What Is a Governmental Fund?
A governmental fund is a distinct accounting and financial reporting entity used by state and local governments to account for financial resources that are earmarked for specific governmental activities. These activities typically involve the delivery of public services financed primarily through taxes and intergovernmental revenues, such as general government administration, public safety, public works, and culture and recreation. As a core component of governmental accounting, governmental funds focus on the flow of current financial resources rather than the entity's overall economic resources, emphasizing compliance with spending mandates and legal restrictions. The information generated by a governmental fund is presented in specific financial statements that differ from those used in the private sector, providing a framework for tracking public money and ensuring accountability. This approach contrasts with the accrual basis of accounting commonly used in business.
History and Origin
The framework for governmental accounting, including the use of governmental funds, has evolved significantly over time to enhance transparency and accountability in public finance. A pivotal development occurred with the issuance of GASB Statement No. 34, "Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments," by the Governmental Accounting Standards Board (GASB) in June 1999. Thi22, 23s landmark standard introduced comprehensive new financial reporting requirements for state and local governments, fundamentally changing how these entities present their annual reports. Bef19, 20, 21ore GASB Statement No. 34, the financial reporting model for governments was different, and the new standard aimed to make annual reports more understandable and useful to a wider range of stakeholders by requiring the presentation of both government-wide and fund-based financial statements. The16, 17, 18 standard also mandated the reporting of capital assets and their depreciation in government-wide statements, a significant departure from previous practices focused solely on current financial resources within governmental funds. Thi14, 15s evolution underscores a continuous effort to improve the clarity and comprehensiveness of public financial reporting.
Key Takeaways
- A governmental fund focuses on the flow of current financial resources available for spending, rather than the overall economic resources of the government.
- These funds account for typical public services funded by taxes, such as public safety, education, and general administration.
- They primarily use the modified accrual basis of accounting, which differs from the full accrual basis used in business.
- Governmental funds help demonstrate compliance with legal provisions and budgetary authorizations for public spending.
- The three main types of governmental funds are the General Fund, special revenue funds, and capital projects funds.
Interpreting the Governmental Fund
Interpreting a governmental fund involves understanding its focus on current financial resources and their use for specific public purposes. Unlike business accounting, which centers on profit and loss, governmental fund accounting emphasizes accountability for how taxpayer money is raised and spent. The "bottom line" of a governmental fund is its fund balance, which represents the difference between its current assets and current liabilities. A positive fund balance indicates resources available for future expenditures, while a deficit suggests that current spending has outpaced current revenue. Users of financial reports, such as citizens, bondholders, and oversight bodies, evaluate the fund balance to gauge the government's ability to finance ongoing operations and meet short-term obligations without incurring long-term debt or raising taxes. The reporting provides insight into the allocation of resources and adherence to the budget.
Hypothetical Example
Imagine the City of Harmony operates its public safety services (police and fire departments) through a governmental fund called the "Public Safety General Fund." For the fiscal year ending June 30, the fund records all its financial transactions.
The Public Safety General Fund receives tax revenue of $10,000,000. Additionally, it receives grants totaling $1,500,000 for specific public safety initiatives. During the year, the fund incurs expenditures of $9,800,000 for police officer salaries, fire truck maintenance, and equipment purchases. At the end of the fiscal year, the fund has outstanding invoices (accounts payable) of $200,000 (a current liability) and holds $1,500,000 in its cash account (a current asset).
To determine the ending fund balance:
Current Assets = Cash = $1,500,000
Current Liabilities = Accounts Payable = $200,000
Beginning Fund Balance (assume $0 for simplicity)
Add: Revenue = $10,000,000 (taxes) + $1,500,000 (grants) = $11,500,000
Subtract: Expenditures = $9,800,000
Change in Fund Balance = Revenue - Expenditures = $11,500,000 - $9,800,000 = $1,700,000
Ending Fund Balance = Beginning Fund Balance + Change in Fund Balance = $0 + $1,700,000 = $1,700,000
This ending fund balance of $1,700,000 signifies the resources available to the Public Safety General Fund for the next fiscal period, demonstrating its financial health and capacity to continue providing services.
Practical Applications
Governmental funds are fundamental to the financial operations and reporting of virtually all state and local governments. They are used to track and manage the vast majority of activities typically associated with public services. For instance, a city's general fund, a type of governmental fund, accounts for the core services such as police and fire protection, sanitation, and general administrative functions, all of which are primarily funded by general taxes. Special revenue funds are another application, used for resources legally restricted to specific purposes, like gasoline tax revenues earmarked for road maintenance. Capital projects funds, meanwhile, account for financial resources used for the acquisition or construction of major capital assets, such as new schools, bridges, or public buildings.
Federal agencies also adhere to strict financial reporting guidelines. For example, the Department of the Treasury publishes the Financial Report of the U.S. Government annually, providing a comprehensive overview of the federal government's financial position and operations. Thi11, 12, 13s report is prepared in conformity with U.S. Generally Accepted Accounting Principles (GAAP) as promulgated by the Federal Accounting Standards Advisory Board (FASAB). The10 Office of Management and Budget (OMB) issues OMB Circular A-136, which provides detailed guidance for Executive Branch entities on preparing audited financial statements and other reports, ensuring consistent and transparent financial management across federal agencies. Thi5, 6, 7, 8, 9s robust framework ensures that the accounting system for governmental entities provides critical information for oversight, budgeting, and public accountability.
