The General Fund and Special Revenue Funds. Chapter 3

The General Fund and

Special Revenue Funds

Learning Objectives

 Discuss similarities & differences between GF and SRFs

 Explain MFBA used for these funds

 Understand and prepare budgetary entries

 Analyze common journal entries for transactions, including interfund activity

 Prepare adjusting & closing entries

 Define special items and extraordinary items

General Fund

 Used to account for all financial resources that are not restricted to specific purposes or otherwise required to be accounted for in another fund.

Special Revenue Funds

 Used to account for general government financial resources that are restricted by law or contractual agreement to specific purposes other than debt service or major capital projects.

 _{Exist as long as the government has}

MFBA

 Measurement Focus (MF) is on current financial resources – what is expendable  Basis of Accounting (BA) is modified

accrual – recognition occurs for

 Revenues when measurable & available

 Expenditures when underlying liability is incurred,

except for long-term debt principal and interest payments (when due)

Basic Accounting Equation

Assumptions for this Chapter

 Transactions do not address budgetary accounting, reporting, & control issues  Accounts maintained on GAAP basis

during the year

Second assumption rarely holds in practice, but makes instruction easier and more

Illustrative Entries

 Other revenues

 Orders and contracts

 Salary expenditures

 Interfund activity

 Short-term borrowing

 Extraordinary and special items

#1 Property Tax Levy

Taxes Receivable – Current Allowance for Uncollectible

Current Taxes

Revenues – Property Taxes

200,000

3,000 197,000

Property Tax Levy

 Notice use of allowance account in entry

 No bad debts expense – remember, a

governmental fund does not use expenses

 Records revenue at the amount government

expects to collect

 This form of entry assumes net amount will be available – other options discussed in Chapter 5

Other Revenues

 Some revenues will be accrued when services are provided

 Other revenues may be recognized only when cash is received – no allowance necessary since all of revenue received

#2 Other Revenues

Accounts Receivable

Allowance for Uncollectible Accounts Receivable Revenues

36,000

1,000 35,000

#3 Orders and Contracts

Expenditures

Vouchers Payable

29,900

Orders and Contracts

 Preceding slide showed the general journal entry

 However, the details are in the subsidiary ledger effects – not demonstrated in slide show

 Most accounts are for current operating expenditures

 Last account affects capital assets, resulting in accounting in GCA-GLTL accounts

GCA-GLTL Accounts

GCA (Equipment) GLTL Net Assets

#5 Salary Expenditures

Expenditures

Vouchers Payable

29,900

Salary Expenditures

 Comprise about 75% of city General Fund expenditures and 85% of school board

General Fund expenditures

 Effective control over these expenditures is essential

Interfund Activity

 Nonreciprocal transactions

 Interfund reimbursements  Interfund transfers

 Reciprocal transactions

 Interfund services provided  Interfund loans

Interfund Reimbursements

 Underlying event:

 Transaction initially recorded in one fund

 Should have been accounted for and reported in

a different fund

 May also be used to distribute costs from one from to others

 Will not separately reported in financial statements

#6 Interfund Reimbursement

Receiving fund [Page 75]

Due from SRF Expenditures

Paying fund (not in textbook)

Expenditures

Due to General Fund

1,500

1,500

1,500

Interfund Transfers

 Usually involve moving assets (cash or inventory) from one fund to another

 Do not involve requirement or expectation or subsequent repayment

 May also result from one fund providing services to another without charging for those services

Common examples

 GF resources transferred to DSF for principal and interest payments

 GF resources transferred to CPF to pay for government’s

portion of capital project

 _{SRF resources transferred to GF to finance expenditures for}

which SRF resources are restricted

 GF resources transferred to EF to provide initial permanent financing

 _{Residual assets of CPF or DSF transferred upon completion}

of purpose of fund

 PF resources transferred to other funds to subsidize operations

#7 Principal & interest

#8 Routine unpaid transfer

#9 Transfer to EF

Transfer to EF Cash

6,000

6,000

Assets Liabilities Net Assets

+$6,000 _{+$6,000 (Transfer)} Effect on EF

Interfund Services

 Defined as “sales and purchases of goods and services between funds for a price

approximating their external market value  Accounting:

 Seller fund sells goods or services to external

party (recognizes revenues)

 Buyer fund purchases same goods or services

from external entity (recognizes expenditures or expenses)

#10 Interfund services

Expenditures Due to ISF

30,000

30,000

Assets Liabilities Net Assets

+$30,000 _{+$30,000 (Revenues)} Effect on Stores ISF

Interfund Loans

 One fund loans cash to another

 Transaction does not change Fund Balance  Reporting

 Lender fund recognizes a receivable  Receiving fund recognizes a liability

Interfund Loan Terminology

 Lender Fund

 Short-term loan – Due from

 Long-term loan – Advance to (normally causes

Reservation of Fund Balance)

 Receiving Fund

 Short-term loan – Due to

#11 Payment of short-term loan

#12 Loan repayment

Short-term external borrowings

 Usually made with banks

 Receipt of loan and principal repayment do

not affect Fund Balance; however,

payment of interest does affect Fund Balance

#13 Short-term borrowing

Short-Term Notes Payable

20,000

#14 Partial loan repayment

Expenditures [Interest]

