Fund Accounting

Chapter two

OBJECTIVES
The nature of funds
Basic types of funds used by governments
The

main

components

of

governments

comprehensive annual financial report

How the fund structures and financial reports of

not-for-profits differ from those of governments.

How the financial reports of not-for-profits differ
2

from those of governments.

WHAT IS A FUND?
G

and NP organizations establish their

accounting systems on a fund basis.

A fund is a fiscal and accounting entity .
Each fund has its own self-balancing set of

accounts from which financial statements

can be prepared. (ie., chart of accounts ,
general
3

journal,

general

ledger,

balances, and financial statements)

trial

WHAT IS A FUND?
G

& NP usually use several funds to

account for their resources and activities.

Example: A church may use
Fund 1 to account for its general operating

revenues and expenses,

Fund 2 to account for resources set aside to

construct a new building, and

Fund 3 to account for its religious school.

WHAT CHARACTERIZES A FUND?

Fund accounting uses the equation:

Assets = Liabilities + Fund Balance

Fund balance is the difference between funds

assets and the claims against those assets.

Fund balance is the amount left to the parties

with rights to the assets after all other claims

have been liquidated.
Fund balance is often referred to as net assets.
5

WHAT CHARACTERIZES A FUND?

Funds use the same double entry system of bookkeeping.
A balance sheet of a fund can detail the specific assets,

liabilities and the elements of funds balance that underlie

the accounting equation as of any point in time.
A statement of revenue, expenditures, and other

changes in fund balance can explain the reasons for

changes in fund balance during a specified period of time.
A statement of cash flows can reconcile the changes

in cash between the end and the beginning of a period.

6

Use of multiple funds to account

for an entity
G & NP separate resources into funds to

ensure that they adhere to the restrictions

placed upon them by legislators, grantors,
and donors, or other outside parties.
Example: when BZU receives a donation

that must be used only for scholarships, it

would account for the resources received in
a special scholarship fund.
7

Use of multiple funds to account

for an entity
G and NP use establish funds to account for

certain activities that are different in nature

from their usual activities. business type
activities.
For example: a G would account for its

gold course in a fund separate from general

operations to assess their performance
separately.
8

Use of multiple funds to account

for an entity

Fund accounting promotes both

control and accountability over
restricted resources.

Use of multiple funds to account

for an entity
To appreciate the relationship between the two or

more funds used to account for a single entity,

one must remember that each fund is a separate
accounting entity.
Every

transaction that affects a fund must be

recorded by at least one debit and one credit.

Any transaction that affects two or more funds must

be accounted for as if it affected two or more

independent businesses and must be recorded
10

individually in each fund.

Use of multiple funds to account

for an entity
Example: a city maintains two funds. a general
fund accounts for its unrestricted resources and
general operations, and a utility fund accounts
for its electric utility , which sells electricity to city
residents and other government departments.
The

electric

utility

bills

the

other

city

departments, all of which are accounted for in the

general operating fund, for $10,000. The following
entries would be recorded:
11

Use of multiple funds to account

for an entity
Utility Fund books
Accounts Receivable (from general fund)
$10,000
Revenue from sale of electricity $10,000
To record the sale of electricity to general fund

General Fund books

Electricity expenditure $10,000
Accounts Payable (to utility fund)
To record the use of electricity
12

$10,000

Basis of Accounting and

Measurement Focus

Basis
when

of

accounting

transactions

and

determines
events

are

recognised.
The measurement focus of an entity

determines

what

is

being

reported

upon. Which assets and liabilities will be

given
13

accounting

recognition

reported on the balance sheet.

and

Basis of Accounting and

Measurement Focus
Modified
Accrual Basis

Full Accrual
Revenues
Basis
recognized
earned,

when

expenses

recognized

when

Revenues
recognized
available

Cash Basis
Revenues

when
and

recognized

when

available;

measurable;

expenses/expendit

expenditures when

ures

incurred.

when paid.

economic

Measurement focus

Measurement focus

resources.

on

is upon cash.

incurred.
Measurement focus
is

14

upon

all

short

term

financial assets and

liabilities.

recognized

Basis of Accounting and

Measurement Focus
If an entity adopted Full

Accrual

basis of

accounting, then its measurement focus will be

on all economic resources.
Its balance sheet will report on all assets and liabilities,

both current and noncurrent.

