Chapter One: - Overview of Governmental Accounting

1.0. Aim and objectives

This unit aims at explaining the concept of fund accounting and organizations using. After going through
this unit, you will be able to:
 understand classification of not for profit organizations
 explain those organizations using fund accounting system
 compare and contrast accounting for profitable and non-profitable organizations
 identify government financial reporting.
1.1. Introduction
There are organizations whose object is not to make profit. these not-for-profit organizations account their
resources and financial activities under different accounting system. Every organization wants to be
successful. Of course. In order to know if it is successful, “success” must be defined in terms of goals.
And then it needs some means to measure its results against its goals. Measuring success is often thought
of in terms of effectiveness (achieving the goal at the highest level) and efficiency (achieving the goal
through using the least amount of resources. for profit seeking organizations(F.P.) or

organizations whose objective is to make profit, both efficiency and effectiveness can easily be measured
with financial statement. There are certainly non financial criteria to judge success like qualitative or
quantitative measures. But regardless of what other measures are employed, ultimately effectiveness will
be measured by the income statement. Not only income statement measures effectiveness, it also
measures efficiency. As with efficiency, there may be non-financial criteria for evaluating efficiency. But
ultimately, efficiency is evaluated by the expense section of the income statement. If expenses are less
than revenue and the organization has earned an “acceptable” profit, then we can say it is successful in
efficiency. We can therefore say that the objective of the income statement is to demonstrate both the
effectiveness and efficiency of the organization.
For not-for-profit organizations (N-F-P) however, these objectives are not as useful. Without a good
measure of effectiveness, measurement of efficiency becomes almost meaningless. If n-f-p accounting
system cannot measure effectiveness (as can profit seeking accounting systems), what then is their use?
They are most often employed to control public resources i.e. each person given custody of or access to
public resources should report back as to how they were used. The public can then hold the person
accountable for the proper use of the resources. This means that the income statement is only limited to
use in judging effectiveness. Both the nature of non profit organizations and the objectives of their
financial reporting have given rise to a particular accounting method, i.e. the use of “fund accounting”

1.2. Definition
It is very important to understand the meaning of fund in this context. in normal conversation “fund”
means simply, a resource of money. That is not the meaning “fund” has in Fund Accounting. In fund
accounting, “fund” means a distinct entity within a larger entity. A separate journal entry ledger will
be kept and separate financial statements will be kept for each fund. The fund accounting concept can be
used to define very clearly the purposes for which the resources are to be used, and who is to be held
accountable for the resources. Furthermore the definition will be discussed along with the other principles
in the next chapter.

1.3. Classification of non- profit entities

Generally, organizations could be classified either based on their objectives or their ownership. if
Organizations are classified by their:
1. Objectives
a. Commercial / for profit organizations-
organizations- which emphasize on the making of profit

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 b. Non commercial/ not –for – profit organizations-
organizations- which do not give emphasis
on the making of profit
2. Ownership
a. Non-governmental (Private organizations) – are operating for the benefit of an individual
proprietor or, as partners, a group of partners or shareholders.
b. Governmental organization – are operated for the benefit of society as a Whole.

A non profit (not- for profit) organization is a legal accounting entity that is operated for the benefit of
society as a whole rather than for the benefit of an individual proprietor or a group of partners or
shareholders. Thus, the concept of net income is not meaningful for non-profit organization. A non-profit
organization strives only to obtain revenue & support sufficient to coves its expenses.

Non-profit organizations comprise a significant segment of the country’s economy.

Basically, the following are suggested way of classifying NFP organizations.

1. GOVERNMENTAL UNITS
When thinking of governmental units, one tends to focus upon the federal government, or on the states
within the federal government (state governments) or those major local governmental units or
organizations within those governments. The federal government of Ethiopia is comprised of states &
Local governmental units.
E.g.- Regions of the federal government of Ethiopia are:
Tigray South nations & nationalities
Afar Gambella
Amhara Harari
Oroma Addis Ababa
Somalia
Benishangul /Gumuz
- Local governmental units are
1. Zone (Counties) – administrative division of the largest unit of local
government
2. Kifleketema 3. Kebele

2. EDUCATIONAL INSTITUTIONS
These could be private, public or community
E.g. Colleges & University, schools.

3. HEALTH CARE PROVIDERS

-Theses could be private, public on community
e.g. Hospitals, clinics, nursing home, red Cross

4. VOLUNTARY HEALTH & WELFARE ORGANIZATIONS (VHWO)

E.g. NGOS like USAID, Save the children, Care Ethiopia etc.

5. OTHER N.F.P ORGANIZATIONS

These are organizations whose objectives and activities are different from the above four classifications.
E.g. Philanthropic foundations
Political parties
Civic organizations
Research & scientific organization
Professional associations

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In the above classification, governmental units are being categorized as N.F.P organizations. However
governmental units may undertake two types of activities.
- Profit making activates &
- Non-profit making activates

The governmental units which undertake non-profit activates & the other indicated four not-for-profit
organizations are collectively known as Non-business
Non-business organizations.
organizations. It is those organizations that we
discuss in this course that use fund accounting system.

Students beginning the study of fund accounting temporarily must set aside many of the familiar
accounting principles for business enterprises. Such fundamental concept of accounting theory for
business enterprises as the nature of the accounting entity, the primacy of the income statement and the
pervasiveness of the accrual basis of accounting have limited relevance in accounting for governmental
units.

Thus the two types of non-business organization i.e. governmental units & the other NFPs (how, health
care, educational, other) have several characteristics in common as well as differentiating features.

1.4. Distinguish Characteristics of Governmental Units & Non-Profit Entities

For all the similarities and differences in the mechanics of accounting and management of resources,
there are very significant resources in what the two types of organizations do and how they operate. First
consider the three distinctions noted by the financial accounting standards board (FASB) which
characterize NFP organizations as
- receipts of significant amount of resources from resource providers who do not
expect to receive either repayment of economic benefit proportionate to the
resources provided
- operating purposes that are other than provide goods or services at a profit or profit
equivalent
- Absence of defined ownership interests that can be sold , transferred, redeemed, or that convey
entitlement to a share of residual distribution of resources in the event of liquidation of the organization.
Putting this points in simple terms we might say that an NFP:
- gets money from people whom do not necessarily expect anything in return.(eg. Tax payers, donors to
NGOs)- is not trying to make money
- does not have ownership shares that can be sold or bought.

From the standpoint of the management of resources, for profit and not for profit organizations are similar
different ways. For example both use the same type of resources as cash, fixed asset personnel, etc...
Since both are using the same type of resources, both need good information for decision making, and
both need to exercise careful control of the resources that they have. This means that mechanics of
providing information and control system are similar for each. Both should imply accounting forms and
other types of controls to restrict the use of assets and capture information, double entry accounting to
record and classify that information, employing journals and ledgers, and then use those journals and
ledgers as a basis to produce periodic financial reports which summarise the information in a meaningful
way to guide decisions.

Despite the wide range in size and scope of governance, similarity & differences as the accounting
treatment as compared to business organizations, Governmental units and other non-profit organizations
would have the following common characteristics.

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1. Organization to serve the society (citizens)
The basic principle of governmental philosophy is that governmental units exist to serve the citizens
subject to their jurisdictions. Thus the citizens as a whole establish governmental units through the
constitutional & charter process. In contrast, business enterprises are created by only a limited number of
individuals.

2. General absence of profit motive

With few exceptions, governmental units render services to the citizenry with out the objective of
profiting from those services. Business enterprises are motivated to earn profit.
3. Society as a principal source of revenue
As with governmental units, most non- profit organization depend on the general population for a
substantial portion of their support. Because, revenue from charges, for their services is not intended to
cover all their operating cost. Exceptions are professional societies and the philanthropic foundations
established by wealthy individuals or families, whereas the citizenry contributions are mostly involuntary
Taxes. Citizen’s contribution to non-profit organizations is voluntary donations. There is no comparable
source for business enterprise.

N.B it is important to know about types of taxes for the future topics. Tax is an involuntary contribution
from the society to the government. based upon their assessment, taxes could be classified into -

i) Self assessed taxes: - taxes, which are assessed and declared by the tax payer
E.g. Income tax, value added tax
ii) Government assessed taxes:-
taxes:- taxes determined and levied by the governmental authorities.
E.g. property tax , customs duty, Excise Tax

4. Importance of budget
Governmental accounting systems as we have seen are employed by government resources. That is each
person given custody of or access to resources should report back as to how they were used. The
government can then hold the person accountable for the resources. This means that budget become
highly important in governmental entities. Since expenditures are divorced from revenue collections, the
use of governmental resources is compared to the budget. The four-proceeding characteristics of non –
profit organizations also cause their annual budget to be as important as for governmental units. Non-
profit organizations may employ object budget, programming budget or performance budget.

5. Stewardship for resources

A primary responsibility of governmental units in financial reporting is to demonstrate adequate
stewardship for resources provided by its citizenry. Non-profit organizations have a comparable
responsibility to their donors but not to the same extent as governmental units.

1.5. Uses & Users of Financial Reports of Governmental Units

Since financial reports are means of communicating the operation results & position, it is required for
both business & non-business organizations. Financial reports could either be for a year (annual financial
reports) or for a period less than a year (interim financial report). Every states and local governmental
units are required to prepare annual financial reports, which would render information about the operation
results & position to users. The users are categorized into as:

i) Internal – who are the governing body of the states & local governmental
ii) External - who are the society /citizenry

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 The governmental accounting standards board (GASB), which is one of the responsible body in
developing a accounting & reporting standards for state & local governmental units in its concepts
statement no.1 “objectives of financial reporting”, it established the following objectives.

GASB Reporting Objectives

I. Financial reporting should assist in fulfilling governmental duty to be publicly
accountable & should enable users to assess that accountability by:
a) Providing information’s to determine whether current year revenues were sufficient to pay for
current year services.
b) Demonstrating whether resources were obtained & used in accordance with the entities
legally adopted budget & demonstrating compliance with other finance related or contractual
requirements.
c) Providing information to assist users in assessing the service efforts, costs & accomplishment
of the governmental entity.

