Agency fund definition
/What is an Agency Fund?
An agency fund is an assemblage of funds that one government agency holds on behalf of another government agency. These funds typically arise when it is more efficient for one fund to collect cash on behalf of other funds, either through fund raising activities, billings, or tax collections, and then distribute the funds elsewhere. It would be much more expensive for the downstream funds to collect the cash on their own, since they would need to pay for additional administrative staff in order to do so.
Example of an Agency Fund
A state government operates an agency fund to collect local sales taxes on behalf of counties and municipalities. During the month, the state collects $8 million from retailers and records the cash along with a corresponding liability to the participating local governments. The state does not recognize revenue because the money belongs to other entities. After deducting any authorized administrative fee, it distributes the remaining collections according to statutory allocation formulas. The agency fund therefore serves only as a custodial mechanism for receiving, temporarily holding, and transferring resources to their rightful recipients.
Agency Fund FAQs
What basis of accounting is used for agency funds?
Agency funds, now generally classified as custodial funds under GASB standards, use the accrual basis of accounting and the economic resources measurement focus. Transactions are recognized when the underlying events occur, rather than when cash is received or paid.