Unit 3
Unit 3
Unit 3
Contents
3.0 Aims and Objectives
3.1 Introduction
3.1.1.General Fund
3.1.2 Special Revenue Fund
3.2 Accounting Characteristics
3.3 Budgets and Budgetary Accounts
3.3.1 Recording the Budget
3.4 Accounting for General Fund & Special Revenue Funds
3.5 Terminology and Classification of Governmental Fund Budget and Accounts
3.6 Inter Fund Transactions and Transfers
3.7 Summary
3.8 Answers to Check Your Progress Questions
In this unit, the two type of funds in the governmental funds category i.e general fund and
special revenue fund are discussed, it gives a clear detail how the two fund operate, how their
financial operations are accounted and recorded, theoretical as well as accounting illustrations
are given to give the reader a clear detail understanding of the two funds.
3.1 INTRODUCTION
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resources used for financing the general administration of the unit & the traditional services
provided to the people.
- Comparison:
The general fund should account for all financing sources for which a separate fund is not
required. Special revenue funds are necessary when they are required by law or contract. A
governmental entity will have several special revenue funds at any time & these funds are
opened & closed according to need.
The general funds and the special revenue funds have different purposes, but they are both
revenue funds, and the accounting and reporting procedure is the same for both. They are
similar in that all or almost all of their resources are expended each year. They are then filled up
(replenished) again for the next year.
Fixed assets are not capitalized in either fund. Their purchase is considered as expenditure, the
same as for salaries or utilities. Such fixed assets are not accounted for by these funds. Because
they are not normally converted into cash. Similarly the same categories of funds account for
only those liabilities incurred for normal operations that will be liquidated by use of fund assets.
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The arithmetic difference between the amount of financial resources and the amount of
liabilities recorded in the fund is called the fund equity.
equity. Residents of the governmental unit
have no legal claim on any excess of liquid assets over current liabilities. therefore the fund
equity is not analogous to the capital accounts of an investor owned entity. Accounts in the
fund equity category of general funds & special revenue funds consist of reserve accounts
established to disclose that portion of the equity are not available for appropriations. The
portion of equity available for appropriation is disclosed in an account called Fund Balance.
Balance.
General funds & special revenue funds account for financial activates during a fiscal year in
accounts classified as Revenues,
Revenues, Other Financing Sources,
Sources, Expenditures & Other
Financing Uses.
Uses.
Revenue:
Revenue: - is the increase in the fund financial resources other than from inter fund transfers &
debt issue proceeds.
Expenditure is defined as decrease in fund financial resources other than through inter fund
transfers, operating transfers out of a fund and debt issue proceeds are classified as other
financing uses. It is a term which replaces both the terms costs and expenses used in
accounting for profit seeking entities.
Other Financing uses - a decrease in the fund financial resources as a result of operating
transfers out of a fund.
An example of the use of transfer accounts occurs in those jurisdictions where a portion of the
taxes recognized as revenue by the general fund of a unit is transferred to a debt service fund
which will record expenditures for payment of interest and principal of general obligation debt.
the general fund would record the amounts transferred as operating transfers out: the debt
service fund would record the amount received as operating transfers in. Thus the use of
transfer accounts achieve the desired objective that revenues be recognized in the fund which
levied the taxes and expenditures be recognized in the funds which expends the revenue.
In few jurisdictions taxes must be collected in the year before the year in which they are
available for expenditure. In such jurisdictions tax collection should be credited, deferred
revenue should be debited & revenue should be credited.
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Under accrual basis, expenditure is recognized when a liability to be met from fund asset is
incurred. It is important to note that an amount of a liability incurred whether the liability is for
salaries (an expense) for supplies ( a current asset) ,or for a long lived capital assets such as
land building or equipment.
The fact that budgets are legally binding upon administrators has led to the incorporation of
budgetary accounts in the general fund and in the special revenue funds and in all other funds
required by law to adopt a budget.
Budgeting is the process of allocating scarce resources to unlimited demands budgeting has a
great role in governmental accounting than in profit making business.
