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Chapter Seventeen
Governmental Entities:
General Fund
Scope of Chapter
In 1999, the governmental Accounting Standards Board (GASB), whose establishment in 1984
is described on page 717, issued GASB Statement No. 34, Basic Financial Statements
and Managements Discussion and Analysisfor State and Local Governments. That pronouncement was a major milestone in the upgrading of the nancial accounting and
reporting by governmental entities other than the United States government and sparked
renewed interest in a somewhat arcane area of accounting: state and local governmental
entities.
This chapter deals with the following aspects of state and local governmental entities:
their nature; their nancial reporting objectives; their accounting and reporting standards;
and accounting for a governmental entitys general fund. Accounting and reporting for
other funds and account groups of governmental entities are covered in Chapters 18 and 19.
However, it must be emphasized that Chapters 17 through 19 do not discuss accounting
standards for the United States federal government.

NATURE OF GOVERNMENTAL ENTITIES

Students beginning the study of accounting for governmental entities temporarily must set
aside many of the familiar accounting principles for business enterprises. Such fundamental concepts of accounting theory for business enterprises as the nature of the accounting
entity and the primacy of the income statement have limited relevance in accounting for
governmental entities. Consequently, the following discussion identies the features of governmental entities that give rise to unique accounting concepts.
When thinking of governmental entities of the United States, one tends to focus on the
federal government or on the governments of the 50 states. However, in addition to those major governmental entities and the governments of the several U.S. territories, there are the
following governmental entities in the United States:1
More than 3,000 counties.
Nearly 17,000 townships.

Local Governmental Accounting Trends & Techniques1990 Third Edition (New York: AICPA,
1990), p. 11.

714

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Over 19,000 municipalities.

Nearly 15,000 school districts.
Over 28,000 special districts (port authorities, airports, public buildings, libraries, and
others).
Despite the wide range in size and scope of governance, the governmental entities listed
above have a number of characteristics in common. Among these characteristics are the
following:
1. Organization to serve the citizenry. A basic tenet of governmental philosophy in the
United States is that governmental entities exist to serve the citizens subject to their jurisdiction. Thus, the citizens as a whole establish governmental entities through the constitutional and charter process. In contrast, business enterprises are created by only a
limited number of individuals.
2. General absence of the prot motive. With few exceptions, governmental entities render services to the citizenry without the objective of proting from those services. Business enterprises are motivated to earn prots.
3. Taxation as the principal source of revenue. The citizens subject to a governmental
entitys jurisdiction provide resources to the governmental entity principally through taxation. Many of these taxes are paid on a self-assessment basis. There is no comparable
revenue for business enterprises.
4. Impact of the legislative process. Operations of governmental entities are for the most
part initiated by various legislative enactments, such as operating budgets, borrowing
authorizations, and tax levies. Business enterprises also are affected by federal, state,
and local laws and regulations, but not to such a direct extent.
5. Stewardship for resources. A primary responsibility of governmental entities in nancial reporting is to demonstrate adequate stewardship for resources provided by their
citizenry (other peoples money). Business enterprises have a comparable responsibility to their owners, but not to the same extent as governmental entities.
The ve foregoing characteristics of governmental entities are major determinants of accounting standards for such entities.

OBJECTIVES OF FINANCIAL REPORTING FOR

GOVERNMENTAL ENTITIES
Shortly after its establishment (as described on page 717) the Governmental Accounting
Standards Board (GASB) issued Concepts Statement No. 1, Objectives of Financial Reporting, in which it established the following reporting objectives for state and local governmental entities:
1. Financial reporting should assist in fullling governments duty to be publicly accountable
and should enable users to assess that accountability.
a. Financial reporting should provide information to determine whether current-year revenues were sufcient to pay for current-year services. This also implies that nancial reporting should show whether current-year citizens received services but shifted part of
the payment burden to future-year citizens; whether previously accumulated resources
were used up in providing services to current-year citizens; or, conversely, whether
current-year revenues were not only sufcient to pay for current-year services, but also
increased accumulated resources.

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b. Financial reporting should demonstrate whether resources were obtained and used in
accordance with the entitys legally adopted budget; it should also demonstrate compliance with other nance-related legal or contractual requirements.
c. Financial reporting should provide information to assist users in assessing the service
efforts, costs, and accomplishments of the governmental entity. This information, when
combined with information from other sources, helps users assess the economy, efciency, and effectiveness of government and may help form a basis for voting or funding decisions. The information should be based on objective criteria to aid interperiod
analysis within an entity and comparisons among similar entities. Information about
physical resources (as discussed in paragraph 3b) should also assist in determining cost
of services.
2. Financial reporting should assist users in evaluating the operating results of the governmental entity for the year.
a. Financial reporting should provide information about sources and uses of nancial resources. Financial reporting should account for all outows by function and purpose, all
inows by source and type, and the extent to which inows met outows. Financial reporting should identify material nonrecurring nancial transactions.
b. Financial reporting should provide information about how the governmental entity nanced its activities and met its cash requirements.
c. Financial reporting should provide information necessary to determine whether the entitys nancial position improved or deteriorated as a result of the years operations.
3. 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 they become due.
a. Financial reporting should provide information about the nancial position and condition of a governmental entity. Financial reporting should provide information about resources and obligations, both actual and contingent, current and noncurrent. The major
nancial resources of most governmental entities are derived from the ability to tax and
issue debt. As a result, nancial reporting should provide information about tax sources,
tax limitations, tax burdens, and debt limitations.
b. Financial reporting should provide information about a governmental entitys physical
and other nonnancial resources having useful lives that extend beyond the current
year, including information that can be used to assess the service potential of those resources. This information should be presented to help users assess long- and short-term
capital needs.
c. Financial reporting should disclose legal or contractual restrictions on resources and
risks of potential loss of resources.2

The foregoing objectives provide the framework within which the GASB develops
standards of nancial reporting for governmental entities3 (as described in the following
section).

ACCOUNTING AND REPORTING STANDARDS FOR

GOVERNMENTAL ENTITIES
For many years, accounting and reporting standards for governmental entities were established by the National Council on Governmental Accounting, a 21-member organization composed primarily of local, state, and national nance ofcers, including two
2

Codication of Governmental Accounting and Financial Reporting Standards (Norwalk: GASB, 2003),
App. B, pars. 77-79 (footnote omitted).
3
Ibid., p. B-5.

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Canadian nance ofcers. In 1984, the Governmental Accounting Standards Board was
established as an arm of the Financial Accounting Foundation, which also oversees the
Financial Accounting Standards Board. The GASB issues Statements of Governmental
Accounting Standards for nancial accounting and reporting of state and local governmental entities.
One of the rst acts of the GASB was to codify governmental accounting and nancial
reporting standards in effect in 1984. Subsequently, the GASB has issued a number of
Statements that superseded, modied, or supplemented the standards set forth in the Codication; and the Codication was frequently revised. This chapter and Chapters 18 and 19
discuss and illustrate many of the governmental accounting and nancial reporting standards
currently in effect.

The Governmental Financial Reporting Entity

A signicant question to be resolved in accounting for governmental entities is what
agencies, institutions, commissions, public authorities, or other governmental organizations are to constitute the nancial reporting entity for a governmental entity. The Codication provided that the governmental nancial reporting entity is to consist of the
following:4
1. The primary governmenta state government, a municipality or county, or a specialpurpose government such as a school district or a park district meeting specied
criteria.
2. Organizations for which the primary government is nancially accountable by reason
of appointing a voting majority of the governing bodies and thus either imposing its will
on the organizations or being responsible to provide nancial benets to, or nancial
burdens on, the organizations.
3. Other organizations whose relationship with the primary government necessitates their
inclusion in the nancial reporting entity.
The organizations described in 2 and 3 above are termed component units. The Codication provided several nonauthoritative illustrative examples of governmental nancial reporting entities.5

Funds: The Principal Accounting Unit for

Governmental Entities
Accounting for business enterprises emphasizes the economic entity as an accounting
unit. Thus, a partnership is considered to be an accounting entity separate from the partners; and consolidated nancial statements are issued for a group of afliatedbut
legally separatecorporations that constitute a single economic entity under common
control.
There is generally no single accounting entity for a specic governmental entity, such as
a city or a county. Instead, the principal accounting unit for governmental entities is the
fund. The Codication dened fund as follows:
Governmental accounting systems should be organized and operated on a fund basis. A fund
is dened as a scal and accounting entity with a self-balancing set of accounts recording
cash and other nancial resources, together with all related liabilities and residual equities or
4
5

Ibid., Sec. 2100.111 ff.

Ibid., Sec. 2100.902 ff.

