Recognizing Expenditures in Governmental Funds

Chapter 5
Recognizing Expenditures in
Governmental Funds
Granof & Khumawala-6e
Chapter 5
The same prudence which in private life would forbid

our paying our own money for unexplained projects,
forbids it in the dispensation of public moneys.
President Thomas Jefferson
Chapter 5
Thought to Ponder: Chapter 5
Learning Objectives
Full accrual basis
Chapter 5
Accounting for different expenditures
Modified accrual basis
Types of interfund activities and how they are

reported
Other Financing Sources and Uses
Financial Statements
Government-wide F.S.
o Basis of Accounting: Full accrual basis
o Presents revenues and expenses from the perspective of the
entity as a whole and not of the individual funds.
o Basis of Accounting: Modified accrual basis

o Provides information relating to Inter-period equity
Chapter 5
Two types of financial statements:

Governmental Fund financial statements
The Codification asserts that the accrual basis is the

superior method of accounting for the economic
resources of any organization, and states that the
use of the accrual basis to the fullest extent
practicable is recommended.
GASB Codification, paragraphs 1600.102 through

1600.105.
Chapter 5
GAAP
Governmental Fund Statements
Basis of Accounting
o Modified accrual basis
All measurements are in accordance with

GAAP.
o Balance sheet
presents the funds resources at a particular
point in time.
o Operating statement
presents the net change in resources during a
particular period of time.
Chapter 5
Required Financial Statements
Modified Accrual Accounting
Available : Collectible within the current period or

soon enough thereafter to be used to pay liabilities
of the current period.
Measurable : Government is able to determine or

reasonably estimate the amount.
Chapter 5
Criteria : Measurable and Available
Expenditures vs. Expenses
Expenses
Definition: measure of costs expired or consumed during a
period
Reduction in net economic resources (overall net assets)
Used in Full Accrual Basis
-- i.e. Government-wide Statements
Definition: measure of fund liabilities liquidated with current

resources
Decreases net current financial resources (i.e. Fund Net
Assets)
Used in Modified Accrual Basis
-- i.e. Fund Financial Statements
Chapter 5
Expenditures
Expenditures
Expenditures recognized when cash is paid or fund

liability accrued* for goods/services received.
* next slide . . .
Governmental funds report only current liabilities

and not long-term liabilities.
Chapter 5
Closely tied to cash flows and near-cash flows
. . . liability accrued*
Revised Expenditure Definition:
o Exceptions include: Materials, Supplies, and Prepaid Items

Recognize based on either Purchases or Consumption
Basis
o Debt Service Expenditures on Government Long Term Debt
Recognize when Legally Due
o Pensions, Claims and Judgments, Compensated Absences
Recognize when Payable from Available Expendable
Financial Resources
o Capital Leases
Recognize based on Substance vs. Form Basis
NORM Recognize when FUND Liability is incurred
Chapter 5
o Decreases in net current financial resources (i.e. Fund Net

Assets) NOT resulting from transfers (and refunding
transactions)
10
Recognize the expenditure in the period in which it is

earned by the employee (provided the governments
obligation will be liquidated with expendable available
financial resources.)
May be earned in one fiscal year but paid in the next
Chapter 5
Salaries and Wages
11
General Fund
Wages and benefits expenditures
Accrued wages payable
Dr.
$40M
Cr.
40M
Government-wide: same (except for expense label).

Remember, no entries are made under government-wide.
There is only a conversion done on the Working Papers at the
end of the year.
Governmental fund vs. for-profit (full accrual) payroll accounting

similar, except expenditures, not expenses are recorded.
Example: Wages and related benefits of employees for the last
pay period in December 2013 were $40 million. Employees are
to be paid on January 6, 2014. The fiscal year ends December
31.
Chapter 5
Example 1
12
Example 2
Dr. Expenditures (for the full amount of payroll)
Cr. Liabilities (for withholdings from employees pay)
Cr. Cash for the amount paid to employees
GF General Journal
Expenditures--2013
Due to Federal Govt
Due to State Govt
Cash
Dr.
948,000
86,000
Cr.
49,000
713,000
The Subsidiary Ledger provides the details of the total expenditure as

follows:
General Government
178,000
Public Safety
480,000
Public Works
290,000
pay period for employees paid from the General Fund.
Chapter 5
Timbaktu City recognized its payroll for the most recent two week
13
Salaries and Wages (contd.)

