In: Accounting
You are the auditor of Winter Valley. You have noticed that the town is recording all of their transactions in the General Fund. The town has not established additional funds although they have the following transactions. They are constructing a new city hall They have a town operated skating rink for which they charge an entrance fee. They have $2,000,000 in an employee pension plan. They are paying interest and principal on Winter Haven Municipal Bond They have unclaimed funds of $1,000,000 They have established a $3,000,000 endowment fund to maintain the Library into perpetuity They have a centralized payroll department that provides payroll services to all departments of Winter Valley They collect sales taxes on behalf of Stars Hollow They invest idle funds on behalf of Stars Hollow They have passed a gasoline surcharge to fund the planting of Flower Beds on the sides of Central Highway. Required Prepare a one to two page memo explaining what additional funds should be established in order to assure proper accounting control for Winter Valley. In your memo discuss the importance of funds in Governmental accounting. Additionally, describe the three categories of governmental funds.
To : Secretary, Winter Valley
From ; Ricky ponting, Auditor (winter valley)
Re : Non establishment of specific funds
Dear sir.
I have noticed that you are maintaining only one fund to record various transactions of the town. All those different different transactions are being recorded in General Fund rather than specific funds.
Various transactions are to be reported under various funds which are described as below :
1. For constructing a new city hall = all transactions relating to construction of major capital projects are recorded in Capital Projects Fund. Thus, exp. Relating to construction of new city hall would come under Capital Projects Fund.
2. Entrance fees charged for Town operated skating rink = if government provides goods and services to the general public any receipts with respect to it is recorded in Proprietary Fund. Thus, entrance fees charged for town operated skating rink will be recorded in proprietary Fund.
3 . Employee pension plan = If government holds certain sum under trust than it is recorded under fiduciary fund. Further any amount on bahalf of employee pension is shown under agency find.
4. Interest and principal on winter Haven municipal board = any long term debt or it's payback is recorded under Debt service fund. Thus, paying interest and principal on winter Haven municipal board would come under debt service fund.
Likewise other transactions will also be recorded under several other funds funds as appropriate.
It should be noted that every fund has its specific purpose and recording transactions under specific funds helps in keeping track of various activities and helps in keeping control of various activities based on the balance of these funds. If however we continue to show all the transactions under a single head i.e. general fund then that tracking and controlling objective cannot be fulfilled and may lead to utter confusion.
There are mainly three categories of governmental funds in respect of which various transactions are bifurcated which are brodly described as
1 . Govermnmental funds = All typical functions that a government performs comes under Governmental fund . It has four sub categories :
a. Special revenue fund = revenue from specific sources having certain restrictions comes under this fund.
b . Debt service fund = All long term debt and it's payback comes under this fund.
c . Capital project funds = All constructions of major capital projects comes under this head.
d. General fund = All general transactions other than mentioned above.
2 . Proprietory fund = It pertains to activities concerning providing of goods and services to general public in large i.e. activities similar to that businesses do. It consists of two sub categories :
a. Enterprise fund = This fund is used for recording transactions pertaining to services given to public on person to person basis.
b . Internal service fund = It generally pays for operational cost of serving other funds.
3 .Fiduciary fund = When .government holds assets in trust for the benefit of some individual or institution . It has two subcategories
a . Trust fund = money Spended for some specific programme.
b . Agency fund = like employee pension fund
So it is kindly requested to look forward into the matter, please.
Regards
Ricky pointing
Auditor