CHAPTER 18

Introduction to Accounting for State and Local Governmental Units

BRIEF OUTLINE
18.1 The History of Generally Accepted Governmental 18.7 External Reporting Requirements (GASB Statement No. 34)
Accounting Standards 18.8 Government Fund-Based Reporting
18.2 The Structure of Governmental Accounting 18.9 Government-Wide Reporting
18.3 Governmental Fund Entities 18.10 Managements Discussion and Analysis (MD&A)
18.4 Proprietary Funds 18.11 Interfund Activity
18.5 Fiduciary Funds Appendix: Government Wide Financial Statements City of
18.6 Capital Assets and Long-Term Debt Atlanta (Available online at www.wiley.com/collete/jeter

INTRODUCTION

In order to learn about accounting for state and local governments you must learn a whole new
vocabulary many different funds. In addition, the whole field is experiencing change with the
implementation of GASBs Statement No. 34, which became effective in 2001. The process of changing
governmental reporting to make it easier for outsiders to use just makes learning how to do it more
difficult!

CHAPTER OUTLINE

18.1 The History of Generally Accepted Governmental Accounting Standards

A. Pioneer organization Municipal Finance Officers Association (MFOA)
1. National Council of Governmental Accounting (NCGA) 1974
a. Statement 1: Government and Financial Reporting Principles 1979
b. Joined AICPA Industry Audit Guide: Audits of State and Local Government Units
1974
B. GASB was created in 1984
1. It is under the oversight of the Financial Accounting Foundation (FAF)
a. This organization also directs FASB
b. The funding for FASB and GASB are different
c. GASB has 2 full-time and 3 part-time members
2. GASB issues
a. Statements (GASBS)
b. Interpretations (GASBI)
c. Concept Statements (GASBCS)
d. Technical Bulletins (BASGTB)
e. Codified and updated annually
C. A hierarchy of Generally Accepted Reporting Standards for Governmental Entities is found in
your book.
18.2 The Structure of Government Accounting
A. Each government unit is a legal entity which is divided into a number of accounting entities
B. Fund entities
1. Governmental funds (expendable)
a. General fund all funds except those in special funds the left over fund
b. Special revenue funds revenues for specific purpose and expenditures are restricted
c. Capital projects funds account for the purchase or construction of capital assets
Study Guide to accompany Jeter and Chaney, Advanced Accounting

d. Debt service funds accumulate resources for the payment of long-term debt and its
interest
e. Permanent funds account for funds where only the income but not the principal can
be spent
2. Proprietary funds quasi-business funds
a. Enterprise funds any activity that provides goods or services sold to external users
b. Internal service funds any activity that provides goods or services to other funds or
agencies on a cost reimbursement basis
3. Fiduciary funds report assets held in a trust or agency category
a. Pension (and other employee benefit) trust funds resources held in trust for
members and beneficiaries of various employee benefit plans
b. Investment trust funds report external investment pools
c. Private-purpose trust funds report escheat property and trusts which benefit others
d. Agency funds one fund which acts as an agent for the temporary management of
another funds resources
18.3 Government Fund Entities
A. General fund
1. Most day-to-day transactions involving the government entity runs through the general
fund
2. Chapter 17 illustrated the basic transactions in the general fund
B. Special revenue funds
1. Have only a single source of revenue
2. Have a budget with appropriations and encumbrances
3. The records are similar to the general fund
4. With GASB No. 34, special revenue funds include expendable trust funds
C. Capital projects funds
1. The resources come from a variety of sources to acquire or build capital assets
a. Long-term debt
b. Grants or payments from other government funds
c. Private donations
d. Transfers from other funds
e. Special assessments
f. Other sources
2. See the example in text.
3. Some general information
a. The fund is temporary its used only until the capital project is completed
b. The capital projects fund generally doesnt get separate revenue
c. Debt is not recorded as a liability in the capital projects fund because it is an
expendable fund
d. Often funds are transferred from one fund to another to pay for capital projects
e. When the capital project takes longer than one year, the fund accumulated the various
accounts and carries them forward to the next year
f. When the project is completed, the fund is closed, and the assets and liabilities are
reported in the government-wide statement of net assets.
D. Debt service funds
1. Complete illustrations of the debt service funds are found in your book.
2. General information
a. The actual debt is kept on the statement of net fiduciary assets
b. The debt service fund accumulates resources to pay off the debt and interest on that
debt
c. Revenues can be specially designated for debt service

