CHAPTER 5

Recognizing Expenditures in
Governmental Funds
 LEARNING OBJECTIVES
After studying Chapter 5, you should be able to understand:
Accounting for different expenditures
Types of interfund activities and how they are reported
Other Financing Sources and Uses
 EXPENDITURES VS. EXPENSES
Expenditures
Definition: measure of fund liabilities liquidated with current
resources
Decreases net current financial resources (i.e. Fund Net Assets)
recognized when cash is paid or fund liability accrued for
goods/services received.
Used in Modified Accrual Basis
-- i.e. Fund Financial Statements
Expenses
Definition: measure of costs expired or consumed during a
period
Reduction in net economic resources (overall net assets)
Used in Full Accrual Basis
-- i.e. Government-wide Statements
 EXPENDITURES
Both operating and capital transactions are
considered expenditures in governmental fund
types. Both capital purchases and operating
expenditures are considered spending of funds and
are treated as current year expenditures.
 EXPENDITURES
Governmental fund:
DR CR
Expenditure $25,000
Vouchers payable or cash $25,000

Government-wide:

Assets $25,000
Account payable or cash $25,000
SALARIES AND WAGES
(PAYROLL)

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 SALARIES AND WAGES

May be earned in one fiscal year but paid in the next

Recognize the expenditure in the period in which it is

earned by the employee (provided the governments
obligation will be liquidated with expendable available
financial resources.)

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 SALARIES AND WAGES EXAMPLE
Example: Wages and related benefits of employees for the last pay period in
December 2013 were $40 million. Employees are to be paid on January 6,
2014. The fiscal year ends December 31.

General Fund Dr. Cr.

Wages and benefits expenditures $40M
Accrued wages payable 40M

Government-wide: same (except for expense label).

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 GOVERNMENTS VS. BUSINESS
7 Major differences
1. Compensated absences (Ch. 5 & 8)
2. Pension accounting (Ch. 10)
3. Claims and Judgments (Ch. 8)
4. Inventory accounting (Ch. 5)
5. Prepayments (Ch. 5)
6. Accounting for capital assets (Chs. 6 & 7)
7. Accounting for interest and principal (Chs. 6 & 8)
1. COMPENSATED ABSENCES

1) VACATION LEAVE
2) SICK LEAVE
3) SABBATICAL

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COMPENSATED ABSENCES (CA) OVERVIEW
Earned in one period but often not paid until several
periods later (i.e. Its not current.)
Amount to be paid is often uncertain.
o Compensation is based on the salary/wage rate in
effect when the time off is taken.
GASB standard:
o Vacation leave and compensated absences should
be accrued as a liability as the benefits are earned
if BOTH the following conditions are met:
Attributable to services already rendered and
Probable that compensation will occur (paid time off or other
means)
 (1) VACATION LEAVE

Vacation pay expenditures and related fund liabilities

should be recognized in the periods in which they are due.

Until those periods, those liabilities are reported ONLY

in the schedule of long-term obligations.
 (1) VACATION LEAVE EXAMPLE 1
Example 1: City employees earned $300,000 in vacation
leave they did not take in 2013. The leave vests and can be
taken at any time up to retirement.
Governmental fund
No entry in the governmental funds

Government-wide: (no real entry here either)

But this will be the conversion at year end.
Dr. Cr.
Vacation pay expense 300,000
Accrued vacation payable 300,000
 (1) VACATION LEAVE EXAMPLE 2
Example 2: City employees earn $8 million in vacation leave. Of this amount,
they are paid $6 million in 2010 and defer the balance until future years.

Governmental fund DR CR
Vacation pay expenditure $6M
Cash (or Wages Payable) $6M

The $2 million deferred until future periods should be reported in a schedule of

long-term obligations.

Government-wide statements (no real entry here either).

But this will be the conversion at year end.
DR CR
Vacation Pay expense $8M
Cash (or Wages Payable) $6M
Accrued Vacation Pay 2M
 (2) SICK LEAVE
Beyond the control of both the employee and the
employer.

