139slides17-Jeter4e

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Introduction to Fund Accounting

Advanced Accounting, Fourth Edition

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Fund Accounting Accounting for nonbusiness

organizations.

Fund AccountingFund AccountingFund AccountingFund Accounting

Nonbusiness Organizations

Provide socially desirable service without regard to

financial gain.

Business Enterprises

Earn a return on investment.

Competitive market. Liquidity concerns.

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Five Major Classifications

1. Governmental units.

2. Hospitals and other health care providers.

3. Colleges and universities.

4. Voluntary health and welfare organizations.

5. Other nonbusiness organizations (trade associations, professional associations, museums, religious organizations, etc.)

Classification of Nonbusiness Classification of Nonbusiness OrganizationsOrganizationsClassification of Nonbusiness Classification of Nonbusiness OrganizationsOrganizations

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Distinctions

Absence of primary goal to earn a profit.

No equity interests.

Seldom finance through user charges.

Rely on political action or fund-raising campaigns.

Income determination model generally not applicable.

Restrictions or limitations on use of resources.

Distinctions between Nonbusiness Distinctions between Nonbusiness Organizations and Profit-Oriented Organizations and Profit-Oriented EnterprisesEnterprises

Distinctions between Nonbusiness Distinctions between Nonbusiness Organizations and Profit-Oriented Organizations and Profit-Oriented EnterprisesEnterprises

LO 1 Nonbusiness organizations versus profit-oriented LO 1 Nonbusiness organizations versus profit-oriented enterprises.enterprises.

6 LO 2 The role of fund accounting.LO 2 The role of fund accounting.


Fund Entity Classification

Expendable – Basic fund accounting concepts.

Proprietary – Business type activity.

Fiduciary - Agent or trustee.

7 LO 3 Differences in applications of revenue, expense, and LO 3 Differences in applications of revenue, expense, and

expenditures.expenditures.


Financial resources dedicated to a specified use.

Examples - Capital Projects or Debt Service fund.

Resources consist of cash and claims to cash.

Resources - Claims against resources = Fund balance.

Measurement focus is on flow of current financial resources.

Expendable Fund Entities

Accounting Model




Activities that are similar to business enterprises.

Examples:

Electric or water utility by a municipality

Rental of real estate by religious organization.

Focus on determination of net income, financial position, and cash flows.

Proprietary Fund Entities




Trust and Agency funds:

Pension trust fund.

Agency fund (resources of taxes, bonds, and other receipts held for individuals, outside organizations, and/or other funds).

Fiduciary Fund Entities




Approved resource flows are incorporated into annual budgets.

Budgeted expenditures are referred to as appropriations.

Approved budget may be recorded in the accounting records.

Budgetary account integration is useful in the control and administration of fund resources.

Budgetary Fund Entities (Governmental Funds)




Basic Financial Statements

Basis of Accounting

Government-Wide

Nonfiduciary activities.

Short- and long-run information.

Economic resources measurement concept.

Accrual basis of accounting.

Governmental Fund (expendable)

Current financial resources concept.

Modified accrual basis of accounting.

Revenues recognized when measurable and available.

Expenditures recorded when liability is incurred.

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When used in fund accounting, the term “fund” usually refers to

a. A sum of money designated for a special purpose.

b. A liability to other governmental units.

c. The equity of a municipality in its own assets.

d. A fiscal and accounting entity having a set of self-balancing accounts.

QuestionQuestion

LO 3 Differences in applications of revenue, expense, and LO 3 Differences in applications of revenue, expense, and expenditures.expenditures.


13 LO 4 Classification of revenues.LO 4 Classification of revenues.


By Fund and Major Revenue Source

Classification of Revenues

Major Sources of Revenue

Property taxes

Income taxes Sales and excise taxes Gift and inheritance taxes Fines and penalties Gifts and donations Forfeits Licenses and permits

Sales of property Charges for services Interest earned on loans and

investments

From federal, state, or local units: Grants Shared revenues Payments in lieu of taxes

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Debt issue proceeds are accounted for as “other

financing sources.”

Interfund operating transfers are accounted for

as “other financing sources,” or “uses.”

Other Financing Sources

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Revenue is ordinarily not recognized until it

1) can be objectively measured and

2) is available for expenditures of current period.

Recognition of Revenue (Expendable Funds)

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Revenue recognized when measurable and available.