Budgeting is a key elements of legislative control over governmental units. The two
classifications of budget for governmental units are the same as those for business enterprises.
Annual budgets and long term or capital budgets. Annual budgets include the estimated
revenues & appropriations for expenditures for a specific fiscal year of the governmental unit.
Annual budgets are appropriate for the general fund & special revenue funds. They sometimes
are used for other governmental funds. An expendable trust funds also may have an annual
budget, depending upon the terms, the terms of the trust indenture. Capital budgets, which are
used to control the expenditures for construction projects or other plant asset acquisitions, may
be appropriate for capital projects funds. The annual or capital budgets often are recoded in the
accounts of all these funds, to aid in act for compliance with legislative authorities.
The operations of the two proprietary funds are similar to those of business enterprises.
Consequently, annual budges are used by these funds as a managerial planning & control
device rather than as a legislative control tool. Thus annual budgets of enterprise funds &
internal service funds generally are not recorded in ledger accounts by these funds.
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incorporate budgetary accounts. Only three general ledger control accounts are needed to
provide budgetary control; Estimated Revenue, Appropriations and Encumbrances.
All the three must be supported by subsidiary ledger accounts whatever detail is required by
law or by sound financial administration. Budgeted interfund transfers and debt issue proceeds
may be recorded in Estimated Other Financing Sources and Estimated Other Financing
Uses control accounts supported by subsidiary accounts as needed.
Recording encumbrance helps the one managing the finances to know that money has been
committed to some purpose and is no longer available for expenditure. There is often a delay
between placing the purchase order and receiving the goods ordered. Therefore it is possible
for the administrators to forget about the purchase orders that have been placed and to think
that the money is still available to be used. This is especially true in a large entity where dozens
of purchase orders are placed each week. To ensure that outstanding purchase orders are not
overlooked in the on going commitment of resources, purchase orders are recorded in the
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Encumbrance account. An encumbrance differs from an expenditure in that the encumbrance
is an estimate of liability to be incurred while expenditure is an actual liability which has been
incurred. the reason that encumbrance is only an estimate is that invoiced amounts sometimes
differ from purchase order amounts. for example a particular item may be out of stock, and
either backordered, or substituted by a similar item.
Example-
Example- when a purchase orders for goods or services is issued to a supplier by one of those
funds, a journal entry similar to the following is prepared for the fund.
Encumbrance 150,000
Fund Balance Reserved for Encumbrances 150,000
= to record encumbrances for purchase order no. 001
issued to X company.
When the suppliers invoice for the ordered merchandise or services is received by the
governmental unit, it is recorded and the related encumbrance is reversed as seen below:
Expenditures 180,500
Vouchers payable 180,500
= to record an invoice received from Wilson company under purchase
order no. 001
Fund Balance reserved for Encumbrances 150,000
Encumbrances 150,000
=To reverse encumbrance for purchase order no. 001 issued
to X company
Two journal entries are needed for encumbrances, one when the order is placed and another
when the goods are received. When the order is placed, encumbrance is debited and Reserve
for Encumbrance (a
(a fund balance account) is credited. When the order is received, the entry
is reversed. As indicated by the example above the invoice amount may differ from the amount
of the governmental units purchase order because of such items as shipping charges, Sales
Taxes, and price changes.
Regardless of which types of annual budgets are used by government unit, the final budget
adopted by the governmental units legislative body will include estimated revenue other
financing sources, appropriations and other financing uses. If the estimated revenue and other
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financing sources of the budget exceed appropriations and other financing uses (as required by
law for many governmental units), there will be budgetary surplus, if vice-versa, there will be
budgetary deficit.
Illustration
Below is the Balance Sheet of town of X General fund on June 30, year 5 and the annual
budgets adopted for the year ended June 30, year 6.
Below are the approved budget by the town council for the fiscal year ended on June 30, year 6.