Increases or decreases in net capital assets and long

term obligations are recognised as revenues or

expenses. Example: an organization purchased a
vehicle by giving a note:
15

Dr. Vehicle

$25,000

Basis of Accounting and

Measurement Focus
G & NP maybe primarily concerned with the

assets needed to satisfy current year obligations,

they may adopt a modified accrual basis of
accounting and a measurement focus on mainly
short term financial assets and liabilities.
Capital assets and long term liabilities would be

excluded form the balance sheet, and net

changes in short term financial assets and
16

liabilities would be recognized as revenues or

Basis of Accounting and

Measurement Focus
Example: if a government borrows $25,000

(issuing a long term note) and uses the

proceeds to purchase a vehicle:
Dr. Cash $25,000
Cr. Proceeds from borrowings 25,000
Dr. Expenditure for vehicle 25,000
17

Cr. Cash

25,000

Basis of Accounting and

Measurement Focus
The government would report neither the vehicle nor the long

term note on its fund balance sheet.

Instead it would record both the increase and the decrease in a

financial asset (cash) on the funds statement of revenues and

expenditures.
From an accounting standpoint neither the vehicle nor the related

liability would be recognized.

The vehicle would be written off (expensed) at the time acquired.
The proceeds from the note would be recorded as proceeds from
18

borrowing, an increase in fund balance (like a revenue).

Basis of Accounting and

Measurement Focus

For the purposes of internal management

and control, NP may adopt a modified
accrual basis of accounting, FASB requires
that

they

prepare

their

general-purpose

external reports on a full accrual basis.

19

Example: Fund Accounting in A

School District
A newly school district accounts for its operations on a modified
accrual basis. It maintains four funds:

20

A general fund: this fund accounts for taxes and other

unrestricted resources.

A capital projects fund: this fund accounts for the proceeds

of bonds that are restricted to the construction of buildings and
similar assets.

A debt service fund: this funds accounts for resources that

are to be set aside each year to ensure that the district has the
ability to make its required payment of interest and principal on
its long term debt.

A special revenue fund: it accounts for state grants that

must be used for specific purposes.

Example: Fund Accounting in A

School District
The district imposed $9.0 m of general property
taxes of which it actually collected $8.8 m. it
expects to collect the balance shortly after year end.
These taxes are unrestricted general fund
General Fund

Cash

$8.8

Property Taxes Receivable

Property taxes revenue

21

0.2
$9.0

Example: Fund Accounting in A

School District
The district received a state grant of $0.2 m to
purchase computers. This grant is restricted to a
specific purpose and therefore must be recorded in a
restricted fund the special revenue fund.
Special Revenue Fund

Cash

$0.2

Grant Revenue

22

$0.2

Example: Fund Accounting in A

School District
The district issued $12 m in long term bonds to construct a new
building. The proceeds must be used for the intended purpose
and therefore must be recoded in the capital project fund.
Because the district is on a modified accrual basis of accounting,

which excludes the recognition of both long term assets and long term
liabilities, the proceeds are recognised in a revenue type account.
The district must maintain a record of both its long lived assets and

obligations in the ledgers or other off the balance sheet lists.

Capital Projects Fund
Dr. Cash $12.0
Cr. Proceeds from Borrowing $12.0

23

Example: Fund Accounting in A

School District
The district constructed the school building for
$11m. The construction of the school building must
be accounted for as an expenditure rather than a
capital asset.
The assets must be recorded in a supplementary

ledger list.
Capital Project Fund

Dr. Construction of building (expenditure)

24

Cr. Cash $11.0

$11.0

Example: Fund Accounting in A

School District
The district incurred $6.0 m in general
operating expenditures of which it actually
paid $5.5 m.
General Fund

Dr. General Operating Expenditure$6.0

Cr. Cash

$5.5

Cr. Accounts Payable

25

0.5

Example: Fund Accounting in A

School District

Using

its

state

grant,

the

district

purchased computers for $0.1 m.

