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In this video we cover fund accounting basics for governmental fund accounting on the FAR CPA exam.
The 3 categories of funds used in governmental accounting are governmental funds, proprietary funds, and fiduciary funds.
Governmental funds use the modified accrual basis of accounting, which focuses on the flow of current financial resources, and they are used primarily for nonexchange revenues such as taxes, grants, and revenues between other funds. These funds are used for the primary functions of government such as health and safety, infrastructure such as roads, and general government administration. The 5 types of governmental funds are: 1) General fund, 2) Special revenue funds, 3) Debt service funds, 4) Capital projects funds, 5) Permanent funds.
Proprietary funds operate like for-profit businesses and engage in exchange transactions where users are charged for goods and services. These funds use accrual accounting, which focuses on the flow of economic resources. The 2 types of proprietary funds are: 1) Enterprise funds, 2) Internal service funds.
Fiduciary funds are funds that are held for other entities or individuals, and these funds do not belong to the government entity. These funds also use accrual accounting. The 4 types of fiduciary funds are: 1) Pension trust funds, 2) Investment trust funds, 3) Private purpose trust funds, 4) Custodial (agency) funds.
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All right, in this video from SuperfastCPA, we're going to go over governmental accounting
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and fund accounting specifically. Again, in SuperfastCPA fashion, we're going to go straight through practice problems
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and the ones that I have lined up will kind of take us from the top of this concept through
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to some of the deeper parts of it. So starting with example problem one, which of the following is not one of the three categories
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of funds used in governmental accounting? Is it governmental funds, encumbrance funds, proprietary funds, or fiduciary funds
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So just take a second, pause the video and just read through those and make your best guess
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That's all you're trying to do at this point. We will move on. So the answer is encumbrance funds
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So it was asking which of the following is not one of the three categories of funds used
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in governmental accounting? So the explanation is the three categories of funds used in governmental accounting are
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governmental funds, proprietary funds, and then fiduciary funds. Governmental funds use the modified accrual basis of accounting that focuses on the flow
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of current financial resources. They are used primarily for non-exchange revenues such as taxes or grants, revenues between
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other funds. Then you have proprietary funds that are used for the primary functions of the government
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such as health and safety infrastructure, such as building roads or just general government administration
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Then you have proprietary funds and these operate like a for-profit business and they
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engage in exchange transactions, meaning users are charged for goods or services just like
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a regular business. These funds and fiduciary funds use accrual accounting, which focuses on the flow of economic
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resources versus current financial resources. So that's accrual accounting. And again, fiduciary funds, these are funds that are held for other entities or individuals
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and these funds do not belong to the governmental entity. These funds, like I said, also use accrual accounting
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There are there is no such thing as an encumbrance fund. Encumbrance accounting is the term for the for the way that governments track and account
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for purchases against a budget. Moving on to example problem number two, which of the following is not a governmental fund
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Is it an internal service fund, general fund, permanent fund or a debt service fund
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So pause the video, read those words and just think about what they mean
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And that might not help at all. You know, if you're new to this and that's OK, just read the words, think about what
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they might mean and then make your best guess. We're going to move on
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The answer is the internal service fund. So again, the question was, which of the following is not a governmental fund
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So again, going back to problem one, you have governmental type funds, you have proprietary
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funds, then you have fiduciary funds. Now within the governmental funds, there are five of those
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Those are the general fund, special revenue funds, debt service funds, capital projects
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funds and then permanent funds. Going down to proprietary funds again, proprietary funds use accrual accounting
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They are for exchange based transactions, meaning some type of users being charged for
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a product or service. So these are the business type funds. You have enterprise funds and then internal service funds
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Then we have the fiduciary funds. There are four types of these. Those are pension trust funds, investment trust funds, private purpose trust funds and
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then custodial funds. They used to be called agency funds or there was a fifth type, but it's all within custodial
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funds at this point. Now just a memory or a retention tip from different review courses or other things I've
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seen all these different mnemonics for these, I guess there'd be five, two and then four
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So there's 11 types of funds total across the three categories of funds
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But I think what works the best and what will help you the most instead of just trying to
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memorize these words, these 11 types of funds, what really helps is to just think about what
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the words mean. And if you just do that, these all really make sense
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So for example, we know that proprietary funds are business type funds
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So there are just two types of proprietary funds. And the first type is enterprise
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That is kind of just another name for a business, right? We all have that word associated with business
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So an enterprise type fund, just remember that's a business type fund
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And then the second type is an internal service type fund, meaning a service is being provided
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within or among the different government funds or accounts or parts of the government and
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a service fee or a fee is being charged to the users for that service
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So internal service, just think of a business providing a service. So for the two proprietary funds, you have enterprise funds and internal service funds
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Then with the fiduciary funds, we know that the fiduciary funds, the purpose is for the
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government entity to hold funds for some other entity or persons. And so each of the names of the fiduciary funds, they have the word trust in the name
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of the fund. So something being held in trust for somebody else
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The three types do. And then custodial funds, which is a different way of saying that, right
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Funds being held in custody for another party. So pension trust funds, investment trust funds, private purpose trust funds, and then custodial funds
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Those are all if you just think about the words, you know, you can get this that it's
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a fiduciary type fund. And then the ones that are left, the five that are left, you know that those are the
