Chapter Four: Accounting for General & Special Revenue Fund

Nature of General and Special Revenue Funds

The General Fund and Special Revenue Funds are discussed together in this chapter. This is
because the General Fund and Special Revenue Funds typically are used to finance and account
for most general governmental activities which include police and fire protections, central
administration, social services and similar general operating activities of state and local
governments which make the accounting and reporting of the funds to be identical. Therefore,
the chapter illustration would be for the General Fund and similar treatment would be assumed
for special revenue funds.
Special revenue funds are established to account for general governmental financial resources
that are restricted by law or contractual agreements to specific purpose (s) and special revenue
funds are exist for the life of restriction. For example, they may be used to account for federal
(state) grants which are restricted as to purpose or to account operating activities of libraries and
other services supported by special taxes. Another example might be when a tax or other revenue
source is restricted to a specific purpose by a legislative body; its use assists in demonstrating
compliance with that purpose.
The General Fund account is used for unrestricted resources and exists from inception of the
government throughout the government`s life unlike that of special revenue funds which exist as
long as the government has resources dedicated to specific purposes.
Resources of the General Fund and special revenue funds are expended each year and are
commonly replenished for current operating purposes such as for salaries, supplies, and
contractual services; routine capital outlay such as for vehicles and equipment; and for routine
debt services such as for capital leases and equipment notes payable. Resources which are
significant in amounts which are to be expended for large capital projects or debt services are
usually transferred from the General Fund or special revenue funds to capital projects funds and
debt service funds, respectively and then expended from those funds.

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 Account classification of governmental unit accounting
1. Balance sheet account
Assets = Liabilities + Fund Equity

Asset Accounts Liability Accounts Fund Equity Accounts

Examples: Examples: Reserved Fund Balance
Cash Accounts Payable
Receivables Accrued Liabilities
Inventories
Prepaid Items*
Inventories*

3. Budgetary Accounts
2. Operating Statement Examples:
Accounts Estimated Revenues
Examples: Appropriations
Revenues Encumbrances
Expenditures Estimated Other Financing Sources
Other Financing Sources Estimated Other Financing Uses
Other Financing Uses

Budget and Budgetary Accounts

The fact that budgets are legally binding upon administrators has led to the integration of
budgetary accounts into the general ledgers of the General Fund and special revenue funds; and
all other funds required by state laws to adopt a budget. GASBS 34 requires that a budget to
actual comparison schedule be provided for the General Fund and for each major special revenue
fund for which a budget is legally adopted. GASBS 34 recommends that these schedules be
provided as required supplementary information (RSI), which should be placed immediately
following the notes to the financial statements. GASBS 34 provides the option, however, for
governments to report the budgetary comparison information in a budgetary comparison
statement, a statement of revenues, expenditures, and changes in fund balances ―budget and
actual, which would then be part of the basic financial statements. Thus, according to GASBS
34, a budgetary comparison can be in the form of a basic financial statement or required
supplementary information schedule.
GASB require, at a minimum, the presentation of both the originally adopted and final amended
budgets and actual amounts of inflows, outflows, and balances.

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In order to achieve budgetary control, the following budgetary control accounts are needed in the
General Fund (and other funds for which a budget is adopted):
 Estimated Revenues- different sources revenue for the governmental unit expected to be
collected during the year. It is an account maintained to show the amount of revenue that
will be collected in future. Major revenue source classes commonly used are:
 Taxes
 Special Assessments
 Licenses and Permits
 Intergovernmental Revenues
 Charges for Services
 Fines and Forfeits
 Miscellaneous Revenues (including interest earnings, rents and royalties, contribution in
lieu of taxes from the government`s enterprise fund activities, escheats, and contributions
and donations from private enterprises).
 Appropriations- An authorization granted by law to make expenditures and to incur
obligations for specific purpose.
 Encumbrances- An account used to record the estimated amount of purchase orders or
contracts
 Estimated Other Financing Sources- amount of financial resources estimated to be
received during the period from inter fund transfer.
 Estimated Other Financing Uses – amount of financial resources estimated to be
disbursed for other funds.
Subsidiary ledger accounts should be provided in whatever detail is required by law or for sound
financial administration to support each of the control accounts.

The normal balance of Budgetary and Operating Statement Accounts can be summarized as
follows.

