Funds in Governmental Accounting
In governmental accounting, the term “funds” refers to separate fiscal and accounting entities with a self-balancing set of accounts. These funds are used to track specific revenues and expenditures that are associated with particular purposes or activities.
There are three main categories of funds in governmental accounting:
- Governmental Funds: These funds are used to account for most of the government’s general activities. They include:
- General Fund: This is the main operating fund of the government, used to account for all financial resources except those required to be accounted for in another fund. It typically includes revenues from taxes and other general revenue sources.
- Special Revenue Funds: These funds account for specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.
- Debt Service Funds: These funds account for the accumulation of resources for, and the payment of, general long-term debt principal and interest.
- Capital Projects Funds: These funds account for financial resources that are restricted, committed, or assigned to expenditure for capital outlays such as building, construction, or equipment acquisition.
- Proprietary Funds: These funds are used to account for a government’s business-like activities. They include:
- Enterprise Funds: These are used to account for operations that are financed and operated in a manner similar to private business enterprises. Examples might be a water and sewer utility, a public transportation system, or a municipal power plant.
- Internal Service Funds: These funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the government on a cost-reimbursement basis, such as fleet services or information technology services.
- Fiduciary Funds: These funds are used to account for resources that are held by the government as a trustee or agent for parties outside the government and cannot be used to support the government’s own programs. They include pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds, and agency funds.
By segregating resources into separate funds, governments can ensure that money is being spent where it is supposed to be spent and that certain revenues are used for their intended purposes. This enhances accountability and transparency in government finance.
Example of Funds in Governmental Accounting
Let’s imagine a fictional city called “Cityville” to illustrate these different kinds of funds in governmental accounting:
- Governmental Funds:
- General Fund: The Cityville General Fund accounts for the city’s main operating activities. It collects property taxes, sales taxes, and other general revenues, and it pays for the city’s day-to-day services like police and fire protection, parks and recreation, and city administration.
- Special Revenue Fund: Cityville has a Special Revenue Fund for its library system. The city levies a specific library tax, which is accounted for in this fund, and the money is used exclusively to support the city’s libraries.
- Debt Service Fund: Cityville recently issued bonds to fund a new city hall. The money it pays to service this debt (i.e., make principal and interest payments to bondholders) is accounted for in the Debt Service Fund.
- Capital Projects Fund: The money that Cityville uses to construct the new city hall is accounted for in the Capital Projects Fund. This includes costs for design, construction, and equipment.
- Proprietary Funds:
- Enterprise Fund: Cityville operates its own water and sewer utility, which is financed and operated like a business. The utility charges residents for water and sewer services, and these revenues and the expenses of operating the utility are accounted for in an Enterprise Fund.
- Internal Service Fund: Cityville has an Internal Service Fund for its central services department, which maintains the city’s vehicles and equipment. The department charges other city departments for these services, and these revenues and expenses are accounted for in the Internal Service Fund.
- Fiduciary Funds:
- Cityville’s Pension Trust Fund is a Fiduciary Fund. The city collects pension contributions from employees and makes contributions on behalf of the city, and these are invested to fund future pension benefits. The city acts as a trustee for these assets, which are dedicated to providing pensions to city employees and can’t be used for other purposes.
In each case, the use of separate funds allows Cityville to clearly track the sources and uses of its resources and to ensure that money is being used for its intended purpose. These funds are all reported separately in the city’s annual financial statements, providing transparency for city residents and other stakeholders.