II. Finical reporting should assist users in evaluating the operating results of the governmental entity the
year by:
a) Providing information about sources and uses of financial resources.
b) Providing information how it financed its activities and met its cash requirements.
c) Providing information necessary to determine whether its financial position improved or
deteriorated as a result of the year’s operations.
III. Financial reporting should assist users in assessing the level of services that can be provided by the
governmental entity and its ability to meet its obligations as it become due by.
a) Providing information about its financial position and condition
b) Providing information about its and other non-financial resources.
c) Disclosing legal or contractual restrictions on resources and the risk of potential loss of
resources.

It can be understood from the statement that all Financial Reporting in the case of government units
Accountability is the cornerstone. Accountability requires governments to answer to the citizens, to
justify the raising of public resources and the purposes for which they are used. Governmental
accountability is based on the belief that citizenry has a “right to know” a right to receive openly
declared facts that may lead to public debate by the citizens and their elected representatives. Financial
reporting plays a major role in fulfilling government’s duty to be publicly accountable in a democratic
society. the GASB believe that inter period equity is a significant part of accountability and is
fundamental to public administration. It therefore needs to be considered when establishing financial
reporting objectives. In short financial reporting should helpusers assess whether current year revenues
are sufficient to pay for services provided that year and whether future taxpayers will be required to
assume burdens for services previously provided.

Financial reports of Non profit organizations- Voluntary health and welfare organizations, college and
universities, Hospitals, religious organizations and others- have similar uses but, in recognition of the fact
that the financial operations of NFPs are generally not subject to as detailed legal restrictions as are those
of governments,

The financial accounting standards board believes the financial reports for not-for-profit organizations
should provide
1. Information useful in making resource allocations decisions;
2. Information useful in assessing services and ability to provide services;
3. Information useful in assessing management stewardship and performance; and
4. Information about economic resources, obligations, net resources and changes in them.

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 Note the objectives of financial reporting for governments and for non-profit entities stress the need for
public to understand and evaluate the financial activities and management of these organizations.

Government Financial Reporting

Serious users of government financial information have the need for much more detail than what is found
in the audited general-purpose financial statement (GPFS). Much of that detail as well as the auditors
report and the GPFS is found in the governmental reporting entity’s Comprehensive Annual Financial
Report (CAFR) which is considered as the entity’s official Annual report published as a matter of public
record.

Government financial reporting, Comprehensive annual financial report (CAFR) contains three main
sections,
I. An introductory section
II. A Financial section
III. A statistical section

I) Introductory Section

Introductory materials include such obvious but some times forgotten items as title page and contents
page, the letter of transmittal and other material deemed appropriate by management. The letter of
transmittal may be literally that a letter from the chief finance officer addressed to the chief executive and
the governing body of the governmental unit- or it may be a narrative over the signature of the chief
executive. In either event the letter of narrative material should cite legal and policy requirement for the
report and discuss briefly the important aspects of the financial condition and financial operations of the
reporting entity as a whole of the entity’s funds and account groups. Significant changes since the prior
annual report and changes expected during the coming year should be brought to the attention of the
reader of the report.
II) Financial section

The financial section of a comprehensive annual financial report (CAFR) should include
- An Auditors Report
- General purpose financial Statement (GPFS)
- Combining and individual fund and account group statements and schedules.

The financial section has sufficient information to disclose fully and present fairly the financial position
and results of its operation during the fiscal year. in addition agreements with creditors and others provide
constraints over the financial activities and introduce financial reporting requirements. In order to make it
possible to determine and demonstrate compliance with laws, regulations and agreements using fund
accounting system, indicating the nature of each fund type and account group prepare combined statements
in which financial data are presented in a columnar form for each fund type and account group used by the
reporting entity. The five combined statements that comprise the GPFS and that must be included in the
financial section of a CAFR are

1. Combined balance sheet- all fund types and account groups

2. Combined statement of revenues, expenditures and changes in fund balances- all governmental fund
types.
3. Combined statement of revenues, expenditures and change in fund balances- budget and actual-general
and special revenue fund types, and similar fund types for which
annual budgets have been legally adopted.

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4. Combined statement of revenue, expenses, and changes in retained earnings (or equity)- all proprietary
fund types.
5. Combined statement of cash flows- all proprietary fund types and non-expendable trust funds.

The notes to the financial statement are also an integral part of the GPFS.

III) Statistical Section

In addition to the introductory section and the financial section the report should contain the statistical
section, which presents tables and charts showing social and economic data, financial trends and the fiscal
capacity of the government in detail needed by readers who are more than casually interested in the
activities of the governmental unit.
1.6. Similarities and Differences Between Governmental & Commercial Entities

Similarities

1. Impact of legislative process

The federal, state & local laws & regulations would have an impact upon both Governmental &
commercial entities. However the level of legislative impact is not as strong for commercial units as it is
for governmental entities.

2. Stewardship for Resources

Since the resources of commercial entities are provided by the owners themselves, they are taking full
responsibility or the accountant along with the owner will be taking the responsibilities for the
stewardship of resources. In the same way, members of the governmental entities should demonstrate
adequate stewardship for resources.

3. Importance of Budget
The overall nature of governmental & commercial entities requires a plan of expected expenditure and
income to be implemented for both entities. it is important to employ relative budgets as per their
accounting entities.

Differences
1. Profit motive
Commercial units have a presented profit motive as part of their objectives where as governmental units
with some exceptions does not operate with the objective of earning a profit.
2. Governance
The legislative and executive branches of a governmental unit share the responsibilities for their
governance where as in the case of commercial entities, it is governed by elected or appointed directors or
managers.
3. Basis of accounting
The modified accrual basis of accounting is mostly used by some governmental units but in case of
commercial entities the basis of accounting is the accrual basis.
4. Source of revenue in nature
The primary source of revenue for commercial entitles is through sales or services they provide, whereas
in case of governmental units, with some exceptions, the main source of revenue is though fund or
donations.
5. Beneficiaries
Governmental units are operating for the benefit of the citizenry where as commercial entities are
operating for the interest and benefit of the owners.

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 1.7. Sources of Accounting Standards
Accounting and financial reporting standards for state and local governmental units are established by the
governmental accounting standards board (GASB).
Accounting and financial reporting standards for profit seeking business are established by the financial
accounting standards board (FASB)
(FASB)

The GASB and the FASB are parallel bodies under the oversight of the Financial Accounting Foundation.
they are referred to as “ independent standard setting boards” in the private sector. Before the creation of
the GASB & FASB, financial reporting standards were set by groups sponsored by professional
organizations. Before 1934 in US, there was no governmental accounting standard. But by 1934, to
overcome this confusion & scandal specially in municipality accounting, the Municipal Finance Officers
Association (MFOA) formed, the National Committee on Municipality Accounting (NCMA) (NCMA) to assure
accounting standard for municipalities. By expanding its scope, the NCMA in 1949 was reorganized as
National Committee on Governmental Accounting (NCGA) to establish accounting standards for
states and local governmental units. In 1974, the committee was again reorganized as a council and
formed the National Council of Governmental Accounting (NCGA). In 1984 the council was again
reorganized as a board parallel to FASB and was renamed as Governmental Accounting Standards
Board (GASB).
(GASB).

Authority to establish accounting principles (financial reporting standards for non profit organizations) is
split between the GASB and the FASB. Because a sizable number of non profit organizations
(particularly colleges, universities & hospitals) are governmentally related. But many others are
independent of governmental units. Accordingly the GASB has the responsibility for establishing
accounting & financial reporting standards for not for profit organizations whose financial statements
may be combined with the financial statements of state and local governmental reporting entities, or
which are considered governmentally owned.

The FASB has the responsibility for establishing accounting and financial reporting standards for non-
governmental non-for profit organizations. Both the GASB and the FASB have issued concept
statements, which are intended to communicate the framework within which the two bodies strive to
establish consistent financial reporting standards for entities within their respective jurisdictions.

The financial accounting foundations appoints the members of the two boards & supports the operating
expenses of the boards by obtaining contributions from business corporations, professional organization
of accountants, financial analysts, CPA firms and other groups concerned with financial reporting.

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 GOVERNMENTAL UNITS
2.0. Aim and Objectives
This unit aims at explaining all the principles of governmental accounting and financial reporting
applied by the governmental entities using fund accounting system.
and the common accounting characteristics they possess.

After going through this unit, the student should be able to:
 explain all governmental accounting principles
 understand the concept of fund accounting system applied
 Identify the funds, their common accounting character and the financial activities and
resources they account.

2.1. INTRODUCTION
The GASBs codification of governmental accounting and financial reporting standards presents
twelve principles of governmental accounting. These principles are basic, carefully thought out
beliefs and specific fundamental tenets which on the basis of reason, demonstrated performance,
general acceptance are generally essential to effective management control and financial
reporting which also have been proven to work well and are accepted by most.

2.2. STATEMENT OF THE PRINCIPLES

2.2.1 Accounting & Reporting Capabilities (principle #1)
A government accounting system must make it possible both
(a) To present fairly & with full disclosure the financial operation of the funds & account groups
of the governmental unit in conformity with Generally accepted accounting principles
(GAAP) &
(b) To determine & demonstrate compliance with finance-related legal and contractual
provisions.
1. Adherence to GAAP is essential to answering a reasonable degree of comparability
among the general-purpose financial reports of state and local governmental units.
2. Sometimes the legal requirements might be contrary to GAAP; for instance,
governmental entities may require to keep books with a single entry ledger, or it may
require to keep all account on a strictly cash basis. In these cases since the legal
requirements are contrary to GAAP financial statements & reports prepared in
compliance with state laws are complied. Sometimes legal requirements are also
contrary to good financial management. For example a purchase for 3 birr might require
the same amount of paper work as a purchase of 10,000 birr. In this case the cost of the
forms, the labour to complete them and the storage space to keep them might actually
exceed the 3 birr. It is the law. But it is good management of resources.

