QUEENS’ College

Training, Teaching and Learning Materials

ACCOUNTS AND BUDGET SERVICELEVEL IV

Learning Guide
Unit of Competence - Prepare Financial Statements for Non-
Reporting Entities

Module Title - Preparing Financial Statements for Non-Reporting

Entities
LG Code: BUF ACB4 02 0812
TTLM Code: BUF ACB4 M02 0812

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

INTRODUCTION

Welcome to the module “Prepare Financial Statements for Non-

Reporting Entities”. This learner’s guide was prepared to help you achieve the
required competence in “Accounts and Budget Support Level IV”. This will be the
source of information for you to acquire knowledge attitude and skills in this
particular occupation with minimum supervision or help from your trainer.

Summary of Learning Outcomes

After completing this learning guide, you should be able to:

Lo1:- . Compile data
Lo2:- Prepare reports
How to Use this TTLM

o Read through the Learning Guide carefully. It is divided into sections

that cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of
each section to check your progress
o Read and make sure to Practice the activities in the Operation Sheets.
Ask your trainer to show you the correct way to do things or talk to
more experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

LO1:- Compile data

Information Sheet ONE

What Are Governmental and Not For Profit Organizations

Governmental and not for profit organizations are vast in number and diversity. States,
countries municipalities (for example cities and villages) and townships are general purpose
governments that provide many categories to their residents (such as police and fire protection;
sanitation; construction, and maintenance of streets, roads, and bridges; and health and welfare).
Independent school districts, a public colleges and universities, and special districts are limited
or special purpose governments that provide only a single function, or limited number of
functions (such as education, drainage and flood control, irrigation, soil and water conservation,
fire protection, and water supply).

Not-for-profit organizations also exist in many forms and serve many different functions.
These include various kinds of health care entities, some libraries, museums, professional and
trade associations, fraternal and social organizations, and religious organization.

Based on the general guidelines of the preparation of this module give accounting
students an understanding of the many features of not-for-profit organizations that differentiate
them from business organization. Those features include the necessity to use several accounting
entities termed “fund” for a single not-for-profit (NFP) organization and the issuance of a
statement of activity rather than an income statement and reporting for NFP organization, and the
role of accounting as part of the budgeting process.

1.1 Distinguishing Characteristics Of Governmental And NFP Organizations

From the stand point of management of resources, for profit (FP) and not-for-profit
(NFP) organizations are similar in many ways. For example, both use type of resources cash,
fixed assets, personnel, etc. Both are faced with the problem of trying to acquire scarce
resources. Both need good information for decision making, and both need to exercise careful
control of the resources that they have. The mechanics of providing information and of control
TTLM Development Manual Date: 2010/17
Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

systems are similar for each. Both should use double entry accounting, employing journals and
ledgers, and then use those ledgers to produce periodic financial reports.

What Is NFP

For all similarities in the principles of accounting and management resources, there are
very significant differences in what the two types of organizations do and how they operate. First
consider three distinctions noted by the financial Accounting standards Board (FASB) which
characterized NFP organizations.
- Receipts of significant amounts of resources from resource providers
who do not expect to receive either repayment or economic benefits
proportionate to the resources provided
- Operating purposes that are other than to provide goods or services at a
profit or profit equivalent.
- Absence of defined ownership interest that can be sold, transferred, or
redeemed, or that convey entitlement to a share of a residual distribution
of resources in the events of liquidation of the organization.
In summary, we might say that an NFP:
 Gets money from people who do not necessarily expect any thing in return (eg.
Taxpayers, donors to NGOs)
 Is not trying to make money
 Does not have ownership shares that can be bought and sold.

Why Do NFPs Exist?

NFP usually arise to meet a need that society feels is vital, or essential. However, it is
considered that the particular need could not, should not, can not or will not be met by profit
seeking organization.

Consider the provision of a town water supply. It might be thought that allowing a profit
making entity to fill that need would give the profit making entity too much control over the
residents of the town. Water, after all, is necessary to life, and who every controls its supply
could charge excessive prices for it. Therefore, many governments have taken water supply as
own responsibility. Or consider a religious group that wants to spread its beliefs. Since many
people consider profiting form religion to be unseemly, the religious group might start an NFP
that makes its materials available for free.
TTLM Development Manual Date: 2010/17
Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

It should be clear that an NFP will usually have a specific purpose for its existence, other
than simply to increase the wealth of its owners. NFPs also have sub purpose within its main
purpose. For example, the NGO, REST has as its purpose, “To promote the social well being of
the people of Tigray.” With in it, to fulfill that purpose, it may choose to drill wells at different
weredas, or build clinic. It follows then, that the resources obtained by an NFP will be used only
for its specific purpose.