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balances, and changes therein, which are segregated for the purpose of carrying on specic activities or attaining certain objectives in accordance with special regulations, restrictions, or
limitations. [Emphasis added.]6

GASB Statement No. 34 identied the following 11 types of funds:7

Governmental Funds
1. The General Fundto account for all nancial resources except those required to be accounted for in another fund.
2. Special Revenue Fundsto account for the proceeds of specific revenue sources
(other than trusts for individuals, private organizations, or other governments or for
major capital projects) that are legally restricted to expenditure for specified purposes.
3. Capital Projects Fundsto account for nancial resources to be used for the acquisition or construction of major capital facilities (other than those nanced by proprietary funds or in trust funds for individuals, private organizations, or other
governments).
4. Debt Service Fundsto account for the accumulation of resources for, and the payment
of, general long-term debt principal and interest.
5. Permanent Fundsto report resources that are legally restricted to the extent
that only earnings, and not principal, may be used for purposes that support the
governmental entitys programs, that is, for the benefit of the government or its
citizenry.
Proprietary Funds
1. Enterprise Fundsto report any activity for which a fee is charged to external users for
goods or services.
2. Internal Service Fundsto report any activity that provides goods or services to other
funds, departments, or agencies of the governmental entity, or to other governments on
a cost-reimbursement basis.
Fiduciary Funds
1. Pension (and other Employee Benet) Trust Fundsto report resources required to be
held in trust for the members and beneciaries of pension, other postemployment benet, and other employee benet plans.
2. Investment Trust Fundsto report the external portion of investment pools reported by
the sponsoring government.
3. Private-Purpose Trust Fundsto report all other trust arrangements under which principal and income benet individuals, private organizations, or other governments.
4. Agency Fundsto report resources held by the governmental entity in a purely custodial capacity (assets equal liabilities).
The governmental funds account for nancial resources of a governmental entity that
are used in day-to-day operations. The proprietary funds carry out governmental entity
activities that closely resemble the operations of a business enterprise. Fiduciary funds

6
7

Ibid., Sec. 1100.102.

Ibid., Secs. 1300.1041300.114.

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account for resources that are not owned by a governmental entity, but are administered by
the entity as a custodian or duciary.
Every governmental entity has a general fund. According to the Codication, any additional funds should be established as required by law and sound nancial administration.8
Accounting and reporting for the general fund are discussed in a subsequent section of this
chapter; accounting and reporting for other funds are explained in Chapters 18 and 19.
At this point, it is appropriate to emphasize that a governmental entity does not have a
single accounting unit to account for its nancial resources, obligations, revenues, and
expenditures.

The Modied Accrual Basis of Accounting

The governmental funds of a governmental entity have used a modied accrual basis of accounting, in which revenues are recognized only when they became both measurable and
available to nance expenditures of a scal period. Expenditures are recognized when the
related liabilities are incurred, and short-term prepayments are not recognized as assets.
The conventional accrual basis of accounting is used for other funds.9

Recording the Budget

GASB Statement No. 34 provided the following statement regarding budgets of governmental entities:10
1. An annual budget(s) should be adopted by every governmental entity.
2. The accounting system should provide the basis for appropriate budgetary control.
3. Budgetary comparison schedules should be presented as required supplementary information for the general fund and for each major special revenue fund that has a legally
adopted annual budget.
Budgets are key elements of legislative control over governmental entities. The executive
branch of a governmental entity proposes the budgets; the legislative branch reviews, modies, and enacts the budgets; and nally the executive branch approves the budgets and carries out their provisions.
The two basic classications of budgets for governmental entities are the same as those
for business enterprisesannual budgets and long-term or capital budgets. Annual budgets include the estimated revenues and appropriations for expenditures for a specic scal year of the governmental entity. Annual budgets are appropriate for the general fund and
special revenue funds; they sometimes are used for other governmental funds. 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 recorded in the accounts of all these funds, to aid in accounting for compliance with legislative authorizations.
The operations of the two proprietary funds (enterprise funds and internal service funds)
are similar to those of business enterprises. Consequently, annual budgets are used by these
funds as a managerial planning and control device rather than as a legislative control tool.

Codication, Sec. 1100.104.

Ibid., Secs. 1600.1051600.106, 1600.116, 1600.127.
10
Ibid., Sec. 1700 Statement of Principle.
9

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Thus, annual budgets of enterprise funds and internal service funds generally are not
recorded in ledger accounts by those funds.

Types of Annual Budgets

Several types of annual budgets may be used by a governmental entity.11 An object budget
emphasizes, by department, the object of each authorized expenditure. For example, under
the legislative activity of the general government function, the object budget may include
authorized expenditures for salaries, services, supplies, and equipment.
A program budget stresses measurement of total cost of a specic governmental entity
program, regardless of how many departments of the governmental entity are involved in
the program. Object of expenditure information is of secondary importance in a program
budget.
In a performance budget, there is an attempt to relate the input of governmental resources to the output of governmental services. For example, the total estimated expenditures of the enforcement section of the taxation department might be compared with the
aggregate collections of additional tax assessments budgeted for the scal year.
Regardless of which types of annual budgets are used by a governmental entity, the
final annual budget adopted by the governmental entitys legislative body will include
estimated revenues for the fiscal year and the appropriations for expenditures authorized for that year. If the estimated revenues of the budget exceed appropriations (as required by law for many governmental entities), there will be a budgetary surplus; if
appropriations exceed estimated revenues, there will be a budgetary decit in the decit
budget.

Journal Entry for a General Fund Budget

To illustrate the recording of an annual budget in the accounts of a general fund, assume
that the Town of Verdant Glen in June 2005 adopted the following condensed annual budget for its General Fund for the scal year ending June 30, 2006:

Budget of General
Fund of a
Governmental Entity

Estimated revenues:
General property taxes
Other
Total estimated revenues
Add: Estimated other nancing sources (transfer from
Enterprise Fund)
Subtotal
Less: Appropriations:
General government
Other
Total appropriations
Estimated other nancing uses (transfer to Debt
Service Fund)
Excess of estimated revenues and other nancing
sources over appropriations and other nancing
uses (budgetary surplus)

11

$700,000
140,000
$840,000
10,000
$850,000
$470,000
340,000
$810,000
10,000

820,000

$ 30,000

Audit and Accounting Guide, Audits of State and Local Governmental Units (New York: AICPA,
2003), pars. 11.0511.07.

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The journal entry to record the annual budget on July 1, 2005, follows:

Journal Entry for

Budget of General
Fund of a
Governmental Entity

Estimated Revenues
Estimated Other Financing Sources
Appropriations
Estimated Other Financing Uses
Budgetary Fund Balance
To record annual budget adopted for scal year ending June 30, 2006.

840,000
10,000
810,000
10,000
30,000

An analysis of each of the ledger accounts in the foregoing journal entry follows:
1. The Estimated Revenues and Estimated Other Financing Sources ledger accounts may
be considered pseudo asset controlling accounts because they reect resources expected
to be received by the General Fund during the scal year. These accounts are not actual
assets, because they do not t the accounting denition of an asset as a probable future
economic benet obtained or controlled by a particular entity as a result of past transactions or events.12 Thus, the two accounts in substance are memorandum accounts,
useful for control purposes only, that will be closed after the issuance of nancial statements for the General Fund for the scal year ending June 30, 2006.
2. The Estimated Other Financing Sources ledger account includes the budgeted amounts
of such items as proceeds from the disposal of plant assets (which also may be recognized as revenue) and transfers in from other funds.
3. The Appropriations and Estimated Other Financing Uses ledger accounts may be considered pseudo liability controlling accounts because they reect the legislative bodys
commitments to expend General Fund resources as authorized in the annual budget.
These accounts are not genuine liabilities because they do not t the denition of a liability as a probable future sacrice of economic benets arising from present obligations
of a particular entity to transfer assets or provide services to other entities in the future
as a result of past transactions or events.13 The Appropriations and Estimated Other Financing Uses accounts are memorandum accounts, useful for control purposes only,
that will be closed after issuance of year-end nancial statements for the General
Fund.
4. The Estimated Other Financing Uses account includes budgeted amounts of 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, the
Budgetary Fund Balance account does not purport to show an ownership interest in a
general funds assets. At the end of the scal 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 Verdant Glen General Funds annual budget for
the year ending June 30, 2006, is accompanied by detailed entries to subsidiary ledgers for
estimated revenues, estimated other nancing sources, appropriations, and estimated other
12

Statement of Financial Accounting Concepts No. 6, Elements of Financial Statements (Stamford:

FASB, 1985), par. 25.
13

Ibid., par. 35.

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nancing uses. The budget of the Town of Verdant Glen General Fund purposely was condensed; in practice, the general funds estimated revenues and appropriations would be detailed by source and function, respectively, into one or more of the following widely used
subsidiary ledger categories:
Estimated revenues:
Taxes
Licenses and permits
Intergovernmental revenues
Charges for services
Fines and forfeits
Miscellaneous

Appropriations:
General government
Public safety
Public works
Health and welfare
Culturerecreation
Conservation of natural resources
Debt service
Intergovernmental expenditures
Miscellaneous

In summary, budgets of a governmental entity generally are recorded in the accounts

of the general fund and special revenue funds; they may also be recorded in the accounts of
capital projects funds. The recording of the budget initiates the accounting cycle for each
of the funds. Recording the budget also facilitates the preparation of nancial statements
that compare actual amounts of revenues and expenditures with budgeted amounts.

