Irs Nonprofit Trust Fund by wjn14829


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									         MODULE 1

Basics of Governmental & Nonprofit
     Accounting: Chapters 1-5
            Module 1 Content
•   Government, NFP Basics
•   Fund Accounting
•   Budgeting
•   Modified Accrual vs. Full Accrual
•   Financial Reporting & GASB 34
•   Revenues
•   Expenditures
          Chapter 1

The Government and Not-for-Profit
•   Describing governments & nonprofits
•   Governmental characteristics
•   Nonprofit characteristics
•   Standard-setting: GASB & FASB
•   Financial Reporting
•   Users
    Describing Governments &
• US governments: federal, state & local
• Branches: legislative, executive & judicial
• Constitution: federal vs. state jurisdiction
• Nonprofits: over 1.5 million organizations, $1.3
  trillion in assets
• Nonprofits: colleges & universities, hospitals,
  voluntary health & welfare organizations, other
• Nonprofits: importance of IRS & tax-exempt
 Characteristics of Governments
         & Nonprofits
• No profit motive
• Ownership interests are nontransferable (&
  usually not defined)
• Fund accounting recommended
• Differential GAAP
• Emphasis of accountability of resources & flow of
  these resources
• Unique revenue sources
• Often lack of direct cost/benefit relationships
• Importance of budgeting
    Government Characteristics
• Federal Government: Broad jurisdiction, 2000
  receipts $1,958 billion; 2000 outlays $1,781
• 50 states: jurisdiction defined in Constitution,
  establishes legal roles of local governments
• 87,453 local governments: 3,043 counties; 36,001
  cities; 13,726 school districts; 34,683 special
  Other Governmental Financial
• Ability of governments to levy taxes
• Use of modified accrual; revenues & expenditures; budget
• Financial operations may be restricted—one reason for
  fund accounting
• Power to issue tax-exempt debt (e.g, municipal bonds)
• Intergovernmental financial relationships (importance of
  intergovernmental revenues)
• Overlapping jurisdictions & overlapping debt
• GASB 34: addition of government-wide statements (full
  accrual) & other reporting requirements
     Nonprofit Characteristics
• Importance of IRS & tax-exempt status
• Nonprofits must file for tax-exempt status:
  charities are recognized as 501(c)(3)
  organizations, based on filing Form 1023
• Annual report, Form 990, must be followed
  using IRS format
• Other nonprofit categories also exist
• See
 Purpose of Financial Reporting
• Assess financial condition (operating results
  & financial resources)
• Compare actual results with the budget
• Legal compliance
• Evaluate performance (especially efficiency
  and effectiveness; service effort &
Governmental Financial Reports
• Comprehensive Annual Financial Report (CAFR)-
  -two levels of reporting: (1) government-wide
  (full accrual), (2) fund accounting (modified
  accrual for governmental funds)
• Annual Operating Budget(s)
• Other documents: for citizens or media;
  specialized reports, etc.
• Most governments have well-developed web
• Note importance of interperiod equity
Users of Governmental Financial
• Executives & employees
• Governing Boards (legislative function)
• Investors & Creditors (importance of
  municipal bonds; credit-rating agencies)
• Taxpayers & voters
• Regulatory agencies (e.g., Texas Education
  Agency for Texas ISDs)
            Standard Setting

                Financial Accounting

Financial Accounting         Governmental Accounting
   Standards Board              Standards Board
 (1973) [Non-profits]         (1984) [Governments]
        Standard Setting History
• Government GAAP initially established by National
  Council of Governmental Accounting (NCGA); GASB
  established in 1984
• Nonprofit GAAP initially established by “industry”: (1)
  colleges & universities, (2) NP hospitals, (3) other—
  AICPA would write two audit guides (voluntary health &
  welfare organizations & “other”); FASB took over
  jurisdiction in the 1980s.
• Federal government establishes its own standards, through
  the Federal Accounting Standards Advisory Board
 Chapter 2