Cash

5,000 600

Extraordinary & Special Items

 Extraordinary item

 Used by FASB & GASB

 Event is not under control of management and is

both (1) unusual in nature and (2) infrequent in

occurrence

 Special Item

 Unique to GASB

 Event is under control of management and is

#15 Special item

Cash

Special Item – Proceeds from Sale of Beach Property

8,000

8,000

GCA

(Land) GLTL Net Assets

– $2,000 – $2,000

#16 Extraordinary item

Cash

Extraordinary Item – Insurance Recovery Proceeds

5,750

5,750

GCA

(Land) GLTL Net Assets

– $6,000 – $6,000

Other Transactions and Events

 Preceding entries were for events common to all governments

 Following entries may or may not occur for every government

#17 Collecting taxes and other

receivables

Cash

Taxes Receivable – Current Accounts Receivable

175,000

160,000 15,000

Reclassify taxes as delinquent

Taxes Receivable – Delinquent Taxes Receivable – Current #19 Allowance account

Allowance for Uncollectible Taxes – Current

Allowance for Uncollectible Taxes – Delinquent

40,000

3,000

40,000

#20 Other Revenues

Cash

Revenues

205,000

#21 Ordering goods & services

No journal entry required until goods or services are received.

#22 Collecting delinquent accounts

Taxes Receivable – Delinquent Revenues

20,200

20,000 200

#23 Purchase of investments

Cash

10,000

10,000

The GASB has issued two standards in the last few years addressing

accounting for investments: #31 and #40. #31 addresses marking investments to fair value. #40 addresses risk issues related to the investment. These and related issues are discussed in Chapter 5.

#24 Accruing other expenditures

(Equipment) GLTL Net Assets

$23,000 $23,000

#25 Paying amounts owed

Cash

360,000

#26 Interfund transaction: Payment to

ISF of balance owed

Due to Internal Service Fund Cash

22,500

#27 Collect accounts receivable

Cash

Accounts Receivable

13,000

#28 Write-off an account

Allowance for Uncollectible Accounts Receivable

Accounts Receivable

400

#29 Correcting an error

Correction of Prior Year Error Vouchers Payable

300

Using the CPYE Account

Some wonder about using the Correction of Prior Year Error Account (CPYE)

 Since the previous year’s expenditure accounts

have been closed, it can’t be charged to that account

 The use of the Unreserved Fund Balance account is an option, but doing so would hide the error

 Besides, remember to where the CPYE account will be closed: Unreserved Fund Balance

Year-End Adjustments

 Revenue Adjustments

 Interest on investments and delinquent taxes  Unbilled charges for services

 Unrestricted intergovernmental grants that are

due but haven’t been received

 Expenditure Adjustments

 Interest on short-term debt  Accrued payroll

A1 Interest & Penalties

Interest & Penalties Receivable Allowance for Uncollectible

Interest & Penalties

Revenues – Interest & Penalties

550

50 500

A2 Accrued interest on investments

Revenues

400

A3 Accrued interest on short-term debt

Expenditures

Accrued Interest Payable

250

Closing Entry Process

 Close the operating accounts and update Unreserved Fund Balance

 Close subsidiary revenue and expenditure accounts

C Close the Actual

Transfer from SRF

Special Item – Proceeds from Sale of Beach Property

Extraordinary Item – Insurance Recovery Proceeds Unreserved Fund Balance Expenditures

Transfer to DSF Transfer to EF

Correction of Prior Year Error

438,100 10,000 8,000 5,750 51,300 399,250 5,000 6,000 300

Reserve for Encumbrances

 Reserves indicate that portion of Fund Balance not available for appropriation  Reserve for Encumbrances indicates

amount that must be appropriated next

#30 Outstanding orders

Reserve for Encumbrances

20,000

General Fund Financial Statements

 Balance Sheet

 Statement of Revenues, Expenditures, and Changes in Fund Balance

 ___ Revenues, Expenditures, and Changes in Fund Balance – Budget-to-Actual

 Statement of . . ., if part of the Basic Financial

Statements

 Schedule of . . ., if placed in Required

Balance Sheet



Standard Report Format

Current Assets = Current Liabilities + Fund Balance



Fund Balance presented in two sections

 Reserved – with specific reserves identified

 Unreserved – which may be further divided into

 Designated – with specific designations identified  Undesignated

Reserves of Fund Balance

 Indicate that some amounts are not available for appropriation or expenditure

 Creation requires action by governing council

 Common reserves:

 Encumbrances  Petty Cash

 Inventories  Advances

Long-Term Loan

Advance to SRF Cash

“The Reserve”

Unreserved Fund Balance

Reserve for Advance to SRF

5,000

5,000

5,000

Unreserved Fund Balance

 Available for appropriation and expenditure  May be designated for some specific

purpose

 Normally done by Finance Director  Less formal than a reserve

Statement of Revenues, Expenditures,

& Changes in Fund Balance

 May be referred to as the operating statement

 Format specified by the GASB (there had been optional formats prior to 1999)

Notes on the “Statement”

 Beginning Fund Balance shown “as previously

reported” and than corrected for error

 Transfers reported separately from revenues and expenditures

 Special item and extraordinary item reported

between Other Financing Sources (Uses) and Net Change in Fund Balance

 Statement explains changes in fund balance for the year

Classification of Expenditures

 Function

 Organizational Unit (including Department and Subunit)

 Activity

 Object Class  Character