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Chapter4Recognizing Revenue in Governmental Funds and Transactions Illustrations
Focus: measure the flow of current financial resources Current financial resources include cash, receivables,
marketable securities, prepaid items, and supplies inventories
Capital assets such as land, buildings, and equipment are not accounted for in governmental funds, but rather in governmental activities at the government-wide level
Basis: modified accrual accounting
Review: Governmental Funds
Governments are unique in that they get revenue from non-exchange transactions – those in which one party gives or receives value without receiving direct value in exchange!!!!
Under modified-accrual basis of accounting – Revenue cannot be recognized until they are both measurable and available to finance expenditures Available = collected in the current period or
expected soon enough to pay liabilities Property tax rule is 60 days
Recognition of Revenue
Imposed non-exchange revenue Property taxes and fines
Derived tax revenue Assessed on exchange transactions carried on by
tax payers Sales tax, and income tax
Gov’t mandated non-exchange transactions Grant established to maintain roads Grant for computers at the library
Voluntary non-exchange transactions Gifts to a public university for research
Non-exchange Revenue
Ad valorem taxes are those that are paid according to the value of underlying property--e.g. personal and real property taxes Look at the example in the book on Page 126-129
Self-assessing taxes are those that are based on income or sales, and thus are not measurable until income or sales for a period are known. Recognize sales tax at date of sale Recognize income tax in the period earned Look at the example on page 131-135
Revenues - Taxes (Ad valorem and Self-assessing)
Fines/Permits/Inspection Charges Recognize revenue in funds when measurable and
available which is usually when cash is received Food Stamps
Recognize revenue when food stamps are distributed Donations of Capital Assets
Capital assets cannot be accounted for in governmental funds unless (Government-wide statements only)
Held for sale: then treat like a marketable security and defer revenue if a sale contract has been negotiated – See page 139
Fines, Food Stamps, Donated Capital
Unrestricted w/time requirement Award given in 2004 for use in 2005 – page 137
Grant with purpose restriction Recognize when grant is announced – page 137
Reimbursement Grant Recognize when eligible expenditures have been
incurred – page 137 Unrestricted Grant w/contingent eligibility
Usually in the form of a matching fund (whirlpool)
Recognize revenue after contingency becomes known – page 138
Grants – Come in Many Shapes and Forms
Levied against certain properties deemed to receive a particular benefit that not all taxpayers receive.
Examples may be street repair, street cleaning, or snow plowing for taxpayers who live outside the normal service area.Example: Sewer done viaproperty taxes
Revenues - Special Assessment Taxes
Includes items such as vehicle licenses, business licenses, liquor licenses, marriage licenses, animal licenses, building permits, zoning variances, etc.
Ordinarily not measurable in advance of transactions; thus, accounted for on the cash basis --- sometimes an estimate is booked in the deferred revenue account See example on Page 129 - 130
Revenues - Licenses and Permits
Includes grants, entitlements, shared revenues, payment in lieu of taxes
Often the amount is known before the actual receipt of cash and thus may be accrued under the modified accrual basis.
Revenues - Intergovernmental Revenue
Restricted Grants Must be used for specific items
Unrestricted Grants Can be used for anything
Entitlements From a higher govt for a specific
purpose (No child left behind/Food stamps)
Shared revenues Taxes raised by one gov. given to
another (education) Payment in lieu of taxes – Water co.
doesn’t pay property tax!
Revenues - Intergovernmental Revenue
Many governments have shifted much of their revenues from taxes on all taxpayers to charges to recipients of services, including charges for recreational services, building inspections, etc.
Accrue if the amount is known prior to the receipt of cash
Revenues - Charges for Services
Fines are amounts assessed by the courts against those guilty of statutory offenses and neglect of official duties.
Forfeits arise from deposits or bonds made by contractors, accused felons, and others to assure performance on contracts or appearance in court.
Accrue if the amount is known prior to the receipt of cash, which usually is not the case
Revenues - Fines and Forfeits
Revenues that do not fall into one of the other categories
Examples, proceeds from the sale of government assets investment income (see page 145-146)
Accrue if the amount is known prior to the receipt of cash; but usually accounted for when collected in cash
Revenues - Miscellaneous
The budget for the Town of Brighton authorizes expenditures of $4,180,000, but forecasts revenues of only $3,986,000 for FY 2005.
Q: Is this an example of poor financial management? (See next slide)
Recording the Budget at the Beginning of the Year
A: A budgetary deficit does not necessarily indicate poor financial management.
To provide a reserve for revenue shortfalls or unexpected expenditure needs, many governments maintain a “target” ratio of Unreserved Fund Balance (the amount available at the beginning of the year) to General Fund Revenues in the range of 10 to 20 percent. If the fund balance is larger than desired, the City Council (or other legislative body) may intentionally budget a deficit to reduce fund balance.