In some governmental units however Under such circumstances where the laws require to
follow practices not consistent with GAAP, Governmental units may prepare two sets of
financial statements.
1. One set in compliance with legal requirements,
2. One set in conformity with GAAP
2.2.2 Fund Accounting System (Fund defined) (principle # 2)

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Governmental accounting systems should be organized & operated on a fund basis.
“A fund is defined as a fiscal & accounting entity with a self balancing set of accounts recording
cash & other financial resources, together with all related liabilities & residual equities and
balances, & changes there in, which are segregated for the purpose of carrying on specifies
activates or attaining certain objectives in accordance with special regulations, restrictions or
limitations.”
- The word FUND is given special definition as it relates to Fund Accounting. The narrow
definition of Fund as used in ordinary conversation is a “resource of money”. However in this
course it is given the special definition above. It has key phrases indicating the following
points; It is by itself is an entity, having its own accounting existence and a self balancing set of
books (double entry system). That set of books is established for recording a specific financial
activity. The establishment of the fund will attain a specific objective and will have regulations,
restrictions or limitations.
Example
Two examples follow to illustrate the concept of fund. First the ministry of education operates
several colleges. Although all are part of the MINISTRY as a whole each one is treated as a
fund. Each college will be given money that is specifically for its operations, is not to be mixed
up with other institutions. Therefore each college will keep its own set of books, and issue its
own Financial Reports, irrespective of the performance of other individual institutions or the
ministry as a whole.
Or take the case of Non governmental organizations. For instance, a single NGO will likely have
several projects; it may have the following different projects, which are funded by different
donors.
1. Construction of a Damn in region 1
2. Water development project in region 2
3. Cattle development project in region 3
Under this case the donor for each project will not necessarily be given the financial statement of
the NGO as a whole. The donor for a cattle development project will want financial statements
for only the project, which he is funding. There for, each project will have its own set of books &
produce its own financial statements. So each project will be a separate distinct fund. The very
reason of setting up of funds accounting in governmental entity is that of legal requirement &
good financial management.

2.2.3 Types of Funds (Principle # 3)

There are seven types of funds, which are subdivided into three categories:

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I. GOVERNMENTAL FUNDS
1. The General Fund- to account for all financial resources except those required to be
accounted for in another funds.
2. Special Revenue Funds- to accounts for the proceeds of specific revenue sources (other than
expendable trusts or for major capital projects) that are legally
restricted to expenditure for specific purposes.
3. Capital Project Fund- to account for financial resources to be used for the acquisition or
construction of major capital facilities (other them those financed
by proprietary & trusts funds)
4. Debt Service Funds- to account for the accumulation of resources for & the payment of
general long term debt principal & interest.

II. PROPRIETARY FUNDS

5. Enterprise Funds-
Funds- to accounts for operations
1. That are financed and operated in a manner similar to private business
enterprises-where the intention 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 determinations of reveries
earned, expenses incurred and/or net income is appropriate for capital
maintenance, public policy, management control, accountability, or other
purposes.
6. Internal Service Funds- to account for the financing of goods or services provided
by one department or agency to the another department or
agency of the governmental unit, or to the other
governmental units on a cost reimbursement basis.
III. FIDUCIARY FUNDS
7. Trust And Agency Funds- To account for assets held by governmental unit in a trustee
capacity or as an agent for individual private organizations, other
governmental units & or funds. These include:
1. Expandable trust funds
2. Non-expendable trust funds
3. Pension trust funds
4. Agency funds
All governmental funds are Expendable Funds; expendable funds are meant to be expended or
their resources are used up entirely usually within one fiscal year. As a practical matter, any
money that remains in an expendable fund at the end of the year typically must be returned to its
source. Therefore managers of expendable funds normally try to ensure that all their funds are
used up within one time period. if they are not used up, the manager is often perceived as being a
poor budget planner. This course deals primarily with accounting for expendable funds. The
accounting equation for an expendable fund is slightly different from an FP. recall the
accounting equation for an FP: A - L = C. The accounting equation for an expendable fund (from

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the definition of Fund above) is cash plus other financial resources minus liabilities = fund
balance. (C + OR - L = FB). There are no ownership interests in an NFP. So there is no capital
or owners equity. There is only a balance remaining to be used for specific purpose.

Non-Expendable Funds are used when maintenance of capital is desired, and the unexpended
funds are not meant to be returned. All proprietary funds are non-expendable funds
1. The general fund is the first one mentioned. All governmental units should have a
general fund except if the resources are to be accounted in other funds. There will be one
general fund established. Some governmental units will have only a general fund. If any
of the other types of funds are needed, the governmental unit may have several of those
funds as needed. The general fund is used for general government services. It is basically
used for services that does not require a separate fund.
2. An example of a special revenue fund might be “The Unity and safety of the motherland
tax” that was collected during the Derg regime. This fund was not for the general fund of
the government but was raised specifically for the armed forces. it would have needed to
be accounted for and reported on separately. An other example is the oil price
contingency fund which was established by the government specifically for the purpose
of controlling the fluctuation of oil prices in the country.
3. An example of Capital Projects Funds could be the construction of new building for the
city government Administration. the costs incurred in the construction of the building are
quite different from the operating cost of the city administration and would need to be
accounted for and reported on as an entity in itself.
4. If money has been borrowed from the construction of new building that would give rise
to a Debt service Fund. Assume that 10,000,000 birr was borrowed at 10 % simple
interests and is to be repaid in full in 10 years, each year 2,000,000 birr would be needed
to be put in a debt service fund- 1,000,000 for the payment of the principal plus
1,000,000 for the payment of each year’s interest.
5. A public park could be an example of an Enterprise Fund. The park would charge a user
fee, from which it could pay the expenses (eg. Salaries) of operating the park. as a non-
expendable fund, it would not have to return unused money to its source at the end of the
year. Therefore, it might also accumulate money from year to year for the purchase of
equipment, furnishings and the like from its income from the user charges.
6. A shared garage is a common example of an Internal Service Fund in government
ministry offices. the garage would repair all the ministries` vehicles regardless of which
project, offices or funds uses them. charges are made to various funds for the repair cost.
as a non expendable fund, part of the charge made to the various funds could be intended
to be accumulated for future years for the purchase of tools and equipment.
7. Fiduciary funds are used to account for money which one branch of government has on
behalf of another fund, organization or individual. a common example of a fiduciary fund
is a central tax collection agency, such as the Inland Revenue Authority. the taxes it
collects are not for its own benefit, but are rather passed on to other ministries or
departments. fiduciary funds are expendable as well as non expendable depending upon
the type of fund.

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N.B- one additional type of fund i.e special assessment fund has been eliminated by GASB for
financial reporting purposes.

2.2.4 Number of Funds (Principle # 4)

Governmental units should establishes and maintain those funds require by law & sound
financial administration. Only the minimum number of funds in consistent with legal and
operating requirements should be established, however since unnecessary funds result in
inflexibility, undue complexity & inefficient financial administration.
The seven fund types are to be used if needed by Governmental unit to demonstrate compliance
with legal requirements or if needed to facilitate sound financial administration.
In rare instances the use of a certain fund type is required by GASB standards. If legal
requirements GASB standards or sound financial administration do not require the use of a given
fund type, it should not be used. In the simplest possible situation, a governmental unit could be
in conformity with GAAP if it used a single fund, the general fund, to account for all events &
transactions. In addition to that one fund, however it would need two account groups.
This principle is especially important in NGOS who intend to do a number of limited life
projects, each of which is accounted for as a separate fund. When the project is finished the fund
should be closed. As long as the fund remains open, financial statements continue to be produced
for it. Wasting paper, ink, labour and time.
2.2.5 Accounting for fixed assets & long-term liabilities (Principle #5)
A clear distinction should be made between Fund fixed assets & general fixed assets & Fund
long-term liabilities & General long-term debt
A. Fixed assets related to specific property funds & trust funds should be accounted for through
those funds. All other fixed assets of governmental units should be accounted for through the
general fixed asset account group.
B. Long term liabilities of proprietary funds & trusts fund should be accounted for through those
funds. All other un matured general long-term liabilities of governmental unit including
special assessments debt for which the government is obligated in some manner should be
accounted for through the general long-term debt account group.
1. General fixed assets include land, buildings, and improvements other than buildings, car
& equipments used by activities accounted by the four fund types classified as
“governmental funds”. Which belong to the governmental unit as wholes, rather than to a
particular, fund and are to be shared among the different funds e.g. A fleet of cars or
office building that is shared among the funds of the municipality. General fixed assets
do not represent resources available for expenditure, but rather are items for which
resources have been used. Note that the construction or purchase fixed assets is accounted
for in a fund as the resource for those assets is being expended. The two principles quoted
below establish requirements that relate to fixed asset accounting.
2. General long-term debt would be borrowings of the entire governmental entity
rather than by a specific fund. The money would be backed by the full faith and

13
 credit of the governmental entity rather than by specific fund. They are to be paid
from general tax levies, specific debt service tax levies, or special assessments. The
rationale for not including general long-term debt in the general fund’s account is
like that of general fixed assets. The general long-term debt is not something will
require current period resources for payment. These liabilities do not constitute a
fiscal entity either. But they do need accountability, so the general long term debt
account group is used to provide this.

2.2.6 Valuation of Fixed Assets (PRINCIPLE # 6)

Fixed assets should be accounted for at cost, or if the cost is not practically determinable, at
estimated cost, donated fixed assets should be recorded at their estimated fair value at the time
received.
Note: as with FP, Fixed assets should be recorded at their historical cost. But one
Difference with profit making accounting is that fixed assets are not usually donated to profit
making entities. so they are not concerned with accounting for them.

