Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
CHAPTER 17
GOVERNMENTAL ENTITIES:
INTRODUCTION AND GENERAL FUND ACCOUNTING
OVERVIEW OF CHAPTER
Chapter 17 begins a two-chapter sequence on the accounting and financial reporting
standards for governmental entities such as state governments, municipal governments, and other
governmental subdivisions. The chapter begins with an overview of the history of governmental
accounting, including Governmental Accounting, Auditing, and Financial Reporting (GAAFR)
published by the National Committee on Governmental Accounting. The GASB now establishes
the accounting standards for governmental entities.
Governmental entities use fund accounting to account for their operations. A fund is a
separate legal and accounting entity and a governmental entity may have many funds, each of
which may collect and expend resources. Chapter 18 introduces the basic fund structure used by
most government units. The funds are separated into three groups as follows, (a) governmental
funds, (b) proprietary funds, and (c) fiduciary funds. Chapters 17 and 18 utilize a continuous
example- Sol City – to illustrate the integrated nature of fund accounting for a single
governmental entity. Chapter 17 extensively focuses on the general fund, while chapter 18
focuses on the other funds.
GASB 34 significantly changed the governmental reporting model for governmental
units. GASB 34 requires that government-wide financial statements be prepared on the basis of
accrual accounting and requires several new footnote and schedule disclosures. GASB 33 and
36, which address non-exchange transfers also are discussed in the chapter.
Students may initially be somewhat confused by the new terminology and logic required
to understand fund accounting. However, once students understand the legal structure of
funds—that each fund has specific constraints on resources collected and expended—students will
begin to understand the necessity for establishing separate funds for specific purposes.
The basis of accounting in each of the funds is dependent on the purpose of the specific
fund. The modified accrual basis of accounting is used in the general fund because of the ‘flow
of financial resources measurement focus’ of this fund.
Budgets are an essential component of legislative control. The accounting policies are
established in the preparation of the budget. In addition, the budget provides the
revenue-generating ability and appropriation authority of the governmental unit. To aid the
learning process, all budgetary accounts are presented in capital letters throughout Chapters 17
and 18.
Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
17-2
The expenditure process begins with the budget appropriation. When goods or services
are ordered, an encumbrance is recorded. The expenditure is recorded when the good or service
is received, and finally, the disbursement is made when the legislative body approves payment.
Encumbrances outstanding at year-end may be treated as lapsing or nonlapsing, depending upon
the budgetary policy of the governmental unit. Both methods are utilized in practice. The
Additional Considerations portion of the chapter presents the highlights of a proposed GASB
statement entitled “Fund Balance Reporting and Governmental Fund Type Definitions.”
LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 17-1 Understand and explain the basic differences between governmental and private
sector accounting.
LO 17-2 Understand and explain major concepts of governmental accounting.
LO 17-3 Understand and explain the differences between the various governmental fund
types.
LO 17-4 Understand and explain basic concepts for financial reporting in governmental
accounting.
LO 17-5 Understand and explain the basic differences in the measurement focus and basis of
accounting between governmental and private sector accounting.
LO 17-6 Understand and explain basic budgeting concepts in governmental accounting.
LO 17-7 Make calculations and record journal entries for the general fund.
LO 17-8 Make calculations and record journal entries for basic interfund activities.
SYNOPSIS OF CHAPTER 17
Governmental Entities:
Introduction and General Fund Accounting
Accounting For the Bustling City of San Diego
LO 17-1 Understand and explain the basic differences between governmental and private
sector accounting.
Differences between Governmental and Private Sector Accounting
History of Governmental Accounting
LO 17-2 Understand and explain major concepts of governmental accounting.
Major Concepts of Governmental Accounting
Elements of Financial Statements
Expendability of Resources versus Capital Maintenance Objectives
Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
17-3
LO 17-3 Understand and explain the differences between the various governmental fund
types.
Definitions and Types of Funds
LO 17-4 Understand and explain basic concepts for financial reporting in governmental
accounting.
