NFP Acctg. Concepts - 1 NOT-for-PROFIT ACCOUNTING Basic Concepts
Dec 22, 2015
NFP Acctg. Concepts - 2
NOT-FOR-PROFITACCOUNTING
Governmental units (state & local) Colleges and Universities Hospitals Voluntary Health and Welfare Organizations Others
– Trade & Professional associations– Performing arts associations– Religious organizations – Museums and art districts– Research & Scientific organizations
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Why study NFP Accounting?
Emphasis on CPA Exam May audit an NFP Entity Employment by NFP Entity Voluntary service to an NFP Entity
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Importance of Governmental Accounting
Absence of profit removes an important internal control Allocation of limited resources to unlimited needs
creates public debate Focus on methods used to generate financial sources
and the uses made of those funds Need to keep public informed (Stewardship) Massive
– Federal government– 50 State governments– Thousands of local governmental units
16-4
NFP Acctg. Concepts - 5
1. Governmental entities collect resources and make expenditures to fulfill societal needs.
2. Generally, governmental entities do not have a profit motive.
3. Government entities have legal authority for their existence, revenue raising powers through taxation, and mandated expenditures to provide services.
ContinuedContinuedContinuedContinued
GOVERNMENTAL VS.
FOR-PROFIT ENTITIES
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4. Governmental entities use comprehensive budgetary accounting and fund accounting (significant control mechanisms).
5. Primary emphasis in governmental accounting is to measure and report on management’s stewardship.
6. Governmental entities typically are required to establish separate funds to carry out their various missions.
7. Many fund entities do not record fixed assets or long-term debt in their funds.
GOVERNMENTAL VS.
FOR-PROFIT ENTITIES
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GOVERNMENT ACCOUNTING STANDARDS
Municipal Finance Officers Association (1951)– National Committee on Governmental Accounting
• (1968) “Governmental Accounting, Auditing, and Financial Reporting,” GAAFR
• Periodic updates - latest in 1994
AICPA– (1974) Industry Audit Guide - “Audits of State and Local Government
Units”– (1979) National Council on Governmental Accounting (NCGA) -
Statement No. 1– (1986) Audit and Accounting Guide - “Audits of State and Local
Government Units”
GASB (1984)– Created by FASB– Responsible for maintaining and developing accounting and reporting
standards for state and local governmental entities – Issues GASB Statements which are authoritative source of GAAP
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FINANCIAL REPORTING BY GOVERNMENT ENTITIES
Definition of government entity (GASB No. 14 - 1991)– Appoints majority of organization’s
governing body– Ability to impose its will on an
organization– Posseses financial benefit or assumes
financial burden from organization
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FINANCIAL REPORTING BY GOVERNMENT ENTITIES
(GASB NO. 34 1999-2003)
MD&A Basic financial statements
– Government-wide financial statements– Fund financial statements– Notes to financial statements
Other supplementary information
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GOVERNMENT-WIDE
FINANCIAL STATEMENTS
GOVERNMENT-WIDE
FINANCIAL STATEMENTS
1) Statement of Net Assets2) Statement of Activities3) Reconciliation Schedules4) Budgetary Comparison Schedules5) Other Required Supplementary
Information (RSI)a) Management’s Discussion and Analysis
(MDA)b) Information about Infrastructure Assets c) Footnotes
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FUND ACCOUNTING CONCEPTS
Fund = “A fiscal and accounting entity with a self-balancing set of accounts”
Unique nature of operations
Legal requirements or limitations
Distinct funding sources and/or activities or objectives
Emphasis on financial controls
Records cash and other resources, related liabilities, and residual balances
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Fund-Based Financial Statements Seek to Answer
Three Questions
How did the government generate its
current financial resources?
How did the government generate its
current financial resources?
Where did those financial resources go?
Where did those financial resources go?
What amount of financial resources is presently held?
What amount of financial resources is presently held?
16-12
NFP Acctg. Concepts - 13
1. General fund2. Special revenue funds3. Capital projects funds4. Debt service funds5. Permanent funds
Governmental Funds
6. Enterprise funds7. Internal service
funds
Proprietary Funds
8. Pension funds and other employee benefit trust funds
9. Investment trust funds
10. Private-purpose trust funds
11. Agency funds
Fiduciary Funds and Similar Component Units
FUNDS & ACCOUNT GROUPS
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GOVERNMENTAL FUNDS
General Fund– Routine operations– Not accounted for elsewhere
Special Revenue Funds– Specific revenue sources– Expenditures restricted to a
purpose Restricted activities such as maintenance of
public parks
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GOVERNMENTAL FUNDS Capital Projects Funds
Debt Service Funds– Accumulation of resources for, and
payment of principal and interest on long-term general obligation debt
Account for the acquisition or construction of major
capital facilities or improvements that benefit
the public.
