Governmental & Not-For-Profit Accounting: By: Gurmu - Eph

GOVERNMENTAL & NOT-FOR-PROFIT ACCOUNTING
UNIT 1: OVERVIEW OF GOVERNMENTAL AND NOT-FOR PROFIT

ACCOUNTING
1.1 INTRODUCTION
There are organizations whose object is not to make profit. These not-for-profit
organizations account their resources and financial activities under different accounting
system. Every organization wants to be successful. Of course in order to know if it is
successful, “success” must be defined in terms of goals. And then it needs some means to
measure its results against its goals. Measuring success is often thought of in terms of
effectiveness (achieving the goal at the highest level) and efficiency (achieving the goal
through using the least amount of resources. for profit seeking organizations (F.P.) or
Organizations whose objective is to make profit, both efficiency and effectiveness can
easily be measured with financial statement. There are certainly non-financial criteria to
judge success like qualitative or quantitative measures. But regardless of what other
measures are employed, ultimately effectiveness will be measured by the income
statement. Not only income statement measures effectiveness, it also measures efficiency.
As with efficiency, there may be non-financial criteria for evaluating efficiency. But
ultimately, efficiency is evaluated by the expense section of the income statement. If
expenses are less than revenue and the organization has earned an “acceptable” profit, then
we can say it is successful in efficiency. We can therefore say that the objective of the
income statement is to demonstrate both the effectiveness and efficiency of the
organization.
For not-for-profit organizations (N-F-P) however, these objectives are not as useful.
Without a good measure of effectiveness, measurements of efficiency become almost
meaningless. If NFP 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”
1.2 MEANING AND DEFINITION
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
BY: GURMU.EPH Page 1

accountable for the resources. Furthermore the definition will be discussed along with the
other principles in the next chapter.
1.3 CLASSIFICATION OF NOT-FOR-PROFIT ORGANIZATIONS
Generally, organizations could be classified either based on their objectives or their

ownership. If Organizations are classified by their:
1. Objectives
 Commercial / for profit organizations- which emphasize on the making of profit
 Non-commercial/ not –for – profit organizations- which do not give emphasis on
the making of profit
1. Ownership
 Non-governmental (Private organizations) – are operating for the benefit of an
individual proprietor or, as partners, a group of partners or shareholders.
 Governmental organization – are operated for the benefit of society as a Whole.
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 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 Harar, Dire Dawa South nations &

Afar Oroma, Benishangul nationalities
Gambella Addis Ababa /Gumuz,
Amhara , Somalia Sidama
- Local governmental units are

1. Zone (Counties) – administrative division of the largest unit of local government
2. Kifleketema
3. Kebele
2. EDUCATIONAL INSTITUTIONS
These could be private, public or community
E.g. Colleges & University, schools.

3. HEALTH CARE PROVIDERS

-Theses could be private, public on community
E.g. Hospitals, clinics, nursing home, Red Cross
4. VOLUNTARY HEALTH & WELFARE ORGANIZATIONS (VHWO)

E.g. NGOS like USAID, save the children, Care Ethiopia etc.
5. OTHER N.F.P ORGANIZATIONS

These are organizations whose objectives and activities are different from the above four
classifications.
E.g.
Philanthropic foundations
Political parties
Civic organizations
Research & scientific organization
Professional associations

In the above classification, governmental units are being categorized as N.F.P organizations.
However governmental units may undertake two types of activities.
- Profit making activates &
- Non-profit making activates
The governmental units which undertake non-profit activates & the other indicated for not-for-
profit organizations are collectively known as Non-business organizations. It is those
organizations that we discuss in this course that use fund accounting system.
Thus the two types of non-business organization i.e. governmental units & the other NFPs
(VHWO, health care, educational, other) have several characteristics in common as well as
differentiating features.
1.4 DISTINGUSH CHARACTERISTICS OF GOVERNMENTAL UNITS & NON-

PROFIT ENTITIES
For all the similarities and differences in the mechanics of accounting and management of
resources, there are very significant resources in what the two types of organizations do and how
they operate. First consider the three distinctions noted by the financial accounting standards
board (FASB) which characterize NFP organizations as
 Receipts of significant amount of resources from resource providers who do not expect
to receive either repayment of economic benefit proportionate to the resources provided
 Operating purposes that are other than provide goods or services at a profit or profit
equivalent.
 Absence of defined ownership interests that can be sold, transferred, redeemed, or that
convey entitlement to a share of residual distribution of resources in the event of
liquidation of the organization. Putting this points in simple terms we might say that an
NFP
 Gets money from people whom do not necessarily expect anything in return.(eg. Tax
payers, donors to NGOs
 Is not trying to make money
 Does not have ownership shares that can be sold or bought.
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 without 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 charges for their services are 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
contributions are mostly involuntary Taxes. Citizen’s contribution to non-profit organizations is
voluntary donations. There is no comparable source for business enterprise.
It is important to know about types of taxes for the future topics. Tax is an involuntary
contribution from the society to the government. Based upon their assessment, taxes could be
classified into -
1. Self-assessed taxes: - taxes, which are assessed and declared by the tax payer
E.g. Income tax, value added tax
2. 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.
1.5 USES AND USERS OF FINANCIAL REPORTS OF GOVERNMENTAL UNITS
Since financial reports are means of communicating the operation results & position, it is
required for both business & non-business organizations. Financial reports could either be for a
year (annual financial reports) or for a period less than a year (interim financial report). Every
states and local governmental units are required to prepare annual financial reports, which would
render information about the operation results & position to users. The users are categorized into
as:
i. Internal – who are the governing body of the states & local governmental
ii) External - who are the society /citizenry
The governmental accounting standards board (GASB), which is one of the responsible body in
developing an accounting & reporting standards for state & local governmental units in its
concepts statement no.1 “objectives of financial reporting”, it established the following
objectives.
GASB Reporting Objectives

I. Financial reporting should assist in fulfilling governmental duty to be publicly
accountable & should enable users to assess that accountability by:
a) Providing information’s to determine whether current year revenues were sufficient to
pay for current year services.
b) Demonstrating whether resources were obtained & used in accordance with the
entities legally adopted budget & demonstrating compliance with other finance
related or contractual requirements.
c) Providing information to assist users in assessing the service efforts, costs &
accomplishment of the governmental entity.
II. Finical reporting should assist users in evaluating the operating results of the governmental
entity the year by:
a) Providing information about sources and uses of financial resources.
b) Providing information how it financed its activities and meet its cash requirements.
c) Providing information necessary to determine whether its financial position
improved or deteriorated as a result of the year’s operations.
III. 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 it become due by.
a) Providing information about its financial position and condition
b) Providing information about its and other non-financial resources.
c) Disclosing legal or contractual restrictions on resources and the risk of potential
loss of resources.
It can be understood from the statement that Accountability is the cornerstone of all financial
reporting in government. Accountability requires governments to answer to the citizens, to justify
the raising of public resources and the purposes for which they are used. Governmental
accountability is based on the belief that citizenry has a “right to know” a right to receive openly
declared facts that may lead to public debate by the citizens and their elected representatives.
Financial reporting plays a major role in fulfilling government’s duty to be publicly accountable
in a democratic society. The GASB believe that inter period equity is a significant part of
accountability and is fundamental to public administration. It therefore needs to be considered
when establishing financial reporting objectives. In short financial reporting should help users
assess whether current year revenues are sufficient to pay for services provided that year and
whether future taxpayers will be required to assume burdens for services previously provided.