Encumbrances and Budgetary Control

Because of the need for the expenditures of governmental entities to be in accord with appropriations of governing legislative bodies, an encumbrance accounting technique often
is used for the general fund and special revenue funds and sometimes for capital projects
funds.14 When a purchase order 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:

Journal Entry for

Encumbrances

Encumbrances
Fund Balance Reserved for Encumbrances
To record encumbrance for purchase order No. 1685 issued to Wilson
Company.

18,413
18,413

When the suppliers invoice for the ordered merchandise or services is received by the governmental entity, it is recorded and the related encumbrance is reversed as illustrated below:

Journal Entries for

Receipt of Invoice
and Reversal of
Encumbrance

14

Expenditures
Vouchers payable
To record invoice No. 348J received from Wilson Company under
purchase order No. 1685.

18,507

Fund Balance Reserved for Encumbrances

Encumbrances
To reverse encumbrance for purchase order No. 1685 issued to Wilson
Company.

18,413

Codication, Sec. 1700.128.

18,507

18,413

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Subsidiary Ledger
Account for Supplies

As indicated by the example on page 722, the invoice amount may differ from the amount
of the governmental entitys purchase order because of such items as shipping charges,
sales taxes, and price changes.
The controls inherent in the encumbrance technique may be illustrated by assuming,
with respect to the foregoing journal entries, that they applied to a purchase order for supplies (not available from the governmental entitys internal service fund) for the general
government, the general fund scal year appropriation for which totaled $85,000. The subsidiary ledger record for general government supplies would include the following information (dates are assumed):

General GovernmentSupplies
Appropriation,
Credit

Date
2005
July 1 Budgeted appropriation
2 P.O. 1685 to Wilson Company
6 Inv. 348J from Wilson Company

Encumbrance,
Debit

Expenditure,
Debit

Unexpended,
Unencumbered
Balance, Credit

18,507

85,000
66,587
66,493

85,000
18,413
(18,413)

The posting of the $18,413 encumbrance on July 2 reduces the balance of the appropriation by that amount and protects against the issuance of one or more purchase orders in excess of the unexpended, unencumbered balance of $66,587. Receipt of the invoice for
$18,507 and reversal of the related encumbrance of $18,413 reduces the unexpended, unencumbered balance by $94 ($18,507 $18,413).
Thus, the encumbrance technique is a memorandum method for ensuring that total expenditures for a scal year do not exceed appropriations. Encumbrance journal entries are
not necessary for normal recurring expenditures such as salaries and wages, utilities,
and rent. The encumbrance technique used in accounting for governmental entities has no
counterpart in accounting for business enterprises.

ACCOUNTING AND REPORTING FOR A GOVERNMENTAL

ENTITYS GENERAL FUND
As indicated on page 718, a general fund is used to account for all transactions and events
of a governmental entity not accounted for in one of the other 10 types of funds. Thus, the
general fund as an accounting unit serves the same residual purpose that the general journal provides as an accounting record. Although the general fund is residual, it generally accounts for the largest aggregate dollar amounts of the governmental entitys revenues and
expenditures.
In illustrating the accounting for a general fund, the example of the Town of Verdant
Glen used in the preceding section is continued.

Illustration of Accounting for a General Fund

Assume that the balance sheet of the Town of Verdant Glen General Fund on June 30, 2005
(prior to the journal entry for the Fiscal Year 2006 budget illustrated on page 721), was as
shown on page 724.

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Balance Sheet of a
Governmental Entitys
General Fund at End
of Preceding Fiscal
Year

TOWN OF VERDANT GLEN GENERAL FUND

Balance Sheet
June 30, 2005
Assets
Cash
Inventory of supplies
Total assets

$160,000
40,000
$200,000
Liabilities and Fund Balance

Vouchers payable
Fund balance:
Reserved for inventory of supplies
Unreserved and undesignated
Total liabilities and fund balance

$ 80,000
$40,000
80,000

120,000
$200,000

The fund balance reserved for inventory of supplies is analogous to a mandatory restriction of retained earnings in a business enterprise. It represents a reservation of the General Funds fund balance, so that the $40,000 nonexpendable portion of the General Funds
total assets will not be appropriated for expenditures in the legislative bodys adoption of
the annual budget for the General Fund for the year ending June 30, 2006.
Assume that, in addition to the budget illustrated on page 720 and recorded on page 721,
the Town of Verdant Glen General Fund had the summarized transactions and events for the
scal year ended June 30, 2006, that follow. For simplicity, income taxes, sales taxes, shortterm prepayments, and short-term loans are disregarded in this illustration.
1. Property taxes were billed in the amount of $720,000, of which $14,000 was of doubtful collectibility.
2. Property taxes collected in cash totaled $650,000; revenues from licenses and permits
fees collected totaled $102,000.
3. Property taxes in the amount of $13,000 were determined to be uncollectible.
4. Purchase orders for nonrecurring expenditures were issued to outside suppliers in the
total amount of $360,000.
5. Expenditures for the year totaled $760,000, of which $90,000 applied to additions to
inventory of supplies, and $350,000 applied to $355,000 of the purchase orders in the
total amount of $360,000 issued during the year.
6. Billings for services and supplies received from the Enterprise Fund and the Internal
Service Fund totaled $30,000 and $20,000, respectively.
7. Cash payments on vouchers payable totaled $770,000. Cash payments to the Enterprise Fund and the Internal Service Fund were $25,000 and $14,000, respectively.
8. Transfers of cash to the Debt Service Fund for maturing principal and interest on general obligation serial bonds totaled $11,000.
9. A payment of $40,000 in lieu of property taxes and a subsidy of $10,000 were received
from the Enterprise Fund.
10. Supplies with a cost of $80,000 were used during the year.
11. All uncollected property taxes on June 30, 2006, were delinquent.
12. The Town Council designated $25,000 of the unreserved and undesignated fund balance for the replacement of equipment during the year ending June 30, 2007.

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After the journal entry for the budget is recorded, as illustrated on page 721, the
following journal entries, numbered to correspond to the foregoing transactions or
events, are prepared for the Town of Verdant Glen General Fund during the year ended
June 30, 2006:

Journal Entries for

General Fund of a
Governmental Entity

Taxes ReceivableCurrent
Allowance for Uncollectible Current Taxes
Revenues
To accrue property taxes billed and to provide for estimated
uncollectible portion.

720,000
14,000
706,000

As indicated on page 719, the modied accrual basis of accounting for a general fund
requires the accrual of property taxes because they are billed to the property owners by
the Town of Verdant Glen and are thus measurable and available as collected. The estimated
uncollectible property taxes are offset against the total taxes billed in order to measure
actual revenues from property taxes for the year.

Cash
Taxes ReceivableCurrent
Revenues
To record collections of property taxes and licenses and permits
fees revenues for the year.

752,000
650,000
102,000

Under the modied accrual basis of accounting, revenues from licenses and permits fees
are recognized on the cash basis. However, any taxes or other revenues collected in advance
of the scal year to which they apply are credited to a liability ledger account.
If a governmental entitys general fund has a cash shortage prior to collection
of property taxes, it may issue short-term tax anticipation notes to borrow cash. Typically, tax anticipation notes payable are repaid from proceeds of the subsequent tax
collections.

Allowance for Uncollectible Current Taxes

Taxes ReceivableCurrent
To write off receivables for property taxes that are uncollectible.

13,000
13,000

The foregoing journal entry represents a shortcut approach. In an actual situation, uncollectible property taxes rst would be transferred, together with estimated uncollectible
amounts, to the Taxes ReceivableDelinquent ledger account from the Taxes Receivable
Current account. Any amounts collected on these delinquent taxes would include
revenues for interest and penalties required by law. Uncollected delinquent taxes would

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be transferred, together with estimated uncollectible amounts, to the Tax Liens Receivable ledger account. After the passage of an appropriate statutory period, the governmental entity might satisfy its tax lien by selling the property on which the delinquent
taxes were levied.

Encumbrances
Fund Balance Reserved for Encumbrances
To record purchase orders for nonrecurring expenditures issued
during the year.

360,000
360,000

As explained on page 722, encumbrance journal entries often are used to prevent the
overexpending of an appropriated amount in the budget. The 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 appropriations. The unexpended balance
of each appropriation thus is reduced for the amount committed by the issuance of purchase
orders.

5a

Expenditures
Inventory of Supplies
Vouchers Payable
To record expenditures for the year.

