Lecture one

 Governmental entities have operating objectives different from those of

commercial entities;
 therefore, governmental accounting is different from accounting for commercial
enterprises.

Definition of governmental accounting:

- A set of principles, rules and procedures which govern the collection, analysis,
recording, classifying, summarizing and presenting of the financial information of
the governmental entities,
- which are related to the collection of the State's resources or the expenditure (use),
- and providing information which would help in preparing the Public State Budget
in the upcoming years

Characteristics of the governmental entities and their effect on the accounting

system:
1. The governmental entities do not aim at realizing profits but mainly aims to
provide a range of essential services to the community.
2. The governmental entity is completely publicly owned by the state (public
ownership)
3. Governmental entities do not have capital like other commercial entities.
However, the State allocates the required funds to them annually to spend on
their activities.
4. There is no direct relationship between revenues and expenditure in the
governmental entities.

5. The absence of the competition.

6. The concept of resources in government entities is different from the accounting
concept of revenue in economic entities which aims to realize profit. However,
the resources in governmental entities are the amounts they receive under the
law.
 7. The concept of (expenditures/utilizations (use)) in government entities is different
from the accounting concept of expenses in economic entities which aims to
realize profit. However, the utilizations in governmental entities are the funds
allocated by the state.

Introduction to Fund Accounting

• Nonbusiness organizations are economic entities that are organized to provide a

socially desirable service without regard to financial gain.

- Accounting for nonbusiness organizations is referred to as Fund Accounting

• In contrast, business enterprise are designed to earn a return on investment for

equity investors, operate in a competitive market, and face liquidity concerns.

- Accounting for profit oriented enterprises is referred to as Financial

Accounting

Classification of nonbusiness organizations

Nonbusiness organizations can be separated into five major classifications, as follows:

1. Governmental units (federal, state, and local governmental entities).

2. Hospitals and other health care providers.
3. Colleges and universities
4. Voluntary health and welfare organizations.
5. all others nonbusiness organizations

Distinctions Between Nonbusiness Organizations and Profit Oriented Organizations

(Main Characteristics of Nonbusiness Organization)

1. The most obvious characteristic that distinguishes a nonbusiness organization

from a profit oriented enterprise is the absence of a primary goal to earn a profit.
 2. The services performed by nonbusiness organizations are based on social need
rather than on the profit motive. Thus, their financial statements are sometimes
referred to as not-for profit or non-profit financial statements.
3. Nonbusiness organizations seldom finance their operations through charges to
the individuals benefiting from the service.

4. the person who contributes resources to nonbusiness organization does not receive
equity interests in the net assets of the organization, and does not necessarily
benefit proportionately or at all from the services provided by such organizations.

5. There is no relationship between voluntary contribution (or Tax levies) and the
value of the services introduced by nonbusiness organizations to the individuals
contributing the money

Because of these characteristics

- The Net Income concept can’t be used to measure the effectiveness of the
management of resources dedicated to nonbusiness objectives.
- Therefore the income determination model of accounting is generally not
applicable to such organizations (Nonbusiness Organization).

Financial Accounting and Reporting Standard for Nonbusiness Organizations

The standard setting bodies - the governmental accounting standard board (GASB), and the financial
accounting standard board (FASB) – primarily are responsible for determining the accounting
standards for various types of nonbusiness organizations

GASB Primary body establishing FASB

accounting standards

Governmental units Nonbusiness organizations Nongovernment units

1. federal units 1. private colleges,

2. state units (state
 hospitals - state universities
universities) 2. private hospitals and
3. local governmental voluntary health and
units (counties – welfare organizations
townships – 3. other nongovernmental
municipalities – school units (private
districts – port elementary schools,
authorities – sanitation labor unions)
districts – industrial
development districts)

Notice: profit oriented enterprises apply GAAP established by FASB

 What is fund accounting?

Fund accounting is a system of accounting for nonbusiness organizations where the entity
resources are accounted for by individual funds.

 What is fund?

A fund is a fiscal and accounting entity with a self balancing set of accounts for recording
and classifying all financial transactions (i.e., each fund constitutes a separate accounting
entity)

Fund is created to carry out specific activities and certain objectives according to special
regulations and restrictions.

