BAR CPA Exam: How to Prepare the Balance Sheet for the Governmental Funds of a State or Local Government from a Trial Balance and Supporting Documentation

Introduction

Brief Overview of Governmental Accounting

In this article, we’ll cover how to prepare the balance sheet for the governmental funds of a state or local government from a trial balance and supporting documentation. Governmental accounting differs significantly from private sector accounting because of the unique needs and purposes of government entities. Unlike for-profit businesses, state and local governments focus on accountability rather than profitability. Their primary objective is to manage and report how public resources are collected and used. Governmental accounting is governed by standards issued by the Governmental Accounting Standards Board (GASB), which establishes principles designed to promote transparency and accountability.

In governmental accounting, transactions are recorded and reported in separate funds based on the nature of the activities. The two primary bases of accounting used by governments are the modified accrual basis for governmental funds and the accrual basis for proprietary and fiduciary funds. The modified accrual basis focuses on current financial resources, recognizing revenues when they are measurable and available, and expenditures when liabilities are incurred.

Importance of the Balance Sheet for Governmental Funds

The balance sheet is one of the core financial statements for governmental funds, providing a snapshot of the financial position of a state or local government at a given point in time. It reports the fund’s assets, liabilities, and fund balances, offering insights into the resources available for future use and obligations that need to be settled.

The balance sheet for governmental funds serves as a key tool for understanding how well a government is managing its current financial resources, including cash, receivables, and liabilities. It also reflects the classifications of fund balances, helping stakeholders determine the extent to which funds are restricted, committed, or available for general use. The balance sheet’s importance is magnified for those involved in budgeting, policymaking, and public oversight, as it shows whether a government has the financial capacity to meet its obligations and sustain its operations.

Purpose of the Article

This article aims to guide readers through the step-by-step process of preparing the balance sheet for governmental funds using information from a trial balance and supporting documentation. It will help those studying for the BAR CPA exam understand how to interpret the trial balance, adjust for necessary accruals, and accurately report assets, liabilities, and fund balances according to GASB standards. By the end of the article, readers will be equipped with the knowledge needed to prepare a governmental fund balance sheet and ensure compliance with the relevant accounting principles.

Understanding Governmental Fund Accounting

Types of Governmental Funds

Governmental funds are used to account for a government’s general activities, particularly those that are tax-supported. There are five main types of governmental funds, each with a distinct purpose:

1. General Fund: This is the primary operating fund of a government. It accounts for all financial resources not restricted to other specific funds. Most day-to-day activities, such as public safety, education, and public works, are recorded in the general fund.
2. Special Revenue Funds: These funds are used to account for proceeds of specific revenue sources that are legally restricted or committed to expenditure for particular purposes, other than debt service or capital projects. An example could be funds dedicated to public transportation or parks maintenance.
3. Debt Service Funds: These funds account for financial resources that are restricted, committed, or assigned to expenditure for the repayment of debt. Governments use debt service funds to track the accumulation of resources for, and payment of, general long-term debt principal and interest.
4. Capital Projects Funds: These funds are used to account for financial resources earmarked for the acquisition or construction of major capital assets such as buildings, roads, or bridges. Capital projects funds ensure that capital improvement projects are properly financed and tracked.
5. Permanent Funds: These funds are used to account for resources that are legally restricted in such a way that only the earnings, and not the principal, can be used to support government programs. A common example of a permanent fund might be an endowment set up to support library operations where the original donation remains intact, but interest income is used for specific purposes.

Modified Accrual Basis of Accounting: Key Principles

Governmental funds, unlike proprietary or fiduciary funds, operate on a modified accrual basis of accounting. This accounting method focuses on the current financial resources available to a government and recognizes transactions differently than the accrual basis of accounting used by private entities or business-type activities.

The key principles of the modified accrual basis are:

1. Revenue Recognition: Revenues are recognized when they are both measurable and available. “Measurable” means the government can determine or reasonably estimate the amount. “Available” means the revenue is collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period (typically within 60 days).
2. Expenditure Recognition: Expenditures are recognized when the related liability is incurred, regardless of when the actual cash payment is made. However, under the modified accrual basis, long-term liabilities such as debt service are not recognized in governmental funds because they do not require the use of current financial resources.

This method ensures that governments report financial transactions in a way that emphasizes the availability of current resources and obligations.

Differences Between Governmental Funds and Proprietary/Fiduciary Funds

Governmental funds, which focus on fiscal accountability and current financial resources, differ from proprietary and fiduciary funds, which are more focused on operational accountability and the economic resources available.

