Government and Non for Profit Accounting lecture notes

This is a note about Government and NFP accounting

1. Governmental and Not-for-Profit Accounting By Moulid Abdirahman Ali (BA &MA) [email protected]

2. Grading policy Mid Term Exam: 20% Assignments and presentations15% Final Exam: 50% Attendance: 5% Class participation 10%

3. Method of delevering course will be: Two way learning approarch Class discussion Presentation case stuy

4. Course Content Chapter 1: Overview Of Financial Reporting For Governmental And NFP Entities Chapter 2: Principles Of Accounting And Financial Reporting Of Governmental Entities Chapter 3: Accounting For General And Special Revenue Funds Chapter 4: Accounting For Capital Project Fund Chapter 5: Accounting For Debt Service Fund Chapter 6: Accounting For Other Not-for-profit Entities

5. Text BOOK Accounting for Governmental and Non-Profit Entities, 15th edition, by Wilson, Kattelus, Hay. McGraw-Hill/Irwin Inc., USA, 2010.

6. Chapter-one Overview Of Financial Reporting For Governmental And NFP Entities Govt and NFP Accounting

7. Learning outcomes of this chapter After studying Chapter 1, you should be able to: Understand the characteristics that distinguish governments and not-for-profit organizations from businesses (for-profit entities). Identify the features that distinguish governments from not-for-profits Identify authoritative bodies responsible for setting GAAP and financial reporting standards for different governmental and not-for-profit entities. Govt and NFP Accounting

8. Accounting for Governmental and Not-for-Profit Organizations Why are accounting practices for these organizations very different from those of business organizations? Different purposes in society Financed by resource providers who do not expect benefits proportional to the resources they provide Management has a special duty to be accountable for how resources are used in providing services

9. What Are Governmental Organizations? General purpose governments Provide a broad array of services Examples: Federal government, state governments, cities, towns, villages, counties Special purpose governments Usually provide only a single or just a few services Examples: Independent school systems, public colleges and universities, public hospitals, fire protection districts, sewer districts, transportation authorities, and many others

10. What are Not-for-Profit Organizations? Legally separate organizations Usually exempt from federal, state, and local taxation Religious, community service, private educational and health care, museums, and fraternal and social organizations, among many other kinds of organizations

11. Resource providers do not expect to receive proportional benefits Lack of a profit motive Absence of transferable ownership rights How Do Governmental and Not-For-Profit Organizations Differ from Business Organizations ?

12. Power ultimately rests in the hands of the people People delegate power to public officials through the election process Empowered by and accountable to a higher level government Taxation powers How Do Governmental Entities Differ From Not-For-Profit Organizations?

13. FASB Business organizations Nongovernmental not-for-profits GASB State and local governmental organizations Governmental not-for-profits FASAB= Federal Accounting Standards Advisory Board Federal government and its agencies and departments Sources of GAAP and Financial Reporting Standards

14. Different financial report users with different needs Governmental financial reporting focuses on stewardship and accountability for how public resources are raised and used to provide services Why Governmental Financial Reporting Must Differ from Business Financial Reporting?

15. “ACCOUNTABILITY is the cornerstone of all financial reporting in government “ (GASB Concepts Statement No. 1 , par. 56) Objectives of Financial Reporting— SLG (Cont’d)

16. Governmental fund financial statements assist in assessing fiscal accountability whether the government raised and spent financial resources in accordance with: budgetary, legal, and regulatory constraints

17. Governmental financial reports are used primarily to: Compare actual financial results with legally adopted budget Assess financial condition and results of operations Assist in determining compliance with finance-related laws, rules, and regulations Assist in evaluating efficiency and effectiveness Objectives of Financial Reporting—State and Local Governments (SLG)

18. Minimum Requirement for General Purpose External Financial Reporting Management’s discussion and analysis Government-wide Fund financial financial statements statements Notes to the financial statements Required supplementary information (other than MD&A)

