What Accounting Problem Arises If An Internal Service Fund Is Operated At A Significant Profit

3.ane Bookkeeping

3.1 Bookkeeping Principles and Internal Controls

3.1.1 Fund Types and Bookkeeping Principles

Quick Links

3.1.1.20 Accounting and reporting capabilities

3.1.one.thirty Fund accounting systems

3.1.1.40 Types of funds

Governmental funds

Code 000 - General (Current Expense) Fund

Lawmaking 100 - Special Revenue Funds

Lawmaking 200 - Debt Services Funds

Code 300 - Capital Projects Funds

Code 700 - Permanent Funds

Proprietary funds

Code 400 - Enterprise Funds

Code 500 - Internal Service Funds

Fiduciary funds

Code 600 - Fiduciary Funds

Codes 600-609 - Investment Trust Funds

Codes 610-619 - Pension (and Other Employee Benefit) Trust Funds

Codes 620-629 - Private-Purpose Trust Funds

Codes 630-698 - Custodial Funds

Code 699 - External Investment Puddle Fund

3.1.1.l Number of funds

3.one.1.sixty Reporting capital assets

3.1.1.90 Reporting long-term liabilities

3.1.1.100 Government-wide financial statements

3.1.1.110 Fund financial statements

three.ane.one.120 Budgeting, budgetary control and monetary reporting

3.1.i.130 Transfer, revenue, expenditure and expense classifications

3.1.one.140 Common terminology and classifications

3.one.1.150 Annual financial reports

iii.1.1.x The following principles of accounting and financial reporting are based on those set forth in the Governmental Accounting Standards Board's (GASB) Codified of Governmental Accounting and Financial Reporting Standards. The Confined manual permits accounting and financial reporting that conforms to these principles in all respects and requires GAAP municipalities to account and report in conformity with these principles, except that the annual written report required is not as extensive as the Almanac Comprehensive Financial Report (ACFR).

Back to superlative

3.1.1.twenty Accounting and reporting capabilities

A governmental accounting system must make it possible both: (a) to nowadays fairly and with full disclosure the funds and activities at the government in conformity with generally accepted accounting principles; and (b) to determine and demonstrate compliance with finance-related legal and contractual provisions.

3.1.1.thirty Fund accounting systems

A governmental accounting arrangement should be organized and operated on a fund basis. A fund is divers as a financial and bookkeeping entity with a self-balancing fix of accounts recording greenbacks and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining sure objectives in accordance with special regulations, restrictions, or limitations. Fund fiscal statements should be used to report detailed information near main government, including its blended component units. The focus of governmental and proprietary fund fiscal statements is on major funds.

Back to pinnacle

three.1.one.40 Types of funds

In fund financial statements, governments should report governmental, proprietary, and fiduciary funds to the extent that they have activities that meet the criteria for using these funds.

Presented below is a system to classify all funds used by local government and the assignment of code numbers to identify each blazon of fund. A iii digit code is used: the outset digit identifies the fund type and the next ii digits will be assigned by the governmental unit of measurement to identify each specific fund.

Governmental funds

Code 000 - General (Current Expense) Fund – should be used to business relationship for and report all financial resources not accounted for and reported in another fund.

Although a local government has to report only one general fund in its external financial reports, the government can take multiple full general subfunds for its internal managerial purposes. These managerial subfunds have to be combined into one general fund for external financial reporting.

Code 100 - Special Acquirement Funds – should be used to business relationship for and report the proceeds of specific acquirement sources that are restricted or committed to expenditure for specific purposes other than debt service or capital projects. Restricted revenues are resources externally restricted by creditors, grantors, contributors or laws or regulations of other governments or restricted by constabulary through constitutional provisions or enabling legislation (like to restricted component of cyberspace position used in authorities-wide reporting). Committed revenues are resource with limitations imposed past the highest level of the government, and where the limitations can be removed only by a similar action of the aforementioned governing body. Revenues do not include other financing sources (long-term debt, transfers, etc.).

The term proceeds of specific acquirement sources establishes that i or more specific restricted or committed revenues should be foundation for a special revenue fund. They should be expected to continue to comprise a substantial portion of the inflows reported in the fund. While GASB Statement 54 has not provided a numeric range for substantial portion of inflows, it was recommended that at least 20 percentage is a reasonable limit for reporting a special revenue fund. Local governments need to consider factors such as past resource history, time to come resource expectations and unusual current twelvemonth inflows such as debt proceeds in their analysis.

They may use the calculation below to determine whether an activeness would qualify for reporting as a special revenue fund.