Fund Accounting
           Fund Accounting
• What is a Fund? The government or
  nonprofit is the economic entity. The fund
  is the fiscal & accounting entity. Each
  organization usually has several funds.
  Each fund is a separate self-balancing set of
  accounts. A major reason for funds is
  control purposes, both legal & fiscal
   Funds Used by State & Local
• Governmental Funds: also called source &
  disposition funds or expendable funds. Most
  governmental activities are financed through these
• Proprietary Funds: also called business-type funds,
  which handle most activities financed through user
• Fiduciary Funds or trust & agency funds, where
  government acts as trustee or agent
          Governmental Funds
• General Fund: primary operating fund; by
  definition it accounts for all activities not required
  for another fund. The General Fund is used for
  unrestricted operations.
• Special Revenue Fund: specific revenue source
  used for a specific purpose. This is an operating
• Capital Projects Fund: Used specifically for the
  acquisition & construction of capital assets.
• Debt Service Fund: Used for funding & payment
  of interest & principal on long-term debt.
            Proprietary Funds
• Enterprise Funds: provide services to the public on
  a user-fee basis. The most common category is
  government-owned utilities; also, mass transit,
  airport, housing authorities, government-owned
  hospitals, etc.
• Internal Service Fund: provide services to other
  departments in the same government, such as
  motor pool, data processing, or supplies
             Fiduciary Funds
• Pension Trust Funds: provide retirement benefits
  to governmental employees
• Permanent private-purpose trust funds:
  endowments to benefit the government (accounted
  for as Permanent Funds), other organizations or
• Agency Funds: temporary accounting for assets
  held for other governments or organizations.
            Financial Reports
• The complete annual report is the Comprehensive
  Annual Financial Report (CAFR).
• The three sections are: Introductory Section,
  Financial Section, & Statistical Section.
• Governments also prepare annual operating
  budgets & may have capital budgets & other
         CAFR (“Old Format”)
• Introductory Section: includes transmittal letter &
  may include Certificate of Achievement,
  organization chart, table of contents, etc.
• Financial Section: includes Auditors’ Report;
  Combined Financial Statements, Notes; &
  statements by fund category.
• Statistical Section: various tables & other
  information on economic, demographic &
  supplementary fiscal data.
     CAFR (GASB 34 Format)
• Same basic format with the following
• Management Discussion & Analysis
  (MD&A) added to Introductory Section.
• Government-wide Financial Statements
  added, based on full accrual accounting—
  (1) statement of net assets & (2) statement
  of activities.
        Chapter 3

Issues of Budgeting & Control
• The Current Operating Budget (also called an
  appropriation budget): a plan of financial
  operations for the period. The annual budget
  authorizes, and provides the basis for control of,
  financial operations during the year (NCGA
  Statement #1).
• The Budget is a formal expression of public policy
  on objectives & priorities & how the resources
  will be provided to meet them (NCGA Statement
         Functions of Budgets
• Planning: type, quantity & quality of services to
  be provided & how to pay for these services.
• Control: budgets insure that resources are
  available & are used to monitor compliance with
  legislative spending authority.
• Review: budgets can be compared to actual results
  to evaluate whether legislative & other legal
  mandates were carried out, as well as effectiveness
  & efficiency.
     Types of Annual Operating
• Traditional Budget: classifies spending by line
  item (object classification), which focuses on
  control. Appropriations specifically limits
  spending on each line item.
• Performance Budget: use measurable units of
• Program Budgets: budgets are defined by
  programs, based on specific objectives for each
  identified program.
            The Budget Cycle
• Budget Preparation (several months before the
  start of the fiscal year)
• Legislative Approval (before the start of the fiscal
• Fiscal Year Operations (Budget Execution)
• Feedback & Review (after the end of the fiscal
         Budget Preparation
• Chief financial officer (CFO) accumulates
  budget requests based on chief executive
  officer (CEO) & City Council objectives,
  along with revenue forecasts to develop a
  proposed budget.
• Inputs: revenue forecasts, expenditure
  requests & priorities
• Outcome: proposed (executive) budget
        Legislative Approval
• Legislature must approve the budget before
  taxes can be levied & appropriations spent.
• Considerations: tax levy(ies), bond (&
  other borrowing) initiatives, budget
  authorization & mandate
• Outcome: annual operating budget (this
  process & the budget is publicly available)
 Fiscal Year Operations (Execution)

• Budget journal entries begin the new fiscal
  year accounting & operations depend on
  these budget entries.
• Actual revenues & expenditures
• Budget revisions & transfers
• Adjusting & closing process
         Feedback & Review
• Reporting & auditing: financial reports are
  prepared & audited
• CAFR is issued
• Other analysis conducted: budget to actual
  comparisons, service effort &
  accomplishment, etc.
              Budget Entries
• Revenue-related: Debit estimated revenues &
  Credit fund balance.
• Expenditure-related: Debit fund balance & credit
• Operations: revenues are credited when
  “measurable & available” & expenditure debited
  when corresponding liability is recorded.
• Both budget & actual entries are closed out at
• Encumbrances are journal entries used to
  recognize future commitments (such as purchase
  orders) & “earmark” these funds for control
• When commitments are recognized (e.g., for
  approved purchase orders) debit encumbrances &
  credit fund balance reserved for encumbrances.
• Encumbrances are reversed when expenditures are
  recognized for the commitments.
     Chapter 4