19. Government-wide Financial Statements Provide an aggregated overview of the government’s net position and change in net position, reported for the government as a whole Assist in assessing operational accountability —whether government has used its resources efficiently and effectively in meeting service objectives Focused on flow of economic resources, recognized on the accrual basis—similar to business organizations

20. Note that a fund is a separate set of accounts used to account for resources segregated for a particular purpose. Funds that focus on the flow of current financial resources are called governmental funds Fund Financial Statements

21. Fund Financial Statements (Cont’d) Governmental fund revenues and expenditures are recognized on the modified accrual basis: revenues are recognized when measurable and available for spending; expenditures when an obligation is incurred that will be paid from currently available financial resources

22. Other fund categories: Proprietary funds report on business-like activities of the government Fiduciary funds report on fiduciary (trust and agency) activities of the government Both categories follow accounting principles similar to businesses Fund Financial Statements (Cont’d)

23. Comprehensive Annual Financial Report (CAFR) Introductory section Financial section Statistical section

24. Title page Contents page Letter of transmittal Other (as desired by management) CAFR - Introductory Section

25. Auditor’s report Management’s discussion and analysis (MD&A) Basic financial statements (and notes thereto) Required supplementary information (RSI)(other than MD&A) Combined and individual fund statements and schedules CAFR - Financial Section

26. Basic Financial Statements Government-wide financial statements Fund financial statements

27. Basic Financial Statements Government-wide financial statements Statement of net assets (Illustration A1-1 PAGE 16 ) Statement of activities (Illustration A1-2) 1-

28. Tables and charts showing multiple-year trends in financial and socio-economic information. CAFR - Statistical Section

29. Overview—Not-for-Profit (NFP) Organizations’ Financial Reporting Primary purpose of NFP financial statements is to provide decision-useful financial information to resource providers, such as donors, members, and creditors Resource providers share the need for information to assess: Services provided by the NFP and+ the ability to continue to provide those services Management’s performance and stewardship of resources

30. Not-for-Profit (NFP) Organizations’ Financial Reporting (Cont’d) FASB standards require that NFPs provide the following financial statements: Statement of financial position (i.e., balance sheet) Statement of activities (i.e., income statement) Statement of cash flows Statement of functional expenses (voluntary health and welfare organizations only)

31. Not-for-Profit (NFP) Organizations’ Financial Reporting (Cont’d) Reporting requirements unique to NFP organizations Demonstrating accountability for donor-imposed restrictions by reporting net assets and changes in net assets in the three categories of (1) permanently restricted, (2) temporarily restricted, and (3) unrestricted

32. Not-for-Profit (NFP) Organizations’ Financial Reporting (Cont’d) Reporting program service expenses separately from supporting service expenses. The latter include overheads (such as, non-program management and general expenses) and fund-raising expenses

33. Governmental Accounting User Needs In Concepts Statement #1, GASB identified 3 basic groups of users of governmental accounting information: Citizenry Legislative and oversight bodies Investors and creditors

34. Required Financial Statements (Cont’d) Fund financial statements: Two governmental fund financial statements. Three proprietary fund financial statements. Two fiduciary fund financial statements.

35. International Public Sector Accounting Standards (IPSASs) International Public Sector Accounting Standards (IPSASs) deal with issues related to the presentation of annual general purpose financial statements (GPFSs) of public sector reporting entities other than government business enterprises (GBEs). GBEs apply International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB).

36. IPSASs… The International Public Sector Accounting Standards Board (IPSASB) is an independent standard setting board supported by the International Federation of Accountants (IFAC). The IPSASB issues IPSAS, guidance, and other resources for use by the public sector around the world.

37. IPSASs… For the purposes of IPSAS, the ‘public sector’ refers to national governments, regional governments (e.g., state, provincial, and territorial), local governments (e.g., town and city), and related governmental entities (e.g., agencies, boards, commissions, and enterprises). The IPSAS are intended to be applied in the preparation of general-purpose financial reports not to meet specific information needs .

