Budgetary and Activity Accounting Flashcards
Governmental funds have no:
profit motive, income statement, matching principle, or accrual method
governmental funds (GRaSPP) use modified accrual accounting (budget, activity, and encumbrances), which means separate accounting for each area
these differences demonstrate enhanced accountability and can be summarized in these accounting areas:
budgetary - this accounting is used to control spending
activity - this accounting emphasizes the flow of current financial resources and has an annual budgetary focus
encumbrance - this accounting is used to record purchase orders and is designed to monitor spending for increased budgetary control
What are the governmental funds (GRaSPP)?
general fund
revenue (special) fund
and
service (debt) fund
projects (capital) fund
permanent fund
budgetary accounting is used by the GRaSPP funds; it is used to control expenditures and to account for the levy of taxes sufficient to cover estimated expenditures
budgets are based on estimated revenues and appropriations; governmental resources are typically derived from the following sources:
revenue - income tax, sales tax, property and real estate tax, fines and penalties,
other financing sources - debt proceeds (bonds and notes) and interfund transfers
Budgetary accounting JEs
budgetary accounts are estimated accounts, which are the opposite (in terms of natural debit and credit balances) from real, proprietary, or actual accounts; budgetary accounts are posted only twice during the year, unless a supplemental appropriation is made
at the beginning of the year, the difference between estimated revenues and appropriations goes to an account called budgetary control (which is the budgetary “equity account”)
DR estimated revenue control
DR budgetary control (negative/deficit)
CR appropriations control
CR budgetary control (positive/surplus)
at the end of the year, the budget is reversed and closed; the JE uses the same amounts that were recorded at the beginning of the period plus/minus any amendments
DR appropriations control
DR budgetary control (positive/surplus)
CR estimated revenue control
CR budgetary control (negative/deficit)
**do not be confused by the question fact patterns that provide additional information regarding actual activity in amounts different from the budget; the budgetary accounts and actual activity are closed out separately
T/F: governmental fund financial statements emphasize the flow of current financial resources (similar to cash basis reporting) rather than profit and loss
True; the matching principle is not used; time and eligibility requirements along with modified accrual concepts (measurable and available) are used to determine the period in which revenue is recognized
What is a non-exchange transaction?
non-exchange transactions are a significant source of revenue for government entities; a non-exchange transaction is a transaction in which an entity gives/receives value without directly receiving/giving equal value in return
What is an exchange transaction?
it is the primary source of revenue for commercial entities and proprietary funds and involves entities giving and receiving equal value in an arm’s-length transaction
What are types of non-exchange revenue?
derived tax revenues - represents taxes imposed on or derived from exchange transactions, such as commercial sales (sales taxes), taxpayer income (income taxes), etc.
imposed non-exchange revenues - represents taxes imposes on non-exchange transactions (fines) or wealth (property taxes); receivables are recorded when the government has an enforceable legal claim (i.e. when property taxes are levied)
government-mandated non-exchange transactions - represents instances in which a higher level of government (a state) provides funds and mandates certain activities by another level of government (a county), such as environmental cleanup, etc.
voluntary non-exchange transactions - represents instances in which the government receives resources and does not provide equal value (grant agreements)
What are the revenue recognition requirements for non-exchange revenues?
all revenues are subject to time requirements
derived and imposed tax revenues are only subject to time requirements
only government-mandated and voluntary non-exchange transactions are subject to eligibility requirements
only voluntary non-exchange transactions are subject to contingency requirements (a subset of eligibility requirements)
upon satisfaction of recognition standards, governmental fund revenues are subject to basis of accounting rules; under modified accrual accounting, governmental fund revenues are recorded when measurable and available; this usually means the collection period does not exceed 60 days after fiscal year-end
What are expenditures?
capital purchases, debt service payments, and operating expenditures are considered spending of funds and are treated as current year expenditures
the timing of expenditure recognition is consistent with accrual accounting and is governed by when the voucher payable is recorded; the modified accrual basis of accounting does not delay the expenditure until the cash payment is made
What are the alternatives for expenditure recognition?
the following methods can be used to account for the purchase and use of the supplies, prepaid assets, and inventory of governmental funds:
purchase method - record an expenditure when purchased (buying item: DR expenditure CR vouchers payable) & record a current asset and nonspendable fund balance at year-end for any items not used (still on hand) (on-hand at year-end: DR supplies inventory CR nonspendable fund balance - inventory) **no entry for use of item
consumption method - record a current asset when purchased (buying item: DR supplies inventory CR vouchers payable) & record an expenditure as consumed during the period (use of item: DR expenditure CR supplies inventory) **no entry for on-hand at year-end
What are the classifications of governmental expenditures?