1. Proprietary Funds: These funds are used to account for government activities that are more business-like in nature. They include Enterprise Funds, which account for operations financed and run similarly to private businesses (e.g., public utilities), and Internal Service Funds, which account for services provided by one department to other departments on a cost-reimbursement basis (e.g., vehicle maintenance). Proprietary funds use the accrual basis of accounting, recognizing revenues and expenses when they are earned or incurred, much like in the private sector.
2. Fiduciary Funds: These funds account for resources held by the government in a trust or agency capacity for others and cannot be used to support the government’s own programs. Fiduciary funds include Pension (and other employee benefit) Trust Funds, Investment Trust Funds, Private-Purpose Trust Funds, and Agency Funds. Like proprietary funds, fiduciary funds follow the accrual basis of accounting, but they focus on the government’s responsibility to safeguard assets rather than fiscal accountability for government programs.

Governmental funds provide a picture of a government’s short-term fiscal health and capacity to meet immediate obligations, whereas proprietary and fiduciary funds offer a view of ongoing operations and long-term sustainability.

Review of Trial Balance for Governmental Funds

Importance of the Trial Balance as the Starting Point

The trial balance is the foundation for preparing the balance sheet and other financial statements in governmental accounting. It provides a detailed listing of all general ledger accounts and their balances at a specific point in time, which helps in identifying the components that will appear on the balance sheet. For governmental funds, the trial balance allows accountants to organize and classify information related to assets, liabilities, and fund balances, serving as the critical first step in the preparation process.

Since governmental funds focus on current financial resources, the trial balance plays a crucial role in showing what resources are available and what obligations exist. Any discrepancies, missing entries, or misclassifications discovered at this stage must be addressed to ensure the balance sheet is accurate and in compliance with Governmental Accounting Standards Board (GASB) principles.

How to Interpret the Trial Balance for Governmental Funds

Interpreting the trial balance for governmental funds involves understanding how each account relates to the financial position of the government and ensuring that accounts are correctly classified into assets, liabilities, and fund balances.

Assets

Governmental fund assets represent the resources the government has available to meet its short-term obligations and deliver services. These accounts typically include:

• Cash and Cash Equivalents: The most liquid resources available to fund operations.
• Investments: Short-term investments that can be converted into cash.
• Receivables: Amounts due to the government, such as taxes receivable or grants receivable, which are collectible in the near future.
• Due from Other Funds: Any amounts owed to the governmental fund by other funds within the government.
• Inventories and Prepaid Items: Supplies and prepayments for future expenses that the government has already acquired but not yet used.

These accounts must be classified appropriately in the balance sheet, often distinguishing between current and noncurrent assets, though governmental fund accounting usually emphasizes current financial resources.

Liabilities

Liabilities represent the government’s obligations that are payable from the available current financial resources. Key liability accounts include:

• Accounts Payable: Short-term obligations due to vendors or service providers.
• Accrued Liabilities: Expenses incurred but not yet paid, such as salaries or benefits.
• Due to Other Funds: Amounts the governmental fund owes to other internal funds.
• Short-Term Notes Payable: Any short-term borrowing that the government must repay.

It is important to note that long-term liabilities, such as bonds payable, are not typically reported in governmental fund balance sheets since these funds focus on current financial resources. These are reported in the government-wide financial statements.

Fund Balances

Fund balances represent the net position of a governmental fund after accounting for assets and liabilities. The fund balance is critical because it shows the residual resources that can be used in the future and the level of restriction on those resources. GASB 54 establishes five categories for fund balances:

• Nonspendable: Funds that are not in spendable form, such as inventory or prepaid items.
• Restricted: Funds that can only be spent for specific purposes imposed by external sources (e.g., grants or donor restrictions).
• Committed: Funds that have been earmarked for specific purposes through formal action by the government’s highest level of decision-making authority.
• Assigned: Funds intended for specific purposes but not formally committed.
• Unassigned: The portion of the fund balance available for any governmental purpose.

When interpreting the trial balance, it’s important to classify fund balance accounts correctly based on restrictions and intended uses.

Revenues and Expenditures

Though revenues and expenditures do not appear on the balance sheet, they provide essential context for evaluating the financial performance of the fund. These accounts help explain changes in fund balance during the period. Reviewing revenues and expenditures helps ensure that resources have been correctly allocated, restricted funds have been spent appropriately, and liabilities have been recognized in the correct period.

Adjustments: Why and How Adjustments May Be Necessary Before Preparing the Balance Sheet

Before preparing the governmental fund balance sheet, it’s often necessary to make adjustments to the trial balance. These adjustments ensure that financial transactions are recorded accurately and in line with the modified accrual basis of accounting. Some common reasons for adjustments include:

1. Accrual Adjustments: Adjustments may be needed to recognize revenues that are available but not yet received, such as property taxes due within 60 days of year-end. Similarly, expenses incurred but not yet paid, such as salaries earned in the current period but paid after year-end, must be accrued.
2. Deferred Inflows and Outflows: Adjustments may also be necessary for deferred inflows and outflows of resources. For example, grant revenues that are measurable but not yet available should be deferred and recognized as an inflow in the future when the funds are collected.
3. Reclassifications: Certain trial balance accounts may need reclassification to conform with the appropriate reporting categories. For example, amounts due to other funds may be reclassified from liabilities to the “due to other funds” account.
4. Elimination of Non-Fund Accounts: Accounts that are not relevant to the current financial resources of the fund, such as long-term debt or capital assets, should be eliminated from the trial balance before preparing the governmental fund balance sheet.