Distinct Accounting Principles

This purposeful nature of NFPs gives rise to two accounting principles that are unique to
NFPs. One of these is the use of “Fund” accounting. It is very, very important to understand the
meaning of fund in this context. In normal conversation, “Fund” means simply, a resource of
money. That is not the meaning “fund” has in fund accounting. In fund accounting, “fund”
means a distinct entity with in a large entity. A separate journal, ledger will be kept, and separate
financial statements will be kept for each fund.

The second relates to budgets. The budget of an NFP, especially of a government branch
is far more important than in an FP. Because the money allocated for a specific purpose is
frequently determined in advance, NFP budgets are often fixed by law and cannot be charged.
On the other hand, an FP budget can be flexible as conditions merit. In order to ensure that a
fixed budget is not exceeded, the budget of government branches and some other NFPs actually
recorded in a ledger account. This is not normally the case with FPs. (for profit organizations)

Distinct Accounting Practices

In practical matters, two other distinctions between NFPs and FPs that will be noted here.
The first concerns sources of revenue. As will be recalled from principles of Accounting, an FP
makes a distinction between the money received from sales of goods, Disposal of fixed assets,
and gifts. For the NFP, there is no distinction between these all are considered revenue.

The second distinction concerns costing and pricing. The NFP prices it goods and
services, if applicable, according to its cost of providing them. “what the market will bear” has
less relevance for NFPs. Indeed, NFP often operate as a monopoly, and there is no market to
guide its pricing decision. In fact, in many cases, the activities of the NFP are subsidized by the
government or private donors, so its goods and services are priced below the cost of providing
them.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Classification of Non Business Organization

We can note six classes of NFP organization that fit the three FASB distinctions above
1. Governmental - includes all levels national, regional, wereda, city, etc.
2. Educational - schools, kindergartens, colleges
3. Health and welfare - hospitals, orphanages, the Red Cross and Red Crescent, etc.
4. Religious – churches, mosques, missions
5. Charitable – includes many NGOs.
6. Foundations – private organizations for educational, religious or charitable purpose.
There is of course, overlap among NFPs, and many are involved in more than one of the
above activities. Here is Ethiopia, we generally speak of two broad classes of NFP organizations
Governmental and Non governmental organizations (NGOs). Many, if not all, NGOs in Ethiopia
are regulated in some way by the DPPC (Disaster prevention and preparedness commission, in
Amharic Yeadega Mekelkakiya Nazegijunet Commission).

Objectives Of Governmental And NFP Accounting And Financial Reporting

In considering the objectives of governmental and NFP financial reporting, we should
again mention the reason of an NFP’s existence. An NFP exists to provide a service not being
met profit making businesses. An NFPs goal then, will be to provide its clientele as many goods
and services as it can, given the limitations of its resources. It does not exist to increase the
wealth of its owners, as FPs do.

The evaluation of the performance of an NFP, especially of a government organization,

therefore, is difficult. Firms which strive for profit are easily measured by their profitability. If
the FP firm is profitable, it is likely producing the products that its customer want at a price they
can afford. Governments, specially, have the ability to force its “customers” to pay for goods and
services that they may or may not want, so the fact that its revenue may equal or exceed its
expenditures tells us nothing about its “Success”. Similarly, an NGO’s activities might be for
removed from its donors, and the donors may not really know how successful the program that
they support is in aiding its beneficiaries.

Accountability
If the “bottom line” is not very useful in evaluating an NFP, what then are the objectives
of financial reporting? The first objective is accountability. The guiding principle is that the
management of the NFP is obligated to the taxpaying or giving public, who provide the resources

