Revenue Accounting:

Governmental Funds

Chapter 5
Learning Objectives
 Determine when to recognize and report various revenues
 Identify categories of nonexchange revenues and when to
recognize assets and revenues
 Discuss and apply modified accrual revenue recognition criteria
to simple and complex situations
 Understand accounting for levy, collection, and enforcement of
property taxes and other tax revenues
 Account for investment income
 Distinguish and account for intergovernmental revenues
 Understand classification and accounting for other types of
revenues & other financing sources
 Account for and report changes in revenue accounting
principles and error corrections
Revenues in governmental funds

Increases in net assets of a governmental

fund that either:
 Result in a corresponding increase in net
assets of governmental entity as a whole
 Result from exchange-like interfund
services provided
Revenues: Operational Definition

All increases in fund net assets except those

arising from
 Interfund reimbursements
 Interfund transfers
 Sale (or compensation for loss) of capital
assets
 Long-term debt issues
Nonexchange Transactions

 Governed by GASBS #33

 4 classifications of transactions
Nonexchange Transactions

 Governed by GASBS #33

 4 classifications of transactions
 Derived tax revenues
 Imposed tax revenues
 Government-mandated transaction
 Voluntary transaction
Nonexchange Transactions

 Governed by GASBS #33

 4 classifications of transactions
 May have significant deferred revenues due to
timing of recognizing asset and revenue from
transaction
 Revenues recognition requires entity to meet
both
 Asset recognition criteria or received cash
 Revenue recognition criteria
Modified Accrual Revenue
Recognition
 Recognize only revenues susceptible to
accrual – others on a cash basis
 Requirements for susceptible to accrual
 Objectively measurable
 Legally available (usable) to finance current
period expenditures
Establishing legal claim to
revenues
 Charges for services – performing the
service
 Taxes – levy establishes claims to
resources
 Sales taxes – business making a taxable
sale
 Income taxes – taxpayer earning taxable
wages
Recommended Classes of
Revenues
 Taxes
 Licenses & permits
 Intergovernmental revenues
 Charges for services
 Fines and forfeits
 Miscellaneous
Types of Tax Revenues

 Taxpayer assessed
 Income taxes
 Sales taxes
 Levied – property taxes
Taxpayer assessed taxes

 Must assure that tax base has been accurately

reported by taxpayer – may be very difficult to
do
 Should be recognized when susceptible to
accrual
 When underlying transaction takes place
 In practice, usually recognized when collected
 Revenue from tax stamps usually recognized
when stamps are sold
Administering property taxes

1. Tax assessor determines assessed value of property

2. Local assessment review board hears complaints
about assessments
3. Boards of equalization assign values to taxing
districts
4. Legislative body levies amount of tax needed to
cover expenditures
5. Tax levy distributed among taxpayers based on
assessed value
6. Taxpayers are billed
7. Tax collections are credited to taxpayers’ accounts
8. Collects enforced by penalties, interest, & sale of
property for taxes
1. Assessment of Property

 Valuing property for tax purposes

 Properties of other governments &
religious organizations exempt from tax
 Several governments may tax same
property – overlapping jurisdictions

No journal entries required at this point.

2. Review of Assessment

 Performed by local board

 May adjust individual assessments
 Taxpayers can still appeal in courts

No journal entries required at this point.

3. Equalization of Assessments

 Assessments made by a number of

different assessors
 Equalization board attempts to make
sure multiple properties are taxed at the
same percentage of fair value

No journal entries required at this point.

4. Levying the Tax

 Levy made through ordinance

 Levies may vary in level of restrictions as
to use or purpose of tax
 Determining tax rate – divide levy by total
assessed valuation – resulting
percentage is rate or mills per dollar

No journal entries required at this point.

5. Distribution of Levy to
Taxpayers
Amount due from each taxpayer is
determined by multiplying rate times
assessed value of property

No journal entries required at this point.