2.2.7 Deprecation of Fixed Assets (PRINCIPLE # 7)

A. Deprecation of general fixed assets should not be recorded in the accounts of governmental
funds. Depredation of general fixed assets may be recorded in cost accounting systems or
calculated for cost finding analysis; & accumulated deprecation may be recorded in the
General Fixed Asset Account group.
B. Deprecation of fixed assets accounted for in proprietary funds should be recorded in accounts
of that fund. Deprecation also recognized in those trust funds where expenses, net income
&/or capital maintenance are measured.
1. Depreciation is not recognized in as expenditure in governmental funds because it is not a
decrease in fund financial resources. However, It should be calculated in the general
fixed asset account group because knowing depreciation is helpful for good financial
management and helps in planning for the replacement of assets in the future.
2. Proprietary fund fixed assets- because a proprietary fund needs to know that it is covering
all its costs, it includes depreciation as an expense in its accounts. remember that
accounting in a proprietary fund is similar to FP accounting.
2.2.8 Basis of Accounting (PRINCIPLE # 8)
The Modified Accrual or accrual basis of accounting as appropriate should be utilized in
measuring financial position & operating results.
A. Governmental fund revenues & expenditures should be recognized on the modified accrual
basis. Revenues should be recognized in the accounting in which they become available &
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.
1. Revenues & other governmental fund financial resource increments (e.g.) bond issue
proceeds are recognized in the accounting period in which they be come susceptible to
accrual i.e. when they be come both measurable & available to finance expenditures of
the fiscal period.

14
B. Proprietary fund revenues & expenses should be recognized on the accrual basis. Revenues
should be recognized in the accounting period in which they are earned & become
measurable. Expenses should be recognized in the period incurred, if measurable.

2. Proprietary fund account is virtually the same as for profit account.

C. Fiduciary funds revenue and expenses or expenditures (as appropriate) should be recognized
on the basis consistent with the fund’s accounting measurement objective. Nonexpendable
trusts and Pension Trust Funds should be accounted for on the accrual basis;

3. Expendable trust funds should be accounted for on the modified accrual basis. Agency
fund assets and liabilities should be accounted for on the modified accrual basis.
4. It is sufficient to say that the basis of accounting for Fiduciary funds depends on whether
or not the nature of the fund is expendable or non-expendable. Both kinds are possible in
fiduciary funds.
D. Transfers of financial resources among funds should be recognized in all funds affected in the
period in which the inter fund receivables & payable(s) arise.
1. Sometimes there are transfers made between funds. Because each fund is a separate
accounting and reporting entity, these transfers must be reported.
In business enterprise accounting, the accrual basis is employed to obtain a matching of costs
against the revenues flowing from those costs, they producing a more useful Income Statement.
In governmental entities, however, even for those funds that do attempt to determine net income,
only certain trust funds have major interest in the largest possible amount of gain. Internal
service and enterprise funds are operated principally for service. They make use of revenue and
expense accounts to promote efficiency of operations and to guard against importance of ability
to render the services desired.
For these reasons, operating statement of proprietary funds, non-expendable trust funds &
pension trust fund are called statement of revenue and expenses rather them in come statement.
GASB standards require that modified accrual basis is appropriate for the four governmental
funds, for agency funds & for expendable trust funds while the accrual basis is used for the two
proprietary funds, non-expendable and pension trust funds.
The difference between Expenses and Expenditure must be known properly to understand the
distinction between NFP and FP accounting. In the dictionary these words have almost exactly
the same meaning. However in fund accounting, they have been given specialized meanings.
2. An Expense is a current period consumption of resources.
3. Expenditure a decrease in the fund financial resources.
For example in a profit making accounting a car would be considered as an asset and
depreciation would be recorded as an expense as the car is “used up” or “wears out”. In a
governmental fund, the car would be considered as expenditure at the time of purchase.

2.2.9 Budget and Budgetary Accounting (Principle # 9)

A. An annual budget (s) should be adapted by every governmental units.

15
B. The accounting system should provide the basis for appropriate budgetary control.
C. Budgetary comparisons should be included in the appropriate financial statement & schedules
for governmental units funds, for which an annual budget has been adapted. [Budget with
Actual]
1. Budgeting is the process of allocating of resource to meet unlimited demands.
There are three primary questions to ask when preparing a budget.
Q, How much will we spend?
Q, why will we spend it?
Q, where will we get the money?
2. Budgets are key elements of legislative control over governmental units. The executive
branches of governmental units propose the budget, the legislative branch reviews,
modifies & enacts the budget and finally approves and the executive branch then carries
out the provisions. Budgets have a greater role in governmental accounting than in profit
making business, because governmental budgets are fixed by law and are generally
unchangeable, so exceeding them may carry severe penalties. Budget in profit making
enterprises are usually more flexible & can change as conditions change during the year.
A budget, when adopted according to procedures specified in state laws is binding on the
administration of a Governmental unit. Accordingly, a distinctive characteristic of
Governmental accounting resulting from the need to demonstrate with laws governing the
sources of revenues available to governmental units, & lows governing the utilization of
those revenues is the formal recording of the legally approved budgets in the accounts of
funds operated on an annual basis.

2.2.10 Financial Reporting (Principal # 10)

Interim financial reports
A. Appropriate interim financial statements & reports of financial position, operating results &
other pertinent information should be prepared to facilitate management control of financial
operations, legislative oversight & where necessary or desired for external reporting purpose.
3. In NFP accounting interim reporting is used if it fulfils one of these three purposes:
1. for good management
2. for the legislature (legal compliance)
3. for external reporting (perhaps for those who have loaned money to it)
Comprehensive Annual Financial Reports (CAFR)
B. A comprehensive annual financial report covering all funds & account gropes of the
governmental unit including appropriate combined, combining & individual fund statements,
notes to the F.S, schedules, narrative explanations & statistical tables should be prepared &
published.
4. Combined statement would should the operations of the entire governmental entity
constituting all the individual funds in to one statement. Combining would candidate the
results of all funds of same type e.g. all special revenue funds. Individual fund statement
would be prepared for each individual fund.

General purpose Financial Statement (GPFS)

16
C. General Purpose F.S may be used separately from the comprehensive annual financial report.
Such statement should include the basic F.S & notes to the financial statement that are
essential to fair presentation of financial position and operating results (changes in financial
position of proprietary funds & similar funds)
1. The general purposes F.S are essentially the same as the combined statement.
2. NOTE: governmental reporting entity
3. The first thing that must be clear in accounting for governmental units is that what
agencies, commissions, institutions public authorities or other governmental
organizations (called component units) are to constitute the reporting entity for a
governmental unit. The basic criteria for inclusion in the reporting entity is the ability
of governmental units, elected officials to excise oversight responsibility over the
organization in question the primary indication of oversight responsibility is financial
independency of the organization & other indicators are – the ability of ducted officials
to influence the operations.

2.2.11 Classification and Terminology (Principle # 11,12)

Classification (principle # 11)
11)
Transfer, Revenues, Expenditure and Expense account classifications

I. Classification of Transfers
A. Inter fund transfers & proceeds of general long-term debt issues should be classified
separately from fund revenue and expenditures or expenses.
1. Inter fund transfers- a transfer from one fund within the unit to another fund within the
same unit
2. e.g. - suppose on NGO operates clinics, & these clinics charges to cover wages &
medicines. During the year one clinic had a surplus & another had a loss. The head of the
organization decides to transfer funds from one to another.
3. Proceeds of general long term debt issues- money that is received from borrowing.
4. Donation from outside – goes in to the general fund or into a particular project fund as
the donor indicates.
5. -There are basically fund types of inter fund transaction and transfers we commonly
encounter in state and local govt. these are: -
1. Quasi-external transactions-
transactions- transactions that would be treated as revenues, expenditures, or
expenses if they organization external to the government unit.
2. Reimbursements-
Reimbursements- one fund pages a bill on behalf of another
E.g. An NGO operates a cline in A.A & southern Shoa,
The A.A clinic, for convenience, might pay a bill for medicine on behalf of the Southern Shoa
clinic. The Southern Shoa clinic would then reimburse the A.A clinic & it would be
expenditure for the Southern Shoa clinic.

3. Residual equity transfer-

transfer- lift over money at the end of a certain project given to another.

17
 E.g. Funding for water project in Asosa transferred to a water project in Shoa after the Asela
project is finished.
4. Operating transfers-
transfers- all other inter fund transfers
E.g. legally authorized transfers from a fund receiving revenue to the fund through which the
resources are to be expended.
E.g. Transfers of fund from general fund to a special reserve fund.
N.B: 1&2 are merely transactions whereas 3&4 are transfers

II. Classification of Revenues and Expenditures

A. Governmental fund revenues should be classified by fund and source. Expenditures should be
classified by fund, function (or programmes), organization unit, activity, character & principal
classes of object.

III. Proprietary fund Revenues and Expenses

C. Proprietary fund revenues & expenses should be classified in essentially the same manner as
those of similar business organizations functions or activities.
Expense is a current period consummation of resources while expenditure is a decrease in fund
financial resources.
E.g. in profit making accounting, a car would be considered as an asset & depreciation would be
recorded as an expense as the car is used up on wears out, in a fund the car would be considered
as expenditure at the time of purchase.
Terminology (Principle #12)
#12)
A common terminology & classification should be used consistently through out the budget, the
accounts, and the financial reports of each fund.
1. The common terminology and classification principle is simply a statement of common
sense proposition that if the budgeting, budgetary control, and budgetary reporting
principle is to be implemented, persons responsible for preparing the budgets and persons
responsible for preparing the financial statements and the financial reports should work
with the persons responsible for designing and operating the accounting system.
Agreement on a common terminology and classification scheme is needed to make sure
the accounting system produces the information needed for budget preparation and for
financial statement and report preparation

18
Chapter 3. Accounting for General Fund & Special Revenue Fund
3.1.1 General Fund
As it can be recalled from chapter two, the general fund is used for general governmental activities such as police,
administration and the like. To distinguish the general fund adversely, it can be said that the general fund should
account for all financial resources for which a separate fund is not required. All governmental entities have a general
fund(GF). Although it may be called the operating fund, the current fund or something similar, the general fund will
exist as long as the entity exists. a governmental entity will have only one general fund. The general fund of a state
or local government unit is the entity that accounts for all the assets & resources used for financing the general
administration of the unit & the traditional services provided to the people.