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

to the NFP. That obligation is fundamentally two fold. One, to use the resource appropriately,
and two, to provide information showing how the resources have been used.
The information provided in financial reports should show economic resources,
obligations, net resource, and changes in them. The information will then be useful: in marketing
resource allocation decisions, in assessing, services and ability to provide services, in assessing
management stewardship and performance, all of which are necessary to promote accountability.
Expressed as simple questions, the information found in government financial reports
ought to help give answers to:
1. How should we spend our money?
2. Can and are we giving our clientele what they need?
3. Are we administering our funds well?
4. How much do we have, how much do we owe, and are we able to pay what we owe?
Legal Obligations
The second objectives which is arguably more important from a practical point of view,
is fulfillment of legal obligations. This objective cannot really be divorced from the first, since
legal obligation regarding financed are usually an attempt to force a accountability through
states. These legal obligations are felt necessary in a large part because the profit motive, which
controls the activities of NFPs, is lacking in NFP activities. A number of legal standards have
been enacted to control both governmental actives and NGOs. For government reporting, the
ministry of finance has set down certain standards. For most NGOs, the legal standards come
through the DPPC, those standards weigh heavily in the design of accounting systems for NFPs.
Legal standards are of great importance in both the activities and reports of NFPs, even
though they may or may not contribute to good resource management. However, failure to
adhere to the legal standards can result in loss of job, confiscation of assets, payments of fines,
and even time jail. Managers of NFP resources are usually very careful to follow the legal
standards first and foremost.
Self Assessment
1. Explain the essential differences between general purpose and special purpose
governments and give several examples of each.
2. What are the principal characteristics that distinguish governmental and not for profit
organizations from business enterprises (FP)
3. Explain what distinguishes governmental not-for-profit organizations from non
governmental not-for-profit organizations. Why is such a distinction necessary?
4. Explain in your own words why accountability is the cornerstone of all financial
reporting in government?
5. What should be the government wide financial statements report on and why?

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

LO2 :- Prepare reports

Information Sheet

Introduction
Accounting and financial reporting principles for the governmental activities category
have evaded to meet the legal budgetary and financial needs of governments what was termed
fiscal accountability.
Accounting and financial reporting principles for the business type activities of a
governmental are quite similar to those for commercial business entities. The principles of
accounting for business type activities are intended to measure and report on operational
accountability.
Accounting and reporting for the fiduciary activities of government use principles similar
to those of business type activities.
Governmental Accounting Standard Board (GASB) reporting standards reflect the
GASB’s view that users such as citizens, legislative and oversight bodies, and investors and
creditors have diverse information need. In particular, users want and need information about the
medium to long term financial performance of government as well as information about short-
term financial compliance with budget and finance related laws and regulations.
Generally this chapter provides a good foundation for better understanding the principle
of governmental accounting and financial reporting .

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Governmental Accounting Principles (Part I)

GAAP Vs Legal Compliance (Accounting/Reporting Capacity) (prn-1)
Prn-1 A governmental accounting system must make it possible both: (a) to present fairly
and with full disclosure the financial position and results of financial operation of the funds and
account groups of the governmental unit in conformity with generally accepted accounting
principles; b) to determine and demonstrate compliance with finance related legal and
contractual provisions.
In summary, the accounting system must make possible both financial statements based
on GAAP, and adhere to whatever the legal requirements for book keeping and reporting are.
This does not mean that two sets of books are needed, but that whichever system (GAAP or
legally mandated) is used, statement for the other should be able to be produced.
Sometimes legal requirements are contrary to good management.
For example, a purchase for $3 might require the same amount of paperwork as a
purchase of $10,000. In that case, the cost of the forms, the labor to complete them, and the
storage space to keep them, might actually exceed the $3. It is the law, but is it good
management of resources?
Sometimes legal requirements are contrary to GAAP
An example of this could be a government entity which is required to keep books with a
single entry ledger, or one that is required to keep all account on a strictly cash basis. Both of
these are contrary to GAAP, but sometimes they are what is required by the law, perhaps because
the system is old and has not been updated.
Fund And Fund Accounting (Prn # 2,3,4)
“Fund Defined And Illustrated
Prn 2. Governmental accounting systems should be organized and operated on a fund
basis. A fund is defined as a fiscal and accounting entity with a self balancing set of accounts
recording cash and other financial resources, together with all related liabilities and residual
equities or balances, and changes therein, which are segregated for the purpose of carrying on
specific activities or attaining certain objectives in accordance with special regulations,
restrictions or limitations.
. Definition Of Fund And Discussion Of Fund Accounting
The word fund is given a special definition as it relates to fund accounting. The narrow
definition of fund, as used in ordinary conversation is “a resource of money”. However, in this
course it is given the special definition above. Understanding the word fund as it is used here is
absolutely essential to this course. It is the key concept in the entire course. (module)

