CH 17

Advanced
Accounting
Jeter ● Chaney
Introduction to Fund
Accounting
1
Prepared by Sheila Ammons, Austin Community College
Learning Objectives
• Distinguish between a nonbusiness organization and a
profit-oriented enterprise.
• Explain the role of fund accounting.
• Distinguish among the concepts of revenues, expenses,
and expenditures as used in profit-oriented entities and
as used for expendable fund entities.
• Understand the classification of revenues and other
resource inflows for fund accounting.
• Understand the classification of expenditures and other
resource outflows for fund accounting.
2
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Learning Objectives
• Describe the critical events in the use of financial
resources of an expendable fund.
• Explain how capital expenditures are recorded in an
expendable fund.
• Understand the role of a general fund.
• Contrast the consumption and the purchases methods of
accounting for inventories (and other prepaid items).
3
Fund Accounting
Fund Accounting
Accounting for nonbusiness
organizations.
Nonbusiness Organizations Business Enterprises

Economic Entities  Earn a return on investment.
Provide socially desirable  Operate in a competitive
service without regard to market.
 Face liquidity concerns.
financial gain.
4
Classification of Nonbusiness Organizations
Five Major Classifications
– Governmental units.
– Hospitals and other health care providers.
– Colleges and universities.
– Voluntary health and welfare organizations.
– Other nonbusiness organizations (trade associations,
professional associations, museums, religious
organizations, etc.)
5
Distinctions between Nonbusiness Organizations
and Profit-Oriented Enterprises
• Distinctions
– Absence of primary goal to earn a profit.
– No equity interests.
– Seldom finance through charges to individuals who
benefit from the service.
– Rely on political action or fund-raising campaigns.
– Income determination model generally not
applicable.
– Restrictions or limitations on use of resources.
LO 1 Nonbusiness organizations versus profit-oriented enterprises.
6
Standards for Nonbusiness Organizations

7
Standards for Nonbusiness
Organizations
GASB Conceptual Framework: Concept Statements
Number Title
1 Objectives of Financial Reporting
2 Service Efforts and Accomplishments
3 Communication Methods
4 Elements of Financial Statements
5 Amendment of Statement Number 2
6 Measurement of Elements of Financial Statements

8
Fund Accounting
•Fund Accounting
–Designed primarily to meet internal reporting and
control objectives.
–Provides a basis for determining the fiscal
responsibility and status of the organization.
•Fund Entity Classification
– Expendable – Basic fund accounting concepts.
– Proprietary – Business type activity.
– Fiduciary - Agent or trustee.
LO 2 The role of fund accounting.
9
Fund Accounting
Expendable Fund Entities
Financial resources dedicated to a specified use.
Examples - Capital Projects or Debt Service fund.
Resources consist of cash and claims to cash.
Resources - Claims against resources = Fund balance.
Measurement focus is on flow of current financial resources.
Accounting
Model
LO 3 Differences in applications of revenue, expense, and expenditures.

10
Fund Accounting
Restricted and Unrestricted Fund Entities
• Classification usually applicable to nonbusiness
organizations other than governmental units.
• “Restricted” refers to resources that bear a legal
restriction as to use imposed by parties outside the
organization.
• “Unrestricted” refers to current financial resources that
are available to carry out the primary or general
activities of the organization at the discretion of the
governing board.

11
Fund Accounting
Proprietary Fund Entities
• Activities that are similar to business enterprises.
• Examples:
– Electric or water utility by a municipality
– Rental of real estate by religious organization.
• Focus on determination of net income, financial
position, and cash flows.

12
Fund Accounting
Fiduciary Fund Entities
Trust and Agency funds:
• Trust Fund – The government acts as trustee for an
individual or organization.
– Pension trust fund.
• Agency Fund – Accounts for resources of taxes, bonds,
and other receipts held for individuals, outside
organizations, and/or other funds.

13
Fund Accounting
Budgetary Fund Entities (Governmental Funds)
• Approved resource flows are incorporated into annual
budgets.
• Budgeted expenditures (that are enacted into law) are
referred to as appropriations.
• Approved budget may be recorded in the accounting
records.
• Budgetary account integration is useful in the control
and administration of fund resources.

