Definition
Government accounting is far more complex as compared to normal accounting that is carried out by businesses. In this aspect, it is important to consider the fact that government accounting holds tantamount value for numerous different reasons.
Governments need to be accountable in terms of the funds they receive since these funds are technically generated from public collections, and therefore, they are accountable for it. Therefore, governmental accounting and fund management is considered to be a highly integral part of organizations.
Government funds are the main source of revenue for any particular government. Similar to any business that operates, governments also establish set accounts in order to achieve certain aims and targets. Therefore, a government fund is defined as a group of funds that the government has received over the course of a fiscal year.
This fund is mainly amalgamated from tax-supported activities that are undertaken by businesses. Government funds include various different heads, and for all these respective fund types, a separate balance sheet is duly maintained.
How Do Governmental Funds work?
Government Funds are supposed to be accounted for bearing in mind the blueprint provided by major accounting bodies. All government funds need to be accounted for using this particular premise, and there needs to be a clear understanding regarding these government funds, and how these funds are treated when it comes to accounting-related treatment.
Government Funds are classified into 5 main types. These governmental funds are as following:
- General Fund
- Capital Projects Fund
- Debt Service Funds
- Special Revenue Funds
- Permanent Funds
All these fund types are categorized on the basis of where they gain revenue from, and how this revenue is spent in order to account for it in a different manner. These funds and their respective functions are mentioned in the diagram below:
Further descriptions of these funds are given below:
General Fund
The general fund, as the name suggests, accounts for the basic activities or the services that are provided by the government. Technically, it is used for all ‘general’ transactions that are not accounted for elsewhere.
The general fund is used as a medium to account for respective different heads that are used in order to note all the related expenses in the respective accounting heads. This is also referred to as the chief operating fund of the government. It includes all the tax-related resources that are not classified elsewhere.
Capital Projects Fund
Capital Projects Fund accounts for financial resources that are mainly related to the construction of major capital-related projects. Therefore, it mainly accounts for infrastructure-related costs that are borne by the government. Therefore, they mainly include costs pertaining to significant capital expenditures that are undertaken, and this fund only holds reserves for this particular cause.
The reason behind creating a special fund behind the construction of major capital outlays lies in the realms of the volume of finance that is directed towards this cause. In the same manner, capital outlays have an inherent cost, and then there are other costs that are associated with the construction. Therefore, it makes sense to have a separate fund for all the capital-related projects, where all the information can be duly managed.
Debt Service Fund
The Debt Service Fund is used to account for and report financial resources that are spent in order to settle different debts. Therefore, this particular type of fund is used in order to account for all debt-related payments and issues within the government.
Hence, a debt service fund is created with the aim and the objective to pay back the long-term debt that has been issued by the government in order to finance specific government-related projects. All the revenue generations by the government, targeted towards debt repayments are collected in this particular fund so that it gets easier to have the required funds upon repayment date. It accounts for both, interest, as well principal repayments.
Special Revenue Funds
Special Revenue Funds are used in order to track the revenue from specific resources that are restricted to specific purposes. It is perhaps the most commonly used fund. It is used in order to undertake special projects by the government.
This particular fund is kept separate because it deals with a couple of different tasks that are specifically designated for a stated cause.
Permanent Funds
Permanent Funds are referred to as a restricted endowment that is known to generate and subsequently disburse money for a particular cause.
As far as these types of funds are concerned, it can be seen that the return that is generated from these particular funds is supposed to be kept intact in terms of the principal amount. Only the interest that is generated from the principal amount can be disbursed as returns for the cause.
Accounting Treatment of Government Funds
In order to accurately account for government funds, it is important to realize that the objective of government account should inculcate the following tasks and objectives:
- Full and accurate disclosure of funds and activities that are present to fully disclose the incoming and outgoing funds from the government reserve. All the transactions should be duly recorded, and then disclosed so that none of the important information is missed out upon.
- Determination and subsequent demonstration of proper compliance with finance-related legal as well as contractual positions.
Therefore, it can be seen that the governmental accounting system should be organized in a manner that ensures that all transactions are duly recorded in the system. In this regard, a fund is realized to be defined as a fiscal and accounting entity. The main premise here is to make sure that all cash or non-cash-related transactions are mentioned on the financial statement in order to reduce the chance of any embezzlement or fraudulent activities within the company.
Therefore, these accounts should be properly maintained in proper compliance with the stated rules and regulations, in order to ensure that all the respective tasks and objectives are properly accounted for. The treatment of these funds on the balance sheet is similar to that of any reserve that is undertaken by commercial companies. However, what needs to be inculcated is the fact that it is supposed to be maintained on a perpetual basis because at the end of the day, government accounts also undergo an auditing treatment.
Journal Entry for Government Funds
As mentioned earlier, it can be seen that government funds normally comprise funds collected from taxes and other various incomings. These ‘incomings’ are assumed to be the revenue for these government funds. In order to record this particular revenue, the following journal entry is made:
| Particular | Debt | Credit |
| Bank | xxxx | |
| Revenue (Tax Incoming) | xxxx |
In the same manner, as far as expenses are concerned, they are recorded in the following journal entry.
| Particular | Debt | Credit |
| Expenses | xxxx | |
| Bank | xxxx |
For all the subsequent entries, it can be seen that all journal entries are duly recorded in terms of ensuring that all commercial activities are recorded in a proper manner. All respective accounting entries are supposed to be recorded so that they are not missed out upon. Therefore, these journal entries are maintained following which financial statements are subsequently drawn for all the respective years.
For all the different fund types, separate financial statements are maintained, and this helps to analyze and audit all the different funds accordingly. Eventually, all these different categories of funds are amalgamated to get a holistic view of the performance of the government in terms of funds received, and the relevant expenses associated with these different heads.