Estimated revenues:
- General property taxes .......................... 7,000,000
- Licenses and permits .......................... 400,000
- Charges for services ......................... 500,000
- Fines and for fits ............................... 300,000
- Miscellaneous revenues ........................ 200,000 8,400,000
Estimated other financing sources (transfer from EF) 100,000
Appropriation:
- General government .......................... 4,700,000
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- Public safety .......................... 1,900,000
- Health and welfare .......................... 1,100,000
- Culture and recreation ...................... 400,000 8,100,000
Estimated other financing uses (transfer to DSF) 100,000
* The journal entry to record the annual budget for the town of X General fund on July 1,
year 5 was as follows:
An analysis of each of the ledger accounts in the forgoing journal entry follows:
1. Estimated Revenues and Estimated Other financing Sources ledger account may be
considered Pseudo Asset controlling accounts because they reflect resources expected to be
received by the General Fund during the fiscal year. These accounts are
Not actual assets because they do not fit the accounting definition of an Asset as a probable
economic benefit obtained or controlled by a particular entity as a result of past transactions or
events. Thus the two accounts in substance are memorandum accounts,
accounts, useful for control
purposes only, that will be closed after the issuance of Financial statements for the General
fund for the fiscal year ending June 30 year 6.
2. The Estimated other Financing source ledger accounts includes the budgeted amounts
of such non Revenue items as proceeds from the disposal of plant assets and operating
transfers from other funds.
3. The Appropriations and Estimated Other Financing Uses Ledger Account may be considered
Pseudo Liability controlling accounts because they reflect the legislative body’s commitment
to expend General fund resources as authorized in the Annual Budget. These accounts are not
genuine liabilities because they do not fit the definition of a liability as a probable future
sacrifice of economic benefits arising from present obligation of a particular entity to transfer
assets to provide services to other entities in the future as a result of past transactions or
events. The appropriations and Other Financing uses are memorandum accounts,
accounts, useful for
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control purposes only, that will closed after issuance of year end financial statements for the
general fund.
4. The Estimated Other Financing Uses accounts include budgeted amount of operating
transfers out to other funds, which are not expenditures.
5. The Budgetary Fund Balance Ledger Account, as its title implies is an account that balances
the debit and credit entries to accounts of a budget journal entry. Although similar to the
owners’ equity accounts of a business enterprise in this balancing feature, does not purport to
show an ownership interest in the General funds assets. At the end of the fiscal year, the
budgetary fund balance account is closed by a journal entry that reverses the original entry for
the budget.
The journal entry to record the town of X general funds annual budget for the year ending June
30 year 6 is accompanied by detailed entries to subsidiary ledgers for Estimated Revenues,
Estimated other financing Sources, Appropriations and Estimated Other Financing Uses. the
budget of the town of X general fund purposely was condensed; in practice the general fund
estimated revenues and appropriations would be detailed by source and function, respectively
into one of the following widely used subsidiary ledger categories:
Such details will be discussed in the next topic; Classification and terminology of governmental
funds budgets and accounts.
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In summary, budgets of a governmental unit are often recorded in the accounts of the four
governmental funds. An expendable trust fund may also record a budget if required to do so by
the trust indenture. The recording of the budget initiates the accounting cycle of each for each
of the funds listed above. Recording the budget also facilitates the preparation of financial
statements that compare budgeted and actual amounts of revenues and expenditures.
Assume that in addition to the budget illustrated earlier, the town of X general fund had the
following summarized transaction and events for the fiscal year ended June 30, 19x6
1. Property taxes were billed in the amount of 7,200,000 of which 140,000 was of
doubtful collect ability.
Explanation-
Explanation- The modified accrual basis of accounting for a general fund permits the accrual
of property taxes, because they are billed to the property owners. The estimated uncollectibles
property taxes are offset against the total assets billed in order to measure actual revenues from
property taxes for the year.
2. A total of 6,500,000 amount of Property tax were collected and a total of 1,020,000
Amount of cash from other revenue sources like licenses and permits, fines and forfeits,
Miscellaneous sources were also collected.
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Cash 7,520,000
Property taxes receivable-current 6,500,000
Revenue 1,020,000
= To record collection of property taxes and other revenues for the year.