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 Budgetary Accounts Operating Statement Accounts
Account Title Normal Balance Account Title Normal Balance
Estimated Revenues Debit Revenues Credit
Estimated Other Financing Sources Debit Other Financing Credit
Sources
Appropriations Credit Expenditures Debit
Estimated Other Financing Uses Credit Other Financing Debit
Uses
Encumbrances Debit

Recording the budget

At the beginning of the budget period, the estimated revenue control account is debited
for the total amount of revenues expected to be recognized as provided in the revenue
budget where as the credit will be fund balance.
Estimated revenue ------------------xx
Fund balance ------------------------xx
The accounting entry to record the legally approved appropriations budget is a debit to
fund balance and a credit to appropriations.
Fund balance -----------------------------xx
Appropriation ----------------------xx
Budgeted inter fund transfer may be recorded as
Fund balance ------------xx
Estimated other financing uses ------------- xx
 The estimated revenues account and estimated other financing source accounts may be
considered as pseudo asset account, because it reflects revenues expected to be received
by general fund during the fiscal year.
 Appropriations account and estimated other financing use may be considered as a pseudo
liability account, because it reflects legislative body’s commitment to expend.
Illustration: Assume the following are the amounts that have been legally approved as
the budget for the general fund of a certain governmental unit for the fiscal year ending
December 31, 2008.

Estimated revenue Appropriations

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 Taxes ----------------------------- 882,500 General gov’t ----1,150,000
Intergovernmental revenue ----200,000 Public safety -----212,000
License and permit --------------- 195,000 Total ---------- 1,362,000
Total ---------------------1,277,500
Estimated other financing uses (EOFU)
Operating transfer out to other funds ---------------------274,500
Required: Show in general form the entries that would be necessary to record the budget
assume it is legally approved at the beginning of the year; show the subsidiary ledger as
well.
Solution
1. Estimated revenue ----------------------------1,277,500
Fund balance ------------------------------------1,277,500
(To record general ledger)
Revenue ledger (subsidiary ledger): Dr
Tax --------------------------------------------------------882,500
Intergovernmental revenue ----------------------------200,000
Licence and permit -------------------------------------195,000
2. Fund balance -------------------------------------1362,000
Appropriation -----------------------------------------------------1,362,000
(To record the general ledger)
Appropriation ledger (subsidiary): Cr
General government -------------------------------------- 1,150,000
Public safety --------------------------------------------------212,000
3. Fund balance ------------------------------------274,500
EOFU ---------------------------------------------------------------274,500
(To record the general ledger)
Other financing use ledger (subsidiary): Cr
Operating transfer out to other funds --------------------274,500

4. Combined entry
Estimated revenue ---------------------------------1,277,500

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 Fund balance --------------------------------------- 359,000
Appropriations ---------------------------------------------------1,362,000
EOFU --------------------------------------------------------------- 274,500
Accounting for subsequent collection of Revenues
To establish accountability for revenues and permit budgetary control, actual revenues should
be recognized in the general ledger accounts of governmental funds by credits to the
Revenues account (offset by debits to receivable accounts for revenues that are accrued
or by debits to Cash for revenues recognized when received in cash). The general ledger
Revenues account is a control account supported by Revenues subsidiary ledger accounts
kept in exactly the same details as kept for the Estimated Revenues subsidiary ledger
accounts.
When revenues are collected in cash, the journal entry would be:
Cash xxx
Revenues xxx
Revenues from sources such as licenses and permits, fine and forfeits, charges for services, and
certain other sources are often not measurable until received in cash. However, under the
modified accrual basis of accounting, if such revenues are measurable in advance of collection
and available for current period expenditure, they should be accrued by recording a debit to a
receivable and a credit to Revenues.
Assume during fiscal year 2008, the Town of Hawassa has collected revenues in cash from the
sources shown below.
Licenses and permits $100,000
Fines and forfeits 151,000
Charges for services 7,000
Miscellaneous revenues 1,200
The journal entry in General Fund would be:
General Fund:
Cash 259,200
Revenues 259,200
Revenues Ledger:
Licenses and permits $100,000

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 Fines and forfeits 151,000
Charges for services 7,000
Miscellaneous revenues 1,200
Accounting for Encumbrances and Expenditures
When enacted into law, an appropriation is a legal authorization for administrators to incur on
behalf of the governmental unit liabilities in the amounts specified in the appropriation ordinance
or statue, for the purposes set forth in that ordinance or statue, during the period of time
specified. An appropriation is considered expended when the authorized liabilities have been
incurred. Because penalties are imposed by law on an administrator who incurs liabilities for any
amount in excess of that appropriated, or for any purpose not covered by an appropriation, or
who incurs liabilities after the authority to do so has expired, prudence dictates that each
purchase order and each contract be reviewed before it is signed to determine that a valid and
sufficient appropriation exists to which the expenditure can be charged when goods or services
are received. If the review indicates that a valid appropriation exists and it has an available
balance sufficient to cover the amount of the purchase order or contract being reviewed, the
purchase order or contract legally may be issued. When a purchase order or contract has been
issued, it is important to record the fact that the appropriation has been encumbered in the
amount of the purchase order or contract. The word encumbered is used, rather than the word
expended, because the amount is only an estimate of the liability that will be incurred when the
purchase order is filled or the contract executed. It is reasonably common for quantities of goods
received to differ from the quantities ordered, and it is not uncommon for invoices prices to
differ from unit prices shown on purchase orders. The use of appropriation authority may be
somewhat tentative in as much as some suppliers are unable to fill orders or to perform as
stipulated in a contract; in such cases, related purchase orders or contracts must be canceled.

