Comprehensive Example: General Fund | Governmental Accounting | CPA Exam FAR

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The purpose of fund accounting is to segregate those financial resources that have constraints or limitations on their use so that the government may demonstrate compliance with those limitations. However, many resources have no limitations on their use and do not require segregation. The General Fund accounts for any resources not reported in one of the other (limited-use) funds. Every general-purpose government will have one, and only one, General Fund. Special revenue funds are an example of a fund established because of constraints placed on the use of government resources. Note, however, that special revenue funds are not used if the resources are required to be used to acquire capital assets or for the payment of interest and principal on long-term debt.

GASB standards provide particular guidance for the use of special revenue funds. Specifically, the standards require that special revenue funds be used only if a substantial portion of the resources are provided by one or more restricted or committed (but not assigned) revenue sources. Although a government may use resources to supplement a special revenue fund, assignment of resources is not sufficient for the establishment of a special revenue fund. In this respect, special revenue funds are notably different from debt service and capital project funds. Further, if the government expects that a substantial portion of the resources supporting a special revenue fund’s activities will no longer be derived from restricted and committed revenue sources, the government should discontinue the use of a special revenue fund and report the fund’s remaining resources in the General Fund.

The financial statements of governmental funds are prepared on the modified accrual basis of accounting. Under modified accrual accounting, revenues are recognized when they are both measurable and available to finance expenditures of the current period. The term measurable means that the government is able to determine or reasonably estimate the amount. For example, property taxes are measurable before collection because the government determines the amount assessed and estimates any portion that will ultimately prove to be uncollectible. The term available means the amount is expected to be collected within the current period or soon enough thereafter to be used to pay liabilities of the current period.

The term expenditure rather than expense is used in modified accrual accounting. Expenditures are decreases in net financial resources and are generally recognized when the related liability is incurred. Expenditures may be for current purposes (such as salaries or electricity), for capital outlay, or for debt service (principal or interest). GASB Interpretation 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements (Sec. 1600.116), clarifies when expenditures should be recognized when using modified accrual accounting.

Generally, expenditures are recorded and fund liabilities are recognized when goods and services are received, regardless of whether resources are available in the fund. As a result, many expenditures are accrued, even in governmental funds. Expenditures for claims and judgments, compensated absences, pensions, and landfill closure and postclosure care costs of governmental funds should be recognized to the extent that the liabilities are going to be paid with available resources; additional amounts are reported as (long-term) liabilities in the government-wide statements. The most important exception is that debt service expenditures for principal and interest are recorded when due. This means that debt service expenditures are not accrued, but are recognized and fund liabilities are recorded on the maturity date.