17.1 Fund Accounting Principles
5 min read•july 30, 2024
is a unique system used by governments and nonprofits to track resources. It focuses on accountability and stewardship rather than profit, using separate funds to segregate resources based on purpose or restrictions.
This system employs different accounting bases and fund types. Governmental funds use modified accrual accounting, while proprietary and fiduciary funds use accrual. Each type serves specific purposes, from general operations to enterprise activities to trust management.
Fund Accounting Principles
Unique Characteristics and Focus
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- Fund accounting focuses on accountability and stewardship of resources rather than profitability, which is the focus of for-profit accounting
- The use of funds allows for the segregation of resources based on their intended purpose, legal requirements, or restrictions imposed by donors or grantors (grants, donations)
Basis of Accounting
- The of accounting is used for governmental funds, which recognizes revenues when they are measurable and available, and expenditures when liabilities are incurred
- The accrual basis of accounting is used for proprietary and fiduciary funds, which recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash is received or paid (similar to for-profit accounting)
- in fund accounting are prepared separately for each fund, providing transparency and accountability for the use of resources within each fund (balance sheet, income statement, cash flow statement)
Types of Funds
Governmental Funds
- Governmental funds include the , Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds
- The General Fund is used to account for all financial resources except those required to be accounted for in another fund (main operating fund)
- Special Revenue Funds are used to account for specific revenue sources that are legally restricted or committed to expenditure for specified purposes (gas taxes for road maintenance)
- Capital Projects Funds are used to account for financial resources used for the acquisition or construction of major capital facilities (new government buildings, infrastructure)
- Debt Service Funds are used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest (bonds, notes)
- Permanent Funds are used to account for resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government's programs (endowments)
Proprietary Funds
- Proprietary funds include Enterprise Funds and Internal Service Funds
- Enterprise Funds are used to account for operations that are financed and operated in a manner similar to private business enterprises, where the intent is to recover costs primarily through user charges (public utilities, airports)
- Internal Service Funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit, or to other governmental units, on a cost-reimbursement basis (fleet maintenance, IT services)
Fiduciary Funds
- Fiduciary funds include Pension Trust Funds, Investment Trust Funds, Private-Purpose Trust Funds, and Custodial Funds
- Pension Trust Funds are used to account for resources that are required to be held in trust for the members and beneficiaries of defined benefit pension plans, defined contribution plans, or other postemployment benefit plans (government employee retirement plans)
- Investment Trust Funds are used to account for the external portion of investment pools reported by the sponsoring government (local government investment pools)
- Private-Purpose Trust Funds are used to account for trust arrangements under which principal and income benefit individuals, private organizations, or other governments (scholarship funds, cemetery perpetual care funds)
- Custodial Funds are used to account for resources held by the reporting government in a purely custodial capacity (property taxes collected on behalf of other governments)
Budgetary Accounts
Purpose and Use
- Budgetary accounts are used to record the adopted budget, track actual revenues and expenditures, and monitor compliance with the budget throughout the fiscal year
- The use of budgetary accounts allows for the comparison of actual financial activity to the adopted budget, enabling management to identify variances and make necessary adjustments
- Budgetary accounts are typically used in governmental funds, as these funds are required to have a legally adopted budget
Components of Budgetary Accounts
- The budgetary accounts include estimated revenues, appropriations, encumbrances, and fund balances
- Estimated revenues represent the anticipated inflows of resources for the fiscal year (property taxes, grants, fees)
- Appropriations represent the authorized expenditures for the fiscal year (salaries, supplies, capital outlay)
- Encumbrances represent commitments related to unperformed contracts for goods or services (purchase orders)
- Fund balances represent the difference between assets and liabilities, including budgetary accounts (unassigned, assigned, committed, restricted, nonspendable)
- Budgetary control is maintained by ensuring that expenditures do not exceed appropriations at the legal level of control, which is usually at the fund, department, or object level
Governmental vs Proprietary vs Fiduciary Funds
Governmental Funds
- Governmental funds are used to account for activities primarily supported by taxes, grants, and similar revenue sources, focusing on current financial resources and the use of the modified accrual basis of accounting
- Governmental funds have a short-term focus and measure the flow of current financial resources
- Governmental funds do not report capital assets or long-term liabilities on their balance sheets
Proprietary Funds
- Proprietary funds are used to account for activities that are financed and operated in a manner similar to private businesses, focusing on the determination of operating income, financial position, and cash flows, and using the accrual basis of accounting
- Proprietary funds have a long-term focus and measure the flow of economic resources
- The financial statements for proprietary funds include the statement of net position, statement of revenues, expenses, and changes in net position, and statement of cash flows
Fiduciary Funds
- Fiduciary funds are used to account for resources held in a trustee or custodial capacity for the benefit of parties outside the government, focusing on net position and changes in net position, and using the accrual basis of accounting
- Fiduciary funds have a long-term focus and measure the flow of economic resources
- The financial statements for fiduciary funds include the statement of fiduciary net position and the statement of changes in fiduciary net position
Key Terms to Review (17)
Accountability Reporting: Accountability reporting is the process by which an organization demonstrates transparency and responsibility regarding its financial resources and activities, ensuring stakeholders that funds are being used effectively and in accordance with established guidelines. This type of reporting is essential in fund accounting as it provides a clear view of how resources are allocated and spent, reinforcing trust with donors, taxpayers, and other stakeholders.