670,000
90,000
760,000

The Expenditures ledger account is debited with all expenditures, regardless of purpose,
except for additions to the inventory of supplies. Principal and interest payments on longterm debt, additions to the governmental entitys plant assets not accounted for in other
funds, payments for goods or services to be received in the futureall are debited to
Expenditures or to Other Financing Uses rather than to asset or liability ledger accounts.
(Expenditures for long-term debt principal and plant asset additions often are recorded on
a memorandum basis in the general long-term debt and general capital (plant) assets
account groups, respectively, as explained and illustrated in Chapter 18.)
The accounting for general fund expenditures described above emphasizes once again
the importance of the annual budget in the accounting for a general fund. Expenditures are
chargeable to amounts appropriated by the legislative body of the governmental entity. Detailed items making up the $670,000 total debit to the Expenditures ledger account in the
foregoing journal entry are posted to the appropriations subsidiary ledger as reductions of
unexpended balances of each appropriation.

5b

Fund Balance Reserved for Encumbrances

Encumbrances
To reverse encumbrances applicable to vouchered expenditures
totaling $350,000.

355,000
355,000

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Recording actual expenditures of $350,000 (included in the $670,000 total in entry 5a

on page 726) applicable to purchase orders totaling $355,000 makes this amount of the previously recorded encumbrances no longer necessary. Accordingly, $355,000 of encumbrances is reversed; the reversal is posted to the detailed appropriations subsidiary ledger
as well as to the general ledger. Encumbrances of $5,000 ($360,000 $355,000 $5,000)
remain outstanding on June 30, 2006, the scal year-end.

Expenditures
Payable to Enterprise Fund
Payable to Internal Service Fund
To record billings for services and supplies received from other funds.

50,000
30,000
20,000

Billings from other funds of the governmental entity are not subject to encumbrance or
vouchered for payment, as are billings from outside suppliers. Instead, billings from other
funds are recorded in separate liability ledger accounts. The related debit is to the Expenditures account if the billings are for quasi-external transactions, such as providing services and supplies.

Vouchers Payable
Payable to Enterprise Fund
Payable to Internal Service Fund
Cash
To record payment of liabilities during the year.
Other Financing Uses
Cash
To record transfer to Debt Service Fund for maturing principal and
interest on long-term general-obligation serial bonds.

770,000
25,000
14,000
809,000

11,000
11,000

The Other Financing Uses ledger account is debited because the payment to the Debt
Service Fund is a transfer out rather than a quasi-external transaction. (The corresponding journal entry in the Debit Service Fund is shown in Chapter 18.)

Cash
Revenues
Other Financing Sources
To record payment in lieu of property taxes ($40,000) and subsidy
($10,000) received from Enterprise Fund.

50,000
40,000
10,000

Amounts transferred in to the General Fund from other funds are recognized as revenues
if they are quasi-external transactions, such as payments in lieu of property taxes; otherwise, they are recognized as other nancing sources if they are transfers in, such as subsidies. (The nancial statement display of the foregoing transfers out of the Enterprise Fund
is illustrated in Chapter 19.)

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10a Expenditures
Inventory of Supplies
To record cost of supplies used during the year.

80,000

10b Unreserved and Undesignated Fund Balance

Fund Balance Reserved for Inventory of Supplies
To increase inventory of supplies reserve to $50,000 to agree with
balance of inventory of Supplies ledger account at end of year
($50,000 $40,000 $10,000).

10,000

80,000

10,000

The immediately preceding journal entry represents a restriction of a portion of the Fund
Balance account to prevent its being appropriated improperly to nance a decit annual
budget for the General Fund for the year ending June 30, 2007. Only cash and other monetary assets of a general fund are available for appropriation to nance authorized expenditures of the succeeding scal year.

11

Taxes ReceivableDelinquent
Allowance for Uncollectible Current Taxes
Taxes ReceivableCurrent
Allowance for Uncollectible Delinquent Taxes
To transfer delinquent taxes and related estimated uncollectible
amounts from the current classication.

57,000
1,000
57,000
1,000

The foregoing journal entry clears the Taxes ReceivableCurrent ledger account and
the related valuation account for uncollectible amounts so that they will be available for accrual of property taxes for the scal year ending June 30, 2007.

12

Unreserved and Undesignated Fund Balance

Fund Balance Designated for Replacement of Equipment
To designate a portion of the fund balance for the replacement of
equipment during the year ending June 30, 2007.

25,000
25,000

The Fund Balance Designated for Replacement of Equipment ledger account is similar
to a voluntary retained earnings appropriation of a business enterprise. It indicates that the
annual budget for the Town of Verdant Glen General Fund for the year ending June 30,
2007, must include an appropriation of $25,000 for new equipment and estimated revenues
for the proceeds from disposal of the replaced equipment. The designated fund balance of
$25,000 will be closed to the Unreserved and Undesignated Fund Balance ledger account
on July 1, 2006, when the annual budget for the year ending June 30, 2007, is recorded.

Trial Balance at End of Fiscal Year for a General Fund

After all the foregoing journal entries (including the budget entry on page 721) have been
posted to the general ledger of the Town of Verdant Glen General Fund, the trial balance on
June 30, 2006, is as follows:

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TOWN OF VERDANT GLEN GENERAL FUND

Trial Balance of a
Governmental Entitys
General Fund at End
of Current Fiscal Year

Trial Balance
June 30, 2006

Debit
Cash
Taxes receivabledelinquent
Allowance for uncollectible delinquent taxes
Inventory of supplies
Vouchers payable
Payable to Enterprise Fund
Payable to Internal Service Fund
Fund balance reserved for encumbrances
Fund balance reserved for inventory of supplies
Fund balance designated for replacement of equipment
Unreserved and undesignated fund balance
Budgetary fund balance
Estimated revenues
Estimated other nancing sources
Appropriations
Estimated other nancing uses
Revenues
Other nancing sources
Expenditures
Other nancing uses
Encumbrances
Totals

Credit

$ 142,000
57,000
$

1,000

50,000
70,000
5,000
6,000
5,000
50,000
25,000
45,000
30,000
840,000
10,000
810,000
10,000
848,000
10,000
800,000
11,000
5,000
$1,915,000

$1,915,000

Financial Statements for a General Fund

The results of operations (that is, net income or net loss) is not relevant for a general fund.
Instead, two nancial statementsa statement of revenues, expenditures, and changes in
fund balance, and a balance sheetare appropriate.15 These two nancial statements are
shown below and on page 730 for the Town of Verdant Glens General Fund for the year
ended June 30, 2006.

TOWN OF VERDANT GLEN GENERAL FUND

Financial Statements
of a Governmental
Entitys General Fund
at End of Current
Fiscal Year

Statement of Revenues, Expenditures, and Changes in Fund Balance

For Year Ended June 30, 2006

Revenues:
Taxes
Other
Total revenues

Budget

Actual

Variance
Favorable
(Unfavorable)

$700,000
140,000
$840,000

$706,000
142,000
$848,000

$ 6,000
2,000
$ 8,000
(continued)

15

Ibid., Secs. 2200.153, 2200.156.

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Financial Statements
of a Governmental
Entitys General Fund
at End of Current
Fiscal Year (concluded)

TOWN OF VERDANT GLEN GENERAL FUND

Statement of Revenues, Expenditures, and Changes in Fund Balance (concluded)
For Year Ended June 30, 2006

Expenditures:*
General government
Other
Total expenditures
Excess of revenues over expenditures
Other nancing sources (uses):
Transfers in
Transfers out
Net change in fund balance
Fund balance, beginning of year
Fund balance, end of year

Budget

Actual

Variance
Favorable
(Unfavorable)

$470,000
340,000
$810,000
$ 30,000

$459,000
341,000
$800,000
$ 48,000

$11,000
(1,000)
$10,000
$18,000

10,000
(10,000)
$ 30,000
120,000
$150,000

10,000
(11,000)
$ 47,000
120,000
$167,000

(1,000)
$17,000
$17,000

*Breakdown of actual amounts between general government and other categories is assumed.

TOWN OF VERDANT GLEN GENERAL FUND

Balance Sheet
June 30, 2006
Assets
Cash
Taxes receivable, net of allowance for estimated
uncollectible amounts, $1,000
Inventory of supplies
Total assets
Liabilities and Fund Balance
Liabilities:
Vouchers payable
Payable to other funds
Total liabilities
Fund balance:
Reserved for encumbrances
Reserved for inventory of supplies
Designated for replacement of equipment
Unreserved and undesignated
Total liabilities and fund balance

$142,000
56,000
50,000
$248,000

$ 70,000
11,000
$ 81,000
$ 5,000
50,000
25,000
87,000

167,000
$248,000

The following aspects of the Town of Verdant Glen General Fund nancial statements
are signicant:
1. The statement of revenues, expenditures, and changes in fund balance compares
budgeted with actual amounts. This comparison aids in the appraisal of the stewardship
for the General Funds resources and the compliance with legislative appropriations.