expenditures of governmental funds are first classified according to the appropriate fund; within the fund, the expenditures can be further classified using one of several methods
function or program - this classification provides information on the overall purpose of the expenditures; function groups expenditures go into the major services of the governmental entity; program groups expenditures go into activities, operations, or organizational units that are directed to the attainment of specific purposes or objectives; both function and program are broad classifications; examples of function include public safety, highways, education, health and welfare, and general governmental services; examples of program include programs for the elderly, drug addiction, and education
organizational unit - this classification corresponds to the organizational structure of the governmental entity; an organizational unit may be responsible for carrying out several programs; examples include the police and fire departments; organizational units roll up into functional presentations; for example, the police and fire departments combine to form the public safety function
activity - by classifying expenditures by specific activity, economy and efficiency of operations can be measured; measurement standards, such as expenditure per unit of work, can be determined; in addition, this classification serves as a basis for budget preparation; the activity can be an event, a task, or a unit of work with a specific purpose
character - this classification refers to determining the basis of the fiscal period the expenditures are presumed to benefit; the major classifications by character are: current expenditures (which benefit the current fiscal period), capital outlays (which are presumed to benefit both the present and future fiscal periods), debt service (which benefits prior fiscal periods as well as current and future periods), and intergovernmental (where one governmental unit transfers resources to another)
object classes - this classification classifies the expenditure according to the type of items purchased or services obtained; examples are personnel services, supplies, and principal and interest payments for debt service expenditures
What are fixed assets?
whether purchased, constructed, or leased, they are not expected to contribute to the generation of governmental fund revenue; the acquisition of a fixed asset, therefore, is not capitalized on the funds books; instead, it is considered an expenditure of the fund and is not depreciated in the fund financial statements; the fixed assets and related depreciation are reported on the government-wide financial statements
governmental funds (GRaSPP) use modified accrual and will “expenditure” fixed asset acquisitions consistent with the current financial resources measurement focus; the fixed assets are reported on the government-wide financial statements
proprietary and fiduciary funds (SE-CIPPOE) use full accrual and will capitalize fixed asset acquisitions and depreciate them consistent with the economic resources measurement focus
What are long-term debts?
proceeds from long-term debts are recorded in the governmental funds as “other financing sources;” the governmental funds do not record or carry the long-term debt; rather, it is recorded on the government-wide financial statements; repayment of long-term debts are recorded as expenditures of both principal and interest
governmental funds (GRaSPP) use modified accrual and will record proceeds from long-term debt as “other financing sources” (statement of revenues, expenditures, and changes in fund balance, not the balance sheet) consistent with the current financial resources measurement focus; the debt service fund pays the currently due interest and principal
proprietary and fiduciary funds (SE-CIPPOE) use full accrual, record the long-term debt consistent with the economic resources measurement focus, and directly pay the interest and principal
Lease classifications
governmental accounting classifies leases in one of three ways: leases may be short-term leases (similar in character and definition to short-term commercial operating leases), contracts that transfer ownership (similar in character and definition to commercial sales-type finance leases), or leases other that short-term leases and contractors that transfer ownership (similar in character and definition to commercial direct-finance leases and longer-term operating leases)
Short-term leases
they have a maximum term of 12 months or less; they, by definition, are current and thus, receive the similar accounting treatment in both governmental and proprietary funds; accounting is nearly identical to commercial standards
lessees recognize expenditures or expenses based on payment provisions of the contract; no expenditure or expenses are recognized during rent-free periods
lessors recognize rent revenue based on the payment provisions of the lease contract; no rent revenues are recognized during rent-free periods
Contracts that transfer ownership
contracts that transfer ownership of the underlying asset to the lessee are accounted for as a financed purchase by the lessee and a sale by the lessor
lessee accounting for governmental funds: the lessee accounts for the acquisition of non-current assets with non-current financing as a capital outlay expenditure and other financing source; payment of the debt is handled in a manner consistent with other debt payments
lessor accounting for governmental funds: the lessor accounts for the sale of non-current assets with non-current receivables in a manner similar to other measurable but unavailable revenue and recognizes deferred inflows as revenue over time in a systematic and rational manner
lessee accounting for proprietary and fiduciary funds and government-wide presentation: the lessee would account for the acquired asset and associated lease obligation as a financed purchase in a manner consistent with commercial accounting
lessor accounting for proprietary and fiduciary funds and government-wide presentation: the lessor would derecognize the asset sold, record a receivable, and recognize revenue in a manner consistent with commercial accounting
Leases other than short-term leases and contracts that transfer ownership
leases not meeting the definition of a short-term lease or that represent contracts that do not transfer ownership are accounted for using principles similar to commercial operating leases as adapted for governmental accounting principles
lessee accounting for governmental funds: the lessee accounts for the acquisition of non-current assets with non-current financing as a capital outlay expenditure and other financing source; payment of the debt is handled in a manner consistent with other debt payments as described above for contracts that transfer ownership
lessor accounting for governmental funds: the lessor accounts for the sale of non-current assets with non-current receivables in a manner similar to other measurable but unavailable revenues as described above for contracts that transfer ownership
lessee accounting for proprietary and fiduciary funds and government-wide presentation: at the beginning of the lease, the lessee records an intangible “right-of-use” asset (amortized over the life of the asset or lease term, whichever is less) along with an associated lease liability (amortized using the effective interest method); the value of the asset and lease are equal to the discounted lease payments of the contract; the discount rate is the lesser of the interest rate implied in the lease or the lessee’s estimated incremental borrowing rate; liabilities may be remeasured if significant changes occur
lessor accounting for proprietary and fiduciary funds and government-wide presentation: at the beginning of the lease term a lessor should recognize a lease receivable and a deferred inflow of resources; any initial direct costs should be recorded as an expense; the lease receivable is valued at the present value of future lease payments; lease payments include fixed payments, variable payments, residual guaranteed payments, and incentives; receivables are reduced by periodic payments; the deferred inflow is equal to the lease receivable and recognized rationally and systematically as lease revenue over the life of the lease; the underlying asset is not derecognized; the asset is reported and depreciated
