Governmental Accounting, Financial Reporting and Budgeting
Governmental Accounting
The fund is the accounting entity
Governments use fund accounting because legal restrictions - earmarking, debt covenants, grant terms - require separate accountability. GASB defines three fund categories and eleven fund types:
- Governmental - general, special revenue, debt service, capital projects, permanent. Measurement focus: current financial resources; basis: modified accrual.
- Proprietary - enterprise and internal service. Measurement focus: economic resources; basis: full accrual.
- Fiduciary - pension/OPEB trust, investment trust, private-purpose trust, custodial. Full accrual.
Under modified accrual, revenues are recognized when measurable and available; a common policy is a 60-day availability window for property taxes. Expenditures are recognized when a liability is incurred and is normally paid from expendable available resources. Capital assets and long-term liabilities are excluded from governmental fund statements and appear in the government-wide statements.
Budgetary accounting
Appropriations are legally binding. Many governments record budgetary accounts (estimated revenues, appropriations) and encumbrances - commitments reserving spending authority for a purchase order or contract. Encumbrances are not expenditures under GAAP; at year-end an open encumbrance is reported as restricted, committed, or assigned fund balance, never as a liability.
Traps
- Applying full accrual to the general fund.
- Treating encumbrances as expenditures.
- Recognizing grant revenue before eligibility requirements are met (advance versus deferred inflow).
- Assuming the 60-day rule is mandatory - it is a policy election.
Worked example
A government levies $1,000,000 in property taxes; $950,000 is collected within its 60-day window. Under modified accrual it recognizes $950,000 of revenue and reports $50,000 as a deferred inflow of resources; the government-wide statements defer the same amount until it is available.
Financial Reporting and Budgeting
Two perspectives, one report
GASB's model presents a government-wide view on the full accrual basis (statement of net position; statement of activities showing net expense by function, offset by program revenues and general revenues) and a fund view using each fund type's own measurement focus and basis. A reconciliation links the two.
The CAFR has three sections: introductory, financial, statistical. The financial section contains the MD&A (required supplementary information, not a basic financial statement), the basic financial statements - government-wide statements, fund financial statements, and notes - plus RSI and combining statements.
Reporting entity
The reporting entity includes the primary government and component units: legally separate organizations for which elected officials are financially accountable. Component units are blended when so intertwined that separate presentation would mislead; otherwise they are discretely presented in a separate column.
Budgeting
Budgets are the legal authority to spend. Typical phases: executive preparation, legislative adoption, execution (with allotments or apportionments releasing spending authority), and audit or evaluation. Budget types include operating, capital, and cash budgets; performance budgeting links dollars to measurable results. Because the basis of budgeting often differs from GAAP, statements include a budget-to-GAAP reconciliation as RSI when a legally adopted budget exists.
Traps
- Calling MD&A a basic financial statement - it is RSI.
- Forgetting the statistical section is unaudited.
- Confusing blending with discrete presentation.
- Assuming the budget must be presented on the GAAP basis.
Rule of thumb
Convert fund balances to net position: net position ≈ fund balances + capital assets net of depreciation + deferred outflows − deferred inflows − long-term liabilities. If it does not balance, check the internal service fund and component unit columns first.