State and Local Governments: Fund Accounting and Modified Accrual
Governmental accounting is built around accountability, so questions often turn on which fund or measurement focus applies. Governmental funds-general, special revenue, debt service, capital projects, and permanent-use the current financial resources measurement focus and modified accrual basis: revenues are recognized when measurable and available, and expenditures when the liability is incurred and normally paid from current resources. Proprietary funds (enterprise and internal service) and fiduciary funds use full accrual, with economic resources focus. The classic trap is expending rather than expensing: governmental funds record capital outlays and debt principal payments as expenditures, not assets or liability reductions.
Fund balance classifications follow a hierarchy of constraint: nonspendable, restricted, committed (formal action by the governing body), assigned (intent), and unassigned (residual, generally only in the general fund). Questions frequently ask you to classify a resource; committed requires formal council action and cannot be unilaterally changed by management.
Government-wide statements (statement of net position and statement of activities) convert to full accrual and economic resources, reporting governmental activities and business-type activities separately plus discretely presented component units. Internal service funds are generally blended into governmental activities. Reconciliation between fund statements and government-wide statements is a common tested area.
Budgetary accounting uses the same basis as the budget; encumbrances reserve fund balance and are not expenditures. Worked rule: a city purchases a $500,000 fire truck with general fund cash. In the general fund it is an expenditure of $500,000; in the government-wide statements it is capitalized as a capital asset and depreciated, with no expenditure reported.