38. International Public Sector Accounting Standards Board (IPSASB) IPSASB is the international independent board that develops International Public Sector Accounting Standards (IPSAS). works to improve public sector financial reporting worldwide through the development of IPSAS, international accrual-based accounting standards , for use by governments and other public sector entities around the world. 

39. Statement of Financial Position An entity shall present current and non-current assets, and current and non-current liabilities, as separate classifications on the face line items, headings and sub-totals shall be presented on the face of the statement of financial position when such presentation is relevant to an understanding of the entity’s financial position

40. Statement of Financial Performance all items of revenue and expense recognized in a period are included in surplus or deficit. This includes the effects of changes in accounting estimates. However, circumstances may exist when particular items may be excluded from surplus or deficit for the current period. IPSAS 3 deals with two circumstances: the correction of errors and the effect of changes in accounting policies.

41. Statement of Financial Performance An entity shall present, either on the face of the statement of financial performance or in the notes, an analysis of expenses using a classification based on either the nature of expenses or their function within the entity, whichever provides information that is reliable and more relevant. Entities classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation and amortization expense and employee benefits expense.

42. Statement Of Changes In Net Assets/Equity An entity shall present a statement of changes in net assets/equity showing on the face of the statement: (a) Surplus or deficit for the period; (b) Each item of revenue and expense for the period that, as required by other Standards, is recognized directly in net assets/equity, and the total of these items; (c) Total revenue and expense for the period (calculated as the sum of (a) and (b)), showing separately the total amounts attributable to owners of the controlling entity and to minority interest; and (d) For each component of net assets/equity separately disclosed, the effects of changes in accounting policies and corrections of errors recognized in accordance with IPSAS 3.

43. Cash Flow Statement Cash Flow Information Provides Users Of Financial Statements With A Basis To Assess The Ability Of The Entity To Generate Cash And Cash Equivalents And The Needs Of The Entity To Utilize Those Cash Flows. IPSAS 2 Sets Out Requirements For The Presentation Of The Cash Flow Statement And Related Disclosures.

44. Notes The notes shall: (a) Present information about the basis of preparation of the financial statements and the specific accounting policies used; (b) Disclose the information required by IPSASs that is not presented on the face of the statement of financial position, statement financial performance, statement of changes in net assets/equity or cash flow statement; and (c) Provide additional information that is not presented on the face of the statement of financial position, statement of financial performance, statement of changes in net assets/equity or cash flow statement, but that is relevant to an understanding of any of them.

45. Disclosure of Accounting Policies An entity shall disclose in the summary of significant accounting policies: (a) The measurement basis (or bases) used in preparing the financial statements; (b) The extent to which the entity has applied any transitional provisions in any IPSAS; and (c) The other accounting policies used that are relevant to an understanding of the financial statements

46. END OF CHAPTER ONE THANK YOU

47. Chapter 2 State and Local Government Accounting Principles

48. Learning Objectives Discuss major aspects of government financial reporting model Define fund and examine broad categories Analyze effects of transactions Discuss budgetary accounting & reporting Understand fund categories and types of funds found in each category Understand basic financial reporting requirements

49. Principles Of Accounting & Financial Reporting For State & Local Governments State Accounting & Reporting Capabilities Fund Accounting System Types of Funds Number of Funds Reporting Capital Assets Valuation of Capital Assets Depreciation of Capital Assets Reporting Long -Term Liabilities Measurement Focus & Basis of Accounting Budgeting, Budgetary Control & Reporting Transfers, Revenue, Expenditure & Account Classifications Common Terminology & Classification Interim & Annual Financial Reports

50. Principle One: Accounting and Reporting Capabilities A governmental accounting system must make it possible both: To present fairly and with full disclose the financial position and results of financial operations of the funds and account groups of the governmental units in conformity with Generally Accepted Accounting Principles; and To determine and demonstrate compliance with finance related legal and contractual provisions.

51. Principle Two: Fund Accounting System Governmental accounting systems should be organized and operated on a fund basis. Definition of Fund: It is 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 change there in, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations; restrictions or limitations. If you look at the definition closely, the word fund does have the following characteristic. It is a separate physical and accounting entity (separate set of books) It is established for specific purpose It will be governed by the rule and regulation of the entity.