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

To distinction fund (NFP) accounting from FP accounting, it will be noted that on FP is

accounted for as one entity. However, a single NFP unit may be treated as several different
entities. Each of these entities is a fund.
Example of funds
Two examples follow to illustrate the concept of “fund” first, the ministry of education
operates several colleges. Although all are part of the ministry of education as a whole, each one
is treated as a fund. Each college will be given money that is specifically for its operations, and is
not be mixed up with other institutions. Therefore, each college will keep its own set of books,
and issue its own financial reports, irrespective of the performance of the other individual
institutions or the ministry as a whole.
Or, consider an NGO with several projects. For example, a single NGO could have a
school in Tigray, a water development project in Amhara, and cattle project in Oromia. Each of
those projects will probably be supported by a different donor. The donor for each project will
not be necessarily concerned with the financial statements of the NGO as a whole. The donor for
a particular project will want financial statements for that project. Therefore, each project will
have its own set of books, and produce its own financial statements. Each project will be a
separate, distinct fund.
The Rational For Fund Accounting
Why is fund accounting needed? The main reason for fund accounting is to focus
accountability, and secondarily to enhance reporting ability. For government branches, budget
amounts are legally given for specific purpose e.g provision of police protection, repayment of
debt, construction of new offices. The money for the different purposes can not be mixed with
that of other purposes, so a fund (separate ledger, set of books) is established for each purpose.
The separate fund then makes it very clear who is responsible for those resources, and that
person can then report on his performance. Similarly, the donations, NGOs receive, are often
designated for a specific purpose, and should not be used for anything else. The donors of these
designated funds often request a financial report for the specific project they have given to, and
are there by able to held NGO responsible for the money given.

The Justification For Opening A New Fund

Setting up, journalizing entries, and reporting for each separate fund is time consuming,
so why would an NFP set up a new fund? The primary reason would be a legal requirement, a
secondary reason would be if the management felt a fund was necessary for good management.
That is, if it felt that some particular type of expenditure needed special attention, it could set up
a fund to divide its activity for the other organization.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Two Kinds Of Funds- Expendable And Non Expendable

Expendable funds are meant to be expended (entirely used up), usually with in one year.
As a particular matter, any money that remains in an expendable fund at the end of the year
typically must be returned to its source. Therefore, managers of expendable fund normally try to
ensure that all that their funds are used up with in the time period. If they are not all used up, the
manager is often perceived as being a poor budget planner. This course will deal primarily with
accounting for expendable funds.

The accounting equation for an expendable fund is slightly different from an FP. Recall
the accounting equation for An FP: A-L = C. The accounting equation for an expendable fund
(from the definition of fund above) is cash plus other financial Resources minus liabilities.
= Fund balance (C+OR-L=FB). There are no ownership interests in an NFP, so there is
no capital or owner’s equity. There is only a balance remaining to be used for the specific
purpose.

The key statement for an expendable fund is the statement of changes in financial
positions. (Revenue), uses of money (expenditures), the corresponding terms in FP accounting
are, of course, income, expenses, and net income, and the corresponding statement is the income
statement.

Non expendable funds are used when maintenance of capital is desired, and the
unexpended funds are not meant to be returned. The employees’ cafeteria of a governmental unit
is an example of this. The accounting for non expendable fund very closely resembles that of a
profit making entity, and the accounting equation will be nearly the same (A-L=C). One
expendable funds are sometimes could proprietary funds.
Types Of Funds
There are seven types of funds, which are divided into three categories:
Prn-3 The following types of funds should be used by state and local governments.
1. Government Funds
a. General fund –GF
b. Special Revenue fund – SRF
c. Capital project fund – CPF
d. Debt service funds - DSF
2. Proprietary Funds
a. Enterprise funds
b. Internal service funds

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

3. Fiduciary Funds
- Trust and Agency funds
Governmental Funds
All governmental funds are expendable. They are meant to be entirely used up, usually in
one accounting period. Expendable assets are assigned based on the purpose for which they may
(must) be spent.

a. The General Fund - used to account for all financial resources except those required
to be accounted for in another funds.
All governments should have a general fund, and there will be only one general fund.
Some governmental units will have only a general fund. If any of the other types of funds
are needed. The governmental unit may have several of those, as needed. The general fund
is used for general government services. It is basically used for everything that does not
require a separate fund.

b. Special Revenue Fund - used to account for the process of specific revenue sources
(other than expendable trusts, or for major capital projects) that are legally restricted to
expenditure for specified purposes.
An example of a special revenue fund might be the unity and safety of the mother land
tax that was collected during the Derg regime. This tax was not for the general fund of
the government, but was raised specifically for the armed forces. It would have needed to
be accounted for and reported on separately.

c. Capital project funds - to account for financial resources to be used for the
acquisition or construction of major capital facilities (other than those financed by
proprietary funds or trust funds).
An example of capital projects fund could be the new Wukiro Agricultural college
campus. The costs incurred in the construction of the buildings are quite different from
operating costs of the college, and would need to be accounted for and reported on as an
entity in itself.

