CHAPTER ONE

Over View of Fund Accounting

What is a Government?

A government is an organized entity which, in addition to

having governmental character, has sufficient discretion in the
management of its own affairs to distinguish it as separate
from the administrative structure of any other governmental
unit.
Government is classified as:
Special Purpose Government(limited) is a government that
provides a single service or few services to the citizenry.
For Example: Transportation authorities can be taken as
Special Purpose Government Entity.

General Purpose Government provides a wide collection of

services to the citizenry.
Examples: Federal government, state governments, zone
government, cities, towns, villages, etc
NFP Entities are entities other than the government and
that provide community services either free from charge or
with a “token” charge.
Major Types of Governmental and Not-For-Profit Entities:
General Government – includes federal, state, county, city,
town, village, special districts
Educational – includes kindergartens, primary and
secondary schools, vocational & technical schools, colleges,
and universities
Health and Welfare – Hospitals, Orphanages, the Red Cross
and Red Crescent, etc
Religious – churches, mosques, missions
Charitable – includes many NGOs
Foundations - private organizations that promote research
and development for improvement of human life.
 Distinguish Characteristics of Governmental &
Not-for-profit Entities
• Basic characteristics of Governmental & Not-for- profit entities are:
a. Receipts of significant amounts of resources from
resource providers who do not expect to receive either
repayment or economic benefits proportionate to the
resources provided.
b. Operating purposes that are other than to provide goods
or services at a profit or profit equivalent. c.
c. Absence of defined ownership interests that can be sold,
transferred, or redeemed or that convey entitlement to a
share of a residual distribution of resources in the event
of liquidation of the organization
Similarities & Differences – Governmental and
Other NFP Entities

Similarities
•Lack of competitive market place
Governmental and NFP entities operate in an environment which is
difficult to set the quality and quantity of service or product
•Use of fund accounting as a control device
Both classes of organizations are organized and operated on a fund
basis.
•Significant investment in non revenue producing activities or assets
 Differences

• Government differs from Other NFP entities in the following

manners:
•Power ultimately rests in the hands of the people
 public officials are accountable to the general public and the
legislative, judicial, and executive bodies will have an impact
on their operation
•People vote and delegate that power to public officials
•Government has the power to tax citizens for revenue citizens
(tax payers) who are the providers of resources but the
contribution may not be voluntary and the tax payers have little
say in deciding how to use the resources
 Difference…

•The budget is an expression of public policy and method

of providing control.

•The nature of the political process has a significant

influence on their operation

•They may have monopoly power on some of its services

 Similarities of Gov’t and NP Entities to
Business Entities

• Both are integral part of an economic system

• Both acquire resources to provide goods or services
• Both use financial management processes
• Both need financial information systems
• Both undergo cost analyses, control and evaluation techniques.
• Both may provide similar services – e.g. transportation
systems; sanitation services; utilities, stadiums, arenas, etc
Differences between G&NP from Business firms

1. Organizational objectives – absence of profit motive; most

are tax exempt
2. Operational focus
3. Sources of Financial Resources – benefits are not
proportional to resources provided
4. Accounting and Financial Reporting
5. Evaluating Performance and Operating Results
6. Regulation and Control
7. Other Distinguishing Characteristics
8. Consensus policy-setting by elected or appointed
oversight body
9. Absence of transferable ownership rights
 1. Organizational objectives

•Businesses - want to maximize income from revenues

and other resources.

•G&NP Organizations - want to maximize services

provided from revenues and other resources. They provide
services as resources permit to serve constituency
 2. Operational focus

•Businesses – businesses must report short-term but look

to the long-term as well

•G&NP Organizations – operate on annual budget, so

current year is of primary importance
 3. Sources of Financial Resources

Businesses
•Raise resources from sales or from capital stock & debt
transactions. They must account for different sources – invested
capital and revenue transactions – differently.

