Introduction
Overview of the Governmental Financial Reporting Requirements
In this article, we’ll cover how to prepare the statement of revenues, expenditures, and changes in fund balances for the governmental funds of a state or local government. State and local governments are required to provide financial statements that present their financial activities in a transparent and accountable manner. These governments follow accounting standards set by the Governmental Accounting Standards Board (GASB), which aims to ensure that financial reporting is consistent, comprehensive, and allows stakeholders, such as taxpayers, creditors, and regulatory agencies, to assess the government’s financial health.
Governmental financial reporting is structured to meet the specific needs of these stakeholders, focusing on accountability over profitability. The reports emphasize the use of public resources and how efficiently and effectively they are managed. One of the most critical statements in this context is the Statement of Revenues, Expenditures, and Changes in Fund Balances, which is prepared specifically for governmental funds. This statement provides detailed insight into how funds are received, spent, and carried over for future use.
Importance of the Statement of Revenues, Expenditures, and Changes in Fund Balances
The Statement of Revenues, Expenditures, and Changes in Fund Balances is a fundamental component of governmental financial reporting. It plays a crucial role in reflecting the financial performance and fiscal accountability of state or local governments over a specific period, typically a fiscal year.
This statement provides a breakdown of:
- Revenues: The various streams of income the government has collected (e.g., taxes, grants, and charges for services).
- Expenditures: The amounts spent on public services and capital outlays (e.g., public safety, education, and infrastructure).
- Changes in Fund Balances: The resulting surplus or deficit, reflecting whether the government operated within its means or if it drew on reserves or borrowed funds to meet its financial obligations.
By detailing these elements, the statement allows for the evaluation of whether resources were managed efficiently and if the government’s expenditures align with its priorities. The statement highlights both the sources of revenue and areas of spending, giving a clear picture of how public money is being utilized.
Purpose of the Statement in Relation to State or Local Governments’ Accountability
Accountability is one of the cornerstones of governmental financial reporting. Unlike private sector entities, where profit maximization is the primary goal, state and local governments are held accountable for how well they manage public funds and deliver essential services to citizens. The Statement of Revenues, Expenditures, and Changes in Fund Balances is a key tool for this purpose. It helps stakeholders:
- Assess Financial Performance: Whether the government has generated enough revenues to cover its expenditures and whether it has sufficient reserves for future needs.
- Monitor Compliance: It ensures that the government is adhering to its budgetary constraints and operating within its approved spending limits.
- Evaluate Resource Allocation: The statement shows how resources are allocated to different programs and services, allowing for an analysis of spending priorities and effectiveness.
By providing a clear snapshot of the financial activities, this statement fosters transparency, enabling stakeholders to hold the government accountable for its fiscal decisions and ensuring that resources are used in a manner that benefits the public.
Understanding Governmental Funds
Definition of Governmental Funds
Governmental funds are used by state and local governments to account for the various activities and services they provide to the public. These funds focus on fiscal accountability, ensuring that resources are used efficiently to meet governmental objectives. The most common types of governmental funds include:
- General Fund: The primary operating fund of a government. It accounts for all financial resources not required to be accounted for in another fund. Typically, the General Fund supports general government operations, such as public safety, health services, and education.
- Special Revenue Funds: These funds are used to account for specific revenues that are legally restricted or committed to being used for particular purposes. For example, a Special Revenue Fund might be used for a government’s highway maintenance projects if the revenue comes from a specific tax earmarked for that purpose.
- Capital Projects Funds: These funds track resources used for significant capital expenditures, such as the construction of buildings, infrastructure, or major equipment purchases. This allows governments to keep the financial records related to large-scale investments separate from their day-to-day operating funds.
- Debt Service Funds: Governments use Debt Service Funds to account for the accumulation of resources to pay interest and principal on long-term debt, such as bonds. This ensures that the repayment of debt is managed transparently.
- Permanent Funds: These funds are used to report resources that are legally restricted so that only earnings, and not principal, may be used for government programs. For example, a government may establish a Permanent Fund to support a specific public benefit, where the principal remains intact, and only interest income is spent.
Differences Between Governmental Funds and Proprietary or Fiduciary Funds
While governmental funds focus on public service delivery and the efficient use of resources, other fund types exist to account for different government functions. These include:
- Proprietary Funds: These funds account for a government’s business-like activities, such as utilities (e.g., water, electricity) or transit systems. They follow full accrual accounting, similar to private sector businesses, and are meant to be self-sustaining through user charges. The two types of proprietary funds are:
- Enterprise Funds: Used for activities where services are provided to the public on a user-charge basis.
- Internal Service Funds: Account for services provided to other governmental departments on a cost-reimbursement basis.
- Fiduciary Funds: These funds account for assets that the government holds in trust for others, such as pension funds or agency funds. Fiduciary funds are not used for the government’s own programs and services but are instead held and managed on behalf of other parties.
The key distinction between governmental funds and proprietary or fiduciary funds lies in their objectives. Governmental funds focus on services that are meant to benefit the public, while proprietary funds operate more like a business, and fiduciary funds are used for managing assets on behalf of others.