d. Debt Service Funds – used to account for the accumulation of resources for, and the
payment of, general long-term debt principal and interest.
If money has been borrowed for the construction of the new campus, that would give rise
to a debt service fund. Assume that 10 million Birr was borrowed, at 10% simple interest,
and it to be repaid in full in 10 years. Each year, 2 million birr would need to put into a debt
service fund 1 million for repayment of principal, plus 1 million for each years interest.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Proprietary Funds
Proprietary funds are non expendable. They are for a part of the government that is run
like a private business, where the income and fees for services of the fund is expected to cover at
least a part of the expenses. The accounting for proprietary funds is very much like the
accounting for a profit making business.
 Enterprise funds– to account for operations
a) That are financed and operated in a manner similar to private business enterprises
where the intention of the governing body is that the costs (expenses, including depreciation)
of providing goods or services to the general public on a continuing basis be financed or
recovered primarily through user charges; or
b) Where the governing body has decoded that periodic determination of revenues
earned, expenses incurred, and / or net income is appropriate for capital maintenance,
public policy, management control, accountability, or other purposes.
A public park could be an example of an enterprise fund. The park would charge
a user fee from which it would pay the expenses (e.g. salaries) of operating the park.
As a non expendable fund, it would not have to return unused money to its source at
the end of the year. Therefore, it might also accumulate money from year to year for
the purchase of equipment, furnishings, and the like from its income from the user
charges.

 Internal service fund - to account for the financing of goods or services provided by one
department or agency to other departments or agencies of the governmental unit, or to other
governmental units, on a cost reimbursement basis.
A shared garage is a common example of an internal service fund, particularly in NGOs.
That garage would repair all the NGO’s vehicles, regardless of which project or fund uses them.
Charges are made to the various funds for the repair costs. As a non expendable fund, part of the
charge made to the various funds could be intended to be accumulated for future years for the
purchase of tools and equipment.

Fiduciary Funds
Fiduciary funds are used to account for money which one branch of government has on
behalf of another fund, organization, or individuals. A common example of a fiduciary fund is a
central tax collection agency, such as the Inland Revenue Department. The taxes it collects are
not for its own benefits, but are rather passed on to other ministries or departments.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Trust and Agency funds: - to account for assets held by a governmental unit in a trustee capacity
or as an agency for individuals, private organizations, other governmental units, and/or funds.
These include expendable trust funds, non expandable trust funds, pension trust funds, and
agency funds.

Number Of Funds
Prn 4. Governmental units should establish and maintain those funds required by law and
sound financial administration. Only the minimum number of funds consistent with legal and
operation requirements should be established, however, since unnecessary funds result in
inflexibility, undue complexity, and inefficient financial administration.
This principle is especially important in NGOs NGOs tend to do a number of limited life
projects, each of which is accounted for a separate fund. When the project is finished the fund
should be closed. As long as the fund remains open, financial statements will continue to be
produced for it, wasting paper, ink, and time. On the other hand, if not enough funds are opened,
it will difficult to account for the sources allocated to each specific purpose.

Basis Of Accounting (Principle 5)

Modified Accrual Basis
Prn.5. The modified accrual basis or accrual basis of accounting, as appropriate, should be used
in measuring financial position and operating results.
a) Governmental fund revenues and expenditures should be recognized on the modified
accrual basis. Revenues should be recognized in the accounting period in which they
become available and measurable. Expenditures should be recognized in the accounting
period in which the fund liability is incurred, if measurable, except for unmatured interest
on general long term debt, which should be recognized when due.
Discussion of modified accrual basis of accounting.
Revenues - recognize as “available and measurable” measurable means when the amount to be
collected is known with some certainty. Available means the taxes are available to
cover spending in the year of recording (usually interpreted to mean during the fiscal
year, or with in 60 days of the end of the fiscal year).
Example:
Taxes: Assume a January to December fiscal year. In October 1999, property tax rates for 2000
are set. Formal notice (levy) is sent to property owners on December 31,1999. Taxes
must be paid by June 30,2000. On what date do the revenue become measurable?
October 1999, Available? Assuming that each taxpayer wait until the last day to pay,
they become available on June 30,2000. There is probably no need to accrue in this case.
TTLM Development Manual Date: 2010/17
Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Still assuming a January to December fiscal year, in October 1999, property tax rates for
1999 are set. The levy is sent on December 31,1999, to be paid by February 29,2000. On what
date have these revenues become measurable? October 1999. When do they become available?
December 31,1999 why?