Dr. expenditures for the employers payroll costs
(including employers share of FICA)
Expenditures Subsidiary Ledger:

Contributions for Retirement
Dr.
188,000
Cr.
188,000
188,000
Encumbrances usually are not recorded for recurring

expenditures such as payroll.
GF General Journal
Expenditures--2013
Due to Federal Govt.
Chapter 5
Cr. Liability to federal government.
14
7 Major differences
1) Compensated absences (Ch. 5 & 8)
2) Pension accounting (Ch. 10)
3) Claims and Judgments (Ch. 8)
4) Inventory accounting (Ch. 5)
5) Prepayments (Ch. 5)
6) Accounting for capital assets (Chs. 6 & 7)
7) Accounting for interest and principal (Chs. 6 & 8)
Chapter 5
Governments Vs. Business
15
(1) Compensated Absences (CA)

Overview
GASB standard:
o Vacation leave and compensated absences should be
accrued as a liability as the benefits are earned if BOTH the
following conditions are met:
Attributable to services already rendered and
Probable that compensation will occur (paid time off or
other means)
o Compensation is based on the salary/wage rate in effect

when the time off is taken.
Chapter 5
Earned in one period but often not paid until several

periods later (i.e. Its not current.)
Amount to be paid is often uncertain.
16
Until those periods, those liabilities are reported

ONLY in the schedule of long-term obligations.
Vacation pay expenditures and related fund

liabilities should be recognized in the periods in
which they are due.
Chapter 5
(1) Vacation Leave
17
Example 1-a
Government-wide: (no real entry here either)

But this will be the conversion at year end.
Dr.
Cr.
Vacation pay expense
300,000
Accrued
vacation payable 300,000
No entry in the governmental funds
Chapter 5
Example: City employees earned $300,000 in vacation leave

they did not take in 2013. The leave vests and can be taken
at any time up to retirement.
18
Example 1-b
Example: City employees earn $8 million in vacation leave. Of this
amount, they are paid $6 million in 2010 and defer the balance until
future years.
$6M
$6M
The $2 million deferred until future periods should be reported in a

schedule of long-term obligations.
Government-wide statements (no real entry here either).
But this will be the conversion at year end.
DR
CR
Vacation Pay expense $8M
Cash (or Wages Payable)
$6M
Accrued Vacation Pay 2M
Chapter 5
CR
Governmental fund DR
Vacation pay expenditure
Cash (or Wages Payable)
19
(2) Sick Leave
It should be recorded ONLY when expected to be

paid to employees upon their resignation or
retirement.
GASB states that sick leave is recognized as a

liability only if it is probable that the employer will
compensate the employees for the benefits through
cash payments conditioned on the employees
termination or retirement.
Chapter 5
Beyond the control of both the employee and the

employer.
20
Example 2-a
Government-wide*: Same rules apply. Only the $140,000 paid

needs to be charged as an expense.
*No actual journal entry is made. But this will be the conversion at
year end.
Governmental fund DR
CR
Sick leave expenditure
$140,000
Cash
$140,000
The city will not have to compensate employees for leave not taken
as a termination benefit. It should charge as an expenditure only
the amount that was liquidated with expendable financial resources.
It need not report a liability even in the schedule of long-term
obligations.
Chapter 5
Example: City employees earned $170,000 in sick leave but were

only paid for $140,000. The leave accumulates but does not vest.
21
Government-wide: (again no actual journal entry is made)
1M
DR
Sick leave termination benefit expense $1M
Accrued Sick Leave
Example: A city pays for its employees unused sick leave up to

thirty days only if they terminate at least after 10 years of service.
In 2013, the city had the following estimates:
Sick leave earned = $12 mil;
Payments in the future to employees = $8 mil
Payments to 10-year employees upon termination = $1mil
Amount that will not be paid = $3 mil
Governmental fund:
No entry is required. The city recognizes a liability only
for the $1 million to be paid in termination benefits. Assuming that
those termination benefits are not paid in the current year, it is
recognized in the schedule of long-term obligations
Chapter 5
Example 2-b
CR
22
After a specified term of service, employees may be