Financial Reporting of Governmental Entities
Fund-Based Financial Statements: Governmental Funds
LO 17-5 Understand and explain the basic differences in the measurement focus and basis of
accounting between governmental and private sector accounting.
Measurement Focus and Basis of Accounting (MFBA)
Basis of Accounting – Governmental Funds
Basis of Accounting – Proprietary Funds
Basis of Accounting – Fiduciary Funds
LO 17-6 Understand and explain basic budgeting concepts in governmental accounting.
Budgetary Aspects of Governmental Operations
Recording the Operating Budget
LO 17-7 Make calculations and record journal entries for the general fund.
Accounting for Expenditures
The Expenditure Process
Classification of Expenditure Transactions and Accounts
Outstanding Encumbrances at the End of the Fiscal Period
Expenditures for Inventory
Accounting for Fixed Assets
Long-Term Debt and Capital Leases
Investments
LO 17-8 Make calculations and record journal entries for basic interfund activities.
Interfund Activities
(1) Interfund Loans
(2) Interfund Services Provided and Used
(3) Interfund Transfers
(4) Interfund Reimbursements
Overview of Accounting and Financial Reporting for the General Fund
Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
17-4
Comprehensive Illustration of Accounting for the General Fund
Adoption of the Budget
Property Tax Levy and Collection
Other Revenue
Expenditures
Acquisition of Capital Asset
Interfund Activities
Adjusting Entries
Closing Entries
General Fund Financial Statement Information
NOTES ON POWERPOINT SLIDES
We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
the chapter and studied the topic, followed by an extended discussion the next class period after
students have read the chapter and attempted homework problems.
We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors
to use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
The slides are organized by learning objective. We have included a slide at the beginning of
each learning objective to show where the new material begins. Instructors may or may not want
to use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple-choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
17-5
• At the outset, we explain to students that governmental accounting differs in many
ways from the accounting for commercial entities. Some universities offer a semester–
long class on governmental (and sometimes not-for-profit) accounting. This book is
not designed for a detailed course of that nature. The two chapters in this text devoted
to governmental accounting are intended to give students exposure to general
principles and procedures associated with the accounting of state and local
governments. We generally spend about two weeks giving students an overview of
governmental accounting, which is sufficient for most students preparing for the CPA
exam. However, students interested in a career closely linked to state and municipal
governments should seek a stand-alone governmental accounting course.
• Whenever possible, we invite a guest speaker to spend an entire class period helping
us kick off this portion of the class. In our experience, the city manager of a small city
can be a good person to help students understand why the objectives and operations
of a municipal government are different from those of a for-profit business. The
speaker can help students to understand how state and local laws as well as the
political process influence everything that is done in state and local governments. The
speaker also introduces the budget process. While government employees run the
day-to-day operations of a government entity, elected officials (the state legislature or
the city council) make all major appropriation decisions at the beginning of the year.
• The visit of our guest speaker is also an opportunity to introduce a three-part case we
use in our course based on an actual small city. We developed this case using the
actual budget and transactions of this city to help students see the big picture of the
budget process and the day-to-day operations of a local government. Hands-on
experience with an actual city’s accounting helps many students to overcome their
initial “fears” of governmental accounting. Instructors interested in providing their
students with an experience of this nature can contact the authors directly.
LO 17-1 Understand and explain the basic differences between governmental and private
sector accounting.
• Slides 3-5 summarize differences between governmental and commercial activities.
• Slides 6-9 provide a brief history of governmental accounting.
• Slides 10-11 introduce the GASB and the GAAFR (Blue Book).
LO 17-2 Understand and explain major concepts of governmental accounting.
• Slides 15-17 summarize major governmental accounting concepts.
LO 17-3 Understand and explain the differences between the various governmental fund types.
• Slides 21-27 provide a general overview of the types of governmental activities, fund
accounting, and the types of funds.
LO 17-4 Understand and explain basic concepts for financial reporting in governmental
accounting.
• Slides 31-38 introduce the financial statements of governmental entities.
LO 17-5 Understand and explain the basic differences in the measurement focus and basis of
Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
17-6
accounting between governmental and private sector accounting.