Financial reports of Non-profit organizations- Voluntary health and welfare organizations,

college and universities, Hospitals, religious organizations and others- have similar uses but, in
recognition of the fact that the financial operations of NFPs are generally not subject to as
detailed legal restrictions as are those of governments,
The financial accounting standards board believes the financial reports for not-for-profit
organizations should provide:
1. Information useful in making resource allocations decisions;
2. Information useful in assessing services and ability to provide services;
3. Information useful in assessing management stewardship and performance; and
4. Information about economic resources, obligations, net resources and changes in them.
Note that the objectives of financial reporting for governments and for non-profit entities
stress the need for public to understand and evaluate the financial activities and
management of these organizations.
Government Financial Reporting

Serious users of government financial information have the need for much more detail than what
is found in the audited general-purpose financial statement (GPFS). Much of that detail as well
as the auditor’s report and the GPFS is found in the governmental reporting entity’s
Comprehensive Annual Financial Report (CAFR) which is considered as the entity’s official
Annual report published as a matter of public record.
Government financial reporting, Comprehensive annual financial report (CAFR) contains three
main sections,
I. An introductory section
II. A Financial section
III. A statistical section
I) introductory section
Introductory materials include such obvious but sometimes forgotten items as title page and
contents page, the letter of transmittal and other material deemed appropriate by management.
The letter of transmittal may be literally that a letter from the chief finance officer addressed to
the chief executive and the governing body of the governmental unit- or it may be a narrative
over the signature of the chief executive. In either event the letter of narrative material should
cite legal and policy requirement for the report and discuss briefly the important aspects of the
financial condition and financial operations of the reporting entity as a whole of the entity’s
funds and account groups. Significant changes since the prior annual report and changes
expected during the coming year should be brought to the attention of the reader of the report.
II) Financial section

The financial section of a comprehensive annual financial report (CAFR) should include
 An Auditor’s Report
 General purpose financial Statement (GPFS)
 Combining and individual fund and account group statements and schedules.
The financial section has sufficient information to disclose fully and present fairly the financial
position and results of its operation during the fiscal year. In addition agreements with creditors
and others provide constraints over the financial activities and introduce financial reporting
requirements. In order to make it possible to determine and demonstrate compliance with laws,
regulations and agreements using fund accounting system, indicating the nature of each fund type
and account group prepare combined statements in which financial data are presented in a
columnar form for each fund type and account group used by the reporting entity. The five
combined statements that comprise the GPFS and that must be included in the financial section of
a CAFR are
1. Combined balance sheet- all fund types and account groups
2. Combined statement of revenues, expenditures and changes in fund balances- all
governmental fund types.
3. Combined statement of revenues, expenditures and change in fund balances- budget and
actual-general and special revenue fund types, and similar fund types for which annual
budgets have been legally adopted.
4. Combined statement of revenue, expenses, and changes in retained earnings (or equity)-
all proprietary fund types.
5. Combined statement of cash flows- all proprietary fund types and non-expendable trust
funds.
The notes to the financial statement are also an integral part of the GPFS.
III) Statistical Section
In addition to the introductory section and the financial section the report should contain the
statistical section, which presents tables and charts showing social and economic data, financial
trends and the fiscal capacity of the government in detail needed by readers who are more than
casually interested in the activities of the governmental unit.
1.6 SIMILARITIES AND DIFFERENCES BETWEEN GOVERNMENTAL AND

COMMERCIAL ENTITIES
Similarities
From the standpoint of the management of resources, for profit and not for profit organizations
are similar different ways. For example both use the same type of resources as cash, fixed asset
personnel, etc... Since both are using the same type of resources, both need good information for
decision making, and both need to exercise careful control of the resources that they have. This

means that mechanics of providing information and control system are similar for each. Both
should imply accounting forms and other types of controls to restrict the use of assets and
capture information, double entry accounting to record and classify that information, employing
journals and ledgers, and then use those journals and ledgers as a basis to produce periodic
financial reports which summarise the information in a meaningful way to guide decisions.
1. Impact of legislative process
The federal, state & local laws & regulations would have an impact upon both Governmental &
commercial entities. However the level of legislative impact is not as strong for commercial units
as it is for governmental entities.
2. Stewardship for Resources
Since the resources of commercial entities are provided by the owners themselves, they are
taking full responsibility or the accountant along with the owner will be taking the
responsibilities for the stewardship of resources. In the same way, members of the governmental
entities should demonstrate adequate stewardship for resources.
3. Importance of Budget
The overall nature of governmental & commercial entities requires a plan of expected
expenditure and income to be implemented for both entities. it is important to employ relative
budgets as per their accounting entities.
Differences
1. Profit motive
Commercial units have a presented profit motive as part of their objectives whereas
governmental units with some exceptions do not operate with the objective of earning a profit.
2. Governance
The legislative and executive branches of a governmental unit share the responsibilities for their
governance where as in the case of commercial entities; it is governed by elected or appointed
directors or managers.
3. Basis of accounting
The modified accrual basis of accounting is mostly used by some governmental units but in case
of commercial entities the basis of accounting is the accrual basis.
4. Source of revenue in nature
The primary source of revenue for commercial entitles is through sales or services they provide,
whereas in case of governmental units, with some exceptions, the main source of revenue is
though fund or donations.
5. Beneficiaries
Governmental units are operating for the benefit of the citizenry where as commercial entities are
operating for the interest and benefit of the owners.
1.7 SOURCE OF ACCOUNTING STANDARDS

Accounting and financial reporting standards for state and local governmental units are
established by the governmental accounting standards board (GASB). Accounting and financial
reporting standards for profit seeking business are established by the financial accounting
standards board (FASB).
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, financial reporting standards were set by groups
sponsored by professional organizations. Before 1934 in US, there was no governmental
accounting standard. But by 1934, to overcome this confusion & scandal especially in
municipality accounting, the Municipal Finance Officers Association (MFOA) formed, the
National Committee on Municipality Accounting (NCMA) to assure accounting standard for
municipalities. By expanding its scope, the NCMA in 1949 was reorganized as National
Committee on Governmental Accounting (NCGA) to establish accounting standards for states
and local governmental units. In 1974, the committee was again reorganized as a council and
formed the National Council of Governmental Accounting (NCGA). In 1984 the council was
again reorganized as a board parallel to FASB and was renamed as Governmental Accounting
Standards Board (GASB).
Authority to establish accounting principles (financial reporting standards for non-profit

organizations) is split between the GASB and the FASB. Because a sizable number of non-profit
organizations particularly colleges, universities & hospitals are governmentally related. But
many others are independent of governmental units. Accordingly the GASB has the
responsibility for establishing accounting & financial reporting standards for not for profit
organizations whose financial statements may be combined with the financial statements of state
and local governmental reporting entities, or which are considered governmentally owned.
The FASB has the responsibility for establishing accounting and financial reporting standards for
non-governmental non-for profit organizations. Both the GASB and the FASB have issued
concept statements, which are intended to communicate the framework within which the two
bodies strive to establish consistent financial reporting standards for entities within their
respective jurisdictions.
The financial accounting foundations appoints the members of the two boards & supports the
operating expenses of the boards by obtaining contributions from business corporations,
professional organization of accountants, financial analysts, CPA firms and other groups
concerned with financial reporting.
UNIT 2
PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE AND
LOCAL GOVERNMENTS

2.1 INTRODUCTION
The GASBs codification of governmental accounting and financial reporting standards presents
twelve principles of governmental accounting. These principles are basic, carefully thought out
beliefs and specific fundamental tenets which on the basis of reason, demonstrated performance,
general acceptance are generally essential to effective management control and financial
reporting which also have been proven to work well and are accepted by most.
2.2 STATEMENT OF THE PRINCIPLES
2.2.1 Accounting & Reporting Capabilities (principle #1)
A government accounting system must make it possible both

(a) To present fairly & with full disclosure the financial operation of the funds & account groups
of the governmental unit in conformity with generally accepted accounting principles (GAAP)
(b) To determine & demonstrate compliance with finance-related legal and contractual
provisions.
1. Adherence to GAAP is essential to answering a reasonable degree of comparability
among the general-purpose financial reports of state and local governmental units.
2. Sometimes the legal requirements might be contrary to GAAP; for instance,
governmental entities may require to keep books with a single entry ledger, or it may
require to keep all account on a strictly cash basis. In these cases since the legal
requirements are contrary to GAAP financial statements & reports prepared in
compliance with state laws are complied. Sometimes legal requirements are also
contrary to good financial management. For example a purchase for 3 birr might require
the same amount of paper work as a purchase of 10,000 birr. In this case the cost of the
forms, the labour to complete them and the storage space to keep them might actually
exceed the 3 birr. It is the law. But it is good management of resources.
In some governmental units however under such circumstances where the laws require following
practices not consistent with GAAP, Governmental units may prepare two sets of financial
statements.
1. One set in compliance with legal requirements,
2. One set in conformity with GAAP
2.2.2 Fund Accounting System (Fund defined) (principle # 2)
Governmental accounting systems should be organized & operated on a fund basis. “A fund is
defined as a fiscal & accounting entity with a self-balancing set of accounts recording cash &
other financial resources, together with all related liabilities & residual equities and balances,
& changes there in, which are segregated for the purpose of carrying on specifies activates or
attaining certain objectives in accordance with special regulations, restrictions or limitations.”