3.1.2 Special Revenue Fund

Special revenue fund (SRF) in contrast to GF is used to account for resources, which are collected for a specified
purpose. Whenever a tax or other revenue source is authorized by legislative body to be used for specific purpose,
only a governmental unit availing itself of that source may create a Special Revenue Fund in order to be able to
demonstrate that all revenue from the source was used for the specified propose, only separate special revenue funds
are established by governmental units, as mandated by legislative enactments to account for the receipts and
expenditures associated with specialized revenue sources that are earmarked by law or regulation to finance
specified governmental operations. Fees for rubbish collection, state taxes on diesel fuel that is required to be used
only for road maintenance, tax on hotel rooms to be used to improve tourist facilities, traffic violation fines are
examples of governmental units revenues that may be accounted for in a separate special revenue fund.

- Comparison:
The general fund should account for all financing sources for which a separate fund is not required. Special revenue
funds are necessary when they are required by law or contract. A governmental entity will have several special
revenue funds at any time & these funds are opened & closed according to need.

The general funds and the special revenue funds have different purposes, but they are both revenue funds, and the
accounting and reporting procedure is the same for both. They are similar in that all or almost all of their resources
are expended each year. They are then filled up (replenished) again for the next year.

3.2. ACCOUNTING CHARACTERISTICS

Fixed assets are not capitalized in either fund. Their purchase is considered as expenditure, the same as for salaries
or utilities. Such fixed assets are not accounted for by these funds. Because, they are not normally converted in to
cash. Similarly the same categories of funds account for only those liabilities incurred for normal operations that
will be liquidated by use of fund assets.

The arithmetic difference between the amount of financial resources and the amount of liabilities recorded in the
fund is called the fund equity. Residents of the governmental unit have no legal claim on any excess of liquid assets
over current liabilities. therefore the fund equity is not analogous to the capital accounts of an investor owned entity.
Accounts in the fund equity category of general funds & special revenue funds consist of reserve accounts
established to disclose that portion of the equity are not available for appropriations. The portion of equity available
for appropriation is disclosed in an account called Fund Balance. General funds & special revenue funds account
for financial activates during a fiscal year in accounts classified as Revenues, Other Financing Sources,
Expenditures & Other Financing Uses.

Revenue: - is the increase in the fund financial resources other than from inter fund transfers & 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.

19
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.
An example of the use of transfer accounts occurs in those jurisdictions where a portion of the taxes recognized as
revenue by the general fund of a unit is transferred to a debt service fund which will record expenditures for
payment of interest and principal of general obligation debt. the general fund would record the amounts transferred
as operating transfers out: the debt service fund would record the amount received as operating transfers in. Thus the
use of transfer accounts achieves the desired objective that revenues be recognized in the fund which levied the
taxes and expenditures be recognized in the funds which expends the revenue.

In few jurisdictions taxes must be collected in the year before the year in which they are available for expenditure. In
such jurisdictions tax collection should be credited, deferred revenue should be debited & revenue should be
credited.

Under accrual basis, expenditure is recognized when a liability to be met from fund asset is incurred. It is important
to note that an amount of a liability incurred whether the liability is for salaries (an expense) for supplies (a current
asset) ,or for a long lived capital assets such as land building or equipment.

3.3. BUDGET & BUDGETARY ACCOUNTS

The fact that budgets are legally binding upon administrators has led to the incorporation of budgetary accounts in
the general fund and in the special revenue funds and in all other funds required by law to adopt a budget.

Budgeting is the process of allocating scarce resources to unlimited demands budgeting has a great role in
governmental accounting than in profit making business.

Budgeting is a key element of legislative control over governmental units. The two classifications of budget for
governmental units are the same as those for business enterprises. Annual budgets or long term or capital budgets.
Annual budgets include the estimated revenues & appropriations for expenditures for a specific fiscal year of the
governmental unit. Annual budgets are appropriate for the general fund & special revenue funds. They sometimes
are used for other governmental funds. An expendable trust fund also may have an annual budget, depending upon
the terms, the terms of the trust indenture. Capital budgets, which are used to control the expenditures for
construction projects or other plant asset acquisitions, may be appropriate for capital projects funds. The annual or
capital budgets often are recoded in the accounts of all these funds, to aid in act for compliance with legislative
authorities.

The operations of the two proprietary funds are similar to those of business enterprises. Consequently, annual
budges are used by these funds as a managerial planning & control device rather than as a legislative control tool.
Thus annual budgets of enterprise funds & internal service funds generally are not recorded in ledger accounts by
these funds.

In order to facilitate preparation of budgets and preparation of the combined statement of revenues, expenditures and
changes in fund Balance-Budget and Actual required for GAAP conformity, accounting systems of funds for which
budgets are required by law should incorporate budgetary accounts. Only three general ledger control accounts are
needed to provide budgetary control; Estimated Revenue, Appropriations and Encumbrances.

1. Estimated Revenues – resources expected to be received

2. Appropriations – is both an authorization to spend and limitation of spending.
3. 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

All the three must be supported by subsidiary ledger accounts whatever detail is required by law or by sound
financial administration. Budgeted interfund transfers and debt issue proceeds may be recorded in Estimated Other
Financing Sources and Estimated Other Financing Uses control accounts supported by subsidiary accounts as
needed.

20
3.3.1 Recording the Budget
At the beginning of the budget period, estimated revenue control account is debited for the total amount of revenues
expected to be recognized, as provided in the revenues budget and the limitation of spending or authorized
expenditures will be recorded with a credit in the appropriations control account. The amount of revenue expected
from each source specified in the revenues budget is recorded in a subsidiary ledger account so that the total of
subsidiary ledger detail agrees with the debit to the control account and both agree with the adopted budget. The
same way will also be used for the appropriation.
The entry to record the budget is simple. It is normally done on the first day of the fiscal year. Estimated revenue is
debited, Appropriations is credited, and fund balance is debited or credited for the difference. Appropriation could
be further subdivided- by month or other periods; this subdivisions are called Allotments.

Recording encumbrance helps the one managing the finances to know that money has been
committed to some purpose and is no longer available for expenditure. There is
often a delay between placing the purchase order and receiving the goods ordered.
Therefore it is possible for the administrators to forget about the purchase orders that
have been placed and to think that the money is still available to be used. This is
especially true in a large entity where dozens of purchase orders are placed each
week. To ensure that outstanding purchase orders are not overlooked in the on going
commitment of resources, purchase orders are recorded in the Encumbrance account.
An encumbrance differs from an expenditure in that the encumbrance is an estimate
of liability to be incurred while expenditure is an actual liability which has been
incurred. the reason that encumbrance is only an estimate is that invoiced amounts
sometimes differ from purchase order amounts. for example a particular item may be
out of stock, and either backordered, or substituted by a similar item.
Example- when a purchase orders for goods or services is issued to a supplier by one of those
funds, a journal entry similar to the following is prepared for the fund.
Encumbrance 150,000
Fund Balance Reserved for Encumbrances 150,000
= to record encumbrances for purchase order no. 001
issued to X company.

When the suppliers invoice for the ordered merchandise or services is received by the governmental unit, it is
recorded and the related encumbrance is reversed as seen below:
Expenditures 180,500
Vouchers payable 180,500
= to record an invoice received from Wilson company under purchase
order no. 001
Fund Balance reserved for Encumbrances 150,000
Encumbrances 150,000
=To reverse encumbrance for purchase order no. 001 issued
to X company

Two journal entries are needed for encumbrances, one when the order is placed and another when the goods are
received. When the order is placed, encumbrance is debited and Reserve for Encumbrance (a (a fund balance
account) is credited. When the order is received, the entry is reversed. As indicated by the example above the
invoice amount may differ from the amount of the governmental units purchase order because of such items as
shipping charges, Sales Taxes, and price changes.

Regardless of which types of annual budgets are used by government unit, the final budget adopted by the
governmental unit’s legislative body will include estimated revenue other financing sources, appropriations and
other financing uses. If the estimated revenue and other financing sources of the budget exceed appropriations and

21
 other financing uses (as required by law for many governmental units), there will be budgetary surplus, if vice-versa,
there will be budgetary deficit.

3.4. ACCOUNTING FOR GENERAL FUND AND SPECIAL REVENTUE FUND

Illustration
Below is the Balance Sheet of town of X General fund on June 30, year 5 and the annual budgets
adopted for the year ended June 30, year 6.
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

Below is the approved budget by the town council for the fiscal year ended on 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
Appropriation:
- General government .......................... 4,700,000
- Public safety .......................... 1,900,000
- Health and welfare .......................... 1,100,000
- Culture and recreation ...................... 400,000 8,100,000
Estimated other financing uses (transfer to DSF) 100,000

* 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

22
An analysis of each of the ledger accounts in the forgoing journal entry follows:
1. Estimated Revenues and Estimated Other financing Sources ledger account may be
considered Pseudo Asset controlling accounts because they reflect resources
expected to be received by the General Fund during the fiscal year. These accounts
are
Not actual assets because they do not fit the accounting definition of an Asset as a probable
economic benefit obtained or controlled by a particular entity as a result of past
transactions or events. Thus the two accounts in substance are memorandum
accounts,
accounts, useful for control purposes only, that will be closed after the issuance of
financial statements for the General fund for the fiscal year ending June 30 year 6.

2. The Estimated other Financing source ledger accounts includes the budgeted amounts
of such non Revenue items as proceeds from the disposal of plant assets and
operating transfers from other funds.

3. The Appropriations and Estimated Other Financing Uses Ledger Account may be considered
Pseudo Liability controlling accounts because they reflect the legislative body’s
commitment to expend General fund resources as authorized in the Annual Budget.
These accounts are not genuine liabilities because they do not fit the definition of a
liability as a probable future sacrifice of economic benefits arising from present
obligation of a particular entity to transfer assets to provide services to other entities
in the future as a result of past transactions or events. The appropriations and Other
Financing uses are memorandum accounts, useful for control purposes only, that
will closed after issuance of year end financial statements for the general fund.

