1.

Chapter Outline
1. What are government expenditures and expenses?
2. Salary and wages, pensions etc
3. Capital Expenditure
4. Claims and Judgments
5. Materials and Supplies
6. Prepayments
7. Capital Expenditure
8. Interest on Long Term Debts
9. Summary
2. What are Government Expenditures and
Expenses?

Are they same or different?

Expenditure – are decreases in net financial resources whereas expenses are

reduction in overall net assets. Government expenditure relates to the
overall acquisition including capital assets.

Expenses - are generally recognized when resources are expensed

(consumed) when resources are used.

• Government uses modified accrual accounting system to account for

expenditure.
• Government recognize an expenditure in a government fund when the
fund’s net expandable available resources are reduced,
• Government recognizes expenditure when it pays cash for goods or
service upon receipt or accrues ( gives accounting recognition) to a
government fund liability.
GASB No 6. Exception:
Government may delay recording of the fund liability and its associated
3. Expenditure – Salaries and Wages
3.1 Salary and Wages.
Employees are paid fortnightly. These
are accounted for using the accrual basis of
accounting in the current period as:
Journal: DR CR
Payroll expenditure xxx
Accrued Wages & Salary xxx

3.2 Vacation Leave

Employee leave entitlements should be accrued

as a liability using the accrual basis of accounting
in the current period as:
Journal: DR CR
Leave pay entitlements xxx
Wages Payable xxx
3.3 Pensions

Pensions are paid especially to retirees as refunds for their contributions to

superannuation funds under a defined plan.
In PNG the Superannuation Act 2000 stipulates that the contribution as
follows;
• Employee share – 5% of gross salary
• Employer share – 8% of gross salary

A total of 12 % of gross salary is mandatory for each employer to deduct and

pay directly to superannuation such as Nasfund ( private sector), Nambawan
Super (public sector)
Journal: DR CR
1) Payroll expenditure xxx
Employer Superfund payable xxx
To record employer superannuation contribution due to employees for the
period.

2) Superannuation Payable xxx

Cash xxx
To record employer superannuation payments for employees for the period
4. Claims and Judgments

Claims and judgments against governments include those arising from;

•Injuries to employees (workers compensations)
•Negligence of government employees (malpractice by city hospitals, auto
accidents,
•Police brutality
•Contractual disputes with suppliers
•Employment practices.

GASB Standards Note 10 states that claims and judgments should be

recognized when available before the financial statements that;
a) it is probable that an asset has been impaired or a liability has been
incurred,
b) The amount of loss can be reasonably measured. (liquidated loss)
5. Materials & Supplies

Relates to things that the government acquires to be used. Such expenditure

includes things like office supplies, road maintenance materials, spare parts
etc.
Accounting issue:
When should the transaction be recorded?
a) Timing of the expenditure – Should the supplies/materials be recorded
when acquired or when they use them?
b) Reporting of the asset – Should inventory be reported as a government
fund asset even though it has been expended?

• Use either purchase or consumption method to record.

i) Purchases method – GASB permits recognition of inventory as
expenditure when items are purchased.
Journal:
DR CR
Supplies expenditure xxx
Cash/Accounts payable if credit xxx
To record office supplies inventory paid in cash.

ii) Consumption method – GASB permits recognition of inventory as

an asset and expense it when consumed.
Journal:
DR CR
Supplies inventory xxx
Cash/Accounts payable if credit xxx
When consumed:
Supplies expenditure xxx
Supplies inventory xxx
 6 Prepayments

Relates to things that the government paid for in advance such as insurance.
Same accounting issues (like supplies) arise.
Accounting issue:
When should the transaction be recorded?
a) Timing of the expenditure – Should the prepaid insurance be recorded
when paid or when expired?
b) Reporting of the asset – Should prepayments be reported as a government
fund asset even though it has not yet been expended?

• GASB recommends consumption method to record and recognizes the

unused prepaid amount in the balance as an asset.
i) Consumption method – GASB permits recognition of prepayments
as an asset and expense it when consumed.
Journal:
DR CR
Prepaid Insurance xxx
Cash xxx
When consumed:
Insurance expenditure xxx
Prepaid Insurance xxx
7. Capital Expenditure
 What are capital Expenditure ( Capex)?

Refer to the purchases of fixed assets such property, plant, vehicles and
computer equipment.

 Accounting issues arise as to how the costs will be

spread over several years. i.e.., (In business, the assets
are capitalized and depreciated to the life of the asset)
GASB recommends that government funds accounting aims to show the
inflows and outflows of the current financial resources and
whether or not in accordance with the legally approved budget.
Government must budget and appropriate the resources for
capital expenditure in the period they are to be paid for, not
when they will be used.
Journal:
DR CR
Capital Assets Expenditure xxx
Cash xxx
To record acquisition of capital assets i.e., plant, vehicles and
equipment
8. Interest on Long Term Debt
What is interest? It is a major government expenditure for loan
servicing comprising of interest and principal.

What are the accounting issues?

Because government funds do not record long term liabilities, when a loan is
established, the increase in cash is recognized as an asset and the debt (liability)
is recognized as bond proceeds (other financing source- income).

1) Establishment of loan;
Journal: DR Cr
Cash xxx
Bonds proceeds xxx
To record funds received on loan funds for road construction.

GASB – Interest and Principal on long-term debt should not be accrued in government
funds until the period in which they are due. Until then, they are not current
liabilities, they will not require the liquidation of expendable available resources.
2) Interest Payable due:
When the first loan interest is due and payable, government process the
following entry,
Journal: Dr Cr
Debt service, interest expenditure xxx
Matured interest payable (bonds) xxx
To record interest due on government bonds issued.
3) Loan retirement :
At the expiry of the loan term, the following journal is processed to record the
debt retirement.
Journal: Dr Cr
Debt service - Principal expenditure xxx
Matured bond payable xxx
To record maturity of the government bonds issued.
9. Summary and Exceptions
Ledger Accounts
1) Vacations, sick leave, other
compensated absence
2) Pensions expenditure
3) Claims and judgment
4) Inventory Supplies
5) Prepaid expenses
Nature of Accounting
Are not accrued unless they will be
liquidated in the current financial
resources
Reported equal to the governmental
funds for the year, not, as in the
government- wide statements and the
notes, equal to a required contribution
that may be more or less then the cash
contribution.
Are reported as expenditure only in so
far as they will be paid out in the
current financial resources
Accounted for using either the
purchases method or consumption
method used.
Such as prepaid insurance may be
accounted for using either the