GASB states that sick leave is recognized as a

liability only if it is probable that the employer will
compensate the employees for the benefits through
cash payments conditioned on the employees
termination or retirement.

It should be recorded ONLY when expected to be

paid to employees upon their resignation or
retirement.
 (2) SICK LEAVE EXAMPLE 1
Example 1
: City employees earned $170,000 in sick leave but were only paid for
$140,000. The leave accumulates but does not vest.

Governmental fund DR CR
Sick leave expenditure $140,000
Cash $140,000

Government-wide*: Same rules apply. Only the $140,000 paid needs to

be charged as an expense.

*No actual journal entry is made. But this will be the conversion at year
end.
 (2) SICK LEAVE EXAMPLE 2
Example 2: A city pays for its employees unused sick leave up to thirty days
only if they terminate at least after 10 years of service. In 2013, the city had the
following estimates:
Sick leave earned = $12 mil;
Payments in the future to employees = $8 mil
Payments to 10-year employees upon termination = $1mil
Amount that will not be paid = $3 mil
Governmental fund:
No entry is required. The city recognizes a liability only for the $1
million to be paid in termination benefits. Assuming that those termination
benefits are not paid in the current year, it is recognized in the schedule of long-
term obligations

Government-wide: (again no actual journal entry is made)

DR CR
Sick leave termination benefit expense $1M
Accrued Sick Leave 1M
 (3) SABBATICAL LEAVE
After a specified term of service, employees may be granted
a paid leave.
They are offered to benefit both the employee and the
employer in the future, not the past.
The employees are required to perform other activities that
will enhance their job-related abilities during their time off.
GASB standard:
o Accounting depends on the purpose of the leave
Activities to enhance their job-related skills
--Account for in the period the leave is taken
Compensated unrestricted time off
--Liability is accrued during the period the leave is earned.

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 (3) SABBATICAL LEAVE EXAMPLE
Example: City teachers are entitled to sabbatical leaves of six
months every 7 years for research and renewal. The
2013 share of leave costs to be taken in the future was
$300,000.
Governmental Fund:
Sabbatical leaves need not be recognized as a
liability if it is a reward for past service (i.e. it is
for unrestricted time off).
It need not be accrued if it constitutes merely a
change in assigned duties (e.g. research instead of
teaching).
Government-wide:
Same.
 2. PENSIONS OVERVIEW (CH 10)
Definition: Amount of money paid to retired or disabled
employees.
If the Government makes the required contribution to
the pensions in full
-- amount recorded = amount of contribution.
GASB Standard:
oThe expenditure should be the amount that will be
liquidated with expendable available financial
resources.
 2. PENSIONS EXAMPLE
A city is informed by the administrator of its pension plan that per its
contractual arrangement its required contribution for the current year is
$55 million. It expects to make the contribution shortly after year-end.

Governmental fund:
DR CR
Pension expenditure $55
Pension liability $55
To record the pension expenditure for the year

Government-wide:

They will base them on actuarial determinations, not merely the amounts
contributed to the plans during the year or expected to be contributed
shortly after year-end.

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 3. CLAIMS AND JUDGMENTS (CJ)
OVERVIEW (CH 8)
GASB Std. #10, Claims and Judgements, para. 53. (also FASB Std.
# 5)
o Liability accrued if:
Probable that Asset Impaired/Liability Incurred by Balance
Sheet date
Loss can be reasonably estimated
Expenditure amount:
o Recognize in the governmental fund only the
portion of liability that is normally to be
Liquidated with Available Expendable Financial
Resources
o Liability recorded at face value.

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3. CLAIMS AND JUDGMENTS EXAMPLE
A county is sued for personal injuries resulting from negligence on the
part of a road maintenance crew. The case is settled for $400,000, to be
paid in four annual installments of $100,000 beginning immediately.
Inasmuch as the county uses a discount rate of 10 percent to evaluate all
long-term projects, ofcials determine the present value of the ventual
payment to be $348,685.
Governmental fund:
DR CR
Claims and judgments (expenditures) $100,000
Cash $100,000
To record the rst payment of settling claims and judgments

Government-wide:
Claims and judgments (expense) $348,685
Cash $100,000
Liability for claims and judgments 248,685
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3. CLAIMS AND JUDGMENTS EXAMPLE
A county is sued for personal injuries resulting from negligence on the
part of a road maintenance crew. The case is settled for $400,000, to be
paid in four annual installments of $100,000 beginning immediately.
Inasmuch as the county uses a discount rate of 10 percent to evaluate all
long-term projects, ofcials determine the present value of the ventual
payment to be $348,685.