 The role of fund accounting:

Fund accounting provides a basis for determining the fiscal responsibility and status of
the organization and the compliance of administrators with the approved or stipulated
receipt and utilization of financial resources.

Therefore, fund accounting is an important means of meeting several of the accounting,

control, and reporting objectives of most nonbusiness organizations.

 Fund entities may be classified into:

 1. Expendable fund entities: Are most closely associated with basic fund
accounting concepts.
- Expendable fund entities consist of net financial resources that are dedicated to a
specific use.
- Financial resources consist of cash and claims to cash (such as receivables and
investments in marketable securities that are securities that can be converted into
cash).
- Thus, separate expendable fund entities are established based on the purpose for
which financial resources may or must be used.

Examples:

Capital projects fund created to account for new highway construction.

Debt service fund created to account for interest and principal payments on long term
debt.

The financial statements

Financial statements for expendable fund entities include:

A. Financial position statement (balance sheet)

Financial resource of the fund xxx (assets)

(-) claims against those financial resources xxx (liabilities)

= the fund balance xxx

Fund Balance

- The difference between the financial resources of an expendable fund entity

(assets) and claims against those resources (liabilities)
- Fund balance represents the net financial resources that are available for
expenditure for the specific purposes or objectives for which the fund was
created.

Balance sheet, for an expendable fund entity reflects:

 1. the financial resources of the fund (assets)
2. The claims against those resources (liabilities)
3. The fund balance

- Assets and liabilities are not subdivided into current and noncurrent assets and liabilities

B. operating statement

Financial resources inflows (by source) “increases in financial resources” xxx

(-)financial resources outflows(by function)“decreases in financial resources”
xxx

= change in fund balance

- The relevant measures of the operations of expendable fund entities are not
revenue, expense, and net income, but rather increases in fund resources,
decreases in fund resources, and the changes in the fund balance.
A. Increases in fund resources (financial resources inflows) include not only
revenues, but also items such as proceeds from debt issuance, and transfers from
other funds.
B. Decrease in fund resources (financial resources outflows) include expenditures
and transfers to other funds.

Expendable fund entities

Operating statement

Increases in financial resources (inflows) (-) Decreases in financial resources (outflows)

include : include:

1- revenue 1- expenditures

2- proceeds from debt issuance 2- transfer to other funds

3- transfer from other funds

Revenues should be classified by Expenditures should be classified by function,

source, and transfer from other funds and transfer to other funds should be
should be distinguished and separated distinguished and separated from expenditures
from revenue

2. Proprietary fund entities: Are most similar to business enterprises

- Proprietary fund entities are used to account for the activities of nonbusiness
organizations that are similar to those of business enterprises.
- Example of such activities, the operation of an electric or water utility by a
municipality.
- Relevant accounting measurement and reports are similar to those applicable to
profit-oriented enterprises and focus on the determination of net income, financial
position, and cash flows.
3. Fiduciary fund entities: Are used when the government acts as an agent or
trustee for resources belong to others

• fiduciary fund entities are funds where the government acts as an agent (ex: tax
agency) or acts as a trustee for an individual or organization (ex: pension trust
fund)
 Lecture 2
 Budgetary fund entities

• In the traditional compliance model of reporting on the operations of

governmental units, actual and approved (or stipulated) inflows and outflows of
resources are compared.

- Approved resource flows are incorporated into annual budgets.

- In some instances the budget for an expendable fund entity is so important to
management control of fund resources that entries for budgeted revenues and
expenditures are recorded in the books
- Fund entities in which the budget is formally incorporated into the accounting
records are sometimes referred to as budgetary funds.

• When budgeted (estimated) expenditures are enacted (passed) by law, they are
referred to as appropriations.

• Appropriations represent the maximum expenditures that are authorized by the

legislature.

• The accounting system must provide administrators of governmental units with

timely information as to actual expenditures and allowable expenditures
(appropriations).

• In addition, financial reports must be prepared in such a way that the legislature or
its representatives can determine that the spending limits authorized by it have
not been exceeded.