Limitations and Criticisms
While governmental funds serve a critical purpose in public sector financial reporting, they do have limitations and have faced criticisms, primarily concerning their focus on current financial resources. Because governmental funds emphasize modified accrual accounting and current financial resources, they typically do not record all long-term assets, such as general capital assets, or all long-term liabilities. This can create a less complete picture of a government's overall financial health or economic position compared to the full accrual basis of accounting used by businesses. For example, depreciation of infrastructure assets like roads and bridges was not historically reported within governmental funds until the advent of government-wide financial statements mandated by GASB Statement No. 34.
Cr4itics argue that this modified accrual basis, while useful for demonstrating compliance with legal spending mandates, may not fully capture the true cost of providing services or the long-term financial obligations of the government. For instance, future pension liabilities or post-employment benefits are typically reported in the government-wide statements but not directly in the governmental funds themselves. This separation can make it challenging for users to understand the full financial impact of current governmental decisions on future generations. However, the comprehensive annual financial reports (CAFRs), which include both governmental fund statements and government-wide statements, aim to bridge this gap by providing a more holistic view. The Governmental Accounting, Auditing, and Financial Reporting (GAAFR) "Blue Book" issued by the Government Finance Officers Association (GFOA) offers guidance to help professionals navigate these complexities and ensure thorough auditing and reporting.
##1, 2, 3 Governmental Fund vs. Proprietary Fund
Governmental funds and proprietary funds represent two distinct types of accounting funds used by state and local governments, reflecting different operational characteristics and reporting objectives. The primary difference lies in their measurement focus and basis of accounting.
| Feature | Governmental Fund | Proprietary Fund |
|---|---|---|
| Purpose | Accounts for activities that are primarily supported by taxes and intergovernmental revenues, focused on public services (e.g., police, fire, education). | Accounts for business-type activities where a fee is charged for services, similar to a commercial enterprise (e.g., public utilities like water and sewer, airports). |
| Measurement Focus | Flow of current financial resources (emphasis on sources and uses of spendable resources). | Economic resources measurement focus (emphasis on matching revenues and expenses to determine operating income or loss). |
| Basis of Accounting | Modified accrual basis (revenues are recognized when measurable and available; expenditures recognized when the liability is incurred, typically when due). | Full accrual basis of accounting (revenues recognized when earned; expenses recognized when incurred, regardless of when cash is received or paid). This mirrors private sector accounting. |
| Financial Statements | Balance Sheet (current assets/liabilities, fund balance), Statement of Revenues, Expenditures, and Changes in Fund Balances. | Statement of Net Position (assets, liabilities, and net position), Statement of Revenues, Expenses, and Changes in Fund Net Position, Statement of Cash Flow. |
| Long-term Assets/Liabilities | Generally, long-term assets (like capital assets) and long-term liabilities are not recorded directly within the fund, but rather in the government-wide statements. | Both long-term assets and long-term liabilities are recorded directly within the fund. |
The distinction clarifies where confusion might occur: governmental funds are for core public services, while proprietary fund accounting is reserved for government activities that operate more like businesses.
FAQs
What are the main types of governmental funds?
The three primary types of governmental funds are the General Fund (for most ordinary services), special revenue funds (for specific revenue sources restricted to particular purposes), and capital projects funds (for major capital asset acquisition or construction). There are also debt service funds (for accumulating resources for and paying general long-term debt principal and interest) and permanent funds (for legally restricted resources for the benefit of the government, where only earnings, not principal, may be spent).
How is a governmental fund different from a private business?
A governmental fund differs from a private business because its primary goal is public service and accountability for spending, not profit generation. It uses a modified accrual basis of accounting focused on current financial resources, whereas private businesses typically use the full accrual basis of accounting to measure economic performance and profitability. Governmental funds also operate under stricter legal and budgetary controls.
Do governmental funds report all assets and liabilities?
No, governmental funds generally do not report all assets and liabilities. They focus on current financial resources, meaning they typically record current assets (like cash) and current liabilities (like accounts payable). Long-term assets, such as infrastructure and buildings, and long-term liabilities, like bonds payable, are usually reported in the government-wide financial statements rather than within individual governmental funds.
What is the role of the budget in governmental funds?
The budget is central to governmental funds. It represents the legal authorization for a government to incur expenditures and collect revenue for a specific fiscal year. Governmental funds are managed to ensure compliance with budgetary appropriations, and financial reports often include comparisons of budgeted amounts to actual results to demonstrate accountability.
How is a governmental fund's financial position reported?
A governmental fund's financial position is reported on its Balance Sheet, which presents its current assets, current liabilities, and fund balance at a specific point in time. The Statement of Revenues, Expenditures, and Changes in Fund Balances reports the financial activities (inflows and outflows of current resources) for a period, showing how the fund balance changed.