Focus on Modified Accrual Basis for Governmental Funds
One of the most important aspects of governmental fund accounting is the use of the modified accrual basis of accounting. This accounting method is distinct from the full accrual basis used in proprietary and fiduciary funds.
- Revenue Recognition: Under the modified accrual basis, revenues are recognized when they are both measurable and available to finance the expenditures of the current period. “Available” generally means that the revenue will be collected within a certain time frame, usually 60 days after the fiscal year ends. This approach emphasizes current financial resources, meaning that only revenues expected to be received in the near term are counted.
- Expenditure Recognition: Expenditures are recognized when the related liability is incurred, with a focus on when the funds are actually paid out, rather than when the expense is recognized. For example, a government records an expenditure when it issues payment for goods or services rather than when those services are received.
The modified accrual basis ensures that financial statements for governmental funds highlight the flow of current financial resources, emphasizing short-term fiscal accountability rather than long-term economic resources. This is critical in helping stakeholders understand whether the government has the resources to meet its current obligations and provide public services.
Key Components of the Statement of Revenues, Expenditures, and Changes in Fund Balances
The Statement of Revenues, Expenditures, and Changes in Fund Balances is a key financial statement used by state and local governments to report the financial activity within their governmental funds. This statement provides a comprehensive view of how much revenue was generated, how funds were expended, and how the fund balances changed over the course of the fiscal period.
The statement is divided into several major sections, each of which provides critical information about the government’s financial performance.
Revenues
The Revenues section of the statement details the various sources of income that a government collects during the fiscal period. Revenue is recognized when it becomes measurable and available, following the modified accrual basis of accounting. Revenues are critical for funding public services, maintaining infrastructure, and ensuring that governmental operations can continue without interruption. Typical sources of revenue for governmental funds include:
Taxes
Taxes are the primary revenue source for most state and local governments. They are compulsory charges levied on individuals and businesses to fund public services and infrastructure. Common types of taxes include:
- Property Taxes: Levied on the assessed value of real estate or personal property.
- Sales Taxes: A percentage added to the sale price of goods and services.
- Income Taxes: Charged on the earnings of individuals and corporations.
- Excise Taxes: Taxes imposed on specific goods, such as fuel, alcohol, or tobacco.
Intergovernmental Revenue
Intergovernmental revenues refer to funds that one level of government (e.g., federal or state) transfers to another (e.g., local governments). These funds can come in the form of:
- Grants: Financial assistance provided for a specific purpose, such as education, transportation, or healthcare.
- Shared Revenues: Where higher levels of government (e.g., state governments) distribute a portion of collected taxes (such as sales or income taxes) to lower levels of government based on a predetermined formula.
- Entitlements: Ongoing financial assistance programs that guarantee funding to recipients who meet certain eligibility criteria, such as Medicaid or social services funding.
Charges for Services
Charges for services represent fees that governments collect in exchange for providing certain public services to individuals, businesses, or other entities. These charges often support self-sustaining activities that generate their own revenue streams. Examples include:
- Water and Sewer Services: Fees charged for the provision of utility services like water treatment and distribution.
- Recreational Fees: Charges for access to public parks, recreational facilities, or public events.
- Licenses and Permits: Fees associated with obtaining business licenses, building permits, or vehicle registration.
Fines
Fines are imposed as penalties for violating laws or regulations. Governments often collect fines for traffic violations, code enforcement infractions, and other legal or regulatory violations. While fines may not be a major revenue source compared to taxes, they are an important part of maintaining public safety and compliance with laws.
Grants
Grants are a form of intergovernmental revenue, but they deserve special mention due to their importance in funding specific programs or projects. Grants can be restricted for particular purposes, meaning they must be used for the grant’s intended objective, or they can be unrestricted, providing more flexibility in their use. Examples of grants include:
- Federal Education Grants: Used to fund local school districts and educational programs.
- Transportation Grants: Often used to improve infrastructure, such as roads, bridges, and public transit systems.
- Community Development Grants: Used to revitalize underserved neighborhoods, improve housing, or support economic development.
Each of these revenue sources plays a vital role in the financial health of a government, enabling it to fund essential services, invest in infrastructure, and meet its obligations to citizens. Understanding the composition of revenues in this section provides insight into the government’s financial flexibility and the sustainability of its operations.
Expenditures
The Expenditures section of the Statement of Revenues, Expenditures, and Changes in Fund Balances details how a government allocates its financial resources to provide public services and maintain infrastructure. Expenditures represent the outflow of funds to cover various governmental functions, and they are classified by both purpose and function. The classification of expenditures allows stakeholders to assess how government resources are being used to fulfill public needs and whether the government is operating efficiently.
The typical categories of expenditures in governmental funds include:
Public Safety
Public safety expenditures are a significant portion of most local government budgets and include costs related to maintaining law and order, protecting citizens, and responding to emergencies. These expenditures cover a wide range of activities, such as:
- Police Services: Salaries, benefits, and operating costs of police departments.
- Fire Protection: Equipment, personnel, and facilities for fire departments.