Note that in an FP, the revenue would most likely have been recognized (accrued) on
December 31,1999 the day they become officially due.
Donation (NGO): In 1998, an NGO solicits money from private individuals to operate a clinic.
Ten thousand individual donars pledge to contribute $25 per month in 1999 and 2000. The
NGO’s giving history shows that 50% of its pledge are actually received in cash, and half of the
donors fulfill their pledge by giving a lump sum for the entire year in December.

On what date do the revenues becomes measurable? In 1998 available? Sometimes in

1999 and 2000. When should they be recorded pledges is a subject of debate among accountants.
Most NGOs would probably record the funds as they were received in cash. They likely would
not be accrued, unless required by law.

Expenditures- It is assumed throughout the module that governments operate on an account

basis. That is, as transactions are entered into, the entity charges its account for later payment,
rather than paying cash when the goods are recorded or delivered. That is why this principle says
that expenditures are recognized when the fund liability is incurred (except general long-term
debt). At that point, a sum is owed on account, and it is an expenditure regardless of when the
cash actually changes hands. These liabilities are then paid from the expendable assets which
have been assigned for that specific purpose.

The difference between expense and expenditure must be understood to properly

understand the distinction between NFP and FPC (for profit accounting). In the dictionary these
worlds have almost exactly the same meaning. However, almost exactly the same meaning.
However, in Fund Accounting they have been given specialized meanings. An expense is current
period consumption of resources. An expenditure is a decrease in fund financial resources.

For example, in profit making accounting, a car would be considered an asset,

depreciation would be recorded as an expense as the car is “used up”, or wears out. In a fund, the
car would be considered an expenditure at the time of purchase.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Interest on General Long Term Debt - For example, a government issues 10 years, 8% simple
interest bond of $1,000,000 on July 1,1999. The interest and principal are both payable at
maturity. When is the liability incurred for the principal? July 1,1999 for the interest? As it
occurs. What is the amount of accrued interest after one year? $80,000. When should it be
recorded as an expenditure? In the period it must actually be paid out each year, Accordingly, the
principal is recorded as an expenditure in the period when it must actually be paid, in this case on
June 30,2009.

Proprietary Fund Basis Of Accounting

b) Proprietary fund revenues and expenses should be recognized on the accrual basis.
Revenues should be recognized in the accounting period in which they are earned and
become measurable; expenses should be recognized in the period incurred, if measurable.
Discussion of Proprietary Fund Basis of Accounting
Proprietary fund accounting is virtually the same as for profit accounting. Note the
difference in wording for recognizing revenues-“period in which they are earned,” as opposed
to “become available.”

Fiduciary Fund Basis Of Accounting

c) Fiduciary fund revenues and expenses or expenditures (as appropriate) should be
recognized on the basis consistent with the funds accounting measurement objective. Non
expendable Trust funds should be accounted for on the accrual basis; expendable trust
funds should be accounted for on the modified accrual basis. Agency fund assets and
liabilities should be accounted for on the modified accrual basis.
Discussion of Fiduciary Fund Basis of Accounting
The basis of accounting for fiduciary funds depends on whether or not the nature of the
fund is expendable or non expendable. Both kinds are possible in fiduciary funds.

Inter Fund Transfer Basis Of Accounting

d) Transfers should recognized in the accounting period in which the inter fund receivable and
payable arise.
Discussion of Inter Fund Transfer Basis of Accounting
Sometimes there are transfers between funds. Because each fund is separate accounting
and reporting entity, these transfers must be reported. This principle is saying that the transfer
should be recorded when the receivable and payable arise, rather than when the cash is actually
shifted from one fund to another. This is accrual basis. For example, consider that on December

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

31,1999, the General fund of a governmental entity is required to transfer money to the capital
projects fund to help pay for construction of a new office building. The transfer would be
recorded at that time, even if the cash did not actually change hands until July 31,2000.