granted a paid leave.
They are offered to benefit both the employee and
the employer in the future, not the past.
The employees are required to perform other
activities that will enhance their job-related abilities
during their time off.
GASB standard:
o Accounting depends on the purpose of the leave
Activities to enhance their job-related skills
--Account for in the period the leave is taken
Compensated unrestricted time off
--Liability is accrued during the period the leave
is earned.
Chapter 5
(3) Sabbatical Leave
23
Sabbatical leaves need not be recognized as a liability if it is

a reward for past service (i.e. it is for unrestricted time off).
It need not be accrued if it constitutes merely a change in
assigned duties (e.g. research instead of teaching).
Government-wide:
Same.
City teachers are entitled to sabbatical leaves of six

months every 7 years for research and renewal.
The 2013 share of leave costs to be taken in the
future was $300,000.
Governmental Fund:
Chapter 5
Example 3-a
24
Definition: Amount of money paid to retired or

disabled employees.
If the Government makes the required contribution
to the pensions in full
-- amount recorded = amount of contribution.
GASB Standard:
oThe expenditure should be the amount that will
be liquidated with expendable available financial
resources.
Chapter 5
Pensions Overview (Ch 10)
25
GASB Std. #10, Claims and Judgements, para. 53. (also

FASB Std. # 5)
o Liability accrued if:
Probable that Asset Impaired/Liability Incurred by
Balance Sheet date
Loss can be reasonably estimated
Expenditure amount:
o Recognize in the governmental fund only the portion of
liability that is normally to be Liquidated with Available
Expendable Financial Resources
o Liability recorded at face value.
Balance of liability is in the Schedule of LT Obligations
o No expenditure recognized
o Expense is recognized in the government-wide statements
at the time the loss liability first satisfies the FASB No. 5
criteria. (probable and estimatable)
Chapter 5
Claims and Judgments (CJ)

Overview (Ch 8)
26
(4) Materials and Supplies--Overview
Unlike businesses, governments do not acquire

inventories with the intention to resell them.
o Instead, they use it to carry out day-to-day
operations.
Two Primary issues pertaining to governmental funds
are:
o Timing of the expenditure
o Reporting of the assets
Chapter 5
Are not expendable available financial resources.
27
Overview (contd)
Each method assumes periodic rather than

perpetual inventory accounting
All purchases are debited to Expenditures
The Inventory of Supplies account is updated at
year-end as an adjusting entry
Two methods of accounting available

o Consumption Method
o Purchases Method
Chapter 5
Accounting for Inventory
28
Cr.
5,000
Consumption Method. Assume the following data:

Beginning inventory
$ 20,000
Purchases during year
150,000
Available for use
170,000
Ending inventory
(15,000)
Amount consumed
$155,000
Adjusting Journal Entries:
Dr.
Expenditures--2010
$5,000
Inventory of Supplies
Fund Balance - Reserved for Inventories 5,000
Fund Balance nonspendable
Chapter 5
Example 1 Consumption Method
5,000
29
the same data:

$ 20,000
150,000
170,000
(15,000)
$155,000
Adjusting Journal Entries:

Dr.
Cr.
Fund Balance-nonspendable
$5,000
Inventory of Supplies
5,000
(Note that the Expenditures account is not affected by
the adjusting entry)
Purchases Method. Assuming

Beginning inventory
Purchases during year
Available for use
Ending inventory
Amount consumed
Chapter 5
Example 2 Purchases Method
30
Supplies expense (not expenditure) would be

debited.
No need for inventory reserve.
Government-wide statements:
Should be reported on a consumption basis.
Chapter 5
Materials and Supplies (contd)
31
Example 3
Encumbrances
Reserve for encumbrances
Reserve for encumbrances
Encumbrances
Accounts Payable
Cash
Dr.
$4
Cr.
$4
$3.5
$3.5
$3
$3
Common Entries*:
Chapter 5
In 2013 the City ordered supplies that cost $4 million, received

supplies that cost $3.5 million, paid for supplies that cost $3
million and used supplies that cost $3.3 million.
* Common under both Consumption and Purchases method

