CHAPTER THREE

Accounting for the General andSpecial revenue funds

3.1 Budgets as legal documents

Budgeting is the process of allocating scarce resource to unlimited demand, a
dollar and cents plan of operations for a specific period of time. As a minimum
requirement, such a plan should contain information about the types and
amounts of proposed expenditures, the purposes for which they are to be made,
and the proposed means of financing them.
Although practices are by no means uniform, budgeting and budgets typically
play a far greater role in the planning and control of governmental operations
than those of privately owned business.
The adoption of budget implies that decisions have been made, on the basis of a
planning process, as to how the unit is to reach its objectives. The accounting
system then provides assistance to the administrators in carrying out the plans
and in preparing the statement that permit comparison of operations with the
budgets.
Budget and budgetary accounts are required in general, special revenue fund
and in all other funds of the government. A governmental budgetary system
should be designed to fit its environmental factors, some of which may be
unique. Its system should provide a planning and control balance that is
appropriate to its circumstances

1|Page
2.2 General Fund and Special Revenue Funds
- The general fund and special revenue funds typically are to finance and account
for most “general government” activities of governments.
Example:- Police protection, fire protection, certain administration, school and street
maintenance.
- They are disclosed together because accounting and reporting for general and
special revenue funds are identical.
- The general fund is established at the inception of a government and exists
throughout the government’s life; where as special revenue funds exists as long as
the government has resources dedicated to specific purpose.
- In the typical case the resources of both types of funds are expended wholly or
almost wholly each year and replenished on an annual basis.
- Special revenue funds are established to account for financial resources allocated
by government as contractual or agreement to specific purposes.
- The general fund is used to account for all financial resources not allocated to
specifies purposes.
- Governmental funds account only for current financial resources cash,
receivables, marketable securities and if material, prepaid items and supplies
inventory. They do not account for plant and equipment because not normally
converted to cash.
- Funds in the governmental category account for only those liabilities to be paid
from fund assets.
3.2.1 Account Classification of Governmental Units Accounting
A) Balance Sheet Accounts:
1. Assets: - are financial resources account classification governmental units only
for cash, receivables, marketable securities and if material, prepaid items &
inventory.
2. Liabilities: - Only those liabilities incurred for normal operations that will be
liquidated by use of fund assets are included. Examples- Voucher payable (A/P).

2|Page
 3. Fund equity including fund balance and reserved equity:- The
arithmetic difference between fund assets and fund liabilities is called the fund
equity. Fund equity may be reserved. The portion of fund equity that is not
reserved is called fund balance. Residents of the governmental unit have no legal
claim on any portion of fund equity, so it is not equivalent to the capital section f
an investor owned entity. Accounting for fixed assets and long-term liabilities. A
clear distinction should be made between (a) Fund fixed assets and general fixed
assets (b) fund long-term liabilities and general long-term debt.
A. Fixed assets related to specific proprietary funds or trust should be accounted for
through those funds. All other fixed assets of a governmental unit should be
accounted for through the general fixed asset account group.
B. Long term liabilities of a proprietary funds, Special assessment funds and trust
funds should be accounted for those funds. All other unmatured general long-
term liabilities of the governmental unit should accounted for through the
general long-term debt account group.
N.B. Example:- Purchase of fixed assets with the financial resources of these funds
decrease their fund balance (general fund). Expenditures for fixed assets
have the same status with in these funds as expenditures for wages and
salaries, since fixed assets are not capitalized in the general or special
revenue fund; the same is true for general long-tem debt.
B) Operating Statement accounts
- In additional to the balance sheet accounts, the general fund and special revenue
funds account for financial activities during a fiscal year in operating statement
accounts classified as: revenues, other financing sources, expenditures and other
financing uses.
1. Revenue:- is an increase in fund financial resource other from inter fund
transfers and debt issue proceeds.
2. Other financial Sources:- are transfers in to a fund and debt issue proceeds
received by fund.

