Financial Accounting for Local and State School Systems: 2014 Edition Chapter 4: Governmental Accounting Fund Structure

  12. November 2020, von Sebastian

Both criteria must be met in the same element (assets, liabilities, etc.) for a fund to be defined as major. However, GASB Statement 34 permits a government to designate a particular fund that is of interest to users as a major fund and to individually present its information in the basic financial statements, even if it does not meet the criteria. However, a government does not have the option to not report a fund as major if it meets the criteria above. The government should also recognize transactions in which cash may have been exchanged by third parties on behalf of the government (e.g., bond issuances and bond retirement transactions, loan advances deposited and held by a trustee). The transaction should be recorded as if the cash was received and expended in order to reflect the legal transaction. For example, debt proceeds wired directly to an escrow account, payments by the State Treasurer’s Office to vendors for items purchased with LOCAL resources, etc.

  1. Governments use fund accounting to demonstrate fiscal responsibility to their resource providers.
  2. They should be expected to continue to comprise a substantial portion of the inflows reported in the fund.
  3. As can be observed above, the various fund types not only differ in their practical use but also in terms of the basis of accounting applied to recognize revenue and expenditures.

At each layer, the definition and display provisions should be applied before the layer is included in the financial statements of the next level of the reporting government. A fund is a standalone accounting entity with a set of self-balancing accounts for tracking cash and other financial resources earmarked for the purpose of carrying out specific functions or activities. Governments use fund accounting to demonstrate fiscal responsibility to their resource providers. The reporting entity is the primary government (including its blended component units) and all discretely presented component units. Governments should discontinue reporting a special revenue fund, and instead report the fund’s remaining resources in the general fund, if the government no longer expects that a substantial portion of the inflows will derive from restricted or committed revenue sources. In fund financial statements, governments should report governmental, proprietary, and fiduciary funds to the extent that they have activities that meet the criteria for using these funds.

Special revenue funds should not be used to account for resources held in trust for individuals, private organizations, or other governments. Special revenue funds include funds collected from specific sources. Governments use special revenue funds to finance specific projects. Separate funds are not required for bond redemption, construction, reserves, or deposits, for any utility. Separate funds are not required even though bond covenants may stipulate a bond reserve fund, bond construction fund, etc.

It differs profoundly from the accounting system used by for-profit commercial organizations. The objective of for-profit organizations is to maximize revenue and profit whereas nonprofit and government organizations have the goal of providing specified services with a fixed amount of revenues allocated. Local governments should periodically undertake a comprehensive evaluation of their fund structure to ensure that individual funds that became superfluous are eliminated from accounting and reporting.

Internal service funds should be used only if the reporting government is the predominant participant in the activity. Cash basis special purpose districts (such as a fire or water district) should not use the internal service fund category. Local governments may separate operating, capital projects and debt functions of enterprise funds. However, when reporting such proprietary activities, all those functions should be contained in one fund.

In most cases, discussions of fund balance will properly focus on a government’s general fund. Nonetheless, financial resources available in other funds should also be considered in assessing the adequacy of unrestricted fund balance in the general fund. The key measurement focus in a government fund’s financial statements is on expenditures, which are decreases in the net financial resources of a fund.

This means that these items are not only available to finance the expenditures of the period, but are also measurable. The “available” concept means that the revenue and other fund resources are collectible within the current period or sufficiently soon thereafter to be available to pay for the current period’s liabilities. The “measurable” concept allows a government to not know the exact amount of revenue in order to accrue it. The focus of governmental funds is on current financial resources, which means assets that can be converted into cash and liabilities that will be paid for with that cash.

Special Revenue Funds

Government funds include funds collected from the public held by a government entity. The Statement of Changes in Fiduciary Net Position shows all additions and deductions (different terminology than revenues and expenditures in governmental funds) to or from net position of the funds. In the past, Agency funds were not included in the Statement of Changes in Fiduciary Net Position, but this will now be required for the new Custodial funds.


Amounts over the formal policy may reflect a structural trend, in which case governments should consider a policy as to how this would be addressed. Additionally, an education or communication strategy, or at a minimum, explanation of large changes in fund balance is encouraged. In all cases, use of those funds should be prohibited as a funding source for ongoing recurring expenditures. Some types of funds use a different basis of accounting and measurement focus.

Special revenue funds

Fund accounting is the mechanism by which governments and nonprofits demonstrate their responsible use of the cash and other financial resources they receive. The nucleus of a financial reporting entity usually is a primary government. However, a governmental organization other than a primary government (such as a component unit, joint venture, jointly governed organization, or other stand-alone government) serves as the nucleus for its own reporting entity when it issues separate financial statements. For all of these entities, the provisions the GASB Statement 14 should be applied in layers from the bottom up.

They should be expected to continue to comprise a substantial portion of the inflows reported in the fund. While GASB Statement 54 has not provided a numeric range for substantial portion of inflows, it was recommended that at least 20 percent is a reasonable limit for reporting a special revenue fund. Local governments need to consider factors such as past resource history, future resource expectations and unusual current year inflows such as debt proceeds in their analysis. Code Fiduciary Funds – should be used to account for assets held by a government in a trustee capacity or as a custodian for individuals, private organizations, other governmental units, and/or other funds. It is recommended that at least 20 percent is a reasonable limit for restricted and committed revenues to create a foundation for a special revenue fund. The government-wide statement of net position and statement of activities should be prepared using the economic resources measurement focus and the accrual basis of accounting.

What is the accounting for Government Funds?

Capital outlays financed from general obligation bond proceeds should be accounted for through a capital projects fund. Capital project funds exclude those types of capital-related outflows financed by proprietary funds or for assets that will be held in trust for individuals, private organizations, or other governments (private-purpose trust funds). Code Capital Projects Funds – should be used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities or other capital assets. A governmental accounting system should be organized and operated on a fund basis. Fund financial statements should be used to report detailed information about primary government, including its blended component units.

As far as these types of funds are concerned, it can be seen that the return that is generated from these particular funds is supposed to be kept intact in terms of the principal amount. Only the interest that is generated from the principal amount can be disbursed as returns for the cause. With the use of funds, a governing body is able to establish and monitor how resources are allocated and spent, set and manage spending limits and achieve other fiscal accountability objectives. A common terminology and classification should be used consistently throughout the budget, the accounts, and the financial reports of each fund. (2) Activities accounted for in enterprise funds by different identifiable activities. These criteria should be applied in the context of the activity’s principal revenue source.


For example, purchases of capital assets are expensed during the year of acquisition without any capitalization of capital assets or allocation of depreciation expense. However, please be aware that certain liabilities should be reported on Schedule 09 and in the notes in financial statements. (1) Activities accounted for in governmental funds by function, to coincide with the level of detail required in the governmental fund statement of revenues, expenditures, and changes in fund balances. Proceeds of general long-term debt issues should be classified separately from revenues and expenditures in the governmental fund financial statements. In fund financial statements, the modified accrual or accrual basis of accounting, as appropriate, should be used in measuring financial position and operating results.

Other resources (investment earnings and transfers from other funds, etc.) also may be reported in the fund if these resources are restricted, committed, or assigned to the specific purpose of the fund. Governments also undertake various capital projects for public welfare. Capital governmental accounting fund types project funds include resources that they hold to construct different capital-base projects. Usually, it consists of funds that government expects to spend on creating infrastructure. General funds refer to government funds used by a government for primary services or activities.


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