• Slides 42-50 explain concepts related to the measurement focus and basis of
accounting for the different fund types.
• Slides 51-54 introduce the basics of governmental revenue recognition.
LO 17-6 Understand and explain basic budgeting concepts in governmental accounting.
• Slides 58-62 summarize the budget and expenditure process.
LO 17-7 Make calculations and record journal entries for the general fund.
• Slides 66-59 provide a very simple example of the four steps involved in accounting
for expenditures during the year.
• Slide 76 provides an important summary that students need to understand. It is
important to explain to students that at any given point in time, the amount of funds
that can still be spent legally.
• Slides 77-84 summarize two important choices in government accounting.
o The first relates to the choice of whether or not to allow outstanding
encumbrances to lapse at year end.
o The second relates to the decision of whether to use the purchase or the
consumption method for accounting for supplies inventories.
• Slides 85-87 provide an illustration of accounting for inventories.
• Slides 88-91 explain the accounting for expenditures related to fixed assets, works of
art or historical treasures, long-term debt and capital leases, and investments.
• Slides 92-117 provide an important comprehensive example of the day-to-day
accounting for normal transactions in the general fund. We find this exercise to be
extremely useful in helping students learn governmental accounting. We spend most
of a class period on this one exercise. Some portions of the exercise work well as
group exercises while other transactions are more difficult and require an instructor
explanation.
LO 17-8 Make calculations and record journal entries for basic interfund activities.
• Slides 119-128 provide a brief overview of the accounting for interfund activities.
• Slides 129-130 provide a brief overview of the accounting for the general fund.
Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
17-7
TEACHING IDEAS
1. Invite a local elected official to class to speak about the way government works and the
types of accounting information that is needed to efficiently and effectively manage the
governmental unit.
2. Obtain a copy of the local government’s annual report and discuss the types of resources
obtained by the governmental entity. Students will especially be interested in sources to
which they contribute, such as local sales taxes and property taxes that are part of the rent
of off-campus housing. Students will then see that these taxes are a significant source of
local government resources.
3. Ask the students to review government-wide financial statements of a state or local
government and write a brief report describing the financial statements, notes and
disclosures required consistent with GASB 34.
Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
17-8
DESCRIPTION OF CASES, EXERCISES, AND PROBLEMS
C17-1
LO 17-6
25 min.
E
Budget Theory
This case requires students to discuss the general purpose of fund accounting and
the importance of the budget in the governmental accounting system.
C17-2
LO 17-1
35 min.
M
Municipal versus Financial Accounting
Students must compare GAAP accounting and fund accounting. The treatment of
inventories in fund accounting is also to be discussed.
C17-3
LO 17-4
40 min.
E
Revenue Issues
Students must prepare a memorandum discussing the proper accounting and
financial reporting in the general fund for each of six transactions.
C17-4
LO 17-4
40 min.
M
Examining the General Fund Disclosures in a Comprehensive Annual
Financial Report (CAFR)
Students must answer several questions relating to the overall government and
governmental funds using a Comprehensive Annual Financial Report for a
government entity chosen by the instructor.
C17-5
LO 17-2
40 min.
M
Examining Deposit and Investment Risk Disclosures of a Governmental
Entity
Students should go through the summaries of GASB 40 and GASB 3 and answer
specific questions on the types of deposit and investment risks addressed. They
should also explain why disclosures of information about these risks are
important to the users of the government’s financial statements. They should
then locate the most recent annual report of a local government to answer
specific questions based on footnote information in the report.
E17-1
LO 17-7
15 min.
E
Multiple-Choice Questions on the General Fund [AICPA Adapted]
Five multiple-choice questions on the types of transactions that are recorded in
the general fund.
E17-2
LO 17-7
20 min.
E
Matching for General Fund Transactions [AICPA Adapted]
Twelve transactions are presented for which students must match the item to
record the transactions.
E17-3
LO 17-6,
LO 17-7
25 min.