4. The Estimated Other Financing Uses accounts include budgeted amount of operating transfers
out to other funds, which are not expenditures.

5. The Budgetary Fund Balance Ledger Account, as its title implies is an account that balances
the debit and credit entries to accounts of a budget journal entry. Although similar to
the owners’ equity accounts of a business enterprise in this balancing feature, does
not purport to show an ownership interest in the General funds assets. At the end of
the fiscal year, the budgetary fund balance account is closed by a journal entry that
reverses the original entry for the budget.

The journal entry to record the town of X general funds annual budget for the year ending June
30 year 6 is accompanied by detailed entries to subsidiary ledgers for Estimated
Revenues, Estimated other financing Sources, Appropriations and Estimated Other
Financing Uses. the budget of the town of X general fund purposely was condensed;
in practice the general fund estimated revenues and appropriations would be detailed
by source and function, respectively into one of the following widely used subsidiary
ledger categories:

23
Estimated Revenues: Appropriations:
- Taxes - General government
- Licenses and permits - Public safety
- Intergovernmental revenues - Public works
- Charges for Services - Health and Welfare
- Fines and Forfeits - Culture - recreation
- Miscellaneous - Conservation of natural resources
- Debt service
- Intergovernmental expenditures
- Miscellaneous

Such details will be discussed in the next topic; Classification and terminology of governmental
funds budgets and accounts.
In summary, budgets of a governmental unit are often recorded in the accounts of the four
governmental funds. An expendable trust fund may also record a budget if required
to do so by the trust indenture. The recording of the budget initiates the accounting
cycle of each for each of the funds listed above. Recording the budget also facilitates
the preparation of financial statements that compare budgeted and actual amounts of
revenues and expenditures.

Encumbrances and budgetary control- because of the need for expenditures of governmental
units to be in accordance with appropriations of governing legislative bodies, an a
encumbrance Accounting techniques are used for the general fund and the special
revenue funds and sometimes for capital projects funds. The Encumbrance is a
memorandum method for assuring that total expenditures for a fiscal year do not
exceed appropriations. The encumbrance technique is used in accounting for
governmental units have no counterpart in accounting for business enterprises.
Assume that in addition to the budget illustrated earlier, the town of X general fund had the
following summarized transaction and events for the fiscal year ended June 30, 19x6

1. Property taxes were billed in the amount of 7,200,000 of which 140,000 was of
doubtful collect ability.

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.

Explanation- The modified accrual basis of accounting for a general fund permits the accrual of
property taxes, because they are billed to the property owners. The estimated

24
 uncollectible property taxes are offset against the total assets billed in order to
measure actual revenues from property taxes for the year.

2. A total of 6,500,000 amount of Property tax were collected and a total of 1,020,000
Amount 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.

Exp- Under the modified accrual basis of accounting, revenues not susceptible to accrual are
recognized on the cash basis like self-assessment basis tax revenue (Eg. Income tax,
Sales Tax, Gross receipts Tax, ) and miscellaneous revenues (Eg. Annual business
licenses, construction and home improvement permits, Fines and forfeits etc.)

3. Property tax in the amount of 130,000 were uncollectible.

Allowance for uncollectable current taxes

130,000
Property taxes receivable- current 130,000
= To write off receivables for property taxes that are uncollectable

Explanation- The forgoing journal entry represents a shortcut approach. in an actual situation ,
uncollectible property taxes first would be transferred together with estimated
uncollectible amounts, to the Taxes Receivable- Delinquent ledger account from the
Taxes Receivable- Current account. Any amounts collected on these delinquent taxes
would include revenues for interests and penalties required by law. Any uncollected
delinquent taxes would be transferred, together with estimated uncollectible amounts
to the Tax-Liens Receivable ledger Account. After the passage of an appropriate
statutory period, the governmental unit might satisfy its tax lien by selling the
property on which the delinquent taxes were levied.

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.

25
 Explanation- encumbrance journal entries are used to prevent the over expending of an
appropriated amount in the budget. This journal entry to the encumbrances ledger
account is posted in detail to reduce the unexpended balances of each applicable
appropriation in the subsidiary ledger for appropriation. The unexpended balance of
each appropriation is thus reduced for the amount committed by the issuance of
purchase orders.

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
= To record expenditures for the year.

Explanation- the expenditure ledger account is debited with all expenditures regardless of
purpose except for Additions to the Inventory of Supplies, Principal and Interest
Payments on Debt, Additions to the Governmental Unit’s Plant Asset, Payments
for Goods or Services to be Received in the Future, - all are debited to
expenditure or other financing uses rather than to asset or liability ledger account.
(Expenditure for debt principal and interest and plant asset additions are also
recorded on a memorandum basis in the general long-term debt and general fixed
assets account group respectively.

b) Fund Balance reserved for Encumbrance 3,550,000

Encumbrance 3,550,000
= To reverse encumbrances applicable to vouchered expenditures,
Explanation- Recording actual expenditures of 3,500,000 (included in the 6,700,000 total in
entry 5a above) applicable to purchase orders totaling 3,550,000 makes this amount
of the previously recorded encumbrances no longer necessary. Accordingly
3,550,000 of encumbrances are reversed. Encumbrances of 50,000 (3,600,000 -
3,550,000) remain outstanding.

6. Billings for services and supplies received from enterprise fund and internal service fund
totaled 300,000 and 200,000 respectively.

Expenditures 500,000
Payable (Due) to Enterprise fund 300,000
Payable (Due) to Internal Service fund 200,000
= To record billings for services and supplies received from other funds.
Explanation- Billings from other funds of the governmental unit are not vouchered for

26
payment as are billings from outside suppliers. Instead billings from other funds are
recorded in a separate liability ledger account. the related debit is to the expenditure
accounts if the billings are for Quasi- external transaction , such as providing
services and supplies.

7. Cash payments on vouchers payable totaled 7,700,000. Cash payment to the Enterprise fund
and the Internal service fund were 250,000 and 140,000 respectively.

Vouchers payable 7,700,000

Payable to Enterprise fund 250,000
Payable to Internal service fund 140,000
Cash 8,090,000
= To record payment of liabilities during the year
8. The town of X general fund made an operating transfer of 110,000 to the debt service
Fund for the matured principal and interests.
Other financing uses 110,000
Cash 110,000
= To record transfer to debt service fund for maturing principal and interest on
General obligation serial bond.
Explanation- The other financing uses ledger account is debited because the payment to
the debt service fund is an operating transfer rather than quasi- external transaction.

9. A payment of 400,000 in lieu of property taxes and a subsidy of 100,000 were

Received from the Enterprise fund.

Cash 500,000
Revenue 400,000
Other Financing Sources 100,000
= To record payment in lieu of property taxes (400,000) and subsidy (100,000)
Received from Enterprise fund.

Explanation-amounts transferred to the general fund from other funds are recognized as
revenues if they are quasi-external transactions, such as payment in lieu of
property taxes; otherwise they are recognized as other financing sources if they are
operating transfers, such as subsidies.

10. Supplies at a cost of 800,000 were used during the year.

Expenditures 800,000
Inventory of supplies 800,000
= To record cost of supplies used during the year.

27
 Unreserved and undesignated fund balance 100,000
Fund balance reserved for inventory of supplies 100,000
= To increase inventory of supplies reserve to 500,000 to agree with
balance of inventory of supplies ledger account at end of year
(500,000 - 400,000= 100,000)

Explanation- the immediately preceding journal entry represents a restriction of the portion of
the fund balance account to or event its being appropriated improperly to finance a
deficit annual budget for the general fund for the year ending June 30,year 7. Only
cash and other monetary assets of a general fund are available for appropriation to
Finance authorized expenditures of the succeeding fiscal year.

11. All uncollected property taxes on June 30 year 6 were delinquent.

Taxes Receivable- Delinquent 570,000

Allowance for uncollectable Current Taxes 10,000
Taxes Receivable- Current 570,000
Allowance for Uncollectable Delinquent Taxes 10,000
= To transfer delinquent taxes and related estimated uncollectable amounts from the current
classification
Explanation- The forgoing journal entry clears the Taxes Receivable- Current ledger account
and the related contra account for uncollectable amounts so that they will be
available for accrual of property taxes for the fiscal year ending June 30,year 7.

12. The town council designated 250,000 of the unreserved and the undesignated fund balance
for the replacement of equipment during the year ending June 30, year 7.
Unreserved and Undesignated Fund Balance 250,000
Fund Balance Designated for -
Replacement of Equipment 250,000
= To designate a portion of the fund balance for the replacement
of equipment during the year ending June 30, year 7.

Explanation- The fund balance designated for replacement of equipment ledger account
Is similar to a retained earnings appropriation of a business enterprise. It indicates that the annual
budget for the town of X General fund for the year ending June 30, year 7 Must
include an appropriation of 250,000 for new equipment and estimated revenue For
the proceeds from the disposal of the replaced equipment. The designated Fund
balance of 250,000 will be closed to the unreserved and undesignated fund balance
Ledger account on July 1, year 6, when the annual budget for the year ending June
30 year 7 is recorded.