Government-wide:
Interest expense $24,869
Liability for claims and judgments $24,869
To adjust the liability to its new present value (10 percent of
$248,685)

Liability for claims and judgments $100,000

Cash $100,000
To record the second cash payment
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4 MATERIALS AND SUPPLIES
(INVENTORY)

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 4 MATERIALS AND SUPPLIES (INVENTORY)
ALTERNATIVES FOR EXPENDITURE RECOGNITION
(1) Purchase Method
a. Expenditure current assets when purchased:
(1) Supplies
(2) Pre-paids (insurance)
(3) Inventory
b. Reverse (set-up as a current asset) for items not used during period
(still on hand).

(2) Consumption Method

a. Set up as a current asset when purchased:
(1) Supplies
(2) Pre-paids (insurance)
(3) Inventory
b. Expenditure items as consumed (by periodic physical count).
ALTERNATIVES FOR EXPENDITURE RECOGNITION
 MATERIALS AND SUPPLIES (CONTD)

Government-wide statements:
Should be reported on a consumption basis.

Supplies expense (not expenditure) would be debited.

No need for inventory reserve.

 5 PREPAYMENTS
(E.G. INSURANCE AND SIMILAR
SERVICES)

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 5 PREPAYMENTS: OVERVIEW
GASB standards:
Fund Statements:
o Either purchases or consumption method can be used

Government-wide statements:
o Only consumption method must be used

If services extend over more than one accounting period

o Need not be allocated between or among accounting
periods
o GASB does not distinguish between current and
long-term prepayments.
--i.e. the unused portion of insurance policy for two or more years 30
would be reported as an asset the same as a one-year policy
 5 PREPAYMENTS EXAMPLE
Example : On June 15, 2013 the city acquired and paid for an insurance
policy that cost $300,000. The policy covers the two-year period
beginning July 1.

Purchases method: DR CR
Insurance expenditure $300
Cash $300

Consumption method:
Prepaid insurance $300
Cash $300

Government-wide: Must use consumption method.

 6 CAPITAL ASSETS OVERVIEW (CH 6)

Provide services in periods beyond those in which they are acquired.

GASB standards:
General capital assets are not specifically related to activities that are
reported in proprietary or fiduciary funds.
General capital assets are neither reported on governmental fund balance
sheets nor depreciated on governmental fund statements of revenues,
expenditures, and changes in fund balance.
Governments reports general capital assets in the period requiring the
outflow of expendable available financial resources.
Accounting for capital assets
Fund Statements
--Expenditure as purchased
Government-wide statements
--Capitalize and Depreciate (like business)
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 6 CAPITAL ASSETS EXAMPLE
Example: The city acquired a computer system for all its departments at a
cost of $3 million, and paid in cash. It has a useful life of three years.

General Fund: DR CR
Expenditure-acquisition of capital assets $3
Cash $3

Government-wide: Would capitalize and depreciate

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7 INTEREST AND PRINCIPAL ON LONG-TERM
DEBT: OVERVIEW
Principle:
Recorded in schedule of long-term obligations.
If a principal repayment extends beyond a fiscal year,
expenditures are recognized entirely in the year the
payments are due.
Interest:
Major expenditure for many governments.
Source of payments are either general revenues or
revenues dedicated for debt service revenues.
The government transfers cash from general fund as
payments are made.
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 7 INTEREST AND PRINCIPAL ON LONG-TERM
DEBT: EXAMPLE
Example: A state issues $100 million of 20-year bonds on August 1, 2014, at
an annual rate of 6 percent. Interest of $3 million per semiannual period is
payable on January 31 and July 31. The bonds are sold for $89.3 million,
a price that reects an annual yield of 7 percent (semiannual yield of 3.5
percent). The rst payment of the interest is due on January 31, 2015.