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(Expenditures in excess of appropriated amounts generally are not permitted unless a

supplementary appropriation is made by the legislative body and approved by the executive of the governmental entity.)
2. The amounts received from and paid to other funds of the Town of Verdant Glen are
termed transfers in and transfers out, respectively, to distinguish them from other types of
nancing sources and uses that might have been received or paid by the General Fund.
3. The assets of the General Fund include only current nancial resources assetscash,
some short-term investments, receivables, and inventories. Expenditures for plant assets
are not recognized as assets in the General Fund; they might be recorded in the General
Capital Assets Account Group.
4. The unreserved and undesignated fund balance in the balance sheet, $87,000, is a balancing amount to make the total of the reserved, designated, and unreserved and undesignated fund balance amounts equal to $167,000, the nal amount in the statement of
revenues, expenditures, and changes in fund balance. After the posting of the closing entries illustrated in the next section, the ending balance of the Unreserved and Undesignated Fund Balance ledger account is $87,000 (see page 732).

Closing Entries for a General Fund

After nancial statements have been prepared for the Town of Verdant Glen General Fund,
the budgetary and actual revenues, expenditures, and encumbrances ledger accounts must
be closed, to clear them for the next scal years activities. The closing entries below are
appropriate for the Town of Verdant Glen General Fund on June 30, 2006:

Closing Entries for a

Governmental Entitys
General Fund at End
of Current Fiscal Year

Unreserved and Undesignated Fund Balance

Encumbrances
To close Encumbrances ledger account.

5,000
5,000

Appropriations
Estimated Other Financing Uses
Budgetary Fund Balance
Estimated Revenues
Estimated Other Financing Sources
To close budgetary ledger accounts. (See page 721.)

810,000
10,000
30,000

Revenues
Other Financing Sources
Expenditures
Other Financing Uses
Unreserved and Undesignated Fund Balance
To close revenues, expenditures, and other nancing sources and
uses ledger accounts.

848,000
10,000

840,000
10,000

800,000
11,000
47,000

The foregoing journal entries do not close the Fund Balance Reserved for Encumbrances ledger account. Thus, the reserve represents a mandatory restriction of the fund
balance on June 30, 2006, because the Town of Verdant Glen General Fund is committed
in Fiscal Year 2007 to make estimated expenditures of $5,000 attributable to budgetary
appropriations carried over from Fiscal Year 2006. If the Fund Balance Reserved for
Encumbrances account had been closed, the Unreserved and Undesignated Fund Balance

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account would have been overstated by $5,000. The Unreserved and Undesignated Fund
Balance ledger account balance must represent the amount of the General Funds net assets
that is available for appropriation for a decit budget in Fiscal Year 2007. When expenditures applicable to the $5,000 outstanding encumbrances on June 30, 2006, are vouchered
for payment in the succeeding scal year, the Fund Balance Reserved for Encumbrances
ledger account is debited for $5,000, the Vouchers Payable account is credited for the
amount to be paid, and the balancing debit or credit is entered in the Unreserved and
Undesignated Fund Balance account. In this way, the Expenditures ledger account is not
improperly debited in Fiscal Year 2007 for an amount attributable to Fiscal Year 2006.
The budgetary accounts are closed at the end of the scal year because they are no
longer required for control over revenues, expenditures, and other nancing sources and
uses. The amounts in the journal entry that closed the budgetary accounts were taken from
the journal entry to record the budget (page 721).
After the June 30, 2006, closing entries for the Town of Verdant Glen General Fund are
posted, the Unreserved and Undesignated Fund Balance ledger account is as follows:

Unreserved and
Undesignated Fund
Balance Ledger
Account of a
Government Entitys
General Fund at End
of Current scal year

Unreserved and Undesignated Fund Balance

Date

Explanation

2005
June 30
2006
June 30
30
30
30

Review
Questions

Debit

Credit

Balance
Increase in amount reserved for inventory
of supplies (page 728)
Designation for replacement of equipment
(page 728)
Close Encumbrances account (page 731)
Close excess of revenues and other
nancing sources over expenditures
and other nancing uses (page 731)

Balance
80,000 cr

10,000

70,000 cr

25,000
5,000

45,000 cr
40,000 cr

47,000

87,000 cr

1. Does the Financial Accounting Standards Board establish accounting standards for
governmental entities? Explain.
2. What characteristics of governmental entities have a signicant inuence on the accounting for governmental entities? Explain.
3. What is a fund in accounting for governmental entities?
4. What is the support for each of the following accounting standards for general funds
of governmental entities?
a. The modied accrual basis of accounting.
b. The encumbrance accounting technique.
c. Recording the budget in the accounting records.
5. a. Differentiate between a program budget and a performance budget.
b. Differentiate between a budgetary decit and a decit budget.
6. The Estimated Revenues ledger account of a governmental entitys general fund may
be considered a pseudo asset, and the Appropriations account may be considered a
pseudo liability. Why is this true?

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7. What is the function of the Budgetary Fund Balance ledger account for a governmental entitys general fund?
8. What does the reference to a governmental entitys general fund as residual mean?
Explain.
9. What revenues of a governmental entitys general fund generally are accrued? Explain.
10. Distinguish between the Expenditures ledger account of a governmental entitys general fund and the expense accounts of a business enterprise.
11. Explain the purpose of the Other Financing Sources and Other Financing Uses ledger
accounts of a governmental entitys general fund.
12. The accounting records for the City of Worthington General Fund include a ledger account titled Fund Balance Reserved for Inventory of Supplies. Explain the purpose of
this account.
13. Differentiate between a reservation and a designation of the fund balance of a governmental entitys general fund.
14. a. What are the nancial statements issued for a governmental entitys general fund?
b. What are the principal differences between the nancial statements of a governmental entitys general fund and the nancial statements of a business enterprise?

Exercises
(Exercise 17.1)

Select the best answer for each of the following multiple-choice questions:
1. The Estimated Revenues ledger account of a governmental entitys general fund is debited when:
a. The budgetary accounts are closed at the end of the scal year.
b. The budget is recorded.
c. Actual revenues are recognized under the modied accrual basis of accounting.
d. Actual revenues are received in cash.
2. Which of the following ledger accounts is debited by a governmental entitys general
fund that uses the encumbrances accounting technique when a purchase order is issued?
a. Appropriations.
b. Vouchers Payable.
c. Fund Balance Reserved for Encumbrances.
d. Encumbrances.
e. None of the foregoing.
3. GASB Statement No. 34, Basic Financial Statements . . . for State and Local Governments, identied:
a. Eleven types of funds.
b. Seven types of funds and two account groups.
c. Two types of funds and seven account groups.
d. Eight types of funds and two account groups.
4. Is a fund of a governmental entity:

a.
b.
c.
d.

A Fiscal Unit?

An Accounting Unit?

Yes
Yes
No
No

Yes
No
Yes
No

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5. In the journal entry to record the annual budget of a governmental entitys general
fund, appropriate entries to the following general fund ledger accounts are:

a.
b.
c.
d.

Estimated Revenues

Appropriations

Estimated Other
Financing Uses

Debit
Debit
Credit
Credit

Debit
Credit
Debit
Debit

Credit
Credit
Debit
Credit

6. Which of the following is a budgetary ledger account of a governmental entitys general fund?
a. Encumbrances.
b. Other Financing Sources.
c. Unreserved and Undesignated Fund Balance.
d. Appropriations.
7. Which of the following ledger accounts of a governmental entitys general fund is credited when previously ordered supplies are received?
a. Fund Balance Reserved for Encumbrances.
b. Encumbrances.
c. Expenditures.
d. Appropriations.
e. None of the foregoing.
8. In a governmental entitys general fund journal entry on the date an invoice is received
for a nonrecurring procurement under a purchase order for which encumbrance accounting was used, the appropriate entries to the following ledger accounts are:

a.
b.
c.
d.

Encumbrances

Expenditures

Debit
Debit
Credit
Credit

Debit
Credit
Debit
Credit

9. The ledger account debited in the journal entry of a governmental entitys general fund
crediting the Allowance for Uncollectible Current Taxes ledger account is:
a. Doubtful Current Taxes Expense.
b. Unreserved and Undesignated Fund Balance.
c. Revenues.
d. Taxes ReceivableCurrent.
e. Some other account.
10. Repairs that have been made for a governmental entitys general fund, and for which an
invoice has been received, are recorded in the general fund with a debit to:
a. Expenditures.
b. Encumbrances.
c. Repairs Expense.
d. Appropriations.
e. Some other ledger account.
11. The appropriate ledger accounts to be credited by a governmental entitys general fund
for cash received from the entitys enterprise fund are:

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a.
b.
c.
d.

Payments in Lieu
of Property Taxes

Subsidies

Revenues
Revenues
Other Financing Sources
Other Financing Sources

Other Financing Sources

Revenues
Revenues
Other Financing Sources

12. The appropriate format of the end-of-scal-year journal entry (explanation omitted) to
close the Encumbrances ledger account of a governmental entitys general fund is:
a. Unreserved and Undesignated Fund Balance
Encumbrances
b. Fund Balance Reserved for Encumbrances
Encumbrances
c. Expenditures
Encumbrances
d. Encumbrances
Appropriations
(Exercise 17.2)

CHECK FIGURE
July 8 unexpended,
unencumbered
balance, $62,520
credit.

