Chapter 5
Recognizing Expenditures in
Governmental Funds
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Learning Objectives
 Modified accrual basis
 Full accrual basis
 Accounting for different expenditures
 Types of interfund activities and how they are
reported
 Other Financing Sources and Uses
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Modified Accrual Accounting
 Criteria : Measurable and Available
 Measurable : Government is able to
determine or reasonably estimate the
amount.
 Available : Collectible within the current
period or soon enough thereafter to be used
to pay liabilities of the current period.
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Expenditures & Expenses
 Expenditures (measure of fund liabilities
liquidated with current resources)
-Modified accrual basis--Governmental funds
-Are decreases in net current financial
resources
 Expenses (measure of costs expired or consumed
during a period)
-Full accrual basis--Government-wide Statements
-Reduction in net economic resources
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Expenditures

Expenditures are closely tied to
cash flows and near-cash flows

Governmental funds report only current
liabilities and not long-term liabilities.

A government recognizes expenditures when it
pays cash for goods and services received or
accrues a liability.
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Expenditure Definition and Recognition

Definition - Decreases in Fund Net Assets NOT resulting
from Transfers (and refunding transactions)
 NORM – Recognize when FUND Liability is incurred
 Exceptions:
--Debt Service Expenditures on GLTD – When Legally
Due
--Either Purchases or Consumption Basis for Materials,
Supplies, and Prepaid Items
--Pensions, Claims and Judgments, Compensated
Absences – When Payable from Available Expendable
Financial Resources
--Capital Leases – on Substance vs. Form Basis
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GAAP
 GASB Codification, paragraphs 1600.102 through
1600.105.
 The Codification asserts that the “accrual basis is
the superior method of accounting for the
economic resources of any organization,” and
states that the “use of the accrual basis to the
fullest extent practicable is recommended.”
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Salaries and Wages
 May be earned in one fiscal year but
paid in the next.
 Should be recognized in the period in
which it is earned provided the
government’s obligation will be
liquidated with expendable available
financial resources.
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Salaries and Wages (Payroll)

Payroll accounting is similar for a governmental fund
and a for-profit entity, except Expenditures rather than
Expenses are recorded.

Example: Wages and related benefits of employees for
the last pay period in December 2006 were $40 million.
Employees are to be paid on January 6, 2007. The fiscal
year ends December 31.
General Fund
Wages and benefits expenditures
Accrued wages payable
DR
$40
CR
40
Government-wide: same.
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Payroll (cont’d)
 Debit Expenditures for the full amount of payroll and credit liabilities
for withholdings from employees pay; credit Cash for the amount paid
to employees.
 Example: Timbaktu City recognized its payroll for the most recent
two week pay period for employees paid from the General Fund.
GF General Journal
Expenditures--2007
Due to Federal Gov’t
Due to State Gov’t
Cash
Dr.
948,000
Cr.
86,000
49,000
713,000
The Subsidiary Ledger provides the details of the total expenditure as follows:
General Government
178,000
Public Safety
480,000
Public Works
290,000
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Payroll (cont’d)

Record Expenditures for the employer’s payroll costs,
including employer’s share of FICA and credit a liability to
federal government.

Encumbrances usually are not recorded for recurring
expenditures such as payroll.
The employer’s share of FICA is recorded.

GF General Journal
Expenditures--2007
Due to Federal Gov’t
Dr.
$188,000
Cr.
188,000
Expenditures Subsidiary Ledger:
Contributions for Retirement
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188,000
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Governments Vs. Business
 7 Major differences between the application of
accrual method in governmental funds and
business:







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Compensated absences
Pension accounting
Claims and Judgments
Inventory accounting
Prepayments
Accounting for capital assets
Accounting for interest and principal
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Compensated Absences (CA)
 They are earned in one period but often not paid
until several periods later. Therefore, its not
current.
 Amount of compensation to be paid is not always
certain. It is based on the salary/wage rate in
effect when the time off is taken.
 GASB states that vacation leave and compensated
absences should be accrued as a liability as the
benefits are earned if BOTH the following
conditions are met:
-Attributable to services already rendered and
-Probable that compensation will occur (paid
time off or other means)
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Compensated Absences: (Cont’d)
 Vacation pay expenditures and related fund liabilities
should be recognized in the periods in which they are due.
 Until those periods, those liabilities are reported ONLY in
the schedule of long-term obligations.
 Example: City employees earned $300,000 in vacation
leave they did not take in 2007. The leave vests and can be
taken at any time up to retirement.
Government-wide:
Vacation pay expenditure
Accrued vacation payable
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DR
CR
$300,000
300,000
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Vacation Leave
 Example: City employees earn $8 million in vacation
leave. Of this amount, they are paid $6 million in 2007
and defer the balance until future years.
Governmental fund
Vacation pay expenditure
Cash (or Wages Payable)
DR
$6
CR
$6
The $2 million deferred until future periods should be reported in a
schedule of long-term obligations.
Government-wide statements
Vacation Pay expense
Cash (or Wages Payable)
Accrued Vacation Pay
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DR
$8
CR
$6
$2
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Sick Leave
 Beyond the control of both the employee and the
employer.
 GASB states that sick leave is recognized as a
liability only if it is probable that the employer
will compensate the employees for the benefits
through cash payments conditioned on the
employees’ termination or retirement.
 It should be recorded ONLY when expected to be
paid to employees upon their resignation or
retirement.
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Example-Sick Leave
Example: City employees earned $170,000 in sick leave but were only
paid for $140,000. The leave accumulates but does not vest.
Governmental fund
Sick leave expenditure
Cash
DR
$140,000
CR
$140,000
The city will not have to compensate employees for leave
not taken as a termination benefit. It should charge as an
expenditure only the amount that was liquidated with
expendable financial resources. It need not report a
liability even in the schedule of long-term obligations.
Government-wide: Same rules apply. But only the $140,000
paid needs to be charged as an expense.
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Sick Leave (cont’d)
• Example: A city pays for its employees’ unused sick leave up to
thirty days only if they terminate at least after 10 years of service. In
2007, the city had the following estimates:
-Sick leave earned = $12 mil; Payments to future employees = $8mil
-Payments to 10-year employees upon termination = $1mil
-Amount that will not be paid = $3mil
Governmental fund:
No entry is required. The city recognizes a liability only for the $1
million to be paid in termination benefits. Assuming that those
termination benefits are not paid in the current year, it is recognized in
the schedule of long-term obligations
Government-wide:
Sick leave termination benefit expense
Accrued Sick Leave
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DR
$1
CR
$1
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Sabbatical Leave
 After a specified term of service, employees may be
granted a paid leave.
 They are offered to benefit both the employee and the
employer in the future, not the past.
 The employees are required to perform other activities that
will enhance their job-related abilities during their time off.
 GASB states that the accounting for sabbatical leave
depends on the purpose of the leave.
 During the leave, if the employees are required to engage
in activities to enhance their job-related skills, then it
should be accounted for in the period the leave is taken.
 Instead, if the leave is for “compensated unrestricted time
off,” then the liability is accrued during the period the
leave is earned.
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Sabbatical Leave- Example

City teachers are entitled to sabbatical leaves of
six months every 7 years for research and
renewal. The 2007 share of leave costs to be
taken in the future was $300,000.

Sabbatical leaves need not be recognized as a liability
unless the leave is a reward for past service (i.e. it is for
unrestricted time off). It need not be accrued if it
constitutes merely a change in assigned duties (e.g.)
research instead of teaching).
Government-wide: same.

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Pensions
 Definition: Amount of money paid to
retired or disabled employees.
 If the Government makes the required
contribution to the pensions in full, then the
amount to be recorded would be the
amount of contribution.
 According to GASB, the expenditure
should be the amount that will be liquidated
with expendable available financial
resources.
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Pensions - Example
According to city actuaries, employees earned $370,000 in
pensions. However, the city had budgeted only $300,000.
During the year it contributed to its pension fund $250,000
and plans to contribute an additional $50,000 in early Jan.2007.
General Fund
DR
CR
Pension expenditure
$300,000
Cash
$250,000
Current obligation to
Pension fund
$50,000
Government-wide: The entire $370,000 earned by employees
would be charged as an expense.
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Pensions - Example
• A city is estimated to contribute $55 million to its pension
fund. However, it elects to contribute only $45 million.
Governmental fund:
Pension expenditure
Cash
(or current pension liability)
DR
$45
Government-wide:
Pension expense
Cash/Current pension liability
Pension liability
DR
$55
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CR
$45
CR
$45
$10
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Claims and Judgments (CJ)
Common examples:
 Injuries to employees
 Negligence of government employees
 Contractual disputes with suppliers
 Employment practices
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Claims and Judgments (CJ)
 GASB Std. #10, Claims and Judgements, para. 53. (also
FASB Std. # 5)
 Liability accrued if:
-Probable that Asset Impaired/Liability Incurred by Balance Sheet
date
-Loss can be reasonably estimated
 Expenditure recognized in the governmental fund only for the
portion of liability that is:
-Normally to be Liquidated with Available Expendable Financial
Resources
-Liability recorded at “face value.”
 Balance of liability is in GLTDAG –
-No expenditure recognized
-Expense is recognized in the government-wide statements at the
time the loss liability first satisfies the FASB No. 5 criteria.
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Claims and Judgments -Example
 The city settled a judgment brought against it by an injured
employee. The city agreed to pay $6 million in 2005 and
$4 million in each of the next five years.
General Fund:
DR
CR
Expenditures
$6
Claims payable
$6
Government-wide: Assuming discount rate of 6% and 5
payments at the end of the following five years.
DR
CR
Expenses
$22.8
Claims payable (current)
$ 6.0
Claims payable (long-term)
16.8
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Materials and Supplies