- Emergency Medical Services (EMS): Funding for ambulances, paramedics, and related services.
- Corrections and Detention: Costs associated with operating jails, detention centers, and rehabilitation programs.
Public Works
Public works expenditures relate to the maintenance and development of infrastructure that supports the day-to-day operations of a community. These expenditures ensure that vital systems like transportation, utilities, and waste management are functioning properly. Key public works expenditures include:
- Road Maintenance and Construction: Costs of building, repairing, and maintaining streets, bridges, and highways.
- Water and Sewer Services: Expenses for water treatment facilities, sewage systems, and related infrastructure.
- Sanitation: Waste collection, recycling, and disposal services.
Health and Welfare
Health and welfare expenditures focus on programs and services that promote the well-being of the population, particularly vulnerable and low-income groups. These expenditures often include:
- Public Health Programs: Funding for local health departments, immunization programs, and disease prevention efforts.
- Social Services: Assistance programs for low-income families, the elderly, and the disabled, such as food assistance, housing subsidies, and Medicaid.
- Child and Family Services: Support for child welfare programs, foster care, and child protection services.
Education
Education is often the largest expenditure for state and local governments, particularly at the state level, where governments are responsible for funding public schools and higher education institutions. Education-related expenditures include:
- K-12 Education: Salaries for teachers and administrators, funding for public school districts, and maintenance of school facilities.
- Higher Education: Support for public universities, community colleges, and vocational schools.
- Educational Support Services: Funding for libraries, special education, and extracurricular programs.
Capital Outlay
Capital outlay expenditures refer to the purchase, construction, or improvement of long-term assets such as buildings, equipment, and infrastructure. These expenditures are often substantial and may be funded through bond proceeds or other financing methods. Common capital outlay expenditures include:
- Construction of Public Buildings: New schools, government offices, or public safety facilities.
- Infrastructure Projects: Investments in transportation infrastructure, such as roads, bridges, and public transit systems.
- Equipment Purchases: Large-scale acquisitions of vehicles, technology systems, or machinery needed for governmental operations.
Debt Service
Debt service expenditures represent the costs associated with repaying the government’s outstanding debt. These payments typically consist of:
- Principal Repayments: Payments made to reduce the outstanding balance of long-term bonds or loans.
- Interest Payments: The cost of borrowing, reflecting the interest due on bonds or other debt instruments.
Debt service is crucial for maintaining the government’s creditworthiness and ensuring that it meets its long-term obligations without jeopardizing financial stability.
In the Expenditures section of the statement, the government categorizes its spending by functional area, making it easier to track how funds are used across various public services and initiatives. By analyzing these categories, stakeholders can assess whether government spending aligns with public needs and whether resources are being used effectively to meet community goals.
Other Financing Sources (Uses)
The Other Financing Sources (Uses) section of the Statement of Revenues, Expenditures, and Changes in Fund Balances captures financial activities that do not fall under regular revenues or expenditures. These items represent inflows and outflows related to the broader financial management of governmental funds, including transfers between funds, debt issuance, and proceeds from asset sales. These sources and uses are crucial for understanding how governments manage their finances outside of operational activities and are essential for maintaining balanced budgets and ensuring long-term fiscal health.
Transfers
Transfers are the movement of financial resources between different governmental funds. These transfers are not considered revenues or expenditures since they do not involve external parties, but they play a vital role in ensuring that each fund has sufficient resources to meet its obligations. Common types of transfers include:
- Operating Transfers: Funds moved from one governmental fund to another to support operations. For example, a transfer from the General Fund to a Debt Service Fund to make debt payments.
- Capital Transfers: Transfers made to support capital projects, such as moving funds from the General Fund or Special Revenue Fund to a Capital Projects Fund to finance infrastructure development.
Transfers are essential for maintaining flexibility in governmental finances, as they allow governments to allocate resources to where they are most needed. They are especially important for managing situations where certain funds may have a surplus while others require additional resources to meet expenditures.
Bond Issuances
Bond issuances represent a significant source of funding for many governments, particularly for financing large capital projects, such as building schools, roads, or public facilities. When a government issues bonds, it borrows money from investors with the promise to repay the principal, along with interest, over a set period.
The proceeds from these bond issuances are recorded in this section as Other Financing Sources, since they represent an inflow of resources that must be repaid over time. Governments often issue two main types of bonds:
- General Obligation Bonds: Backed by the full faith and credit of the issuing government, meaning that the government pledges its taxing power to repay the debt.
- Revenue Bonds: Secured by specific revenue streams, such as tolls or utility payments, and are not backed by general tax revenues.
Bond issuances are critical for funding projects that require large, upfront investments but generate long-term benefits. The recording of bond proceeds and the corresponding debt service payments in future years must be carefully tracked to ensure that debt is managed responsibly.
Proceeds from Sale of Assets
Proceeds from the sale of assets represent another important source of financial inflow for governments. When a government sells a physical asset, such as land, buildings, vehicles, or equipment, the proceeds from the sale are recorded in this section. These transactions are treated as Other Financing Sources, as they are nonrecurring and do not reflect typical government revenue-generating activities.