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i. General property tax

ii. Sales tax
iii. Transfers
iv. Special assessments
v. Revenue from investing funds
d. On the fund statements no interest is accrued and premiums or discounts are not
amortized, but on the government-wide statements (GASB) the accruals and
amortization are recorded
e. Actuarial requirements for the payment of debt must be disclosed
f. The debt service fund is closed if there is no more long-term debt, with any
remaining resources transferred to another fund (usually another debt service fund)
E. Permanent funds
1. Nonexpendable trust funds often referred to as endowment funds.
2. There are two types of nonexpendable trust funds:
a. Those in which the principal must be retained intact, but earnings may be expended
b. Those in which both principal and the earnings of the fund must be intact.
3. Where the earnings of a trust fund may be expended, they are generally transferred to a
special revenue fund
4. There is a detailed example in your book.
18.4 Proprietary Funds
A. Enterprise funds
1. Enterprise funds are used for any fund where goods or services are sold to external users
2. The enterprise is accounted for like a for-profit entity
3. Often enterprise funds are services such as public utilities, airports, parking lots, and
recreational facilities
4. A fund must be accounted for as an enterprise fund if
a. Revenues from the activity must be used to pay off its debt
b. Laws or other regulations require that costs must be paid by users fees, not taxes or
other revenues
c. The enterprise charges users fees large enough to recover costs
5. Under GASB No. 34, the balance sheets for proprietary funds do not include equity. The
remaining funds of the enterprise are reported as net assets
a. Invested in capital assets, net of debt
b. Restricted
c. Unrestricted
B. Internal service funds
1. Internal service funds are used to provide goods or services for other parts of the
governmental funds
2. Fees are charged for the goods or services on a cost reimbursements basis
3. Internal service funds are established with resources from other funds or general
obligation bonds
4. Bonds are not part of the internal service fund, but are on the statement of net assets and
the debt service fund
C. There is a complete illustration in your book.
18.5 Fiduciary Funds
A. Trust funds
1. The focus is no net assets and changes in net assets
2. General categories of trust funds
a. Pension trust funds
b. Investment trust funds
c. Private-purpose trust funds

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3. All the above are closely restricted by the trust agreement which outlines the extent of
management involvement in the trust and the length of time the resources are held
4. GASB No. 34 requires a separate statement of fiduciary responsibilities, net assets, and
changes thereto
B. Agency funds
1. Agency funds are purely custodial
2. The resources are equal to the liabilities
3. There are no revenues or expenditures
4. The funds are generally short term
18.6 Capital Assets and Long-Term Debt
A. Under GASB No. 34
1. All capital assets, depreciation and long-term debt are reported on government-wide
statements
2. Governments must maintain amortization schedules for all debt and interest expense
B. Capital assets
1. There is an example in the book.
2. The assets are accumulated and accounted for, including depreciation
3. The total assets and depreciation are reported on government-wide statements
4. Payments for the assets are accounted for in other funds or on the statement of net assets
C. Long-term debt
1. Look for the example in the book.
2. The long-term debt for all the funds is accumulated in one place
3. Resources from the debt are used for other funds
4. Payment of debt is from the debt service fund
18.7 External Reporting Requirements (GASB Statement No. 34)
A. The balance sheet is Illustration 18-14
B. The statement of revenues, expenditures and changes in fund balance (fund accountings
version of an income statement!) is Illustration 18-15
C. The reconciliation to the government statements can be found in Illustrations 18-16 and 18-17
D. There are a series of separate disclosures for the
1. Proprietary funds
2. Fiduciary funds
3. Government-wide statements
4. Combining statements for major component units
5. Notes
6. Supplementary information
18.8 Government Fund-Based Reporting
A. The separate major funds are accumulated and reported together
B. Reconciliation between government fund balances and government-wide net assets
1. The separate funds use the modified accrual basis and record no long-term debt or fixed
assets
2. The government-wide net assets report those things
3. A reconciliation statement (see Illustration 18-16 in your book) must be prepared
18.9 Government-Wide Reporting
A. Statement of Net Assets similar to a balance sheet
1. The statement reports financial and capital resources
2. It uses accrual-basis accounting
3. The statement is divided into two categories
a. Primary government government funds and proprietary funds
b. Component units government units that are legally independent but within the
reporting units control