Are not expendable available financial resources
Unlike businesses, governments do not acquire inventories
with the intention to resell them.
Instead, they use it to carry out day-to-day operations.
Two Primary issues pertaining to governmental fund are:
-Timing of the expenditure
-Reporting of the asset

Two methods of accounting
-Consumption Method
-Purchases Method


Under each method we assume that periodic rather than
perpetual inventory accounts are maintained;
All purchases are debited to Expenditures and that the
Inventory of Supplies account is updated at year-end as an
adjusting entry.
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Materials and Supplies (cont’d)
Consumption Method. Assume the following data:
Beginning inventory
Purchases during year
Available for use
Ending inventory
Amount consumed
$ 20,000
150,000
170,000
(15,000)
$155,000
Adjusting Journal Entries:
Dr.
Expenditures--2007
Inventory of Supplies
Reserve for Inventory of Supplies
Fund Balance
$5,000
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Cr.
5,000
5,000
5,000
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Materials and Supplies (cont’d)
Purchases Method. Assuming the same data:
Beginning inventory
Purchases during year
Available for use
Ending inventory
Amount consumed
Adjusting Journal Entries:
$ 20,000
150,000
170,000
(15,000)
$155,000
Dr.
Cr.
Reserve for Inventory of Supplies
$5,000
Inventory of Supplies
5,000
(Note that the Expenditures account is not affected by the
adjusting entry)
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Materials and Supplies (cont’d)
 Government-wide statements:
 Should be reported on a consumption basis.
 Supplies expense rather than supplies
expenditure would be debited.
 No need for inventory reserve.
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Materials and Supplies – Add. Examples
In 2007 the City ordered supplies that cost $4 million,
received supplies that cost $3.5 million, paid for supplies
that cost $3 million and used supplies that cost $3.3
million.
Common Entries:
Dr.
Cr.
Encumbrances
$4
Reserve for encumbrances
$4
Reserve for encumbrances
$3.5
Encumbrances
$3.5
Accounts Payable
$3
Cash
$3
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Example (cont’d)
Purchases method:
DR
CR
Supplies expenditure
$3.5
Accounts Payable
$3.5
Supplies inventory
$0.2
Fund balance
$0.2
Consumption method:
Inventory
$3.5
Accounts payable
$3.5
Supplies expenditures
$3.3
Inventory
$3.3
Fund balance (unrestricted)
$0.2
Fund balance (reserved)
$0.2
Government-wide: Must use consumption method.
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Prepayments
GASB standards:
 Either purchases or consumption method can be
used. But in the government-wide statements,
only consumption method may be used.
 Expenditures for insurance and similar services
extending over more than one accounting period
need not be allocated between or among
accounting periods.
 GASB does not distinguish between current and
long-term prepayments.
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Prepayments -Example
On June 15, 2007 the city acquired and paid for an insurance
policy that cost $300,000. The policy covers the one-year
period beginning July 1.
Purchases method:
Insurance expenditure
Cash
Consumption method:
Prepaid insurance
Insurance expenditure
Cash
DR
$300
CR
$300
$150
150
$300
Government-wide: Must use consumption method.
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Capital Assets
 Provide services in periods beyond those in which they are
acquired.
 Government funds account for capital assets in the same
way as businesses.
 GASB standards:
-General capital assets – are not specifically related to activities that
are reported in proprietary or fiduciary funds.
-General capital assets are neither reported on governmental fund
balance sheets nor depreciated on governmental fund statements of
revenues, expenditures, and changes in fund balance.
-Governments reports general capital assets in the period requiring the
outflow of expendable available financial resources.
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Capital Assets - Example
The city acquired a computer at a cost of $3 million, and paid
in cash. It has a useful life of three years.
General Fund:
DR
Expenditure-acquisition of capital assets
$3
Cash
CR
$3
Government-wide: Would capitalize and depreciate
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Capital Assets - Example
It acquired the same computer, issuing a 3 year, 6%, installment
note for the purchase price. During the year it paid the first
installment of $1,122,330 (interest=$180,000,
principal=$942,330).
General Fund:
Expenditures-acquisition of capital assets
$3 mil
Other financing sources
Expenditures-debt service
$180k
Cash
Expenditures-debt service
(principal)
$942,330
Cash
$3 mil
$180k
$942,330
Government-wide: would capitalize and depreciate
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General Government Leases
Capital Lease Vs. Operating Lease
Classify leases per FASB 13