14
Fund Accounting
Basis of Accounting
Basic Financial Statements
Government-Wide Governmental Fund (expendable)

 Nonfiduciary activities.  Current financial resources
 Short- and long-run concept.
information.  Modified accrual basis of
 Economic resources accounting.
measurement concept.  Revenues recognized when
 Accrual basis of accounting. measurable and available.
 Expenditures recorded when
liability is incurred.
15
Fund Accounting
Question
When used in fund accounting, the term “fund” usually
refers to
a) A sum of money designated for a special purpose.
b) A liability to other governmental units.
c) The equity of a municipality in its own assets.
d) A fiscal and accounting entity having a set of self-
balancing accounts.

16
Fund Accounting
Classification of Revenues
Classified by Fund and Major Revenue Source
Major Sources of Revenue
 Property taxes  Sales of property
 Income taxes  Charges for services
 Sales and excise taxes  Interest earned on loans and
 Gift and inheritance taxes investments
 Fines and penalties From federal, state, or local units:
 Gifts and donations  Grants
 Forfeits  Shared revenues
 Licenses and permits  Payments in lieu of taxes
17
LO 4 Classification of revenues.
Fund Accounting
Other Financing Sources
• Debt issue proceeds are accounted for as “other
financing sources.”
– Classify separately from revenue.
• Interfund operating transfers are accounted for as
“other financing sources,” or “uses.”
– These transfers do not represent an increase in
expendable financial resources of the organization as
a whole.
18
LO 4 Classification of other resource flows.
Fund Accounting
Recognition of Revenue (Expendable Funds)
• Revenue is ordinarily not recognized until it
1) can be objectively measured and
2) is available to finance expenditures of current period.
• Property taxes usually meet both criteria when levied.
– Available in the period levied
• Provide a basis for obtaining cash from tax
anticipation notes
• Usually collected early in the subsequent period and
thus are available to finance current period operations.
19
Fund Accounting
Recognition of Revenue (Expendable Funds)
Revenue recognized when measurable and available.
When Recognized?
Property Taxes Levied
Income Tax and Sales Tax Returns are filed with payment
Fines and Forfeits Collected
Sales of Property Time of sale
Pledges Time of pledge
Grants May or may not at time authorized
20
Fund Accounting
Classification of Expenditures and Other Resources
Outflows
Match
Function Drug Control
Character Public Safety
Activity Fire or Police Department
Object Class Current Operating
Organizational Unit Supplies or Salaries
LO 5 Classification of expenditures.
21
Fund Accounting
Transfers to Other Funds
• Do not represent decreases in the expendable financial
resources of the organization as a whole.
• Classified separately from expenditures for financial
reporting purposes.
22
Fund Accounting
Fund Balance and Classification
GASB Statement No. 54:
–Significantly changed how fund balances are reported on
governmental fund financial statements.
–Applies to all governmental funds: General, Special
Revenue, Debt Service, Capital Projects, and
Permanent.
–Does not affect the government-wide or accrual-based
statements presentations.
–Does not change the amount of total fund balance on any
fund statements.
LO 6 Use of financial resources.

23
Fund Accounting
GASB Statement No. 54:
 Fund balance is reported from the perspective of the
underlying resources within the fund.
 Fund balances are determined using a hierarchy of fund
balance classifications
• based upon the extent to which governments are bound
by constraints on resources reported in the funds.
• For all governmental funds other than the general fund,
any remaining positive amounts are classified as
nonspendable, restricted, or committed.

24
Fund Accounting
 Nonspendable: Includes amounts that cannot be spent
because they are either
• Not in a spendable form (inventories or prepaid items)
• Legally or contractually required to be maintained intact
(principal of a permanent fund)
 Restricted: Constraints placed on the use of resources are

either
• Externally imposed by creditors (debt covenants)
• Grantors, contributors, or laws or regulations (of other
governments)

25
Fund Accounting
 Committed: Amounts that can be used for specific
purposes subject to constraints imposed by formal action
of
(1) state’s highest level of decision-making authority
(State Legislature) or (2) City Council ordinance.
 Assigned: Amounts constrained for the intent to be used for
a specific purpose by a governing body or official that
has been delegated authority to assign amounts.
 Unassigned: Residual classification for the general fund –
the only fund that can have a positive unassigned fund
balance.