G&NP Organizations
• Raise resources from sales or debt transactions – typically no
distinction made in sources. Owner investments and sales are
insignificant or nonexistent and taxation is unique source of
revenue to government. Grants and shared revenues are common
for G&NP
 4. Accounting and Financial Reporting

Businesses
•Objective - seeking to increase and maintain wealth
•Accounting and reporting focuses on net income

G&NP Organizations
•Objectives - acquiring and spending resources legally and appropriately
•Accounting & reporting focus on budgets and appropriations and funds and fund
accounting,etc
•Use of special accounting for restricted activities
•Dual basis of accounting & reporting - budgetary accounts is integrated directly into
accounting systems ledger accounts to control and demonstrate budget compliance
and monitor expenditure authority. GAAP basis follows defined measurement
standards for reporting; and Budget basis follows method used to authorize budgets
such as cash and commitments
•Presentation of budgetary comparisons in connection with regular financial reporting
 5. Evaluating Performance & Operating
Results

Businesses
•Continuing a product or service determined by success in
marketplace.
•Able to modify or withdraw unprofitable goods and services
from the marketplace.
•Responds to value of resources provided to type and quality of
goods and services provided.
•Profit motive and measurement result in an allocation and
regulation of resources vs. goods and services provided
 5. Evaluating Performance…..

G&NP Organizations
•Profit is not a motive and frequently cannot be measured.
•Services not found elsewhere, so there is no competition.
•Face rules and regulations not found in private sector.
•Not able to modify or withdraw some unprofitable goods
and services from the marketplace.
•Value of resources provided often not related to type and
quality of goods and services provided
•Goods and services provided often unique and without
charge or at a “token” charge.
 6.Regulation and Control

Businesses
• presence of supply, demand and profit devices is used as control
and regulation over businesses.

G&NP Organizations
•Controls - use of statutory, fund and budgetary controls
•G&NP Regulated by Federal / state statutes and laws; Grant
regulations; Judicial decisions; Charter, by-laws, & ordinances;
Contractual obligations; Trust / donor agreements; Organization
structure - elected governance, line of authority; Personnel
policies and procedures – who hires / fires, compensation
 7.Other Distinguishing Characteristics.

Businesses
•Perfect competition; open market for goods and services
•All the services are provided at arm’s length prices

G&NP Organizations
•Monopolistic services; no open market – E.g. Police and
fire services
•User charges based on cost without profit – E.g. Health and
social services.
•Charges often only cover part of cost – E.g. Transit,
colleges or universities.
Objectives of Financial Reporting for
Government &NP Entities
 Objectives of Financial Reporting for NFP Entities

NFP financial reporting should provide information useful

in:
 Making resource allocation decisions.
 Assessing services and ability to provide services.
 Assessing management stewardship and performance.
 Assessing economic resources, obligations, net
resources, and changes in them.
 ACCOUNTABILITY

• Accountability is the cornerstone of all financial reporting in

government
• Accountability arises from the citizens’ “right to know.” It
imposes a duty on public officials to be accountable to citizens for
raising public monies and how they are spent.
• Government officials are accountable and have an obligation to
disclose whether current-year revenues were sufficient to pay for
current-year benefits or not. If inter-period equity is not achieved,
the current citizens are deferring payments to future taxpayers.
• Financial Reporting plays a major role in fulfilling
government’s duty to be publicly accountable in a
democratic society
 Purpose of financial repotting in
Government and NFPs
In general, financial reports of governmental entities are used
to:

 Compare actual financial results with legally adopted

budget.
 Assess financial condition and results of operations.
 Assist in determining compliance with finance-related laws,
rules, and regulations.
 Assist in evaluating efficiency and effectiveness.
 Financial Reporting (FR) for State and
Local Government
Minimum External Financial Reporting
The minimum requirements for general purpose external financial statements
under the governmental financial reporting model specified by GASB
Statement No. 34 include:

• Management’s Discussion and Analysis (MD& A); Basic Financial

Statements (Government Wide Financial Statements, Fund Financial
Statements, and Notes to Financial Statements), and Required
Supplementary Information (RSI) other than MD& A.

• The MD&A is required supplementary information (RSI) designed to

communicate in narrative, easily readable form the purpose of the basic
financial statements and the government’s current financial position and
results of financial activities compared with those of prior years. GASB
Statement No. 34 prescribes two categories of basic financial statements,
government-wide financial statements and fund financial statements:
CONt’d
Comprehensive Annual Financial Report (CAFR)

General purpose financial reporting includes not only

financial statements but also all other means of
communicating information that relate directly or indirectly
to the information provided by the accounting system.