Exp-
Exp- Under the modified accrual basis of accounting, revenues not susceptible to accrual are
recognized on the cash basis like self-assessment basis tax revenue (Eg. Income tax, Sales Tax,
Gross receipts Tax, ) and miscellaneous revenues (Eg. Annual business licenses, construction
and home improvement permits, Fines and forfeits etc.)
130,000
Property taxes receivable- current 130,000
= To write off receivables for property taxes that are uncollectable
Explanation-
Explanation- The forgoing journal entry represents a shortcut approach. in an actual
situation , uncollectibles property taxes first would be transferred together with estimated
uncollectibles amounts, to the Taxes Receivable- Delinquent ledger account from the Taxes
Receivable- Current account. Any amounts collected on these delinquent taxes would include
revenues for interests and penalties required by law. Any uncollected delinquent taxes would be
transferred, together with estimated uncollectibles amounts to the Tax-Liens Receivable ledger
Account. After the passage of an appropriate statutory period, the governmental unit might
satisfy its tax lien by selling the property on which the delinquent taxes were levied.
4. Purchase orders for non recurring expenditures were issued to outside suppliers in the total
amount of 3,600,000.
Encumbrances 3,600,000
Fund Balance reserved for Encumbrances 3,600,000
= To record purchase orders for non-recurring expenditures issued during the year.
Explanation-
Explanation- encumbrance journal entries are used to prevent the over expending of an
appropriated amount in the budget. This journal entry to the encumbrances ledger account is
posted in detail to reduce the unexpended balances of each applicable appropriation in the
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subsidiary ledger for appropriation. The unexpended balance of each appropriation is thus
reduced for the amount committed by the issuance of purchase orders.
5. Expenditures for the year totaled 7,600,000 of which 900,000 applied to the acquisitions of
supplies and 3,500,000 applied to 3,550,000 of the purchase orders in the total amount of
3,600,000 issued during the year.(assume consumption method).
a) Expenditures 6,700,000
Inventory of supplies 900,000
Vouchers payable 7,600,000
= To record expenditures for the year.
Explanation-
Explanation- the expenditure ledger account is debited with all expenditures regardless of
purpose except for Additions to the Inventory of Supplies, Principal and Interest
Payments on Debt, Additions to the Governmental Unit’s Plant Asset, Payments for
Goods or Services to be Received in the Future,
Future, - all are debited to expenditure or other
financing uses rather than to asset or liability ledger account. (Expenditure for debt principal
and interest and plant asset additions are also recorded on a memorandum basis in the general
long-term debt and general fixed assets account group respectively.
6. Billings for services and supplies received from enterprise fund and internal service fund
totaled 300,000 and 200,000 respectively.
Expenditures 500,000
Payable (Due) to Enterprise fund 300,000
Payable (Due) to Internal Service fund 200,000
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= To record billings for services and supplies received from other funds.
Explanation-
Explanation- Billings from other funds of the governmental unit are not vouchered for
payment as are billings from outside suppliers. Instead billings from other funds are
recorded in a separate liability ledger account. the related debit is to the expenditure accounts
if the billings are for Quasi- external transaction , such as providing services and supplies.
7. Cash payments on vouchers payable totaled 7,700,000. Cash payment to the Enterprise fund
and the Internal service fund were 250,000 and 140,000 respectively.
Cash 500,000
Revenue 400,000
Other Financing Sources 100,000
= To record payment in lieu of property taxes (400,000) and subsidy (100,000)
Received from Enterprise fund.
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Explanation-amounts
Explanation-amounts transferred to the general fund from other funds are recognized as
revenues if they are quasi-external transactions,
transactions, such as payment in lieu of property taxes;
otherwise they are recognized as other financing sources if they are operating transfers,
transfers, such
as subsidies.
Explanation-
Explanation- the immediately preceding journal entry represents a restriction of the portion of
the fund balance account to or event its being appropriated improperly to finance a deficit
annual budget for the general fund for the year ending June 30,year 7. Only cash and other
monetary assets of a general fund are available for appropriation to Finance authorized
expenditures of the succeeding fiscal year.