Basis of accounting

Accrual basis of accounting Cash basis of accounting

 A method of summarizing operating results A method of summarizing operating results
in terms of revenue earned and expenses in terms of cash receipts or cash payments,
incurred, rather than cash receipts and cash rather than revenue earned and expenses
payments incurred

The basic financial statements of government include two types:

1. Government wide financial statements

- report on all the non-fiduciary activities of the government and provide both short
and long run information about the financial status of the government.
- are prepared using the economic resources management concept and the
accrual basis of accounting.

2. Governmental (expendable) Fund Financial Statement:

- Are reported using the current financial resources concept and the modified
accrual basis of accounting.
- Under the modified accrual basis of accounting, it is not sufficient for an
economic event to occur to affect the operating statement.
- instead, the related cash flow must occur within a period short enough to
have an effect on current spendable resources.

- In other words, revenues must be both measurable and available to liquidate

(finance) liabilities of the current period (i.e. revenues are recognized when they
are measurable and available).

- Expenditures are recorded when a liability is incurred, similar to accrual

accounting.

- However, because governments generally do not attempt to allocate costs to

periods benefited, the term modified accrual accounting is also used.

- Therefore, expenditures are recognizable when an event is expected to use

current spendable resources.
 Concept of Revenue, Expenses, and Expenditure

Profit oriented entities

• Revenues: increases in net assets resulting from the sale of goods or services (the
price for goods sold and services rendered during a given accounting period).

• Expenses: costs of resources (goods and services) used up to produce current

period revenues.

Expendable Fund Entities

• Revenues: any increase in (source of) net current financial resources other than
increases from other financing sources as (debt issue proceeds and transfers of
resources from other funds).

• Expenditures: any decrease in (use of) net current financial resources other than
decreases from other financing uses as (transfers of financial resources to other
funds). Or the amount of financial resources expended during the period to carry
out the operations and activities of the fund entity.

Classification of revenues
- Revenues are classified by fund and by source. Major sources of revenue of state
and local governmental units are:
A. Taxes (property taxes, income taxes, sales taxes);
B. Grants (gifts and donations, pledges and grants, grants from: federal, state, or
local governmental unit);
C. Other revenues (fines and forfeit/penalties, interest earned on loan and
investments, sales of property)

Classification of Other Financing Sources

 A. Debt Issue Proceeds: Governmental units may finance their operations through
the issuance of bonds or other debt instruments.

B. Transfers of Resources From Other Funds within an organization: do not

represent an increase in the expendable financial resources of the organization.

- Accordingly, debt issue proceeds and transfers of resources from other funds
within an organization should be classified separately from revenue for financial
reporting purposes.

Recognition of Revenue

 In accounting for profit oriented enterprises

Revenue is ordinarily not recognized until:

1. a transaction has taken place (that is, the amount of revenue can be objectively
measured).
2. the earnings process is complete.

Criteria 2 is not applicable to expendable fund entities.

 In accounting for expendable fund entities

Revenue is ordinarily not recognized until:

1- it can be objectively measured.

2- it is available to finance expenditures of the current period.

Classification of expenditures and other resources

outflows
Classification of expenditures: Expenditures is any decrease in net current financial
resources other than transfers to other funds.

- Thus, expenditures are not matched to the production of current revenues as are
expenses for profit seeking enterprises.
Expenditures may be classified by:

1. Fund

2. Function (public safety – public works)

3. Organizational Unit (police department or fire department)

4. Activity (drug control, custody of prisoners, patrol)

5. Character or nature of expenditure (current operating)

6. Object class (supplies or salaries)

Transfer to other funds (other resources outflows)

• Transfers of resources to other fund entities within an organization do not

represent decreases in the expendable financial resources of the organization as a
whole.

• Accordingly, even though they represent a decrease in financial resources of a

particular fund, they should be classified separately from expenditures for
financial reporting purposes.