Proceeds from the sale of assets may be used for various purposes, such as funding new capital projects, paying off existing debt, or contributing to the operating budgets of governmental funds. The sale of surplus or outdated assets can provide a government with the financial flexibility it needs to support ongoing operations or invest in new initiatives.
The Other Financing Sources (Uses) section provides insight into how governments manage their broader financial activities beyond regular revenue generation and service-related expenditures. By tracking transfers, bond issuances, and proceeds from asset sales, this section helps stakeholders understand how the government uses financing tools to support operations and long-term investments. Managing these sources and uses effectively is essential for maintaining fiscal balance and ensuring that the government can meet its short- and long-term financial obligations.
Fund Balances
The Fund Balances section of the Statement of Revenues, Expenditures, and Changes in Fund Balances represents the net financial resources available in a governmental fund after all revenues and expenditures have been accounted for. The fund balance shows whether the government has more resources than obligations or whether it needs to draw on reserves to meet its expenses. Fund balances are classified into five categories based on the level of constraints placed on the use of these resources. These classifications provide transparency into how much of the available funds are committed to specific purposes or are freely available for general use.
Non-Spendable Fund Balance
The non-spendable fund balance includes amounts that cannot be spent because they are either:
- Not in a spendable form, such as inventories, prepaid expenses, or long-term receivables.
- Legally or contractually required to be maintained intact, such as the principal of a Permanent Fund.
Non-spendable fund balances represent resources that are not available for expenditure in the near term. For example, if a government holds land that it intends to use in the future or prepaid expenses that will benefit future periods, those amounts are classified as non-spendable.
Restricted Fund Balance
The restricted fund balance consists of amounts that can only be used for specific purposes due to constraints imposed by external parties or legislation. These restrictions are legally enforceable and can come from:
- External sources, such as creditors, grantors, or contributors.
- Laws and regulations, such as constitutional provisions or state laws.
For example, if a state government receives federal grant funds that can only be used for healthcare services, those funds would be classified as restricted. The government cannot use restricted funds for any other purpose, ensuring that the money is spent according to the stipulations set by the external party.
Committed Fund Balance
The committed fund balance includes amounts that the government itself has set aside for specific purposes through formal action by its highest decision-making authority, such as the city council or state legislature. These commitments are binding and can only be changed or removed by taking similar formal action.
For example, a city council may pass a resolution to set aside funds for future capital projects, such as the construction of a new library. These funds are classified as committed because they are earmarked for a particular purpose and cannot be reallocated without a new resolution or action.
Assigned Fund Balance
The assigned fund balance includes amounts that the government intends to use for specific purposes, but these amounts do not meet the more stringent criteria of restricted or committed funds. Assigned balances can be designated by the government’s management or other designated bodies and are often used for specific projects or purposes where a formal commitment has not yet been made.
For instance, a government may assign funds for the upcoming purchase of new vehicles for public works, but until formal approval is given, these amounts remain classified as assigned. This category provides flexibility to allocate resources for future expenditures without the requirement of formal legislation or action.
Unassigned Fund Balance
The unassigned fund balance represents the portion of the fund balance that is available for any purpose and is not constrained by external or internal restrictions. This balance is typically found in the General Fund and represents the government’s most flexible resource, available to address unexpected expenses or emergencies.
Unassigned fund balances provide a financial cushion that governments can rely on when revenues fall short or when unforeseen expenditures arise. Maintaining a healthy unassigned fund balance is essential for ensuring fiscal stability and protecting against future uncertainties.
The Fund Balances section provides a clear breakdown of how available financial resources are categorized based on their intended use and legal constraints. By classifying fund balances into non-spendable, restricted, committed, assigned, and unassigned categories, governments provide stakeholders with a transparent view of how much of their financial resources are tied up for specific purposes and how much is available for discretionary use. This classification system helps ensure responsible financial management and the appropriate allocation of resources to meet public needs.
Steps to Prepare the Statement of Revenues, Expenditures, and Changes in Fund Balances
The process of preparing the Statement of Revenues, Expenditures, and Changes in Fund Balances for governmental funds involves several important steps to ensure that all financial activity is accurately reflected. This section provides guidance on how to classify revenues and expenditures correctly and how to apply the appropriate accounting methods.
Identify Revenue Sources
The first step in preparing the statement is to identify and classify the various sources of revenue according to governmental accounting standards. Accurate classification of revenue is essential for transparency and accountability, as it helps stakeholders understand where government funds are coming from.
Proper Classification of Revenues Based on Governmental Accounting Standards
Revenues should be classified according to their source and type, following guidelines from the Governmental Accounting Standards Board (GASB). The major types of revenue include taxes, intergovernmental revenue (such as grants), charges for services, fines, and proceeds from special assessments.
Each type of revenue must be recorded in the appropriate category to maintain consistency and meet reporting requirements. For example, property taxes should be recorded under tax revenues, while federal or state grants should be categorized as intergovernmental revenue.
Proper classification ensures that stakeholders can assess the government’s fiscal health and understand the government’s primary sources of income.