Other resources (investment earnings and transfers from other funds, etc.) also may be reported in the fund if these resources are restricted, committed, or assigned to the specific purpose of the fund.

Governments should discontinue reporting a special acquirement fund, and instead report the fund'south remaining resources in the general fund, if the government no longer expects that a substantial portion of the inflows volition derive from restricted or committed revenue sources.

The Statement requires all revenue to be recognized in the special revenue fund. If the resources are initially received in another fund, such as the general fund, and later on remitted to a special revenue fund, they should not be recognized as revenue in the fund initially receiving them. They should be recognized as revenue in the special revenue fund from which they will be expended. So, the local governments can either receive resources direct into the special acquirement fund, or business relationship for the resources equally agency deposits in the receiving fund and, after remitting them, recognize them as acquirement to the special acquirement fund.

Special revenue funds should not be used to account for resource held in trust for individuals, private organizations, or other governments.

The general fund of a composite component unit should be reported as a special acquirement fund.

The state statutes contain many requirements for special funds to account for different activities. The legally required funds do non ever see GAAP standards for external reporting. And so, while the local governments are required to follow their legal requirements, they will have to make some aligning to their fund structure for external fiscal reporting.

Back to elevation

Code 200 - Debt Service Funds – should exist used to account for and written report financial resources that are restricted, committed, or assigned to expenditure for main and interest. Debt service funds should exist used to report resources if legally mandated. Financial resources that are being accumulated for chief and involvement maturing in time to come years also should exist reported in debt service funds. The debt service transactions for a special assessment for which the government is not obligated in any matter should be reported in an agency fund. Also, if the authorities is authorized, or required to establish and maintain a special assessment bond reserve, guaranty, or sinking fund, GASB Statement half-dozen requires using a debt service fund for this purpose.

Note: Debt service funds should not be used in proprietary funds (400 and 500). Use enterprise funds (400) or internal service (500) for debt payments related to utilities and other business type activities.

Back to elevation

Code 300 - Majuscule Projects Funds – should be used to account for and written report fiscal resources that are restricted, committed, or assigned to expenditure for upper-case letter outlays including the conquering or structure of majuscule facilities or other capital assets. Upper-case letter outlays financed from general obligation bail proceeds should be accounted for through a capital projects fund. Capital project funds exclude those types of capital letter-related outflows financed past proprietary funds or for avails that volition be held in trust for individuals, private organizations, or other governments (private-purpose trust funds).

Notation: Uppercase project funds should not be used in proprietary funds (400 and 500). Use enterprise funds (400) or internal service (500) for capital payments related to utilities and other business blazon activities.

Code 700 - Permanent Funds – should be used to account for and written report resources that are restricted to the extent that only earnings, and not master, may be used for purposes that support the reporting government's programs – that is for the do good of the authorities or its citizens (public-purpose). Permanent funds do non include private-purpose trust funds which account for resources held in trust for individuals, private organizations, or other governments.

Proprietary funds

Code 400 - Enterprise Funds - may be used to report any action for which a fee is charged to external users for goods or services. Enterprise funds are required for any action whose main revenue sources meet any of the following criteria:

Debt backed solely by a pledge of the internet revenues from fees and charges.
Legal requirement to recover price. An enterprise fund is required to be used if the cost of providing services for an activeness including capital costs (such equally depreciation or debt service) must be legally recovered through fees or charges.
Policy decision to recover price. It is necessary to use an enterprise fund if the government's policy is to establish activity fees or charges designed to recover the toll, including capital costs (such as depreciation or debt service).

These criteria should exist applied in the context of the activity's principal acquirement source.

The term activeness generally refers to programs and services. This term is not synonymous with fund. As a practical consequence, if an activity reported as a separate fund meets whatsoever of the three criteria, it should be an enterprise fund. Also, if a "multiple activeness" fund (e.g., general fund) includes a significant activeness whose principal revenue source meets any of these three criteria, the activeness should be reclassified as an enterprise fund.

The determination of an activity'southward principal revenue source is a affair of professional judgement. A skillful indicator of the activity'southward significance may be comparing pledged revenues or fees and charges to full revenue. For example, consider a county auditor's office that charges fees to provide a payroll service to diverse taxing districts. Fifty-fifty if the fee is meant to encompass the cost of the service, the county auditor office as a whole is primarily supported with taxation dollars from the full general fund. It would exist allowable in this instance to go out the activity all within general fund.

Finding an advisable fund blazon requires a careful analysis since there is non always a clear option. For example, building permit fees may be deemed for in the general fund or a special acquirement fund in certain circumstances, such as when they are partially supported by taxes. However, if there is a pricing policy to recover the price of issuing those private building permits, they should be reported in an enterprise fund.