Budgetary compliance: Budgetary compliance refers to the adherence to the approved budget within an organization, ensuring that actual expenditures do not exceed budgeted amounts. This concept is crucial in maintaining fiscal discipline, allowing organizations to meet their financial goals and objectives while providing transparency and accountability in financial reporting.
Current financial resources measurement focus: Current financial resources measurement focus is an accounting approach used primarily in governmental and not-for-profit entities that emphasizes the flow of current financial resources available for spending in the near term. This focus assesses the inflows and outflows of financial resources, such as cash and receivables, rather than the overall economic resources of an entity, leading to a unique presentation of financial statements that aids in understanding short-term fiscal health.
Economic resources measurement focus: The economic resources measurement focus refers to the approach used in accounting to assess and report the financial position of an entity based on its economic resources, including assets, liabilities, and net position. This focus emphasizes the importance of measuring the value of resources available for use and the obligations that exist, which is particularly significant in the context of how government entities manage and report their financial activities.
Encumbrance Accounting: Encumbrance accounting is a budgeting method used primarily in governmental and not-for-profit organizations to track commitments for future expenditures. This approach helps in monitoring spending by reserving funds for specific purchases, ensuring that budgeted amounts are not overspent and that financial resources are appropriately allocated. It plays a vital role in fund accounting by enhancing transparency and accountability in the management of public funds.
FASAB: FASAB stands for the Federal Accounting Standards Advisory Board, which is responsible for establishing accounting standards for the federal government in the United States. This board aims to improve the financial reporting of federal entities by promoting transparency, accountability, and effective communication through standardized accounting practices. FASAB plays a crucial role in ensuring that government financial statements provide reliable and relevant information to stakeholders.
Financial audits: Financial audits are systematic examinations of an organization’s financial statements and related operations, aimed at ensuring accuracy and compliance with accounting standards. These audits provide assurance to stakeholders that the financial reports are free from material misstatements, whether due to fraud or error, and help maintain transparency in financial reporting.
Financial statements: Financial statements are formal records that outline the financial activities and position of a business, organization, or individual. These documents provide a summary of the financial performance, including income, expenses, assets, and liabilities, which are essential for stakeholders to make informed decisions. They serve as a crucial tool for accountability and transparency in reporting the financial health of an entity.
Fund accounting: Fund accounting is a specialized accounting system used primarily by not-for-profit organizations and governmental entities to track and manage financial resources by segregating them into various funds based on their intended purpose. This method helps ensure that funds are utilized according to donor restrictions, legal requirements, or organizational policies, providing transparency and accountability in financial reporting.
General fund: The general fund is the primary operating fund used by government entities to account for all financial resources that are not required to be accounted for in another fund. It serves as the main source of funding for government services and activities, covering a wide range of expenditures including public safety, education, and infrastructure. This fund plays a crucial role in maintaining transparency and accountability in government financial reporting.
Governmental Accounting Standards Board (GASB): The Governmental Accounting Standards Board (GASB) is an independent organization that establishes accounting and financial reporting standards for U.S. state and local governments. It plays a critical role in ensuring that governmental entities provide transparent and comparable financial information to the public, stakeholders, and regulatory bodies. Through its standards, GASB seeks to enhance accountability and facilitate informed decision-making by users of financial statements.
Interfund Transfers: Interfund transfers refer to the movement of funds between different governmental or non-profit funds, allowing for the allocation of resources according to needs and priorities. These transfers are essential in fund accounting as they ensure that each fund operates efficiently, maintains its purpose, and meets financial requirements without compromising overall fiscal health.
Modified accrual basis: The modified accrual basis is an accounting method that combines aspects of both cash and accrual accounting, primarily used in government financial statements. Under this method, revenues are recognized when they become measurable and available, while expenditures are recognized when the related liability is incurred. This approach helps to provide a more accurate representation of a government's financial status by focusing on short-term financial performance and ensuring that resources are accounted for when they are expected to be available for use.
Permanent Fund: A permanent fund is a type of investment fund that is established to provide long-term financial stability and support for specific purposes, such as public services or educational initiatives. The principal amount of the fund remains intact, while the earnings generated from investments are used for designated expenditures. This structure ensures a sustainable source of funding over time, aligning with the principles of fund accounting.
Restricted fund: A restricted fund is a type of financial resource that has limitations on its use, typically imposed by the donor or grantor. These restrictions can dictate how the funds can be spent, ensuring they are used for specific purposes, such as scholarships, research, or program activities. This concept is important in fund accounting as it helps organizations track and report on how resources are allocated according to the intended purpose.
Special revenue fund: A special revenue fund is a type of governmental fund that is used to account for the revenues that are legally restricted to specific purposes. This means that money coming into this fund can only be spent on designated activities or projects, often funded by taxes, grants, or fees. Special revenue funds help governments manage resources for particular needs, ensuring transparency and accountability in how those funds are used.
Unrestricted fund: An unrestricted fund is a type of financial resource that an organization can use for any purpose, without limitations imposed by donors or external parties. These funds provide organizations with the flexibility to allocate resources according to their needs, priorities, or operational strategies, making them essential for day-to-day operations and long-term planning.