6. Taxpayers are billed
 Amount owed by each taxpayer entered
into Tax Roll
 Taxes recorded in the accounts
 Receivable is for gross levy
 Adjustments made for
 Allowance for uncollectible accounts
 Discounts on taxes
Journal Entry to Record Billing

Taxes Receivable – Current 100,000

Allowance for Uncollectible
Taxes – Current 5,000
Allowance for Discounts 3,000
Revenues 92,000

Entry assumes gross billing of $100,000 with 5% estimated

to be uncollectible and 3% estimated to be paid within
discount period.
7. Recording Tax Collections

 Must keep track of which year’s taxes

were collected – current and delinquent
 Taxes may be levied but not available
 Levied for next year’s operations
 Will not be collected in time to be available
 Taxes collected in advance – reported as
deferred revenue at time of collection
Journal Entry to Record
Collection [Page 185]
Cash 90,000
Taxes Receivable – Current 70,000
Taxes Receivable – Delinquent 20,000
Taxes levied but not available
[Page 186]

Levy
Taxes Receivable – Current 100,000
Allowance for Uncollectible
Current Taxes 3,000
Deferred Revenues 97,000

Revenues becomes available

Deferred Revenues 97,000
Revenues 97,000
Taxes collected in advance and
later earned [Page 187]
Advance collection
Cash 2,500
Taxes Collected in Advance 2,500

Apply collection to receivable

Taxes Collected in Advance 2,500
Taxes Receivable – Current 2,500
Discounts on Taxes [Page 187 – 188]

Taxes Receivable – Current 300,000

Allowance for Uncollectible
Current Taxes 9,000
Allowance for Discounts on
Taxes 2,000
Revenues 289,000
Discounts [continued]

Collection within discount period

Cash 150,000
Allowance for Discounts on Taxes 1,500
Taxes Receivable – Current 151,500

Discount period expires

Allowance for Discounts on Taxes 500
Revenues 500
8. Enforcing Tax Collections

 Interest and penalties – assessed for late

payment of taxes – subject to availability
requirement
 Tax sales
 Lien receivable created from taxes receivable,
interest and penalties, & court costs
 Allowances also converted
 Sales price > than receivable, difference goes to
taxpayer
 Sales price < than receivable, charge allowance
account
Recording interest & penalties
[Page 189]

Interest & Penalties Receivable –

Delinquent Taxes 15,000
Allowance for Uncollectible
Interest & Penalties 1,000
Revenues 14,000
Accounting for Tax Sales [Page 189]

Reclassify assets to lien

Tax Liens Receivable 28,000
Taxes Receivable – Delinquent 25,000
Interest & Penalties Receivable –
Delinquent Taxes 3,000

Add court costs

Tax Liens Receivable 1,000
Cash 1,000
Accounting for Tax Sales [continued]

Reclassify allowances
Allowance for Uncollectible
Delinquent Taxes 2,000
Allowance for Uncollectible Interest
& Penalties 100
Allowance for Uncollectible Tax
Liens 2,100
Accounting for Tax Sales [continued]

Government keeps property [page 190]

Expenditures 4,000
Allowance for Uncollectible Tax Liens 2,000
Tax Liens Receivable 6,000

Record related revenue

Deferred Revenues 4,000
Revenues 4,000
Licenses and Permits

 Categories
 Business – alcoholic beverages, health,
corporations, utilities, professional,
occupational, and amusements
 Nonbusiness – building, vehicles, driver
licenses, hunting & fishing, marriage, burial,
& animal
 Rates established by ordinance and
adjusted periodically
Intergovernmental Revenues

 Government-mandated nonexchange
transactions
 Voluntary nonexchange transactions
Government-mandated
Nonexchange Transactions
 Government at one level
 Provides resources to government at
another level, and
 Requires recipient to use them for a specific
purpose
 Provider government establishes
purpose restrictions and may set time
requirements and other eligibility
requirements
Voluntary Nonexchange
Transactions
 Legislative or contractual agreements between
two or more willing parties
 Examples: grants, certain entitlements, and
donations
 Parties not limited to governments but includes
individuals
 Provider may establish purpose restrictions
and eligibility requirements and may require
return of resources if requirements not met
Types of Grants

Capital Grants Operating Grants

 Solely for capital  All other grants
purposes
 Examples  Example – operation
 Airport improvements of social welfare
 Buses programs
 Subway systems
 Wastewater treatment
plants
Entitlements & Shared Revenues