Accrual of Revenue When Measurable and Available
In governmental accounting, revenues are recognized on the modified accrual basis of accounting. This means that revenue should only be recorded when it is both measurable and available.
- Measurable: The revenue amount can be reasonably estimated.
- Available: The revenue is collectible within the current fiscal period or soon enough thereafter (usually within 60 days) to be used to pay liabilities of the current period.
For example, property taxes that are levied and due within the current fiscal year but will not be collected until the following fiscal year should only be recognized as revenue if they meet the “available” criterion. This approach helps ensure that the statement reflects the actual resources the government can use in the current period.
Identify and Classify Expenditures
After identifying revenues, the next step is to properly classify expenditures. Expenditures represent the outflow of resources used to provide public services, build infrastructure, or meet financial obligations. Accurate classification of expenditures is critical to understanding how resources are allocated across different governmental functions.
Align Expenditures with Functional Categories and Consider Capital Outlays or Debt Service
Expenditures must be classified into functional categories based on the purpose for which the funds are used. Common functional categories include public safety, public works, education, health and welfare, and general government. Each of these categories reflects a specific area of government operations.
In addition to operational expenditures, it is important to account for capital outlays (expenditures for the purchase or construction of long-term assets) and debt service (payments of principal and interest on government debt). These expenditures are classified separately to ensure that large, non-recurring expenses (such as infrastructure projects) and long-term financial obligations are clearly visible to stakeholders.
For example, a government’s expenditure for constructing a new school would be recorded as a capital outlay, while payments on bonds issued to finance the project would be classified as debt service.
Timing and Recognition Under Modified Accrual
Similar to revenue recognition, expenditures in governmental funds are recognized when the related liability is incurred, following the modified accrual basis of accounting. This means that expenditures are recognized when the government has a legal obligation to pay, regardless of when the actual cash outflow occurs.
The timing of expenditure recognition is critical for ensuring that financial statements provide an accurate picture of a government’s fiscal condition. For example, salaries earned by government employees at the end of the fiscal year but paid in the following year must still be recognized as expenditures in the current year.
Additionally, debt service expenditures are recorded when payments on principal and interest are due, not when the debt was originally issued. This ensures that the timing of financial obligations is reflected in the appropriate fiscal period, providing stakeholders with insight into the government’s ongoing debt management.
By properly identifying and classifying revenues and expenditures, and applying the modified accrual basis of accounting, governments can ensure that their Statement of Revenues, Expenditures, and Changes in Fund Balances accurately reflects their financial activities. This process is essential for maintaining fiscal accountability and providing clear, transparent financial information to the public.
Recording Other Financing Sources (Uses)
In addition to revenues and expenditures, governments often engage in financial activities that are categorized as Other Financing Sources (Uses). These items are essential to fully understanding a government’s financial position, as they represent transfers between funds, bond proceeds, and other non-operational inflows and outflows.
Understanding Transfers Between Funds, Bond Proceeds, and Other Inflows/Outflows
- Transfers Between Funds: These are internal reallocations of resources between different governmental funds. Transfers are not considered revenues or expenditures because they do not involve external parties. They are used to support specific functions, such as moving funds from the General Fund to a Debt Service Fund to make a debt payment or transferring surplus funds to a Capital Projects Fund to finance construction projects. Recording these transfers helps ensure transparency in how funds are allocated across different programs or funds.
- Bond Proceeds: Governments often issue bonds to finance large capital expenditures like infrastructure projects. The proceeds from these bond issuances are classified as Other Financing Sources because they represent borrowing that must be repaid in the future. Recording bond proceeds separately from operating revenues ensures that stakeholders can clearly see how much debt the government has taken on to finance long-term projects.
- Other Inflows/Outflows: This category includes other non-revenue and non-expenditure financial activities, such as proceeds from the sale of capital assets, insurance recoveries, and payments made to refund existing debt. These items are not part of the government’s normal operations but must still be recorded in the statement to provide a complete picture of financial activity.
Understanding and accurately recording these other financing sources and uses is crucial for assessing the government’s long-term financial commitments and its ability to manage internal resources effectively.
Calculating Fund Balances
Once revenues, expenditures, and other financing sources and uses are properly recorded, the next step is to calculate the fund balance for each governmental fund. The fund balance reflects the net financial position of the fund at the end of the fiscal period.
Update Fund Balance by Adding Revenues, Subtracting Expenditures, and Accounting for Other Financing Sources/Uses
The calculation of the fund balance involves a straightforward process:
- Revenues are added to the beginning fund balance.
- Expenditures are subtracted to account for the outflow of financial resources.
- Other Financing Sources (Uses) are then added or subtracted based on whether they represent inflows (such as bond proceeds or transfers in) or outflows (such as transfers out or debt payments).
The resulting figure is the ending fund balance, which represents the resources remaining in the fund after all financial activities have been accounted for. This balance is critical for understanding the financial health of the fund and the availability of resources for future periods.