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4. Under new guidelines, the current portion of long-term debt must be listed separately
from the noncurrent portion. The additions and reductions to the long-term liability
account for the year, including the current portion, should be disclosed in a footnote.
5. Net assets are displayed in three components:
a. Invested in capital assets, net of related debt
b. Restricted
c. Unrestricted
6. Infrastructure assets will be reported as assets in the government-wide statements at
historical cost and government will be required to report depreciation on these assets
7. GASB is considering changing the name of the Statement of Net Assets to the Statement
of Net Position
B. Statement of Activities the government equivalent of an income statement
1. Program revenues are used to decrease program expenses, and then the net amount is
accumulated
2. The result of government activities is combined with or offset against general revenues to
get a change in net assets
3. The beginning net assets are combined with the current years change to find the ending
balance of net assets
18.10 Managements Discussion and Analysis (MD&A)
A. The MD&A is an integral part of the new annual report
B. It should provide an easily-understood analysis of the governments financial activities
C. The minimum components are
1. A brief discussion of the financial statements
2. Comparisons from the prior year to this year of government wide-statements
3. Analysis of the governments overall financial position and results of operations to assess
whether that financial position has improved, including reasons for significant changes
4. Analysis of balances and transactions of individual funds, including reasons for changes
and availability of resources
5. Analysis of variances between budgeted and actual amounts in the general fund
6. Description of capital assets and long-term debt activity during the year, including
commitments, credit ratings, and debt limitations
7. Discussions of modified approach for infrastructure assets
8. Description of significant information which might have an effect on net assets or results
of operations
18.11 Interfund Activity
A. Reciprocal interfund activity
1. Interfund loans are reported as receivables and payables
2. Interfund services provided and used
a. Sales and purchases of goods and services between funds
b. Revenues for seller funds, expenditures for buyer funds
B. Nonreciprocal interfund activity
1. Interfund transfers
a. Flows of assets without equivalent flow of assets in return and without requirement
for repayment
b. Government funds are listed as other financing uses or sources of funds
c. Proprietary funds are included after nonoperating revenues and expenses
2. Interfund reimbursements are not displayed on the financial statements
Appendix: Government Wide Financial Statements City of Atlanta
(Available on line at www.wiley.com/collete/jeter)

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MULTIPLE CHOICE QUESTIONS

Choose the BEST answer for the following questions.

_____ 1. What is the major purpose of GASB Statement No. 34?

a. To make governmental accounting exactly like accounting for business
b. To create government-wide financial statements
c. To create a separate entity for each fund that is completely separate from all other funds
d. To join government accounting standards with financial accounting standards

_____ 2. Which fund is used to account for the day-to-day work of the specific government unit?
a. General fund
b. Proprietary fund
c. Capital projects fund
d. Permanent fund

_____ 3. A fiduciary fund reports

a. assets held in a trust or agency capacity
b. external investment pools
c. a fund which is an agent for the temporary management of another fund's resources
d. all of these

_____ 4. Which of the following is reported on the government-wide statement of net assets?
a. Long-term debt
b. Capital assets
c. General fund
d. Both long-term debt and capital assets

_____ 5. Which of the following would be most likely to be accounted for as a capital projects fund?
a. The payment of a mortgage on a new municipal swimming pool
b. The accumulation of funds which have been given to the city for the perpetual care of the
municipal cemetery
c. The construction of the new city jail
d. The accumulation of funds to create a centennial celebration for the city

_____ 6. An enterprise fund accounts for

a. goods or services sold to outsiders
b. goods or services sold to other funds
c. either goods or services sold to outsiders or goods or services sold to other funds
d. none of these

_____ 7. How is a proprietary fund different from an expendable fund?

a. A proprietary fund keeps track of noncurrent assets and liabilities
b. A proprietary fund works more like a for-profit entity
c. An expendable fund is designed to use all its resources for an entitys major purpose
d. All of these

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_____ 8. What are the reporting requirements of GASB No. 34?

a. Only balance sheet and income statement
b. A statement of net assets and statement of activities with supporting statements
c. Only a series of separate disclosures for the funds
d. There are no reporting requirements in GASB No. 34

_____9. What is Managements Discussion and Analysis?

a. An easily understood analysis of the governments financial activities
b. An optional position statement on the state of the government entity
c. A careful discussion of each fund and its unencumbered balance
d. A document published separately from the governments financial statements

_____10. If one fund loans resources to another fund which has an obligation to repay those resources,
there is
a. reciprocal interfund activity
b. nonreciprocal interfund activity
c. a fiduciary relationship
d. none of these

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MATCHING

Match the terms in the list to the definition below. Each term may be used only once.

