Tutoring for Governmental Accounting: Government-Wide & Fund Accounting Statements using Modified Accrual Accounting

Our governmental accounting tutors provide live online tutoring for accounting for governments and governmental organizations courses including courses such as public sector accounting, governmental accounting, fund accounting, non-profit accounting, etc. We start by tutoring students on the differences between governmental accounting and general accounting practices. We begin with the differences in governmental accounting and corporate accounting objectives and tutor students on understanding Governmental financial statements. Only then do we tutor students on accounting transactions and journal entries related to government-wide accounting statements and Governmental Funds accounting statements.

Here are a few topics we cover when we tutor governmental accounting students:

Types Of Governmental Financial Statements

One of the first things we focus on when we tutor governmental accounting students is the fact that there are two types of Governmental financial statements.

  • Government-wide financial statements
  • Fund financial statements

As governmental accounting tutors, we first make sure students understand the difference between and the objectives of Government-wide financial statements and Fund financial statements.

  • Government-wide financial statements reflect 1) the government’s net assets and 2) changes in net assets. Government-wide financial statements reflect operational accountability or whether the government has used its resources efficiently and effectively in meeting operating objectives. Government-wide financial statements follow the accrual basis and flow of economic resources measurement.
  • Fund financial statements focus on sub-activities with specific applications of funds. Fund financial statements are prepared for maintaining accountability, compliance and conformity to budget plans and laws/regulations. Fund financial statements only focus on current financial resources and the liabilities that need to be paid out of these current financial resources.

There are three types of funds that present their financial statements separately: 1) Governmental funds reflect the short-term flow of current financial resources or fiscal accountability. 2) Proprietary funds present the financial activity of business-like activities of a government (water, electricity, etc). 3) Fiduciary funds focus on fiduciary activities. These have different types of financial statements too listed further below.

Types of Governmental Activities

Governments and governmental organizations carry out a wide range of activities. These activities are classified into three categories based on the nature of the governmental work.

  1. Governmental Activities: Governmental activities are core government services such as safety (police and fire services), building and maintaining public infrastructure (roads, bridges, and public buildings, including parks and recreation facilities), and educational, cultural, and social services. Governmental activities include general administrative services such as data gathering and maintenance, finance, and human resources. (Governmental activities are defined in Governmental Accounting Standards Board, Codification of Governmental Accounting and Financial Reporting Standards as of June 30, 2008 (Norwalk, CT, 2008), Appendix B, Concepts Statement No. 1, par. 10).
  2. Business-type Activities: Business-type activities are governmental activities that charge for services. These services include public utilities such as electricity, water, gas, and sewer utilities, transportation, toll roads/bridges, hospitals, parking garages, liquor stores, etc.
  3. Fiduciary Activities: Fiduciary activities are government activities in which the government acts as a fiduciary only. The government could serve as an agent or trustee. Examples include taking care of the assets or responsibilities of other governments, escheating properties, etc. (Note that under GASBS 34, fiduciary activities are only reported for private-purpose agency and trust relationships, which serve individuals, private organizations, and other governments. Public-purpose agency and trust activities, which primarily benefit the general public and the government’s programs, are considered governmental activities for accounting and financial reporting purposes.)

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Five Types of Funds used in Governmental Fund Accounting

There are five types of funds. Our governmental accounting tutors help students identify when each of these funds will be used and how inter fund transactions will be accounted for in governmental fund accounting. The five types of governmental funds are:

  1. The General Fund: The General Fund is the primary operating Fund. It captures a governmental organization’s day-to-day financial expenses like salaries, utilities, and other essential services. Most government departments such as police and fire, public works, parks and recreation, culture, education, and social services, as well as general government support services, such as the city manager’s office, finance, personnel, and data processing, are accounted for in the General Fund. Unless a financial resource is required to be accounted for in a different fund type, it is usually accounted for in the General Fund.
  2. Special Revenue Fund: Special revenue funds account for specific revenue sources or programs, such as grants, taxes, or fees, and ensure that these funds are used only for their intended purposes.
  3. Debt Service Fund: Debt service funds account for payments on long-term debt, including principal and interest payments.
  4. Capital Projects Fund: Capital projects funds account for the construction or acquisition of assets like buildings, infrastructure, or equipment, supporting long-term development initiatives.
  5. Permanent Funds: Permanent funds are invested to generate income or growth, with the principal typically remaining intact, serving as a perpetual source of funding for future generations or specific purposes.

