Expenditure Accounting Govt.

8/6/2019 Expenditure Accounting Govt.

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Expenditure Accounting:Expenditure Accounting:

Governmental FundsGovernmental Funds

Chapter 6Chapter 6


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Learning ObjectivesLearning Objectives

Define expendituresDefine expenditures

Understand & apply expenditureUnderstand & apply expenditurerecognition guidancerecognition guidance

Understand multiple classifications ofUnderstand multiple classifications ofexpendituresexpenditures

Understand accounting for allocations,Understand accounting for allocations,

allotments, & appropriations revisionsallotments, & appropriations revisionsAccount for changes in expenditureAccount for changes in expenditure

accounting principlesaccounting principles


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Types of ExpendituresTypes of Expenditures

Personal service costsPersonal service costs

Materials & suppliesMaterials & supplies

PrepaymentsPrepayments Capital leasesCapital leases

Claims & judgmentsClaims & judgments

Compensated absencesCompensated absences Pension paymentsPension payments


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ExpendituresExpenditures

Foundation of planning, authorizing,Foundation of planning, authorizing,controlling, & evaluating activities ofcontrolling, & evaluating activities ofgovernmental fundsgovernmental funds

Measure of fund liabilities incurred (orMeasure of fund liabilities incurred (orexpendable financial resources used)expendable financial resources used)

Typically classified as:Typically classified as:

OperationsOperations Capital outlayCapital outlay

Debt serviceDebt service


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When to recognize expendituresWhen to recognize expenditures

In the accounting period in which the fundIn the accounting period in which the fundliability is incurred except for unmaturedliability is incurred except for unmatured

interest [and principal] on longinterest [and principal] on long--term debt,term debt,which is recognized when duewhich is recognized when due


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Expenditure / Expense ComparisonExpenditure / Expense Comparison

ExpendituresExpenditures ExpensesExpenses

OperatingOperatingChapter 6Chapter 6

Salaries,Salaries,

supplies,supplies,utilities, etc.utilities, etc.

Salaries,Salaries,

supplies,supplies,utilities, etc.utilities, etc.

Capital OutlayCapital OutlayChapter 7Chapter 7

AcquisitionAcquisition DepreciationDepreciation

Debt ServiceDebt ServiceChapter 8Chapter 8

Principal &Principal &interestinterest

InterestInterest


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Expenditure / Expense ComparisonExpenditure / Expense Comparison


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Expenditure RecognitionExpenditure Recognition

OptionsOptions Interest on longInterest on long--term debt maturing in followingterm debt maturing in following

fiscal year may be accrued in current fiscal yearfiscal year may be accrued in current fiscal yearif due early (not more than one month) in nextif due early (not more than one month) in next

yearyear Inventory expenditures may be recognized usingInventory expenditures may be recognized using

either purchases method or consumptioneither purchases method or consumptionmethodmethod

Prepayment expenditures may be allocated overPrepayment expenditures may be allocated overbenefited period or accounted for only in currentbenefited period or accounted for only in currentperiodperiod


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Intergovernmental:Intergovernmental:

The New Expenditure ClassificationThe New Expenditure Classification Frequently incurred inconjunctionwithFrequently incurred inconjunctionwith

state revenuestate revenue--sharing, grant, and othersharing, grant, and other

financialassistance programs with localfinancialassistance programs with localgovernmentsgovernments

Classification indicates thatexpenditureClassification indicates thatexpenditurewas not forstatewas not forstate--leveloperationsleveloperations


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Accounting for Personal ServicesAccounting for Personal Services

Ensure that the persons is a bona fideEnsure that the persons is a bona fideemployeesemployees

Determine rates of payDetermine rates of pay Establish amounts earned by employeesEstablish amounts earned by employees

Record payments made to employeesRecord payments made to employees

Charge expenditures to proper accountsCharge expenditures to proper accounts


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Pension Cost ExpendituresPension Cost Expenditures

Payments to pension plans, even selfPayments to pension plans, even self--administered ones, qualify as expendituresadministered ones, qualify as expenditures