The word FUND is given special definition as it relates to Fund Accounting. The narrow
definition of Fund as used in ordinary conversation is a “resource of money”. However in this
course it is given the special definition above. It has key phrases indicating the following
points; It is by itself is an entity, having its own accounting existence and a self-balancing set of
books(double entry system). That set of books is established for recording a specific financial
activity. The establishment of the fund will attain a specific objective and will have regulations,
restrictions or limitations.
Example
Two examples follow to illustrate the concept of fund. First the ministry of education operates
several colleges. Although all are part of the MINISTRY as a whole each one is treated as a
fund. Each college will be given money that is specifically for its operations, is not to be mixed
up with other institutions. Therefore each college will keep its own set of books, and issue its
own Financial Reports, irrespective of the performance of other individual institutions or the
ministry as a whole.
Or take the case of Non-governmental organizations. For instance, a single NGO will likely have
several projects; it may have the following different projects, which are funded by different
donors.
1. Construction of a Dam in region 1
2. Water development project in region 2
3. Cattle development project in region 3
Under this case the donor for each project will not necessarily be given the financial statement of
the NGO as a whole. The donor for a cattle development project will want financial statements
for only the project, which he is funding. There for, each project will have its own set of books &
produce its own financial statements.
So each project will be a separate distinct fund. The very reason of setting up of funds
accounting in governmental entity is that of legal requirement & good financial management.
2.2.3 Types of Funds (Principle # 3)
There are seven types of funds, which are subdivided into three categories:
I. GOVERNMENTAL FUNDS
1. The General Fund- to account for all financial resources except those required to be
accounted for in another funds.
2. Special Revenue Funds- to accounts for the proceeds of specific revenue sources (other than
expendable trusts or for major capital projects) that are legally
restricted to expenditure for specific purposes.

3. Capital Project Fund- to account for financial resources to be used for the acquisition or
construction of major capital facilities (other them those financed
by proprietary & trusts funds)
4. Debt Service Funds- to account for the accumulation of resources for & the payment of
general long term debt principal & interest.
II. PROPRIETARY FUNDS
5. Enterprise Funds- to accounts for operations

1. That are financed and operated in a manner similar to private business
enterprises-where the intention of the governing body is that the costs (expenses,
including depreciation) of providing goods or services to the general public on a
continuing basis be financed or recovered primarily through user charges; or
2. Where the governing body has decided that periodic determinations of reveries
earned, expenses incurred and/or net income is appropriate for capital
maintenance, public policy, management control, accountability, or other
purposes.
6. Internal Service Funds- to account for the financing of goods or services provided by one
department or agency to the department or agency of the
governmental unit, or to the other governmental units on a
cost reimbursement basis.
III. FIDUCIARY FUNDS
6. Trust And Agency Funds-To account for assets held by governmental unit in a trustee
capacity or as an agent for individual private organizations, other governmental units &
or funds. These include:
a) Expandable trust funds
b) Non-expendable trust funds
c) Pension trust funds
d) Agency funds
All governmental funds are Expendable Funds; expendable funds are meant to be expended or
their resources are used up entirely usually within one fiscal year. As a practical matter, any
money that remains in an expendable fund at the end of the year typically must be returned to its
source. Therefore managers of expendable funds normally try to ensure that all their funds are
used up within one time period. If they are not used up, the manager is often perceived as being a
poor budget planner. This course deals primarily with accounting for expendable funds.
The accounting equation for an expendable fund is slightly different from an FP. recall the
accounting equation for an FP: A - L = C. The accounting equation for an expendable fund (from
the definition of Fund above) is cash plus other financial resources minus liabilities = fund
balance. (C + OR - L = FB). There are no ownership interests in an NFP. So there is no capital
or owners’ equity. There is only a balance remaining to be used for specific purpose.

Non-Expendable Funds are used when maintenance of capital is desired, and the unexpended
funds are not meant to be returned. All proprietary funds are non-expendable funds.
1. The general fund is the first one mentioned. All governmental units should have a
general fund except if the resources are to be accounted in other funds. There will be one
general 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. Another 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 for 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.
N.B- one additional type of fund i.e. special assessment fund has been eliminated by GASB for
financial reporting purposes.
2.2.4 Number of Funds (Principle # 4)

Governmental units should establishes and maintain those funds require by law & sound
financial administration. Only the minimum number of funds in consistent with legal and
operating requirements should be established, however since unnecessary funds result in
inflexibility, undue complexity & inefficient financial administration.
The seven fund types are to be used if needed by Governmental unit to demonstrate compliance
with legal requirements or if needed to facilitate sound financial administration.
In rare instances the use of a certain fund type is required by GASB standards. If legal
requirements GASB standards or sound financial administration do not require the use of a given
fund type, it should not be used. In the simplest possible situation, a governmental unit could be
in 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.
This principle is especially important in NGOS, who intend to do a number of limited life
projects, each of which is accounted for as a separate fund. When the project is finished the fund
should be closed. As long as the fund remains open, financial statements continue to be produced
for it. Wasting paper, ink, labour and time.
2.2.5 Accounting for fixed assets & long-term liabilities (Principle #5)
A clear distinction should be made between Fund fixed assets & general fixed assets & Fund
long-term liabilities & General long-term debt
A. Fixed assets related to specific proprierty funds & trust funds should be accounted for
through those funds. All other fixed assets of governmental units should be accounted
for through the general fixed asset account group.
B. Long term liabilities of proprietary funds & trusts fund should be accounted for through those
funds. All other un matured general long-term liabilities of governmental unit including
special assessments debt for which the government is obligated in some manner should be
accounted for through the general long-term debt account group.
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.
2.2.6 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.
2.2.7Deprecation of Fixed Assets (PRINCIPLE # 7)

A. Deprecation of general fixed assets should not be recorded in the accounts of governmental
funds. Deprecation 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 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.
2.2.8 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 become 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.
2. 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 income 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.
3. An Expense is a current period consumption of resources.
4. An 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 an expenditure at the time of purchase.
2.2.9 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 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 characteristics 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.
2.2.10 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 groups 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 purpose F.S is essentially the same as the combined statement.
2. NOTE: governmental reporting entity
3. The first thing that must be clear in accounting for governmental units is that what
agencies, commissions, institutions public authorities or other governmental
organizations (called component units) are to constitute the reporting entity for a
governmental unit. The basic criteria for inclusion in the 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.
2.2.11 Classification and Terminology (Principle # 11, 12)
Classification (principle # 11)

Transfer, Revenues, Expenditure and Expense account classifications

I. Classification of Transfers
A. Inter fund transfers & proceeds of general long-term debt issues should be classified
separately from fund revenue and expenditures or expenses.
1. Inter fund transfers- a transfer from one fund within the unit to another fund within the
same unit
e.g.- suppose on NGO operates clinics, & these clinics charges to cover wages &
medicines. During the year one clinic had a surplus & another had a loss. The head of the
organization decides to transfer funds from one to another.
2. Proceeds of general long term debt issues- money that is received from borrowing.
3. Donation from outside – goes in to the general fund or into a particular project fund as
the donor indicates.
4. -There are basically fund types of inter fund transaction and transfers we commonly
encounter in state and local govt. these are: -
1. Quasi-external transactions- transactions that would be treated as revenues,

expenditures, or expenses if they organization external to the government unit.
2. Reimbursements- one fund pages a bill on behalf of another
 E.g. an NGO operates a clinic in Hawassa City& BensaWoreda,
 The Hawassa clinic, for convenience, might pay a bill for medicine on
behalf of the Bensa clinic.
 The Bensa clinic would then reimburse the Hawassa clinic & it would be
expenditure for the Bensa clinic.
3. Residual equity transfer- lifts over money at the end of a certain project given to
another. E.g. Funding for water project in Aroresa transferred to a water project in
Aleta Wondo after the Aroresa project is finished.
4. Operating transfers- all other inter fund transfers E.g. legally authorized transfers
from a fund receiving revenue to the fund through which the resources are to be
expended. E.g. Transfers of fund from general fund to a special reserve fund.
N.B: 1&2 are merely transactions whereas 3&4 are transfers.
II. Classification of Revenues and Expenditures

A. Governmental fund revenues should be classified by fund and source. Expenditures should be
classified by fund, function (or programmes), organization unit, activity, character &
principal classes of object.
III. Proprietary fund Revenues and Expenses

C. Proprietary fund revenues & expenses should be classified in essentially the same manner as
those of similar business organizations functions or activities.