Explanation-
Explanation- The forgoing journal entry clears the Taxes Receivable- Current ledger account
and the related contra account for uncollectable amounts so that they will be available for
accrual of property taxes for the fiscal year ending June 30,year 7.
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12. The town council designated 250,000 of the unreserved and the undesignated fund balance
for the replacement of equipment during the year ending June 30, year 7.
Unreserved and Undesignated Fund Balance 250,000
Fund Balance Designated for -
Replacement of Equipment 250,000
= To designate a portion of the fund balance for the replacement
of equipment during the year ending June 30, year 7.
Explanation-
Explanation- The fund balance designated for replacement of equipment ledger account
Is similar to a retained earnings appropriation of a business enterprise. It indicates that the
annual budget for the town of X General fund for the year ending June 30, year 7 Must include
an appropriation of 250,000 for new equipment and estimated revenue For the proceeds from
the disposal of the replaced equipment. The designated Fund balance of 250,000 will be closed
to the unreserved and undesignated fund balance Ledger account on July 1, year 6, when the
annual budget for the year ending June 30 year 7 is recorded.
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Fund Balance Designated for Replacement of Equipment 250,000
Unreserved and undesignated fund balance 450,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
Appropriations 8,100,000
Estimated Other Financing Uses 100,000
Revenues 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Encumbrances 50,000 .
Total 19,150,000 19,150,000
Financial statements for a General Fund
The results of operation (i.e, net income or net loss) are not relevant for a General Fund.
Instead, two financial statements- a Statement of Revenues, Expenditures and Change in Fund
Balance and a Balance Sheet are appropriate.
Assuming that the total revenue for the town of X is composed of the following sources,
Also assume that the total expenditures is composed of the following items.
General Government 4,590,000
Public safety 2,000,000
Health and Welfare 1,200,000
Culture and Recreation 210,000
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Town of X General fund
Statement of Revenues, Expenditures and Change in Fund Balance
for the Year ended June 30, 19x6
Budget Actual Variance- Favourable
Revenues: (Unfavourable)
Expenditures:
General Government 4,700,000 4,590,000 110,000
Public Safety 1,900,000 2,000,000 100,000
Health an Welfare 1,100,000 1,200,000 (100,000)
Culture and Recreation 400,000 210,000 190,000
Total Expenditures 8,100,000 8,000,000 100,000
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Town of X General Fund
Balnce Sheet,
June 30, Year 6
Assets
Cash 1,420,000
Taxes Receivable- Delinquent 570,000
Less:
Less: Allowance for Uncollectable Taxes 10,000 560,000
Inventory of Supplies 500,000
Total Assets 2,480,000
Liabilities and Fund Balance
Liabilities
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service fund 60,000
Total Liabilities 810,000
Fund Balance:
Reserved for Encumbrance 50,000
Reserved for Inventory of Supplies 500,000
Designated for Replacement of Equipment 250,000
Unreserved and Undesignated 870,000 1,670,000
Total Liabilities and Fund Balance 2,480,000
After the financial statements have been prepared for the town of X General fund, the
budgetary and actual revenues, expenditures and encumbrance ledger accounts must be closed
to clear them for the next fiscal year activities.
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= To close encumbrance ledger account
Appropriations 8,100,000
Estimated Other Financing Uses 100,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
= To close budgetary ledger Accounts
Revenue 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Unreserved and undesignated Fund Balance 470,000
= To close Revenues, Expenditures, Other Financing Sources and Uses
Ledger Accounts
Explanation- The forgoing journal entries do not close the Fund Balance Reserved for
Encumbrance Ledger account. Thus, the reverse represents a restriction on the fund balance on
June 30 year 6 brcause4 the town of X General fund is committed in the fiscal year 7 to make
estimated expenditures of 50,000 attributable to budgetary appropriations carried over from
the fiscal year 6. if the fund balance reserved for encumbrance account had been closed , the
unreserved and undesignated fund balance account would have been overstated by 50,000. The
unreserved and Undesignated Fund Balance Ledger account balance must represent the
amount of the General fund’s Assets that is available for appropriation for a deficit budget in
fiscal year 7. When expenditures applicable to 50,000 outstanding encumbrances on June 30
year 6 are vouchered for payment in the succeeding fiscal year, the fund balance reserved for
encumbrance ledger account is debited for 50,000, the vouchers payable is credited for the
amount to be paid, and the balancing debit or credit is entered in the unreserved and
undesignated fund balance account.