Most governments use either:Most governments use either: Defined contribution pension planDefined contribution pension plan

Defined benefit contribution planDefined benefit contribution plan


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Defined Contribution PlanDefined Contribution Plan

Government obligation is limited toGovernment obligation is limited tomaking contributions required by the planmaking contributions required by the plan

Retiree benefits dependent uponRetiree benefits dependent uponcontributions made and investmentcontributions made and investmentperformance of the planperformance of the plan

Government should recognize expenditureGovernment should recognize expenditure

in year employees earned benefitin year employees earned benefit underpayment is not liability of fund but aunderpayment is not liability of fund but anoncurrent liabilitynoncurrent liability


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Defined Benefit PlanDefined Benefit Plan

Government obligation is to pay certain amountGovernment obligation is to pay certain amountto retirees each periodto retirees each period

Annual required contribution (ARC) based onAnnual required contribution (ARC) based on

many actuarial assumptions:many actuarial assumptions: Years of serviceYears of service

Inflation and pay rates over timeInflation and pay rates over time

Employee turnoverEmployee turnover

Retiree life spans & mortality ratesRetiree life spans & mortality rates

Plan funding, investment returns, & administrativePlan funding, investment returns, & administrativecostscosts


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Accounting for Materials & SuppliesAccounting for Materials & Supplies

When accounting for materials & suppliesWhen accounting for materials & suppliesinventory, it is good to keep two things mind:inventory, it is good to keep two things mind:

In the consumption method, the expendituresIn the consumption method, the expenditures

account reports the amount of supplies usedaccount reports the amount of supplies used that is why changes in inventory level arethat is why changes in inventory level arecharged to that accountcharged to that account

In the purchases method, the expendituresIn the purchases method, the expenditures

account reports the amount of suppliesaccount reports the amount of suppliespurchasedpurchased that is why changes in inventorythat is why changes in inventoryare charged to OFS (increases) and (OFU)are charged to OFS (increases) and (OFU)decreasesdecreases

x


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Why is a Reserve for InventoryWhy is a Reserve for Inventory

account not always required?account not always required?

Consumption Method: supplies representConsumption Method: supplies represent

an expendable current financial resourcean expendable current financial resource it can be used to finance futureit can be used to finance future

expenditures for suppliesexpenditures for supplies

Purchases method: already charged toPurchases method: already charged toexpenditures, so it does not represent aexpenditures, so it does not represent acurrent financial resourcecurrent financial resource


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Accounting for PrepaymentsAccounting for Prepayments

Known as prepaid expenses in the privateKnown as prepaid expenses in the privatesector or in Proprietary Fundssector or in Proprietary Funds

Examples include:Examples include: InsuranceInsurance

RentRent


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Accounting for Prepayments: OptionsAccounting for Prepayments: Options

May use either consumption method orMay use either consumption method orpurchases methodpurchases method

Under consumption method, balance inUnder consumption method, balance inaccount reported as an assetaccount reported as an asset

Under purchases method, balance is notUnder purchases method, balance is notreported as an asset since amount hasreported as an asset since amount hasalready been charged to expendituresalready been charged to expenditures


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Capital LeasesCapital Leases

GASB requirements have adapted private sectorGASB requirements have adapted private sectorrequirements for accounting for capital lease:requirements for accounting for capital lease:

Assets under capital lease are recorded inAssets under capital lease are recorded inGeneral Capital Assets with corresponding entryGeneral Capital Assets with corresponding entryin General Longin General Long--term Liabilitiesterm Liabilities

Asset is recorded in appropriate fund as capitalAsset is recorded in appropriate fund as capitaloutlay expenditure with corresponding Otheroutlay expenditure with corresponding OtherFinancing Source for inFinancing Source for in--substance debt issued tosubstance debt issued to

acquire assetacquire asset Use of Capital Projects Fund for acquisition orUse of Capital Projects Fund for acquisition or

Debt Service Fund for paying principal andDebt Service Fund for paying principal andinterestinterestnotnot requiredrequired