52. Principle Three: Types of Funds and Account Group GASB recognizes and recommends the use of seven major types of funds (categorized in to three broad areas) and two accounts groups. The following types of funds should be used by state and local governments. They are: Governmental Funds Governmental fund is a fund which established to account for the activities of the government that are carried out to serve the citizens: Governmental funds are categorized as follows: The general fund:- used to account for all financial resources except those required to be accounted for in another fund Special revenue fund: - to account for the proceeds of specific revenue source (other than expendable trusts or for major capital projects.) those are legally restricted to expenditure for special purpose. Capital project fund: - to account for financial resource to be used for the acquisition or constriction of major capital facilities (other than, those financed by proprietary funds, special assessment funds, and trust funds.) Debt service funds: - used to account for the accumulation of resource for and the payment of, general long- term debt principal and interest Special assessment fund: - used to account for the financing of public improvement or services deemed to benefit the properties against which special assessments are levied.

53. Proprietary Funds They are used to account for governments continuing organizations and activities that are similar to private business enterprise. Proprietary fund accounting measures net income, financial position and changes in financial position. The generally accepted accounting principles here are those applicable to private businesses. Generally proprietary fund is classified in to two: Enterprise Funds These Funds are used to account for operations: (1) that are financed and operated in a manner similar to private business enterprises where the intent 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 (2) Where the governing body has decided that periodic determination of revenues earned, expenses incurred and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purpose Internal Service Funds They are used 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.  

54. Fiduciary Funds These funds are used to account for assets help by a government in a trustee or agency capacity, whether for individuals, private organizations, other governmental units, or other funds of the government. Fiduciary fund includes: Expendable trust funds Non expendable trust funds Pension trust funds, and Agency fund Expendable trust fund accounting parallels that for governmental funds, non-expendable trust fund and pension trust fund accounting is similar to that of proprietary funds. Agency funds are purely custodial (asset equal liability), and Agency fund accounting is concerned only with recording the changes in fund assets held for others. The accounting equation of expendable funds is different from non-expendable funds (business enterprise) Expendable funds: Cash + Other Resource - Liability = Fund Balance There is no ownership interest in NFP organizations and therefore, there is no capital account. Rather there is only a balance remaining to be used up for specific purpose. Non- Expandable funds: Asset - Liability = Capital

55. Account Groups The General Fixed Assets Account Groups (GFAAG) Fixed asset related to specific proprietary fund or trust funds should be accounted for through those funds. All other fixed assets of a governmental entity should be accounted for through the general fixed assets account groups. The General Long-Term Debt Account Group (GLTDAG) Long term liabilities of proprietary fund and trust funds should be accounted for through those funds. All other un-matured general long term liabilities of the governmental entity, including special assessment debt for which the government is obligated in some manner, should be accounted for through the general long term debt account group

56. Principle Four: Number of Funds 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 operating requirements should be established, however, since unnecessary funds result in inflexibility, undue complexity and inefficient financial administration. The government must establish and maintain those funds required by law or contractual agreement. Also, the unit should maintain other funds that assist in assuring effective control over its finances.

57. Principle Five: Accounting For Fixed Assets and Long Term Liabilities A clear distinction should be made between: Fund fixed assets and general fixed assets Fund long term liabilities and general long term debt General Fixed Asset Account Group (GFAAG) 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 asset account group. The General Long Term Debt Account Group Long term liabilities of proprietary funds, special assessment funds and trust found should be accounted for through those funds. All other un-matured general long tem liabilities of the governmental unit should be accounted for through the general long term debt account group.

58. Principle Six: Valuation of Fixed Asset Fixed asset 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. Principle Seven: Depreciation of Fixed Assets 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 funding analysis, and accumulation may be recorded in the general fixed asset account group. Depreciation of fixed assets accounted for in a proprietary fund should be recorded in the account of that fund. Depreciation is also recognized in those trust funds where expenses, net income, and/or capital/maintenance are measured.

