards prescribed by GASB
Statement No. 34 retain, with certain
modifications, the original principles. A separate
principle has been articulated for long-term
liabilities, bringing the total now to 13 principles
as follows:
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 CON’T
1. Principle of Accounting and Reporting Capabilities
2. Principle of Fund Accounting Systems
3. Principle of Types of Funds
4. Principle of Number of Funds
5. Principle of Reporting Capital Assets
6. Principle of Valuation of Capital Assets
7. Principle of Depreciation of Capital Assets
8. Principle of Reporting Long-Term Liabilities
9. Principle of Measurement Focus and Basis of Accounting
10.Principle of Budgeting, Budgetary Control, and Budgetary
Reporting
11.Principle of Transfer, Revenue, Expenditure, and Expense
Account Classification
12.Principle of Common Terminology and Classification
Principle of Annual Financial Reports
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Principle No. 1: Accounting and Reporting Capabilities

A governmental accounting system must make it

possible both:
(a) to present fairly and with full disclosure the
funds and activities of the government in
conformity with generally accepted accounting
principles or IFRS and
(b) to determine and demonstrate compliance
with finance related legal and contractual
provisions

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 Principle No. 2: Fund Accounting Systems
Governmental accounting systems should be
organized and operated on a fund basis.
A Fund is defined as a fiscal and accounting
entity with a self-balancing set of accounts
reporting cash and other financial resources,
together with all related liabilities and residual
equities or balances, and changes therein,
a fund is an entity with its own set of books and
statements (i.e., chart of accounts, general journal,
general ledger, trial balances, and financial
statements).
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 Principle No. 3: Types of Funds
State and local governments, both general purpose
and special purpose, should use 11 fund types as
needed. These fund types are organized into three
categories; governmental funds, proprietary funds,
and fiduciary funds..

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governmental funds
A)Governmental Funds: - account for activities
of a government that are carried out primarily
to provide services to citizens and that are
financed primarily through taxes.
Governmental Funds are classified into five:
General Fund,
special revenue funds,
capital projects funds,
debt service funds,
permanent funds
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 proprietary funds
B Proprietary Funds – account for a government’s
ongoing organizations and activities that are similar
to those operated by for- profit organizations. or
cost-recovery is important. For example: a Toll
Road would be reported within the proprietary
funds. Two types of funds used by state and local
governments
Enterprise Funds (EFs)
Internal Service Funds (ISFs

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fiduciary funds
C Fiduciary Funds – these are trust and agency
funds that are used to account for assets held by a
governmental unit in a trustee capacity or as an
agent for individuals, private organizations, and
other governmental unit.
Agency Funds
Pension (and Other Employee Benefit) Trusts
Funds
Investment Trust Funds
Private Purpose Trust Funds
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Principle No. 4: Number of Funds

Governmental units should establish and

maintain those funds required by law and sound
financial administration. Only the minimum
number of funds consistent with legal and
operating requirements should be established
because unnecessary funds result in inflexibility,
complexity, and inefficient financial
administration.

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Principle No. 5: Reporting Capital Assets

A clear distinction should be made between general

capital assets and capital assets of proprietary and
fiduciary funds. Capital assets of proprietary funds
should be reported in both government wide and fund
financial statements.
Capital Assets of fiduciary funds should be reported
in only the statement of fiduciary net assets. All other
capital assets of the governmental unit are general
capital assets. They should not be reported as assets
in governmental funds but should be reported in the
governmental activities column in the Government-
Wide Statement of Net Assets.

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Principle No. 6: Valuation of Capital Assets

Capital assets be should reported at

historical cost. The cost of a capital asset
should include capitalized interest and
ancillary charges necessary to replace the
asset into its intended location and
condition for use. Donated capital assets
should be reported at their estimated fair
value at the time of the acquisition plus
ancillary changes if any

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Principle No. 7: Depreciation of Capital Assets

Capital assets should be depreciated over

their estimated lives unless they are either
inexhaustible or are infrastructure assets
according to the modified approach of
GASB Statement No. 34.

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 Principle No. 8: Reporting Long-Term Liabilities
A clear distinction should be made between fund
long-term liabilities and general long - term
liabilities. Long term liabilities directly related to
and expected to be paid from proprietary funds
should be reported in the proprietary fund
statement of net assets and in the government
wide statement of net assets. Long-term
liabilities directly related to and expected to be
paid from fiduciary funds should be reported in
the statement of fiduciary net assets

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Principle No. 9: Measurement Focus and Basis of Accounting
Basis of Accounting (Accounting Method)
It gives answer to the question when should revenues and expenses or
expenditures be recognized?
1 Accrual Basis of Accounting
 Accrual Accounting means that (1) revenues should be recorded in the period
in which the service is given, although payment is received in a prior or
subsequent period, and (2) expense should be recorded in the period in which the
benefit is received, although payment is made in a prior or subsequent period.
2 Modified Accrual Basis of Accounting
 Under modified accrual basis of accounting, Revenues, should be recognized
in the accounting period in which they become available and measurable
3 Cash Basis of Accounting
 Under Cash Basis of Accounting; (1) revenues should be recorded in the
period in which the service is given, although payment is received in a prior
or subsequent period, and (2) expense should be recorded in the period in
which the benefit is received, although payment is made in a prior or
subsequent period

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Principle No. 10: Budgeting, Budgetary control, and Budgetary Reporting

a. An annual budget(s) should be adopted by

every governmental unit
b. The accounting system should provide the
basis for appropriate budgetary control.

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 Principle No. 11:CLASSIFICATION
This principle is intended to ensure that
account classifications provide for separate
financial statement reporting of transfers from
revenues and expenditures (or expenses) and
for appropriate levels of in the basic financial
statements.  
Principle No. 12: Common
Terminology and Classification

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Principle No. 13: Annual Financial Reports

A Compressive Annual Financial Report

(CAFR
should be prepared and published, covering
all activities of the primary government

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Common Accounting Characteristic of Fund Types

1.Common Accounting Characteristics

Governmental Funds
 Focus on fiscal accountability
 Measure and report current (expendable)
financial resources
 Use modified accrual basis of accounting
 Account for and report revenues and
expenditures
 Budgetary accounts integrated into the funds to
achieve legal budgetary control
 Required Financial Statements:
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Common Accounting Characteristics Proprietary Funds

 Focus on operational accountability

 Measure and report economic resources (as in
business accounting)
 Use full accrual basis of accounting
 Account for and report revenues and expenses
 Account for capital assets or long-term
liabilities within the funds; report depreciation
 Budgetary accounts not integrated into the
funds; should use budgeting for planning and
control purposes
 Required Financial Statements:
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Common Accounting Characteristics Fiduciary Funds

 Accounting for fiduciary funds is similar to

that for proprietary funds, i.e., full accrual
accounting and focus on flows of economic
resources
 Capital assets and long-term liabilities are
recorded in the funds, if applicable
Required Financial Statements

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