By carefully reviewing the trial balance and making necessary adjustments, the governmental fund balance sheet will provide a true representation of the available resources and obligations of the fund. These adjustments ensure that the balance sheet complies with GASB standards and accurately reflects the financial condition of the governmental entity.

Supporting Documentation

Common Sources of Supporting Documentation

Preparing an accurate balance sheet for governmental funds requires thorough review of supporting documentation. This documentation serves as the foundation for verifying the figures in the trial balance and making any necessary adjustments. Common sources of supporting documentation for governmental entities include:

• Contracts: Agreements related to services, construction, or other governmental activities can help verify liabilities or commitments that need to be recognized in the financial statements.
• Grants: Governmental entities often receive restricted funds through federal, state, or private grants. Documentation for these grants ensures proper classification of restricted or committed resources and compliance with grantor requirements.
• Debt Agreements: For any borrowing, documentation such as bond issuances, loans, and notes payable must be reviewed to ensure that the appropriate liabilities are recognized and that the fund balance reflects any restrictions imposed by debt covenants.
• Invoices and Payment Receipts: Verifying expenditures and accounts payable requires reviewing invoices and receipts from vendors and contractors.
• Tax Receivables Records: Documentation related to taxes owed to the government (e.g., property tax or sales tax records) helps to validate the receivable amounts reported in the trial balance.
• Purchase Orders: These confirm obligations for goods or services the government has ordered but not yet received, helping to determine if liabilities need to be accrued.

Verifying Amounts in the Trial Balance Against Supporting Documentation

The next step in preparing the balance sheet is ensuring that the amounts listed in the trial balance align with the amounts in supporting documentation. This step is essential for both accuracy and compliance with the Governmental Accounting Standards Board (GASB) standards.

Key steps for verification include:

1. Cross-checking Receivables: Ensure that amounts reported as receivables (e.g., taxes or grants receivable) are supported by the corresponding tax records, grant awards, or other documentation that proves they are measurable and collectible.
2. Verifying Liabilities: Review contracts, invoices, and debt agreements to confirm the liabilities listed in the trial balance, ensuring that obligations are correctly recorded as either current or deferred.
3. Examining Fund Balances: Supporting documentation should be reviewed to confirm that fund balances are properly classified (e.g., restricted, committed, assigned) based on the specific terms of grants, contracts, or legal restrictions.

This verification process ensures that the amounts on the balance sheet are complete, accurate, and in accordance with the modified accrual basis of accounting.

Key Adjustments from Supporting Documentation

Supporting documentation often reveals the need for adjustments to ensure the balance sheet accurately reflects the financial position of the governmental fund. These adjustments typically fall into two categories: accrued revenues/expenditures and deferred inflows/outflows of resources.

Adjusting for Accrued Revenues or Expenditures

Accrued revenues and expenditures represent financial activity that has occurred but has not yet been recorded in the trial balance because it falls outside of the cash-based accounting period. Adjustments are made to recognize these amounts based on supporting documentation.

• Accrued Revenues: For revenues to be recognized under the modified accrual basis, they must be both measurable and available. For example, property taxes that are expected to be collected within 60 days of year-end may need to be accrued based on tax rolls or collection reports.
• Accrued Expenditures: Expenses that have been incurred but not yet paid, such as salaries or services received at year-end, must be accrued. Payroll records, invoices, or contractual agreements serve as supporting documentation for these accrued expenses.

Making these adjustments ensures that revenues and expenditures are reported in the correct period, reflecting the true financial position of the governmental entity at the end of the reporting period.

Deferred Inflows and Outflows of Resources

In some cases, governmental funds may need to recognize deferred inflows or outflows of resources, which represent amounts that are expected to impact future financial periods.

• Deferred Inflows of Resources: These occur when the government receives resources in advance of when they are legally allowed to recognize the revenue. For example, grant money received before the eligibility requirements are met should be classified as a deferred inflow. Documentation such as grant agreements or payment schedules provides the basis for this adjustment.
• Deferred Outflows of Resources: These represent the consumption of resources that will affect future periods, such as payments made for future services. Supporting documentation, such as payment contracts or prepayment receipts, may require the recognition of deferred outflows to ensure proper matching of expenses with the periods they benefit.

By adjusting for deferred inflows and outflows of resources, governmental funds can ensure that revenues and expenses are recognized at the appropriate time, enhancing the accuracy of the balance sheet and ensuring compliance with GASB principles.