Account for the acquisition or construction of major
capital facilities or improvements that benefit
the public.
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GOVERNMENTAL FUNDSPermanent Funds
Established in those cases in which the fund principal must be preserved but that the income from the permanent funds is required to be used for the benefit of the government’s programs or
its general citizenry.
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Governments sometimes offer goods or services for sale to the public. Such operations are
accounted for in an enterprise fund.
sports arenas
airports
utilities
busses
PROPRIETARY FUNDS ENTERPRISE FUNDS
–Same GAAP as –commercial entities
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Internal service funds account for the financing of goods or services provided by one department or agency to other departments or agencies, on a
cost reimbursement basis.
Internal service funds account for the financing of goods or services provided by one department or agency to other departments or agencies, on a
cost reimbursement basis.
centralized centralized purchasingpurchasingcentralized centralized purchasingpurchasing
vehicle vehicle poolspools
vehicle vehicle poolspools
supplies supplies inventoryinventorysupplies supplies
inventoryinventory
PROPRIETARY FUNDS INTERNAL SERVICE FUNDS
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1. Balance sheet
2. Statement of revenue, expenditures and changes in fund balance
FINANCIAL STATEMENTSGovernment Funds
NFP Acctg. Concepts - 21
Statement of Net Assets
Note that we Note that we keep the keep the
Governmental Governmental Activities Activities
separate from separate from the Business-the Business-
Type Activities.Type Activities.
Note that we Note that we keep the keep the
Governmental Governmental Activities Activities
separate from separate from the Business-the Business-
Type Activities.Type Activities.
Exh.16-1
16-21
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Statement of Net Assets
Also note that Also note that this statement this statement does not give does not give information information
about about Fiduciary Fiduciary
FundsFunds
Also note that Also note that this statement this statement does not give does not give information information
about about Fiduciary Fiduciary
FundsFundsThis is consistent with the This is consistent with the
economic resources economic resources management focus which only management focus which only includes assets and liabilities includes assets and liabilities
that are available to use for that are available to use for governmental purposes.governmental purposes.
This is consistent with the This is consistent with the economic resources economic resources
management focus which only management focus which only includes assets and liabilities includes assets and liabilities
that are available to use for that are available to use for governmental purposes.governmental purposes.
Exh.16-1
16-22
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Statement of Activities
The net for a given function is determined horizontally, while the
totals for expenses and revenues are
determined vertically.
The net for a given function is determined horizontally, while the
totals for expenses and revenues are
determined vertically.
Exh.16-2
16-23
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BASIS OF ACCOUNTINGGovernmental Funds
Modified Accrual
Applications of modified accrual– Revenues recorded when measurable
and available to finance expenditures in current period
– Expenditures recorded in period when liabilities are measurable and incurred
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BUDGETARY ACCOUNTING
Formally recorded in accounts– Operating budget– Capital budget
Legal basis for action
Emphasis on control
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EXPENDITURE PROCESS
Appropriation– Legal authority to expend resources– Recorded as part of budget
Encumbrance– Recorded when order is placed for goods or services– Control function
Expenditure– Recorded when goods or services are received– Voucher system
Disbursement
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ENCUMBRANCES
Reservation of appropriations Outstanding at fiscal year end
– Lapsing = authority expires and must be re-established in following
year– Non-lapsing = spending authority carries over to the following year
Final result of either method is identical
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REVENUE CATEGORIES
Derived tax revenues
Imposed nonexchange revenues
Government-mandated nonexchange transactions
Voluntary nonexchange transactions
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RECOGNITION OF REVENUE Property taxes
– Accrued when levied and available (often basis for ST financing)– Current year and collected within 60 days – Net of estimated uncollectibles– Maintain current/deliquent classification
Interest on investments & deliquent taxes– Accrued when earned available
Income and sales taxes– When subject to acrual (measurable and available)
Miscellaneous revenues (fees, fines, licenses)– Cash receipt
Grants, entitlements, shared revenue– When local government has the right to receive (meets eligibility
requirements
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RECOGNITION OF EXPENDITURES
Personal services & normal operating items– Cash payment
Goods & services– When received
Capital outlays for long-term facilities– In the period of acquisition
Interest on long-term debt– Period when payable
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INVENTORY EXPENDITURES
Purchase method– Acquisition = Expenditure
Consumption method– Use of inventory = Expenditure
Material amount of inventory• Recognition as an asset• Reservation of fund balance
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INTERFUND TRANSFERS & TRANSACTIONS
Interfund loans– Usually short-term (rec. or pay. on balance sheet)
Interfund services provided and used– Formally called “quasi-external transactions– Would be revenue or expenditure with external parties
Interfund transfers– To be used by receiving fund for operations– Not expected to be repaid– Not revenue for receiving fund (already shown in transferring fund) –
avoids “double counting”
Interfund reimbursements– Initially made from fund– Properly chargeable to another fund