59. Principle Eight: Basis of Accounting Accrual Basis in Governmental Accounting The modified accrual or accrual basis of accounting, as appropriate, should be utilized in measuring financial position and operating results. 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 un-matured interest on general long term debt, which should be recognized when due. Proprietary fund revenues and expenses should be recognized on the accrual basis. Revenues should be recognizes in the accounting period in which they are earned and become measurable and expenses should be recognized in the period incurred, if measurable. Fiduciary fund revenues and expenses or expenditures (as appropriate) should be recognized on the basis consistent with funds accounting objective. Non expendable trust and pension trust funds should be accounted for on the accrual basis, expendable trust funds should be accounted for on the modified accrual basis. Agency found assets and liabilities should be accounted for on the modified accrual basis. Transfers should be recognized in the accounting period in which the inter fund receivable and payable arise.

60. Principle Nine: Budgeting, Budgetary Control, and Budgetary Report The importance of budgeting, budgetary control and budgetary accountability is recognized in the principle as follows. An annual budget(s) should be adopted by every governmental unit. The accounting system should provide the basis for appropriate budgetary control. Budgetary comparisons should be included in the appropriate financial statements and schedules for governmental funds for which an annual budget has been adopted.

61. Principle Ten: Transfer, Revenues, Expenditure and Expense Account Inter fund transfers and proceeds of general long term debt issues should be classified separately from fund revenues and expenditures or expenses. Governmental fund revenues should be classified by funds and fund source. Expenditures should be classified by fund, function (or program), organization unit, activity, character and principal classes of objects. Proprietary fund revenues and expenses should be classified is essentially the same manner as those of similar business organization functions or activities.

62. Inter Fund Transaction There are five types of inter fund transactions commonly encountered in state and local government these are: Inter fund loans and advances Quasi-External Transaction Transactions that would be treated as revenue, expenditures or expenses if they involved organization external to the governmental units should be accounted for as revenue expenditures or expenses in the fund involved. Reimbursements These are transaction which constitutes reimbursements of a fund for expenditure, or expenses initially made by one fund for expenditures or expenses applicable to another fund. Residual Equity Transfers They are non-recurring or non-routine transfers of equity between funds. Operating Transfers All other inter fund transfers or transfers that are legally authorized to transfers from fund receiving revenue to the fund through which the resources are to be expended. Example: Transfer of tax revenue from the special revenue fund to debt service fund, or transfer from the general fund to special revenue, or capital project funds.

63. Principle Eleven: Common Terminology and Classification A common terminology and classification should be used consistently throughout the budget, the accounts and the financial reports of each fund. Principle Twelve: Financial Reports The final principle emphasizes the importance of both interim internal financial reporting and external annual financial reporting. Interim and Annual Financial Reports: 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. A comprehensive annual financial report covering all funds and account groups of the reporting entity including introductory section, appropriate combined, combining and individual fund statements, notes to the financial statements, required supplementary information, schedules, narrative explanations, and statistical table should be prepared and published. General purpose financial statements of the reporting entity may be issued separately from the comprehensive annual financial report. Such statements should include the basic financial statements and notes to the financial statements that are essential to fair presentation of financial position and result of operations (and cash flows of proprietary funds and non-expendable trust funds). Those statements may also be required to be accompanied, by required supplementary information, essential to financial reporting of certain entities. A component unit financial report covering all funds and account groups of a component unit including introductory section, appropriate combined, combining and individual fund statement, notes to the financial statements, schedules, narrative explanation and statistical tables may be prepared and published, as necessary. Component unit financial statements of a component unit may be issued separately from the component unit financial report such statement should include the basic financial statements and notes to the financial statements that are essential to the fair presentation of financial position and result of operations.