Trial balance at end of fiscal year for a General fund

28
After all the forgoing journal entries (including the budget entry) have been posted to the general
ledger of the town of X General Fund, the trial balance on June, 30 year 6 is as
illustrated below.
Town of X General fund
Trial Balance
June 30, year 6

Account title Debit Credit

Cash 1,420,000
Taxes Receivable- Delinquent 570,000
Allowance for Uncollectable Delinquent Taxes 10,000
Inventory of Supplies 500,000
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service Fund 60,000
Fund Balance Reserved for Encumbrances 50,000
Fund Balance Reserved for Inventory of Supplies 500,000
Fund Balance Designated for Replacement of Equipment 250,000
Unreserved and undesignated fund balance 450,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
Appropriations 8,100,000
Estimated Other Financing Uses 100,000
Revenues 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Encumbrances 50,000 .
Total 19,150,000 19,150,000
Financial statements for a General Fund
The results of operation (i.e., net income or net loss) are not relevant for a General Fund. Instead,
two financial statements- a Statement of Revenues, Expenditures and Change in
Fund Balance and a Balance Sheet are appropriate.
Assuming that the total revenue for the town of X is composed of the following sources,

General Property Tax 7,060,000

Licenses and Permits 450,000
Charges for Services 470,000
Fines and Forfeits 310,000
Miscellaneous Revenue 190,000
Also assume that the total expenditures is composed of the following items.
General Government 4,590,000
Public safety 2,000,000

29
Health and Welfare 1,200,000
Culture and Recreation 210,000

Town of X General fund

Statement of Revenues, Expenditures and Change in Fund Balance
for the Year ended June 30, 19x6
Budget Actual Variance-Favourable
Revenues: (Unfavourable)
General Property Tax 7,000,000 7,060,000 60,000
Licenses and Permits 400,000 450,000 50,000
Charges For Services 500,000 470,000 (30,000)
Fines and Forfeits 300,000 310,000 10,000
Miscellaneous Revenue 200,000 190,000 (10,000)
Total Revenues 8,400,000 8,080,000 80,000
Expenditures:
General Government 4,700,000 4,590,000 110,000
Public Safety 1,900,000 2,000,000 100,000
Health an Welfare 1,100,000 1,200,000 (100,000)
Culture and Recreation 400,000 210,000 190,000
Total Expenditures 8,100,000 8,000,000 100,000
Excess of Revenue over Expenditures-
Other Financing sources (Uses):
Operating Transfers In 100,000 100,000
Operating Transfers Out (100,000) (110,000) (10,000)
Excess of Revenue and O.F.S.-
Over Expenditures and O.F.U. 300,000 470,000 170,000
Add: Fund Balance, July 1, 19x5 1,200,000 1,200,000 .
Fund balance June 30,19x6 1,500,000 1,670,000 170,000

Town of X General Fund

Balnce Sheet,
June 30, Year 6
Assets
Cash 1,420,000

30
Taxes Receivable- Delinquent 570,000
Less: Allowance for Uncollectable Taxes 10,000 560,000
Inventory of Supplies 500,000
Total Assets 2,480,000
Liabilities and Fund Balance
Liabilities
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service fund 60,000
Total Liabilities 810,000
Fund Balance:
Reserved for Encumbrance 50,000
Reserved for Inventory of Supplies 500,000
Designated for Replacement of Equipment 250,000
Unreserved and Undesignated 870,000 1,670,000
Total Liabilities and Fund Balance 2,480,000
Closing Entries for a General Fund
After the financial statements have been prepared for the town of X General fund, the budgetary
and actual revenues, expenditures and encumbrance ledger accounts must be closed
to clear them for the next fiscal year activities.
Unreserved and Undesignated Fund Balance 50,000
Encumbrances 50,000
= To close encumbrance ledger account
Appropriations 8,100,000
Estimated Other Financing Uses 100,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
= To close budgetary ledger Accounts
Revenue 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Unreserved and undesignated Fund Balance 470,000
= To close Revenues, Expenditures, Other Financing Sources and Uses
Ledger Accounts
Explanation- The forgoing journal entries do not close the Fund Balance Reserved for
Encumbrance Ledger account. Thus, the reverse represents a restriction on the fund
balance on June 30 year 6 brcause4 the town of X General fund is committed in the
fiscal year 7 to make estimated expenditures of 50,000 attributable to budgetary
appropriations carried over from the fiscal year 6. if the fund balance reserved for
encumbrance account had been closed , the unreserved and undesignated fund

31
 balance account would have been overstated by 50,000. The unreserved and
Undesignated Fund Balance Ledger account balance must represent the amount of
the General fund’s Assets that is available for appropriation for a deficit budget in
fiscal year 7. When expenditures applicable to 50,000 outstanding encumbrances on
June 30 year 6 are vouchered for payment in the succeeding fiscal year, the fund
balance reserved for encumbrance ledger account is debited for 50,000, the vouchers
payable is credited for the amount to be paid, and the balancing debit or credit is
entered in the unreserved and undesignated fund balance account.
The budgetary accounts are closed at the end of the fiscal year because they are no longer
required for control over revenues, expenditures, and other financing sources and
uses. the amounts in the journal entry that closed the budgetary accounts were taken
from the original journal entry to record the budget at the beginning.
After june30, year 6, closing entry for the town of X general Fund are posted, the unreserved and
undesignated Fund Balance Ledger Account appears as shown below.
Unreserved and Undesignated Fund Balance

Date Explanation Debit Credit Balance

Year 5
June 30 Balance 800,000
--------------------------------------------------------------------------------------------
Year 6
June 30 Increase in the amount reserved 100,000 700,000
for Inventory of supplies
------------------------------------------------------------------------------------------------

30 Designation for replacement

of equipment 250,000 450,000
---------------------------------------------------------------------------------------------
30 Close encumbrances ledger
account 50,000 40,000
---------------------------------------------------------------------------------------------
30 Close Excess of Revenue and
Other Financing Sources over
Expenditures and Other Financing
Uses 47,000 87,000
=========================================================
----------------------------------------------------------------------------------------------
Accounting for Special Revenue Funds
The distinguishing feature of a special revenue fund is that its revenues are obtained primarily
from tax and non-tax sources not directly related to services rendered or facilities
provided for use. Separate special revenue funds are established by governmental
units as mandated by legislative enactments., to account for the receipts and

32
 expenditures associated with specialized revenue sources that are earmarked by law
or regulation to finance specified governmental operations. Ledger account titles,
budgetary processes and financial statements for a special revenue funds are similar
to those of General funds.
Illustration
To illustrate the accounting for a Special Revenue Fund, Assume that on July 1, year 6, The town
council of the town of X authorized the establishment of a special Revenue Fund- its
first such fund- to account for Special Assessment against certain residents of the
neighboring village of Y. Because the property tax revenue of the town of X, which
among other services financed street cleaning and street light maintenance for
residents of the town only, could not be used for such services elsewhere, the town
council authorized special assessment to finance comparable services for the
requesting residents of the village of Y. the 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.
Following are additional transactions or events of the town of X special revenue fund for the year
ending June 30 year 7.

1. On July 1, year 6, the town recorded the adopted budget in the books.
Estimated Revenues 800,000
Appropriations 750,000
Budgetary Fund Balance 50,000
= To record the annual adopted budget for fiscal year ending June 30 year 7.
2. Special Assessments tax totaling 820,000 were levied which are to be paid in full in
sixty days.

Special Assessment Tax Receivable- current 820,000

Revenues 820,000
= To record special assessments billed, all of which are estimated
to be collectable
3. Cash Receipts from Special Assessment Taxes of 820,00 were collected in full.

Cash 820,000
Special Assessment Tax Receivable- current 820,000
= To record collection of special assessment tax in full during the year.
4. Of the cash receipts, 630,000 was invested in Treasury bills with face amount of

33
 650,000. The treasury bills mature on June 30 year 7 and were redeemed in full on
that date.

Short Term Investments 630,000

Cash 630,000
= To record acquisition of 65,000 face amounts of treasury bills,

Cash 650,000
Short Term investments 630,000
Revenues 20,000
= To record receipts of cash for matured U.S treasury bills.
Maturity June 30, year 7.
5. Billings from the town of X General fund, requesting reimbursement of expenditures of that
fund, totaled 760,000; of that amount, 620,000 was paid to the General Fund by
June 30, year 7.
Expenditures 760,000
Payable to General Fund 760,000
= To record billings from general fund for reimbursement of expenditures for street cleaning
and street light maintenance for residents of the village of Y

Payable to General Fund 620,000

Cash 620,000
= To records payments of general fund during the year.
6. On June 30, year 7, the town council of the town of x designated the fund balance
of the Special revenue fund(80,000) for reimbursement of the General Fund during
the year ending June 30, year 8.
Unreserved and Undesignated fund balance 80,000
Fund Balance Designated for -
Reimbursement of General Fund 80,000
= To designate the entire fund balance for reimbursement of General Fund during the year
ending June 30 year 8.

Because of the 760,000 billings of the town of X General Fund to the Special Revenue Fund
were for reimbursement of General fund expenditures, the general fund credited its
expenditures ledger account in the journal entry in which it debited receivable from
Special Revenue fund.
Closing Entries
Appropriations 750,000
Budgetary Fund Balance 50,000
Estimated Revenues 80,000
= To close budgetary ledger accounts.

34
Revenue 840,000
Expenditures 760,000
Unreserved and Undesignated- 80,000
fund balance
= To close revenue and expenditures ledger account
Financial Statements for a special revenue funds
The financial statements for a special Revenue funds is the same as that of a General fund-a
statement of Revenues, Expenditures and change in Fund Balance and a Balance
sheet. Following are the financial statements for the town of X Special Revenue fund
for the year ended June 30, year 7:

Town of X - Special Revenue Fund

Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, year 7
Favourable
Budget Actual Variance (Unfavourable)
Revenues:
Special Assessments 800,000 820,000 20,000
Other - 20,000 20,000
Total Revenues 800,000 840,000 40,000
Expenditures
Reimbursement of General Fund-
expenditures 750,000 760,000 (10,000)
Excess of Revenues over Expenditures . . .
(Fund Balance End of year)------------- 50,000 80,000 30,000

Town of X Special Revenue fund

Balance Sheet
June 30, year 7
Assets
Cash ----------------------------------------------------------------------- 220,000
Liabilities and Fund Balance
Payable to General fund ------------------------------------------------- 140,000
Fund Balance Designated for Reimbursement of General fund ----- 80,000
Total Liabilities and Fund Balance ------------------------------- 220,000

