Governmental Funds

In governmental accounting the government accounts for its resources by utilizing funds, this is known as fund accounting. Governments utilize many funds to account for their resources and activities. Each fund is classified as an independent accounting entity because they each follow the governmental accounting equation of Assets = Liabilities + Fund Balance. The government groups its funds into three categories: governmental, proprietary, and fiduciary.

Governmental funds include a general, special revenue, debt service, capital projects, and permanent funds. The general fund is primarily used for a government’s operations such as administration, operation of facilities, sanitation, police and fire protection. This fund accounts for resources that do not have a legal or contractual restriction on the funds. The special revenue fund is used to account for revenues that have been restricted for a specific purpose but do not fall into the category of debt service or capital projects such as gas tax revenues for road repairs. The debt service fund accounts for the payment of interest and principal on long-term debt such as bonds that have been issued by the government. The capital projects fund accounts for revenues received for the capital construction of buildings and highways. The permanent fund is where resources are placed that the government is only allowed to use the earnings on the fund not the principal. This is normally seen when a donor donates funds to be utilized for the upkeep and maintenance of a public park, library, or cemetery.

Proprietary funds include an enterprise and internal service fund. Enterprise funds operate very similarly to a for-profit business because the objective of the government is to recover its costs of providing goods and services through user charges. Examples of enterprise funds include; utilities, hospitals, mass transportation, airports, and housing authorities. Internal service funds account for government activities that provide goods and services to other government agencies or departments usually within the same government, on a cost reimbursement basis. An example of utilizing an internal service fund could be found if the government has their own printing service that provides all the printing services to the government agencies. When the printer service bills the other government agencies it recognizes revenue and a receivable from the other fund. The other department recognizes an expense and a payable to the internal service fund.

Fiduciary funds are funds established that benefit other parties not the government, they include trust and agency funds. Trust funds include funds for pensions, healthcare, and private purpose trust funds. Agency funds are used for assets that are held by the government in a custodial capacity on behalf of other individuals