32
Consumption method:
Supplies Inventory
Accounts payable
Supplies expense
Supplies Inventory
Fund balance (unassigned)
Fund balance -nonspendable
DR
CR
$3.5
$0.2
$0.2
$3.5
$3.5
$3.3
$3.3
$0.2
Chapter 5
Purchases method:
Supplies expenditure
$3.5
Accounts Payable
Supplies inventory
Fund balance-nonspendable
Example 3 (contd)
$0.2
33
Government-wide: Must use consumption method.
(5)
Prepayments:
Overview
GASB standards:
Fund Statements:
o Only consumption method must be used
If services extend over more than one accounting

period
o Need not be allocated between or among accounting periods
o GASB does not distinguish between current and long-term
prepayments.
--i.e. the unused portion of insurance policy for two or more
years would be reported as an asset the same as a oneyear policy
Government-wide statements:
Chapter 5
o Either purchases or consumption method can be used
34
Example 1
Consumption method:
Prepaid insurance
Cash
DR
$300
CR
$300
$300
$300
Purchases method:
Insurance expenditure
Cash
Chapter 5
On June 15, 2013 the city acquired and paid for an insurance
policy that cost $300,000. The policy covers the two-year period
beginning July 1.
Government-wide: Must use consumption method.

35
Provide services in periods beyond those in which they are

acquired.
GASB standards:
General capital assets are not specifically related to activities
that are reported in proprietary or fiduciary funds.
General capital assets are neither reported on governmental
fund balance sheets nor depreciated on governmental fund
statements of revenues, expenditures, and changes in fund
balance.
Governments reports general capital assets in the period
requiring the outflow of expendable available financial
resources.
Accounting for capital assets
Fund Statements
--Expenditure as purchased
Government-wide statements
--Capitalize and Depreciate (like business)
Chapter 5
Capital Assets Overview (Ch 6)
36
Example 1
DR
$3
CR
$3
Government-wide*: Would capitalize and depreciate

*This is not a real entry but conversion is made at the end of the
year.
General Fund:
Expenditure-acquisition of capital assets
Cash
Chapter 5
The city acquired a computer system for all its departments at a cost
of $3 million, and paid in cash. It has a useful life of three years.
37
Principle:
Recorded in schedule of long-term obligations.
If a principal repayment extends beyond a fiscal
year, expenditures are recognized entirely in the
year the payments are due.
Interest:
Major expenditure for many governments.
Source of payments are either general revenues
or revenues dedicated for debt service revenues.
The government transfers cash from general fund
as payments are made.
Chapter 5
(7) Interest and Principal on Longterm Debt: Overview
38
Nonexchange Expenditures:
Overview
Nonexchange expenses
o Grants would be recognized as expenses in the same period in
the government-wide as in the fund statements.
Modified accrual statements
o Revenues must be available for expenditure before they can be
recognized.
Nonexchange expenditures
o Should generally be recognized with their revenue counterparts
-- (i.e.) when the recipient of the grant has satisfied all eligibility
requirements.
Chapter 5
GASB Standards (applicable to both modified and full

accrual statements):
39
General Fund: In as much as the clinic cannot use the funds

until 2014, the grant is subject to a time requirement. The
clinic need not recognize either a liability or an expenditure until
2014, when the time requirement is satisfied.
Government-wide: Same.
Example: In December 2013, the city approves a

$300,000 grant to a not-for profit health clinic. The
funds are to be paid in 2014 out of funds budgeted
for that year and are intended to support the clinics
activities in 2014.
Chapter 5
Example 1
40
Example 2
Governmental Fund:
Grant expenditure $400,000
Cash
$400,000
Government-wide*: Same, but expense instead of expenditure.

* This is not a real entry but conversion is made at the end of the
year.
--Purpose restrictions have no impact on the timing of either

expenditure or revenue recognition. The state must recognize
an expenditure as soon as it expends the funds and the county is
eligible to spend them:
Chapter 5
Example: In Dec. 2013 the city awards a not-for profit clinic

$400,000 for the acquisition of emergency communications
equipment. Payment is made at the time the award is announced.
The clinic is permitted to use the funds upon receipt, but intends
to use them in 2014.
41
Government-wide*: Same, but expense instead of expenditure.