Expense is a current period consummation of resources while expenditure is a decrease in fund

financial resources.
E.g. in profit making accounting, a car would be considered as an asset & depreciation would be
recorded as an expense as the car is used up on wears out, in a fund the car would be considered
as expenditure at the time of purchase.
Terminology (Principle #12)

A common terminology & classification should be used consistently throughout the budget, the
accounts, and the financial reports of each fund.
1. The common terminology and classification principle is simply a statement of common

sense proposition that if the budgeting, budgetary control, and budgetary reporting
principle is to be implemented, persons responsible for preparing the budgets and persons
responsible for preparing the financial statements and the financial reports should work
with the persons responsible for designing and operating the accounting system.
Agreement on a common terminology and classification scheme is needed to make sure
the accounting system produces the information needed for budget preparation and for
financial statement and report preparation
2.3 COMMON ACCOUNTING CHARACTERISTICS OF THE FUND TYPES.
2.3.1 Accounting Characteristics Common to Funds of the Governmental Fund

Category
The four governmental funds (i.e. general, special revenue, capital project & debt service funds)
have common characteristics that would distinguish them from that of the other two fund types
(i.e. proprietary & fiduciary)
1. Governmental funds are created in accordance with legal requirements.

 Each fund has only those resources allowed by law.
 Any governmental unit might or might not use the allowed resource but they should
not utilize unauthorized resources.
 The resources may be expended only for purposes & in amounts approved by the
legislative branch. So the measurement focus of governmental fund accounting is on
the flow of financial resources (as distinguished from business organization focus on
determination of net-income)
 Governmental funds are expendable i.e. resources are received & expended with no
exceptions, that they will be returned through user or departmental charges.
 Revenues & expenditures (not expenses) of governmental funds are recognized on the
“modified accrual basis of account”.
2. Legal constraints on the raising of revenue & the expenditure of revenue are, in most
jurisdictions, set forth by a legally adopted budget.

 Accounting systems of governmental funds should provide the basis for appropriate
budgetary control.
3. Governmental funds account only for financial resources: cash, receivables, marketable
securities, and, if material, prepaid items & supplies inventories.
 They do not account for plant & equipment.
4. Funds in the governmental category account for only those liabilities to be paid from fund
assets.
5. The arithmetic difference between fund assets & fund liability is called fund equity which
could either be reserved or not.
 The portion of fund equity that is not reserved is called fund balance. Residents of the
governmental unit do not have legal claim on any portion of it.
 It is not equivalent to the capital section of an investor owned entity.
2.3.2 Accounting characteristics common to funds of the proprietary fund category.
 Proprietary fund provide services to users on a cost reimbursement basis.

 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.
 They are not subject to income taxation, nor do they have owners in the sense that
business enterprises do.
 Their account is similar with profit making business.
 Proprietary funds are established in accordance with enabling legislation & their
operations and policies are subject to legislative oversight.
 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.
 Proprietary funds should prepare budget as an essential element in the management
planning & control process.
 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.
 Proprietary funds account for all assets used in fund operations- current assets, plant &
equipment & any other assets considered as belonging to the fund.
 Proprietary funds account for current & long-term liabilities to be serviced from fund
operations &/or to be paid from fund assets.
 They are non- expendable funds.
2.3.3 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.
5. 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.
CHAPTER THREE
GENERAL FUND & SPECIAL REVENUE FUNDS
3.1 INTRODUCTION
3.1.1 General Fund

As it can be recalled from chapter two, the general fund is used for general governmental
activities such as police, administration and the like. To distinguish the general fund adversely, it

can be said that the general fund should account for all financial resources for which 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. The
general fund of a state or local government unit is the entity that accounts for all the assets &
resources used for financing the general administration of the unit & the traditional services
provided to the people.
3.1.2 Special Revenue Fund

Special revenue fund (SRF) in contrast to GF is used to account for resources, which are
collected for a specified purpose. Whenever a tax or other revenue source is authorized by
legislative body to be used for specific purpose, only a governmental unit availing itself of that
source may create a Special Revenue Fund in order to be able to demonstrate that all revenue
from the source was used for the specified purpose , only separate special revenue funds are
established by governmental units, as mandated by legislative enactments to account for the
receipts and expenditures associated with specialized revenue sources that are earmarked by law
or regulation to finance specified governmental operations. Fees for rubbish collection, state
taxes on diesel fuel that is required to be used only for road maintenance, tax on hotel rooms to
be used to improve tourist facilities, traffic violation fines are examples of governmental units
revenues that may be accounted for in a separate special revenue fund.
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.
The general funds and the special revenue funds have different purposes, but they are both
revenue funds, and the accounting and reporting procedure is the same for both. They are 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.
3.2 Accounting Characteristics

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 uses of transfer

accounts achieve the desired objective that revenues are 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.
3.3 Budget & Budgetary accounts
The fact that budgets are legally binding upon administrators has led to the incorporation of
budgetary accounts in the general fund and in the special revenue funds and in all other funds
required by law to adopt a budget.
Budgeting is the process of allocating scarce resources to unlimited demands budgeting has a
great role in governmental accounting than in profit making business. Budgeting is a key
element of legislative control over governmental units. The two classifications of budget for
governmental units are the same as those for business enterprises; Annual budgets and long term
or capital budgets.
Annual budgets include the estimated revenues & appropriations for expenditures for a
specific fiscal year of the governmental unit. Annual budgets are appropriate for the general
fund & special revenue funds. They sometimes are used for other governmental funds. An
expendable trust fund also may have an annual budget, depending upon the terms, the terms of
the trust indenture. Capital budgets, which are used to control the expenditures for construction
projects or other plant asset acquisitions, may be appropriate for capital projects funds. The
annual or capital budgets often are recoded in the accounts of all these funds, to aid in act for
compliance with legislative authorities.
The operations of the two proprietary funds are similar to those of business enterprises.
Consequently, annual budgets are used by these funds as a managerial planning & control

device rather than as a legislative control tool. Thus annual budgets of enterprise funds &
internal service funds generally are not recorded in ledger accounts by these funds.
In order to facilitate preparation of budgets and preparation of the combined statement of

revenues, expenditures and changes in fund Balance-Budget and Actual required for GAAP
conformity, accounting systems of funds for which budgets are required by law should
incorporate budgetary accounts. Only three general ledger control accounts are needed to provide
budgetary control; Estimated Revenue, Appropriations and Encumbrances.
1. Estimated Revenues – resources expected to be received

2. Appropriations – is both an authorization to spend and limitation of spending.
3. Encumbrances– Purchase orders(P.O.) in governmental entities have the function of
keeping track of coming expenditures so that the budget is not exceeded. this is done by
actually recording the P.O in the ledger account as an Encumbrance
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.
3.3.1 Recording the Budget