In addition to the minimum financial information, GASB

Standards state: “Every governmental entity should
publish, as a matter of public record, a comprehensive
annual financial report (CAFR).
A CAFR includes introductory section, financial section, and
statistical section
 CAFR-Introductory Section

Introductory section includes such items as:

•Title page
•Contents page
•Letter of transmittal – a letter from the chief finance
officer addressed to the chief executive and governing
body of the governmental unit or it may be a narrative
over the signature of the chief executive. The letter or
narrative material should cite legal and policy
requirements for the report
•Other (as desired by management)
 CAFR: Statistical Section

• A CAFR should contain a statistical section.

• The statistical section typically presents tables and
charts showing social and economic data, financial
trends and the fiscal capacity of the government in detail
needed by readers who are more than casually
interested in the activities of the government unit.
 CAFR: Financial Section (GASB
Statement No. 34

The financial section of a CAFR should include:

• Auditor’s report
• MD & A
• Basic Financial Statements
• Required Supplementary Information (RSI) other than
MD&A
• Combining and individual fund statements and schedules
• Brief objective narrative providing management’s
analysis of the government’s financial performance
 Basic Financial Statements

Government-Wide Financial Statements

•Statement of Net Assets
•Statement of Activities

Fund Financial Statements

Governmental Funds
• Balance Sheet
• Statement of Revenues, Expenditures, and Changes in Fund Balances

Proprietary Funds
•Statement of Net Assets
•Statement of Revenues, Expenses, and Changes in Fund Net Assets
•Statement of Cash Flows

Fiduciary Funds
•Statement of Fiduciary Net Assets
•Statement of Changes in Fiduciary Net Assets

•Notes to the Financial Statements

 Principles of Accounting and Financial Reporting for
State and Local Governments (SLGs)

Activities of Government
There are three major activity categories of a
state and local governments:
a. Governmental Activities,
b. Business-Type Activities, and
c. Fiduciary Activities.
 a. Governmental Activities

As per GASB Concepts Statement No.1, government provides certain

core services called General Activities.
General Activities provided by most general purpose governments are
related to:
 Protection of life and property, police and fire protection,
 Public works (streets and highways, bridges, and public
buildings),
 Parks and recreation facilities and programs,
 Cultural and social services.
Governments also incur costs for general administrative support such
as data processing, finance, and personnel.
Core governmental services, together with general administrative
support, comprise the major part of governmental type activities or
simply Governmental Activities.
 b. Business-type Activities

Governments also engage in business type activities. These include:

 Public utilities (electric, water, gas and sewer utilities)
 Transportation systems;
 Toll roads and toll bridges;
 Airports;
 Hospitals;
 Parking garages and lots;
 Liquor stores;
 Swimming pools;
 Stadiums and arenas
Many of these activities are intended to be self supporting by charging
users for the services they receive.
 c. Fiduciary Activities

 Governments often act in a fiduciary capacity, either as an

agent or trustee, for parties outside the government.
 A government may serve as agent for other governments
in the administering and collecting of taxes.
 Governments serve also as trustees for amounts placed in
trust from private citizens for parks and other purposes,
for escheat properties that revert to the government
when there are no legal claimants or heirs to a deceased
individual’s estate, and for assets being held for employee
pension plans.
GASB Statement of Principles of Accounting and FR for SLGs

At its inception in 1984, the GASB adopted 12 accounting and financial

reporting principles for state and local governments that had been established
by its predecessor standards-setting body. The standards prescribed by GASB
Statement No. 34 retain, with certain modifications, the original principles.
A separate principle has been articulated for long-term liabilities, bringing the
total now to 13 principles as follows:

1. Principle of Accounting and Reporting Capabilities

2. Principle of Fund Accounting Systems
3. Principle of Types of Funds
4. Principle of Number of Funds
5. Principle of Reporting Capital Assets
6.Principle of Valuation of Capital Assets
GASB Statement of Principles of Accounting and
FR for SLGs

At its inception in 1984, the GASB adopted 12 accounting and financial

reporting principles for state and local governments that had been established
by its predecessor standards-setting body. The standards prescribed by
GASB Statement No. 34 retain, with certain modifications, the original
principles.
A separate principle has been articulated for long-term liabilities, bringing the
total now to 13 principles as follows:

1. Principle of Accounting and Reporting Capabilities

2. Principle of Fund Accounting Systems
3. Principle of Types of Funds
4. Principle of Number of Funds
5. Principle of Reporting Capital Assets
6.Principle of Valuation of Capital Assets
 Cont’d
7. Principle of Reporting Long-Term Liabilities
8. Principle of Depreciation of Capital Assets
9. Principle of Measurement Focus and Basis of Accounting
10. Principle of Budgeting, Budgetary Control, and Budgetary
Reporting
11. Principle of Transfer, Revenue, Expenditure, and Expense
Account Classification
12. Principle of Common Terminology and Classification
13. Principle of Annual Financial Reports
Principle No. 1: Accounting and Reporting Capabilities

A governmental accounting system must make it possible both:

(a) to present fairly and with full disclosure the funds and
activities of the government in conformity with generally
accepted accounting principles, and

(b) to determine and demonstrate compliance with finance

related legal and contractual provisions.
Adherence to GAAPs is essential to ensuring a reasonable
degree of comparability among the general purpose financial
reports of state and local governmental units.
 Cont’d
• In some cases, however, laws require the state government
and the local governments within the state to follow practices
(such as cash basis of accounting) not consistent with GAAP.
• In those cases, financial statements and reports prepared in
compliance with state law are considered “Special reports”
or “Supplementary schedules” and are not the basic financial
statements.
• Thus, Governmental units may prepare two sets of financial
statements: (a) one set in compliance with GAAP (General
purpose financial statements) and (b) one set in compliance
with legal requirements (Special Reports).
 Principle No. 2: Fund Accounting Systems

 Governmental accounting systems should be organized

and operated on a fund basis.

 A Fund is defined as a fiscal and accounting entity with

a self-balancing set of accounts reporting cash and other
financial resources, together with all related liabilities and
residual equities or balances, and changes therein, which
are segregated for the purpose of carrying on specific
activities or attaining certain objectives in accordance
with special regulations, restrictions or limitations.
 Principle No. 3: Types of Funds

 State and local governments, both general purpose and special purpose, should use 11 fund
types as needed.

 These fund types are organized into three categories;

I. Governmental funds,
II. Proprietary funds, and
III.Fiduciary funds.
 Principle No. 3 discusses these fund types. However, funds should be used by state and
local governments to the extent that they have activities that meet the criteria for using
those funds.

 Governmental Funds: - account for activities of a government that are carried out
primarily to provide services to citizens and that are financed primarily through taxes.
 Governmental Funds are classified into five: General Fund, special revenue funds, capital
projects funds, debt service funds, permanent funds, which are discussed as follows:
 I.Governmental Funds

1.The General Fund (GF) – account for all financial

resources except those required to be accounted for in
another fund. It is used to account for resources required to
provide most of the basic services provided by the
governmental unit such as public safety, public works,
education, etc. Only one GF is used per government and
most financial transactions related to general governmental
operating activities are recorded in the GF.
 Governmental …
2.Special Revenue Funds (SRFs) – to account for proceeds
from specific revenue sources (other than private purpose trusts
or major capital projects) that are legally restricted to use for
specified purposes. The purpose of special revenue fund is to
demonstrate that all revenues from that source are used for the
special purpose only.
SRFs are used when required by law or by policy to account for
financial resources earmarked for a specified operating purpose.
If for example, a government earmarked 25% of current year
revenue from value added tax for draught affected people, special
revenue fund may be established to account for this revenue.
 Governmental …

3.Capital Project Funds (CPFs) – accounts for financial

resources to be used for the acquisition or construction of major
capital project facilities (other than those financed by proprietary
funds or fiduciary funds). They are used to account for financial
resources segregated to pay for construction or acquisition of
long-lived capital assets such as the construction of bridge,
buildings, road, dams, railway, hydroelectric power etc.
 Governmental …
4.Debt Service Funds (DSFs) – are used to account for the
accumulation of resources for, and the payment of, general long-
term debt principal and interest.