Special Revenue Fund

Dr. Acquisition of computers (expenditure) $0.1
Cr. Cash

26

$0.1

Example: Fund Accounting in A

School District
The district transferred $1.1 m from the general fund to the
debt service fun to make the first payment of both principal
and interest that are due in the following year. entries in
both funds

General Fund
Dr. Transfer-out to debt service fund
Cr. Cash

$1.1

$1.1

Debt Service Fund

Dr. Cash $1.1
27

Cr. Transfer-in from general fund

$1.1

Example: Fund Accounting in A

School District
School Districts Fund Balance Sheet (in
millions)
Gener Specia Capita Debt
al
l
l
Servi
Reven Projec
ce
ue
ts
Assets
Cash
Property Taxes
Receivable
Totals

28

$2.2

$1.0

$1.1

$0.1

$1.0

$1.1

0.2
$2.4

Liabilities and fund

balances
Accounts Payable

$0.1

$0.5

Example: Fund Accounting in A

School District
School Districts Statement of Fund Revenues,
Expenditures, and Other Changes in Fund Balances (in
millions)
General

Special
Revenu
e

Capital
Projects

Debt
Servic
e

$9.0

$0.2

9.0

0.2

Operating Expenditures

6.0

Construction of building

$11.0

Acquisition of computers

0.1

6.0

0.1

(11.0)

(1.1)

Property tax revenue

Revenue from state grant
Total Revenues

Total Expenditures

29

Other increases and

decreases in fund
balances
Transfer in / (Out)

$1.1

How can funds be combined and

consolidated?
GASB mandates governments to prepare two sets of

financial statements:
Government-wide

statements: presented on a full

accrual basis and consolidates all of a governments

operations.
Fund financial statements: government and business

type funds are reported on separate schedules.

Government funds are prepared on a modified accrual
basis while business type fund is prepared on a full
30

accrual basis.

How can funds be combined and

consolidated?

31

How can funds be combined and

consolidated?
FASB permits NP to consolidate the assets and liabilities

of funds into a single balance sheet. However, the net

assets of the entity must be reported in three categories
of restrictiveness: unrestricted, temporarily restricted,
permanently restricted.
FASB also requires that on its statement of activities

(similar to business income statement) the entity display

separately

those

revenues

that

are

unrestricted,

temporarily restricted, and permanently restricted.

32

Main Types of Government

Funds
Governments engage in three broad categories of
activities:
1. Governmental activities are those financed

predominantly

through

taxes

and

intergovernmental grants.
2. Business

type

activities

those

financed

through user charges.

3. Fiduciary activities where the government
33

acts as a trustee or agent for another party.

Main Types of
Government Funds
1.
1. Governmental
Governmental Funds
Funds

2.
2. Proprietary
Proprietary funds
funds

a. General fund
b. Special

revenue

funds
c. Debt Service fund
d. Capital

projects

funds
e. Permanent funds
34

a. Enterprise funds
b. Internal service

fund
3.
3. Fiduciary
Fiduciary Funds
Funds

c. Trust funds
d. Agency Funds

1. Governmental Funds
Governmental funds

Governmental Funds are maintained to account

for G operating and financing activities.

There are five primary types of governmental

funds
35

1. Governmental Funds: General

Fund
General fund
This fund accounts for all unrestricted resources.
It embraces major governmental functions, police,

fire,

street

maintenance,

sanitation,

and

administration.
Government finance their general operations mainly

with unrestricted resources, such as property taxes.

General fund is accounted for on a modified accrual
36

basis.

1. Governmental Funds: General

Fund
Why does one single fund cover so many
functions?
A government fund structure rarely mirrors its

organizational structure.
Funds are established mainly to ensure that

governments adhere to resource restrictions.

Funds divide the government into categories of

resource
departments.
37

restriction,

not

functional

1. Governmental Funds: Special

Revenue Fund
Special Revenue Fund
These funds account for resources that are legally

restricted to specific purposes. Examples:

Gasoline tax revenue that must be used for highway

maintenance.
Lottery

fund proceeds that must be used for

education.
Private donation that must be used to repair parks.