Note that the GASB specified accounting structure for Special Revenue Funds and the General Fund are identical.

List of Financial Statements in Governmental Accounting

Accounting students will see numerous statements when reviewing a governmental organizations annual report. Here is a list of Governmental Financial Statements so you can identify what type of statement you are studying.

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Government-Wide Financial Statements

There are two types of government wide financial statements.

  1. Statement of net assets
  2. Statement of activities

Fund Financial Statements

There are seven types of governmental fund financial statements because the three types of governmental activities have different reporting needs.

  1. Balance sheet—governmental funds
  2. Statement of revenues, expenditures, and changes in governmental fund balances
  3. Statement of net assets—proprietary funds
  4. Statement of revenues, expenses, and changes in proprietary fund net assets
  5. Statement of cash flows—proprietary funds
  6. Statement of fiduciary net assets
  7. Statement of changes in fiduciary net assets

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Governmental and Non-Profit Accounting Text Books

Here are some of the textbooks used in Governmental and Non-Profit Accounting courses:

  • “Governmental and Nonprofit Accounting: Theory and Practice” by Robert J. Freeman, Craig D. Shoulders, Gregory S. Allison, and Terry K. Patton
  • “Accounting for Governmental & Nonprofit Entities” by Jacqueline Reck, Suzanne Lowensohn, and Earl Wilson
  • “Government and Not-for-Profit Accounting: Concepts and Practices” by Michael H. Granof and Saleha B. Khumawala
  • “Essentials of Accounting for Governmental and Not-for-Profit Organizations” by Paul A. Copley
  • “Governmental and Nonprofit Accounting: A Balance Sheet Approach” by Robert J. Freeman, Craig D. Shoulders, and Dwayne N. McSwain
  • “Governmental and Nonprofit Accounting: Theory and Practice” by Robert J. Freeman, Craig D. Shoulders, and Dwayne N. McSwain
  • “Advanced Governmental and Nonprofit Accounting: Principles and Practice” by Ted N. Timberlake
  • “Not-for-Profit Accounting, Tax, and Reporting Requirements” by Edward J. McMillan
  • “Governmental and Nonprofit Financial Management” by Robert J. Freeman, Craig D. Shoulders, and Dwayne N. McSwain
  • “Government and Nonprofit Accounting: A Public Sector Approach” by Michael H. Granof and Saleha B. Khumawala

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Difference Between Program Revenues And General Revenues in Governmental Accounting

Governmental accounting students need to understand the different types of revenues that a government or governmental organization has as they need to be accounted for and reported appropriately. There are two types of revenues: program revenues and general revenues.

  • Program Revenues: Program revenues are of three types: 1) charges for services, 2) operating grants and contributions, and 3) capital grants and contributions) and are reported for each program or function in line to reduce the expense and arrive at the net revenue.
  • General Revenues: General revenues are revenues not directly associated with any function or program.

A few other points and exceptions must be noted regarding program revenues and general revenues:

  • Charges for services include charges to customers or others for both governmental and business-type activities. Examples include licenses and permits, fines and forfeits, operating special assessments, etc.
  • Grants and contributions restricted by other governments, organizations, or individuals for the operating purposes of a particular function or program are reported in a separate column from those restricted for capital purposes.
  • Multipurpose grants or contributions should be reported as general revenue unless the amounts restricted to each program are specifically identified in either the grant award or grant application.
  • Earnings from permanent funds, endowments that are restricted for a specific public purpose in the endowment contract or agreement, should be reported as program revenue.
  • However, unrestricted earnings from such sources should be reported as general revenue.
  • All taxes, should be reported as general revenue. This includes even those specified by law for a particular use (for example, motor vehicle fuel taxes that can be used only for road and bridge purposes).