* This is not a real entry but conversion is made at the end of the
year.
Example: In Dec. 2013, the city awards a not-for profit $200,000 for
the acquisition of emergency communications equipment. The
grant is to be paid as the organization incurs and documents
allowable costs. In 2014 the organization submits claims for
$150,000 of which the city pays $125,000. The city expects to
pay the $25,000 balance of claims submitted in Jan 2015 and the
$50,000 balance of the grant by June 2015.
--- The not-for- profit is eligible for the award only as it incurs and
documents allowable costs. In 2014, the city became eligible for
$150,000 of the grantthe amount that the state should
recognize as an expenditure.
General Fund:
Grant expenditure
$150,000
Cash
$125,000
Grants payable
25,000
Chapter 5
Example 3
42
Example 4
Explanation: Until eligibility requirements for the grant have been

met by incurring expenditures for the intended purpose, an
exchange transaction it is reported as Deferred Revenue
(a liability).
The entry in the special revenue fund is:

Dr. Cr.
Cash
$100,000
Deferred Revenue
$100,000
Chapter 5
Assume a grant of $100,000 is received at the

beginning of the fiscal year from the federal
government to operate a counseling program for
troubled youths.
43
Deferred Revenues
$75,000
Revenues
$75,000
(This amount would also be recorded in the Revenue
detail account in the Revenue subsidiary ledger).
Assume that during the year the Counseling Program

expended $75,000 for costs related to youth counseling,
thus meeting the eligibility requirement to expend grant
resources. The entries would be:
Dr.
Cr.
Expenditures
$75,000
Vouchers Payable
$75,000
Chapter 5
Example 4 (contd)
44
Interfund Transfers (Ch. 6-9)
(b) Nonreciprocal: Equivalent of nonexchange

transactions.
(a) Reciprocal: Equivalent of exchange

transactions
Chapter 5
Two types of interfund activity:
45
Accrual basis recommended to the fullest extent

practicable.
2 criteria must be met before revenues are recognized
in governmental funds:
o Resources must be Measurable and
o Available
Governmental fund expenditures are defined as
decreases in net financial resources.
Expenses are outflows or consumption of overall net
assets.
Nonexchange transactions in the governmental fund
are accounted for symmetrically to nonexchange
revenues.
Grants are recognized as expenditures when all the
requirements are met.
Chapter 5
Summary
46

Recognizing Expenditures in Governmental Funds

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Recognizing Expenditures in Governmental Funds

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Chapter 5

Granof & Khumawala-6e

Granof & Khumawala-6e

The same prudence which in private life would forbid

Thought to Ponder: Chapter 5

Full accrual basis

Accounting for different expenditures

Granof & Khumawala-6e

Modified accrual basis

Types of interfund activities and how they are

Granof & Khumawala-6e

o Basis of Accounting: Modified accrual basis

Two types of financial statements:

The Codification asserts that the accrual basis is the

Granof & Khumawala-6e

GASB Codification, paragraphs 1600.102 through

Governmental Fund Statements

All measurements are in accordance with

Granof & Khumawala-6e

Required Financial Statements

Modified Accrual Accounting

Available : Collectible within the current period or

Granof & Khumawala-6e

Measurable : Government is able to determine or

Criteria : Measurable and Available

Expenditures vs. Expenses

Granof & Khumawala-6e

Definition: measure of fund liabilities liquidated with current

Expenditures recognized when cash is paid or fund

Granof & Khumawala-6e

Governmental funds report only current liabilities

Closely tied to cash flows and near-cash flows

o Exceptions include: Materials, Supplies, and Prepaid Items

Granof & Khumawala-6e

NORM Recognize when FUND Liability is incurred

o Decreases in net current financial resources (i.e. Fund Net

Recognize the expenditure in the period in which it is

Granof & Khumawala-6e

May be earned in one fiscal year but paid in the next

Salaries and Wages

Government-wide: same (except for expense label).

Granof & Khumawala-6e

Governmental fund vs. for-profit (full accrual) payroll accounting

The Subsidiary Ledger provides the details of the total expenditure as

Granof & Khumawala-6e

pay period for employees paid from the General Fund.

Salaries and Wages (contd.)

Expenditures Subsidiary Ledger:

Encumbrances usually are not recorded for recurring

Granof & Khumawala-6e

Cr. Liability to federal government.

Granof & Khumawala-6e

Governments Vs. Business

(1) Compensated Absences (CA)

Granof & Khumawala-6e

o Compensation is based on the salary/wage rate in effect

Earned in one period but often not paid until several

Until those periods, those liabilities are reported

Granof & Khumawala-6e

Vacation pay expenditures and related fund

(1) Vacation Leave

Government-wide: (no real entry here either)

Granof & Khumawala-6e