64. End Of Chapter Two Thank You

65. CHAPTER THREE General Fund and Special Revenue Funds After the completion of this chapter, you should be able to: Identify the features of general and special revenue funds Describe the revenue sources for general and special revenue funds Record revenue and expenditure budget for general and special revenue fund Record journal entries related to general and special revenue funds Prepare financial statements for general and special revenue funds Make closing entries for general and special revenue funds

66. Revenue: - is the increase in the fund financial resources other than from inter fund transfers and debt issue proceeds. Other financing sources- are classified as an increase in the fund financial resources as a result of operating transfers into a fund and debt issue proceeds received by a fund. 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.

67. Accounting Characteristics Fixed assets are not capitalized in either fund. Their purchase is considered as expenditure, the same as for salaries or utilities. Revenue: - is the increase in the fund financial resources other than from inter fund transfers and debt issue proceeds. Other financing sources- are classified as an increase in the fund financial resources as a result of operating transfers into a fund and debt issue proceeds received by a fund. 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.

68. 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.

69. Budget and Budgetary Accounts Budgeting is the process of allocating scarce resources to unlimited demands budgeting has a great role in governmental accounting than in profit making business. Budgetary accounts are: Estimated Revenues – resources expected to be received Appropriations – is both an authorization to spend and limitation of spending. Encumbrances – Purchase orders (P.O.) in governmental entities have the function of keeping track of coming expenditures so that the budget is not exceeded. this is done by actually recording the P.O in the ledger account as an Encumbrance

70. Accounting illustration on general fund Town of X General Fund Balance Sheet June 30, year 5 Assets Cash .................................................................... 1,600,000 Inventory of supplies ............................................ 400,000 Total Assets 2,000,000 Liabilities and Fund Balance Vouchers payable ................................................. 800,000 Fund balance: Reserved for encumbrance 400,000 Unreserved and undesignated 800,000 1,200,000 Total liabilities and fund balance 2,000,000

71. The following are the approved budgets by the Town Council for the fiscal year ended 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

72. Appropriation : General government .......................... 4,700,000 Public safety .......................... 1,900,000 Health and welfare .......................... 1,100,000 lture and recreation ...................... 400,000 8,100,000 Estimated other financing uses (transfer to DSF) ………..100,000

73. The journal entry to record the annual budget for the town of X General fund on July 1, year 5 was as follows: Estimated revenues 8,400,000 Estimated other financing sources 100,000 Appropriations 8,100,000 Estimated other financing uses 100,000 Budgetary fund balance 300,000

74. recording transactions 1. Property taxes were billed in the amount of 7,200,000 of which 140,000 was of doubtful collectability. Property tax receivable- current 7,200,000 Allowance for uncollectible current taxes 140,000 Revenue 7,060,000 (To accrue property taxes billed and to provide for estimated uncollectible portion)

75. 2. A total of 6,500,000 amount of Property tax were collected and a total of 1,020,000 amounts of cash from other revenue sources like licenses and permits, fines and forfeits, miscellaneous sources were also collected. 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 )

76. 3. Property tax in the amount of 130,000 was uncollectible. Allowance for uncollectable current taxes 130,000 Property taxes receivable- current 130,000 (To write off receivables for property taxes that is uncollectable) 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)

77. 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

78. Accounting for Special Revenue Funds 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.

79. End of Chapter Three

80. CHAPTER FOUR Capital Project Fund After going through this topic, the student should be able: understand clearly how governmental units account for construction or acquisition of major capital facilities determine the sources of financing used in the construction and acquisition of such major capital facilities identify accounting and reporting procedures used in from the establishment to closure of the capital project fund

81. General Outline of Capital Projects Fund Capital Projects Funds (CPF) account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds & trust funds). Examples of major capital facilities are Administration Buildings, Civic Centers and libraries etc. These funds do not account for the acquisition of smaller fixed assets, such as vehicles, machinery & office equipment which are normally budgeted for & recorded as expenditures in the general fund

82. Bond Premiums, Discount and Accrued Interest on Bonds Sold Issuance of Bonds at a Premium Bond premiums arise because of adjustments to the interest rates. The bond indenture agreements usually specify that any bond premium is to be set-aside in the related DSF. This is desirable because it remains the incentive to spend more on a project than is authorized merely by raising additional cash by increasing the interest rate in the CPF. There are two ways of accounting the bond proceeds and the associated premium.