The budgetary accounts are closed at the end of the fiscal year because they are no longer
required for control over revenues, expenditures, and other financing sources and uses. the
amounts in the journal entry that closed the budgetary accounts were taken from the original
journal entry to record the budget at the beginning.
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After june30, year 6, closing entry for the town of X general Fund are posted, the unreserved
and undesignated Fund Balance Ledger Account appears as shown below.
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operations. Ledger account titles, budgetary processes and financial statements for a special
revenue funds are similar to those of General funds.
Illustration
To illustrate the accounting for a Special Revenue Fund, Assume that on July 1, year 6, The
town council of the town of X authorized the establishment of a special Revenue Fund- its first
such fund- to account for Special Assessment against certain residents of the neighboring
village of Y.
Y. Because the property tax revenue of the town of X, which among other services
financed street cleaning and street light maintenance for residents of the town only, could not
be used for such services elsewhere, the town council authorized special assessment to finance
comparable services for the requesting residents of the village of Y. the town council adopted
a budget for the special revenue fund for the year ending June 30 year 7, providing for
estimated revenues (from the special Assessments) of 800,000 and appropriations for
reimbursement to the General fund for expenditures made by that fund for the services
provided to the village of Y residents) of 75,000.
Following are additional transactions or events of the town of X special revenue fund for the
year ending June 30 year 7.
1. On July 1, year 6, the town recorded the adopted budget in the books.
Estimated Revenues 800,000
Appropriations 750,000
Budgetary Fund Balance 50,000
= To record the annual adopted budget for fiscal year ending June 30 year 7.
2. Special Assessments tax totaling 820,000 were levied which are to be paid in full in
sixty days.
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3. Cash Receipts from Special Assessment Taxes of 820,00 were collected in full.
Cash 820,000
Special Assessment Tax Receivable- current 820,000
= To record collection of special assessment tax in full during the year.
4. Of the cash receipts, 630,000 was invested in Treasury bills with face amount of
650,000. The treasury bills mature on June 30 year 7 and were redeemed in full on
that date.
Cash 650,000
Short Term investments 630,000
Revenues 20,000
= To record receipts of cash for matured U.S treasury bills.
Maturity June 30, year 7.
5. Billings from the town of X General fund, requesting reimbursement of expenditures of that
fund, totaled 760,000; of that amount, 620,000 was paid to the General Fund by
June 30, year 7.
Expenditures 760,000
Payable to General Fund 760,000
= To record billings from general fund for reimbursement of expenditures for street cleaning
and street light maintenance for residents of the village of Y
6. On June 30, year 7, the town council of the town of x designated the fund balance
of the Special revenue fund(80,000) for reimbursement of the General Fund during
the year ending June 30, year 8.
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Unreserved and Undesignated fund balance 80,000
Fund Balance Designated for -
Reimbursement of General Fund 80,000
= To designate the entire fund balance for reimbursement of General Fund during the year
ending June 30 year 8.
Because of the 760,000 billings of the town of X General Fund to the Special Revenue Fund
were for reimbursement of General fund expenditures, the general fund credited its
expenditures ledger account in the journal entry in which it debited receivable from Special
Revenue fund.
Closing Entries
Appropriations 750,000
Budgetary Fund Balance 50,000
Estimated Revenues 80,000
= To close budgetary ledger accounts.
Revenue 840,000
Expenditures 760,000
Unreserved and Undesignated- 80,000
fund balance
= To close revenue and expenditures ledger account
Financial Statements for a special revenue funds
The financial statements for a special Revenue funds is the same as that of a General fund-a
statement of Revenues, Expenditures and change in Fund Balance and a Balance sheet.
