Question

According to GASB statement, “Governmental fund balance information is reported in five different classifications, which provide hierarchy showing the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent”.

You are required to explain these five classifications of fund balances with an appropriate examples for each. Also, explain why there is a need for such a classification of governmental fund balances? Justify your answer with supportive examples.

Answer 1

• The general fund is a government's basic operating fund and accounts for everything which is not accounted in any other fund
  
• Special revenue funds are to be utilised  to reflect  specific revenue sources that are limited to being used for a particular purpose, such as transportation aid. In general  governments also use them to report: all of the financial activities associated with a single function (such as road maintenance); classes of revenues (for example, all federal grants); and "rainy day" resources.
  
• Debt service funds account for the repayment of debt. If a government is accumulating resources for the purpose of making debt service payments, it should report them in a debt service fund. In praticallity , some resources intended to finance debt service payments can be found in other governmental funds. Furthermore, debt transactions associated with proprietary and fiduciary activities are accounted for in those funds.
  
• Capital projects funds account for the construction, rehabilitation, and acquisition of capital assets, such as buildings, equipment, and roads. Governments are not required to account for all capital expenditures in this fund type, however, and therefore it may also be reflected  in the general fund or even special revenue funds.
  
• Permanent funds account for resources that cannot be expended, but must be held in perpetuity. Generally, these resources are invested and a government may spend the earnings, often for a purpose specified by the provider of the resources.

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