35
3.5 TERMINOLOGY AND CLASSIFICATION FOR GOVERNMENTAL FUND
BUDGETS AND ACCOUNTS

I. Classification of Appropriations and Expenditures

The term, appropriations and expenditure, both have to do with resources, which are used by a governmental
entity. The relation between the two is that an appropriation is the authorization to make expenditure. In reality,
an appropriation is actually both an authorization to spend and at the same time a limitation on spending. An
appropriation, when enacted by law is an authorization to incur on behalf of the governmental unit liabilities
for, goods, services and facilities to be used for purposes specified in the appropriation ordinance, or statute, in
amounts not in excess of those specified for each purpose. The budgeted appropriations are often called
estimated expenditures,
expenditures, and the appropriation budget is called expenditure budget.
budget.
According to GASB’s Principles, Expenditures should be classified by: -
1. Fund
2. Function or program
3. Organization unit
4. Activity
5. Character
6. Object
1. Classification by Fund
The primary classification of governmental expedition is by fund, since funds are the basics fiscal & accounting
entity of governmental unit.
Eg. G,F SRF CPF, DSF

2. Classification by Function or Programme

Functions are group related activities that are aimed at accomplishing a major service or regulatory responsibility.
Programmes are group activates, operation on organizational units that are directed to the attainment of specified
purposes or objectives generally speaking, function refers to what is done programme refers to the means by which
it is done.
E.g. The G.F. may –have the following programmes or functions.
-General Governmental
-Public safety
-Health & welfare
-Culture & recreation

3. Classification by organization unit

To carry out the broad functions or programmes, responsibility is divided to smaller units or departments. This helps
with affixing specific accountability.
E.g. - Police dept
- Fire dept
- Public works dept
- Parks & recreation dept

The key distinction between the classification of expenditures by organizational

unit & Classification by programmes or functions is that responsibility for a
dept is fixed, where as a number of depts. may be involved in the performance
of a programme or a function.
4. Classification by activity
An activity is a specific & distinguishable line of work performed by an organizational unit to fulfill the overall
goals of the programme or function. For example, within the police dept, activities such as the following may be
performed.
- Crime control by -- Foot patrol
Car Patrol
- Traffic control by -- Traffic

36
5. Classification by character
This classification has to do with the expenditure itself than the department or fund in which it is incurred. the
character of an expenditure is either.
- Current expenditure – meant to benefit the current period only.
- Capital expenditure – benefits the current period plus other periods the future.
- Debt service expend – includes payment of interest or debt & payment of debt principal that arises from
past period benefits which may also be expected to benefit the current and future period.

6. Classification by object
Object of expenditure is the thing for which the expenditure was made. It is mainly a concern of current period
expenditures.
E.g. Personal services
Other services & charges
Supplies
Capital outlays

Addis Ababa city council G.F

Public safety programmes /function
Police dept organization unit
Crime control activity
Current expend. character
Supplies object

II. Classification of Estimated Revenues & Revenues

Revenues are defined, as all increases in fund net Assets except those arising from inter fund transfers and from
proceeds of long-term debit. A governmental unit and the funds thereof, may raise revenue only from sources
available to them by law.

The primary classification of governmental revenues is by fund. Within each fund, the major classification is, by
source. Major revenue source classes are: -
1. Taxes
2. Licenses & permits
3. Inter governmental revenues
1. Charges for services
2. Fines & forfeits
3. Miscellaneous revenues

1. Taxes
Taxes are a forced contribution imposed on the citizens by the government. There are a number of different kinds of
taxes possible, including property (land use) sales, excise, income, customs, and capital gain etc….

Giving a formal notice of a tax to be paid is called a levy. A tax levy, especially on goods or property also typically
creates a Lien, which gives the taxing authority, the power to confiscate the goods or property in the event of a non-
payment of the tax.

Incorrect calculation of taxes by the tax payer may result in penalties. Taxes, which are not paid on time usually,
include accrued interest on any unpaid balance. These penalties & interest create an additional revenue source for
the government.

37
In addition to revenue accounts, the following accounts may also be needed to account for tax collections; Taxes
Receivables Current, Taxes Receivable Delinquent, Tax Lien Receivable, Interest & Penalties Receivable on
Delinquent Taxes (all four are assets), Deferred Taxes, Trust for property owners (Both are Liabilities), Allowance
for Uncollectable Taxes (contra-Asset). any uncollected taxes are accounted for as a reduction of revenue.

The deferred taxes account is credited for taxes, which are paid in a year before they may legally be used for
expenditure. The Taxes Receivable Current account is used to accrue taxes, which are due in the current year. The
taxes receivable Delinquent account is used to accrue taxes, which are due in the current year. The Taxes Receivable
Delinquent account is used to record any taxes, which are, past due. The Taxes Lien- Receivable account is used to
record taking possession of goods on which an owed tax has not been paid. If those possessed goods are sold in an
attempt to cover the tax & any additional cost incurred in colleting it, The Trust for Property Owners account is used
to record any balance remaining from the selling price after the tax & collection cost are deducted. The Interest &
Penalties Receivable on delinquent taxes account is used, obviously, to record interest & penalties due on unpaid
taxes.

2. Licenses and permits

Licenses and permits may be divided into two categories.
a) Business - like merchants licenses, customs clearing Agency licenses, professional (physician, attorney)
b) Non business - like driving licenses, hunting license, Residential permits
Revenue from licenses & permits are accounted on the cash basis.
3. Intergovernmental Revenue
Intergovernmental revenues include Grants, Entitlements & Shared Revenues.
a) Grant is money, which is given for a specific purpose & it should be classified according to both its source &
it purpose. A grant could be given from the federal governmental to regional state government (called a
subsidy) or from a foreign government to the federal government. Grants can be divided into two types.
b) Shared revenues is a revenue levied by one government but shared on a predetermined basis, often in
proportion o the amount collected at the local level, with another government or class of government. it should
be accrued unless there are matching or specific spending requirements.
c) Entitlement is the amount of payment to which a state or local government is entitled as determined by the
federal government pursuant to an allocation formula
4. Charges for services
Charges for services include revenue from charges for all activities of a
governmental unit, except the operations of enterprise funds.
E.g. court costs, special parking meters.
It should be recognized as revenue when earned, if that is prior to the collection of cash.

5. Fines & forfeits

Fines & forfeits are penalties, which are paid to governmental unit, usually as punishment for violating the law. It is
accounted thorough cash basis.

6. Miscellaneous revenue
Any revenue types that do not fit one of the above five classifications.
E.g. interest in come on investments – should be accrued
- Sales of fixed assets
- Insurance claim
- Contribution from private individuals

3.6 INTERFUND TRANSACTIONS AND TRANSFERS

Inter fund transactions are transactions between different entities within the governmental unit. they need to be
recorded in two different sets of books.

38
 1) Inter fund loans & advances
Often funds sometimes loan or advance money to each other in order to use idle cash effectively. Short Period (one
year or less is commonly used), the borrowing is called a loan;
loan; For longer periods, the borrowing is called an
advance.
advance.

Due from SRF xxx

Cash xxx

Cash xxx
Due to the GF xxx

2) Quasi –external transaction

These are transactions that would be treated as Revenue, Expenditures or Expenses if they involved organizations
external to the governmental unit. They are the type of interfund transactions which are considered as revenue &
expenditure within the entity. The most meaningful form of reporting for such transactions is to report expenditure
in the fund receiving the services & report revenues in the fund providing the services, b/c the fund receiving the
services would have had to change expenditures if it had obtained the services for an organizations external to the
governmental unit.

GF
Expenditure xxx
Due to ISF xxx

SRF
Due from GF xxx
Revenues xxx
3) Reimbursements
Are transactions that reimburse a fund for expenditures made by it on behalf of another fund i.e. one fund pays a
bill on behalf of another & is then reimbursed.

Expenditure xxx
Cash xxx
= To record payment of bill on behalf of ---

Cash xxx
Expenditure xxx
= To record reimbursement

4) Residual Equity transfers

Residual Equity transfers are non-recurring or non-routine transfers of equity between funds made in connection
with the formation, expansion, contract or discontinual of a fund. not only are they not Revenues or Expenditures,
they are not Other Financing Sources or Uses, even though they are technically increase / decreases in fund financial
resources.

Equity transfer out xxx

Due to ISF xxx

Due from GF xxx

Equity transfer in xxx

5) Operating transfers
Operating transfers are made in connection with the normal operation of the recipient fund. They are legally
authorized transfers from a fund, which receives revenue to the fund through which the resources are to be
expended. These transfers are other financing source of the receiving fund, other financing uses of the paying fund.

Other Financing Uses-Operating Transfers Out xxx

39
 Due to DSF xxx

Due from GF xxx

Other Financing Sources-Operating Transfers In xxx
- 4 & 5 are properly called transfers & 1,2,3 are merely transfers.
transfers.

Check Your Progress

1. Compare and Contrast General Fund and Special Revenue funds.
__________________________________________________________________________________________
________________________________________________________
2. Discuss the reservation and designation of the fund balance account of the governmental unit’s General Fund and
special Revenue fund.
__________________________________________________________________________________________
________________________________________________________
3. What are the principal differences between the financial statements of the governmental units general fund and
the financial statements of a business enterprise?
__________________________________________________________________________________________
________________________________________________________
4. What does a budget include in a governmental units general fund and special revenue funds.
__________________________________________________________________________________________
________________________________________________________
5. Describe the classification of Governmental funds revenue and expenditures?
__________________________________________________________________________________________
________________________________________________________
6. What revenues of general fund Generally accrue?
__________________________________________________________________________________________
________________________________________________________
7. Discuss the use of Encumbrance as a budgetary control account.
__________________________________________________________________________________________
________________________________________________________

8. Describe how expenditures are recorded and exceptions which are recorded separately.
__________________________________________________________________________________________
________________________________________________________
9. Describe accounting for supplies in governmental entities general fund and special
revenue fund.
__________________________________________________________________________________________
________________________________________________________
10.Describe the interfund transfer and transactions in The governmental funds?
__________________________________________________________________________________________
________________________________________________________

3.7 SUMMARY

Even though the General fund and the special Revenue fund have different Purposes, they are both revenue funds
and the accounting and reporting procedure is the same for both. They are very similar in that all or almost all of
their resources are expended each year and then filled up in the next year. Understanding the accounting and
characteristics of General fund with an exception of few points will enable us to have a clearer understanding of
both funds.

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