Following are the financial statements for the town of X Special Revenue fund for the year
ended June 30, year 7:
Favourable
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Revenues:
Special Assessments 800,000 820,000 20,000
Other - 20,000 20,000
Total Revenues 800,000 840,000 40,000
Expenditures
Reimbursement of General Fund-
expenditures 750,000 760,000 (10,000)
Excess of Revenues over Expenditures . . .
(Fund Balance End of year)------------- 50,000 80,000 30,000
Assets
Cash ----------------------------------------------------------------------- 220,000
Liabilities and Fund Balance
Payable to General fund ------------------------------------------------- 140,000
Fund Balance Designated for Reimbursement of General fund ----- 80,000
Total Liabilities and Fund Balance ------------------------------- 220,000
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3.5 TERMINOLOGY AND CLASSIFICATION FOR GOVERNMENTAL FUND
BUDGETS AND ACCOUNTS
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-Public safety
-Health & welfare
-Culture & recreation
The key distinction between the classification of expenditures by organizational unit &
Classification by programmes or functions is that responsibility for a dept is fixed, where as a
number of depts. may be involved in the performance of a programme or a function.
4. Classification by activity
An activity is a specific & distinguishable line of work performed by an organizational unit to
fulfill the overall goals of the programme or function. For example, within the police dept,
activities such as the following may be performed.
- Crime control by -- Foot patrol
Car Patrol
- Traffic control by -- Traffic
5. Classification by character
This classification has to do with the expenditure itself than the department or fund in which it
is incurred. the character of an expenditure is either.
- Current expenditure – meant to benefit the current period only.
i. Capital expenditure – benefits the current period plus other periods the future.
i. Debt service expend – includes payment of interest or debt & payment of debt principal
that arises from past period benefits which may also be expected to benefit the
current and future period.
6. Classification by object
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Object of expenditure is the thing for which the expenditure was made. It is mainly a
concern of current period expenditures.
E.g. Personal services
Other services & charges
Supplies
Capital outlays
Revenues are defined, as all increases in fund net Assets except those arising from inter fund
transfers and from proceeds of long-term debit. A governmental unit and the funds thereof,
may raise revenue only from sources available to them by law.
The primary classification of governmental revenues is by fund. Within each fund, the major
classification is, by source. Major revenue source classes are: -
1. Taxes
2. Licenses & permits
3. Inter governmental revenues
i. Charges for services
i. Fines & forfeits
i. Miscellaneous revenues
1. Taxes
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Taxes are a forced contribution imposed on the citizens by the government. There are a number
of different kinds of taxes possible, including property (land use) sales, excise, income,
customs, and capital gain etc….
Giving a formal notice of a tax to be paid is called a levy. A tax levy, especially on goods or
property also typically creates a Lien, which gives the taxing authority, the power to confiscate
the goods or property in the event of a non- payment of the tax.
Incorrect calculation of taxes by the tax payer may result in penalties. Taxes, which are not
paid on time usually, include accrued interest on any unpaid balance. These penalties & interest
create an additional revenue source for the government.
In addition to revenue accounts, the following accounts may also be needed to account for tax
collections; Taxes Receivables Current, Taxes Receivable Delinquent, Tax Lien Receivable,
Interest & Penalties Receivable on Delinquent Taxes (all four are assets), Deferred Taxes, Trust
for property owners (Both are Liabilities), Allowance for Uncollectable Taxes (contra-Asset).
any uncollected taxes are accounted for as a reduction of revenue.
The deferred taxes account is credited for taxes, which are paid in a year before they may
legally be used for expenditure. The Taxes Receivable Current account is used to accrue taxes,
which are due in the current year. The taxes receivable Delinquent account is used to accrue
taxes, which are due in the current year. The Taxes Receivable Delinquent account is used to
record any taxes, which are, past due. The Taxes Lien- Receivable account is used to record
taking possession of goods on which an owed tax has not been paid. If those possessed goods
are sold in an attempt to cover the tax & any additional cost incurred in colleting it, The Trust
for Property Owners account is used to record any balance remaining from the selling price
after the tax & collection cost are deducted. The Interest & Penalties Receivable on delinquent
taxes account is used, obviously, to record interest & penalties due on unpaid taxes.
