How does governmental fund expenditures should be recognized in the accounting period?

Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

Governmental Reporting Overview Modified Accrual Basis of Accounting

Modified accrual is a combination of cash basis and full accrual basis. Revenues are recognized when they are both measurable and available.

• Measurable — the cash flow from the revenue can be reasonably estimated
• Available — the revenue is available to finance current expenditures to be paid within 60 days

Expenditures, however, are recorded on a full accrual basis because they are always measurable when they are incurred. The measurement focus of governmental funds affects which transactions are recognized in the operating fund. If transactions are not a current resource or use, they are not reported in the operating fund of the fund financial statement (for example, capital assets or long-term liabilities). Under GASB 34, these noncurrent activities are reported on the government-wide statements only.

Depreciation expense is not recorded for governmental funds under the modified accrual basis — assets are instead expensed in the operating fund when purchased because they are a current use of funds.

Expenditure Recognition – Consumption Method and Purchases Method

Under accrual accounting, expenditures are recognized as soon as a liability is incurred regardless of the timing of related cash flows. However, under the modified accrual basis, GAAP provided modifications to the general rule in the areas of inventories and prepaid items.

• Under the purchases method — inventories and prepaid items are reported as expenditures when purchased rather than capitalized as an asset.
• Under the consumption method — governments may initially report inventories and prepaid items they purchased as an asset and defer the recognition of the expenditure until the period the inventories and prepaid items are actually consumed or used.

The Comptroller’s office adopted the consumption method and agencies must use the consumption method in their AFR. For more information, see Inventories and Prepaid Items.

Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

The same amounts of receivables are recognized under either the modified or full accrual basis. The difference of the two bases is in the recognition of revenues.

Modified Accrual

Report deferred inflows of resources on the balance sheet for:

• Revenues earned but not available
• Intra-entity sales of future revenues (unearned but available) between the primary government and a component unit (GASB 65, paragraph 13)

Report unearned revenue as a liability for derived tax revenues received in advance (unearned but available) (GASB 33, paragraph 16 and GASB 65, paragraph 53).

Full Accrual

In governmental funds, report deferred inflows of resources in the statement of net position for intra-entity sales of future revenues (unearned but available) between the primary government and component unit (GASB 65, paragraph 13).

Report unearned revenues as a liability for derived tax revenues received in advance (unearned but available) (GASB 33, paragraph 16 and GASB 65, paragraph 53).

Report a reconciling item on the GWFS — Reconciliation of the balance sheet to the statement of net position for revenues earned but not available. In proprietary funds, report revenues in the statement of revenues, expenses and changes in net position and the statement of activities as soon as they are earned.

In proprietary funds, report deferred inflows of resources in the statement of net position for:

• Intra-entity sales of future revenues (unearned but available) between the primary government and component unit (GASB 65, paragraph 13)
• Future revenues in regulated operations (unearned but available) (GASB 65, paragraph 29)

Governmental Funds (GAAP FT01, FT02, FT03, FT04 and FT19)

A governmental fund recognizes revenues (using the modified accrual basis of accounting) in the accounting period the revenues become both measurable and available to finance expenditures of the fiscal period.

Per GASB 65, paragraph 30, when an asset is recorded in a governmental fund but the revenue is not available, deferred inflows of resources are reported in the governmental fund financial statements until such time the revenue becomes available.

The following table illustrates four types of transactions that require different recognition of accounts receivable and revenues under the modified versus full accrual basis for governmental funds. In all four types, transactions are assumed measurable and probable of collection.

Proprietary Funds (GAAP FT05 and FT15)

A proprietary fund recognizes revenues using the full accrual basis of accounting. GASB 65, paragraph 30, is not applicable to proprietary funds.

The following table illustrates four types of transactions that require different recognition of accounts receivable and revenues under the full accrual basis for proprietary funds. In all four types, transactions are assumed measurable and probable of collection.

When Should general fund expenditures be recognized what are the major exceptions?

What basis of accounting is used in governmental funds?

Under which basis of accounting for a government should revenues be recognized?

What is the accounting equation for governmental fund?