Debt service funds do not account for a government’s long-term

debt. Rather, they monitor the financial resources currently
available to satisfy long-term liabilities and also record the
eventual payments.
 Governmental …
5.Permanent Funds (PFs) – to account for legally restricted
resources provided by trust in which the earnings but not the
principal may be used for purposes that support the primary
government’s programs (those that benefit the government or its
citizenry) (Note: similar permanent trusts that benefit private
individuals, organizations, or other governments that is, private
purpose trust funds are classified as fiduciary funds).
 II. Proprietary Funds

Proprietary Funds – account for a government’s ongoing

organizations and activities that are similar to those operated
by for- profit organizations.
This fund type normally encompasses operations where a
user charge is assessed so that determining operating income
or cost-recovery is important.
For example: a Toll Road would be reported within the
proprietary funds. Two types of funds used by state and
local governments are classified as proprietary funds.
 Proprietary Funds …
6.Enterprise Funds (EFs) – to account for operations (a)
that are financed and operated in a manner similar to
private business enterprises–where the intent of the
governing body is that the costs (expenses, including
depreciation) of providing goods or services to the general
public on a continuing basis be financed or recovered
primarily through user charges; or (b) where the governing
body have decided that periodic determination of revenues
earned, expenses incurred, and/or net income is appropriate
for capital maintenance, public policy, management
control, accountability or other purposes.
 Proprietary Funds …

• They are used when resources are provided primarily through the
use of sales and service charges to parties external to the
government.
• Accrual basis of accounting is used to account for operations of
enterprise funds. Examples of activities that can be accounted
through enterprise funds include water and other utilities, airports,
swimming pools and transit systems.
According to GASB, a particular activity is accounted through
enterprise fund if it meets any one of the following criteria:
• Net revenues generated by the activity provide the sole security
for the debts of the security
• Laws or regulations require the activity’s costs to be recovered
through fees or charges
• Fees and charges are set at prices intended to recover costs
including depreciation and debt service.
 Proprietary Funds …

7. Internal Service Funds (ISFs) – to account for the financing of goods or services
provided by one department or agency to other departments or agencies of the
governmental unit, or to other governmental units, on a cost reimbursement basis.
1. Accrual basis of accounting is used for internal service funds.
2. Like, enterprise funds, fees are charged but the service is performed for the
primary benefit of the government rather than for outside users.
Examples of activities that can be accounted through internal service funds include:
3. Central data processing facility (information services fund)
4. Centralized vehicle maintenance or Garage facility (Fleet services fund)
5. Photo Copy service activities (copy service fund)
6. Centralized supply stores (Warehouse revolving fund).
7. Central Printing Shop
ISFs are usually reported as governmental activities in the government-wide financial
statements because they primarily serve departments financed by governmental funds.
 III. Fiduciary Funds

Fiduciary Funds – these are trust and agency funds that are used
to account for assets held by a governmental unit in a trustee
capacity or as an agent for individuals, private organizations, and
other governmental unit. For these funds the government is acting
as a collecting/disbursing agent or as a trustee. These include:

8. Agency Funds- are used to account for situations in which the

government is acting as a collecting/disbursing agent. An example
would be a State tax agency fund, where the State collects
property taxes for other taxing unit, such as Federal Government.
The accounting is simple: assets = liabilities and no revenue and
expense accounts used since there are no net assets
 Fiduciary Funds…

9. Pension (and Other Employee Benefit) Trusts Funds- are

used to account for pension and employee benefit funds for
which the governmental unit is the trustee.
10.Investment Trust Funds – account for external investment
pools in which the assets are held for other (external)
governments, along with funds of the sponsoring government.
Assets, liabilities, net assets, and changes in net assets related to
the equity of the external participants are reported in this
fiduciary fund.
11.Private Purpose Trust Funds- report all other trust
arrangements under which principal and income benefit
individuals, private organization or other governments.
 Principle No. 4: Number of Funds

 Governmental units should establish and maintain those funds

required by law and sound financial administration. Only the
minimum number of funds consistent with legal and operating
requirements should be established because unnecessary funds
result in inflexibility, undue complexity, and inefficient financial
administration.
 The fund types defined in the types of Funds Principle are to be
used if needed by a governmental unit to demonstrate compliance
with legal requirements or if needed to facilitate sound financial
administration. If legal requirements, GASB standards, or sound
financial administration do not require the use of a given fund
type, it should not be used.
 Principle No. 5: Reporting Capital Assets

 A clear distinction should be made between general capital assets and capital assets of
proprietary and fiduciary funds.