The activity with respect to the General GovernmentSupplies subsidiary ledger account
of the Ridge City General Fund included the following for the rst part of the July 1,
2005June 30, 2006, scal year:
2005
July 1 The appropriation in the scal year budget was $100,000.
2 Purchase order 4-1 for $20,000 was issued to Crosby Company; encumbrance
accounting is used.
3 Supplies were received from Crosby Company under purchase order 4-1, invoice 6392 for $20,120.
5 Defective supplies with an invoice 6392 cost of $640 were returned to Crosby
Company, accompanied by debit memorandum 4-6.
8 Purchase order 4-14 for $18,000 was issued to Lassen Company.
Prepare a subsidiary ledger account for General GovernmentSupplies for Ridge City
General Fund and post entries for the foregoing events or transactions. Your ledger account
should have the following columns: Date; Explanation; Appropriation, credit; Encumbrance,
debit; Expenditure, debit; Unexpended, unencumbered balance, credit.

(Exercise 17.3)

The post-closing trial balance of the Winston County General Fund included the following
ledger account balances on June 30, 2005:
Taxes receivabledelinquent
Allowance for uncollectible delinquent taxes

$30,200 dr
1,300 cr

The property taxes assessment for the scal year ending June 30, 2006, totaled $640,000; 4%
of Winston Countys property taxes assessments has been uncollectible in past scal years.
Prepare a journal entry for the property taxes of Winston Countys General Fund on July 1,
2005, the date on which the property taxes for the scal year ending June 30, 2006, were
billed to taxpayers.
(Exercise 17.4)

On July 25, 2005, ofce supplies estimated to cost $2,390 were ordered from a vendor for
delivery to the ofce of the city manager of Gaskill. The City of Gaskill maintains a perpetual

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inventory system and encumbrance accounting for such supplies. The supplies ordered
July 25 were received on August 9, 2005, accompanied by an invoice for $2,500.
Prepare journal entries to record the foregoing transactions in the City of Gaskill General Fund.
(Exercise 17.5)

The Glengarry School District General Fund had an inventory of supplies (and related reserve) of $60,200 on July 1, 2005. For the scal year ended June 30, 2006, supplies costing
$170,900 were acquired; related purchase orders totaled $168,400. The physical inventory
of unused supplies on June 30, 2006, totaled $78,300. The perpetual inventory system and
encumbrance accounting is used to account for the inventory of supplies.
Prepare journal entries for the foregoing facts for the year ended June 30, 2006. Omit
explanations for the journal entries.

(Exercise 17.6)

Among the journal entries prepared by the inexperienced accountant of Rainbow County
General Fund for the scal year ended June 30, 2006, were the following:
2005
July 1 Accounts Receivable
Cash
To record nonreturnable transfer of cash to Internal Service
Fund to provide working capital for that fund.
Sept. 1

800,000
800,000

Equipment
Vouchers Payable
To record acquisition of equipment having a 10-year
economic life and no residual value.

120,000
120,000

Prepare correcting journal entries on June 30, 2006, for Rainbow County General Fund.
(Exercise 17.7)

From the following ledger account balances for the Town of Irving General Fund on June
30, 2006, the end of the towns scal year, prepare closing entries:
Appropriations
Encumbrances
Estimated revenues
Expenditures
Fund balance reserved for encumbrances
Revenues

(Exercise 17.8)

$1,520,000
10,000
1,600,000
1,500,000
10,000
1,616,000

Selected ledger account balances of Bixby Village General Fund on June 30, 2006, were as
follows:
Debit
Appropriations
Budgetary fund balance
Encumbrances
Estimated other nancing sources
Estimated other nancing uses
Estimated revenues
Expenditures
Fund balance reserved for encumbrances
Other nancing sources
Other nancing uses
Revenues
Unreserved and undesignated fund balance

Credit
$400,000
30,000

1,000
10,000
6,000

426,000
395,000
1,000
14,000
5,000
440,000
80,000

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Prepare closing entries (omit explanations) for Bixby Village General Fund on June 30,
2006.
(Exercise 17.9)

Following is the statement of revenues, expenditures, and changes in fund balance for the
Village of Mortimer General Fund for the year ended June 30, 2006. The village did not
have any other nancing sources or uses for the year. Unlled purchase orders on June 30,
2006, for which the village used encumbrance accounting, totaled $11,400.
VILLAGE OF MORTIMER GENERAL FUND
Statement of Revenues, Expenditures, and Changes in Fund Balance
For Year Ended June 30, 2006

Revenues:
Taxes
Other
Total revenues
Expenditures:
General government
Other
Total expenditures
Net change in fund balance
Fund balance, beginning of year
Fund balance, end of year

Budget

Actual

Variance
Favorable
(Unfavorable)

$820,000
160,000
$980,000

$814,200
162,500
$976,700

$(5,800)
2,500
$(3,300)

$615,000
275,000
$890,000
$ 90,000
280,400
$370,400

$618,800
277,400
$896,200
$ 80,500
280,400
$360,900

$(3,800)
(2,400)
$(6,200)
$(9,500)
$(9,500)

Prepare closing entries for the Village of Mortimer General Fund on June 30, 2006.
(Exercise 17.10)

CHECK FIGURE
Unreserved and
undesignated fund
balance, $91,000.

The post-closing trial balance of the Town of Parkside General Fund on June 30, 2006, was
as follows:
TOWN OF PARKSIDE GENERAL FUND
Post-Closing Trial Balance
June 30, 2006

Debit
Cash
Taxes receivabledelinquent
Allowance for uncollectible delinquent taxes
Inventory of supplies
Vouchers payable
Payable to Town of Parkside Enterprise Fund
Fund balance reserved for encumbrances
Fund balance reserved for inventory of supplies
Unreserved and undesignated fund balance
Totals

Credit

$150,000
50,000
$

5,000

60,000

$260,000

80,000
20,000
4,000
60,000
91,000
$260,000

Prepare a balance sheet for the Town of Parkside General Fund on June 30, 2006.
(Exercise 17.11)

On July 1, 2005, the general ledger of the City of Winkle General Fund had the following
fund balance ledger accounts:

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CHECK FIGURE

Balance
July 1, 2005

$248,000.
Reserved for inventory of supplies
Reserved for encumbrances
Unreserved and undesignated

$ 80,600
18,100
214,700

The budget for the scal year ending June 30, 2006, showed a budgetary surplus of $20,400.
Revenues for the year ended June 30, 2006, exceeded expenditures by $37,600. There were
no other nancing sources or uses for the year. The physical inventory of supplies on June 30,
2003, was $88,200, and outstanding encumbrances on June 30, 2006, totaled $14,800.
Prepare a working paper to compute the balance of the Unreserved and Undesignated
Fund Balance ledger account (after posting of closing entries) for the City of Winkle General Fund on June 30, 2006.
(Exercise 17.12)

The Unreserved and Undesignated Fund Balance ledger account of the Town of Oldberry
General Fund was as follows on June 30, 2006. The Town of Oldberry did not have any
other nancing sources or uses during the year ended June 30, 2006.
Unreserved and Undesignated Fund Balance
Date
2005
June 30
2006
June 30
30
30
30

Explanation

Debit

Credit

Balance

Balance
62,400 cr

Decrease in amount reserved for

inventory of supplies
Close Encumbrances ledger account
Close excess of revenues ($840,200)
over expenditures ($764,800)
Designation for replacement of
equipment

3,700

66,100 cr
59,900 cr

75,400

135,300 cr

6,200

60,000

75,300 cr

Reconstruct the journal entries of the Town of Oldberry General Fund indicated by the
foregoing information.

Cases
(Case 17.1)

The inexperienced accountant of Corbin City prepared the following nancial statements
for the citys general fund:
CORBIN CITY GENERAL FUND
Income Statement
For Year Ended June 30, 2006
Revenues:
Taxes
Other
Total revenues

$640,000
180,000
$820,000
(continued)

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CORBIN CITY GENERAL FUND

Income Statement
For Year Ended June 30, 2006 (concluded)
Expenses:
General government
Depreciation
Other
Net income

$600,000
60,000
120,000

780,000
$ 40,000

CORBIN CITY GENERAL FUND

Statement of Changes in Fund Balance
For Year Ended June 30, 2006
Fund balance, beginning of year
Add: Net income
Fund balance, end of year

$4,850,000
40,000
$4,890,000

CORBIN CITY GENERAL FUND

Balance Sheet
June 30, 2006
Assets
Cash
Property taxes receivabledelinquent
Inventory of supplies
Plant assets (net)
Total assets

$ 260,000
80,000
110,000
4,620,000
$5,070,000

Liabilities, Reserves, and Fund Balance

Vouchers payable
Reserve for delinquent property taxes
Fund balance
Total liabilities, reserves, and fund balance

$ 160,000
20,000
4,890,000
$5,070,000

Instructions
Identify the deciencies in each of the foregoing nancial statements of Corbin City General Fund. There are no arithmetic errors in the statements. Disregard notes to the nancial
statements.
(Case 17.2)

In a classroom discussion of the modied accrual basis of accounting for general funds of
governmental entities, student Ella questioned the propriety of accruing self-assessed taxes
such as income taxes and sales taxes. She pointed out that until the taxes are paid, the
governmental entity has no liability-paying ability and no knowledge of the amount of taxes
ultimately to be collected. Student Janice disagreed with Ella, stating that the budgetpreparation process entails estimation of total scal year revenues, including revenues from
sales taxes and income taxes. Janice concluded by asserting that the currently required
modied accrual basis of accounting for governmental entities general fund revenues is
overly conservative and fails to provide meaningful budget-to-actual comparisons in general funds statements of revenues, expenditures, and changes in fund balance.