26
Fund Accounting
Recognition of Expenditures
Appropriation Encumbrance Expenditure
Authorized to Purchase Order or Receipt of Goods

Spend Contract or Services
Encumbrances and expenditures are

classified on the same basis (by fund, Disbursement
function, organizational unit, activity,
Payment (can
character, or object class) as precede, coincide, or
appropriations. follow the expenditure)
27
Fund Accounting
Question
Authority granted by a legislative body to make
expenditures and to incur obligations during a fiscal year
is the definition of an
a) Appropriation.
b) Authorization.
c) Encumbrance.
d) Expenditure.

28
Fund Accounting
• Exercise 17-3: (partial) Listed are transactions of the
Town of Jackson.
– A contract was signed with an independent company
to do the trash collecting for the year. The contract
price was $96,000.
– The first monthly bill of $8,000 was received from
the trash collector.
– The $8,000 bill was paid.
• Required: Prepare the journal entries needed in the
records of the General Fund for these transactions.
29
Fund Accounting
Exercise 17-3: 1. A contract was signed with an independent
company to do the trash collecting for the year. The contract price
was $96,000.
1. Encumbrances 96,000
Fund Balance – Assigned (encumbrances) 96,000
30
Fund Accounting
Exercise 17-3: 2. The first monthly bill of $8,000 was received
from trash collector. 3. The $8,000 bill was paid.
2. Expenditures 8,000
Contracts payable 8,000
Fund Balance – Assigned (encumbrances) 8,000

Encumbrances 8,000
3. Contracts payable 8,000

Cash 8,000
31
Fund Accounting
Question
What type of account is used to earmark the fund balance
to liquidate the contingent obligations of goods ordered
but not yet received?
a) Appropriations.
b) Encumbrances.
c) Obligations.
d) Fund Balance – Assigned (encumbrances).

32
Fund Accounting
Capital Expenditures (Expendable Fund)
 Outflow of financial resources
 Treated as a current period expenditure.

Middletown purchased a police car for $10,000.
Expenditures 10,000
Cash 10,000
Depreciation is not accounted for in the records of an expendable

fund entity.
LO 7 Capital expenditures.
33
Fund Accounting
Recording Budgeted and Actual Revenue and Expenditures
• Exercise 17-3: (partial)
– A budget consisting of estimated revenues of $1,950,000 and
appropriations for expenditures of $1,800,000 was passed by
the town council.
– Property taxes of $1,150,000 were assessed; $1,115,000 are
expected to be collectible.
– Property taxes in the amount of $1,080,000 were collected.
– Equipment costing $200,000 was purchased, and the old
equipment was sold at for $24,000.
• Required: Prepare required journal entries for General Fund.
LO 8 Understand the general 34

fund.
Fund Accounting
Exercise 17-3: 1. A budget consisting of estimated revenues of
$1,950,000 and appropriations for expenditures of $1,800,000 was
passed by the town council.
1. Estimated Revenues 1,950,000
Appropriations 1,800,000
Fund Balance - Unassigned 150,000

fund.
Fund Accounting
Exercise 17-3: 2. Property taxes of $1,150,000 were assessed;
$1,115,000 are expected to be collectible. 3. Property taxes of
$1,080,000 were collected.
2. Property Tax Receivable 1,150,000
Estimated Uncollectible Taxes 35,000
Revenue 1,115,000
3. Cash 1,080,000
Property Tax Receivable 1,080,000

fund.
Fund Accounting
Exercise 17-3: 4. Equipment costing $200,000 was purchased, and
the old equipment was sold at for $24,000.
4. Expenditures 200,000
Cash 200,000
Cash 24,000
Revenue 24,000

fund.
Fund Accounting
Exercise 17-5: The preclosing trial balance for the General Fund of the City
of Springfield is presented below.
Trial Balance for December 31, 2015:
Cash $ 90,000
Certificates of Deposit 120,000
Property Taxes Receivable 175,000
Estimated Revenue 1,690,000
Expenditures 1,310,000
Expenditures—2007 32,000
Encumbrances 165,000
Estimated Uncollectible Taxes $ 51,000
Vouchers Payable 65,000
Unreserved Fund Balance 41,000
Reserve for Encumbrances 165,000
Reserve for Encumbrances—2007 35,000
Revenue 1,675,000
$3,582,000 $3,582,000
38
Fund Accounting
Exercise 17-5: Prepare closing entries.
Revenue 1,675,000
Encumbrances 165,000
Fund Balance – Assigned (Encumbrances 2014) 35,000