• Capital assets of proprietary funds should be reported in both government wide and fund
financial statements.

• Capital Assets of fiduciary funds should be reported in only the statement of fiduciary net
assets. All other capital assets of the governmental unit are general capital assets. They
should not be reported as assets in governmental funds but should be reported in the
governmental activities column in the Government-Wide Statement of Net Assets.

• General capital assets include land, buildings, improvements other than buildings, and
equipment used by activities accounted for by the fund types classified as governmental
funds. Capitalized assets will be reported in the government wide statement of Net Assets,
classified as being a part of governmental activities, business type activities, or component
units. Capitalized fixed assets are not reported in the governmental fund financial
statements but are reported in the proprietary fund financial statements and fiduciary fund
financial statements.
 Principle No. 6: Valuation of Capital Assets

• Capital asset should be reported at historical cost.

• The cost of a capital asset should include capitalized interest

and ancillary charges necessary to place the asset into its
intended location and condition for use.

• Donated capital assets should be reported at their estimated

fair value at the time of acquisition plus ancillary changes if
any.
 Principle No. 7: Depreciation of Capital Assets

 Capital assets should be depreciated over their estimated lives unless

they are either inexhaustible or are infrastructure assets according to
the modified approach of GASB Statement No. 34.

 Inexhaustible assets such as land, land improvements, historical

heritage or antique, and fine arts should not be depreciated.

 Depreciation expense should be reported in the government wide

statement of activities; the proprietary fund statement of revenues,
expenses and changes in fund net assets; and the statement of
changes in fiduciary net assets.
 Principle No. 7….

• Infrastructure assets are long-lived assets that normally are stationary

in nature and normally can be preserved for a significantly greater
number of years than most capital assets.
• Examples of infrastructure assets are roads, bridges, tunnels, drainage
systems, water and sewer systems, dams, and lighting systems. With
the exception of infrastructure assets reported under the modified
approach, all capitalized assets are to be depreciated, using a
generally accepted depreciation method, over estimated useful lives.
• This depreciation charge is included as an expense in the statement of
Activities in the government wide financial statements and as an
expense in the statement of Revenues, Expenses, and changes in Fund
Net Assets in the proprietary fund financial statement.
Principle No. 8: Reporting Long-Term Liabilities

 A clear distinction should be made between fund long-term liabilities and

general long - term liabilities.

 Long term liabilities directly related to and expected to be paid from

proprietary funds should be reported in the proprietary fund statement of
net assets and in the government wide statement of net assets.

 Long-term liabilities directly related to and expected to be paid from

fiduciary funds should be reported in the statement of fiduciary net assets.
 All other unmatured general long-term liabilities of the governmental unit
should not be reported in the governmental funds but should be reported
in the governmental activities column in the government wide statement
of net assets.
Principle No. 9: Measurement Focus and Basis of Accounting

Measurement Focus
Measurement Focus explains the items measured, accounted for, and
reported to prepare basic financial statements and determine
accountability for the entrusted resources.

There are two types of Measurement Focuses: Economic Resources

Measurement Focus and Current Financial Resources Measurement
Focus

•Economic Resources Measurement Focus

It measures, accounts for, and report inflows and outflows of economic
resources (current and noncurrent). It is also called All Resources
Measurement Focus. It mainly focuses on operational accountability;
whether management efficiently uses resources in providing services.
 Principle No. 9…

Current Financial Resources Measurement Focus

It measures, accounts for, and report inflows and outflows of current resources
(expendable resources i.e., cash or other items expected to be converted into
cash during the current period). It mainly focuses on fiscal accountability;
whether managers have met budgetary and other legal financial requirements.

Basis of Accounting (Accounting Method)

It gives answer to the question when should revenues and expenses or
expenditures be recognized?
a)Accrual Basis of Accounting
Accrual Accounting means that (1) revenues should be recorded in the period
in which the service is given, although payment is received in a prior or
subsequent period, and (2) expense should be recorded in the period in which
the benefit is received, although payment is made in a prior or subsequent
period.
 Principle No. 9…

b)Modified Accrual Basis of Accounting

 Under modified accrual basis of accounting, Revenues, should be recognized in the

accounting period in which they become available and measurable.