3|Page
 3. Expenditures:- is to tern that replaces both the terms costs and expenses used in
accounting for profit-seeking entitles. Expenditures are defined as decreases in
fund financial resources other than through interfund transfers.
4. Other financing uses:- are interfund transfers out of a fund.
N/B. In government fund types be recognized revenues and expenditures on the
modified accrual basis i.e. Revenue is recognized in the fiscal year in which they
are available to finance an expenditure. An expenditure is recognized when a
liability to be met from fund assets in incurred. All the operating statements are
closed to fund balances.
C) Budgetary Accounts
Budget is financial expression of plan
- The budgetary accounts are all temporary sub fund balance accounts and like the
operating statements accounts are closed to fund balance at year end.
1. Estimated revenue: - Provide budgetary control over revenues. The budget
revenue is debited as a controlling account and a subsidiary ledger is maintained
for each sources specified in the revenue budget.
- If a separate entry is to be made to record the revenue budgeted, the general
ledger debit to the estimated revenue control account is off set by a credit to fund
balance.
- Fund balance account, before a budget is recorded, would have normally a credit
balance representing the excess of fund assets over the total of liabilities and
reserved equity.
- After the revenue budgeted is record recorded, Fund balance represents the excess
of fund assets plus estimated revenues and other financing sources for period over
liabilities and reserves.
2. Appropriations:- When a budget is enacted by legislative branch, the
expenditure estimate become appropriation, both authorization to and limitation
upon the executive branch. In short appropriation is estimated expenditure.
3. Encumbrances:- Estimate budgetary amounts for goods on order/contracts

4. Estimated Financing sources other:-

4|Page
 5. Estimated other financing uses:-

Resources Inflows and Flows for government

- There are two resources inflows
1. Revenues
2. Other source inflows including transfers in proceeds of long term debt,
capital rease financing and donations from others
- There are two resources outflows
1. Expenditures
2. Other financing uses including transfer out.

Summary Afro Accounts

Comparison For Balance Sheet, Operating Statement & Budgetary Accounts
Assets = Liability + Fund equity

Assets A/c – Cash Accounts payable

- Receivable Accrued liabilities
- Investments
- Prepaid items
- Inventory Operating Statement Budgetary Accounts
- Revenues - Estimated revenue
- Expenditures – Appropriation
- Other financing sources – Encumbrances
- Other financing uses – Estimated other
financing sources
- Estimated other finance
uses

5|Page
3.3 Recording the Budget
- Using the budgetary accounts described earlier. Record the following Example:-
Assume the amounts shown below are the amounts that have been legally
approved as the budget for the general fund of a certain government unit for the
fiscal year ending December 31,2001. As of January 1.2001. the first day of the
fiscal year .the total estimated revenues should be record in the General fund
general ledger account group and the amounts expected to be recognized during
2001 form each revenue source specified spec9fied in the budget should be
recorded in the subsidiary ledger accounts An appropriate entry would be
General Ledger Subsidiary ledger
Dr Cr Dr Cr
1. Estimated revenue 1,277,500
Fund balance 1,277,500
Revenue ledger:
Taxes 882,500
Intergovernmental revenue 200,000
Licenses and permit 195,000
- The total appropriations and other financing uses legally budgeted for 2001 for
the general fund of the same governmental unit should also be recorded in the
general fund general ledger control accounts, and the amounts appropriated for
each function itemized in the budget should be recorded in subsidiary ledger
accounts. An appropriation entry using assumed budget amounts would be:

6|Page
 General Ledger Subsidiary ledger
Debit Credit Debit Credit
2. Fund balance 1,636,500
Appropriation 1,362,000
Estimated other financing use 274,500
Appropriation ledger:
General government 1,150,000
Public safety 212,000
Other financing uses ledger:
Inter fund transfer out to
Other funds 74,500
Inter-fund transfer out to
Component units 200,000
- If would, of course, be acceptable to combine the two entries illustrated above and
make one general fund entry to record estimated revenues, appropriations and
estimated other financing uses: in this case there would be a debit to fund balance
for $359,000 (the amount by which appropriation and estimated others financing
uses exceeds estimated revenue). Even if a single combined entry is made in the
general fund ledger accounts, that entry must provide for entry of the budgeted
amounts in each individual subsidiary ledger account as shown in the illustration
of the two separate entries.
Classifying Revenues in the Context of Fund Accounting
- In order for administrators to determine that proposed expenditures presented in
the appropriations budget can be financed by resources available under the laws
of budgeting executives, a revenue budget should be prepared. Revenue, in the

7|Page
 sense in which it is customarily used in government to budgeting includes all
financial resources inflows.
- Major revenue sources classes commonly used are:
1. Tax:- taxes are of particular importance because they provide a very portion of
the revenue of governmental units on all levels and they compulsory
contributions to the of government, whether the affected tax payer approves or
disapproves of the levy.
Example of taxes – property tax, sales tax, income tax, death and gift tax and interest
and penalties on taxes.
2. Licenses and Permits:- Includes revenues collected by a governmental unit
from individuals or business concerns for various rights or privileges granted by
the government.
3. Changes for Services:- Includes all charges for goods and services provide by
a governmental fund to enterprise funds, individuals and organization and other
governments. Examples- court Cost, Special Police service, waste collection
charges parking charges.
4. Miscellaneous Revenues:- Includes interest earning, rent and royalties, sa;e
of capital asset.