DR CR
Debt service, interestexpenditure $3
Matured bond interest payable $3
To record obligation for bond interest due

Debt service, principalexpenditure $100

Matured bonds payable $100
To record obligation for matured bonds payable
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NONEXCHANGE EXPENDITURES

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NONEXCHANGE EXPENDITURES: OVERVIEW
GASB Standards (applicable to both modified and full
accrual statements):
Nonexchange expenditures
o Should generally be recognized with their revenue
counterparts
-- (i.e.) when the recipient of the grant has satisfied all eligibility
requirements.
Nonexchange expenses
o Grants would be recognized as expenses in the
same period in the government-wide as in the fund
statements.
Modified accrual statements
o Revenues must be available for expenditure before
they can be recognized.
 NONEXCHANGE EXPENDITURES: EXAMPLE1
Example1: In December 2013, the city approves a $300,000
grant to a not-for profit health clinic. The funds are to be
paid in 2014 out of funds budgeted for that year and are
intended to support the clinics activities in 2014.

General Fund: In as much as the clinic cannot use the funds until
2014, the grant is subject to a time requirement. The clinic need not
recognize either a liability or an expenditure until 2014, when the time
requirement is satisfied.
Government-wide: Same.

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 NONEXCHANGE EXPENDITURES: EXAMPLE2
Example2: In Dec. 2013 the city awards a not-for profit clinic $400,000
for the acquisition of emergency communications equipment. Payment
is made at the time the award is announced. The clinic is permitted to
use the funds upon receipt, but intends to use them in 2014.

--Purpose restrictions have no impact on the timing of either

expenditure or revenue recognition. The state must recognize an
expenditure as soon as it expends the funds and the county is eligible to
spend them:

Governmental Fund:
Grant expenditure $400,000
Cash $400,000

Government-wide*: Same, but expense instead of expenditure.

 NONEXCHANGE EXPENDITURES: EXAMPLE3
Example3 : In Dec. 2013, the city awards a not-for profit $200,000 for the
acquisition of emergency communications equipment. The grant is to be
paid as the organization incurs and documents allowable costs. In 2014
the organization submits claims for $150,000 of which the city pays
$125,000. The city expects to pay the $25,000 balance of claims
submitted in Jan 2015 and the $50,000 balance of the grant by June 2015.
--- The not-for- profit is eligible for the award only as it incurs and
documents allowable costs. In 2014, the city became eligible for
$150,000 of the grantthe amount that the state should recognize as an
expenditure.
General Fund:
Grant expenditure $150,000
Cash $125,000
Grants payable 25,000

Government-wide*: Same, but expense instead of expenditure.

* This is not a real entry but conversion is made at the end of the year.
NONEXCHANGE EXPENDITURES: EXAMPLE4
Example4 : Assume a grant of $100,000 is received at the
beginning of the fiscal year from the federal government
to operate a counseling program for troubled youths.

The entry in the special revenue fund is:

Dr. Cr.
Cash $100,000
Deferred Revenue $100,000

Explanation: Until eligibility requirements for the grant have been met
by incurring expenditures for the intended purpose, an exchange
transaction it is reported as Deferred Revenue (a liability).
 NONEXCHANGE EXPENDITURES: EXAMPLE4
Example4 (CONTD)Assume that during the year the Counseling
Program expended $75,000 for costs related to youth
counseling, thus meeting the eligibility requirement to expend
grant resources. The entries would be:
Dr. Cr.
Expenditures $75,000
Vouchers Payable $75,000

Deferred Revenues $75,000

Revenues $75,000
(This amount would also be recorded in the Revenue detail
account in the Revenue subsidiary ledger). 42
 INTERFUND TRANSFERS (CH. 6-9)
Two types of interfund activity:

(a) Reciprocal: Equivalent of exchange transactions

(b) Nonreciprocal: Equivalent of nonexchange

transactions.
END OF CHAPTER 05