Recognition of Revenue (Expendable Funds)

When Recognized?

Property Taxes Levied

Income Tax and Sales Tax

Returns are filed with paymentFines and Forfeits Collected

Sales of Property Time of sale

Pledges Time of pledge

Grants May or may not at time authorized

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Appropriation Encumbrance Expenditure


LO 5 Classification of expenditures.LO 5 Classification of expenditures.

Recognition of Expenditures

Authorized to Spend

Purchase Order or Contract

Receipt of Goods

Disbursement

Payment

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

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Authority granted by a legislative body to make expenditures and to incur obligations during a fiscal year is the definition of an

a. Appropriation.

b. Authorization.

c. Encumbrance.

d. Expenditure.

QuestionQuestion



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Exercise 17-3: (partial) Listed are transactions of the Town of Jackson.

1. A contract was signed with an independent company to do the trash collecting for the year. The contract price was $96,000.

2. The first monthly bill of $8,000 was received from the trash collector.

3. The $8,000 bill was paid.

Required: Prepare the journal entries needed in the records of the General Fund for these transactions.

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Exercise 17-3: 1. A contract was signed with an independent company to do the trash collecting for the year. The contract price was $96,000.

Encumbrance 96,000

Reserve for Encumbrances96,000

1.

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Exercise 17-3: 2. The first monthly bill of $8,000 was received from trash collector. 3. The $8,000 bill was paid.

Expenditures 8,000

Contracts payable8,000

Reserve for Encumbrances 8,000

Encumbrance 8,000

2.

Contracts payable 8,000

Cash8,000

3.

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What type of account is used to earmark the fund balance to liquidate the contingent obligations of goods ordered but not yet received?

a. Appropriations.

b. Encumbrances.

c. Obligations.

d. Reserve for encumbrances.

QuestionQuestion



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LO 7 Capital expenditures.LO 7 Capital expenditures.

Capital Expenditures (Expendable Fund)

Treated as a current period expenditure.

Middletown purchased a police car for $10,000.

Expenditures 10,000

Cash 10,000

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Recording Budgeted and Actual Revenue and ExpendituresExercise 17-3: (partial)

1. A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of $1,800,000 was passed by the town council.

2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible.

3. Property taxes in the amount of $1,080,000 were collected.

4. Equipment costing $200,000 was purchased, and the old equipment was sold at for $24,000.

Required: Prepare required journal entries for General Fund.

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Exercise 17-3: 1. A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of $1,800,000 was passed by the town council.

Estimated Revenues 1,950,000

Appropriations 1,800,000

1.

Unreserved Fund Balance 150,000

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Exercise 17-3: 2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible. 3. Property taxes of $1,080,000 were collected.

Property Tax Receivable 1,150,000

Estimated Uncollectible Taxes 35,000

2.

Revenue 1,115,000

Cash 1,080,000


3.

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Exercise 17-3: 4. Equipment costing $200,000 was purchased, and the old equipment was sold at for $24,000.

Expenditures 200,000

Cash 200,000

4.

Cash 24,000

Revenue 24,000

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Exercise 17-5 (variation): The preclosing trial balance for the General Fund of the City of Springfield is presented below. Trial Balance for December 31, 2008:

Cash 90,000

Certificates of Deposit 120,000

Property Taxes Receivable 175,000

Estimated Revenue 1,690,000

Expenditures 1,310,000

Encumbrances 165,000

Estimated Uncollectible Taxes $51,000

Vouchers Payable 65,000




Revenue 1,675,000

$3,550,000 $3,550,000

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Exercise 17-5: Prepare closing entries.

Revenue 1,675,000





Encumbrances 165,000



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Fund Accounting – Comprehensive Fund Accounting – Comprehensive IllustrationIllustrationFund Accounting – Comprehensive Fund Accounting – Comprehensive IllustrationIllustrationProblem 17-1: The general ledger trial balance of the General Fund of the City of Bedford on January 1, 2008, shows the following:

Cash $100,000

Taxes Receivable 75,000

Allowance for Uncollectible Taxes $ 35,000


Reserve for Encumbrances—2007 30,000

Total $175,000 $175,000

Prepare journal entries to record the following activities and transactions for the General Fund during 2008.

Debit Credit

LO 8 Understand the general fund.LO 8 Understand the general fund.

