Fund Accounting 101
7/18/2006 |
When you accepted your job, you thought they said “fun” accounting, didn’t you? And you thought it shouldn’t be much different from what you were already used to, right? Then you discovered there really were unique differences between private enterprise accounting and governmental accounting. So when is this “fun” supposed to kick in? Hopefully, with just a few brief discussions on governmental accounting concepts, the fun can soon follow.
A government has the responsibility to justify its use of public resources…..did they spend the money the way they were supposed to, according to rules set either by legislation or other regulations and legal restrictions. This is Fiscal Accountability. In order to present the information in a meaningful way…to prove they did indeed spend public monies the way they were supposed to, governments are required to follow a special set of rules that spell out how this financial information is to be fairly presented. That’s GAAP (pronounced “Gap”…and no, it has nothing to do with the clothing store). GAAP stands for generally accepted accounting principles; guidelines that spell out how financial information is to be reported. FASB (Financial Accounting Standards Board) dictates what GAAP is for all private enterprise & non-profits. And because governments are unique creatures, we have GASB (Governmental Accounting Standards Board) that dictates what GAAP is for all State & Local Governments.
In the old days, (around the turn of the twentieth century) some state and local governments were charged with mismanagement and financial corruption. This brought about an argument for keeping financial sources separate to ensure monies were spent for what they were intended. Consequently many local governments started to set up separate cash accounts for each of their operations.
Fortunately, with today’s improved cash management procedures and quality accounting software, multiple cash accounts are quickly becoming a thing of the past. However the concept of accounting for operations separately is not. That’s how Fund Accounting was born.
In governmental accounting these separate operations are grouped by what we call funds. The “official” definition of a fund, according to the NCGA (National Council on Governmental Accounting) is “a separate, self-balancing set of accounts used to account for resources for specific purposes according to special regulations”. In other words, the total of all debits = the total of all credits within the fund. The fund has its own separate chart of accounts. A good quality fund accounting software package will still account for financial resources separately by fund, but without requiring separate cash accounts.
Governments may have many different types of operations they are required to track separately. Some of those operations are run just like business-type operations, charging customers a user charge for goods or services that covers current and future costs. An example would be government utility services (Water Fund, Sewer Fund). Other government operations have no direct relation between the services they provide and costs for those services (Public Safety, Streets). These governmental operations are usually supported by taxes and not user charges.
GASB provides the following major classifications of funds for use when reporting finances for different operations. There are no limitations to the number of funds used. However the basic principle states the government should use the least number of individual funds possible.
Governmental Funds:
General Fund – The chief operating fund. Any overall government activity not specifically required to be recorded in a separate fund is recorded here. Ex: Public Safety, Public Works Streets, Public Health.
Special Revenue Funds - Resources allocated by law or regulations for specific purposes or activities should be recorded as a special revenue fund. Special Revenue Funds usually get their monies from property taxes, grants or shared revenues from another government.
Debt Service Funds –Used to account for principal and interest payments on long-term bonded debt other than revenue bonds. Ex: Special Assessment Bonds. However, parts of government that operate like private enterprise, using user charges (Water Fund, Sewer Fund), are generally required to recognize the debt service within the Enterprise Fund itself and not a separate Debt Service Fund.
Capital Projects Funds – Used to record purchase or construction of major capital facilities, unless it is financed by enterprise activities or trust funds.
Permanent Funds- Used to record monies where the principal cannot be spent…only interest earned can be spent for government purposes.
Proprietary Funds:
Enterprise Funds – Used to record self-supporting business-type activities that provide services to the public and primarily charge user fees to finance activities. They follow the same accounting rules as a for-profit business. Ex: Golf Course; Water Utilities.
Internal Service Funds – Used to account for one governmental department providing services to another governmental department on a cost-reimbursement basis. |
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