E
Multiple-Choice Questions on Budgets, Expenditures, and Revenues
[AICPA Adapted]
Ten multiple-choice questions on the journal entries made and accounts used to
record budgets, the expenditure process, and revenue recognition.
Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
17-9
E17-4
LO 17-2,
LO 17-7
20 min.
M
Multiple-Choice Questions on the General Fund [AICPA Adapted]
Ten multiple-choice questions on the recognition of revenue, use of budgetary
accounts, and the balances to be reported in general fund accounts.
E17-5
LO 17-7
35 min.
M
Encumbrances at Year-End
Journal entries are required for outstanding encumbrances at year-end. First,
students must assume the governmental unit uses the lapsing method. In the
second part of the exercise, the nonlapsing method is used. In the third part, they
should prepare the entry to cancel the specific encumbrance reserve.
E17-6
LO 17-7
30 min.
M
Accounting for Inventories of Office Supplies
Journal entries are required to account for the inventory of office supplies. Part a
assumes the consumption method is being used while part b assumes the
purchase method is being used.
E17-7
LO 17-7
20 min.
M
Accounting for Prepayments and Capital Assets
Journal entries are required in the general fund for three examples of
prepayments and capital assets. Students must make an encumbrance for an
order of new furniture and then must record the expenditure when the furniture is
received.
E17-8
LO 17-7
40 min.
H
Computation of Revenues Reported on the Statement of Revenues,
Expenditures, and Changes in Fund Balance for the General Fund
A schedule of the amount of revenue to be reported in the general fund must be
prepared after analyzing various types of revenue and other transactions.
E17-9
LO 17-7
40 min.
H
Computation of Expenditures Reported on the Statement of Revenues,
Expenditures, and Changes in Fund Balance for the General Fund
A schedule of the amount of expenditures to be reported in the general fund must
be prepared after analyzing various types of expenditures and other transactions.
E17-10
LO 17-7
35 min.
M
Closing Entries and Balance Sheet
A preclosing trial balance is presented. Closing entries are then required after
which students must prepare the general fund’s balance sheet.
Chapter 17 – GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND ACCOUNTING
17–10
E17-11
LO 17-7
25 min.
M
Statement of Revenues, Expenditures, and Changes in Fund Balance
This exercise continues with the data in E17-10. Students are asked to prepare
the general fund’s statement of revenue, expenditures, and changes in fund
balance.
E17-12
LO 17-8
30 min.
M
Matching Items Involving Interfund Transactions and Transfers
Ten transactions and transfers are presented for which students must properly
identify each interfund transaction and transfer type.
P17-13
LO 17- 7
50 min.
H
General Fund Entries [AICPA Adapted]
Students must analyze a series of changes in general fund account balances and
reconstruct the journal entries that would be made for the transactions. Closing
entries are also required.
P17-14
LO 17-7
55 min.
H
General Fund Entries [AICPA Adapted]
The trial balances in the general fund are presented as of the beginning of the
year and end of the year. Additional information is presented. Students must
reconstruct the detailed journal entries that were required to record all the
transactions during the period.
P17-15
LO 17-7,
LO 17-8
65 min.
H
General Fund Entries and Statements
An unadjusted trial balance for the general fund is presented from which students
must prepare adjusting and closing entries. After making the journal entries, the
students must then prepare the general fund balance sheet and the statement of
revenue, expenditures, and changes in fund balance.
P17-16
LO 17-2,
LO 17-6
20 min.
E
Matching Terms
Sixteen terms are presented for which students must match the appropriate
description. This is a good problem to assign if students need more work on
terminology.
P17-17
LO 17-2,
LO 17-8
25 min.
M
Identification of Governmental Accounting Terms
Students are presented with the descriptions of 21 governmental terms and must
provide the term described in each of the items. This is a good problem to use if
students need work on governmental terminology.
P17-18
LO 17-2,
LO 17-8
30 min.
M
General Fund Entries [AICPA Adapted]
Thirty-nine items and seven major transactions are presented. For each item,
students must determine whether the item should be debited, credited, or remains
unaffected by the transaction.