Measurement Focus and Basis of Accounting for Governmental Funds

measurement focus and basis of accounting governmental funds

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In this video and the CPA practice questions below, we are going to cover the measurement focus and basis of accounting for governmental funds on the FAR CPA exam. Again, in SuperfastCPA fashion, we’ll go straight into example problems because I think that is the best way for you to learn the ins and outs of the measurement focus and basis of accounting for governmental funds instead of just going through a bunch of slides kind of in textbook format and going through all the information. It sticks in your brain better by going through questions first.

Revenue Should Be Measurable and Available


Which of the following would not be accrued as revenue by the general fund of Raccoon City?

  • Sales tax collected by merchants
  • State-held sales tax that will soon be remitted to Raccoon City
  • Property taxes levied
  • Interest and penalties on delinquent taxes
(CPA exam study tip: Even if you’re brand new to government accounting, and just, just think about each one and then just make a guess. And obviously, if you’re new to this, that’s all you’re doing right now is just guessing. But it helps you learn the material and the answer will stick in your brain much better if you’ve actually tried to read through the responses and you at least make a guess before you go on.)

The answer is sales tax collected by merchants. So here’s the explanation. The sales tax that is collected by merchants and then remitted back to Raccoon City, that would not be accrued. It would be recognized as revenue when those funds are actually received by the city. 

Sales tax being collected by merchants is not measurable or available until it’s been given back to the city. So under modified accrual accounting, which is what general funds operate under, revenue isn’t recognized unless it is number one, measurable and number two, available. 

Revenue that can be accrued needs to be measurable and then to be considered available, it needs to be legally due prior to the receipt of cash, meaning that it needs to be due within the current period. So items that fit that description would be something like property taxes or interest and penalties on delinquent taxes, investment revenue, taxes collected by other government entities but have not yet been remitted, such as the state collecting sales tax that will be soon remitted to Raccoon City. 

Even though they haven’t received that, that is something they would accrue. Also, like property taxes, those are levied, they are legally due from the citizens within the current period. So those would be accrued as revenue as well. Now, there’s also the 60 day rule, and this just adds on to this part about being legally due. So if something is legally due within the current period. 

They can count that as revenue, but also if they expect to receive it within the first 60 days of the next fiscal period, or the next fiscal year, they can count that as revenue for the prior year.

Measurement Focus and Basis of Accounting for Governmental Funds


Which of the following would is the measurement focus and basis of accounting for governmental funds?

  • Economic resources
  • Current financial resources
  • Expenditures of resources
  • Encumbrance accounting

The answer is current financial resources. Governmental funds use the modified accrual basis of accounting, which focuses on current financial resources. Revenues are recognized when they are measurable and available. 

So the types of governmental funds are number 1, the general fund. 2 would be special revenue funds. 3 would be debt service funds. 4 would be capital project funds, and 5 would be permanent funds. 

So within government accounting or governmental accounting, there are three different types or categories of funds. There are governmental funds, which is what we’re talking about. But then there are proprietary funds and fiduciary funds. And those two types use full accrual accounting or what you’re used to in business. 

Proprietary funds and fiduciary funds focus on economic resources. That means revenues are recognized when they are measurable and earned. 

And again, contrast that with the measurement focus of current financial resources, which governmental funds use, which is measurable and available. 

Property Tax Receivable and Allowance for Uncollectible Taxes


Corona City levied $1,000,000 of property taxes. Based on prior year collection rates, the city estimated that $100,000 of the property taxes would be uncollectible.

Based on this information, what account and for what amount would the city debit for the property tax levy?

  • Revenue for $1,000,000
  • Revenue for $900,000
  • Property tax receivable for $1,000,000
  • Property tax receivable for $900,000

The answer is property tax receivable for $1,000,000. So here’s how this works. The levy was for $1,000,000. So Corona City would debit property tax receivable for that $1,000,000. 

The credit would then be to revenue for $900,000, because you do have $100,000 of estimated uncollectible taxes, and that would go as a credit to the allowance for uncollectible taxes for $100,000. So as a side note here, if you’re really thinking about this, you might be wondering, well, just because they levied the taxes, the taxes aren’t available when they passed the levy. And that’s correct. 

So again, the actual funds from the taxes aren’t available right then and there, but the government can accrue the likely collectible amount as revenue. Again, if the amounts are legally due within the period or by the end of the period or again, you know, the 60 day rule within 60 days of the end of the current period. 

So remember that “available” can also mean any amount that is legally due by the end of the period. So forms of taxes where, those get levied or passed or, the taxpayer owes a certain amount in taxes that’s legally due within the current period, those would be amounts that can be accrued as revenue. 

Here is what the full entry would look like. You have a debit to property tax receivable for $1,000,000. Then you credit revenues for $900,000, and you also credit the allowance for uncollectible taxes for $100,000. 

Revenue from Licenses & Fees in the General Fund


In the previous year, Corona City recorded revenue of $50,000 for licenses and fees collected in the general fund. In the current year, Corona has $60,000 budgeted for licenses and fees.

Based on these facts, how much revenue would the city record for licenses and fees in the current year?

  • $10,000
  • $50,000
  • $60,000
  • It depends on how much the city actually collects

the answer is: it depends on how much the city actually collects. General funds use the modified accrual basis of accounting, as we’ve talked about, and to record revenue, the revenue has to be 1) measurable and 2) available. 

Now for something like licenses and fees, they aren’t measurable and available until they are actually collected. So the city wouldn’t record any revenue until the licenses and fees have actually been collected. So the total amount of revenue from licenses and fees depends on how much the city actually collects. 

It doesn’t have anything to do with the prior year, or the budgeted amount. The final entry would just be a debit to cash for the collected amount and then the same amount would be credited to revenue. 

Free “CPA Study Hacks” Training


Now, if this is your first video you’ve ever come across from SuperfastCPA, we are really big on the “how” behind your study process because everyone out there has a review course, everyone out there is kind of doing the same thing. They’re trying to watch the video lecture, read the chapter and then go to the questions. But across the board, 50% of people fail their exams. 

So why is that? 

It comes down to how you study. When you have a few hours to study each day, how are you actually spending that time? We have a free training that we do several times a week. We call these our “Study Hacks” training sessions. We will walk you through exactly what to do when you sit down to study so that there’s no guesswork, you don’t feel like you’re spinning your wheels, and you will learn how to do a two hour main session. Because our whole thing is “solutions for busy CPA candidates.” 

So people that are working full time and still trying to pass their exams, you will learn on this training how to have a two hour main session with your review course, and on weekdays, that’s all you need to do. So on these sessions, you will learn how to have a two hour session that’s more effective than someone studying four to five hours the normal way. 

So to register for one of these free training sessions, go to superfastcpa.com/passnow, or you can just text the word PASSNOW as one word to 44222, and we will send you back a link. What I always say about these trainings is, this is one hour that can literally save you months and months of time and frustration from trying to figure out this process on your own and save yourself hundreds of dollars from avoiding failing sections. 

You’ll find this training incredibly helpful and it will take you from feeling confused or overwhelmed with the study process to feeling relieved and confident that you can actually do this and pass your exams. So to register for one of these sessions, there’s also going to be a link down below in the description or again, go to that you URL or just text PASSNOW to 44222. Thanks for watching and reading.

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