In addition, GAAP mandate the use of enterprise funds for the separately issued financial statement of public-entity chance pools. Public-entity risk pools also are accounted for every bit enterprise funds when they are included inside a sponsoring regime'south report, provided the sponsor is not the predominant participant in the arrangement. Otherwise, they can use the general fund.

Split up funds should non be reported for bond redemption, construction, reserves, or deposits, for any utility that is accounted for on the full accrual ground, using either the Bars accounts or a nationally recognized utility chart of accounts such as FERC or NARUC. Split funds should non be reported even though bail covenants may stipulate a bond reserve fund, bail construction fund, etc. The bail covenant employ of the term fund is not the aforementioned equally the use in governmental accounting. For bond covenants, fund means only a segregation or split up account, non a self-balancing set of accounts. (Run into business relationship 150 in the general ledger chart of accounts.)

Code 500 - Internal Service Funds – may exist used to report whatever activity that provides goods or services to other funds, departments or agencies of the government, or to other governments, on a cost-reimbursement basis. Internal service funds should exist used only if the reporting government is the predominant participant in the activity. Otherwise, the activity should exist reported in an enterprise fund. For more than data on accounting for these funds see 3.9.half-dozen and for reporting see four.3.6.

Fiduciary funds

Lawmaking 600 - Fiduciary Funds – should be used to account for assets, including capital assets (GASB 34, Paragraph 106), held by a government in a trustee capacity or equally a custodian for individuals, private organizations, other governmental units, and/or other funds. These include (a) investment trust funds, (b) pension (and other employee benefit) trust funds, (c) individual-purpose trust funds, and (d) custodial funds.

For more than information on determining if a transaction is fiduciary please see the Determining Fiduciary Custodial Activities folio.

Back to elevation

Codes 600-609 - Investment Trust Funds – should be used to report fiduciary activities from the external portion of investment pools and private investment accounts that are held in a trust that meets the following criteria: the assets are (a) administered through a trust in which the government itself is not a beneficiary, (b) dedicated to providing benefits to recipients in accordance with the benefit terms, and (c) legally protected from the creditors of the government.

In addition to the trust criteria requirements above, all individual investment accounts are required to be reported in an Investment Trust Fund.

Codes 610-619 - Pension (and Other Employee Benefit) Trust Funds – should be used to study fiduciary activities for the post-obit:

Pension plans and OPEB plans that are administered through trusts that meet the criteria in paragraphs 3 of GASB Argument 67 or paragraph 3 of GASB Argument 74, respectively.
Other employee do good plans for which (i) resource are held in trust that meets the following criteria: the assets are (a) administered through a trust in which the authorities itself is not a beneficiary, (b) dedicated to providing benefits to recipients in accordance with the benefit terms, and (c) legally protected from the creditors of the government and (2) contributions to the trust and earnings on these contributions are irrevocable.

Back to elevation

Codes 620-629 - Individual-Purpose Trust Funds – should be used to study all fiduciary activities that (a) are not required to be reported in pension (and other employee do good) trust funds or investment trust funds, and (b) are held in a trust that meets the post-obit criteria: the assets are (a) administered through a trust in which the regime itself is not a beneficiary, (b) dedicated to providing benefits to recipients in accord with the benefit terms, and (c) legally protected from the creditors of the government.

Code 630-698 - Custodial Funds – should be used to report all fiduciary activities that are non required to exist reported in pension (and other employee do good) trust funds, investment trust funds or private purpose trust funds. The external portion of the investment pools that are not held in trust that meets criteria listed above should be reported in a separate external investment pool fund column under the custodial funds classification.

Annotation: The custodial funds are required to be used past business-type activities and enterprise funds, except when the resources will unremarkably be held for less than ninety (xc) days.

Dorsum to top

Code 699 - External Investment Pool Fund – The external portion of the investment pools that are not held in trust and meet criteria listed above. Although this is considered a custodial fund, it should be reported in a separate external investment puddle fund column under the custodial funds classification.

Dorsum to top

3.1.one.50 Number of funds

Governments should establish and maintain those funds required by police and sound financial administration. Only the minimum number of funds consistent with legal and operating requirements should exist established. Using numerous funds results in inflexibility, undue complexity and inefficient financial administration.

Local governments should periodically undertake a comprehensive evaluation of their fund structure to ensure that individual funds that became superfluous are eliminated from bookkeeping and reporting.