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Instructions
Do you support the views of student Ella or student Janice? Explain.
(Case 17.3)

You have been assigned by your CPA rm, in which you are an audit manager, to conduct
a staff training program in accounting for governmental entities. In preparing for the program, you have decided to anticipate questions about the reasons governmental entities
must use a maximum of 11 separate funds, rather than a single accounting unit, to account
for the governmental entitys transactions and events.
Instructions
Prepare a brief essay on the reasons for the use of fund accounting by governmental entities.

Problems
(Problem 17.1)

The trial balance of Weedpatch County General Fund on June 30, 2006, was as follows
(amounts in thousands):

CHECK FIGURE

Debit

Total assets, $200,000.

Cash
Taxes receivabledelinquent
Allowance for uncollectible delinquent taxes
Inventory of supplies
Vouchers payable
Payable to other funds
Fund balance reserved for encumbrances
Fund balance reserved for inventory of supplies
Unreserved and undesignated fund balance
Budgetary fund balance
Estimated revenues
Appropriations
Revenues
Expenditures
Encumbrances
Totals

Credit

$ 100
60
$

10

50
40
12
4
50
18
20
800
780
830
750
4
$1,764

$1,764

The balance of the Unreserved and Undesignated Fund Balance ledger account on July 1,
2005, was $22,000; there were balances of $6,000 and $40,000, respectively, in the Fund
Balance Reserved for Encumbrances and the Fund Balance Reserved for Inventory of Supplies accounts on that date.
Instructions
Prepare a statement of revenues, expenditures, and changes in fund balance and a balance
sheet (amounts in thousands) for Weedpatch County General Fund for the year ended June
30, 2006.
(Problem 17.2)

The following information was taken from the accounting records of the General Fund of
the City of Lory after the ledger accounts had been closed for the scal year ended June 30,
2006. The budget for the scal year ended June 30, 2006, included estimated revenues of
$2,000,000 and appropriations of $1,940,000. There were no estimated or actual other nancing sources or other nancing uses.

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City of Lory General Fund

Post-Closing
Trial Balance,
June 30,
2005
Debits
Cash
Taxes receivable
Total debits
Credits
Allowance for uncollectible
taxes
Vouchers payable
Fund balance:
Reserved for
encumbrances
Unreserved and
undesignated
Total credits

$700,000
40,000
$740,000

8,000
132,000

600,000
$740,000

Transactions, Events, and

Closing Entries, July 1,
2005, through
June 30, 2006

Post-Closing
Trial Balance,
June 30,
2006

Debit

Credit

$1,820,000
1,870,000

$1,852,000
1,828,000

$668,000
82,000
$750,000

8,000
1,852,000

10,000
1,840,000

$ 10,000
120,000

1,000,000

1,070,000

70,000

70,000
$6,620,000

20,000
$6,620,000

550,000
$750,000

Instructions
Prepare journal entries to record the budgeted and actual transactions and events of the City
of Lory General Fund for the scal year ended June 30, 2006. Also, prepare closing entries.
Do not differentiate between current and delinquent taxes receivable.
(Problem 17.3)

At the start of your audit of the nancial statements of the City of Riverdale, you discovered that the citys accountant failed to maintain separate funds. The trial balance of the
City of Riverdale General Fund for the scal year ended December 31, 2006, is as follows:

CITY OF RIVERDALE GENERAL FUND

Trial Balance
December 31, 2006

Debit
Cash
Taxes receivablecurrent
Allowance for uncollectible current taxes
Revenues
Expenditures
Donated land
Construction in progressRiver Bridge
River Bridge bonds payable
Contracts payableRiver Bridge
Vouchers payable
Unreserved and undesignated fund balance
Totals

Credit

$ 207,500
148,500
$

6,000
992,500

760,000
190,000
130,000

$1,436,000

100,000
30,000
7,500
300,000
$1,436,000

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Additional Information
1. The budget for Year 2006, not recorded in the accounting records, was as follows: estimated revenues, $815,000; appropriations, $775,000. There were no estimated or actual
other nancing sources or other nancing uses.
2. Outstanding purchase orders on December 31, 2006, for expenditures not recognized in
the accounting records, totaled $2,500. Riverdale uses encumbrance accounting.
3. Included in the Revenues ledger account balance was a credit of $190,000 representing the
current fair value of land donated by the state as a site for construction of the River Bridge.
4. The taxes receivable became delinquent on December 31, 2006.
Instructions
Prepare correcting journal entries on December 31, 2006, for the City of Riverdale General
Fund. Correcting entries for other funds or account groups and closing entries are not required.
(Problem 17.4)

The following transactions and events affecting Canning County General Fund took place
during the scal year ended June 30, 2006:
(1) The following annual budget was adopted:
Estimated revenues:
Property taxes
Licenses and permits
Fines
Total estimated revenues
Appropriations:
General government
Police services
Fire department services
Public works services
Acquisition of re engines
Total appropriations

$4,500,000
300,000
200,000
$5,000,000
$1,500,000
1,200,000
900,000
800,000
400,000
$4,800,000

There were no other nancing sources or other nancing uses budgeted.

(2) Property tax bills totaling $4,650,000 were issued; it was estimated that $150,000 of
this amount would be uncollectible. Fines of $200,000 were assessed.
(3) Property taxes totaling $3,900,000 were collected. The $150,000 previously estimated
to be uncollectible remained unchanged, but $630,000 of uncollected property taxes
was reclassied as delinquent. It was known that delinquent taxes would be collected
soon enough after June 30, 2006, to make these taxes available to nance obligations
incurred during the year ended June 30, 2006. (There was no balance of uncollected
taxes on July 1, 2005.)
(4) Other cash collections were as follows:
Licenses and permits
Fines
Disposal of public works equipment (carrying amount in the General
Capital Assets Account Group was $5,000)
Total other cash collections

$270,000
200,000
15,000
$485,000

(5) No encumbrances were outstanding on June 30, 2005. The following purchase orders
were executed:

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General government
Police services
Fire department services
Public works services
Fire engines
Totals

Total
Amount

Outstanding
June 30, 2006

$1,050,000
300,000
150,000
250,000
400,000
$2,150,000

$ 60,000
30,000
15,000
10,000
$115,000

(6) The following vouchers were approved for payment:

General government
Police services
Fire department services
Public works services
Fire engines
Total vouchers approved

$1,440,000
1,155,000
870,000
700,000
400,000
$4,565,000

(7) Vouchers totaling $4,600,000 were paid.

Instructions
Prepare journal entries to record the foregoing transactions and events of Canning County
General Fund for the year ended June 30, 2006. Do not prepare closing entries.
(Problem 17.5)
CHECK FIGURES
a. (1) Favorable ending
fund balance variance,
$1,000; (2) Total fund
balance, $78,850.

The trial balance of Arden School District General Fund is as follows:

ARDEN SCHOOL DISTRICT GENERAL FUND
Trial Balance
December 31, 2006

Debit
Cash
Short-term investments
Taxes receivabledelinquent
Inventory of supplies
Vouchers payable
Payable to Internal Service Fund
Fund balance reserved for encumbrances
Fund balance reserved for inventory of supplies
Unreserved and undesignated fund balance
Budgetary fund balance
Estimated revenues
Appropriations
Estimated other nancing uses
Revenues
Expenditures
Other nancing uses
Encumbrances
Totals

Credit

47,250
11,300
30,000
11,450
$

20,200
950
2,800
11,450
59,400
7,000

1,007,000
985,000
15,000
1,008,200
990,200
10,000
2,800
$2,110,000

$2,110,000

The balance of the Fund Balance Reserved for Inventory of Supplies ledger account on
December 31, 2005, was $9,500.

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Instructions
a. Prepare the following nancial statements for Arden School District General Fund for
the year ended December 31, 2006:
(1) Statement of revenues, expenditures, and changes in fund balance.
(2) Balance sheet.
b. Prepare closing entries for Arden School District General Fund on December 31, 2006.
(Problem 17.6)

CHECK FIGURE
c. Trial balance totals,
$870,000.

