Chapter 5

Objectives:

• Learn the rationale behind expenditures• How different expenditures are recognized• How to do interfund transfers• Learn about other financial sources (uses)

Expenditures vs. Expenses

• Expenses are recognized when incurred which includes accruing expenses at the end of accounting period.• Expenditures are for current liabilities or those due within 60 days when goods and services acquired.

Wages and SalariesWages and Salaries

Recognize those already paid in the current periodand those that are earned and will be paid shortlyafter the beginning of the new fiscal year and which are presumably in the current appropriations.

Expenditures - Payroll $100Accrued wages and salaries $100

How treated on new government-wide statements?

Employee Benefits

• Expenditure recognized when used in the current year. Vacation Expenditure 1,500

Cash 1,500• If owed at the end of the year and the time vests with the employee, and it is probably that the vacation time will be used, then a liability should be carried forward. • Such vested vacations must be adjusted for any intervening wage increases before they are taken.• On government-wide statements accrued in other liabilities.

Sick Leave

• If used during the year, expend as normal

•If vested like vacation pay, accounted for in the schedule of long term debt. Adjust for wage increases.

Government-wide must match and accrue, appears on statement of net assets.

Sabbatical Leave

Since Sabbatical leave is contingent on approval and is contingent on other things, no accruals take place.

Expended as taken!

On government-wide statements, there are nodifferences.

Pensions • Amounts to be recognized based on actuarial assumptions• If actuarial amount is deposited into the pension trust fund, it is recognized as an expenditure• If not all of the actuarial amount is deposited the difference is recognized on the schedule of Long Term Debt.• On Government-wide statements use FASB rules, liability recognized for difference between payments and actuarial liability.

Entries

Accrued Pension Expense is $15,000, city pay $10,000 to trust fund: In General Fund: Expenditure 10,000

Cash 10,000

Difference on schedule of long term debt.

Post-employment benefits accounted for similarly.

Judgments

Criteria for recognition similar to contingentliabilities.

If paid in current period the amount paid is an expenditure

If deferred, the amount is recognized on Schedule of Long Term Debt.

Circumstances of the judgment should be disclosed

Supplies

Two methods of recognition which producethe same effect on the financials:

Purchases method

Consumption method

Purchases method

• When received, supplies are recognized as an expenditure• Make an adjusting entry at the end of the fiscal year to record the remaining supplies on hand• In subsequent years, adjust reserve to reflect current inventory of supplies

Consumption method

• Recognize as an asset when received• Recognize expenditure as used, like FASB rules

Prepaids

• Also uses purchases or consumption methods•Most entities use purchases method.

Fixed Assets

• Expenditure recognized when purchased• Listed on the schedule of General Fixed Assets, those in proprietary funds excluded• If financed with debt, this is an other financing source and principal and interest repayments are also expenditures. This does not result in double expensing the asset, because the OFS adds to fund balance to offset asset expenditure. • Capital leases treated similarly to FASB.

Entries

Cash Received: Cash 50,000

OFS - loan proceeds 50,000Must keep track of long term liabilityPurchase asset: Fixed Asset Expenditure 50,000

Cash 50,000

Net no effect on fund balance after closing.Keep track of the asset

Interest and Principal

Payment of note (in debt service fund): Debt Service expenditure prin 13,000Debt Service expenditure int 2,000

Cash 15,000

Reduction of debt principal also recorded onthe schedule of Long term debt.

Capital Leases

FASB criteria Government-wide similar to FASB Fund statements

PV of Lease payments on schedule of L/T debt

Asset on schedule of Fixed Assets Capital lease OFS Payments recognize expenditure on implied interest and principal

Bond Premiums and Discounts

Interest is an expenditure when paid or when accrued at the end of the year, if the amount is in the current budget

Principal is an expenditure when paid No adjustments for premiums and

discounts on fund statements Treat under FASB rules for government-

wide.

Grant Expenditures

Recognize expenditures as actually

costs incurred. Same recognition on government- wide statements Remember revenue recognition is expenditure drivenNon-exchange transactions

Interfund Transfers

• Non-exchange transfers among funds are in two types:

• Operating Transfer- to provide routine funds for payments and expenditures Language: Operating transfer in (out)• Residual Equity transfers- to provide seed money to start new fund or enterprise

• Closed in closing entries. • Reciprocal interfund transfers are revenue and expenditures for services of loans and repayments• Also can be interfund loans, recognized as “due to” and “due from”

Other Financing Sources

• Proceeds from Long term debt• Proceeds from sales of assets • Assets and Liabilities created from capital lease•Transfers in

•Eliminated on government-wide statements

Other Financing Uses

Payments to “escrow agents” Interfund transfers out

Presentation of StatementGovernmental Funds

Revenues Expenditures

Excess of Revenues over(under) expenditures Other financing sources (uses)

Excess of revenues and other sources over (under)expenditures and other uses

+/- changes in reservesBeginning fund balance

Residual transfersEnding fund balance

Closing Entries1. Close Budgetary accounts2. Close revenue and other financing sources Revenue

Other Financing sourcesTransfers in

Fund Balance 3. Close Expenditures

Fund Balance Expenditures Other Financing uses Transfers out

Review

Learn how to record expenditures Learn about interfund transfers Learn about other financing

sources and uses