Operating leases
-Lessor remains the owner of the property.
-Typically Recorded as Expenditures in Period Paid or Accrued
 Capital leases
-Equivalent of a purchase-borrow transaction.
-Lessee (the party that will use the property) becomes the owner.
-Lessee treats the lease as a purchase.
-Periodic payments are made plus interest.
Capital leases -- at inception:
-Expenditures = Capitalizable Cost of Leased Asset
-Other Financing Source = Capitalizable Cost Less Initial Down
Payment
-Also – Capital Lease Liability in GLTDAG Leased Asset in CFAAG
Capital leases – subsequent payments:
-In Substance – Are Debt Service Expenditures on GLTD
-Also – Reduce Lease Liability by Principal Reduction
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Leases - Example
The City leased a computer, which has a fair market value of
$3 million and an estimated useful life of three years.
The lease cannot be canceled. The lease payment for
2005 was $1,122,330 (interest of $180,000 and principal
of $942,330).
General Fund:
Expenditures – acquisition of capital assets
$3,000,000
Other financing sources – capital leases
$3,000,000
Expenditures – lease interest
Cash
$ 180,000
$ 180,000
Expenditures – lease principal
Cash
$ 942,330
$ 942,330
Government-wide: Would capitalize and depreciate
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Operating Grants



Assume a grant of $100,000 is received at the beginning
of the fiscal year from the federal government to operate
a counseling program for troubled youths.
Until eligibility requirements for the grant have been
met” by incurring expenditures for the intended purpose,
as an “exchange transaction” it is reported as “Deferred
Revenue”--a liability.
The entry in the special revenue fund is:
Dr.
Cr.
Cash
$100,000
Deferred Revenue
100,000
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Operating Grants (cont’d)
 Assume that during the year the Counseling Program
expended $75,000 for costs related to youth counseling, thus
meeting eligibility requirement to expend grant resources,
the entries would be:
Dr.
Cr.
Expenditures
$75,000
Vouchers Payable
75,000
Deferred Revenues
$75,000
Revenues
75,000
(This amount would also be recorded in the Revenue detail
account in the Revenue subsidiary ledger.)
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Interest and Principal on Long-term Debt
Interest:
 Major expenditure for many governments.
 Source of payments are either general revenues or
revenues dedicated for debt service revenues.
 The government transfers cash from general fund as
payments are made.
 Example: In July, the city issued $100 million in 8%
general obligation debt to finance capital improvements.
The first interest payment of $4 million is due in early
January 2007.
General Fund: No entry required.
Government-wide: Must accrue.
Interest expense
Accrued interest payable
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$4
$4
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Interest and Principal on Long-term Debt
(cont’d)
Long-term debt:
 Are recorded in schedule of long-term obligations.
 If a principal repayment extends beyond a fiscal year,
expenditures are recognized entirely in the year the
payments are due.
 Example: The city issued $10 million of 20-year deep
discount bonds to finance a capital project. The bonds
were sold to yield 8%, at a price of $2.145 million.
Interest applicable to 2007 was $171,600.
General fund: No expenditure needs to be reported.
Government-wide: Would accrue.
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Interest and Principal on Long-Term Debt
GASB:
 In governmental funds, neither interest nor principal is
accrued in advance of the year in which it is due. But it
should be accrued only in the period in which they are due.
 Exception: If resources to service the debt are transferred
from another governmental fund, then the expenditure and
the liability may be (not required to be) recognized in the
debt service fund.
Government-wide statements:
 LT debt must be reported at face value plus or minus any
unamortized premiums or discounts.
 Interest must be accrued.
 Timings of cash payments is irrelevant to the period in which
the expense is recognized.
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Nonexchange Expenditures
GASB:
 Nonexchange expenditures should generally be
recognized with their revenue counterparts.
 Expenditure is recognized when the recipient of
the grant has satisfied all eligibility requirements.
 GASB standards are applicable to both modified
and full accrual statements. On the modified
accrual statements, revenues must be available for
expenditure before they can be recognized.
 Grants would be recognized as expenses in the
same period in the government-wide as in the
fund statements.
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Additional Examples
Example 1: In December 2006, the city approves a
$300,000 grant to a not-for profit health clinic.
The funds are to be paid in 2007 out of funds
budgeted for that year and are intended to support
the clinic’s activities in 2007.
General Fund: In as much as the clinic cannot use
the funds until 2007, the grant is subject to a time
requirement. The county need not recognize
either a liability or an expenditure until 2007,
when the time requirement is satisfied.
Government-wide: Same.