Fixed Assets And Long Term Liabilities (Principle 6,7,8)

. Distinguishing Fund Fixed Assets /L.T Debt From General Fixed Assets/L.T Debt
Prn. 6. A clear distinction should be made between a) fund fixed assets and general fixed
assets and b) Fund long term liabilities and general long-term debt.
a) Fixed assets related to specific proprietary funds or trust funds should be accounted
for through those funds. All other fixed assets of a governmental unit should be
accounted for through the general fixed assets account group.
b) Long-term liabilities of proprietary funds and trust funds should be accounted for
through those funds. All other unmatured general long term liabilities of the
governmental unit should accounted for through the general long-term debt account
group.
Discussion of Fixed Assets
Some fixed assets belongs to a particular fund, while others belongs to the governmental
entity as a whole. For example, consider the assets of a cafeteria for used by government
employees. The cafeteria would have a stove, tables, chairs, etc, which belongs to it those assets
are not available to be used for another purpose. On the other hand, a governmental unit, e.g. The
City of Mekelle, may have an office building which belongs to the city as a whole. It may be
used for the administration of all the different funds. In order to account for these fixed assets
that belongs to the unit as a whole, a governmental unit should have a General Fixed Asset
Account Group in addition to the funds mentioned in principle # 3. Another example of a general
fixed asset might include a fleet of cars that is shared among the different funds.

The rational for not including general Fixed Assets in the General Fund accounts is that
available for current expenditures. Rather, they are items for which resources have been used.
Neither do these assets constitute a fiscal entity. However, these assets do require accountability,
and an account group is though to be the best way to maintain this accountability.

Discussion of Long-term Debt

Similarly an enterprise fund, such as a city park, might borrow money for improvements
on a long-term basis. This debt would probably by backed by the assets of the park, and
therefore, would be accounted for in the books of that enterprise fund. Conversely, General long-
term debt would be borrowings of the entire governmental entity, rather than by a specific fund.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

The money would be backed by the “Full faith and credit of the governmental entity,” i.e., its
taxing authority, rather than by specific assets.

The rational for not including General long-term debt in the General Fund Accounts is
like that of General Fixed Assets. The General long-term Debt is not something which will
require current period resources for repayment. These liabilities do not constitute a fiscal entity,
either. But they do need accountability, so the General long-term Debt account group is used to
provide this.

Valuation Of Fixed Assets

Prn 7. Fixed assets should be accounted for at cost or, if the cost is not practicably
determinable, at estimated cost. Donated fixed assets should be recorded at their estimated fair
value at the time received.

Discussion of Valuation of Fixed assets

As with FP accounting, fixed assets should be recorded at their historical costs. NFP
accounting allows for two exceptions, because there are not typically encountered by NFPs. That
are not typically encountered by FPs. One is unknown cost, the other is donated fixed assets.

Unknown costs sometimes happen because of the nature of expendable fund accounting.
Fixed assets are debited to expenditure, and then like expense accounts, expenditures are closed
at the end of the fiscal year. After that first year, the financial statements - balance sheet and
operating statements for the do not show the fixed asset. Since the amounts are not on the
statements, and therefore, not examined by the auditors, many NFPs have not kept good fixed
asset records, and the documents supporting the costs of the fixed asset get “lost”. If a new
accountant comes along, who feels the need to open a General Fixed Asset Account Group, the
historical costs of those assets may need to be estimated in order for the entity to have a complete
record of assets. GAAP (Generally Accepted Accounting Principle) for NFP, allows estimated
costs to be used in cases like this, and others in which the cost of fixed assets is unknown.

The other difference that NFPs have is the inclusion of donated fixed assets in this
principle. Fixed assets are not usually donated to profit making entities, so they are not
concerned with accounting for them. If the cost of the asset is known (i.e a new asset), then the
cost should be used. If the asset is second hand, as frequently happens with NGOs, the fair
market value will need to be estimated.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Depreciation Of Fixed Assets

Prn 8. a) Depreciation of general fixed assets should not be recorded in the accounts of
governmental funds. Depreciation of general fixed assets may be recorded in cost
accounting system or calculated for cost finding analyses; an accumulated
depreciation may be recorded in the general fixed assets account group.
b) Depreciation of fixed assets accounting for in a proprietary fund should be recorded
in the accounts of that fund. Depreciation is also recognized in those trust funds
where expenses, net income and/or capital maintenance are measured.
Discussion of Depreciation of Fixed Assets.
General Fixed Assets – Depreciation is not recognized as an expenditure in governmental funds
because it is not a decrease in fund financial resources. However, it should be calculated in the
general fixed assets account group. Why? Because knowing depreciation is helpful for good
financial management, and helps in planning for the replacement of assets in the future.

Proprietary fixed Assets - Because a proprietary fund needs to know that it is covering all its
costs, it includes depreciation as an expense in its accounts. Remember that accounting in
proprietary fund is almost identical to FP accounting.
Budgetary Accounting (Principle 9)
a) An annual budget (6) should be adopted by every governmental unit.
b) The accounting system should provide the basis for appropriate budgeting.
c) Budgetary comparisons should be included in the appropriate financial statements and
schedules for governmental funds for which an annual budget has been adopted.