Explain Changes in Fund Balance Categories
The ending fund balance is further classified into five categories based on the level of constraints placed on the use of these resources:
- Non-Spendable: Resources that cannot be spent, such as inventories or prepaid items.
- Restricted: Resources restricted by external parties or legislation for specific purposes.
- Committed: Resources that the government’s highest decision-making authority has set aside for specific purposes.
- Assigned: Resources intended for a specific purpose but not formally committed by the government’s highest authority.
- Unassigned: The portion of the fund balance that is available for general use, usually found in the General Fund.
As the government conducts its financial activities throughout the year, the fund balance may shift between these categories. For example, if a city council formally commits funds for a future capital project, those resources move from unassigned to committed. Accurately reflecting these changes ensures that stakeholders understand how much of the government’s financial resources are available for discretionary use versus how much is earmarked for specific purposes.
By carefully updating the fund balance based on revenues, expenditures, and other financing sources and uses, governments can provide a clear picture of their financial health at the end of the fiscal period. The classification of the fund balance into different categories helps ensure transparency and accountability in how resources are managed and allocated. Understanding these changes is essential for evaluating the government’s ability to meet future financial obligations and its capacity for funding new initiatives.
Special Considerations in Fund Accounting
In preparing the Statement of Revenues, Expenditures, and Changes in Fund Balances, certain special considerations must be taken into account to ensure accurate reporting. These considerations include the treatment of interfund transfers, the handling of extraordinary or special items, and the differences in reporting based on the type of governmental fund.
Treatment of Interfund Transfers
Interfund transfers are movements of resources between different funds within the same government entity. These transfers are not considered revenues or expenditures because they do not involve outside parties but are instead used to allocate resources internally to meet various financial obligations or project funding needs. Properly accounting for interfund transfers ensures transparency and provides insight into how resources are distributed across a government’s various funds.
- Operating Transfers: These transfers typically occur between funds to support operations or to balance the budget of a particular fund. For example, the General Fund may transfer money to a Special Revenue Fund to cover shortfalls or to a Debt Service Fund to meet upcoming debt payments.
- Capital Transfers: When a government allocates funds for capital projects, such as construction or infrastructure improvements, resources may be transferred to a Capital Projects Fund. This type of transfer allows for better tracking of long-term capital expenditures and ensures that funding is appropriately segregated for major projects.
Accurate recording of interfund transfers prevents the misstatement of revenues and expenditures and provides clarity on how resources are managed within the organization. The Other Financing Sources (Uses) section of the statement is where these transfers are reflected, ensuring they are not mistaken for actual revenue inflows or expense outflows.
Handling Extraordinary or Special Items
Extraordinary items and special items represent unusual or non-recurring financial activities that fall outside the scope of regular operations. These items must be reported separately to ensure that they are clearly distinguished from normal revenue and expenditure flows. Proper handling of these items provides stakeholders with an accurate understanding of financial activity and prevents skewing operational performance metrics.
- Extraordinary Items: These are events that are both unusual in nature and infrequent in occurrence. Examples might include natural disasters, such as hurricanes or floods, which require large, unplanned expenditures for relief and recovery efforts. If a government receives federal disaster relief funds, these would be reported separately as extraordinary items, clearly indicating that they are not part of the government’s regular revenue stream.
- Special Items: These are significant transactions or events that are under the control of management but are unusual in nature, though not necessarily infrequent. For example, the sale of a major government-owned asset, such as land or buildings, would be classified as a special item. Likewise, bond issuance premiums (i.e., proceeds received in excess of the bond’s face value) would be recorded as special items in the financial statements.
Reporting these items separately ensures that stakeholders are not misled about the government’s ongoing financial performance, and it allows for better assessment of long-term sustainability.
Differences in Reporting Based on Fund Types
Fund accounting requires governments to use different fund types, each with its own reporting requirements based on the nature of the activities involved. The major governmental fund types — including the General Fund, Special Revenue Funds, and Capital Projects Funds — serve different purposes, and the financial reporting for each fund reflects its specific objectives.
- General Fund: The General Fund is the primary operating fund of a government and accounts for all financial resources not restricted to other specific purposes. The revenues and expenditures in the General Fund typically reflect the government’s day-to-day operational activities, such as public safety, education, and public health. Any unassigned fund balance usually resides in the General Fund, representing resources available for general use.
- Special Revenue Funds: These funds are used to account for revenues that are legally restricted or committed to specific purposes. For example, a Special Revenue Fund might be used to track revenues from a gas tax that can only be spent on road repairs. Reporting for these funds focuses on ensuring that the restricted resources are used for their designated purposes.
- Capital Projects Funds: These funds account for resources used in the construction or acquisition of major capital assets, such as buildings, roads, or bridges. Reporting for Capital Projects Funds emphasizes long-term investments and infrastructure development, and often includes bond proceeds and transfers from other funds to support large projects.
The differences in reporting across these fund types reflect the distinct nature of each fund’s activities. By segregating resources and expenditures in this manner, governments can ensure that they meet legal and financial obligations while providing a clear picture of how funds are allocated to specific projects or purposes.
