Government Accounting: Budgetary Entries and Fund Accounting for the CPA Exam
Master government fund accounting and budgetary entries for the CPA FAR exam. Covers the general fund, modified accrual basis, encumbrances, and budgetary comparison schedules.
Governmental Fund Accounting Basics
Governmental accounting differs fundamentally from commercial accounting in its focus on fiscal accountability and budgetary compliance rather than profit measurement. State and local governments follow standards set by the Governmental Accounting Standards Board (GASB), and the CPA FAR exam tests these concepts extensively. The key difference is that governmental funds use the current financial resources measurement focus and the modified accrual basis of accounting, while government-wide statements use the economic resources measurement focus and full accrual basis.
Types of Governmental Funds
Governmental funds include the General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds. These funds measure current financial resources (essentially cash and items expected to become cash soon) rather than all economic resources. Long-term assets and long-term liabilities are not reported in governmental fund financial statements; they appear only in the government-wide statements.
Recording the Budget
When the legislative body adopts an annual budget, the General Fund (and often other governmental funds) records the budget through a formal journal entry. This is unique to government accounting and is one of the most commonly tested entries on the CPA exam.
Budget Entry Example
A city adopts its annual budget with estimated revenues of $5,000,000 and appropriations (authorized expenditures) of $4,800,000. The budgeted excess is $200,000.
- Debit: Estimated Revenues $5,000,000
- Credit: Appropriations $4,800,000
- Credit: Budgetary Fund Balance $200,000
If appropriations exceed estimated revenues, Budgetary Fund Balance is debited (a planned deficit). These accounts are all budgetary accounts and are closed at year-end. They appear only in the budgetary comparison schedule, not in the fund financial statements.
Revenue Recognition Under Modified Accrual
Under the modified accrual basis, revenues are recognized when they are both measurable and available. Available means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. GASB defines "soon enough" as typically within 60 days after year-end, though the government may establish its own policy.
Property Tax Example
A city levies $3,000,000 in property taxes. It estimates that 2% ($60,000) will be uncollectible. Of the remaining $2,940,000, it expects to collect $2,850,000 within 60 days of year-end and $90,000 after 60 days.
- Debit: Property Taxes Receivable $3,000,000
- Credit: Allowance for Uncollectible Taxes $60,000
- Credit: Revenue - Property Taxes $2,850,000
- Credit: Deferred Inflows of Resources $90,000
The $90,000 expected to be collected after 60 days is reported as a deferred inflow because it is measurable but not available.
Encumbrances
Encumbrance accounting is a budgetary control mechanism that reserves a portion of the appropriation when a purchase order or contract is issued. This prevents overspending by tracking commitments before the actual expenditure occurs.
Encumbrance Example
The city issues a purchase order for office supplies estimated at $25,000:
- Debit: Encumbrances $25,000
- Credit: Budgetary Fund Balance Reserved for Encumbrances $25,000
When the supplies arrive and the invoice is $24,200:
- Debit: Budgetary Fund Balance Reserved for Encumbrances $25,000
- Credit: Encumbrances $25,000
- Debit: Expenditures $24,200
- Credit: Vouchers Payable $24,200
Note that the actual expenditure is recorded at the invoice amount ($24,200), not the encumbered amount ($25,000). The $800 difference returns to the available appropriation.
Year-End Closing Entries
At year-end, all budgetary and nominal accounts are closed. The closing entry reverses the budget entry and closes revenues and expenditures to fund balance.
Assuming actual revenues were $4,950,000 and actual expenditures were $4,750,000:
- Close budget: Debit Appropriations $4,800,000; Debit Budgetary Fund Balance $200,000; Credit Estimated Revenues $5,000,000
- Close actuals: Debit Revenues $4,950,000; Credit Expenditures $4,750,000; Credit Fund Balance $200,000
Budgetary Comparison Schedule
Governments must present a budgetary comparison schedule for the General Fund and each major special revenue fund with a legally adopted annual budget. This schedule shows original budget, final budget (after amendments), and actual results on the budgetary basis. Favorable and unfavorable variances help users assess how well the government adhered to its budget.
Key Exam Tips
- Budgetary entries use different accounts (Estimated Revenues, Appropriations) from actual activity (Revenues, Expenditures).
- Revenue under modified accrual must be both measurable and available (collected within 60 days of year-end).
- Encumbrances are commitments, not expenditures. Expenditures are recorded at the actual invoice amount.
- Governmental funds do not report long-term assets or long-term liabilities; those appear only in government-wide statements.
- Know the difference between the fund-level statements (modified accrual) and the government-wide statements (full accrual).
Practice What You Learned
Study with 1,200+ flashcards and 140 practice exams across all 4 CPA sections.