At the beginning of the budget period, estimated revenue control account is debited for the total
amount of revenues expected to be recognized, as provided in the revenues budget and the
limitation of spending or authorized expenditures will be recorded with a credit in the
appropriations control account. The amount of revenue expected from each source specified in
the revenues budget is recorded in a subsidiary ledger account so that the total of subsidiary
ledger detail agrees with the debit to the control account and both agree with the adopted budget.
The same way will also be used for the appropriation.
The entry to record the budget is simple. It is normally done on the first day of the fiscal year.
Estimated revenue is debited, Appropriations is credited, and fund balance is debited or credited
for the difference. Appropriation could be further subdivided- by month or other periods; these
subdivisions are called Allotments
Recording encumbrance helps the one managing the finances to know that money has been
committed to some purpose and is no longer available for expenditure. There is often a delay

between placing the purchase order and receiving the goods ordered. Therefore it is possible for
the 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 of resources, purchase orders are recorded in the
Encumbrance account. 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. The reason that encumbrance is only an estimate is that invoiced amounts sometimes
differ from purchase order amounts. For example a particular item may be out of stock, and
either backordered, or substituted by a similar item.
when a purchase orders for goods or services is issued to a supplier by one of those funds, a
journal entry similar to the following is prepared for the fund.
Encumbrance 150,000
Fund Balance Reserved for Encumbrances150,000
To record encumbrances for purchase order no. 001 issued to X Company.
When the suppliers invoice for the ordered merchandise or services is received by the
governmental unit, it is recorded and the related encumbrance is reversed as seen below:
Expenditures 180,500
Vouchers payable180,500
To record an invoice received from Wilson Company under purchase order no. 001
Fund Balance reserved for Encumbrances 150,000
Encumbrances 150,000
To reverse encumbrance for purchase order no. 001 issued to X company
Two journal entries are needed for encumbrances, one when the order is placed and another
when the goods are received. When the order is placed, encumbrance is debited and Reserve for
Encumbrance (a fund balance account) is credited. When the order is received, the entry is
reversed. As indicated by the example above the invoice amount may differ from the amount of

the governmental units purchase order because of such items as shipping charges, Sales Taxes,
and price changes.
Regardless of which types of annual budgets are used by government unit, the final budget
adopted by the governmental unit’s legislative body will include estimated revenue other
financing sources, appropriations and other financing uses. If the estimated revenue and other
financing sources of the budget exceed appropriations and other financing uses (as required by
law for many governmental units), there will be budgetary surplus, if vice-versa, there will be
budgetary deficit.
3.4 Accounting for General Fund and Special Revenue Fund
Illustration
Below is the Balance Sheet of town of X General fund on June 30, year 5 and the annual budgets
adopted for the year ended June 30, year 6.
Town of X General Fund

Balance Sheet June 30, year 5
Assets
Cash ....................................................................1,600,000
Inventory of supplies................................................400,000
Total Assets 2,000,000
Liabilities and Fund Balance
Vouchers payable ................................................. 800,000
Fund balance:
Reserved for encumbrance 400,000
Unreserved and undesignated 800,000 1,200,000
Total liabilities and fund balance 2,000,000
Below are the approved budgets by the town council for the fiscal year ended on June 30, year 6.
Estimated revenues:
- General property taxes............................... 7,200,000
- Licenses and permits .......................... 400,000

- Charges for services ......................... 500,000

- Fines and for fits ............................... 300,000
- Miscellaneous revenues ........................ 200,000 8,400,000
Estimated other financing sources (transfer from EF) 100,000
Appropriation:
- General government .......................... 4,700,000
- Public safety .......................... 1,900,000
- Health and welfare .......................... 1,100,000
- Culture and recreation ...................... 400,000 8,100,000
Estimated other financing uses (transfer to DSF) 100,000
* The journal entry to record the annual budget for the town of X General fund on July 1 year 5
was as follows:
Estimated revenues 8,400,000

Estimated other financing sources 100,000
Appropriations 8,100,000
Estimated other financing uses 100,000
Budgetary fund balance 300,000
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 Othe Financing uses are memorandum accounts, useful for
control purposes only, that will closed after issuance of year-end financial
statements for the general fund.
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 resource
Debt service
Intergovernmental expenditures
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
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.

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
Under the modified accrual basis of accounting, revenues not susceptible to accrual is 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 taxes in the amount of 130,000 were uncollectable.

Allowance for uncollectable current taxes 130,000
Property taxes receivable- current 130,000
To write off receivables for property taxes those are uncollectable
The forgoing journal entry represents a shortcut approach. In an actual situation, uncollectible
property taxes first would be transferred together with estimated uncollectible amounts, to the
Taxes Receivable- Delinquent ledger account from the Taxes Receivable- 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 3,150,000 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 vouchered 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
previously recorded encumbrances no longer necessary. Accordingly 3,550,000 of encumbrances

is reversed. Encumbrances of 50,000 (3,600,000 - 3,550,000) remain outstanding.
6. Billings for services and supplies received from enterprise fund and internal service fund
totaled 300,000 and 200,000 respectively.
Payable (Due) to Enterprise fund 300,000
Payable (Due) to Internal Service fund 200,000
To record billings for services and supplies received from other funds.
Explanation- Billings from other funds of the governmental unit are not voucher for payment
as are billings from outside suppliers. Instead billings from other funds are recorded in a separate
liability ledger account. the related debit is to the expenditure accounts if the billings are for
Quasi- external transaction , such as providing services and supplies.
7. Cash payments on vouchers payable totaled 7,700,000. Cash payment to the Enterprise fund
and the Internal service fund were 250,000 and 140,000 respectively.
Vouchers payable 7,700,000
Payable to Enterprise fund 250,000
Payable to Internal service fund 140,000
Cash 8,090,000
To record payment of liabilities during the year
8. The town of X general fund made an operating transfer of 110,000 to the debt service fund
for the matured principal and interests.
Other financing uses 110,000
Cash 110,000
To record transfer to debt service fund for maturing principal and interest on general obligation
serial bond
Explanation- The other financing uses ledger account is debited because the payment to the debt
service fund is an operating transfer rather than quasi- external transaction.
9. A payment of 400,000 in lieu of property taxes and a subsidy of 100,000 were received
from the Enterprise fund.
Cash 500,000
Revenue 400,000

Other Financing Sources 100,000

To record payment in lieu of property taxes (400,000) and subsidy (100,000) received from
Enterprise fund.
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.

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- Dear Learner!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 of equipment during the year
ending June 30, year 7
Explanation- Dear Learner!The fund balance designated for replacement of equipment ledger
account is similar to a retained earnings appropriation of a business enterprise. It indicates that
the annual budget for the town of X General fund for the year ending June 30, year 7 must
include an appropriation of 250,000 for new equipment and estimated revenue for the proceeds
from the disposal of the replaced equipment. The designated Fund balance of 250,000 will be
closed to the unreserved and undesignated fund balance Ledger account on July 1, year 6, when
the annual budget for the year ending June 30 year 7 is recorded.
Trial balance at end of fiscal year for a General fund

Dear Learner!After all the forgoing journal entries (including the budget entry) have been
posted to the general ledger of the town of X General Fund, the trial balance on June, 30 year 6 is
as illustrated below.
Town of X General fund

Trial Balance
June 30, year 6
Account title Debit Credit
Cash 1,420,000
Allowance for Uncollectable Delinquent Taxes 10,000
Inventory of Supplies 500,000
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service Fund 60,000
Fund Balance Reserved for Encumbrances 50,000
Fund Balance Reserved for Inventory of Supplies 500,000

Fund Balance Designated for Replacement of Equipment 250,000

Unreserved and undesignated fund balance 450,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
Estimated Other Financing Uses 100,000
Revenues 8,480,000
Expenditures 8,000,000
Other Financing Uses 110,000
Encumbrances 50,000 .
Total 19,150,000 ,19,150,000
Financial statements for a General Fund
Dear Learner!The results of operation (i.e, net income or net loss) are not relevant for a General
Fund. Instead, two financial statements- a Statement of Revenues, Expenditures and Change in
Fund Balance and a Balance Sheet are appropriate.
Assuming that the total revenue for the town of X is composed of the following sources,
General Property Tax 7,060,000

Licenses and Permits 450,000
Charges for Services 470,000
Fines and Forfeits 310,000
Miscellaneous Revenue 190,000
Also assume that the total expenditures are composed of the following items.
General Government 4,590,000
Public safety 2,000,000
Health and Welfare 1,200,000
Culture and Recreation 210,000
Town of X General fund