Q: Is This an Example of Poor Financial Management?
Examples
Assume that the following departments of Macon City order materials and supplies amounting in total to $420,000, the entry would be
GF General Journal Dr. Cr.Encumbrances 420,000
Reserve for Encumbrances 420,000
Macon City needs to record what entry when expenditures of $432,000 for goods received that had been ordered in the preceding transaction?
Encumbrance Accounting
GF General Journal Dr. Cr.
Reserve for Encumbrances 420,000
Expenditures—2005 432,000
Encumbrances—2005 420,000
Accounts Payable 432,000
Accounting for Expenditures
The tax levy is the amount billed to taxpayers. Calculation of levy: Levy =
(Statutory or legislatively approved tax rate *
assessed valuation of taxable property (either real property or personal property))
An additional calculation of levy: Levy =
Revenues required
Estimated collectible proportion
Accounting for Property Tax Revenue
Accounting for Property Tax Revenue (Cont’d)
Assessed valuation is determined by an elected “Tax Assessor”
Calculation: Assessed valuation =
Estimated True Value * Assessment Ratio In some jurisdictions the assessment ratio is 1.00 (i.e.,
full estimated market value), other jurisdictions it might be .30 or some other fraction of full value
Walk through Berrien County property tax bill
How can property taxes be increased?
Assume property revenues of $495,000 have been assessed. It is estimated that 1% will be uncollectible:
The following journal entry would be made:
GF General Journal Dr. Cr.Taxes Receivable-Current year 500,000 Est. Uncollectible current year taxes (B/S) 5,000
Revenues 495,000
**Discuss banks and interest rates!!!!
Uncollectible Property Tax
Assume by end of year $450,000 of current taxes have been collected, the entry is:
GF General Journal Dr. Cr.Cash 450,000
Taxes Receivable—Current 450,000
Property Taxes (Cont’d)
The entry to reclassify uncollected current taxes to delinquent status at year-end:
GF General Journal Dr. Cr.Taxes Receivable—Delinquent (year) 50,000Estimated Uncollectible Current Taxes 5,000 Taxes Receivable—Current 50,000 Estimated Uncollectible Delinquent (year) Taxes 5,000
Entry to reclassify tax revenue when not collected by end of the fiscal year
Interest and penalties are accrued on delinquent taxes and accounted for as follows:
Interest and penalties of $500 were accrued on delinquent taxes, of which 10% was estimated to be uncollectible.
GF General Journal Dr. Cr.Interest and Penalties Receivable on Taxes 500
Estimated Uncollectible Interest and Penalties 50Revenues 450
Entry to reclassify tax revenue when not collected by end of the fiscal year
Interest and penalties are accrued on delinquent taxes and accounted for as follows:
Interest and penalties of $500 were accrued on delinquent taxes, of which 10% was estimated to be uncollectible.
GF General Journal Dr. Cr.Interest and Penalties Receivable on Taxes 500
Estimated Uncollectible Interest and Penalties 50Revenues 450
Interest and Penalties on Delinquent Property Taxes
Revenues from property taxes are often collected during one or two months of the years
Expenditure demands may occur more or less uniformly during the year
A local bank may extend a line of credit in the form of TANs to meet short-term cash needs since they will have the power of lien over taxable properties
Issuance of Tax Anticipation Notes (TANs)
Assume on April 1, 2005, a hypothetical city, Mason City, signs a 60-day $300,000 tax anticipation note, discounted at 6 percent per annum.
GF General Journal Dr. Cr.Cash 297,000Expenditures—2005 3,000
Tax Anticipation Notes Payable 300,000
Note: .06 X 60/360 X $300,000 = $3,000
Tax Anticipation Notes - TANs (Cont’d)
Mason City repaid the 60-day $300,000 tax anticipation note on the due date.
GF General Journal Dr. Cr.
Tax Anticipation Notes Payable 300,000
Cash300,000
Tax Anticipation Notes - TANs (Cont’d)
Balance sheet equation at an interim point during the year (e.g., end of first quarter):
Assets + Budgetary Resources =
Liabilities +
Available Appropriations + Reserved Fund Balance + Unreserved Fund Balance
Interim Balance Sheet
Budgetary resources is the amount of unrealized estimated revenues to date (estimated revenues minus actual revenues)
Available Appropriations is the amount of appropriations that has not yet been expended or encumbered. It is one component of Fund Equity at an
interim point during the year.
Interim Balance Sheet (Cont’d)
Q: Why might a government need to revise its legally adopted budget during the year?
Q: How are budget revisions accounted for?
Discuss.
Revision of the Budget During the Year
A: An error may have been made in estimating revenues or expenditures, or changed conditions may have altered estimated revenues or caused unforeseen expenditure needs.
Because the budget is legally binding on managers, it is important that the budget be revised to reflect changed conditions.