Preparing the Balance Sheet: Assets Section

Step-by-Step Breakdown of Asset Accounts

The asset section of the balance sheet for governmental funds focuses primarily on current assets since governmental funds are concerned with available financial resources rather than long-term assets. Here’s a step-by-step breakdown of the key asset accounts you will encounter when preparing the balance sheet for governmental funds:

Current Assets

Current assets represent the resources available to the government that are expected to be converted into cash, sold, or consumed within the current financial period. Key current asset accounts include:

1. Cash and Cash Equivalents: This account represents the cash on hand and any short-term, highly liquid investments that are readily convertible to cash. It is the most basic and immediate form of resource available to governmental funds. The balance should be verified against bank statements and cash receipts documentation.
2. Investments: Short-term investments that the government holds, which are expected to be liquidated within a year. These may include certificates of deposit, money market funds, or bonds with short-term maturities. Documentation such as investment statements or purchase confirmations will be needed to confirm amounts.
3. Receivables: This account includes amounts owed to the government, such as property taxes receivable, grants receivable, or intergovernmental receivables. To ensure proper reporting, the receivables should be recognized only if they are measurable and available under the modified accrual basis of accounting. Supporting documents could include tax rolls, grant agreements, or billing records.

Noncurrent Assets (If Applicable in Fund Statements)

While governmental fund balance sheets generally emphasize current financial resources, certain noncurrent assets may be reported depending on the specific governmental entity and the fund’s purpose. However, these are rare and typically found in other statements such as government-wide financial statements, not in the balance sheet of governmental funds. If applicable, noncurrent assets could include long-term receivables or investments that will not be converted into cash within the current period.

In most cases, capital assets (e.g., infrastructure, buildings, equipment) are not reported in the balance sheet of governmental funds. These are reported in the government-wide financial statements using the accrual basis of accounting.

Tips for Classifying Assets as Current vs. Noncurrent in Governmental Funds

When classifying assets as either current or noncurrent, consider the following guidelines:

1. Use the Modified Accrual Focus: Governmental fund accounting emphasizes current financial resources, so assets should generally be classified as current unless there is a specific reason to include long-term receivables or investments in the fund’s financial reporting.
2. Liquidity and Time Frame: Current assets are those that can reasonably be expected to be liquidated or used within one year. Noncurrent assets have longer terms, such as receivables due in more than a year or investments that mature beyond 12 months.
3. Check Fund-Specific Guidelines: Certain governmental funds, particularly special revenue or capital project funds, may have specific requirements or restrictions that guide the classification of assets based on external mandates or purposes.

By carefully considering the liquidity of assets and the intended use of resources, you can ensure proper classification in the balance sheet.

Explanation of Fund-Specific Items: Due from Other Funds, Inventories, and Prepaid Items

In addition to the standard current assets like cash and receivables, governmental funds often have fund-specific items that need to be included on the balance sheet. These include:

1. Due from Other Funds: This account reflects amounts that are owed to one governmental fund by another. For example, a capital projects fund may have advanced money to the general fund, and that interfund balance would be reflected in this account. Documentation such as interfund agreements or internal transfer records can confirm the amount. These amounts should be treated as current assets since they are expected to be settled in the near future.
2. Inventories: This account represents supplies or materials that have been purchased by the government but not yet used. For example, a school district’s general fund may hold an inventory of classroom supplies that have not been distributed. Inventories are reported as current assets and classified as nonspendable in the fund balance section because they are not in spendable form. The amount can be supported by physical counts or inventory records.
3. Prepaid Items: Prepaid items are expenses that have been paid in advance but relate to a future period, such as prepaid insurance or rent. These amounts are classified as current assets but, like inventories, are considered nonspendable fund balance items because they are not available for spending. Supporting documentation includes payment receipts and contracts that indicate the period the expense covers.

By properly classifying these fund-specific items and including supporting documentation, you ensure that the balance sheet presents an accurate picture of the government’s available financial resources.

Preparing the Balance Sheet: Liabilities Section

Identifying and Classifying Liabilities

When preparing the liabilities section of the balance sheet for governmental funds, it’s essential to focus on current liabilities, as governmental funds are reported on the modified accrual basis of accounting. Long-term liabilities are not typically included in governmental fund balance sheets, though they may be disclosed elsewhere. Here’s a breakdown of how to identify and classify liabilities.

Current Liabilities

Current liabilities represent obligations that the governmental fund expects to settle using current financial resources within the next fiscal period. Key current liability accounts include:

1. Accounts Payable: This account represents amounts owed to vendors or service providers for goods and services already received but not yet paid for by the government. For example, if a city has unpaid invoices for road repair services, this would be classified under accounts payable. Supporting documentation such as vendor invoices and payment schedules should be reviewed to verify the balance.
2. Accrued Wages and Salaries: These are amounts owed to government employees for work performed but not yet paid by the end of the fiscal period. For example, if a school district’s fiscal year ends before the next payday, the unpaid wages earned up to that date must be accrued. Payroll records and timesheets are key documentation for verifying this liability.
3. Notes Payable (Short-Term Debt): This liability refers to any short-term borrowings by the governmental entity that must be repaid within the current fiscal period, such as tax anticipation notes or revenue anticipation notes. These notes are typically issued to cover temporary cash shortages and are expected to be paid off when taxes or other revenues are collected. Loan agreements and debt schedules serve as supporting documentation for notes payable.