Recognizing Revenues in
  Governmental Funds
• Basis of Accounting [when transactions/events are
  recognized]: Modified Accrual Accounting in the
  Governmental Funds.
• Measurement Focus [what is being measured]:
  Current (expendable) financial resources.
• Revenues are recognized when measurable &
         Revenue Recognition
• Revenue must be measurable & available.
• Measurable: amount is known or can be
  reasonably estimated.
• Available: “physically available”: collected in
  cash during the fiscal year or shortly thereafter
  (“60 day rule” for property tax); legally available
  (e.g., levied or can can be spent based on contract
  or regulation).
• Note: importance of nonexchange revenues (pp.
            Resource Inflows
• Revenues are recorded by source:
      Property Taxes
      Sales Taxes
      Licenses & permits
      Fines & Forfeitures
      Intergovernmental Grants
• Other Financing Sources are resource inflows that
  include transfers in, bond proceeds, etc.
        Nonexchange Revenues
• Imposed nonexchange revenues: assessment on individuals
  or businesses; e.g., property taxes & fines.
• Derived tax revenues: taxes derived from exchange
  transactions, such as sales & income taxes.
• Government-mandated, such as a state requiring a city to
  use resources for specific purposes.
• Voluntary: contractual agreements such as contributions
  from donors.
• Note time & purpose limitations (these usually must be
  met before revenues are recognized).
  Simplified Budgeting Strategy
     (Local Governments)
• Estimate spending needs.
• Forecast all revenues except property tax.
• The difference is the amount that has to be
  collected from property taxes.
• Calculate property tax rates (based on net
  assessed value & collection estimates) &
  total tax levy.
 Budget Strategy Example (1)—
         Property Tax
• Anticipated spending needs = $800,000;
  forecasted revenue, all sources except
  property tax = $200,000; then revenue
  collected from property tax = $600,000.
• Assuming that 92% of property tax is
  collected (assume no delinquent tax
  collection) then tax levy = 600,000/.92 =
  $652,174 for a balanced budget.
 Budget Strategy Example (2)—
         Property Tax
• Net assessed value: assume total assessed value of
  property is $2.3 billion less property exemptions
  of $300 million—net assessed value = $2 billion.
• Tax rate: property tax required / (collection rate x
  net assessed value/100) = 600,000 / (.92 x 2
  billion) = $0.3261 per $100 NAV.
• Tax levy = $2 billion/100 x 0.326087 = $652,174.
 Budget Strategy Example (3)—
        Journal Entries
• Budget entry (balanced budget):
     Estimated Revenues 800,000
          Fund Balance          800,000
• Tax Levy:
     Taxes Receivable [Current] 652,174
          Revenues-Property Tax 600,000
          Allowance for Uncoll. Tax 52,174
    Budget Strategy Example (4)—
           Closing Entries
•     Fund Balance        800,000
           Estimated Revenues 800,000
      Revenue-Property Tax 600,000
           Fund Balance        600,000
                  Other Revenues
• Fines (pp. 129-130)
• Sales Taxes (pp. 130-3)
• Income Taxes (pp. 133-5)
• Grants (pp. 135-142)
        Unrestricted Grants
        Restricted Grants (designated purposes)
        Contingent Grants (based on specific
         actions or occurrences)
        Entitlements (entitled by formula)
        Shared Revenues (on a predetermined basis)
        Payments in Lieu of Taxes (replaces property taxes)
• Sale of capital assets (pp. 142-3)
• Investment Income: investments recorded at fair value & investment
  income includes changes in fair value (pp. 143-7).
       Other Financing Sources
• Resource inflows that include transfers in & bond
• They are operating inflows, but not considered
• Monies are often transferred from one fund to
  another; e.g., the General Fund transfers $10,000
  to the Debt Service Fund for an interest payment:
  this is an other financing sources to the DSF.
• Bond proceeds (usually to a Capital Project Fund)
  also are other financing sources (the money has to
  be paid back).
   Government-wide Statements
• In addition to fund accounting, state & local
  governments prepare government-wide statements
  based on full accrual accounting.
• Generally, the government keeps its books using
  fund accounting, then makes an additional set of
  adjusting entries to arrive at the information to
  prepare government-wide statements.
• Therefore, revenues are recognized on a different
  basis, similar to commercial accounting.
• Generally, the major difference is that “available”
  is not a criteria for revenue recognition.
       Chapter 5

