Cpa Review- Far 8-2 (Modified Accrual Accounting)

Front 1

Similarities w/ Commercial GAAP

Back 1

1. Double-enty bookkeeping
2. Both serve to produce periodic B/S's or statements of financial position (current assets - current liabilities = fund balance)
3. Both serve to produce periodic operating statements (no I/S's in government fund reporting)

Hint 1

4. Both use historical cost and comply w/ most GAAP
5. Terminology is similar, additional terms are unique to modified accrual
6. Both are concerned w/ safeguarding assets and providing information for internal and external use.

Front 2

Differences w/ Commercial GAAP

Back 2

1. Funds must comply w/ both legal statutes and GAAP.
2. No profit motive and thus no income determination.
3. Each fund is a separate entity, a self-balancing set of accounts.
4. Budgetary accounting is emphasized in order to control spending.
5. Activity emphasizes the flow of current financial resources.

Hint 2

6. Encumbrance accounting is used to record purchase orders.
7. Governmental Modified Accrual: Book the budget, activity, encumbrances then close each account to the balance sheet for the same amount.

Front 3

Budgetary Accounting

Back 3

-Used by the GRaSPP funds to control expenditures and to account for the levy of taxes sufficient to cover estimated expenditures.
-Anticipate estimated revenues and appropriates them for current operations.
-May use cash basis or modified accrual basis of accounting.

Hint 3

-Budget is booked on opposite side of control.
-Sources of governmental resources: (1) Revenue: income and sales taxes, property and real estate taxes, fines and penalties. (2) Other Financing Sources: debt proceeds (bonds and notes), interfund transfers.
-AICPA focuses many questions on the details involving J/E's.

Front 4

Budgetary Accounting J/E's

Back 4

-Budgetary accounts are "estimated accounts" which are opposite (in terms of "natural" debit and credit balances) from "real," "proprietary," or "actual" accounts.
-Budgetary accounts posted only twice a year unless a supplemental appropriation is made.
1. At beginning of year, difference between estimated revenues and appropriations goes to an account called budgetary fund balance (the budgetary equity account).
-Term appropriations embraces both transfers and estimated expenditures.
-Estimated revenue and approved expenses appropriations is posted on the opposite side of the T account compared to actual amounts.

Hint 4

DR. Estimated Revenue Control
DR. Est. Transfers From Other Funds (in)
DR. Budgetary Balance (negative / deficit)
CR. Appropriations Control
CR. Estimated Transfers to Other Funds (out)
CR. Budgetary Fund Balance (positive / surplus)
-At the end of the year, the budget is reversed and closed, the J/E uses the same amounts that were recorded at the beginning of the period ± any adjustments.
-Budgetary accounts and actual activity are always closed out separately.

Front 5

Activity

Back 5

-Emphasis is on the flow of current financial resources (very nearly cash flow), not on profit and loss. Therefore, no matching principle application.
1. Revenue: recorded when measurable and available. This usually means the collection period doesn't exceed 60 days after fiscal year end (Jan & Feb).
-Non-exchange transactions: defined by GASB 33 as a transaction in which a government gives or receives value w/out directly giving or receiving equal value in return.*

Hint 5

*Ex's: Derived tax revenues (recognized when measurable and available), Imposed Non-Exchange Revenues (recorded when enforceable legal claim exists), Government Mandated Non-Exchange Transactions (recognized when eligibility requirements are met and measurable and available), Voluntary Non-Exhcnage Transactions (recognized when grant restrictions are met and measurable and available).

Front 6

Expenditures

Back 6

-Both operating and capital transactions are considered expenditures in governmental fund types. Both capital purchases and operating expenditures are considered spending of funds and are treated as current year expenditures.
-No capital asset is set up and there is no asset to depreciate. Capital purchases are however, recorded as government-wide governmental capital assets for government-wide reporting.
-The timing of expenditure recognition is governed by when the voucher payable is recorded.