A. General fund F. Permanent fund J. Government-wide

B. Special revenue fund G. Internal service fund reporting
C. Capital projects fund H. Fiduciary fund K. Restricted assets
D. Debt service fund I. Long-term debt L. MD&A
E. Enterprise fund M. Required Supplemental
Information (RSI)

_____ 1. A method of financial statement presentation required by GASB since 2001

_____ 2. A fund which helps keep track of how much long-term debt is owned by the government
entity

_____ 3. An agency or trust fund

_____ 4. A fund which keeps track of new building for the government

_____ 5. Generally reported between current assets and capital assets

_____ 6. A fund whose primary resources cannot be spent

_____ 7. A fund which accumulates resources in order to pay long-term obligations

_____ 8. A discussion by the people who run the government about the governments current financial
position

_____9. The day-to-day fund which is used to run the government

_____10. A fund which provides goods or services to another fund on a cost reimbursement basis

_____11. A fund which can only spend its resources for a specific purpose

_____12. A reporting requirement to help people evaluate the governmental unit

_____13. A fund accounted for like a business

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EXERCISES

1. The City of Nodine has the following capital projects fund transactions. Record them in general
journal form.
a. Serial bonds with a par value of $4,000,000 were sold at 102. The premium was transferred to the
debt service fund
b. A federal construction grand amounting to $1,200,000 was accrued
c. A construction contract for $6,000,000 was signed
d. A bill from the contractor for $76,000 was approved for payment
e. The general fund agreed to share $1,000,000 of the construction cost. It was accrued by the
capital projects fund
a.

b.

c.

d.

e.

2. The County of Winona collects taxes for the City of Goodview as well as School District 22. The tax
levies for the current year are:
Winona County $800,000
Goodview 700,000
School District 22 500,000
During March, the county tax agency collected $300,000 of taxes and distributed the money
appropriately.
Record the journal entries on the county tax agency fund

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3. The City of Ridgeway paved several streets, the cost of which was partially covered by special
assessments. Ridgeway is obligated to pay the related debt is the property owners default.
Prepare journal entries for the events below. If there is more than one fund involved, indicate the
appropriate fund.
a. A $60,000, 8 percent bond is issued at par
b. The general fund transfers $10,000 to the capital projects fund
c. Construction is completed at a cost of $70,000
d. Special assessments of $20,000 are levied and collected
e. The general fund transfers $400 to the appropriate fund for one months interest
f. At maturity date, the bond and six months interest are paid
Capital Projects Fund

General Fund

Debt Service Fund

4. Refer to the information in Exercise 3. Assume that Ridgeway is not obligated to pay the related debt
if the property owners default. Prepare journal entries for the same events, again indicating the fund
involved
Capital Projects Fund

General Fund

Agency Fund

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5. The citizens of Hokah approved a $10,000,000 bond issue on January 1, 2013. Proceeds were to be
used in the construction of a new city hall, municipal building and jail. Other approved financing
sources were $5,000,000 from a federal grant and $1,500,000 from the Hokah City general fund. The
revenue sources were recorded and the general fund transferred its commitment to the capital projects
fund. Bids were let for the architect and contract. The low bids, which were accepted, were
$1,180,000 and $12,550,000, respectively. Hokah sold its bond issue on March 1 for 103, but the
bond premium was not available to the capital projects fund, so it was transferred appropriately. The
City Council of Hokah decided to invest half of the bond issue proceeds in 6 month, 6 percent
certificates of deposit, as the money wasnt yet needed for construction. The architect and contractor
both submitted invoices of $3,000,000 which were paid, less a 1 percent retainage. Other expenses
were paid which totaled $1,300,000. The end of the year was June 30.

Prepare all of the journal entries for the capital projects fund for the City of Hokah for January
through June of 2013
(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

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6. The City of New Hartford has adopted the GASB No. 34 government-wide reporting requirements
and must prepare reconciliation schedule for the statement of activities. The following information is
available about items that differ between the governmental funds and the government-wide
statements. Assume that there were no internal service funds. The schedule of capital assets prepared
for the year ended December 31, 2013, includes the following items:
Government Beginning Ending
Activities Balance Additions Retirements Balance
Total capital assets $1,500,000 $250,000 ($100,000) $1,650,000
Less: accum. depr. (500,000) (50,000) 80,000 (470,000)
Net capital assets $1,000,000 $200,000 $(20,000) $1,180,000

The bond was issued at the beginning of the year, and the following amortization schedule is
available
Interest Cash Premium Bond
Date Expense Paid Amortization Balance
January 1, 2013 $150,000
December 31, 2013 $8,000 $9,000 $1,000 $149,000

Prepare a reconciliation of the statement of revenues, expenditures, and changes in fund balance to
the statement of activities on a government-wide basis for the year ended December 31, 2013.