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i. Business - like merchants licenses, customs clearing Agency licenses, professional
(physician, attorney)
i. Non business - like driving licenses, hunting license, Residential permits
i. Revenue from licenses & permits are accounted on the cash basis.
i. 3. Intergovernmental Revenue
i. Intergovernmental revenues include Grants, Entitlements & Shared Revenues.
i. a) Grant is money, which is given for a specific purpose & it should be classified
according to both its source & it purpose. A grant could be given from the federal
governmental to regional state government (called a subsidy) or from a foreign
government to the federal government. Grants can be divided into two types.
i. b) Shared revenues is a revenue levied by one government but shared on a
predetermined basis, often in proportion o the amount collected at the local level, with
another government or class of government. it should be accrued unless there are
matching or specific spending requirements.
i. Entitlement is the amount of payment to which a state or local government is entitled as
determined by the federal government pursuant to an allocation formula
4. Charges for services
Charges for services include revenue from charges for all activities of a
governmental unit, except the operations of enterprise funds.
E.g. court costs, special parking meters.
It should be recognized as revenue when earned, if that is prior to the collection of cash.
6. Miscellaneous revenue
Any revenue types that do not fit one of the above five classifications.
E.g. interest in come on investments – should be accrued
i. Sales of fixed assets
i. Insurance claim
i. Contribution from private individuals
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3.6 INTERFUND TRANSACTIONS AND TRANSFERS
Inter fund transactions are transactions between different entities within the governmental unit.
they need to be recorded in two different sets of books.
Cash xxx
Due to the GF xxx
GF
Expenditure xxx
Due to ISF xxx
SRF
Due from GF xxx
Revenues xxx
3) Reimbursements
Are transactions that reimburse a fund for expenditures made by it on behalf of another
fund i.e. one fund pays a bill on behalf of another & is then reimbursed.
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Expenditure xxx
Cash xxx
= To record payment of bill on behalf of ---
Cash xxx
Expenditure xxx
= To record reimbursement
5) Operating transfers
Operating transfers are made in connection with the normal operation of the recipient fund.
They are legally authorized transfers from a fund, which receives revenue to the fund through
which the resources are to be expended. These transfers are other financing source of the
receiving fund, other financing uses of the paying fund.
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_________________________________________________________________________
_________________________________________________________________________
2. Discuss the reservation and designation of the fund balance account of the governmental
unit’s General Fund and special Revenue fund.
_________________________________________________________________________
_________________________________________________________________________
3. What are the principal differences between the financial statements of the governmental units
general fund and the financial statements of a business enterprise?
_________________________________________________________________________
_________________________________________________________________________
4. What does a budget include in a governmental units general fund and special revenue funds.
_________________________________________________________________________
_________________________________________________________________________
5. Describe the classification of Governmental funds revenue and expenditures?
_________________________________________________________________________
_________________________________________________________________________
6. What revenues of general fund Generally accrue?
_________________________________________________________________________
_________________________________________________________________________
7. Discuss the use of Encumbrance as a budgetary control account.
_________________________________________________________________________
_________________________________________________________________________
8. Describe how expenditures are recorded and exceptions which are recorded separately.
_________________________________________________________________________
_________________________________________________________________________
9. Describe accounting for supplies in governmental entities general fund and special
revenue fund.
_________________________________________________________________________
_________________________________________________________________________
10.Describe the interfund transfer and transactions in The governmental funds?
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_________________________________________________________________________
_________________________________________________________________________
3.7 SUMMARY
Even though the General fund and the special Revenue fund have different Purposes, they are
both revenue funds and the accounting and reporting procedure is the same for both. They are
very similar in that all or almost all of their resources are expended each year and then filled up
in the next year. Understanding the accounting and characteristics of General fund with an
exception of few points will enable us to have a clearer understanding of both funds.
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