Expenditures – 2014 32,000
fund.
Fund Accounting – Comprehensive
Illustration
Problem 17-1: The general ledger trial balance of the General Fund of
the City of Bedford on January 1, 2015, shows the following:
Debit Credit
Cash $100,000
Taxes Receivable 75,000
Allowance for Uncollectible Taxes $ 35,000
Fund Balance – Assigned (Encumbrances) 30,000
Total $175,000 $175,000
Prepare journal entries to record the following activities and

transactions for the General Fund during 2015.
fund.
Fund Accounting
Problem 17-1: 1. The City Council adopted a budget with estimated
revenues of $1,560,000 and appropriated expenditures of $1,400,000.


fund.
Fund Accounting
Problem 17-1: 1. The budget authorized the transfer of $50,000 from
the Water Fund to the General Fund. Interest due for the year on the
$1,000,000, 8% bond issue for the Civic Center is approved for transfer
from the General Fund to the Debt Service Fund.
Due from Water Fund 50,000

Transfer from Water Fund 50,000
Transfer to Debt Service Fund 80,000

Due to Debt Service Fund 80,000

fund.
Fund Accounting
Problem 17-1: 2. The annual property tax levy of 10% on assessed
valuation ($11,000,000) is billed to property owners. Two percent is
estimated to be uncollectible.

Revenue 1,078,000
Allowance for Uncollectible Taxes (2%) 22,000

fund.
Fund Accounting
Problem 17-1:
3. Goods and services amounting to $1,150,000 were ordered during
the year.
Encumbrances 1,150,000
Fund Balance – Assigned (Encumbrances) 1,150,000
4. Invoices for all goods ordered in 2014 amounting to $29,000 were

approved for payment.
Expenditures – 2014 29,000

Vouchers Payable 29,000
fund.
Fund Accounting
Problem 17-1:
5. Funds for bond interest on Civic Center bonds were transferred to
the Debt Service Fund.
Due to Debt Service Fund 80,000
Cash 80,000

fund.
Fund Accounting
Problem 17-1:
6. Invoices for goods received during the year totaled $1,155,000.
These were encumbered [see (3) above].
Vouchers Payable 1,155,000
Fund Balance - Assigned (Encumbrances)1,150,000

Encumbrances 1,150,000

fund.
Fund Accounting
Problem 17-1:
7. Transfer of funds from the Water Company was received in lieu of
taxes.
Cash 50,000
Due from Water Fund 50,000
8. Taxes were collected from property owners in the amount of

$1,050,000.
Cash 1,050,000
fund.
Fund Accounting
Problem 17-1:
9. Past-due tax bills of $17,000 were charged off as uncollectible.
Allowance for Uncollectible Taxes 17,000

Property Tax Receivable 17,000
10. Checks in payment of invoices for goods ordered in 2014 and 2015
were issued [see items (4) and (6) above].
Vouchers Payable * 1,184,000

Cash 1,184,000
* ($29,000 + $1,155,000) LO 8 Understand the general 48
fund.
Fund Accounting
Problem 17-1:
11. Revenues received from miscellaneous sources, other than property
taxes, of $455,000 were recorded.
Cash 455,000
Revenue 455,000
12. Purchase order for two trash collection vehicle systems was issued.
Bid price per system was $120,000.
Encumbrances (2 x $120,000) 240,000

Fund Balance – Assigned (Encumbrances) 240,000
49
Fund Accounting
Financial Statements
• Two Basic Statements (expendable fund entities)
– Balance sheet
– Statement of revenue, expenditures, and changes in fund
balance
• Revenue classified by major sources.
• Expenditures classified by major functions.
• Comparative information presented for prior years.
• Statement comparing budgeted and actual should be
prepared for budgetary fund entities.

fund.
Reporting Inventory and
Prepayments
Inventory
• Two Methods of accounting for and reporting
inventory.
– Consumption method
– Purchases method
– Both acceptable for fund purposes
• Under GASB Statement No. 34, consumption method is
consistent with the government-wide approach and the
purchases method is not acceptable.
LO 9 Consumption and purchases Methods.