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Problem 17-1: 1. The City Council adopted a budget with estimated revenues of $1,560,000 and appropriated expenditures of $1,400,000.





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Problem 17-1: 1. The budget authorized the transfer of $50,000 from the Water Fund to the General Fund. Interest due for the year on the $1,000,000, 8% bond issue for the Civic Center is approved for transfer from the General Fund to the Debt Service Fund.

Due from Water Fund 50,000

Transfer from Water Fund 50,000

Transfer to Debt Service Fund 80,000

Due to Debt Service Fund 80,000


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Problem 17-1: 2. The annual property tax levy of 10% on assessed valuation ($11,000,000) is billed to property owners. Two percent is estimated to be uncollectible.


Revenue 1,078,000

Allowance for Uncollectible Taxes 22,000


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Problem 17-1:

3. Goods and services amounting to $1,150,000 were ordered during the year.

Encumbrances 1,150,000

Reserve for Encumbrances 1,150,000

4. Invoices for all goods ordered in 2007 amounting to $29,000 were approved for payment.

Expenditures – 2007 29,000

Vouchers Payable 29,000


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Problem 17-1:

5. Funds for bond interest on Civic Center bonds were transferred to the Debt Service Fund.

Due to Debt Service Fund 80,000

Cash 80,000


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Problem 17-1:

6. Invoices for goods received during the year totaled $1,155,000. These were encumbered [see (3) above].


Vouchers Payable 1,155,000

Reserve for Encumbrances 1,150,000

Encumbrances 1,150,000


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Problem 17-1:

7. Transfer of funds from the Water Company was received in lieu of taxes.

Cash 50,000

Due from Water Fund 50,000

8. Taxes were collected from property owners in the amount of $1,050,000.

Cash 1,050,000



38 LO 8 Understand the general LO 8 Understand the general

fund.fund.


Problem 17-1:

9. Past-due tax bills of $17,000 were charged off as uncollectible.

Allowance for Uncollectible Taxes 17,000

Property Tax Receivable 17,000

10. Checks in payment of invoices for goods ordered in 2007 and 2008 were issued [see items (4) and (6) above].

Vouchers Payable * 1,184,000

Cash 1,184,000

* ($29,000 + $1,155,000)

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Problem 17-1:

11. Revenues received from miscellaneous sources, other than property taxes, of $455,000 were recorded.

12. Purchase order for two trash collection vehicle systems was issued. Bid price per system was $120,000.

Encumbrances (2 x $120,000) 240,000


Cash 455,000

Revenue 455,000

LO 8 Understand the general LO 8 Understand the general fund.fund.

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Two Basic Statements (expendable fund entities)

1. Balance sheet

2. Statement of revenue, expenditures, and changes in fund balance

Revenue classified by major sources.

Expenditures classified by major functions.

Comparative information presented for prior years.

Statement comparing budgeted and actual should be prepared for budgetary fund entities.

Financial Statements

LO 8 Understand the general LO 8 Understand the general fund.fund.

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Reporting Inventory and PrepaymentsReporting Inventory and PrepaymentsReporting Inventory and PrepaymentsReporting Inventory and Prepayments

Two Methods

1. Consumption method

2. Purchases method

Under GASB Statement No. 34, consumption method is consistent with the

Government-wide approach.

Purchases method is not acceptable.

Both acceptable for fund purposes

Inventory

LO 9 Consumption and purchases Methods.LO 9 Consumption and purchases Methods.

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Reporting InventoryReporting InventoryReporting InventoryReporting Inventory

Assume $20,000 of beginning inventory, $50,000 is purchased, and ending inventory of $24,000.


When Purchased: Expenditures 50,000

Cash 50,000

End of Year: Inventory 4,000

Expenditures 4,000

Purchases MethodWhen Purchased: Expenditures 50,000

Cash 50,000

End of Year: NO ENTRY

Consumption Method

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Reporting Inventory and PrepaymentsReporting Inventory and PrepaymentsReporting Inventory and PrepaymentsReporting Inventory and Prepayments

Purchases Method

Material amounts of inventory should be disclosed by

Footnote or

Reporting asset with contra account (Reserve for Inventory).

Reserve for Inventory


Consumption Method

Reserve for inventory created debiting or crediting the “unreserved fund balance.”

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