Long-Term Liabilities

While governmental fund balance sheets do not typically report long-term liabilities—because they focus on current financial resources—long-term obligations should still be disclosed in the notes to the financial statements. Common long-term liabilities that are excluded from the governmental fund balance sheet include:

1. Bonds Payable: Long-term debt such as bonds issued to finance capital projects (e.g., construction of government buildings or infrastructure) should not be included in the fund-level balance sheet but will appear in the government-wide financial statements.
2. Pension Obligations: These represent future pension liabilities owed to government employees but are also excluded from the governmental fund balance sheet, appearing instead in the government-wide financial statements.

While these long-term liabilities are not part of the governmental fund balance sheet, it is critical to disclose them in the notes, particularly if they are material and impact the government’s overall financial health.

Accounting for Accrued Liabilities, Short-Term Notes, and Amounts Due to Other Funds or Entities

Several specific liabilities require careful attention when preparing the balance sheet for governmental funds:

Accrued Liabilities

Accrued liabilities represent expenses that have been incurred but not yet paid by the governmental entity. Examples include accrued wages, interest, and utilities. These are recognized under the modified accrual basis because they reflect obligations the government must settle using current financial resources. To account for accrued liabilities, review the trial balance and supporting documentation such as payroll records, utility bills, or interest schedules.

For instance, if a city’s utility expenses were incurred in the last month of the fiscal year but paid in the following month, these expenses should be recorded as an accrued liability. Accurate accruals ensure that expenditures are matched with the correct period, enhancing the transparency of the financial statements.

Short-Term Notes Payable

Short-term notes payable, such as tax or revenue anticipation notes, are liabilities that must be repaid within the current fiscal year. Governments issue these notes to cover temporary cash flow shortages. When recording these notes on the balance sheet, it’s essential to include both the principal and any accrued interest that must be paid in the short term. The trial balance will reflect the total outstanding notes payable, while loan agreements provide the detailed terms.

For example, if a local government issues a tax anticipation note in anticipation of property tax collections, the note and any accrued interest would be listed as a current liability on the balance sheet. The note is expected to be repaid as soon as the tax revenue is collected.

Amounts Due to Other Funds or Entities

Interfund liabilities arise when one governmental fund owes money to another fund within the same government. These amounts are typically short-term and must be settled within the next fiscal period. The account “Due to Other Funds” records these interfund obligations.

For example, if a special revenue fund borrows money from the general fund to cover temporary operating expenses, this amount will appear in the balance sheet as a liability for the special revenue fund and as a receivable for the general fund. It’s important to review internal fund transfer agreements or documentation to verify these amounts.

Additionally, amounts due to external entities, such as state or federal governments, may also appear under this category. These amounts often arise when governmental funds receive grant money but need to repay unspent funds or remit amounts collected on behalf of other governments.

By properly classifying and accounting for current liabilities like accounts payable, accrued wages, notes payable, and interfund liabilities, the governmental fund balance sheet accurately reflects the obligations that need to be settled in the near term. Ensuring that all supporting documentation is reviewed and adjustments are made when necessary guarantees the reliability of the reported figures.

Preparing the Balance Sheet: Fund Balances

Understanding the Different Classifications of Fund Balances

Fund balances in governmental funds represent the net position after accounting for assets and liabilities. The Governmental Accounting Standards Board (GASB) Statement No. 54 provides specific categories to classify fund balances based on the level of constraints placed on the use of the resources. These classifications help financial statement users understand the nature and availability of the government’s financial resources. Below are the five key classifications:

Nonspendable Fund Balance

Nonspendable fund balance includes amounts that cannot be spent because they are either:

• Not in spendable form, such as inventories or prepaid items, which are resources that will be consumed rather than converted to cash.
• Legally or contractually required to be maintained intact, such as the principal of an endowment fund.

For example, if a school district has purchased textbooks but not yet distributed them, these would be classified as nonspendable inventory. Similarly, prepaid insurance premiums would fall under this category because they have been paid but relate to future periods.

Restricted Fund Balance

Restricted fund balance includes resources that are subject to externally imposed restrictions, such as those imposed by creditors, grantors, contributors, or laws and regulations. These restrictions must be honored and cannot be changed by the government without external approval.

Examples of restricted fund balance include:

• Grant funds that are restricted for specific projects (e.g., funds designated for infrastructure improvements).
• Debt service funds, which must be used for the repayment of long-term debt.

For instance, a local government that receives federal grant money to improve public transportation must report these funds as restricted because they can only be used for the designated purpose.

Committed Fund Balance

Committed fund balance includes amounts that can only be used for specific purposes as determined by formal action of the government’s highest decision-making authority (e.g., the city council or school board). Unlike restricted funds, committed resources are controlled internally by the government but require a formal resolution or ordinance to be redirected or reallocated.