Recognition of Expenditures

An expenditure is one of four critical events in the use of the financial resources of an
expendable fund entity. The sequence of events is as follows:

1. Appropriation (authorization): Appropriations represent the maximum amount

of expenditures that entities are authorized to spend.
- Administrators are responsible for expending fund resources only in the amounts
and for the purposes prescribed in the appropriations act.
- Thus, an important function of financial statements is to let administrators know
how they stand relative to their appropriation authority.
 2. Encumbrances (purchase order): Since the amount of an appropriation cannot
be legally exceeded, the placing of purchase orders and signing of contracts are
critical events in controlling the expenditures of expendable fund entities.

3. The financial resources of fund are said to be encumbered when a transaction is

entered into that requires performance by another party before the governmental
unit becomes liable to perform its part of the transaction by spending financial
resources.

An encumbrance is formally recorded in the accounting records.

Example

Assume that an order was placed for the purchase of goods in the amount of $10,000

Purchase order (encumbrance)

(1) Encumbrance 10,000

Reserve for Encumbrance 10,000

To record an order for goods in the amount of $10,000

3. Expenditure (receipt of goods): An expenditure is a decrease in fund resources

(or an increase in fund liabilities) that occurs when the vendor or the supplier
performs on a contract or purchase order and goods or services are received.
- Expenditures are recognized in the accounting period in which the fund liability is
incurred.
- Thus, an expenditure and corresponding liability or cash disbursement is
recorded at the time funds are granted to an authorized recipient.

- Encumbrances and expenditures are classified on the same basis (by fund,
function, organizational unit, activity, character, or object class) as
appropriations.
Example

- Assume that the goods ordered in (1) are received and invoiced at $12,000

(2) Expenditures 12,000

Vouchers payable 12,000

To record the receipt of goods invoiced at $12,000

(3) Reserve for encumbrance 10,000

Encumbrance 10,000

To remove the encumbrance recorded in (1) for goods received and recorded in an
expenditure in (2)

In this case, the goods cost $2,000 more than was estimated when the order was placed.

4. Disbursement (payment): Disbursements represent the payment of cash for

expenditures.

Example

The payment for the goods purchased in (2) is recorded as follows:

Payment for goods received:

(4) Vouchers payable 12,000

Cash 12,000

To record payment of vouchers payable

Unencumbered Balance

At any particular time the accounting records will reflect management’s remaining
available appropriation authority (unencumbered balance) as follows:

 Unencumbered balance = appropriations – (encumbrances + expenditures)

Unencumbered balance: the amount of resources that can still be obligated or expended
without exceeding the legal or authorized limit.

Example

• An order was placed for the purchase of goods in the amount of $10,000

• The goods ordered are received and invoiced at $12,000

• The appropriation for budget category 103 is $50,000 and that the amount of
expenditures in this category was $15,000.

• The effects of entries (1- encumbrance), (2-Expenditures), (3-Disbursement), and

(4- Unencumbered balance) on the subsidiary ledger control card for budget
category 103 are to reduce the unencumbered balance by $12,000 (the amount of
actual expenditure).

Solution:
Subsidiary Ledger Control Card for one Budget Category

Function: sanitation; Activity: Sanitary Sewer Cleaning; Object: Operating supplies.

Budget line A Appropriation B Encumbrance C Expenditure D=(B)+ E Unencumbered

103 (C) Balance (A)- (D)

Prior 50,000 ------ 15,000 15,000 35,000

Balance

Purchase ------ 10,000 ------ 10,000 (10,000)

Order

(entry 1)

Balance 50,000 10,000 15,000 25,000 25,000

 Expenditure -3- -2- 2,000 (2,000)
s
(10,000) 12,000
(entry 2 and
3)

Balance 50,000 ------ 27,000 27,000 23,000

Lecture 4

Definition of State Budget

State Budget is a formal financial plan for governmental activities during next
period including estimated Revenues and Expenses.

Features of State Budget

1- It is a financial plan:

2- It covers a future period:

3- It includes estimated Expenses and Revenues

4- It is a document approved by the Parliament

Objectives of the State Budget

1-Improving the role of the budget

5-Supporting decentralization and maximizing the role of local authorities

3-Increasing the efficiency of using inventories

4-Increasing gross domestic product to rationalize importing and increasing exports

Scope of State budge

1- Ministries and government agencies (such as Ministry of Transport and education and
health).
2-Local authorities. (Governorates, provinces, cities, districts, villages)

3-Government service organizations (such as, the public Post Office, and the public
Authority for Insurance and Pensions)

4- The special funds and special accounts.

