Governmental Accounting - Section
Effective Date 2/16/04
The basic concepts presented in the Accounting Concepts section are also applied in governmental accounting. There are differences between Generally Accepted Accounting Principles (GAAP) for business enterprises and for those governments as established by the GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB). The following highlights those differences.
1. In governmental accounting the resources of the government are accounted for in "funds". "Funds" are defined as an independent accounting entity with a self-balancing set of accounts. In other words, within each fund, the basic accounting equation (Assets = Liabilities + Equity) still applies. Funds are categorized into fund types each of which is associated with major services provided by the governmental unit.
2. The equity accounts in governmental accounting are referred to as fund balance. The fund balance accounts are more of a balancing item as contrasted to rights of owners in a business enterprise. The fund balance accounts can be divided into unreserved fund balance accounts and reserved fund balance accounts. Unreserved fund balance is the difference between assets, liabilities and fund reserves. "Reserved" indicates that a portion of the fund balance is not available for appropriation or is legally separated for a specific future use.
a. Fund balance "designations" may be established to indicate managerial plans or intent. For example, a portion of the unreserved fund balance may be "designated" for future capital equipment replacement. Designated fund balance accounts are reported as part of the unreserved fund balance.
There are basically three groups of funds in governmental accounting: governmental funds, proprietary funds, and fiduciary funds.
1. Governmental funds are often referred to as "source and use" funds. These are the funds through which most governmental functions typically are financed. The fund types included in this category are general, special revenue, capital projects, debt service, and special assessment funds.
2. Proprietary funds are sometimes referred to as "income-determining" funds. These are used to account for a government's ongoing organizations and activities which are similar to those often found in the private sector. The fund types included in this category are enterprise and internal service funds.
3. Fiduciary funds are used to account for assets held by a governmental unit in a trustee capacity or as an agent for individuals, private organizations, governments, and other funds. The fund types included in this category are trust and agency funds.
a. Since agency funds are merely clearing accounts and do not involve the measurement of expenditures and revenues, at any given time assets should equal liabilities.
The measurement focus in governmental accounting is on the sources and uses of financial resources. In business enterprise accounting the focus is on income determination (i.e. net income). Therefore, in governmental accounting, revenues are defined as additions to assets which do not increase liabilities, or represent the recovery of expenditures. Expenditures are those costs incurred in performing the governmental services as approved by the Legislature. Expenditure accounts should be determined using item orientation with emphasis placed upon what is purchased. The proper use of governmental financial resources is measured within fund and program classifications. In this way, users of governmental financial reporting can determine:
1. what was purchased with government resources and
2. how the items purchased were used to provide governmental services.