Financial Reporting (Principle 10)

Interim (Time Between Fiscal Years) Financial Reporting
(a) Appropriate interim financial statements and reports of financial position, operating results,
and other pertinent information should be prepared to facilitate management control of
financial operations, legislative oversight, and where necessary or desired for external
reporting purposes.
Discussion of Interim Financial Reporting
In NFP accounting, interim reporting is used if it fulfills one of these three purposes:
1. For good management
2. For the legislature (legal compliance)
3. For external reporting (perhaps for those who have loaned money to it)

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Comprehensive Annual Report

(b) A comprehensive annual financial report covering all funds and account groups of the
governmental unit included in the compressive financial report.

Classification & Terminology (Principle 11, 12)

Classification Of Transfers And Long Term Debt Proceeds.
Prn 11 a) Interfund transfers and proceeds of general long term debt issues should be classified
separately from fund revenues and expenditures.

Definition and Discussion

Interfund transfers – a transfer from one fund with in the unit to another fund with in the same
unit. For example, suppose an NGO operates clinics, and these clinics charge to cover wages and
medicines. During the year one clinic had a surplus, and another had a loss. The head of the
organization decides to transfer funds from the one with a surplus to the one with a loss.

Proceeds of General long-term Debt issues – Money that is received from borrowing by the
entity as a whole, backed by the full faith and credit of the governmental unit. These two sources
of resources should appear distinct from revenues and expenditures on the entity’s financial
statements.

Classification Of Revenues And Expenditures

(a) Governmental fund revenues should be classified by fund and resource. Expenditures should
be classified by fund, function or program, organization unit, activity, character, and
principal classes of objects.

Discussion of Revenue & Expenditure classification

In summary, say where you got your money, and what it is to be used for. For example, for
revenues, the fund might be the general fund, and the source might be tax collections. For
expenditures, the fund might be general fund, the function might be services, the organization
unit might be police, the activity might be foot patrols, the character might be current
expenditures, and the object might be office supplies.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Proprietary Fund Revenues & Expenses

(b) Proprietary fund revenues and expenses should be classified in essentially the same manner
as those of similar business organizations, functions or activities.

Discussion of proprietary fund Revenue & Expense

As has been mentioned before, proprietary fund accounting is almost identical to
accounting for FPs. This principle reiterates that fact notice that “Expenses” rather than
“Expenditures” are recorded in proprietary funds.

Common Terminology
Prn. 12. A common terminology should be used consistently throughout the budget, the
accounts, and the financial reports of each fund.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department
QUEENS’ College
Training, Teaching and Learning Materials

Self Check
1. Describe the governmental activities of a state or local government and explain the focus of
accounting and financial reporting for these activities.
2. Describe the fiduciary activities of a state or local government and explain the focus of
accounting and financial reporting for these activities.
3. Describe the business type activities of a state or local government and explain the focus of
accounting and financial reporting for these actives.
4. What is the technical meaning of the term fund in governmental accounting?
5. What is the distinction between fund long-term liabilities and general long-term liabilities?

Multiple Choice – Choose the best answer

1. Which of the following is not one of the activity categories of government, as described in
this chapter?
a) Fiduciary
b) Business type
c) Profit seeking
d) governmental
2. A fund is a (an)
a) Legal entity created only when authorized or required by law.
b) Self-balancing set of accounts recording cash and other financial resources, together with
all related liabilities and residual equities or balances, and charges therein.
c) Accounting but not a fiscal entity.
d) All of the above
3. The governmental funds category is made up of:
a) The general fund, special revenue fund, capital project fund and debt service fund.
b) The general fund, special revenue fund, capital project fund, and internal service fund.
c) The general fund, special revenue funds, and permanent funds.
d) The general fund, special revenue funds, capital project funds, and permanent funds.
4. Self-supporting activities that provide goods or services to the public on a users charge basis
should be accounted for in what fund category?
a) Governmental
b) Governmental business type fund
c) Fiduciary
d) proprietary
5. The proprietary funds category is made up of:
a) Enterprise funds, non expendable trust funds, pension trust funds, and internal service
funds.
b) Internal service funds, special revenue funds, and enterprise funds
c) Enterprise funds and internal service funds.
d) Any of the above, depending on management intent.

TTLM Development Manual Date: 2010/17

Compiled by: Acct department