Statement of Revenues, Expenditures and Change in Fund Balance

for the Year ended June 30, 19x6
Budget Actual Variance-Favourable
Revenues: (Unfavourable)
General Property Tax 7,000,000 7,060,000 60,000

Licenses and Permits 400,000 450,000 50,000
Charges For Services 500,000 470,000 (30,000)
Fines and Forfeits 300,000 310,000 10,000
Miscellaneous Revenue 200,000 190,000 (10,000)
Total Revenues 8,400,000 8,480,000 80,000
Expenditures:
General Government 4,700,000 4,590,000 110,000
Public Safety 1,900,000 2,000,000 100,000
Health an Welfare 1,100,000 1,200,000 (100,000)
Culture and Recreation 400,000 210,000 190,000
Total Expenditures 8,100,000 8,000,000 100,000
Excess of Revenue over Expenditures-

Other Financing sources (Uses):
Operating Transfers In 100,000 100,000
Operating Transfers Out (100,000) (110,000) (10,000)
Excess of Revenue and O.F.S.-
Over Expenditures and O.F.U. 300,000 470,000 170,000
Add: Fund Balance, July 1, 19x5 1,200,000 1,200,000 .
Fund balance June 30,19x6 1,500,000 1,670,000 170,000
Town of X General Fund

Balnce Sheet,
June 30, Year 6
Assets
Cash 1,420,000


Less: Allowance for Uncollectable Taxes 10,000 560,000
Inventory of Supplies 500,000
Total Assets 2,480,000
Liabilities
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service fund 60,000
Total Liabilities 810,000
Fund Balance:
Reserved for Encumbrance 50,000
Reserved for Inventory of Supplies 500,000
Designated for Replacement of Equipment 250,000
Unreserved and Undesignated 870,000 1,670,000
Total Liabilities and Fund Balance 2,480,000
Closing Entries for a General Fund

After the financial statements have been prepared for the town of X General fund, the budgetary
and actual revenues, expenditures and encumbrance ledger accounts must be closed to clear them
for the next fiscal year activities.
Unreserved and Undesignated Fund Balance 50,000
Encumbrances 50,000
To close encumbrance ledger account
Estimated Other Financing Uses 100,000
BY: GURMU.EPH
Budgetary Fund Balance Page 40
300,000
Estimated Revenues 8,400,000

Revenue 8,480,000
Expenditures 8,000,000
Other Financing Uses 110,000
Unreserved and undesignated Fund Balance 470,000
The forgoing journal entries do not close the Fund Balance Reserved for Encumbrance Ledger
account. Thus, the reverse represents a restriction on the fund balance on June 30 year 6 brcause4
the town of X General fund is committed in the fiscal year 7 to make estimated expenditures of
50,000 attributable to budgetary appropriations carried over from the fiscal year 6. if the fund
balance reserved for encumbrance account had been closed , the unreserved and undesignated
fund balance account would have been overstated by 50,000. The unreserved and Undesignated
Fund Balance Ledger account balance must represent the amount of the General fund’s Assets
that is available for appropriation for a deficit budget in fiscal year 7. When expenditures
applicable to 50,000 outstanding encumbrances on June 30 year 6 are vouchered for payment in
the succeeding fiscal year, the fund balance reserved for encumbrance ledger account is debited
for 50,000, the vouchers payable is credited for the amount to be paid, and the balancing debit or
credit is entered in the unreserved and undesignated fund balance account.
The budgetary accounts are closed at the end of the fiscal year because they are no longer
required for control over revenues, expenditures, and other financing sources and uses. the
amounts in the journal entry that closed the budgetary accounts were taken from the original
journal entry to record the budget at the beginning.

After june30, year 6, closing entry for the town of X general Fund are posted, the unreserved and
undesignated Fund Balance Ledger Account appears as shown below.
Unreserved and Undesignated Fund Balance
Date Explanation Debit Credit Balance

Year 5
June 30 Balance 800,000
--------------------------------------------------------------------------------------------
Year 6
June 30 Increase in the amount reserved 100,000 700,000
for Inventory of supplies
------------------------------------------------------------------------------------------------
30 Designation for replacement

of equipment250,000 450,000
---------------------------------------------------------------------------------------------
30 Close encumbrances ledger
account 50,000 40,000
---------------------------------------------------------------------------------------------
30 Close Excess of Revenue and
Other Financing Sources over
Expenditures and Other Financing
Uses 47,000 87,000
=========================================================
----------------------------------------------------------------------------------------------
Accounting for Special Revenue Funds

The distinguishing feature of a special revenue fund is that its revenues are obtained primarily
from tax and non-tax sources not directly related to services rendered or facilities provided for
use. Separate special revenue funds are established by governmental units as mandated by
legislative enactments. To account for the receipts and expenditures associated with specialized
revenue sources that are earmarked by law or regulation to finance specified governmental

operations. Ledger account titles, budgetary processes and financial statements for a special
revenue funds are similar to those of General funds.
Illustration
To illustrate the accounting for a Special Revenue Fund, Assume that on July 1, year 6, The town
council of the town of X authorized the establishment of a special Revenue Fund- its first such
fund- to account for Special Assessment against certain residents of the neighboring village of Y.
Because the property tax revenue of the town of X, which among other services financed street
cleaning and street light maintenance for residents of the town only, could not be used for such
services elsewhere, the town council authorized special assessment to finance comparable
services for the requesting residents of the village of Y. the town council adopted a budget for
the special revenue fund for the year ending June 30 year 7, providing for estimated revenues
(from the special Assessments) of 800,000 and appropriations for reimbursement to the General
fund for expenditures made by that fund for the services provided to the village of Y residents)
of 75,000.
Following are additional transactions or events of the town of X special revenue fund for the year
ending June 30 year 7.
1. On July 1, year 6, the town recorded the adopted budget in the books.
Estimated Revenues 800,000
Appropriations 750,000
To record the annual adopted budget for fiscal year ending June 30 year 7.
2. Special Assessments tax totaling 820,000 were levied which are to be paid in full in sixty
days.
Special Assessment Tax Receivable- current 820,000
Revenues 820,000
To record special assessments billed, all of which are estimated to be

collectable

3. Cash Receipts from Special Assessment Taxes of 820,00 were collected in full.
Cash 820,000
Special Assessment Tax Receivable- current 820,000
To record collection of special assessment tax in full during the year.
2. Of the cash receipts, 630,000 were invested in Treasury bills with face amount of 650,000.
The treasury bills mature on June 30 year 7 and were redeemed in full on that date.
Short Term Investments 630,000
Cash 630,000
To record acquisition of 650,000 face amounts of treasury bills,
Cash 650,000
Short Term investments 630,000
Revenues 20,000
To record receipts of cash for matured U.S treasury bills Maturity June 30,
3. Billings from the town of X General fund, requesting reimbursement of expenditures of that
fund, totaled 760,000; of that amount, 620,000 was paid to the General Fund by June 30,
year 7.
Payable to General Fund 760,000
To record billings from general fund for reimbursement of expenditures for

street cleaning and street light maintenance for residents of the village of Y
Payable to General Fund 620,000
Cash 620,000
BY: GURMU.EPH To records payments of general

Pagefund
44 during the year
6. On June 30, year 7, the town council of the town of x designated the fund balance of the
Special revenue fund (80,000) for reimbursement of the General Fund during the year ending
June 30, year 8.
Unreserved and Undesignated fund balance 80,000
Fund Balance Designated for -
Reimbursement of General Fund 80,000
To designate the entire fund balance for reimbursement of General Fund during
Dear Learner!Because of the 760,000 billings of the town of X General Fund to the Special
Revenue Fund were for reimbursement of General fund expenditures, the general fund credited
its expenditures ledger account in the journal entry in which it debited receivable from Special
Revenue fund.
Closing Entries
Appropriations 750,000
Estimated Revenues 80,000
To close budgetary ledger accounts.
Revenue 840,000
Unreserved and Undesignated- fund balance 80,000
To close revenue and expenditures ledger account

Financial Statements for a special revenue funds
Dear Learner!The financial statements for a special Revenue funds is the same as that of a
General fund-a statement of Revenues, Expenditures and change in Fund Balance and a Balance

sheet. Following are the financial statements for the town of X Special Revenue fund for the year
ended June 30, year 7:
Town of X - Special Revenue Fund

Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, year 7
Favourable
Budget Actual Variance (Unfavourable)

Revenues:
Special Assessments 800,000 820,000 20,000
Other - 20,000 20,000
Total Revenues 800,000 840,000 40,000
Expenditures
Reimbursement of General Fund-
expenditures 750,000 760,000(10,000)
Excess of Revenues over Expenditures . . .
(Fund Balance End of year)------------- 50,000 80,000 30,000
Town of X Special Revenue fund

Balance Sheet
June 30, year 7
Assets
Cash ----------------------------------------------------------------------- 220,000
Payable toGeneral fund ------------------------------------------------- 140,000
Fund Balance Designated for Reimbursement of General fund ----- 80,000
Total Liabilities and Fund Balance ------------------------------- 220,000

UNIT 4: CAPITAL PROJECT FUNDS
4.1 Introduction
The previous unit indicates that long lived assets such as office equipment, government vehicles
and other relatively minor items may be acquired by a governmental unit by expenditures of
appropriations of the general fund or one or more of its special Revenue funds. Long-lived assets
used by activities accounted for by a governmental fund types are called general fixed assets.
Acquisitions of General Fixed Assets that require major amounts of money ordinarily cannot be
financed from general fund or special revenue fund appropriations. Major acquisitions of general
fixed assets are commonly financed by issuance of long term debt to be repaid from tax
revenues, or by special assessments against property deemed to be particularly benefited by the
long lived asset. Other sources financing the acquisitions of long lived assets include grants from
other governmental units, transfers from other funds, gifts from individual or organizations or
by a combination of several of these sources. if money received from these sources is restricted,
legally or morally to the acquisition or construction of specified capital assets, it is recommended

that a capital projects fund be created to account for these resources to be used for major
construction or acquisition projects.
4.2 General Outline of Capital Projects Fund
Capital Projects Funds (CPF) account for financial resources to be used for the acquisition or
construction of major capital facilities (other than those financed by proprietary funds & trust
funds). Examples of major capital facilities are Administration Buildings, Civic Centers and
libraries etc. these funds do not account for the acquisition of smaller fixed assets, such as
vehicles, machinery & office equipment which are normally budgeted for & recorded as
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.
Example

* Issuance of bonds for Br 500,000

1. Capital Projects Fund (CPF) - receives cash from bond offerings & uses cash to construct
fixed assets.
2. General Long Term Debt Account Group(GLTDAG) - accounts for matured General
Long Term Debt, at the maturity date, the liability is transferred to a DSF.
CPF
Cash 500,000
O.F.S Bond proceeds 500,000
3. GFAAG – accounts for fixed assets during & after construction.
* Construct new building
C.P.F
Cash 500,000
4. D.S.F. – services GLTD, making both interest & principal payments using money obtained
from tax levies on operating transfers from General Fund.
* Bond matures
GLTDAG
Bonds Payable. 500,000
Amt to Be Provided 500,000
DSF
* Operating transfer made from GF.
DSF
Bonds payable 500,000

BY: GURMU.EPHCash 500,000 Page 49
4.3 ESTABLISHMENT & OPERATION
C.P.F is usually established on a project-by-project basis, because legal requirements may vary
from one project to another. So the existence of the C.P.F as any other fund will depend on the
legal requirement & the need for good financial management.
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
4.4 FINANCING A CAPITAL PROJECT
Capital projects project obviously need large amount of financing. Typically source of financing
include;
- Long term debt issue proceeds

- Grants from other governmental units
- Transfers from other funds within the
A combination of more than one of those Intergovernmental grants, gifts, special taxes
&investment interests are considered as Revenues, whereas Inter Fund Transfers & Long Term
Debt issue proceeds are not revenues and are presented as Other Financing Sources and are
presented that way on the statement of changes.
Whether to have a separate capital fund for each project or to account for all capital funds for
each project or to account for all capital projects in one fund depends in part on what type of
financing involved. Different bond issues & different inter-governmental transfers might well
have different legal requirements & each might require a separate C.P.F. on the other hand if one
bond issue is used to finance several projects, a single fund may be both permissible advisable.
4.5 OTHER CONSIDERATIONS
4.5.1 Means of Acquisition

Accomplishment of capital acquisition or construction project may be brought about in one or
more of the following ways:
1. Outright purchase from fund cash
2. By construction, utilizing the governmental units own force
3. By construction, utilizing the services of private contractors
4. By capital lease agreement.

4.5.2 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.
4.5.3 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. The withheld portion is normally a contractual percentage of the
amount due on each segment of the contract.
This is to prevent the contractor from doing a poor quality work, especially in a rush to finish at
the end. Basically the entity will pay part of the final sum, and then have its own engineers come
and inspect the contractors work. if the contractors work passes the inspection, the balance of the
amount owed is paid. if the engineer finds poor quality or undone work, the contractor must then
correct the problem before the final retained sum is paid this amount withheld by the
governmental entity is known as retained percentage.
4.5.4 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 are 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
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.
4.6 ALTERNATIVE TREATMENT OF RESIDUAL EQUITY OR DEFICITS
If necessary expenditures & O.F.U are planned carefully & controlled carefully so that actual
does not exceed plans. Revenues & O.F.S of the C.P.F should equal or slightly exceed the
expenditures and other financing uses leaving a residual equity (surplus) and if long term debt
had been incurred for the purposes of the capital projects fund and under this case, There are
three possible options;
1. The balance could be transferred to the DSF, as residual equity transfer for retiring the debt,
which has been incurred for the purpose of the project.
2. If the residual Equity is were deemed to have come from grants or shared revenues restricted
for capital acquisitions or constructions, legal advice may indicate that any residual equity
may return to its source in proportionate amount or;

3. The balance might be retained for future maintenance purpose.
In some situations, in spite of careful planning and cost control, Expenditures and OFU of a CPF
may exceed its revenues and OFS resulting in a negative fund balance (deficit). If the deficit is
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.
4.7 BOND PREMIUMS, DISCOUNT AND ACCRUED INTEREST ON BONDS SOLD
Issuance of Bonds at a Premium

Bond premiums arise because of adjustments to the interest rates. The bond indenture
agreements usually specify that any bond premium is to be set-aside in the related DSF. This is
desirable because it remains the incentive to spend more on a project than is authorized merely
by raising additional cash by increasing the interest rate in the CPF. There are two ways of
accounting the bond proceeds and the associated premium.
1. The proceed including the premium could be recorded in the CPF as OFS-Bond proceeds
Cash 110,000
OFS- Bond proceeds 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 in the DSF.
C.P.F
O.F.U- operating transfer out 10,000
Cash 10,000
DSF
Cash 10,000
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

Dear Learner!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.
4.8 BOND ANTICIPATION NOTES PAYABLE
The “bond anticipation” description of the debt signifies an obligation to retire the notes from the
proceeds of the proposed bond issue The account is increased and decreased for the same reason
and in the same manner employed for Tax anticipation Notes Payable in General Fund.
4.9 INVESTMENTS
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 same 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.
4.10 ACCOUNTING FOR 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.
Any cash deficiency in the capital projects fund probably would be made up by a General fund;
this operating transfer would be credited to the other financing sources ledger account of the
capital projects fund and debited to the other financing uses account of the general fund. a capital
projects fund issues the same financial statements as General Fund-statement of revenues
Expenditures and change in fund balance and a Balance sheet. To reiterate, the assets constructed
with the resources of the capital projects fund are not included in that funds balance sheet. The
constructed plant assets are recorded in the governmental units general fixed assets account
group. Furthermore the bonds issued to finance the capital projects fund are not a liability of that
fund. Prior to maturity date or dates of the bonds, the liability is carried to the General Long
Term Debt Account Group.
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
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.