The following summary of transactions and events was taken from the accounting records
of Melton School District General Fund before the accounting records had been closed for
the scal year ended June 30, 2006:
MELTON SCHOOL DISTRICT GENERAL FUND
Summary of Transactions and Events
For Year Ended June 30, 2006

Ledger accounts with debit balances:

Cash
Taxes receivable
Estimated revenues
Expenditures
Other nancing uses
Encumbrances
Totals
Ledger accounts with credit balances:
Allowance for uncollectible taxes
Vouchers payable
Payable to other funds
Fund balance reserved for encumbrances
Unreserved and undesignated fund balance
Revenues from taxes
Other revenues
Budgetary fund balance
Appropriations
Estimated other nancing uses
Totals

Post-Closing
Balances,
June 30, 2005

Pre-Closing
Balances,
June 30, 2006

$400,000
150,000

$ 700,000
170,000
3,000,000
2,700,000
142,000
91,000
$6,803,000

$550,000
$ 40,000
80,000
210,000
60,000
160,000

$550,000

70,000
408,000
142,000
91,000
162,000
2,800,000
130,000
20,000
2,810,000
170,000
$6,803,000

Additional Information
1. The estimated taxes receivable for the year ended June 30, 2006, were $2,870,000, and
taxes collected during the year totaled $2,810,000.
2. An analysis of the transactions in the Vouchers Payable ledger account for the year
ended June 30, 2006, follows:
Debit (Credit)
Current year expenditures (all subject to encumbrances)
Expenditures applicable to June 30, 2005, outstanding encumbrances
Vouchers for payments to other funds
Cash payments
Net change

$(2,700,000)
(58,000)
(210,000)
2,640,000
$ (328,000)

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3. During Fiscal Year 2006, the General Fund was billed $142,000 for services furnished
by other funds of Melton School District.
4. On May 2, 2006, purchase orders were issued for new textbooks at an estimated cost of
$91,000. The books were to be delivered in August 2006.
Instructions
a. Using the foregoing data, reconstruct the journal entries to record all transactions and
events of Melton School District General Fund for the year ended June 30, 2006, including the recording of the budget for the year. Disregard current and delinquent taxes receivable. (Hint: The $2,000 difference between the $60,000 fund balance reserved for
encumbrances on June 30, 2005, and the $58,000 amount vouchered for the related expenditures is credited to the Unreserved and Undesignated Fund Balance ledger account.)
b. Prepare closing entries for Melton School District General Fund on June 30, 2006.
c. Prepare a post-closing trial balance for Melton School District General Fund on June 30,
2006.
(Problem 17.7)

CHECK FIGURE
Property tax levy
required, $3,361,000.

Because the controller of the City of Romaine had resigned, the assistant controller attempted
to compute the cash required to be derived from property taxes for the General Fund for the
scal year ending June 30, 2006. The computation was made as of January 1, 2005, to serve
as a basis for establishing the property tax rate for the scal year ending June 30, 2006. The
mayor of Romaine has requested you to review the assistant controllers computations and obtain other necessary information to prepare for the City of Romaine General Fund a formal
estimate of the cash required to be derived from property taxes for the scal year ending June
30, 2006. Following are the computations prepared by the assistant controller:
City resources other than proposed property tax levy:
Estimated General Fund cash balance, Jan. 1, 2005
Estimated cash receipts from property taxes, Jan. 1 to June 30, 2005
Estimated cash revenues from investments, Jan. 1, 2005, to June 30,
2006
Estimated proceeds from issuance of general obligation bonds in
August 2005
Total City resources
General Fund requirements:
Estimated expenditures, Jan. 1 to June 30, 2005
Proposed appropriations, July 1, 2005, to June 30, 2006
Total General Fund requirements

$ 352,000
2,222,000
442,000
3,000,000
$6,016,000
$1,900,000
4,300,000
$6,200,000

Additional Information
1. The General Fund cash balance required for July 1, 2006, is $175,000.
2. Property tax collections are due in March and September of each year. You note that during
February 2005 estimated expenditures will exceed available cash by $200,000. Pending collection of property taxes in March 2005, this deciency will have to be met by the issuance
of 30-day tax-anticipation notes of $200,000 at an estimated interest rate of 12% a year.
3. The proposed general-obligation bonds will be issued by the City of Romaine Enterprise
Fund to nance the construction of a new water pumping station.
Instructions
Prepare a working paper as of January 1, 2005, to compute the property tax levy required
for the City of Romaine General Fund for the scal year ending June 30, 2006.
(Problem 17.8)

The following data were taken from the accounting records of the Town of Tosca General
Fund after the ledger accounts had been closed for the scal year ended June 30, 2006:

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TOWN OF TOSCA GENERAL FUND

Data from Accounting Records
For Year Ended June 30, 2006

Assets
Cash
Taxes receivable
Allowance for uncollectible taxes
Total assets
Liabilities and Fund Balance
Vouchers payable
Payable to Internal Service Fund
Payable to Enterprise Fund
Fund balance reserved for
encumbrances
Unreserved and undesignated
fund balance
Total liabilities and fund balance

Balances
July 1,
2005

Fiscal Year 2006 Changes

$180,000
20,000
(4,000)
$196,000

$ 955,000
809,000
6,000

$ 880,000
781,000
9,000

$255,000
48,000
(7,000)
$296,000

$ 44,000
2,000
10,000

880,000
7,000
60,000

889,000
10,000
100,000

$ 53,000
5,000
50,000

40,000

40,000

47,000

47,000

100,000
$196,000

47,000
$2,804,000

88,000
$2,804,000

141,000
$296,000

Debit

Credit

Balances
June 30,
2006

Additional Information
1. The budget for Fiscal Year 2006 provided for estimated revenues of $1,000,000 and appropriations of $965,000. There were no other nancing sources or other nancing uses
budgeted.
2. Expenditures totaling $895,000, in addition to those chargeable against the Fund Balance Reserved for Encumbrances ledger account, were made.
3. The actual expenditure chargeable against the July 1, 2005, Fund Balance Reserved for
Encumbrances ledger account was $37,000.
Instructions
Reconstruct the journal entries, including closing entries, for the Town of Tosca General
Fund indicated by the foregoing data for the year ended June 30, 2006. Do not attempt to
differentiate between current and delinquent taxes receivable.
(Problem 17.9)

The post-closing trial balance of the City of Douglas General Fund on June 30, 2005, was
as follows:
CITY OF DOUGLAS GENERAL FUND
Post-Closing Trial Balance
June 30, 2005

Debit
Cash
Taxes receivabledelinquent
Allowance for uncollectible delinquent taxes
Inventory of supplies
Vouchers payable
Fund balance reserved for inventory of supplies
Fund balance reserved for encumbrances
Unreserved and undesignated fund balance
Totals
*Collectible delinquent taxes were expected to be collected by Aug. 31, 2005.

Credit

$ 62,000
46,000*
$

8,000

18,000

$126,000

28,000
18,000
12,000
60,000
$126,000

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Additional Information
1. The annual budget for the scal year ending June 30, 2006, was as follows:

Estimated revenues
Estimated other nancing sources
Subtotal
Less: Appropriations
Estimated other nancing uses
Budgetary surplus

$400,000
200,000
$600,000
$560,000
20,000

580,000
$ 20,000

2. Property taxes were levied for the year ending June 30, 2006, in an amount to provide
revenues of $220,800, after estimated uncollectible taxes of 4% of total taxes receivable.
3. Purchase orders issued during the year ended June 30, 2006, totaled $518,000. Encumbrance accounting is used.
4. Cash receipts for the year ended June 30, 2006, were as follows:

Delinquent property taxes

Current property taxes
Refund from vendor for overpayment of Fiscal Year 2006 invoice for
acquisition of equipment
Other revenues (licenses and permits fees)
Other nancing sources
Total cash receipts

$ 38,000
226,000
4,000
196,000
200,000
$664,000

5. Vouchers were prepared as follows for the year ended June 30, 2006:

Encumbrance outstanding, June 30, 2005

Expenditures for year ended June 30, 2006 (including supplies,
$80,000; related encumbrances totaled $292,000)
Other expenditures (no encumbrances)
Other nancing uses (payable to Capital Projects Fund)
Total vouchers

$ 10,000
298,000
244,000
20,000
$572,000

6. Cash payments for vouchers payable during the year ended June 30, 2006, totaled
$580,000.
7. The physical inventory of supplies on June 30, 2006, amounted to $12,000. Supplies are
accounted for under the perpetual inventory system.
8. On June 30, 2006, $20,000 of the unreserved and undesignated fund balance was designated for the acquisition of equipment during the scal year ending June 30, 2007.
Instructions
Prepare journal entries for the foregoing transactions and events of the City of Douglas
General Fund for the year ended June 30, 2006, and closing entries on June 30, 2006.