Entitlements – portions of Shared revenues –

appropriations varies in amount in
allocated among each period
governments based on (depending on
relative populations (or collections) and
some other measure) allocated based on
some formula or
underlying transaction
Intergovernmental Revenue
Accounting (IGR) Issues
 Fund Identification
 Pass-Through Grants
 Revenue Recognition
Fund Identification
 Not always necessary to establish a separate
fund for grants
 Use GF whenever possible
 Use SRF only if legally mandated
 Resources for debt principal/interest payment
should be in DSF
 Use CPF for grants restricted for capital
acquisition/construction
 Grants for EFs or ISFs should be accounted for
in those funds
Pass-Through Grants

 Primary recipient (entity that first receives the

money) uses grant to support some other
program
 Primary recipient must pass grant along to
intended user (subrecipient) – cannot use for
own purposes
 Subrecipient uses grant for intended purpose –
or passes along to sub-subrecipient
Pass-Through Grants

 Primary recipient generally accounts for

grant as revenue upon receipt and
expenditure/expense when distributed
 Primary recipient may use Agency Fund
only if it acts as cash conduit – no
administrative or financial involvement
with grant
Revenue Recognition

 Unrestricted IGR recognized as revenues

immediately, if available
 Restricted IGR not recognized until all
eligibility requirements are met: generally
must be expended for allowable costs to
meet requirements – known as
“expenditure-driven” grant
IGR recognition

 If grant received before earned,

recognize asset (Cash), but defer
revenue until earned
 If grant earned before received,
recognize asset (receivable) and
revenue, if considered available
Grant received before earned
[Page 194 – 195]

Grant received
Cash 100,000
Deferred Revenue 100,000

Qualifying expenditures
Expenditures 40,000
Vouchers Payable 40,000

Recognize revenue
Deferred Revenue 40,000
Revenue 40,000
Grant earned before received
before earned [Page 195]
Qualifying expenditures
Expenditures 75,000
Vouchers Payable 75,000

Recognize revenue
Deferred Revenue 75,000
Revenue 75,000
Charges for Services

 Result from goods and services provided to

public, other departments or other
governments
 When dealing with other departments, must
distinguish between reimbursements and
interfund service transactions
 Recognize revenue when service is provided
(earned), if available, or when cash is collected
Special Assessments

 Service provided in one year, collection

made in subsequent years
 Expenditures recognized for service
 Revenue deferred until collection
Special Assessments [Page 197]

Work done in current period

Expenditures 100,000
Vouchers Payable 100,000
Revenue postponed until collection
Accounts Receivable – Deferred
Deferred Revenues 100,000
100,000
Special Assessments [continued]

Annual payment comes due

Accounts Receivable – Current 20,000
Accounts Receivable –
Deferred 20,000
Revenue recognized
Deferred Revenues 20,000
Revenues 20,000
Interest billed on entire amount
Interest Receivable 6,000
Revenues – Interest 6,000
Fines & Forfeits

 Usually not that big of a source of

revenue
 Revenue usually recognized on a cash
basis
 Large fines might be accrued
Investment Earnings

 GASBS #31 sets reporting requirements

for fair value
 GASBS #31 did for investments what
FASBS #115 did in the private sector –
only the GASB rules are much easier
 GASBS #31 identified types of
investments to adjust to fair value
Investments carried at cost

 Nonparticipating investment contracts

(fixed-rate CDs)
 Equity securities, option contracts, stock
warrants, and stock rights without
readily determinable fair values
Investments carried at fair
value or cost
 Participating interest-earning, investment
contracts (variable-rate CDs) purchased
one year or less before maturity
 Money market investments purchased
one year or less before maturity
Investments carried at fair value

 Participating interest-earning, investment

contracts (variable-rate CDs) purchased
more than one year before maturity
 Money market investments purchased
more than one year before maturity
 Investment positions in external
investment pools (except 2a7-like pools)
Investments carried at fair value
[continued]

 Open-end mutual funds

 Equity securities, option contracts, stock
warrants, and stock rights with readily
determinable fair values
 Debt securities
Essential Elements of Fair Value
Accounting for Investments