38

1. Governmental Funds: Debt

Service Fund
Debt Service Fund
These funds are used to account for resources set

aside for the payment of interest and principal on

long term debt.

Debt service fund derive their resources from other

funds transfer from the general fund, or from taxes

or fees dedicated to debt service.
39

1. Governmental Funds: Debt

Service Fund
When G accumulate resources to service their

long term obligations, they commonly invest

them in commercial paper, treasury bills, and
other financial instruments provide reasonable
return.
Therefore, debt service fund transactions relate

to

the

purchase

and

sale

of

marketable

securities and the recognition of investment

40

earnings and related costs.

1. Governmental Funds: Capital

Projects Fund
Capital Projects Fund

These funds are used to account for resources

held for the acquisition or construction of major

capital facility.
Capital projects funds derive their resources from
the proceeds of bonds OR
may receive resources from other funds
41

1. Governmental Funds: Capital

Projects Fund

The

assets

are

reported

only

in

the

government wide statements (full accrual)

and in supplementary schedule.

Governments may invest any excess cash

awaiting for capital projects.

42

1. Governmental Funds:
Permanent Fund
Permanent

fund

are

used

to

report

resources provided by trust in which the

earnings but not the principal must be
used for public purposes; i.e. to benefit
the government and its citizenry.

43

2. Proprietary Funds
Proprietary Fund
Proprietary

funds are used to account for

business type activities.

Government intend to recover costs through

user charges. (breakeven)

Proprietary funds employ a full accrual basis

and their measurement focus is on all economic

44

resources.

2. Proprietary Funds
The financial statements of proprietary finds are

different from those of the governmental funds.

The

statement of net assets (BS) and the

statement of revenues, expenses, and changes

in net assets (IS) look like those of business.
The statement of net assets reports capital

assets and long term debt and the statement of

revenues and expended include depreciation.
45

2. Proprietary Funds: Enterprise

Funds
Enterprise Funds

Governmental activities accounted for in enterprise

funds provide services to the public at large. Such as

Utilities (electricity, gas, and water)
Hospitals
Parking garages
Airports
46

Transportation

2. Proprietary Funds: Enterprise

Funds
Government

enterprise does not issue

stock but issues bonds.

The principal and the interest of the bonds

are

payable

exclusively

out

of

the

revenues of the fund itself. NOT out of the

general fund.

47

2. Proprietary Funds: Internal

Service Funds
Internal Service Fund

Departments accounted for in internal service

funds provide goods or services to other

departments within the same government.
They bill the receiving departments at rates

intended to cover the cost of the goods or

48

services.

2. Proprietary Funds: Internal

Service Funds
Internal service funds are typically established with

contributions of resources from the general or

other fund. Thereafter, they are expected to be self
sustaining.
Because ISF sell their goods to other departments.

Most of their transactions are with other funds.

A vehicle repair service that maintains and services

the cars and trucks of the police department, fire

department, sanitation department.
49

3. Fiduciary Fund
Fiduciary Funds
Fiduciary funds benefit parties other than the

government itself.
These include employees, other governments,

specific individuals, or corporations.

Their activities do not result in revenues or

expenses to the government.

50

3. Fiduciary Fund
Financial statements of fiduciary funds are

included

in

the

government's

comprehensive annual financial report,

they are not included in the governmentwide financial statements.

51

3. Fiduciary Fund: Trust Funds

Trust fund
Trust fund is a fund held by one person (trustee)

for the benefit of another, pursuant to the

provisions of a formal trust agreement.
The resources of the trust fund are intended to

benefit parties other than the G itself.

Trust funds are accounted for on a full accrual
52

basis.

3. Fiduciary Fund: Trust Funds

3.1.1 Pension trust funds:
Benefit
income,

the

employees

disability

insurance,
remuneration
beneficiaries.

53

and
to

income,

by

providing

health

related

forms

retirees

and

care
of
their

3. Fiduciary Fund: Trust Funds

3.1.2 Investment trust funds: similar to
mutual funds, benefit the parties that have
entrusted their resources to the fund.
3.1.3 Private purpose trust funds: all
other trust funds other than pension and
investment funds.