Examples of committed fund balance include:

• Funds set aside for future capital projects, such as the construction of a new city hall.
• Funds earmarked for emergencies, where the government has formally set aside resources for disaster relief.

These funds remain committed until the government’s leadership takes formal action to remove or change the designation.

Assigned Fund Balance

Assigned fund balance includes amounts that are intended for a specific purpose but do not meet the criteria for restricted or committed funds. The authority to assign fund balances is typically given to a specific official or governing body within the government. While the government intends to use these funds for a particular purpose, there is less formality than in committed fund balances.

Examples of assigned fund balances include:

• Funds intended for specific projects, such as the future purchase of equipment, where the governing body has indicated an intention to use these funds but has not taken formal action to commit them.
• Amounts set aside for specific departmental budgets, where the resources are designated for use by a specific department or program.

Unassigned Fund Balance

Unassigned fund balance represents the residual amount available for any purpose, typically found in the general fund. It includes resources that are neither restricted, committed, nor assigned, and can be used for general government operations without any specific constraints.

For example, if a government ends the year with surplus revenues in its general fund that are not earmarked for any specific purpose, those funds would be reported as unassigned. It is important to note that only the general fund should report a positive unassigned fund balance, while other governmental funds may have negative unassigned balances if they have overdrawn resources.

How to Determine the Proper Classification Based on Trial Balance and Documentation

Determining the correct classification of fund balances requires careful analysis of the trial balance and supporting documentation. The following steps can help ensure accurate classification:

1. Review the Trial Balance for Relevant Accounts: Start by examining the trial balance to identify accounts related to inventories, prepaid items, receivables, restricted grants, debt service funds, and other significant categories. These accounts will often indicate whether the balance is nonspendable, restricted, committed, assigned, or unassigned.
2. Analyze Supporting Documentation: Documentation such as grant agreements, debt covenants, ordinances, and resolutions must be reviewed to determine the level of restriction or commitment on specific funds. For example, if a grant agreement specifies that funds can only be used for infrastructure improvements, these funds must be classified as restricted.
3. Apply GASB 54 Guidelines: Use the definitions provided by GASB 54 to assess whether funds are restricted (externally imposed), committed (formally constrained by internal action), assigned (internally designated), or unassigned (available for general use). Supporting documentation like meeting minutes, resolutions, and budget reports provide evidence for classification.
4. Verify Nonspendable Amounts: For nonspendable items like inventories and prepaid expenses, the amount should be verified with physical inventory counts, vendor contracts, or invoices to ensure accurate reporting.

By cross-referencing the trial balance and supporting documentation, you can ensure that each fund balance is correctly classified according to its intended use and legal or contractual constraints.

Examples of How to Allocate Fund Balance Components

Here are some examples of how to allocate fund balance components based on the nature of the resources and their related restrictions:

• Example 1: Nonspendable Fund Balance
  A city has $50,000 worth of office supplies in inventory and $25,000 in prepaid insurance premiums. These amounts would be classified as nonspendable fund balance because they are not in spendable form.
• Example 2: Restricted Fund Balance
  A state government receives a $500,000 federal grant to build a public park. Since the funds are restricted by the federal government for this specific purpose, they must be classified as restricted.
• Example 3: Committed Fund Balance
  A county board passes a formal resolution to set aside $1,000,000 for future road repairs. This amount would be classified as committed because it has been designated for a specific purpose through formal action.
• Example 4: Assigned Fund Balance
  A city council designates $200,000 for the purchase of new police vehicles but does not pass a formal ordinance. These funds would be classified as assigned since they are intended for a specific purpose but have not been formally committed.
• Example 5: Unassigned Fund Balance
  After accounting for all restricted, committed, and assigned amounts, a government’s general fund has a $150,000 surplus with no specific purpose. This amount would be classified as unassigned and can be used for general government purposes.

These examples illustrate how to allocate fund balance components based on the nature of the resources and the level of constraints placed on them. Ensuring proper classification is key to presenting an accurate and transparent balance sheet for governmental funds.

Final Steps: Review and Adjustments

Double-Checking the Balance Sheet Totals

Once all the assets, liabilities, and fund balances have been classified and entered, the final step in preparing the governmental fund balance sheet is to ensure that the totals balance correctly. The basic accounting equation, Assets = Liabilities + Fund Balances, must be satisfied to confirm that the balance sheet is accurate.

1. Check Total Assets: Add up the current assets (such as cash, investments, receivables, and other fund-specific items like inventories and prepaid items). Ensure that all items are properly categorized and accounted for.
2. Check Total Liabilities: Sum the current liabilities, including accounts payable, accrued wages, short-term notes payable, and amounts due to other funds or entities. Verify that the liabilities represent true obligations that are expected to be settled using current financial resources.
3. Check Fund Balances: Review the breakdown of fund balances to ensure that nonspendable, restricted, committed, assigned, and unassigned balances are correctly allocated and reflect the correct classifications based on the trial balance and supporting documentation.
4. Balance the Equation: Ensure that total assets are equal to the sum of total liabilities and fund balances. Any discrepancies may indicate an error in the classification, omission of accounts, or incorrect calculations.