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Extraordinary Items vs. Special Items in Governmental Accounting

All governmental accounting transactions are not reported in the same manner. Extraordinary items and special items need to be accounted for as prescribed by the governmental accounting standards board. So governmental accounting students need to identify what governmental transactions quality as extraordinary items vs. special items.

  • Extraordinary items are “transactions or other events that are both unusual in nature and infrequent in occurrence.”
  • Special items are items within management’s control that may be either unusual in nature or infrequent in occurrence, but not both. An example of a special item is one-time revenue from the sale of a significant governmental asset.
  • Note that special items not in management’s control but qualified as special items because they are unusual or infrequent in nature (such as a losses due to floods) should be recorded as normal expenses, expenditures, or revenue, as appropriate, and be separately disclosed in the notes to the financial statements of the appropriate organizations.

How are Extraordinary Items & Special Items Disclosed in Governmental Accounts

Extraordinary items and special items must be reported as separate line items below General Revenues in the statement of activities to distinguish these nonrecurring items from normal recurring general revenues.

Extraordinary items should be reported as the last item on the statement of activities; special items should be reported before extraordinary items.

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How are Contributions and Transfers between Funds reported in Fund Statements

Activities that should also be separately reported include:

  • Contributions to the principal amounts of endowments and permanent funds
  • Transfers between funds reported as part of governmental activities and funds reported as part of business-type activities.

Interfund transactions between governmental and business-type activities that involve the sale of goods or services (such as the sale of water from a water utility enterprise fund to the General Fund) are reported as program revenue and expenses, not as transfers.

Transfers are reported as an inflow in one activities column and an outflow in the other activities column but are eliminated from the Primary Government Total column.

How to Identify Major Funds in Governmental Fund Accounting?

GASBS 34 requires each ‘Major Fund’ to be reported in a separate column when financial statements are prepared for governmental funds and enterprise funds. GASBS 34 defines a fund as a major fund if:

  1. Total assets, liabilities, revenues, or expenditures/expenses of that governmental or enterprise fund are at least 10 percent of the corresponding element total for all funds of that category or type (that is, total governmental or total enterprise funds), and
  2. The same element that met the 10 percent criterion in (a) is at least 5 percent of the corresponding element total for all governmental and enterprise funds combined.

Note that both the above criterion need to be satisfied for a fun to be qualified as a Major Fund in governmental fund accounting.

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How to Revenue vs. Other Financing Sources vs. Other Financing Uses in Governmental Fund Accounting

Governments and governmental organizations receive resources and income from a variety of sources. In a governmental financial statement, different sources need to be accounted for as specified by the governmental accounting standards board.

  • Revenues: Revenue is defined as increases in fund financial resources other than from financing sources such as inter-fund transfers and debt issue proceeds.
  • Other Financing Sources: ‘Other Financing Sources’ category includes ONLY transfers into a fund from another fund and debt issue proceeds received by a fund. (opposite of other financing uses)
  • Other Financing Uses: ‘Other financing uses’ category includes ONLY transfers of financial resources from one Fund to another fund (opposite of other financing sources)

Expenditure vs Expense in Governmental Accounting

The difference between expenditure and expense in governmental accounting confuses students. As governmental accounting tutors, we remove any confusion between expenditure and expense in governmental accounting early in the tutoring program.

  • Expenditure: Expenditure in governmental accounting is the cost to purchase a good or service (For example, the price paid to buy a tractor).
  • Expense: Expense in governmental accounting is the cost of a good or service consumed during a period. (Example: the annual depreciation on a tractor).

Note: 1) Governmental funds report expenditures, not expenses, as their focus is on tracking current financial resources and the liabilities that need to be paid out of these current financial resources. Expenditure is any decrease in a fund’s current financial resources other than inter-fund transfers!

