Chapter 5: Financial Reporting — Fund Financial Statements — Reporting of Expenditures/ExpensesExpendituresGASB Codification Chapter 1600.116 defines expenditures as decreases in net financial resources. In governmental funds, the recognition of expenditures occurs in accordance with the modified accrual basis of accounting. Expenses incurred in proprietary funds are recognized using the accrual basis of accounting. Therefore, significant differences exist between the recognition of expenditures in governmental funds and the recognition of expenses in proprietary funds. Show
In governmental funds, expenditures are usually recognized in the accounting period in which the goods or services are received and the liability for payment is incurred. However, in instances in which current financial resources are not reduced as a result of the incurrence of a liability, an expenditure is not recorded. A common example is the liability for compensated absences (e.g., employee sick and vacation pay). Such liabilities result from current services received from employees; however, the payment of the liabilities usually does not occur until a future date. As a result, compensated absences relating to employees whose salaries are accounted for in governmental funds are not recorded as expenditures and liabilities of the fund until the due date for payment of the compensated absences. GASB Interpretation No. 6 clarifies the guidance for recognizing certain liabilities and expenditures in governmental funds, including general long-term indebtedness, such as compensated absences. The matured portion of long-term indebtedness, to the extent it is expected to be liquidated with expendable available financial resources, should be recorded as a fund liability and expenditure. The unmatured portion of the long-term indebtedness represents a general long-term liability to be presented in the government-wide financial statements. Types of Expenditures and Accounting Treatments
In addition, transfers result in the reduction of a fund's expendable resources, but they are not classified as expenditures. A transfer is a legally authorized movement of monies between funds in which one fund is responsible for the receipt of funds and another fund is responsible for the actual disbursement. In a transfer, the disbursing fund records the transaction as "other financing uses" of resources and not as an operating expenditure, whereas the fund receiving the transfer does not record the receipts as revenue but rather as "other financing sources" of funds. ExpensesExpenses are defined as the outflows or expiration of assets or the incurrence of liabilities during a period from providing or producing goods, rendering services, or carrying out other activities that constitute the entity's primary operations. Proprietary funds recognize expenses using the accrual basis of accounting (i.e., when the related liability is incurred) without regard for the timing of the payment. This recognition criterion is consistent with the following guidelines discussed in Financial Accounting Standards Board (FASB) Statement No. 5. Although FASB Statements do not represent authoritative guidance for governments, the discussion is useful in classifying expense transactions within proprietary funds.
As examples, the major types of governmental expenditures are accounted for differently in proprietary fund expenses as follows:
Top What funds use modified accrual accounting?Modified accrual basis accounting is used for all governmental funds (general, federal special revenue, other special revenue, general debt service, debt service, and capital projects). Under the cash basis, transactions are recognized only when cash changes hands.
Which funds are accounted for using the accrual basis of accounting?Custodial Funds
They hold the resources until disbursement is made to authorized recipients or entities. These funds are accounted for using the accrual basis of accounting and use the economic resources measurement focus.
What is the modified accrual basis of accounting?Modified accrual is a combination of cash basis and full accrual basis. Revenues are recognized when they are both measurable and available. Measurable — the cash flow from the revenue can be reasonably estimated. Available — the revenue is available to finance current expenditures to be paid within 60 days.
Which of the following funds of a governmental unit uses the modified accrual basis of accounting to prepare its fund financial statements?The Service Revenue Funds uses a modified accrual basis of accounting.
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