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Review of Private Sector EntriesReview of Private Sector Entries

Inception of the LeaseInception of the Lease

Equipment Under Capital LeaseEquipment Under Capital Lease

Obligations Under Capital LeaseObligations Under Capital Lease

CashCash

Annual Lease ObligationAnnual Lease Obligation

Obligations Under Capital LeaseObligations Under Capital Lease

Interest ExpenseInterest Expense

CashCash

900900

1313

55

860860

4040

1818


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Contrast with Governmental FundContrast with Governmental Fund


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Classification of ExpendituresClassification of Expenditures

Basic classification is by fundBasic classification is by fund

Other options include:Other options include:

Function or programFunction or program Public SafetyPublic Safety

ActivityActivity Police Administration, Crime Control, TrafficPolice Administration, Crime Control, TrafficControl, etc.Control, etc.

Organization unitOrganization unit Police Department and FirePolice Department and FireDepartmentDepartment

CharacterCharacter Operating, Capital Outlay, Debt ServiceOperating, Capital Outlay, Debt Service

Object classObject class Personal Services, Supplies, Land, etc.Personal Services, Supplies, Land, etc.


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Accounting for Allocations & AllotmentsAccounting for Allocations & Allotments

Basic authority to expend public money isBasic authority to expend public money isan appropriationan appropriation

Allocation is an apportionment of anAllocation is an apportionment of anappropriation made by executive branchappropriation made by executive branchof a legislative branch appropriationof a legislative branch appropriation

Allotment is periodic release of anAllotment is periodic release of an

appropriation, i.e., a quarterly allotmentappropriation, i.e., a quarterly allotment helps keep departments from spendinghelps keep departments from spendingentire budget early in fiscal yearentire budget early in fiscal year


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Appropriation RevisionsAppropriation Revisions

Parallels discussion of Revenue revisionsParallels discussion of Revenue revisionsin Chapter 5in Chapter 5

Could cause change in Unreserved FundCould cause change in Unreserved FundBalance, depending on circumstances ofBalance, depending on circumstances ofrevisionrevision


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Adjusting EntriesAdjusting Entries

Rules are not the same as revenue adjustingRules are not the same as revenue adjustingentriesentries availability criterion does not applyavailability criterion does not apply

General ruleGeneral rule

Record expenditure and related liability, unless theRecord expenditure and related liability, unless theliability is noncurrentliability is noncurrent

Alternate view: if expenditure is normally paid fromAlternate view: if expenditure is normally paid fromcurrent financial resources, it should be recorded withcurrent financial resources, it should be recorded with

related fund liabilityrelated fund liability applies primarily to accruals forapplies primarily to accruals fordebt service, claims and judgments, accrued vacationdebt service, claims and judgments, accrued vacationand sick leave, and pension plan contributionsand sick leave, and pension plan contributions


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EncumbrancesEncumbrances

Review outstanding encumbrances atReview outstanding encumbrances atyearyear--end to determine if the order hasend to determine if the order hasbeen filledbeen filled

Failure to properly record expendituresFailure to properly record expenditurescould becould be UnintentionalUnintentional invoices and receiving reportsinvoices and receiving reports

not received in a timely manner at yearnot received in a timely manner at year--endend

IntentionalIntentional department trying to avoid goingdepartment trying to avoid goingover budget for the yearover budget for the year


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LongLong--Term Debt ServiceTerm Debt Service

Debt service (principal and interest) normally notDebt service (principal and interest) normally notaccrued at yearaccrued at year--endend

Governments may accrue if two conditions areGovernments may accrue if two conditions are

met:met: Debt service payment occursDebt service payment occurs earlyearly (not more than 30(not more than 30

days) in the next fiscal year;days) in the next fiscal year; andand

Dedicated financial resources must have beenDedicated financial resources must have been

provided in current fiscal yearprovided in current fiscal year

If accrual is made, it must be for full amountIf accrual is made, it must be for full amount


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ShortShort--Term Debt ServiceTerm Debt Service

Governmental funds may borrow on shortGovernmental funds may borrow on short--term basis using:term basis using:

Tax anticipation notes (TANs)Tax anticipation notes (TANs)

Revenue anticipation notes (RANs)Revenue anticipation notes (RANs)

Bond anticipation notes (BANs)Bond anticipation notes (BANs)

Other similar shortOther similar short--term notesterm notes

Recorded as fund liabilitiesRecorded as fund liabilities

Accrue interest at yearAccrue interest at year--endend


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Claims & JudgmentsClaims & Judgments

EmploymentEmployment workers compensation orworkers compensation orunemployment claimsunemployment claims

Contractual actionsContractual actions claims for delays orclaims for delays or

inadequate specificationsinadequate specifications

Actions of governmental personnelActions of governmental personnel medicalmedicalmalpractice, damage caused by governmentmalpractice, damage caused by government--owned equipment, or improper police arrestowned equipment, or improper police arrest

Government propertiesGovernment properties claims related toclaims related topersonal injuries & property damagepersonal injuries & property damage


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May be difficult to estimateMay be difficult to estimateultimate liabilityultimate liability

Unreasonably high claimsUnreasonably high claims

Time between occurrence and filingTime between occurrence and filing

Time between filing and settlement andTime between filing and settlement andpaymentpayment


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GASB StandardsGASB Standards

Claims against the government areClaims against the government arecontingenciescontingencies rules of FASBS #5 have beenrules of FASBS #5 have beenadaptedadapted

Liability is recorded if:Liability is recorded if: It is probable that an asset has been impaired or aIt is probable that an asset has been impaired or a

liability has been incurred (as of date of financialliability has been incurred (as of date of financialstatements)statements)

Amount can be reasonably estimatedAmount can be reasonably estimated

If criteria not met, outstanding claims areIf criteria not met, outstanding claims aredisclosed in the notesdisclosed in the notes


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FASBS #5 Criteria Are MetFASBS #5 Criteria Are Met

Amount calculated reported as fundAmount calculated reported as fundliability if amount is payable fromliability if amount is payable fromexpendable current financial resourcesexpendable current financial resources

amount would include legal & otheramount would include legal & otherrelated costs and the settled orrelated costs and the settled oradjudicated amount, net of any insuranceadjudicated amount, net of any insurancerecoveriesrecoveries

Any remaining liability would be recordedAny remaining liability would be recordedas a General Longas a General Long--Term LiabilityTerm Liability


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InsuranceInsurance

In governmental funds, insurance claimsIn governmental funds, insurance claimsrecorded as Other Financing Source (or, possiblyrecorded as Other Financing Source (or, possiblyas an extraordinary item)as an extraordinary item)

If insurance settlement is delayed, reservation ofIf insurance settlement is delayed, reservation offund balance would be necessary to indicate thatfund balance would be necessary to indicate thatsettlement receivable is not available forsettlement receivable is not available forexpenditureexpenditure

If insurance settlement cannot be reasonablyIf insurance settlement cannot be reasonablyestimated, no receivable or OFS recognized untilestimated, no receivable or OFS recognized untilestimate can be madeestimate can be made


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Self Insurance / No InsuranceSelf Insurance / No Insurance

Governments selfGovernments self--insured because ofinsured because ofescalating insurance ratesescalating insurance rates generally paygenerally payfor all claims up to a certain amountfor all claims up to a certain amount

Alternative is no insuranceAlternative is no insurance establishestablishsignificant reserves to handle claimssignificant reserves to handle claims

Both choices may use umbrella policies toBoth choices may use umbrella policies tocover catastrophic lossescover catastrophic losses


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Compensated AbsencesCompensated Absences

Vacation & similar compensated absencesVacation & similar compensated absences

Sick leave & similar paymentsSick leave & similar payments


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Vacation LeaveVacation Leave

Must accrue a liability when both conditionsMust accrue a liability when both conditionsare met:are met:

Employees right to receive compensationEmployees right to receive compensation

for future absences are attributable tofor future absences are attributable toserviced already rendered;serviced already rendered; ANDAND