54

3. Fiduciary Fund: Agency

Funds
Agency funds
Agency funds are used to account for assets

held on behalf of other governments, funds, or

individuals.
Tax collected by one government for the benefit of

the another.
Balance sheet shown only assets and liabilities.
55

A=L

Comprehensive Annual
Financial Report
Annual

report

of

governments,

known

as

Comprehensive Annual Financial Report CAFR

The financial section of the CAFR contains
Government wide Statements: consolidates the entity's

governmental

funds

and

proprietary

funds

into

governmental activities and business type activities and

report both kinds on a full accrual basis.
Fund Statements
Governmental funds modified accrual basis
Proprietary funds full accrual basis
Fiduciary funds full accrual basis

56

Annual reports of not-for

profits
FASB

is

the

rule-making

authority

for

nongovernmental entities.
FASB established standards as to how NP

must aggregate and display their financial

information in general purpose, external
financial reports.
FASB standards are different from GASBs.

57

Annual reports of not-for

profits
GASB

mandates fund based reporting for

governments.
FASB did not oblige NP to use fund accounting.
NP need to distinguish between resources that

are restricted and unrestricted.

Nevertheless,

for

the

purpose

of

internal

accounting and control, most NP do employ

fund accounting.
58

Annual reports of not-for

profits
Not-for-Profit maintains
Current fund similar to governments general fund
Current restricted fund similar to G special revenue

fund
Plant funds related to capital assets and related debt
Unexpended plant fund capital projects fund
Retirement of indebtedness debt service fund
Investment in plant fund accounts for both capital

assets and long term debts.

59

Annual reports of not-for

profits
Financial reports of NP entities are more closely

resemble those of business than of governments.

Financial report consists of three statements:
Statement of position (Balance sheet)
Statement of activities (statement of revenues and

expenses)
Statement of cash flows

Unlike G, No need not prepare data on their major

funds or even funds type.

60

Annual reports of not-for

profits
Although

the FASB imposes some accounting and

reporting requirements that are unique to not-for

profits, not for profits are generally subject to business
standards.
FASB requires NP to classify their net assets into three

categories based on the restriction from donors:

Unrestricted
Temporarily restricted
Permanently restricted

61

Annual reports of not-for

profits
Temporarily restricted resources are those that

must be used from specific purpose or can not

be spent until some time in the future.
Permanently restricted resources are typically

endowments, only the income of which can be

spent.
FASB permits NP considerable flexibility as to

the form of primary statements.

62

End of Topic Two

63

Example: Funds of a University

Current Funds
Current

fund: funds available for day to day

expenditures and it is unrestricted

Current

restricted

funds: represent

resources

limited by outside parties (donors) for specific

purposes.
Current Designated funds: represent resources

set aside by the university own governing board

(board of trustees) designated fund is unrestricted.
64

Example: Funds of a University

Loan funds account for resources dedicated to

student loans.
Endowment funds are used to account for

gifts and donations specifying that the donated

amount be invested and that only the investment
income be expended.
The principal amount of an endowment is usually

permanently restricted but the revenue or income

from its investment could be restricted or unrestricted.
65

Example: Funds of a University

Quazi-Endowment funds it is like the current

designated funds, accounts for resources set aside

for specific activities by the university governing
board, only the income and not the principal is
expendable.
Annuity Funds are used to account for gifts that

provide

return

to

the

donor

or

person

designated by the donor for a specified term or for

the reminder of his life.
66

Example: Funds of a University

Plant funds
Unexpended

plant

fund

accounts

for

resources

reserved for the construction or purchase of plant assets.

Renewals

and

replacements

represent

resources

committed to the renewal and replacement for existing

plant and equipment.
Retirement of indebtedness: the assets of this fund

are held for the retirement of the dent and the payment
of the interest.

67

Example: Funds of a University

Agency funds are maintained to account

for resources that the institution holds as a

custodian for outsiders such as employees ,
student organization.
Accounting for business type activities are

accounted
funds.
68

for

in

separate

proprietary