Fund Balance Statement

Financial Reporting
Fund Financial Statements
Reporting of Expenditures/Expenses
Expenditures
GASB Codification Chapter 1600.116 defines expenditures as decreases in net financial
resources. In governmental funds, the recognition of expenditures occurs in accordance with the
modified accrual basis of accounting. Expenses incurred in proprietary funds are recognized
using the accrual basis of accounting. Therefore, significant differences exist between the
recognition of expenditures in governmental funds and the recognition of expenses in proprietary
funds.
In governmental funds, expenditures are usually recognized in the accounting period in which
the goods or services are received and the liability for payment is incurred. However, in
instances in which current financial resources are not reduced as a result of the incurrence of a
liability, expenditure is not recorded. A common example is the liability for compensated
absences (e.g., employee sick and vacation pay). Such liabilities result from current services
received from employees; however, the payment of the liabilities usually does not occur until a
future date. As a result, compensated absences relating to employees whose salaries are
accounted for in governmental funds are not recorded as expenditures and liabilities of the fund
until the due date for payment of the compensated absences. GASB Interpretation No. 6 clarifies
the guidance for recognizing certain liabilities and expenditures in governmental funds, including
general long-term indebtedness, such as compensated absences. The matured portion of long-
term indebtedness, to the extent it is expected to be liquidated with expendable available
financial resources, should be recorded as a fund liability and expenditure. The unmatured
portion of the long-term indebtedness represents a general long-term liability to be presented in
the government-wide financial statements.
Types of Expenditures and Accounting Treatments
The major types of expenditures are operating, capital, debt service, and intergovernmental
charges described as follows:
 Operating expenditures for governmental agencies include a wide range of

expenditures. Often, the largest portion relates to payroll and related employee benefits.
The modified accrual basis of accounting requires that proper accruals be made for the
amount of unpaid salaries and related benefits earned by employees at year-end because
these liabilities will be paid early in the next reporting period. (The other types of
operating expenditures should be accounted for in the same manner, with the recording of
a liability when the goods or services are received and necessary accruals made at year-
end.)
 Capital expenditures relate to the acquisition of capital assets. Such expenditures may
be recorded in the general fund, special revenue funds, or capital projects funds,
depending on the source of funding. Purchases of personal property, such as furniture and
equipment, are usually recorded as expenditures in the general fund if they are financed
from operating budgets or in the general fund or special revenue funds if they are
financed from grants. Major projects, such as the construction of a school building
financed by the proceeds of debt, should be accounted for in a capital projects fund. Costs
associated with acquiring capital assets in governmental funds are recorded as capital
outlay expenditures when the liability is incurred, usually on receipt of the related asset.
 Debt service expenditures represent the payment of principal and interest needed to
service debt. Such payments are usually recorded as expenditures in the debt service fund
on the due date. The general fund may also be used if a debt service fund is not required.
The modified accrual basis of accounting provides that accruals for interest are not
usually allowed. When funds have been transferred to the debt service fund in
anticipation of making debt service payments shortly after the end of the period (no more
than 30 days), it is acceptable to accrue interest and maturing debt in the debt service
fund in the year the transfer is made. This option is available only if monies are legally
required to be set aside in a debt service fund and if used on a consistent basis.
 Intergovernmental charges relate to the transfer of resources from one school district to
another, to or from other local governments, or to or from the state. Examples of such
charges include contracted instructional services between public schools, other local
governments, or state-operated schools and certain transfers of resources associated with
state and local funding (e.g., incremental costs associated with wealth redistribution).
Such expenditures are accounted for in the general fund using the modified accrual basis
of accounting. Payments between school districts and fiscal agents of cooperative
services arrangements (e.g., joint instructional or servicing agreements) are also
considered intergovernmental charges.
In addition, transfers result in the reduction of a fund's expendable resources, but they are not
classified as expenditures. A transfer is a legally authorized movement of monies between funds
in which one fund is responsible for the receipt of funds and another fund is responsible for the
actual disbursement. In a transfer, the disbursing fund records the transaction as "other financing
uses" of resources and not as an operating expenditure, whereas the fund receiving the transfer
does not record the receipts as revenue but rather as "other financing sources" of funds.
Expenses
Expenses are defined as the outflows or expiration of assets or the incurrence of liabilities during
a period from providing or producing goods, rendering services, or carrying out other activities
that constitute the entity's primary operations.
Proprietary funds recognize expenses using the accrual basis of accounting (i.e., when the related
liability is incurred) without regard for the timing of the payment. This recognition criterion is
consistent with the following guidelines discussed in Financial Accounting Standards Board
(FASB) Statement No. 5. Although FASB Statements do not represent authoritative guidance for
governments, the discussion is useful in classifying expense transactions within proprietary
funds.
 Associating cause and effect. Some expenses (such as the cost of goods sold) are
recognized on recognition of revenues that result directly and jointly from the same
transactions or other events as the expenses.
 Systematic and rational allocation. Some expenses (such as depreciation and insurance)
are allocated by systematic and rational procedures to the periods during which the
related assets are expected to provide benefits.
 Immediate recognition. Many expenses (such as selling and administrative salaries) are
recognized during the period in which cash is spent or liabilities are incurred for goods or
services that are used up either simultaneously with acquisition or soon after.
As examples, the major types of governmental expenditures are accounted for differently in
proprietary fund expenses as follows:
 Capital. Capital asset acquisition in proprietary funds is accounted for using the flow of
economic resources method. Amounts disbursed for the acquisition of capital assets are
not recorded as an expense. Instead, the appropriate property, plant, or equipment asset
account is debited on the purchase. Depreciation expense is recorded to reflect the
allocation of the cost of the assets to operations over the service life of the asset.
 Debt service. Principal payments on debt do not represent expenses for proprietary
funds, but rather are recorded as a reduction of the obligation. Payments of interest
represent expenses to be accounted for on the accrual basis of accounting. Accrual of
interest at year-end is usually necessary to reflect the proper amount of expense for the
period.

Fund Balance Statement

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Financial Reporting

Fund Financial Statements

Types of Expenditures and Accounting Treatments

 Operating expenditures for governmental agencies include a wide range of

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