What is an Agency Fund?

Agency Fund

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Agency Fund

An agency fund is a type of fiduciary fund used in governmental accounting to account for assets held by a government on behalf of another entity, typically a non-governmental entity or another government. Agency funds are purely custodial in nature, meaning the government holding the assets has no control over their use or disposition, and it acts only as an agent or trustee.

In an agency fund, the government is responsible for collecting, holding, and disbursing the assets as per the agreement or legal requirements, but it does not have the authority to decide how those funds are spent. As a result, agency funds do not involve the recording of revenues, expenditures, or fund balances since the government is not the owner of the funds.

For example, a city government may collect property taxes on behalf of a local school district. The city would establish an agency fund to account for the collection and remittance of these property taxes to the school district. The city government is responsible for managing the funds but cannot use them for its own purposes.

Example of an Agency Fund

Let’s consider a city government that collects property taxes on behalf of two entities: a local school district and a county government. The city is responsible for collecting the property taxes from its residents and then distributing the appropriate amounts to the school district and the county government based on their respective tax rates.

To account for these transactions, the city establishes an agency fund. The agency fund records the amount of property taxes collected, as well as any disbursements made to the school district and the county government.

Here’s a simple example:

  1. The city government collects $1,000,000 in property taxes from its residents.
  2. The local school district is entitled to 60% of the property taxes collected, while the county government is entitled to 40%.

Using an agency fund, the city government would record the following transactions:

  1. $1,000,000 in property taxes collected (as an increase in assets)
  2. $600,000 disbursed to the local school district (as a decrease in assets)
  3. $400,000 disbursed to the county government (as a decrease in assets)

At the end of this process, the agency fund would have a zero balance, indicating that the city government has collected and disbursed the property taxes as required. The city government does not record revenues, expenditures, or fund balances in the agency fund, as it is only acting as a custodian for the school district and county government.

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