Question

Describe how accounting for fund balances for governmental funds is different from that of other entities.

Answer 1

Fund as we know is a general donation given or provided by the donor. Fund accounting is a type of accounitng which records the usage of funds. The usage of such funds is basically limited to the areas which are pemitted by the donor. It involves the a set of self balancing accounts are either unrestricted or semi restricted or completely restricted as per the donor terms.

Financial reporting of Fund Accounting:

Normally for financial reporting purposes, we prepare a profit and loss account to determine the net earnings or loss by the entity. Under the fund accounting a revenue and expenditure account is prepared, the result of which is either a surplus where the incoming funds (revenue) is more or deficit where the expenditure is more than the revenue. Since generating profits is not the purpose of government funds, a general surplus is basically for tax cuts or increase the spending and a general deficit shall result in basically a spending cut or increase borrowings.

Accounting basis :

Generally under accounting basis what businesses around the world use is the "accrual basis" of accounting where the revenues are recorded as and when they are earned and the expenses are recorded when their relative benefits are received. However, under the government fund accounting, the basis used for accounting is the "modified accrual basis" of accounting under which the revenues are recorded when it becomes available and can be easily and accurately measured rather than when it is earned, and the expenses are recorded when the related liability (to be paid for) are incurred. State and local govt. funds ahve two sets of self balancing accounts general fixed asstes and general long term debts. These belong the government entity as a whole rather than any specific fund. If assigend to a specific fund, these are known as fund fixed assets and fund long term liabilities

Note : this is basic difference between the fund base and general normal accounting!!