Types of Budget

1. Traditional budget (items Budget)

2. Programs and performance budget

3. Planning and programming budget

4. Management by objectives budgeting

5. Zero- based budgeting

Budgeting principles

1. Annual

2. Comprehensive

3. linkage

4. Balance

5. Transparency and accountability

6. Flexibility

7. Publishing and publicity

The structure of the state budget in Egypt

utilizations Resources
First :expenses First : Revenues

Chapter one: Wages and Salaries ×× Chapter one: Taxes ××

Chapter two: the purchase of goods and ×× Chapter two: Grants ××

services
×× Chapter three: Other revenues ××
Chapter three: The interests
×× Second: The sources of funding ××
Chapter four: Subsidies, Grants and Social
×× Chapter four: returns from lending and ××
Benefits
sales of financial assets and other assets
××
Chapter five: other expenses
Chapter five: Borrowing
××
Chapter six: Purchase of non - financial assets
(investments) ××

Second: The acquisition of financial assets

Chapter seven: acquisition of financial assets

of local and foreign

Third: loans repayment

Chapter eight: repayment of local and foreign

loans

Total utilizations ××× Total resources ×××

The elements of the accounting system in governmental entities are:

1. A set of documents which support the financial transactions.

2. A set of accounting ledgers and books.

3. A set of financial reports.

First: The Documents

Documents are considered the only source related to the entry into the accounting
ledgers.

governmental documents consist of the following:

- Documents of expenditure and other payments.

- Documents of revenues and other receivable

- Documents of stores

Second: The Books and Ledgers

The governmental entities use two kinds of ledgers and Books.

First: a set of basic accounting books: which represent the main structure of the system
and is based on the principle of double-entry.

Second: a set of statistical Books: which aims to provide the necessary data that do not
exist in the accounting books.

Third :The periodical reports and final account

The Article 53 of the Regulations for the Governmental accounting Act required the
following reports:

1- Monthly Financial Account

2- Quarter annual Financial Account

3-The final account

The governmental entity pays the value of current expenses by:

1- Cheque drawn on the Central Bank or one of its branches.

2- Disbursement voucher drawn on one of the public treasury or the post offices.

First: Disbursement by cheques:

1- Drew the cheque

Date Description Amounts

Dr Cr

‫االستخدامات – الفصل‬Utilizations – Chapter ….. ××

Current account of Credit amounts under adjustment (tax ××

deduction)

Cheques (net) ××

2- Payment of the cheque to the alleged

Date Description Amounts

Dr Cr

Cheques ××

Current account of the Central bank ××

Returning the cheque to the entity once more without disbursement.

1- Being unable to locate the alleged

Date Description Amounts

Cheques ××
 Current account of Credit amounts under adjustment (in ××
the name of the alleged).

• If the alleged appears

A new cheque will be drawn while creating a reverse entry of the previous cheque.

Date Description Amounts

Current account of credit amounts under adjustment (in the ××

name of the alleged).

Cheques ××

2- The return of the cheque due to death of the alleged:

Date Description Amounts

Cheques ××

Current account of Credit amounts under ××

adjustment

• When issuing heritage document

A new cheque will be drawn for the heirs

Date Description Amounts

Current account of Credit amounts under adjustment ××

Cheques ( In the names of heirs) ××

3-The return of the cheque which has been excessively disbursed

a) If the cancellation was in the same fiscal year

Date Description Amounts

Cheques ××

Current account of credit amounts under adjustment (deduction ) ××

Utilizations -Chapter …..(by exclusion) ××

b) If the cancellation was after the end of the fiscal year

In this case it is found under “other revenues” because of the completion of work and
disbursement was effected. The entry is as follows:

Date Description Amounts

Cheques ××

Current account of credit amounts under Adjustment (deduction ) ××

Resources - Chapter three (Other revenues) ××

4- Return the cheque at expiration date of the legal period for disbursement. The
entry is as follows:

Date Description Amounts

Current account of credit amounts under Adjustment ××

Resources - Chapter three (Other revenues) ××

When the alleged presents once again the cheque for the disbursement after expiration.
- In this case, a new cheque is drawn in favor of the alleged subject to the value
being paid out of the revenues. The entry is as follows:

Date Description Amounts

Resources - Chapter three (Other revenues) by exclusion ××

Cheques ××

5- When the cheque is lost from the alleged.