Reconciliation of the Statement of Revenues, Expenditures

And Changes in Fund Balances of Government Funds
For the Statement of Activities
Net changes in fund balances total government funds $900,000
Governmental funds report capital outlays as
expenditures while governmental activities report
depreciation expense to allocate these expenditures over
the life of the asset. This is the amount by which capital
outlays exceeded depreciation in the current period.
Amortization of bond premium reduces expenditures in
the statement of revenues, but does not reduce funds
Changes in net assets of governmental activities

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SOLUTIONS

MULTIPLE CHOICE

1. B 5. C 9. A
2. A 6. A 10. A
3. D 7. D 11. C
4. D 8. B

MATCHING

1. J 5. K 9. A 13.E
2. I 6. F 10. G
3. H 7. D 11. B
4. C 8. L 12. M

EXERCISES

1.
a. Cash 4,080,000
Bond Issue Proceeds 4,080,000
Transfer to Debt Service Fund 80,000
Cash 80,000
b. Due from Federal Government 1,200,000
Revenue 1,200,000
c. Encumbrances 6,000,000
Reserve for Encumbrances 6,000,000
d. Expenditures Payable 76,000
Contracts Payable 76,000
Reserve for Encumbrances 76,000
Encumbrances 76,000
e. Due from General Fund 1,000,000
Transfer from General Fund 1,000,000

2.
To record property taxes receivable
Property Tax Receivable 2,000,000
Due to Winona County 800,000
Due to City of Goodview 700,000
Due to School District 22 500,000
To record collection of property taxes
Cash 300,000
Property Tax Receivable 300,000
To record distribution of taxes
Due to Winona County ([8/20] 300) 120,000
Due to City of Goodview ([7/20] 300) 105,000
Due to School District 22 ([5/20 300) 75,000
Cash 300,000

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3.
Capital Projects Fund
a. Cash 60,000
Bond Issue Proceeds 60,000
b. Cash 10,000
Transfer from General Fund 10,000
c. Expenditures 70,000
Cash 70,000
General Fund
b. Transfer to Capital Projects Fund 10,000
Cash 10,000
e. Transfer to Debt Service Fund 400
Cash 400
Debt Service Fund
e. Cash 400
Transfer from General Fund 400
f. Expenditures Principal 60,000
Expenditures Interest 2,400
Cash 62,400
4.
Capital Projects Fund
a. Cash 60,000
Contributions from Property Owners 60,0000
b. Cash 10,000
Transfer from General Fund 10,000
c. Expenditures 70,000
Cash 70,000
General Fund
b. Transfer to Capital Projects Fund 10,000
Cash 10,000
e. Expenditures 400
Cash 400
Agency Fund
d. Cash 20,000
Amount Held for Debt Service 20,000
e. Cash 400
Amount Held for Debt Service 400
f. Amount Held for Debt Service 62,400
Cash 62,400
5.
(1) Due from Federal Government 5,000,000
Revenue 5,000,000
(2) Due from General Fund 1,500,000
Transfer from General Fund 1,500,000
(3) Cash 1,500,000
Due from General Fund 1,500,000
(4) Encumbrances 13,730,000
Reserve for Encumbrances 13,730,000
(5) Cash 10,300,000
Bond Issue Proceeds 10,300,000
(6) Transfer to Debt Service Fund 300,000
Cash 300,000

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(7) Investments 5,000,000

Cash 5,000,000
(8) Expenditures 6,000,000
Cash 5,940,000
Contracts Payable Retained Percentage 60,000
Reserve for Encumbrances 6,000,000
Encumbrances 6,000,000
(9) Expenditures 1,300,000
Cash 1,300,000
(10) Interest Receivable (5,000 0.06 [4/12]) 100,000
Interest Income 100,000
(11) Interest Income 100,000
Revenue 5,000,000
Transfer from General Fund 1,500,000
Bond Issue Proceeds 10,300,000
Expenditures 7,300,000
Encumbrances 7,730,000
Transfer to Debt Service Fund 300,000
Unreserved Fund Balance 1,570,000

6.
Reconciliation of the Statement of Revenues, Expenditures
And Changes in Fund Balances of Government Funds
For the Statement of Activities
Net changes in fund balances total government funds $900,000
Governmental funds report capital outlays as
expenditures while governmental activities report
depreciation expense to allocate these expenditures over
the life of the asset. This is the amount by which capital
outlays exceeded depreciation in the current period. (200,000)
Amortization of bond premium reduces expenditures in
the statement of revenues, but does not reduce funds 1,000
Changes in net assets of governmental activities $701,000

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