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Chapter 5

Recognizing Expenditures in
Governmental Funds

Granof & Khumawala-6e

Chapter 5

Granof & Khumawala-6e

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

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Thought to Ponder: Chapter 5

Learning Objectives

Full accrual basis

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Accounting for different expenditures

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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.

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o Basis of Accounting: Modified accrual basis


o Provides information relating to Inter-period equity

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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.

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GASB Codification, paragraphs 1600.102 through


1600.105.

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GAAP

Governmental Fund Statements

Basis of Accounting
o Modified accrual basis

All measurements are in accordance with


GAAP.

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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.

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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.

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Measurable : Government is able to determine or


reasonably estimate the amount.

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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

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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

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Expenditures

Expenditures

Expenditures recognized when cash is paid or fund


liability accrued* for goods/services received.
* next slide . . .

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Governmental funds report only current liabilities


and not long-term liabilities.

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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

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NORM Recognize when FUND Liability is incurred

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


Assets) NOT resulting from transfers (and refunding
transactions)

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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.)

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

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Salaries and Wages

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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.

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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.

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Example 1

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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

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pay period for employees paid from the General Fund.

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Timbaktu City recognized its payroll for the most recent two week

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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.

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GF General Journal
Expenditures--2013
Due to Federal Govt.

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Cr. Liability to federal government.

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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)

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Governments Vs. Business

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(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)

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


when the time off is taken.

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Earned in one period but often not paid until several


periods later (i.e. Its not current.)
Amount to be paid is often uncertain.

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Until those periods, those liabilities are reported


ONLY in the schedule of long-term obligations.

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Vacation pay expenditures and related fund


liabilities should be recognized in the periods in
which they are due.

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(1) Vacation Leave

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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

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No entry in the governmental funds

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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.

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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

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CR

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Governmental fund DR
Vacation pay expenditure
Cash (or Wages Payable)

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(2) Sick Leave

It should be recorded ONLY when expected to be


paid to employees upon their resignation or
retirement.

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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.

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Beyond the control of both the employee and the


employer.

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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.

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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.

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Example: City employees earned $170,000 in sick leave but were


only paid for $140,000. The leave accumulates but does not vest.

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Government-wide: (again no actual journal entry is made)

1M

DR
Sick leave termination benefit expense $1M
Accrued Sick Leave

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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

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Example 2-b

CR
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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.

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(3) Sabbatical Leave

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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.

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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:

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Example 3-a

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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.

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Pensions Overview (Ch 10)

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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)

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Claims and Judgments (CJ)


Overview (Ch 8)

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(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

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Are not expendable available financial resources.

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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

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Two methods of accounting available


o Consumption Method
o Purchases Method

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Accounting for Inventory

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Cr.
5,000

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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

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Example 1 Consumption Method

5,000
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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)

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Purchases Method. Assuming


Beginning inventory
Purchases during year
Available for use
Ending inventory
Amount consumed

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Example 2 Purchases Method

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Supplies expense (not expenditure) would be


debited.
No need for inventory reserve.

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Government-wide statements:
Should be reported on a consumption basis.

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Materials and Supplies (contd)

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Example 3

Encumbrances
Reserve for encumbrances
Reserve for encumbrances
Encumbrances
Accounts Payable
Cash

Dr.
$4

Cr.
$4

$3.5
$3.5
$3
$3

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Common Entries*:

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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


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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

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Purchases method:
Supplies expenditure
$3.5
Accounts Payable
Supplies inventory
Fund balance-nonspendable

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Example 3 (contd)

$0.2
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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

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Government-wide statements:

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o Either purchases or consumption method can be used

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Example 1

Consumption method:
Prepaid insurance
Cash

DR
$300

CR
$300

$300
$300

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Purchases method:
Insurance expenditure
Cash

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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.


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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)

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Capital Assets Overview (Ch 6)

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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.

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General Fund:
Expenditure-acquisition of capital assets
Cash

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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.

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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.

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(7) Interest and Principal on Longterm Debt: Overview

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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.

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Nonexchange expenditures
o Should generally be recognized with their revenue counterparts
-- (i.e.) when the recipient of the grant has satisfied all eligibility
requirements.

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GASB Standards (applicable to both modified and full


accrual statements):

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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.

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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.

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Example 1

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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.

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--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:

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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.

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Government-wide*: Same, but expense instead of expenditure.


* This is not a real entry but conversion is made at the end of the
year.

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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

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Example 3

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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).

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The entry in the special revenue fund is:


Dr. Cr.
Cash
$100,000
Deferred Revenue
$100,000

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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.

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Deferred Revenues
$75,000
Revenues
$75,000
(This amount would also be recorded in the Revenue
detail account in the Revenue subsidiary ledger).

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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

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Example 4 (contd)

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Interfund Transfers (Ch. 6-9)

(b) Nonreciprocal: Equivalent of nonexchange


transactions.

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(a) Reciprocal: Equivalent of exchange


transactions

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Two types of interfund activity:

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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.

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Summary

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