Note that the issuance of purchase orders and/or contracts has two effects: (1) the
encumbrance of the appropriation (s) that gave the governmental unit the authority to order
goods or services and (2) the starting of a chain of events that will result in the government
incurring a liability when the purchase orders are filled and the contracts are executed. Both
effects should be recorded in the order to help administrators avoid over expending
appropriations and plan for payment of liabilities on a timely basis.

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An encumbrance is an estimated amount recorded for purchase orders or contracts.
Encumbrance accounts are affected when an order is placed and when the goods or services are
received. When the order is placed, the journal entry would be as follows:
Encumbrances xxx
Reserve for Encumbrances xxx
 When goods or services for which encumbrances have been recorded are received and the
suppliers` invoices are approved for payment, the accounts should record the fact that
appropriations have been expended, not merely encumbered, and that an actual liability, not
merely an expended liability, exists. The journal entry would be:
Reserve for Encumbrances xxx
Encumbrances xxx

Expenditures xxx
Vouchers Payable xxx
When the actual expenditure is determined, the entities setting up the encumbrance are
reserved and the actual expenditure is recorded. The invoice amount may differ from the
amount of the government units purchase order because of such items as shipping charges,
sales taxes and price changes.
 Expenditures and the liability account must both be recorded at the actual amount the
governmental unit agrees to pay the vendors who have filled the purchase orders. The fact
that estimated and actual amounts differ causes no accounting difficulties as long as goods
or services are received in the same fiscal period as ordered.
The encumbrance procedure is not necessary for every type of expenditure transaction. For
example, although salaries and wages of governmental employees must be chargeable
against valid and sufficient appropriations in order to give rise to legal expenditures, many
governmental units do not find it necessary to encumber the departmental personal services
appropriations for estimated payrolls of recurring, relatively constant amounts. Departments
having payrolls that fluctuate greatly from one season to another may follow the
encumbrance procedure to make sure the personal service appropriation is not over
expended.

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Illustration: Assume purchase orders and contracts in the following estimated amounts
were issued by Johnson City:
General government $100,000
Public safety 400,000
Public works 150,000
Total $650,000
Required:
1. Show the necessary entry in general journal form to record the issuance of purchase
orders and contracts. (Show entries in subsidiary ledger accounts as well).
2. Assume all goods and services for which encumbrances have been recorded in the above
example are received in the amounts as shown below in the respective subsidiary ledger.
General government ----------------------------- 105,000
Public safety -------------------------------------- 410,000
Public work ------------------------------------------ 145,000
Prepare the journal entry in the general ledger and subsidiary ledger:
Solution:
1. Encumbrance ------------------------------650,000
Reserve for encumbrance ---------------------------------------650,000
(General journal)
Subsidiary ledger
General government $100,000
Public safety 400,000
Public works 150,000
Total 650,000
2. Reserve for encumbrance ------------------------ 650,000
Encumbrance ---------------------------------------------------650,000
Expenditure ----------------------------------------- 660,000
Voucher payable ---------------------------------------------------660,000
(General journal)
Subsidiary ledger
General government $105,000

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 Public safety 410,000
Public works 145,000

Accounting for Payroll

Payroll accounting is similar for a governmental fund and a for-profit entity, except Expenditures
rather than Expenses are recorded.
 Debit Expenditures for full amount of payroll and credit liabilities for withholdings from
employees pay; credit cash for the amount paid to employees.
 Record expenditures for the employer`s payroll costs, including employer`s share of
FICA and credit a liability for federal government.
 Encumbrances usually are not recorded for recurring expenditure such as payroll.

