Just like all for-profit organizations, governmental entities have to prepare annual financial statements to report all the revenue generated, expenses incurred, and their net worth.
The Governmental Accounting Standards Board (GASB) requires all government organizations to prepare the Comprehensive Annual Financial Reports (CAFR) as per modified accrual basis accounting.
Just like the financial statements for for-profit organizations, governmental entities prepare the following reports:
|Business Financial Statement||Equivalent Governmental Financial Statement|
|Income Statement||Statement of Activities|
|Statement of Financial Position||Statement of Net Assets/Fund Balance|
|Statement of Cash Flow||Statement of Cash Flow|
What are funds?
As per the GASB, funds are 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.”
Funds are not separate legal entities but resources segregated into different activities to keep close tabs on the cash inflow and outflow.
Funds allow the government to ensure that the correct amount of money is spent on the right areas, and that money isn’t overspent or underspent irresponsibly.
Government’s funds are classified into three major categories:
- Proprietary Funds: These are funds used for business-type activities by the government. The services provided are supported by fees or charges.
- Fiduciary Funds: These funds are used to account for assets held by the government in trust for others.
- Governmental Funds: These funds account for activities provided to the public supported by the tax revenue generated by the government. Police, sanitation, social services, and other emergency services all fall under this category.
Proprietary and fiduciary funds aside, the statement of funds balance reports only the governmental funds which are segregated into the following 5 categories:
General Fund: This includes everything that can’t be categorized under other funds. Where other funds are specified for certain purposes, general funds account for every government function that isn’t categorized.
Special Revenue Fund: As the name suggests, special revenue funds are used to account for specific government activities supported by tax generated from specific sources. Citizens can see the revenue that has been generated under this fund and it is typically used for maintaining entities like schools, parks, and libraries.
Debt Service Fund: This fund is used to account for debt payments made by the government to its lenders for obtaining long-term debts to finance certain projects. The amount reported under this fund includes interest and principal both.
Capital Projects Fund: All government activities that involve construction, maintenance, rehabilitation, and acquisition of capital assets are accounted for under the capital projects fund. However, not all capital expenditures get categorized under this fund and may get typed under special revenue or general fund.
Permanent Fund: This fund accounts for resources and investments collected by the government that it can not spend elsewhere. Any revenue generated through such investments can be spent on activities specified by the provider of such resources.
Financial Accounting and Reporting:
All governmental funds are recorded and reported as per a modified accrual basis of accounting. This means that tax revenue is recorded when it becomes measurable and available, and expenses are recorded whenever the liability for it is incurred.
The balance sheet which constitutes of the statement of fund balance has the following line items:
- Deferred outflow of resources,
- Deferred inflow of resources,
- Fund balance
In terms of accounting, however, funds can be defined as the difference between assets owned and liabilities owed by the government. It is the amount of resources that the government would be left with after paying off the liabilities.
Fund Balances = Assets + Deferred outflow of resources – Liabilities – Deferred inflow of resources
On the statement of fund balances, this equation is proved by reconciliation. The net assets are always equal to the sum of liabilities and fund balances.
Here is an example of the balance sheet, also known as statement of fund balance:
Lastly, as you can see in the figure above, the fund balances are reported in two compartments; reserved and unreserved.
Reserved funds reports resources that can not be appropriated or expended or are legally reserved for certain governmental activities.
On the other hand, unreserved funds are the amount of resources that are not reserved, and can be used for any activity.
Unreserved funds reported under debt service funds are used for debt payments whereas unreserved funds reported under general funds can be used for any purpose at all.
Statement of fund balance is a part of the balance sheet that governmental entities are required to prepare every year.
It summarizes the allocation of all governmental funds and makes it easier to understand how resources are used by the government.