Governmental Accounting: Part 1 (#274)
/In this podcast episode, we discuss fund accounting. Key points made are noted below.
Governmental accounting is quite a bit different from the accounting used by for-profit organizations, because the priorities of a government are completely different. It’s not supposed to earn a profit; instead, it’s supposed to provide services in a cost-effective manner. And, because specific amounts of cash are targeted at different service activities, a government uses the concept of funds to channel cash toward specific programs. I’ll get back to that in a moment.
Governmental Accounting Standards Board
Because the accounting is different, there’s also a different organization that sets the accounting standards for it, which is the Governmental Accounting Standards Board. This is the sister organization to the Financial Accounting Standards Board, which sets the accounting standards for most other types of organizations.
Fund Accounting
The core concept in governmental accounting is fund accounting. A fund is an accounting entity with its own set of accounts that’s used to record financial resources and liabilities, as well as operating activities. It’s also segregated in order to carry out certain programs or attain certain objectives. This does not mean that a fund is a separate legal entity – it’s only a separate accounting entity.
A government uses funds to maintain tight control over its resources, with particular attention to how much money is left to be used. By tracking the remaining amount of cash, a government is better able to monitor resource usage, which reduces the risk of overspending, or of spending money in unauthorized areas. A government could have dozens or even hundreds of these funds, which it then rolls up into its financial statements at the end of each reporting period.
So what types of funds are there? The default fund category that’s used to account for all the activities of a government is the governmental fund. This is the primary operating fund. The main point when accounting for governmental funds is to measure the financial position of the fund and its changes in financial position. This means that a governmental fund has a separate balance sheet, and a statement of revenues, expenditures, and changes in fund balances – which is kind of an income statement.
There are a bunch of different fund types within the governmental fund category. One of them is the capital projects fund. This one is used to account for financial resources that have been set aside for capital outlays. There might be a separate capital projects fund for each individual capital project, or you might have a single fund for all capital projects.
Another type of governmental fund is a debt service fund. This is used to account for financial resources that have been set aside to pay for principal and interest on debt. Debt service funds may be required by a bond indenture agreement, so that investors can have more clarity about whether the government can pay the interest on its bonds and eventually redeem the bonds.
And then there’s the permanent fund. This one is used to account for financial resources for which only the earnings can be used to support a program. It’s usually set up when a government receives an endowment, so the endowment is recorded within its own permanent fund, and investment proceeds from it are used to support, for example, a city zoo.
There are also special revenue funds. These are used to account for the proceeds from specific revenue sources, where there’s a commitment for expenditures other than capital projects or debt service. For example, a city government receives a federal grant that has to be used for road safety, and parks the money in a special revenue fund for that purpose.
And finally, there’s the general fund, which is used to account for all financial resources not being reported in any other fund. This is the main operating fund of the government. There’s only one general fund in each government, though there may be lots of the other types of funds.
Now that’s a lot of funds to take in. Here’s an example of how you might see some of them being used. A city government levies several types of property taxes, each of which can only be used in a certain way. All property taxes are initially received into the city’s general fund. The funds are then distributed to other funds, where they’ll eventually be expended, based on the operating instructions for each fund.
Here’s another example. A state government has a revenue-sharing arrangement for the use of state-owned land, where the government receives a usage royalty. Of the amount received, three-quarters is directed toward the funding of affordable housing projects, while the remainder is held in trust for a third party land conservation fund. In this situation, two separate funds may be used to store the incoming funds, or the entire amount can be stored in a single special revenue fund.
So now we’ve covered the different types of governmental funds. Then there’re proprietary funds. These are used to account for the business-type activities of a government. They emphasize operating income, financial position, changes in net position, and cash flows. And as you might expect, there’re several types of proprietary funds. The first is the enterprise fund. This is used to account for any activity for which users are charged a fee for goods and services. Sometimes, a government will set up an enterprise fund just to have information about the total cost of providing a service, like running a municipal golf course or running a vending operation at the local stadium.
For example, a state government operates an enterprise fund for its lottery operations. The fund is used to account for the ongoing operation of the lottery, including the distribution of lottery proceeds to other funds.
Another proprietary fund is the internal service fund. This is used to account for activities that provide goods and services to other funds, as well as to departments of the primary government, or to other governments. For example, a government could set up an internal service fund for data processing, or for purchasing.
A third category of funds is fiduciary funds. These funds are used to report on assets held in trust for the benefit of organizations or other governments that are not part of the reporting entity. In this type of fund, the reporting emphasis is on net position and changes in net position. There are four types of fiduciary funds. The first is an agency fund, which is used to report on resources held in a custodial capacity, where funds are received and then remitted to other parties. For example, a state government could collect sales taxes on behalf of a city government, and temporarily stores the funds in an agency fund until they’re forwarded to the city government.
Another fiduciary fund is the pension and employee benefit trust fund, which is used to report on assets being held in trust for pension plans and other types of employee benefit plans. In short, the name of this fund pretty much describes what it does.
Yet another fiduciary fund is the private-purpose trust fund. This one is used to report on trust arrangements where other parties are the beneficiaries. For example, a state government receives unclaimed property and holds it in a private-purpose trust fund until the rightful owners eventually claim their property.