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governmental type funds. Federal fund, special revenue fund, permanent fund, debt service funds and capital project funds
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And that tip will help you a lot across the entire CPA process is instead of just seeing
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a new word that's kind of a new term to you and just trying to memorize it, think about
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what the words mean, because most of the time it will just from a common sense standpoint
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the definition or the term will kind of explain what it means or how it works
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And that can just go a long ways to helping you deeply understand things versus just trying
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to memorize things. All right. Example problem number three. Which of the following funds would use the flow of economic resources measurement focus
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Is it the permanent fund, special revenue fund, enterprise fund or debt service fund
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Before we go on, press pause, make your own guess, but read what it's asking
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Which one would use the flow of economic resources? Now thinking back, we know that the governmental type funds, they all use the current financial
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resources measurement focus. So this is asking really which one of these is a business type fund
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So the permanent fund, we know that that's a governmental fund. Special revenue is a governmental fund
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Enterprise fund is a proprietary fund. So that's the answer. And then the debt service fund is a governmental type fund
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So the enterprise fund is a proprietary fund which uses accrual accounting
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That is the flow of economic resources measurement focus. The governmental funds use modified accrual accounting, which uses the current financial
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resources measurement focus. What that means, again, if you think about the words, like what is that saying
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That means, OK, what current financial resources do we have available or will we have available
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within the current period to cover the current period's obligations? That's really what that means
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And then on the other hand, the proprietary funds and fiduciary funds, they use accrual
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accounting, which focuses on the flow of economic resources. So the flow of economic resources, it's not just talking about financial
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And that's the distinction. What are all of our cash and non-cash assets and obligations, both in the short term and
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long term? So that's the difference between the current financial resources measurement focus and
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the flow of economic resources measurement focus. Going on to example problem number four, for the year ended December 31st, Corona City
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had the following expenditures from the general fund during the year. They spent $10,000 on new furniture for the city hall, $20,000 on a new copy machine
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What amount would be listed for fixed assets on the general fund balance sheet for these
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expenditures at year end? Is it zero? Is it $10,000? Is it $20,000
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Or would it be $30,000? Press pause, read through that again and just think about it for yourself and make your
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best guess. So we're moving on. The answer is zero. That would not be listed
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Here's why. Now, while proprietary funds would list fixed assets in its fund balance sheets because
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they are like a business type fund, they use accrual based accounting
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Governmental funds assets are classified as general fixed assets and they are not listed
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as part of the fund balance because governmental funds use the current financial resources
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measurement focus. Remember, we said what that really means is what financial resources do we have currently
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or will we have in the current period to cover our obligations for the current period
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So for money spent on these machines or furniture, those are no longer financial resources that
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can be spent. So they're not tracked as such within the governmental type funds
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These general fixed assets, they would be listed in the governmental activity column
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in the government wide financial statements. But again, not in the fund balance because it's not a financial resource that's available
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to be spent. So the accounting equation for governmental funds is current financial assets plus deferred
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outflow of resources minus current liabilities minus deferred inflows of resources. That leaves you with the fund balance
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So there's nothing about fixed assets in there. So another thing related to this type of question, basically just a different way of asking this
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that you could see a question on, it would say something like, which of the following
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funds would record depreciation? And it's the same thing. Only the proprietary funds which use accrual accounting and the economic resources measurement
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focus would record depreciation of fixed assets. Going on to example problem number five, a newly incorporated city is setting up their
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fund structure. For a population of 200,000, what is the minimum number and types of funds required to be established
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Would it be at least a general fund and a special revenue fund
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Or would it be at least a general fund and a debt service fund
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Or would it be at least a general fund, a proprietary fund, and then some type of custodial fund
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Or would it be the minimum number of funds required by law and sound financial administration
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Now this is one of those things where there are a lot of topics on the CPA exams where
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the right answer will be basically a flowery way of saying it depends
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That that's going to be the answer to a lot of things. And they pull in kind of definitions specific to that topic
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But really, it's saying it depends. And this is one of those cases
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So the answer is the minimum number of funds required by law and sound financial
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administration. So this is one of those conceptual ideas or almost just a definition that you just need
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to know. And again, this is basically saying it depends. Right. That's basically what that is
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So here's the specific language. Governmental units should establish and maintain those funds required by law and sound
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financial administration. Only the minimum number of funds consistent with legal and operating requirements should
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be established, however, because unnecessary funds result in inflexibility, undue complexity and inefficient financial administration
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Okay. So those are the five practice questions or sample questions for this topic
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If this is your first thing you've ever seen from us, SuperfastCPA, what
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it really comes down to your success on these exams is how you study
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There are a lot of people out there that are pouring hours and hours week by week into
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We have a free training that we do. These are one hour long trainings
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Our big claim on these is you will learn on these one hour trainings, you will learn
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