Note: 2) Expenditure and expenses for services such as employee payroll, utilities, professional travel, and similar items are equal (unlike capital items)

Modified Accrual Basis Of Accounting in Fund Accounting

Governmental Fund accounting uses the accrual basis of accounting with some modifications. These modifications make it referred to as modified accrual basis of accounting. Governmental accounting students will need to be familiar with the modified accrual basis of accounting to prepare fund accounts.

For example, one modification of the accrual basis of accounting is that revenues and other financing sources are recognized only if they are measurable and ‘available for use’. This is because fund financial statements only focus on current financial resources and the liabilities that need to be paid out of these current financial resources.

Another modification is that governmental funds report expenditures, not expenses, as their focus is on tracking current financial resources and the liabilities that need to be paid out of these current financial resources.

Yet another difference in modified accrual basis of accounting is that fund accounting recognize interest expenses only in the period the interest is legally required to be paid. Fund accounting does not record interest accruals at the end of a reporting period.

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Government Wide Financial Statements uses Accrual Accounting

Please note that the government wide financial statements use the accrual system of accounting. Here the modified accrual basis of accounting does not come into play and so is similar to the generally used accounting concepts.

What does ‘Available for Use Mean’ in Governmental Accounting

Available for use means that the revenue or other financing source is collected or expected to be collected during the current period or soon enough thereafter to pay current period obligations.

What Does ‘Soon Enough’ Mean in the Context of Available for Use in Governmental Accounting

Soon enough is defined as 60 days after the end of the current fiscal year. According to GASB, property taxes needs to be or is expected to be collected in 60 days if it is to be recognized as a current-period revenue.

Deferred Revenues in Governmental Accounting

If a portion of the current tax levy is not expected to be collected within 60 days, it would be recorded in the current period as a credit to Deferred Revenues (a current liability). The following year, Deferred Revenues would be debited, and Revenues would be credited.

For all other categories of revenues, as well as for other financing sources, governments have the discretion to determine the length of time used to define available (generally not more than 90 days after the current fiscal year-end) but must disclose their policy in the notes to the financial statements.

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Difference between Functions and Programs in Governmental Accounting

Functions are related activities that are aimed at accomplishing a major service or regulatory responsibility. Common functional classifications are the following: General Government Health and Welfare, Public Safety Culture, and Recreation Highways and Streets.

Programs group activities, operations, or organizational units that are directed to the attainment of specific purposes or objectives. Economic Development, Infrastructure Efficiency and Responsiveness to Citizens.

Budgetary Accounting vs. Operating Statement Accounts in Governmental Accounting

Another unique accounting activity that our non governmental accounting tutors spend time on when tutoring governmental accounting, specifically fund accounting, is to introduce students to budgetary accounting as practiced in governmental organization.

Both operating statement accounts and budgetary accounts are temporary accounts. These are sub-fund equity accounts that are closed to Fund Balance at year-end. Each operating statement account has a budgetary counterpart account to track budget allocations and uses.

Examples of Budgetary Accounts in Fund Accounting

For example, Revenues account in the operating statements has an Estimated Revenues account in the budgetary accounts. Similarly the Expenditures account is reflected as Appropriations and Encumbrances. And the Other Financing Sources account is mirrored by the Estimated Other Financing Sources account. Likewise, Other Financing Uses and Estimated Other Financing Uses, etc.

Budgetary Accounts Balances in Fund Accounting

One non governmental accounting tutors tip that may prove useful in budgetary accounting is that, budgetary accounts have normal balances that are the opposite of the corresponding operating statement accounts (except for Encumbrances). For example, since the Revenues account has a normal credit balance, the Estimated Revenues account has a normal debit balance. The use of opposite account balances facilitates budgetary comparisons and makes it easy to determine whether actual amounts are under or over the budgeted amounts. Note that the Encumbrances account has the same normal debit balance as the Expenditures account because an encumbrance represents a commitment prior to an expenditure.

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Tutoring For Governmental Accounting, Fund Accounting or Non Profit Accounting

Our governmental accounting tutors provide live online tutoring for accounting for governments and governmental organizations courses including courses such as public sector accounting, governmental accounting, fund accounting, non-profit accounting, etc. Please call or email if we can be of assistance with live one on one tutoring.

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