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Examples (cont’d)
Example 2: In Dec. 2006 the city awards a not-for profit
clinic $400,000 for the acquisition of emergency
communications equipment. Payment is made at the time
the award is announced. The clinic is permitted to use the
funds upon receipt, but intends to use them in 2007.
---Purpose restrictions have no impact on the timing of
either expenditure or revenue recognition. The state must
recognize an expenditure as soon as it expends the funds
and the county is eligible to spend them:
Governmental Fund:
Grant expenditure
$400,000
Cash
$400,000
Government-wide: Same, but expense instead of expenditure.
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Examples (cont’d)
Example 3: In Dec. 2006, the city awards a not-for profit $200,000 for the
acquisition of emergency communications equipment. The grant is to be
paid as the organization incurs and documents allowable costs. In 2007
the organization submits claims for $150,000 of which the city pays
$125,000. The city expects to pay the $25,000 balance of claims
submitted in Jan 2008 and the $50,000 balance of the grant by June
2008.
--- The not-for profit is eligible for the award only as it incurs and
documents allowable costs. In 2007, the city became eligible for
$150,000 of the grant—the amount that the state should recognize as an
expenditure.
General Fund:
Grant expenditure
$150,000
Cash
$125,000
Grants payable
25,000
Government-wide: Same
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Interfund Transfers
Two types of interfund activity:
 Reciprocal: Equivalent of exchange
transactions
 Nonreciprocal: Equivalent of nonexchange
transactions.
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Reciprocal Interfund Activity
Includes:
 Payments for purchase of goods and services at their
approximate external fair value.
 Loans and repayments of loans: If repayment is
expected to occur within a reasonable time period, it
should be accounted as a loan receivable by the
lending fund and as a payable by the borrowing
fund.
-If it is not expected to paid within a reasonable period
of time, it should be accounted as a nonreciprocal
transfer-out by the disbursing fund and as a
nonreciprocal transfer-in by the receiving fund.
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Nonreciprocal Interfund Activity
 Represents transfer of cash for which goods or services of
equivalent value have not been received.
GASB 34 statement:
 Interfund reimbursements should not be reported in
financial statements.
 For instance, if the general fund paid a bill which was the
responsibility of a capital project fund, it is reported only
in the capital project fund (as if it paid the bill itself).
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Additional Examples
Example 1: In December the city transferred $2 million to the debt service
fund for repayment of principal on serial bonds issued several years
earlier. The payment is due in January.
General Fund:
Nonreciprocal transfer out
(debt service)
$2
Cash
$2
Can recognize an expenditure and a liability in the debt service fund as long
as payment is due within 1 month.
Cash
$2
Nonreciprocal transfer in
$2
Debt service expenditure
$2
Debt service payable
$2
Government-wide: No entry required. Payment of principal recorded as a
reduction of a liability when paid.
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Additional Examples (cont’d)
Example 2: Consistent with its budget, the city transferred $6
million to debt service fund to accumulate resources for the
eventual payment of debt.
General Fund:
Nonreciprocal transfer out
Cash
$6
$6
Per s.16 of Interpretation No. 6, the city cannot recognize an
expenditure.
Government-wide: No entry
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Government-wide statements
 Presents revenues and expenses from the
perspective of the entity as a whole and
not of the individual funds.
 Revenues and expenditures must be
eliminated in order to avoid doublecounting.
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Other Financing Sources and Uses
Types:
 Proceeds of long-term debt
 Proceeds from the sale of capital assets
 Present value of assets and liabilities
created by capital leases
 Payment to bond “escrow” agents who
maintain accounts for the eventual
repayment of long-term obligations
 Nonreciprocal transfers
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Governmental Fund Statements
 Governmental fund balance sheet:
presents the fund’s resources at a
particular point in time.
 Governmental fund operating statement:
presents the net change in resources
during a particular point in time.
 All measurements are in accordance with
GAAP.
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Summary
 Accrual basis recommended to the fullest extent practicable.
 2 criteria must be met before revenues are recognized in
governmental funds:
-Resources must be Measurable and
-Available
 Governmental fund expenditures are defined as decreases in
net financial resources.
 Expenses are outflows or consumption of overall net assets.
 Nonexchange transactions in the governmental fund are
accounted for symmetrically to nonexchange revenues.
 Grants are recognized as expenditures when all the
requirements are met.
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