Recognizing Expenditures in
   Governmental Funds
• Expenditures are associated with the acquisition of goods & services
  (usually recognized when the liability is recorded). Expenditures are
  decreases in net financial resources.
• Expenses are associated with the consumption of goods & services.
  Expenses are decreases in net economic resources.
• Expenditures are used instead of expenses in the governmental funds.
  [Expenses are used for government-wide statements.]
• The acquisition of equipment for $10,000 cash in a general fund would
       Expenditures-Capital Asset 10,000
                 Cash                                   10,000
          Resource Outflows
• Expenditures are usually cross-classified by
  (1) department or program (e.g., public
  works, public safety, parks & recreation) &
  (2) object of expenditures (e.g., salaries,
  supplies, maintenance, etc.).
• Other financing uses are resource outflows,
  with transfers out being the most common.
    Expenditure Characteristics
• Mainly associated with exchange transactions;
  e.g., employee compensation, acquisition (or use)
  of supplies.
• Examples:
       Wages & Salaries (pp. 164-171)
       Supplies (pp. 173-5): purchase or
        consumption methods allowed
       Capital assets (pp. 176-180)
       Non-exchange transactions (pp. 183-4)
  Spending Entries (1): Budget
• Spending needs: salaries, $650,000;
  supplies, $150,000.
• Budget entry:
     Fund Balance           800,000
           Appropriations        800,000
    Spending Journal Entries--
• Salaries:
     Expenditures-Salaries 642,000
            Salaries Payable 642,000
• Year-end accruals: at year-end,
  expenditures are recognized for the days
  works for which they haven’t been paid.
     Expenditures-Salaries 8,000
            Accrued Salaries     8,000
  Spending Journal Entries--
Supplies (Purchase method)
   Encumbrances                 150,000
            Reserve for Encumbrances 150,000
    Reserve for Encumbrances 150,000
            Encumbrances                 150,000
    Expenditures-Supplies       150,000
            Vouchers Payable             150,000
   [Note: supplies on hand at year-end total
     Spending Closing Entries
• Appropriations           800,000
     Fund Balance               800,000
• Fund Balance             800,000
     Expenditures-Salaries      650,000
     Expenditures-Supplies      150,000
• Inventory-Supplies       10,000
     Fund Balance Reserved
      for Supplies              10,000
    Other Salary Considerations
• Vacation Pay: recorded in year vacation actually
  taken [accrued for government-wide reporting].
• Sick Leave: recorded in year sick leave taken
  [accrued for government-wide reporting.]
• Pension contributions: generally recorded when
  cash payment made to a pension trust fund
  [recorded as expenses based on calculated amount
  for government-wide reporting].
 Supplies-Consumption Method
• [Encumbrances, same as above.]
• Supplies Inventory      150,000
     Vouchers Payable          150,000
• Expenditures-Supplies 140,000
     Supplies Inventory        140,000
• Fund Balance             10,000
     Fund Balance Reserved
      for Supplies               10,000
• Prepayments are common for insurance &
  certain other spending items; General Fund
  (& other governmental funds) can use the
  purchase or consumption method.
• Purchase method:
      Expenditures-Insurance     10,000
            Vouchers Payable           10,000
Prepayments-Consumption Method
 Prepaid Insurance           10,000
    Vouchers Payable               10,000

 Usage (usually by month):

 Expenditures-Insurance       3,000
   Prepaid Insurance                  3,000
                      Capital Assets
• Expenditures-Capital Assets         20,000
         Contracts Payable                             20,000
• If the money is on a long-term note:
         Cash                                 20,000
            Other Financing Sources-
                   Note proceeds                       20,000
         Expenditures-Capital Assets       20,000
            Contracts Payable                         20,000
• Capital Lease:
         Expenditures-Capital Assets       20,000
                 Other Financing Sources-
                    Capital Lease                     20,000
• [Note: long-term liabilities are serviced in a debt service fund.]
     Multiple-fund Transactions
• Many transactions involve more than one fund;
  therefore, journal entries are required in two or
  more funds.
• A common example in interfund transfers
  (classified as other financing sources & uses).
  Other examples of financing sources & uses
  include proceeds from long-term debt & proceeds
  from the sales of capital assets.
• Note that charges for services would be recorded
  as revenue & expenditures (or expenses).
          Interfund Transfer
• The General Funds sends $20,000 in cash to
  the Debt Service Fund for a future interest
  payment on long-term notes:
      General Fund
       Transfers Out       20,000
           Cash                  20,000
      Debt Service Fund
       Cash                20,000
           Transfers In          20,000

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