3.4 Accounting for Revenues

Recording Actual Revenue In General and Subsiding Ledger
Example:- The general ledger revenue account is a control accounts supported by
revenues subsiding ledger account kept in exactly the same detail as kept for the
estimated revenue subsiding ledger account. For example assume that general fund of the
government unit for which budgetary entries are illustrated in the proceeding section
collected revenue in cash during the month January from license and permits $13,200 and
intergovernmental revenue $61,900.
Further assume the estimated revenue for January were $195,000 licenses & permit
Record the actual revenue and subsidiary ledger.
General Ledger Subsidiary Ledger
Dr cr Dr Cr

8|Page
 Cash 75,000
Revenue 75,000
Revenues:
Licenses and permits 13,200
Intergovernmental revenue 61,900
- Comparability between estimated revenues subsidiary accounts and revenues
subsiding accounts is necessary so that periodically thought the fiscal year actual
revenues from each source can be compared with estimated revenue from the
source.
- Ledger

Name of Government Unit

Revenue Ledger
General Fund
Class: Licenses and Permits
Sub Closs
Date Item Reference Estimated Revenue Cr Balance
Revenue Dr Dr.(Cr)
2001 Budget Estimated J1 $195,000
January 1 Collection CR6 195,000
31 13,000 181,800

3.5. Accounting for encumbrances and Expenditures

Classifying for Encumbrances and expenditures in Context of Fund
Accounting
- When a purchase order has been issued it is important to record the fact that the
appropriation has been encumbered in the amount of the purchase order or
contract.

9|Page
 - The word encumbered is used, rather than the word expended because the amount
is only an estimate of the liability that will be incurred when the purchase order is
filled or the contract executed.
- Appropriation is an authorization is an authorization for administer to incur on
behalf of the government unit liabilities in the amount specified in the
appropriation statute.
- Encumbrance is a control account related to the appropriations control account
raw and to the expenditure account.
- Example:- Assume the governmental entity made purchase on early January
For general government $38,000
Public Safety $7,400
General Ledger Subsidiary Ledger
Dr Cr Dr Cr
Encumbrance 45, 400
Reserve for encumbrance 45,400
Encumbrance Ledger:
General government 38,000
Public safety 7400
- Reserve for encumbrances is used to record the second effect of issuing purchase
order and contracts the creation of an expected liability, same times the reserve
for encumbrance is called out standing encumbrances, is not control account the
balance of the account at the balance sheet date is reported as a reservation of
fund equity.
- When goods or services for which encumbrances have been recorded are received
and the supplier’s invoices are approved for payment, the account should record
the fact that appropriation have been expended, not merely encumbered and that
an actual liability, not merely an expected liability, exists.
General Ledger Subsidiary Ledger
Dr Cr Dr Cr
Reserve for Encumbrance 42,000
Encumbrance 42,000
Encumbrance Ledger:

10 | P a g e
 General government 35,100
Public Safety 7,300
Expenditures 42,400
Voucher payable 42,400
Expenditure ledger:
General Governmental 35,100
Public safety 7,300
 According to GASB transfer, revenue, expenditure and expense Account
classification principle expenditures should be classified by
1. Fund
2. Function or program
3. Organization unit
4. Activity
5. Character and
6. Objective
Identifying Allotments and Allocations Expenditure Control
Expenditure Control Technical and Recording
- A common device for regulating expenditure is the use of allotments. Allotments
may be described as an internally allocation of funds on a periodic basis usually
agreed up on by the department heads and chief executive.
- Allotments may be formally recorded in ledger accounts. This procedure might
being with the budgetary entry, in which unalloted appropriations would replace
appropriations.
General Ledger Subsidiary Ledger
Dr Cr Dr Cr
Estimated revenue 1,277,500
Fund balance 359,000
Unalloted appropriation 1362,000
Estimated other financing uses 274,500

11 | P a g e
 - If it is assumed that $342,000 is the amount formally allotted for the first period
the allowing entry could be made (amounts allotted for each function are shown
in the subsidiary ledger entries).
General Ledger Subsidiary Ledger
Dr Cr Dr Cr
Unalloted appropriate 342,000
Allotments 342,000
Allotment ledger:
General government 289, 000
Public safety 53,000
- Expenditure can be recorded periodically as reports are received from using
departments or divisions under the procedure, expenditures, Allotments and
unalloted appropriations are closed to fund balance at year end, usually in
combined entry.

12 | P a g e