 Investments are carried at fair value

 Premiums & discounts on investments
need not be amortized, unless using
amortized cost
 Fair value accounting not used for
investments accounted for using equity
method
Reporting Interest Income
and Changes in Fair Value
 Investment income = cash interest and
dividends received or accrued realized gains
(losses) changes in fair value of investments
 Investment income may be reported on single
line or broken into components:
 Interest and dividends
 Net increase (decrease) in fair value of investments
[wording required by GASB]
 Realized & unrealized gains & losses should
not be reported separately in statements but
may be disclosed in the notes
Investment entries [Page 200]

Investment (same for A & B)

Investments 496,000
Cash 496,000
Interest received (same for A & B)
Cash 30,000
Revenues – Interest 30,000
Investment entries [continued]

Amortized cost – A
Change in fair value
No Entry

Amortize discount on investment

Investments 2,000
Revenues – Interest 2,000
Fair value – B – change in fair value
Investments 1,000
Revenues – Increase in Fair
Value of Investments 1,000
Miscellaneous Revenues

 Escheats
 Private Contributions
Escheats

 State law indicates when property of

people dying intestate, inactive checking
& other accounts, or other property must
pass to the state
 Property so received is a revenue to the
state
 Capital assets should be recorded in
General Capital Assets at fair value
Private Contributions
 Rare, but it does occur
 Unrestricted donations are revenue in the
General Fund
 Restricted donations
 For the benefit of the government are revenues in
SRF, CPF or Permanent Fund
 For the benefit of others are revenues in a Private
Purpose Trust Fund
 Property received via contributions is recorded
at fair value
Selected Nonrevenue
Fund Balance Increases
 Capital Asset Sales / Losses
 Internal PILOTs
 Collateralized borrowings
Capital Asset Sales/Losses

 Gains & losses on sales of capital assets

not reported in governmental fund
statements – would violate MFBA
 Net proceeds from sales reported as an
Other Financing Source
 For GCA, report proceeds in GF or SRF;
for EF or ISF assets, report in the
appropriate fund
Payments in Lieu of Tax
(PILOTs)
 External – Payment from one government to
another because payor does not pay taxes
 Recognized as miscellaneous revenue
 Federal government major payor
 Internal – Payments within government’s funds
 May qualify as PILOT if payor receives something in
return – otherwise it is a transfer
 Probably should be called interfund service
transaction
Collateralized Borrowings

GASBS #48 provides criteria for treating transfers

of receivable as a sale
 If criteria met, proceeds of sale reported on
operating statement
 If criteria not met, transaction is a borrowing
 Fund liability – balance sheet transaction
 Not fund liability – proceeds reported as OFS
Changes in Accounting
Principles
Two types
 Prospective – affects only current and
subsequent years
 Retroactive – requires restatement of
prior years or computation of cumulative
effect
Common Causes of Changes

 Management decides to change from one

acceptable method of accounting to another
acceptable method (not common)
 Change in circumstances (state) requires
change in method of applying acceptable
principle
 GASB issues new standard that requires
change in revenue recognition
Standard Practices

 Change is effective at beginning of the

year of the change
 Cumulative effect [if any] is reported as a
restatement of beginning fund balance
 Revenues reported under new policy for
each year presented
 Change is disclosed and explained in the
notes to the financial statements
Error Correction

3 step process
1. Recognize the erroneous entry that was
recorded
2. Determine what the correct entry should be
3. Fix the error by essentially combining steps 1
&2
Error Correction Issues

 If error is caught in same year, fairly

simple process to reverse it and record
correction
 If error was made in a previous year,
must consider if accounts affected have
been closed – may result in a “Correction
of Prior Year Error”
Error Correction Example – 1

Identify the error: government accountant

incorrectly calculated interest to be
accrued – amount recorded was $75; it
should have been $100.

Interest Receivable 75
Revenues – Interest 75
Error Correction Example – 2

Correct entry is fairly straight-forward

Interest Receivable 100

Revenues – Interest 100
Error Correction Example – 3

Correction will depend on which year the original error

occurred:

Current year – just add another $25

Interest Receivable 25
Revenue – Interest 25
Previous year – Revenue account closed
Interest Receivable 25
Correction of Prior Year Error 25