Fund accounting involves various complexities that must be carefully managed to ensure accurate and transparent reporting. By properly treating interfund transfers, handling extraordinary and special items separately, and recognizing the unique reporting requirements for different fund types, governments can provide stakeholders with a clear and complete picture of their financial activities. These special considerations are essential for maintaining fiscal accountability and ensuring that resources are used in accordance with legal and regulatory requirements.
Example Statement Preparation
To provide a clear understanding of how to prepare the Statement of Revenues, Expenditures, and Changes in Fund Balances, let’s walk through a simplified example using real numbers. This example will demonstrate how to classify revenues, expenditures, and other financing sources (uses) and calculate the beginning and ending fund balances for a governmental fund.
Step-by-Step Illustration Using Real Numbers
Step 1: Identify and Classify Revenues
For this example, let’s assume we are preparing the statement for a city’s General Fund. Here are the actual revenue sources for the fiscal year:
- Property Taxes: $500,000
- Sales Taxes: $300,000
- Grants (Intergovernmental Revenue): $100,000
- Charges for Services (Public Utilities): $75,000
- Fines: $25,000
In total, the revenues for the General Fund are:
500,000 + 300,000 + 100,000 + 75,000 + 25,000 = 1,000,000
Step 2: Identify and Classify Expenditures
Next, we classify the expenditures based on the governmental functions they support. Assume the following expenditures for the fiscal year:
- Public Safety (Police and Fire Services): $400,000
- Public Works (Road Repairs, Maintenance): $150,000
- Health and Welfare Services: $100,000
- Education (School Operations): $200,000
- Capital Outlay (New City Hall Construction): $100,000
In total, the expenditures are:
400,000 + 150,000 + 100,000 + 200,000 + 100,000 = 950,000
Step 3: Record Other Financing Sources (Uses)
In addition to regular revenues and expenditures, the city engaged in the following financial activities:
- Transfer from Special Revenue Fund: $50,000 to support general operations.
- Bond Proceeds: $150,000 to help finance the construction of a new City Hall (Capital Outlay).
These other financing sources (uses) are recorded as:
- Total Other Financing Sources (Uses):
50,000 (Transfer In) + 150,000 (Bond Proceeds) = 200,000
Step 4: Calculate the Change in Fund Balance
To determine how the fund balance changed over the year, we combine the revenues, expenditures, and other financing sources (uses):
- Revenues: $1,000,000
- Expenditures: $950,000
- Other Financing Sources (Uses): $200,000
Now, calculate the net change in the fund balance:
1,000,000 – 950,000 + 200,000 = 250,000
Step 5: Present Beginning and Ending Fund Balances
Finally, we calculate the ending fund balance by adding the net change to the beginning fund balance. Let’s assume the beginning fund balance at the start of the fiscal year was $500,000.
- Beginning Fund Balance: $500,000
- Net Change in Fund Balance: $250,000
500,000 + 250,000 = 750,000
Thus, the ending fund balance for the General Fund is $750,000.
Example Statement
Here is how the simplified Statement of Revenues, Expenditures, and Changes in Fund Balances would appear:
General Fund Statement of Revenues, Expenditures, and Changes in Fund Balances
| Category | Amount ($) |
|---|---|
| Revenues | |
| Property Taxes | 500,000 |
| Sales Taxes | 300,000 |
| Grants (Intergovernmental Revenue) | 100,000 |
| Charges for Services (Public Utilities) | 75,000 |
| Fines | 25,000 |
| Total Revenues | 1,000,000 |
| Expenditures | |
| Public Safety (Police & Fire) | 400,000 |
| Public Works | 150,000 |
| Health and Welfare | 100,000 |
| Education | 200,000 |
| Capital Outlay | 100,000 |
| Total Expenditures | 950,000 |
| Other Financing Sources (Uses) | |
| Transfer In (Special Revenue Fund) | 50,000 |
| Bond Proceeds | 150,000 |
| Total Other Financing Sources (Uses) | 200,000 |
| Net Change in Fund Balance | 250,000 |
| Beginning Fund Balance | 500,000 |
| Ending Fund Balance | 750,000 |
This example illustrates the key steps involved in preparing the Statement of Revenues, Expenditures, and Changes in Fund Balances, showing how revenues and expenditures are classified and how other financing activities are incorporated into the statement. The beginning and ending fund balances provide a clear view of the government’s financial position over the fiscal year.
Common Mistakes to Avoid
When preparing the Statement of Revenues, Expenditures, and Changes in Fund Balances, several common mistakes can lead to inaccurate financial reporting. Avoiding these errors is crucial for ensuring the government’s financial statements provide a true and transparent view of its fiscal operations. Here are the most common pitfalls and how to avoid them:
Misclassifying Revenues or Expenditures
One of the most frequent mistakes in governmental accounting is misclassifying revenues or expenditures. This occurs when revenues or expenditures are recorded under incorrect categories, which can distort financial analysis and make it difficult to assess the government’s true financial position.