Taking the time to verify that the balance sheet totals correctly ensures the accuracy of the governmental fund’s financial reporting.

Ensuring the Balance Sheet Complies with GASB Standards

The Governmental Accounting Standards Board (GASB) sets the accounting principles that governments must follow, and it’s important that the balance sheet complies with these standards. Specifically, GASB Statement No. 54 outlines how fund balances should be classified and reported.

To ensure compliance with GASB standards, consider the following:

1. Review Fund Balance Classifications: Ensure that the fund balances are categorized into nonspendable, restricted, committed, assigned, and unassigned, as required by GASB 54. Verify that these classifications are based on actual legal, contractual, or internal constraints on the use of resources.
2. Verify Use of Modified Accrual Basis: Confirm that the balance sheet for governmental funds is prepared using the modified accrual basis of accounting. Revenues should be recognized when measurable and available, and expenditures should be recognized when incurred.
3. Check Deferred Inflows and Outflows: Ensure that any deferred inflows or outflows of resources are properly reported. These should include amounts that are not yet recognized as revenues or expenses but will impact future reporting periods, such as deferred grant revenues or payments.

By adhering to GASB standards, the balance sheet will meet the transparency and accountability requirements expected of governmental financial reporting.

Common Pitfalls in Preparing the Governmental Fund Balance Sheet and How to Avoid Them

When preparing a governmental fund balance sheet, several common errors can arise. Being aware of these pitfalls and knowing how to avoid them can save time and ensure the accuracy of the financial statement.

1. Misclassification of Fund Balances: One of the most common mistakes is the incorrect classification of fund balances. For example, misreporting restricted funds as assigned or committed funds as restricted can lead to inaccurate reporting. To avoid this, review all legal, contractual, and internal documents to ensure fund balances are classified according to GASB 54 guidelines.
2. Omission of Accrued Liabilities: Governmental entities may fail to account for liabilities incurred at year-end, such as unpaid wages or vendor invoices, resulting in understated liabilities. To prevent this, ensure that all accrued expenses are recorded by reviewing payroll records, invoices, and contracts to capture liabilities that apply to the current period.
3. Failure to Recognize Deferred Inflows or Outflows: Governments may overlook deferred inflows and outflows, leading to incomplete financial statements. For instance, grant revenues received but not yet eligible for recognition should be reported as deferred inflows. Review all grant agreements and other relevant documentation to properly account for deferred amounts.
4. Incorrect Use of Modified Accrual Basis: Some governments may mistakenly use the accrual basis of accounting, which can cause revenues and expenses to be recognized in the wrong periods. Ensuring that the modified accrual basis is applied—recognizing revenues when they are measurable and available and expenses when liabilities are incurred—is critical to presenting an accurate balance sheet.
5. Inconsistent Documentation: Incomplete or inconsistent documentation can lead to errors in the balance sheet. Governments should keep clear and comprehensive supporting documentation for all transactions, especially for fund balances, grants, and debt agreements. Cross-check the trial balance against supporting documents to ensure all figures are properly substantiated.

By paying attention to these common pitfalls and following a careful review process, governments can produce accurate and reliable balance sheets that reflect their financial position in compliance with GASB standards.

Example Case Study

Simplified Example of Preparing a Balance Sheet for a Governmental Fund

Let’s walk through a simplified example of preparing a balance sheet for the general fund of a small city government. We will use a sample trial balance and supporting documentation, followed by the process of adjustments and classification to create an accurate balance sheet.

Sample Trial Balance

Account	Debit	Credit
Cash	$150,000
Investments	$75,000
Taxes Receivable	$40,000
Accounts Payable		$25,000
Accrued Wages		$15,000
Deferred Revenue – Property Taxes		$10,000
Due to Special Revenue Fund		$5,000
Inventories	$20,000
Prepaid Insurance	$10,000
Restricted Grant Receivable	$50,000
Fund Balance (Unassigned)		$150,000
Revenues (Property Tax)		$250,000
Expenditures (Public Safety)	$200,000
Total	$545,000	$455,000

Supporting Documentation

• Grant Agreement: The city received a restricted federal grant of $50,000 for public transportation improvements. The funds are receivable and restricted for this specific purpose.
• Property Tax Collection Schedule: The city is owed $40,000 in property taxes, but only $30,000 is expected to be collected within 60 days of year-end. The remaining $10,000 should be reported as deferred revenue.
• Invoice for Public Safety Services: The city owes $25,000 for public safety services, to be paid within 30 days.
• Payroll Records: The city owes $15,000 in wages for work completed before year-end, but the wages have not yet been paid.