Another cheque shall be issued after having undertaken the required legal procedures
for the termination of payments of the lost cheque. The entry is as follows:

Date Description Amounts

Cheques (Old) ××

Cheques (New) ××

**Q1 Answers**

1. **Governmental Accounting**: A set of principles, rules, and procedures governing

the collection, analysis, recording, and presentation of financial information for
governmental entities. It aids in preparing the Public State Budget.

2. **Characteristics of Governmental Entities**:

- No profit motive; focus on essential services.

- Public ownership.
 - State-allocated funding (no capital).

- No direct link between revenues and expenditures.

- Absence of competition.

- Resources are legally mandated (e.g., taxes, grants).

- Expenditures are state-allocated funds, not tied to profit.

3. **Nonbusiness Organizations**:

- No profit motive.

- Services based on social need.

- Financed via contributions/taxes, not user charges.

- Contributors receive no equity or direct benefits.

- No link between contributions and services.

4. **Fund Accounting**: A system for nonbusiness organizations where resources are

tracked by individual funds (separate accounting entities).

5. **Fund**: A fiscal entity with self-balancing accounts for specific activities under
legal restrictions.

6. **Fund Balance**: Net financial resources (assets minus liabilities) available for a
fund’s designated purpose.

7. **State Budget Objectives**:

- Improve budget efficiency.

- Support decentralization.

- Track inventory usage.

- Increase GDP via rationalized trade.

8. **Government Financial Statements**:

 - **Government-wide**: Accrual basis, focuses on long-term financial health.

- **Governmental Fund Statements**: Modified accrual basis, tracks current financial

resources.

---

**Q2 Answers** (✔ = True; ✘ = False; corrections in *italics*)

1. ✔

2. ✔

3. ✔

4. ✔

5. ✔

6. ✔

7. ✔

8. ✔

9. ✔

10. ✔

11. ✔

12. ✘ *The utilization side includes multiple chapters (e.g., wages, subsidies,
investments), not just three.*

13. ✔ (Five chapters: Taxes, Grants, Other Revenues, Returns from Lending,
Borrowing).

14. ✔
15. ✔

16. ✘ *Governmental entities have different objectives (e.g., public service) than
commercial entities (profit).*

17. ✔

18. ✘ *Government accounting focuses on budget preparation, not just current-year

financial statements.*

19. ✘ *Government entities do not aim to generate profits; they provide services.*

20. ✔

21. ✘ *Government revenues (e.g., taxes) are not dependent on generating expenses.*

22. ✔

23. ✘ *Expenses (profit entities) differ from expenditures (decreases in financial

resources).*

24. ✔

25. ✔

26. ✘ *No competition exists among government entities.*

27. ✘ *Resources in government entities are legally mandated, not profit-driven

revenue.*

28. ✘ *Nonbusiness organizations serve social needs, not profit motives.*

29. ✔

30. ✘ *Contributors do not directly benefit from services.*

31. ✔

32. ✘ *Fund accounting (not financial accounting) determines fiscal responsibility.*

33. ✘ *Expendable funds (not proprietary) are associated with basic fund accounting.*
34. ✔

35. ✔

36. ✘ *Approved resource flows are part of annual budgets, not financial statements.*

37. ✔

38. ✘ *Modified accrual (not cash basis) requires cash flow timing to affect current
resources.*

39. ✘ *Appropriations are maximum authorized expenditures overall, not per project.*

40. ✔

41. ✔

42. ✔

43. ✔

44. ✔

45. ✔

46. ✔

47. ✔

48. ✔

49. ✔