Chapter 2- Municipal Accounting and Financial Reporting Flashcards
What is Accounting?
-systemic and comprehensive recording of financial transactions pertaining to an organization
-summarizing and analyzing these transactions and report them to tax-collection agencies, regulators and other oversight bodies
-recognition and recording financial transactions with double-entry approach
-designing general ledgers and accounting systems to capture and report financial transactions
-Internal controls to safeguard assets
prepare financial reports
-analyze and investigate results including comparing to budget estimates
-presenting the results to management council and public
What is bookkeeping?
- process of recording and summarizing the financial transactions of an organization.
- maintains journals and ledgers where all dollar amounts are recorded
What are financial statements used for?
-to report operations, transactions, financial position and cash flows.
What are 2 primary objectives of public sector accounting?
- provide information and analysis that is used by responsible decision-makers to provide a basis of management control
- provide information that can be used to ensure accountability, a concept inherent in the nature of government organizations.
What are the 2 broad types of accounting?
- Managements Accounting- preparation of specific-purpose reports for use by people within the organization to help management plan and control operations.
- Financial Accounting- significant because it helps manage direct and control the activities of the municipality and frame relevant managerial policies related to services, asset renewal, financing and more
the two can be distinguished
based on who uses the information, the criteria for decision making, behavioural implications, time frames, and types of reports produced.
Key Accounting Principles
- Time Period principle
- Full Disclosure principle
- Conservatism principle
- Cost principle
- Stable dollar and monetary unit assumption
- Revenue recognition principle
- Matching Principle **Important* heart of accrual-based accounting
- Materiality Principle* Very important
Accounting Equation
ASSETS= LIABILITIES +EQUITY
- for both the public and private sectors the amount of assets musty equal the combines amount of liabilities plus the equity in the accounting equations
- For governments the equation is expressed as ACCUMULATED SURPLUS/DEFICIT=ASSETS - LIABILITIES
Accounting Cycle
- Journalizing of transactions
- Posting journal entries to the general ledger and subsidiary ledgers
- Preparing adjusting entries and posting to the general ledger
- Preparing the financial statements
- Journalizing and posting closing entries
Cash vs Accrual Accounting
- A receipt occurs when revenues are actually collected.
- receipts and revenues are identical with the cash basis accounting
- Accrual basis, the recognition of the revenues is required in accounts at the moment it is earned or a valid claim for it to come in existence.
What is an FIR?
FINANCIAL INFORMATION RETURN
- annually report on financial affairs, accounts and transactions in the for of annual FIR
- Ministry of Municipal Affairs and Housing use the info from FIR (for policy development, evaluation and monitoring)
- Info in the FIR should reflect the audited financial statements
-boards are consolidated in the FIR largely for criterion control
Joint boards are proportionately consolidated
Municipal Financial Reporting Requirements and two main reports.
Two main reports: Financial Statement and annual FIR
- Statement of financial position (balance sheet) reports assets, liabilities, accumulated surplus/deficit
- statement of operations (income statement) reports revenues and expenses and net income in the accounting period
- statement of change in net debt
- statement in cash flows
- notes to financial statement
What are the 4 objectives of financial statements
- to provide an accounting of the full nature and extent of the financial affairs and resources which the government controls
- describe the governments financial position at the end of the accounting period
- present information that describes the changes in a government’s financial position in the accounting period
- demonstrate accountability of the government for resources, obligations and financial affairs that its responsible for
Charter of accounts and accounting entries
- double entry system, every transaction is recorded in at least 2 accounts, one receives a debit and the other a credit to ensure it balances
- accountants sort transactions into accounts organized to a chart of accounts.
- COA helps segregate revenues and expenses for internal and external reporting
What are Assets?
municipalities resources (owns or manages and uses it provide services)
eg: cash, A/R, inventory, investments, land, buildings, equipment, roads, bridges, water and sewage
What are liabilities?
municipalities obligations (owe to others) from things such as agreements, debts, contracts etc.
eg: debts payable, A/P, salaries and wages payable, interest payable, deferred revenue
“Temporary Account”
income statements used to track accounting activity DURING an accounting period.
end of year temporary accounts are closed or reset so there is a zero balance
Permanent account
Balance sheet accounts that track the activities that last longer than an accounting period.
liabilities must be paid in future
What information do financial statements provide?
- Sources and types of gov. revenues
- Allocation and use of economic resources
- Cost of goods and services provided during the accounting period
- extent which costs of the period were met by the revenues of the period
- The government’s financial position
- Stock, allocation, use of non-financial resources
- extent that revenues meet expenditures
- how gov. financed its activities and met cash requirements
- actual results of the period compared with those originally planned
- whether public economic resources were managed in accordance with legislative authorities.
WHAT ARE TANGIBLE CAPITAL ASSETS?
-roads, bridges, watermains, water distributions, buildings, vehicles, equipment, land, aircraft, computer software and hardware, dams etc.
Main Types of Revenues
- property taxes
- user fees and service charges, planning fees, recreation program fees, animal licenses, etc
- government grants from other levels of government
- Investment income generated on investment portfolios
- revenue recognized to be associated with obligatory reserve funds such as development charges and gas taxes
3 classifications of expenditures
- Function
- Organization or sub-function
- Object
Main Expense Functional classifications
- General Government
- Protection Services
- Transportation Services
- Environmental Services
- Health Services
- Social and Family Services
- Social Housing
- Recreation and cultural services
- Planning and Development
Object Expenditures
- Salaries and wages
- Materials and supplies
- Contracted services (consultants, contracts, service agreements)
- Rents
- Financial Expenses (interest, bank charges)
- external transfers (eg community grants)
- amortization (expenses from tangible capital assets)
What are Reserve and Reserve Funds
- account for assets that have been put aside for specific purpose (voluntarily, legal or contractual reasons)
- OBLIGATORY RESERVES required when a statute notes that revenues received for special purposes must be set aside from general municipal revenues, expenditures accounted for separately in reserve fund.