Fund Balance Reserved for Encumbrances 46,000,000
7. Orders were placed for materials estimated to cost 550,000.
Encumbrances 550,000
Fund Balance Reserved for Encumbrances 550,000
8. The materials previously ordered (Transaction 7) were received at a cost of 510,000.
a) Fund Balance reserved for Encumbrance 550,000
Encumbrance 550,000
b) Construction exp 510,000
9. In addition to the construction contract of transaction 6; 3,900,000 was incurred for

the services of the architects and engineers; of this amount 3,100,000 was paid.
Fund Balance Reserved for Encumbrances 3,900,000
Fund Balance Reserved for Encumbrance 3,900,000
Construction Expéditeur 3,900,000
Construction Payable 3,900,000

10. Received cash of 1,000,000 from the General fund as an operating transfer.
Cash 1,000,000
OFS- Operating transfers in 1,000,000
11. A partial payment of 10,000,000 was received from the state irrevocable Grants and
the General Fund loan was repaid with interest amounting to 10,000.
Cash 10,000,000
Bond Anticipation Notes Payable 500,000
Interest Expenditure 10,000
12. When the project was approximately half finished, the contractor submitted billing for a
payment of 12,000,000.
Construction Expéditeur 12,000,000
13. The contractor’s initial claim was fully verified and paid.
Cash 12,000,000

Town of X Library Capital Projects fund

Trial Balance
June 30, Year 6
Account Title Debit Credit

Cash 20,870,000
Short term investment-Treasury Bills 10,000,000
Due to DSF 300,000
Fund Balance Reserved For Encumbrance 32,270,000
Unreserved and Undesignated Fund Balance -
Revenues 20,000,000
OFS- Bond Proceeds 30,000,000
OFS- Operating transfers 1,000,000
Construction Expenditures 16,730,000
Interset Expenditures 10,000
Encumbrances 32,270,000 .
Total 84,880,000 84,880,000
Town of X library Capital Projects Fund

Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, year 6
Revenues:
Irrevocable State Grant 20,000,000
Expenditures:
Construction Expenditures 16,730,000
Interest Expenditure 10,00016,740,000
Excess of Revenue over Expenditure 3,260,000
Other Financing Sources(Uses)
OFS- Bond Issue Proceeds 30,000,000
OFS- Operating transfers in 1,000,00031,000,000

Excess of Revenue and OFS over Expenditure 34,260,000

Add: Fund Balance - July 1, Year 5 -
Fund Balance - June 30, Year 6 34,260,000
Town of X Library Capital Projects Fund

Balance Sheet
June 30, year 6
Assets
Cash 20,870,000
Short Term Investment- Treasury Bills 10,000,000
Total Asset 35,870,000
Due to DSF 300,000
Fund Balance:
Reserved for Encumbrance 32,270,000
Unreserved and Undesignated 260,000
________________________________________________________________________
Closing Entries
Revenues 20,000,000
OFS- Bond Proceeds 30,000,000
OFS- Operating Transfer 1,000,000
Construction Expenditure 16,730,000
Interest Expenditure 10,000
Unreserved and undesignated-
Fund Balance 14,260,000
Unreserved and Undesignated-

________________________________________________________________________
The following transactions related to the town of X Library Capital Projects Fund occurred
during the fiscal beginning July 1 Year 6 and ending June 30, Year 7.
14. Received 10,500,000 at maturity date of the Federal Government Treasury Bills.
Cash 10,500,000
Short Term Investment-Treasury Bills 10,000,000
Revenues 500,000
15. The Library CPF transferred the premium on the Bond to the DSF
Due to DSF 300,000
Cash 300,000
16. A progress billing of 32,270,000 was received from the contractors for the final work
done on the project. as per the term of the contract, the town withhold 10% of the
billing.
a) If Encumbrances are Re-established at the beginning of the fiscal period (July 1,Year 6)
-Entry on July 1, year 6 would be;
- Then, the entry for the current transaction would be
Construction Expenditure 32,270,000
b) If there is no re-establishment of encumbrance (this is not very common in CPF)

On July 1, year 6;
Construction Payable-
17. All outstanding liabilities of the town of X Library CPF are paid except remaining
balance.
Cash 30,353,000
18. Received the remaining balance from the Irrevocable State Grant.
Cash 5,000,000
________________________________________________________________________
Statement of Revenues, Expenditures and Change in Fund Balance
For the year ended June 30, Year 7.
Revenues 500,000
Add: Unreserved and Undesignated Fund Balance July 1, Year 6 1,990,000
Fund Balance June 30, year 7 2,490,000

Balance Sheet
June 30, Year 7
Assets
Cash 5,717,000
Construction Payable- Retained Percentage 3,227,000
Unreserved and Undesignated Fund Balance 2,490,000
________________________________________________________________________

Closing Entry
Revenue 500,000
Fund Balance 500,000
________________________________________________________________________
The following transactions and events take place after the construction has finished
19. The Retained percentage balance has been paid to the contractor because the work
has been performed as per the term of the contract.
Construction Payable- 3,227,000
Retained Percentage
Cash 3,227,000
20. The town council decides to transfer the residual fund balance of the Library CPF to
the DSF.
Residual Equity transfer out 2,490,000
Cash 2,490,000
================================================================
Closing Fund Balance
Unreserved and Undesignated- 2,490,000
Fund Balance
Residual Equity transfer out 2,490,000


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GOVERNMENTAL & NOT-FOR-PROFIT ACCOUNTING

UNIT 1: OVERVIEW OF GOVERNMENTAL AND NOT-FOR PROFIT

1.2 MEANING AND DEFINITION

It is very important to understand the meaning of fund in this context. In normal

BY: GURMU.EPH Page 1

1.3 CLASSIFICATION OF NOT-FOR-PROFIT ORGANIZATIONS

Generally, organizations could be classified either based on their objectives or their

E.g. - Regions of the federal government of Ethiopia are:

Tigray Harar, Dire Dawa South nations &

- Local governmental units are

BY: GURMU.EPH Page 2

3. HEALTH CARE PROVIDERS

4. VOLUNTARY HEALTH & WELFARE ORGANIZATIONS (VHWO)

5. OTHER N.F.P ORGANIZATIONS

BY: GURMU.EPH Page 3

1.4 DISTINGUSH CHARACTERISTICS OF GOVERNMENTAL UNITS & NON-

1. Organization to serve the society (citizens)

2. General absence of profit motive

5. Stewardship for resources

1.5 USES AND USERS OF FINANCIAL REPORTS OF GOVERNMENTAL UNITS

ii) External - who are the society /citizenry

GASB Reporting Objectives

BY: GURMU.EPH Page 6

Financial reports of Non-profit organizations- Voluntary health and welfare organizations,

Government Financial Reporting

II) Financial section

BY: GURMU.EPH Page 7

1.6 SIMILARITIES AND DIFFERENCES BETWEEN GOVERNMENTAL AND

BY: GURMU.EPH Page 8

1.7 SOURCE OF ACCOUNTING STANDARDS

BY: GURMU.EPH Page 9

Authority to establish accounting principles (financial reporting standards for non-profit

BY: GURMU.EPH Page 10

2.2 STATEMENT OF THE PRINCIPLES

2.2.1 Accounting & Reporting Capabilities (principle #1)

A government accounting system must make it possible both

2.2.2 Fund Accounting System (Fund defined) (principle # 2)

BY: GURMU.EPH Page 11

2.2.3 Types of Funds (Principle # 3)

BY: GURMU.EPH Page 12

II. PROPRIETARY FUNDS

5. Enterprise Funds- to accounts for operations

BY: GURMU.EPH Page 13

BY: GURMU.EPH Page 14

departments. Fiduciary funds are expendable as well as non-expendable depending upon

2.2.4 Number of Funds (Principle # 4)

BY: GURMU.EPH Page 15

2.2.6 Valuation of Fixed Assets (PRINCIPLE # 6)

2.2.7Deprecation of Fixed Assets (PRINCIPLE # 7)

1. Depreciation is not recognized in as expenditure in governmental funds because it is not a

2.2.8 Basis of Accounting (PRINCIPLE # 8)

BY: GURMU.EPH Page 16

2. Proprietary fund account is virtually the same as for profit account.

BY: GURMU.EPH Page 17

2.2.9 Budget and Budgetary Accounting (Principle # 9)

1. Budgeting is the process of allocating of resource to meet unlimited demands.

2.2.10 Financial Reporting (Principal # 10)

Interim financial reports