Q: Why Might a Government Need to Revise its Legally Adopted Budget During the Year?
A: If estimated revenues is increased, debit Estimated Revenues and credit Fund Balance
If appropriations are increased, debit Fund
Balance and credit Appropriation
A decrease in either item would result in the reverse of the above entry
Q: How are Budget Revisions Accounted for?
Accounting for encumbrances depends on the budget laws of a particular state or other government
In a minority of jurisdictions, appropriations do not expire at year-end.
In a few jurisdictions, appropriations lapse and encumbrances for goods on order at year-end require a new appropriation in the next fiscal year
We examine the most usual situation: Appropriations lapse, but the government will honor encumbrances for goods still on order at year-end
**If you are doing contract for the government it would be a good idea to know how the agency you are working for handles this situation so you continue to get paid!!!!!
Encumbrances of a Prior Year
Assume at the end of FY 2004, a Reserve for Encumbrances was reported for $8,300. Early in FY 2005, the goods were received at an actual cost of $8,500. First it is necessary to re-establish the Encumbrances at the beginning of the next year (cause they are closed during the year end process)
GF General Journal Dr. Cr.
Encumbrances—2004 8,300Fund Balance
8,300
Encumbrances of a Prior Year (Cont’d)
After the $8,300 encumbrance has been re-established, the following entry records the receipt of the goods early in FY 2005 at an actual cost of $8,500. GF General Journal Dr. Cr.
Reserve for Encumbrances—2004 8,300Expenditures—2004 8,300Expenditures—2005 200
Encumbrances—2004 8,300Vouchers Payable
8,500
Note that only $200 is charged to the FY 2005 appropriation
Encumbrances of a Prior Year (Cont’d)
In the preceding example, what if the actual cost of the goods received had been only $8,100? How would this affect the journal entries?
Encumbrances of a Prior Year (Cont’d)
Assume now the actual cost of the goods received in early FY 2005 had been only $8,100 rather than $8,500.
GF General Journal Dr. Cr.Reserve for Encumbrances—2004 8,300Expenditures—2004 8,100
Encumbrances—2004 8,300
Vouchers Payable 8,100 Note that the FY 2005 appropriation is unaffected.
Encumbrances of a Prior Year (Cont’d)
Assume a grant of $100,000 is received at the beginning of the fiscal year from the federal government to operate a counseling program for troubled youths. Until the grant has been “earned” by meeting eligibility requirements related to service recipients, it is reported as “Deferred Revenue”—a liability. The entry in the special revenue fund is:
Dr. Cr.
Cash 100,000
Deferred Revenue 100,000
Accounting for Operating Grants
Assume that during the year the Counseling Program expended $75,000 for costs related to youth counseling, while meeting eligibility requirements, the entries would be:
Dr. Cr.
Expenditures 75,000
Accounts Payable 75,000
Deferred Revenues 75,000
Revenues 75,000
Accounting for Operating Grants (cont’d)
Alternative methods, any of which is acceptable Close Estimated Revenues and Revenues in one entry and
Appropriations, Encumbrances, and Expenditures in a second entry, debiting or crediting Fund Balance as necessary in each entry
Close budgetary accounts (Estimated Revenues, Appropriations, and Expenditures) in one entry and Proprietary accounts (Revenues and Expenditures) in a second entry, debiting or crediting Fund Balance as necessary, in each entry.
Close all temporary accounts in one entry, debiting or crediting Fund Balance as necessary
Closing Journal Entries
Internal Exchange Transactions
o Transactions between two funds that are similar to those involving the government and an external entity. Example: Billing from a City’s water utility fund
(an enterprise fund) to the City’s General Fund for the Fire Department.
o The funds recognize a revenue and expenditure, respectively, rather than operating transfers in and out
Interfund Activity
Interfund loans Loans made from one fund to another with the intent that
they are to be repaid. Classified as “Interfund Loans Receivable- Current (or
Payable-Current)”, if the intent is to repay during the current year; otherwise “Noncurrent”.
Interfund transfers Nonreciprocal activity in which other financing sources
and uses are transferred between funds with no intention of repayment.
Intra- versus Inter-Activity Transactions
Intra-activity transaction A transaction between two governmental funds (including
an internal service fund) or between two enterprise funds. Neither governmental activities nor business-type activities
are affected at the government-wide level.
Inter-activity transaction Interfund loans or transfers between a governmental fund
(including internal service fund) and an enterprise fund. Report these as “Internal Balances” on the government-wide
Statement of Net Assets and “Transfers” in the Statement of Activities.
Permanent Funds
To account for contributions received under trust agreements in which the principal amount is not expendable, but earnings are.
Specifically intended to meet a public-purpose (i.e., to benefit a government program or function, or the citizenry, rather than an external individual, organization, or government.
A new classification under GASBS 34; formerly classified as nonexpendable Fiduciary Funds.