83. Issuance of Bonds at a Discount Bond discount are rare because the stated interest rate is usually set high enough so that no discounts may result (many Governmental units are legally propitiated from issuing bonds at a discount Assume that the par value of a bond is 110,000 issued at 100,000. Example: Cash 100,000 Due from 10,000 OFS- bond proceed 110,000

84. CAPITAL PROJECT FUND ACCOUNTING ILLUSTRATION The following illustration will show how the construction and related activities are accounted for in a capital projects fund. The town of X wants to construct a new library on the site owned by the town. The construction is expected to cost 50,000,000. It is expected to be completed within two years on June 30 year 7. In a special meeting held on July 2 year 5, the members of the town council approved a 30,000,000 issue of General Obligation Bonds maturing in 20 years. The proceeds of this sale will be used to help finance the construction of the new library. The remaining 20,000,000 will be financed by an Irrevocable State Grant that has been awarded

85. END OF CHAPTER FOUR

86. Chapter five Accounting for debt service fund

87. After successfully completing this unit, you will be able to: Describe how governmental units long-term liabilities are serviced and how such debt servicing activities are accounted in a separate fund Tell how general long term debt is serviced through the debt service fund Tell the transactional relationship between debt service fund and other governmental funds

88. Characteristics of dsf Debt service fund is used to account for both the repayment of the principal and payment of interest of the long-term debt when they are due. As expendable funds, DSF use the modified accrual basis of accounting. An application of modified accrual, which is of special interest to DSF, has to do with interest payable. Interest payable is not accrued in the DSF. It is only recorded as a liability in the period when it becomes due. Accounts recommended for use by a serial bond Debt service fund is similar with that of General Fund and Special Revenue fund. The operations of DSF do not involve the use of purchase orders and contracts for goods and services. So the Encumbrance accounting is not needed.

89. The ledger accounts of a Serial Bond Debt Service fund include liquid assets and current liabilities and Fund Balance Accounts Usually the government designates a bank as a “ Paying Agent ” or a “ Fiscal Agent ” to handle interest and principal payments for each issue. The assets of a Debt service Fund may therefore include Cash with paying Agent and the appropriations, Expenditures and liabilities may include Amounts for the Services and Charges for Paying Agents.

90. Types of Long Term Debts Bond- It is A written promises to pay a specified principal sum at a specified future date with interest. Term Bonds - whose principal is repaid in lump-sum at their maturity date. Serial Bonds - this are bonds, which have periodic maturities .

91. Regular Serial Bonds- The total Principal amount of an issue is repayable in a specified number of equal annual installments over the life of the issue. Differed Serial Bond- The total principal amount of the issue is repaid in equal annual installments, but the first installment is delayed for a period more than one year. Annuity Serial Bond- if the amount of annual principal repayment is scheduled to increase each year by approximately the same amount that interest payments decrease (interest decrease of course, because the amount of outstanding bond decreases) so that the total DSF remains reasonably level over the term of the issue, the bonds are called Annuity Serial Bonds. Irregular Serial Bonds- these types of serial bonds may have pattern of repayment that does not fit the other three categories.

92. Revenue Bonds - are issued to finance the establishment or expansion of activities accounted for in Enterprise Funds (EF). These bonds are shown as liabilities of EF, because their repayment and servicing can only come from money generated from the operations of those funds. B . General Obligation Bonds - these bonds serviced from the enterprise funds are also issued to finance establishment or expansion of activities accounted for in EF.