Hint 6

DR. Expenditure
CR. Vouchers payable or Cash
-Alternatives to Expenditure Recognition
1. Purchase Method: (1) Expenditure current assets when purchased (supplies, pre-paids, inventory). (2) Reverse (set-up as a current asset) for items not used during period (still on hand).
2. Consumption Method: (1) Set up as a current asset when purchased (supplies, pre-paids, inventory). (2) Expenditure items as consumed (by periodic physical count).

Front 7

Transfers Between Funds

Back 7

-Although not an expenditure, transfers out represent the use of financial resources.
-Moving money, not spending money, not expenditure.

Hint 7

DR. Interfund transfer to debt service fund
CR. Cash (from the general fund)

Front 8

Classification of Governmental Expenditures

Back 8

-First classified according to the appropriate fund. Within the fund, the expenditures can be further classified by:
1. Function or Program (Ex: Public Safety): provides info on the overall purpose of the expenditures. Function groups into the major services of the entity. Program groups into activities, operations, or organizational units that are directed to the attainment of specific purposes or objectives. Both are broad classifications.
2. Organizational Unit (Ex: Police or Fire Department): corresponds to the organizational structure of the entity. May be responsible for carrying out several programs. They roll up into functional presentations.

Hint 8

3. Activity (Ex: Drug or Highway Enforcement): allows economy and efficiency of operations to be measured.. Measurement standards can be determined and the classification serves as a basis for budget preparation.
4. Character: refers to determining the basis of the fiscal period the expenditures are presumed to benefit. Major classifications are: (1) Current Expenditures*- Period expense, (2) Capital Outlays*- present and future periods, fixed assets, (3) Debt Service*- prior, current, and future periods, pay off LTD, (4) Inter-Governmental- transfers. *Expenditures
5. Object Classes: classifies the expenditure according to the type of items purchased or services obtained, = chart of accounts.

Front 9

Fixed Assets

Back 9

-(purchased, constructed, and leased) not expected to contribute to the generation of revenue. Isn't capitalized on the fund's books and instead is considered an expenditure of the funds. They are reported on the government-wide F/S's.
-Timing: when liability is incurred (voucher payable) not when cash payment is made.

Hint 9

DR. Expenditure
CR. Voucher Payable (or cash)
-Governmental funds (GRaSPP) will expenditure fixed assets, Proprietary and Fiduciary funds (SE-PAPI) will capitalize.

Front 10

Debts (Long-Term)

Back 10

-Proceeds from long-term debts are recorded in the governmental funds as "other financing sources." The governmental funds don't record or carry the LTD, it is recorded on the government-wide F/S's.

Hint 10

DR. Cash
CR. Other financing sources*
*General Rule: GRaSPP reports the LTD on it's I/S (Statement of revenue and expenditures and changes in fund balance).

Front 11

Encumbrances

Back 11

-Open purchase orders represent an encumbrance or commitment of the available appropriations of a government. Governmental accounting systems must reflect not only the expenditures but also the obligations to spend (purchase orders). Done to prevent the overspending of appropriations.
1. Encumbrance should not be viewed as a GAAp expenditure and the reverse for encumbrances, budgetary fund balance is not a liability. The reverse acts as a limitation or constraint that reduces the available fund balance.
2. Often recorded for budgetary control purposes, especially in the general and special revenue funds. Generally not used for recurring expenditures (ex: salaries). More commonly used for purchases, requiring the use of a purchase order by the government's policy.
-Set up an encumbrance, reverse the estimates when paid for the same amount. Record the actual expenditure when booking the activity.

Hint 11

3. If an encumbrance (purchase order) is still outstanding at year-end and appropriations don't lapse, reverse the J/E and include outstanding encumbrances in an appropriate fund balance classification. Usually included in "fund balance, committed or assigned." Outstanding encumbrances at year-end will be carried forward w/in the appropriate fund balance classification w/ a corresponding reduction of unassigned fund balance, if the appropriations do not lapse. Won't be specifically detailed on the face of the F/S's but may be disclosed if material.
4. In the following year, the use (spending / expenditure) of these amounts won't be recorded as an expenditure for comparison to the following year's budget, rather, it will be recorded as an expenditure of the prior year.