Illustration 3.7
Assume the gross pay of employees of General Fund departments for the month of January
2008 amounted to $252,000. The Town does not use the encumbrance procedure for payrolls.
Deductions from gross pay for the period amount to $19,278 for employees` share of FICA
(federal insurance contribution act tax which is imposed on the employee and employer used
mainly to provide retirement benefit, FICA tax is also known as social security tax); $25,200,
employees` federal withholding tax; and $5,040, employees` state withholding tax. The first
two will, of course, have to be remitted by the Town to the federal government, and the last
item will have to be remitted to the state government. The gross pay is chargeable to the
appropriations in the General Fund. Assuming that the liability for net pay is vouchered, the
entry in the General Fund is:
General Fund:
Expenditures2008 252,000
Vouchers Payable 202,482
Due to Federal Government 44,478
Due to State Government 5,040

Accounting for Interfund Transactions and Transfers

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1. Quasi external transactions- involve the sales and purchases of goods and services between
two funds. These are transactions result in:
a. Revenues being recognized in the fund financing the provider department and
b. Expenditure being recognized in the fund financing the department receiving the
goods or services.
Example: If a car repair of birr 2,000 was done by internal service fund for which the
general fund was responsible.
The journal entry would be:
GF: Expenditure -------------------------------2,000
Due to ISF ------------------------------------------2,000
ISF: Due from GF -------------------------------2,000
Revenue ----------------------------------------------------2,000

2. Interfund loans - are sometimes made from one fund to another with the intent that the
amount be repaid. If the loan must be repaid during the current year or soon thereafter, the
lending fund should record a current receivable, and the borrowing fund should record a
current liability.
Example : Assume that the General Fund makes a short-term loan in the amount of $100,000 to
the internal service fund.
General Fund:
Interfund Loans receivableCurrent 100,000
Cash 100,000
Internal Service Fund:
Cash 100,000
Interfund Loans PayableCurrent 100,000
If this interfund loan require repayment for more than one year, the word “Noncurrent” should be
used rather than “Current” to signify the noncurrent nature of the loan. As shown in the
following entries, Noncurrent is added to each of the interfund loan receivable/payable accounts
to indicate that the loan is not payable during the current year or soon thereafter.

General Fund:

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Interfund Loans receivableNoncurrent 100,000
Cash 100,000
Internal Service Fund:
Cash 100,000
Interfund Loans PayableNoncurrent 100,000

3. Operating transfers and residual equity transfers: Operating transfers and residual equity
transfers, which were reported in two different ways in governmental fund operating
statements. Under GASBS 34, both types of transfers are described simply as interfund
transfers and reported in the same manneras other financing sources by the receiving fund
and as other financing uses by the transferring fund.
a. Operating transfers: are recurring or routine transfers of resources from one fund to
other funds. They are not revenue or expenditures but other financing sources for the
receiving fund and other financing use for the paying fund. It is shifting of resources from
one fund to other fund.
Example: assume that the general fund made the budgeted operating transfers to a debt
service fund for the payment of the debit services in the amount of birr 150,000.
Required: prepare the journal entry for general fund and debt service fund.
1. Operating transfer out to DSF --------------- 150,000
Cash -------------------------------------------------------150,000
(For general fund)
2. Cash -------------------------------------150,000
Operating transfer in from general fund --------------------------------150,000
(For debt service fund)
b. Residual equity transfers: are non-routine transfers from an existing to establish a new
fund. The creation of a fund by transfer of assets and/or resources from an existing fund
to a new fund, or transfers of residual balances of discontinued funds to another fund,
results in the recognition of other financing sources rather than revenue by the new fund
and other financing use rather than expenditure by the transferor fund.
Example: Assume that the general fund made a permanent transfer of birr 120,000 to establish
an internal service fund.

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Required: prepare the journal entry for the general fund and internal service fund.
I. Equity transfer out to ISF ------------120,000
Cash -------------------------------------------------120,000
(For the general fund)
II. Cash ------------------------------120,000
Operating transfer in from GF -----------120,000
(For the ISF)
4 Reimbursements: In certain instances, one fund may record as expenditure an item that
should have been recorded as expenditure by another fund. Often this is the result of an
accounting error. When the second fund reimburses the first fund, the first fund should
recognize the reimbursement as a reduction of its Expenditure account, not as an item of
revenue. The second fund should debit Expenditures and credit Cash, as should have
been done when the transaction initially occurred.
Example: the general fund might pay birr 4,000 for the total facilities used by special
revenue fund.
Required: prepare the entries to record the reimbursement
GF (1st fund): Expenditure --------------4,000
Cash -----------------------------4,000
SRF (2nd fund): Expenditure ---------------4,000
Cash --------------------------------4,000
Reimbursement: Cash ----------------------4,000
Expenditure ------------------4,000

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