51
Reporting Inventory
Assume $20,000 of beginning inventory, $50,000 is purchased, and
ending inventory of $24,000.
Consumption Method
When Purchased: Expenditures 50,000
Cash 50,000
End of Year: Inventory 4,000

Expenditures 4,000
Purchases Method
When Purchased: Expenditures 50,000
Cash 50,000
End of Year: NO ENTRY

52
Prepayments
Inventory
The Fund Balance for the governmental funds should classify
any amounts for inventory as Fund Balance – Nonspendable.
Consumption Method – end of year:
Fund Balance – Unassigned 4,000
Fund Balance – Nonspendable 4,000
The entry has no overall impact on fund balance, but
–Reclassifies the increase in inventory from unassigned to
nonspendable fund balance.

53
Prepayments
Inventory
•The Fund Balance for the governmental funds should classify any
amounts for inventory as Fund Balance – Nonspendable.
•Purchases Method – end of year:
Inventory 4,000
Fund Balance – Nonspendable 4,000
–The entry has changed fund balance.
•After the entry, the amount reported for total fund balance
will now equal the total fund balance if the consumption
method were used.

54
Reporting Prepayments
Question
Prepayments for items such as insurance or rent that cover
more than one accounting period may also be reported
using the consumption or purchases methods.
True

55

CH 17

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Advanced

Nonbusiness Organizations Business Enterprises

LO 1 Nonbusiness organizations versus profit-oriented enterprises.

LO 1 Nonbusiness organizations versus profit-oriented enterprises.

LO 3 Differences in applications of revenue, expense, and expenditures.

LO 3 Differences in applications of revenue, expense, and expenditures.

LO 3 Differences in applications of revenue, expense, and expenditures.

LO 3 Differences in applications of revenue, expense, and expenditures.

LO 3 Differences in applications of revenue, expense, and expenditures.

Government-Wide Governmental Fund (expendable)

LO 3 Differences in applications of revenue, expense, and expenditures.

Pledges Time of pledge

Grants May or may not at time authorized

LO 6 Use of financial resources.

LO 6 Use of financial resources.

 Restricted: Constraints placed on the use of resources are

LO 6 Use of financial resources.

LO 6 Use of financial resources.

Authorized to Purchase Order or Receipt of Goods

Encumbrances and expenditures are

LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Balance – Assigned (encumbrances) 8,000

3. Contracts payable 8,000

LO 3 Differences in applications of revenue, expense, and expenditures.

 Treated as a current period expenditure.

Depreciation is not accounted for in the records of an expendable

LO 8 Understand the general 34

LO 8 Understand the general 35

LO 8 Understand the general 36

LO 8 Understand the general 37

Fund Balance – Assigned (Encumbrances 2014) 35,000

Prepare journal entries to record the following activities and

Estimated Revenue 1,560,000

LO 8 Understand the general 41

Due from Water Fund 50,000

Transfer to Debt Service Fund 80,000

LO 8 Understand the general 42

Property Tax Receivable 1,100,000

LO 8 Understand the general 43

4. Invoices for all goods ordered in 2014 amounting to $29,000 were

Expenditures – 2014 29,000

LO 8 Understand the general 45

Fund Balance - Assigned (Encumbrances)1,150,000

LO 8 Understand the general 46

8. Taxes were collected from property owners in the amount of

Allowance for Uncollectible Taxes 17,000

Vouchers Payable * 1,184,000

Encumbrances (2 x $120,000) 240,000

LO 8 Understand the general 50

LO 9 Consumption and purchases Methods.

End of Year: Inventory 4,000

End of Year: NO ENTRY

LO 9 Consumption and purchases Methods.

LO 9 Consumption and purchases Methods.

LO 9 Consumption and purchases Methods.

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