93. Sources of finances Special Taxes- Special Taxes are not unusual when levied for servicing general long-term debts. Sometimes a special tax is authorized with the issuance of bond -this is more common with City Governments. Investments- for a term bond issue the assets that accumulate in the DSF will be invested in income producing securities. the investment income is to be accounted in the DSF as Revenue. Refinancing- it may be possible to use the proceeds of the Sinking Fund: The process of issuing new bonds to pay of the old ones is called Refinancing. Bond Premium and Accrued Interest on Bonds Sold- Depending upon the bond indenture agreement, the DSF may be entitled to receive bond premium and Accrued Interest on Debt Issue sold which are to be recognized as Revenues of DSF. Residual Equity Transfers- If capital Projects are completed with Expenditures less than Revenues and Other Financing Sources, The Residual Equity is ordinarily transferred to the appropriate DSF.

94. Accounting for Debt Service Funds Illustration: The town of X uses a Serial Bond Debt Service Fund to pay off matured bonds and - -Interest payable amounts. Information about the Bond issue is as follows; Principal Amount ----------------- 1,000,000 Interest Rate ---------------------- 10% Bonds Dated ---------------------- January 1, 20x6 Interest Payable--------------------- January 1 and July 1, beginning July 1, 20x6 Bonds mature serially at the rate of 100,000 a year starting January 1, 20x7. The Fiscal Period runs from July 1, 20x7 - June 30, 20x8.

95. 1. The Revenue Budget for Serial Bond Debt Service Funds for 20x8 consists of estimated Revenues of 330,000 to be raised from Debt Service Tax Levy and Estimated Revenues of 50,000 from earnings on investments. Appropriation Budget includes matured interest payable and matured bonds payable i.e.; Interest for July 1 and January 1 = 900,000 x 5% x 2 = 90,000. Bonds payable mature January 1 = 100,000 Estimated Tax Revenue 330,000 Estimated Investment Revenue 50,000 Appropriations 190,000 Budgetary Fund Balance 190,000

96. 2. Taxes receivable I the amount of 340,000 and estimated uncollectable taxes in the amount of 10,000 are recorded. Taxes Receivable- current 340,000 Allowance for uncollectable current taxes 10,000 Revenues 330,000 3. Half of the gross levy of taxes is collected in cash. Cash 170,000 Tax Receivable-current 170,000 4. Interest payable on July 1, 20x7 is recorded as a liability. Expenditure 45,000 Matured Interest Payable 45,000

97. 5. Checks are written and mailed to the paying agent for the interest payment due on July 1. Cash with Fiscal Agent 45,000 Cash 45,000 6. Interest is paid by the Fiscal Agent and the Fiscal Agent fee of 500 is paid. Matured Interest Payable 45,000 Expenditure 500 Cash with Fiscal agent 45,000 Cash 500 7. Taxes in the amount of 160,000 are collected. Cash 160,000 Tax Receivable- Current 160,000

98. 8. Cash of 100,000 is invested in a short term note which bears interest of 10% Short Term Investment- Note 100,000 Cash 100,000 9. Interest on investment is received for the four months. 100,000 x 10% x 4/12 = 3333.33 Cash 3333.33 Revenue 3333.33     10. Checks are written and mailed to the Fiscal Agent for the matured bonds and interests due on January 1. Cash with Fiscal Agent 145,000 Cash 145,000

99. 11. On January 1, 20x8 matured bonds and interests of 145,000 and the Fiscal Agents fee of 1,000 is charged as expenditure. Expenditure 146,000 Matured Bonds Payable 100,000 Matured Interest Payable 45,000 Fiscal Agent fee payable 1,000 12. Matured Bonds and interests is paid by the Fiscal Agent and the Fiscal Agent Fee is paid. Matured Bond Payable 100,000 Matured Interest Payable 45,000 Fiscal Agent Fee Payable 1,000 Cash with Fiscal Agent 145,000 Cash 1,000 13. Interest on Investment is received for three months. 100,000 x 10% x 3/12 = 2,500 Cash 2,500 Revenue 2,500

100. 14. June 30, 20x8- Interest on investment are accrued for two months. 100,000 x 10% x 2/12 = 1666.67 Interest Receivable 1666.67 Revenue 1666.67

101. exercise The commionners approved a betgerty for the curent fiscal year . it included total revenues of $860000and total operation appropriate 850000, and supplies expenditure is $10000. prepare journal entries as apopriate?