Walkthrough of Adjustments and Classification

Step 1: Classifying Assets

• Cash ($150,000): This represents the most liquid asset and is classified as a current asset.
• Investments ($75,000): These short-term investments are available for spending and are classified as current assets.
• Taxes Receivable ($40,000): The full $40,000 is initially recognized as taxes receivable. However, since only $30,000 will be collected within 60 days, $10,000 will need to be reclassified as deferred revenue.
• Inventories ($20,000): Since inventories are not in spendable form, they will be classified as nonspendable fund balance.
• Prepaid Insurance ($10,000): Prepaid items will also be classified as nonspendable fund balance.
• Restricted Grant Receivable ($50,000): This grant is restricted for a specific purpose, so it will be classified as a restricted fund balance.

Step 2: Classifying Liabilities

• Accounts Payable ($25,000): These are current liabilities that must be settled shortly and are recognized as accounts payable.
• Accrued Wages ($15,000): These unpaid wages for the current period are classified as a current liability.
• Deferred Revenue ($10,000): Since $10,000 of the property taxes will not be collected within 60 days, this amount must be reported as deferred revenue, a liability.
• Due to Special Revenue Fund ($5,000): This interfund liability is reported as a current liability.

Step 3: Classifying Fund Balances

• Nonspendable Fund Balance:
  • Inventories ($20,000) and Prepaid Insurance ($10,000) are classified as nonspendable, as they represent resources that are not in spendable form.
• Restricted Fund Balance:
  • The $50,000 restricted grant receivable will be reported under restricted fund balance, as it is externally restricted for public transportation improvements.
• Unassigned Fund Balance:
  • After accounting for nonspendable and restricted fund balances, the remainder of the fund balance, representing general use funds, will be classified as unassigned. We will calculate this balance in the final step.

Step 4: Preparing the Final Balance Sheet

City Government General Fund Balance Sheet

Assets	Liabilities and Fund Balances
Assets	Liabilities
Cash: $150,000	Accounts Payable: $25,000
Investments: $75,000	Accrued Wages: $15,000
Taxes Receivable: $30,000	Deferred Revenue: $10,000
Restricted Grant Receivable: $50,000	Due to Special Revenue Fund: $5,000
Inventories: $20,000	Total Liabilities: $55,000
Prepaid Insurance: $10,000
Total Assets: $335,000	Fund Balances:
	Nonspendable Fund Balance: $30,000
	Restricted Fund Balance: $50,000
	Unassigned Fund Balance: $200,000
	Total Fund Balances: $280,000
	Total Liabilities and Fund Balances: $335,000

• Taxes Receivable: Only $30,000 of the taxes receivable was classified as an asset, with the remaining $10,000 classified as deferred revenue.
• Inventories and Prepaid Insurance: These amounts were classified as nonspendable fund balance because they are not in spendable form.
• Restricted Grant Receivable: The $50,000 grant was classified as restricted fund balance, given the external limitations on its use.
• Unassigned Fund Balance: The remaining balance was classified as unassigned for general use, calculated as the residual after nonspendable and restricted funds.

This process ensures that the balance sheet accurately reflects the city’s financial position by properly classifying assets, liabilities, and fund balances in accordance with GASB standards.

Conclusion

Recap of the Key Steps to Preparing the Governmental Fund Balance Sheet

Preparing a balance sheet for a governmental fund involves several crucial steps to ensure accuracy and compliance. The process begins with reviewing the trial balance and identifying assets, liabilities, and fund balances. Key steps include:

1. Classifying Assets: Distinguishing between current and nonspendable assets, such as cash, receivables, inventories, and prepaid items, to ensure proper categorization.
2. Classifying Liabilities: Recognizing current liabilities like accounts payable, accrued wages, and deferred revenues, while excluding long-term liabilities from the governmental fund balance sheet.
3. Allocating Fund Balances: Using the GASB 54 guidelines to classify fund balances as nonspendable, restricted, committed, assigned, or unassigned based on the nature and restrictions of the resources.
4. Reviewing Totals: Ensuring that total assets equal the sum of total liabilities and fund balances, verifying that the balance sheet is balanced.

Importance of Accuracy and Compliance with GASB

Accuracy and compliance with the Governmental Accounting Standards Board (GASB) standards are essential in preparing governmental fund balance sheets. GASB guidelines, particularly those outlined in GASB 54, ensure transparency and accountability in financial reporting. By adhering to these standards, governments provide a clear and accurate picture of their financial health, which is critical for stakeholders, such as citizens, policymakers, and oversight bodies. Proper classification of fund balances helps demonstrate how public resources are being used and whether they are available for future needs.

Encouragement for Continued Study and Practice with Trial Balances and Documentation

Mastering the preparation of a governmental fund balance sheet requires ongoing study and practice. Reviewing trial balances, understanding supporting documentation, and making necessary adjustments are fundamental skills for governmental accounting. By regularly working through real-world examples and ensuring compliance with GASB standards, you can develop the expertise needed to produce accurate financial statements. Continued practice will build your confidence and proficiency, helping you excel in governmental accounting and financial reporting.