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Are you just starting to work in the governmental arena? Have you worked in the governmental arena for years but need a refresher to keep up with recent changes? If so, this is the course for you. This course features the fundamental tenets of governmental accounting and reporting in today’s environment. Learn more than the buzz words, learn the underlying concepts and how they are applied.
Objectives:
Prerequisite: None
VALUE AID! State and Local Governments AICPA Audit and Accounting Guide
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Chapter 2 - Fund Accounting and the Financial Reporting Model
Learning Objectives
After completing this chapter, you should
• Know the definition of funds and understand why they are used.
• Know how many funds are needed.
• Know the reasons to create new funds.
• Know the fund structure used by governments.
• Understand the financial reporting model used by governments.
Reporting in Two Ways
Governments report financial activities in two ways, by funds and the government as a whole.
Fund Fundamentals
So These Are Funds
Before a fund is defined, it is important to understand why governments use funds? One reason is because governments receive resources from a variety of sources for a variety of purposes. For example, a city may receive resources from the state to maintain roads or from the federal government to run a reading program. Governments may also hold resources restricted for such things as employee pensions or a required reserve for future debt payments. Governments must be able to demonstrate that that they are using resources for the purposes for which they were given.
In addition, governments are engaged in a diverse range of activities with different operating objectives. For example, many activities are provided without direct charge (for example, police service), while some services are set up to recover full costs (for example, water and sewer services). Governments will want to separately measure these types of activities to see if they are meeting their different financial objectives.
In order to meet the overall objective of accountability, governments must be able to demonstrate compliance with legal and other restrictions placed on resources as well as being able to properly measure the costs of different activities. To do this, governments use several smaller accounting entities called funds to provide financial information. Fund accounting provides the means to report financial activities based on different legal requirements as well as operating objectives.
The GASB defines a fund as follows:
A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.
This definition contains several important concepts. First, funds are not separate legal entities, but are created by accounting. The "self-balancing set of accounts" concept relates to the fact that each fund will record activity under its own accounting equation, and therefore separate financial statements can be prepared for each fund. Financial reporting by governments emphasizes the activities of funds and fund types. The final part of the definition gives several reasons for having separate funds.
Number of Funds
How many funds does a government need? Will 5, 10, 20, or 50 be enough? That depends on a number of things. Often the accounting system is capable of tracking several different activities within one fund. For example, a government may use one fund to account for all federal restricted operating grants. Another government may set-up separate funds for each major grant. What is important is that both governments must be able to demonstrate that they used the resources in compliance with any restrictions placed on those resources. In addition, separate funds must sometimes be used because of accounting or legal requirements. The following rule should be used to determine the number of funds:
In general, a government should use the minimum number of funds necessary for sound financial management and/or to meet legal and accounting requirements.
As the number of funds grows, so do the complexities in budgeting, accounting, and other administrative matters, while flexibility decreases. An organization must maintain a balance between too many and too few funds. Therefore, the number of funds that a government should use becomes a matter of professional judgment.
All governments need at least one fund, called a general fund. Use of additional funds again becomes a matter of legal requirements and professional judgment.
Creating a New Fund
A new fund can be established at any time. For example, a new fund may be mandated due to a new accounting standard or a change in the state constitution. A grant or other restricted revenue source may also require the use of a separate fund. Also, a government may start a new activity that it wants to track separately. The governing board may create a new fund at anytime during the year.
A new fund should be established when mandated by legal requirements or through accounting standards. In other cases, management needs to determine if the desired level of financial control and management can be achieved by accounting for an activity within an existing fund or if a separate fund is required.
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