- Revenue Misclassification: For example, recording grants (intergovernmental revenue) as property taxes can mislead stakeholders into thinking the government’s revenue base is stronger than it is. Grants are often one-time or restricted funds, while property taxes represent a more stable and recurring revenue source. How to Avoid: Follow the Governmental Accounting Standards Board (GASB) guidelines carefully when classifying revenue types. Ensure that taxes, fees, grants, and fines are all properly categorized according to their nature and restrictions.
- Expenditure Misclassification: Similarly, classifying a capital expenditure (such as the construction of a public building) as an operating expenditure (such as maintenance) can lead to incorrect assumptions about the government’s operational efficiency or capital investment priorities. How to Avoid: Review each expenditure and ensure it is classified by function (e.g., public safety, public works) and purpose (e.g., capital outlay, operational). Consider the long-term nature of capital projects versus the short-term, recurring nature of operational costs.
Improper Treatment of Interfund Transfers and Other Financing Sources
Interfund transfers and other financing sources (such as bond proceeds) require careful handling. Misreporting these items can result in inflating revenues or expenditures, giving a distorted view of the government’s financial performance.
- Misreporting Transfers: Interfund transfers are internal reallocations of resources and should not be treated as revenues or expenditures. Misclassifying transfers as revenues can give the false impression that the government has more external income than it does. How to Avoid: Ensure that interfund transfers are properly recorded under the Other Financing Sources (Uses) section of the statement, not as operational revenues or expenditures. This keeps the internal resource movements separate from external financial activity.
- Incorrect Treatment of Bond Proceeds: Bond proceeds are funds borrowed for capital projects and should be recorded under Other Financing Sources, not as regular revenue. Misclassifying bond proceeds as revenue can suggest that the government has generated more income than it actually has. How to Avoid: Clearly differentiate bond proceeds and other financing inflows (such as asset sales) from ongoing revenues. Bond proceeds must be tracked carefully because they represent future liabilities that will need to be repaid, not revenue that adds to the government’s financial capacity.
Failing to Update Fund Balances Correctly
The fund balance is the net financial position of a governmental fund, and it is essential to calculate it accurately at the end of the fiscal period. Errors in updating the fund balance can obscure the true availability of resources or create discrepancies in the financial statements.
- Failing to Reconcile the Beginning and Ending Fund Balances: If the beginning fund balance is not carried over correctly from the prior period or if changes in the current period’s revenues, expenditures, and financing activities are not properly reflected, the ending fund balance will be inaccurate. How to Avoid: Carefully track all revenues, expenditures, and other financing sources and uses throughout the period. After calculating the net change in the fund balance, ensure the beginning balance is correct and the ending balance reflects the total change. Regular reconciliation of the fund balance ensures that any discrepancies are caught and corrected promptly.
- Misclassifying Fund Balance Categories: The fund balance is divided into categories such as non-spendable, restricted, committed, assigned, and unassigned. Misclassifying funds in the wrong category can mislead stakeholders about how much of the government’s resources are available for general use. How to Avoid: Review the restrictions and commitments on each portion of the fund balance carefully before classifying it. Funds that are legally restricted (e.g., for debt service) should not be categorized as unassigned. Follow GASB guidelines to ensure proper classification of fund balance categories.
By avoiding these common mistakes—misclassifying revenues or expenditures, improperly treating interfund transfers and other financing sources, and failing to update fund balances correctly—governments can ensure that their financial statements are accurate and provide a clear, transparent representation of their financial position. Accurate accounting practices are critical for maintaining fiscal accountability and ensuring that stakeholders can trust the government’s financial reports.
Conclusion
Recap of the Importance of Accurate Preparation of the Statement
Accurate preparation of the Statement of Revenues, Expenditures, and Changes in Fund Balances is essential for ensuring the financial transparency and accountability of state and local governments. This statement provides a comprehensive overview of a government’s fiscal activities, including how revenues are generated, how funds are spent, and how the fund balances are adjusted over the fiscal period. Proper classification of revenues, expenditures, and other financing sources, as well as accurate updating of fund balances, is critical to reflecting the true financial health of the government.
Emphasize the Statement’s Role in Demonstrating Fiscal Responsibility and Compliance with Reporting Standards
This statement plays a crucial role in demonstrating the government’s fiscal responsibility and its adherence to reporting standards set by the Governmental Accounting Standards Board (GASB). It allows stakeholders, including citizens, creditors, and regulatory bodies, to assess whether the government is managing its resources efficiently and in line with budgetary constraints. Furthermore, the statement provides insight into how well a government balances its budget, manages debt, and allocates resources to essential public services. Compliance with these standards promotes trust and accountability within the community.
Encourage Continuous Review of Governmental Accounting Principles
The landscape of governmental accounting is continuously evolving, with changes in regulations, standards, and best practices. To maintain accuracy and transparency in financial reporting, it is important for governments to engage in ongoing review and education on current accounting principles. Regular training and review of GASB guidelines will ensure that financial professionals remain up-to-date with the latest requirements, reducing the risk of errors and ensuring high-quality financial statements.
By consistently applying these accounting principles, governments can continue to provide accurate, reliable financial information that supports sound fiscal management and upholds public trust in their operations.