 Expenditures should be recognized in the accounting period in which the fund liability
is incurred, if measurable, except for unmatured interest on general long-term liabilities,
which should be recognized when due.

 Measurable means capable of being expressed in monetary terms; available is defined

as “collectible within the current period or soon enough thereafter to be used to pay
liabilities of the current period. GASB standards require the accrual of revenue from
property taxes in the period for which the taxes are levied. For other categories of non-
exchange revenue transactions, except when certain time requirements and eligibility
requirements have not been met revenues should be accrued if both measurable and
available. In respect to expenditure recognition, the modified accrual basis is almost
identical to the accrual basis when the only assets of a fund are financial resources.
 Government-Wide Financial Statements

• The government wide statement of net Assets and statement of

activities should be prepared using the economic measurement
focus and the accrual basis of accounting.

• Revenue, expenses, gains, loses, assets and liabilities resulting

from the exchange and exchange- like transactions should be
recognized when the exchange takes place.
 Fund Financial statement

In Fund financial statements, the modified accrual or accrual basis of

accounting, as appropriate, should be used in measuring financial position and
operating results.
 Financial statements for governmental funds should be presented using the
current financial renounces measurement focus and the modified accrual
basis of accounting.
 Proprietary fund statements of net assets and revenues, expenses, and
changes in fund net assets should be presented using the economic
resources measurement focus and the accrual basis of accounting.
 Financial statements of fiduciary funds should be reported using the
economic resources measurement focus and the accrual basis of
accounting except for the recognition of certain post employment health
care plans.
 Transfers (between funds) should be reported in the accounting period in
which the inter fund receivables and payable arise.
 Principle No. 10: Budgeting, Budgetary control, and
Budgetary Reporting.

• An annual budget(s) should be adopted by every governmental unit.

• The accounting system should provide the basis for appropriate
budgetary control.
• Budgetary compassion schedules should be presented as required
supplementary information (RSI) for the general fund and each
major special revenue fund that has a legally adopted annual budget.

• The budgetary comparison schedule should present both (a) the

original and (b) the final appropriated budgets for reporting period
as well as (c) actual inflows, outflows, and balances, stated on the
government’s budgetary basis.
 Principle No. 11: Transfers, Revenue, Expenditure and
Expense Account Classification

• Transfers should be classified separately from revenues and expenditures or

expenses in the basic financial statements.
• Proceeds of general long-term debt issued should be classified separately from
revenues and expenditures in the governmental fund financial statements.
• Governmental fund revenues should be classified by fund and source.
Expenditures should be classified by fund, function (program) organization
unit, activity, character and principal classes of objects.
• Proprietary fund revenues should be reported by major sources, and expenses
should be classified in essentially the same manner as those of similar
business organization, functions, or activities.
• The statement of activities should present governmental activities at least at
the level of detail required in the governmental fund statement of revenues
expenditures and changes in fund balances at a minimum by function.
Governments should present business type activities at least by segment.
 Principle No. 12: Common Terminology and
Classification

 A common terminology and classification should be used

consistently throughout the budget, the accounts, and the
financial reports of each fund.
 It is a principle of commonsense that if the budgeting,
budgetary control, and budgetary Reporting Principle is to be
implemented,, persons responsible for preparing the budgets and
persons responsible for preparing the financial statements and
financial reports should work with the persons responsible for
designing and operating the accounting system.
 Agreement on a common terminology and classification scheme
is needed to make sure the accounting system produced the
information needed for budget preparation and for financial
statement and report preparation.
Principle No. 13: Annual Financial Reports

A Compressive Annual Financial Report (CAFR) should be prepared and

published, covering all activities of the primary government (including its blended
component units) and providing an overview of all discretely presented component
units of the reporting entity including introductory sections, management’s discussion
and analysis (MD & A), basic financial statements, required supplementary
information other than MD & A, combining and fund financial statements schedules,
narrative explanations, and statistical section.
•The minimum requirements for MD & A, basic financial statements and required
supplementary information other than MD & A are:
a. Management’s discussion and analysis.
b. Basic financial statements. The basic financial statements should include:
 Government – Wide Financial Statements
 Fund Financial Statements
 Notes to the Financial Statements
c. Required supplementary information other than MD & A.
End of chapter One