It is probable that the employer willIt is probable that the employer will

compensate the employees through paidcompensate the employees through paidtime off or with cash payments attime off or with cash payments attermination or retirementtermination or retirement


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Sick LeaveSick Leave

Expenditures of the year(s) in which theExpenditures of the year(s) in which theemployees are illemployees are ill

Accrued only if it is probable that theAccrued only if it is probable that theemployees will be paid upon retirement oremployees will be paid upon retirement orterminationtermination


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Compensated Absences Accrual RulesCompensated Absences Accrual Rules

Liabilities are accrued at current salary levelsLiabilities are accrued at current salary levels

For vacation leave, accrual may be capped byFor vacation leave, accrual may be capped byamount that may be carried forward at end ofamount that may be carried forward at end of

current yearcurrent year

Sick leave capped by amount that will be paid atSick leave capped by amount that will be paid atretirement or terminationretirement or termination

If not payable from current financial resources,If not payable from current financial resources,liability is in General Longliability is in General Long--Term Liability listTerm Liability list


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Pension / OPEB ContributionsPension / OPEB Contributions

GASBS #27 provides rules for determining contributionGASBS #27 provides rules for determining contributionamountsamounts requires:requires: Use of acceptable actuarial methods in calculating contributionsUse of acceptable actuarial methods in calculating contributions

to defined benefit planto defined benefit plan

Enforce contractual requirements for defined contribution plansEnforce contractual requirements for defined contribution plans GASB requires recognition of expenditures and liabilitiesGASB requires recognition of expenditures and liabilities

in same matter as compensated absences and claims &in same matter as compensated absences and claims &judgmentsjudgments Amount payable from current financial resources recorded asAmount payable from current financial resources recorded as

fund liabilityfund liability Other amounts recorded in General LongOther amounts recorded in General Long--Term LiabilitiesTerm Liabilities


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New Requirements for OPEBNew Requirements for OPEBAccounting & ReportingAccounting & Reporting

Published under GASBS #43 and #45 inPublished under GASBS #43 and #45 in20042004

Examples:Examples: Healthcare insuranceHealthcare insurance

Vision insuranceVision insurance

Life insuranceLife insurance

Requirements are very similar to what isRequirements are very similar to what isrequired for pensionsrequired for pensions


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Expenditure Reporting:Expenditure Reporting:GAAP vs. BudgetaryGAAP vs. Budgetary

Level of required detail may be different inLevel of required detail may be different inbudgetary reporting than in GAAPbudgetary reporting than in GAAPreportingreporting

May report at different level ofMay report at different level ofsummarizationsummarization may use function formay use function forGAAP reporting but by department forGAAP reporting but by department for

local uselocal use


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Change in Accounting PrinciplesChange in Accounting Principles

Expenditure not previously measurableExpenditure not previously measurablemay now be considered reasonablymay now be considered reasonablyestimableestimable

Change from one acceptable alternativeChange from one acceptable alternativeprinciple to anotherprinciple to another

Change in method of applying a principleChange in method of applying a principle

GASB issues new expenditure recognitionGASB issues new expenditure recognitioncriteria that is different from policycriteria that is different from policycurrently in usecurrently in use


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Error Correction:Error Correction:Same Process as with RevenuesSame Process as with Revenues

3 step process3 step process

1.1. Recognize the erroneous entry that wasRecognize the erroneous entry that was

recordedrecorded2.2. Determine what the correct entry shouldDetermine what the correct entry should

bebe

3.3.Fix the error by essentially combiningFix the error by essentially combiningsteps 1 & 2steps 1 & 2


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Error Correction IssuesError Correction Issues

If error is caught in same year, fairlyIf error is caught in same year, fairlysimple process to reverse it and recordsimple process to reverse it and recordcorrectioncorrection

If error was made in a previous year, mustIf error was made in a previous year, mustconsider if accounts affected have beenconsider if accounts affected have beenclosedclosed may result in a Correction ofmay result in a Correction of

Prior Year ErrorPrior Year Error

Expenditure Accounting Govt.

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