Elected officials should be educated to the fact that accountability may be achieved effectively and efficiently by judicious employ of department, program and other bachelor account coding or cautious use of managerial (internal) funds.

iii.1.1.60 Reporting capital letter assets

A clear distinction should be fabricated betwixt general capital assets and capital assets of proprietary and fiduciary funds. Capital assets of proprietary funds should exist reported in both the authorities-wide and fund financial statements. Majuscule avails of fiduciary funds should be reported only in the statement of fiduciary net position. All other capital assets of the government are general uppercase assets. They should non be reported as assets in governmental funds but should be reported in the governmental activities column in the government-wide statement of internet position. The Upper-case letter Assets (BARS iii.iii.9, 3.3.10 and 3.3.xi) sections of the Bars manual provide additional information regarding accounting and reporting of capital assets.

Dorsum to top

3.1.1.90 Reporting long-term liabilities

A clear stardom should be fabricated betwixt fund long-term liabilities and general long-term liabilities. Long-term liabilities direct related to and expected to be paid from proprietary funds should be reported in the proprietary fund statement of net position and in the government-broad statement of net position. Long-term liabilities directly related to and expected to be paid from fiduciary funds should be reported in the statement of fiduciary net position. All other unmatured general long-term liabilities of the governmental unit of measurement should not be reported in governmental funds but should be reported in the governmental activities column in the government-broad statement of net position.

Dorsum to meridian

Measurement focus and ground of accounting in the basic fiscal statements

3.1.1.100 Government-wide financial statements

The government-broad argument of net position and statement of activities should exist prepared using the economical resources measurement focus and the accrual basis of accounting. Revenues, expenses, gains, losses, avails, and liabilities resulting from substitution and exchange-like transactions should exist recognized when the substitution takes place. Revenues, expenses, assets, and liabilities resulting from nonexchange transactions should exist recognized in accordance with the GASB Statements 24 and 33.

iii.1.1.110 Fund fiscal statements

In fund financial statements, the modified accrual or accrual basis of bookkeeping, as appropriate, should be used in measuring financial position and operating results.

a. Financial statements for governmental funds should exist presented using the electric current financial resources measurement focus and the modified accrual basis of accounting. Revenues should exist recognized in the accounting period in which they become available and measurable. Expenditures should exist recognized in the accounting menses in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term liabilities, which should exist recognized when due.

b. Proprietary fund statements of net position and revenues, expenses, and changes in fund net position should be presented using the economic resource measurement focus and the accrual basis of accounting.

c. Financial statements of fiduciary funds should be reported using the economical resources measurement focus and the accrual basis of bookkeeping, except for the recognition of sure liabilities of defined benefit pension plans and certain postemployment healthcare plans.

d. Transfers should be reported in the accounting flow in which the interfund receivable and payable arise.

Note: The various fund types may be grouped in the following manner to more conspicuously portray their relationship to an accounting ground:

Menstruation of Current Financial Resource Measurement Focus Funds – use the modified accrual basis:

000	General (Current Expense) Fund
100	Special Revenue Funds
200	Debt Service Funds
300	Capital Projects Funds
700	Permanent Funds

Flow of Economical Resources Measurement Focus Funds – apply full-accrual basis:

400	Enterprise Funds
500	Internal Service Funds
600-609	Investment Trust Funds
610-619	Alimony (and Other Employee Benefit) Trust Funds
620-629	Private-Purpose Trust Funds
630-698	Custodial Funds
699	External Investment Pool Fund

3.1.1.120 Budgeting, budgetary control and budgetary reporting

a. An annual/biennial budget should be adopted past every authorities.

b. The accounting system should provide the basis for appropriate budgetary command.

c. Budgetary comparison schedules should be presented as required supplementary information for the general fund and for each major special revenue fund that has a legally adopted annual/biennial upkeep. The budgetary comparison schedule should present both (a) the original and (b) the final appropriated budgets for the reporting menstruation advertising well as (c) actual inflows, outflows, and balances, stated on the government'south monetary basis.

Back to meridian

iii.one.1.130 Transfer, revenue, expenditures and expense account classifications

a. Transfers should be classified separately from revenues and expenditures or expenses in the bones fiscal statements.

b. Proceeds of general long-term debt issues should exist classified separately from revenues and expenditures in the governmental fund financial statements.

c. Governmental fund revenues should exist classified past fund and source. Expenditures should be classified by fund, function (or plan), organization unit, activity, grapheme, and principal classes of objects.

d. Proprietary fund revenues should be reported past major sources, and expenses should be classified in essentially the same fashion as those of similar business organization organizations, functions, or activities.

eastward. At a minimum, the statement of activities should present:

(ane) Activities accounted for in governmental funds past function, to coincide with the level of detail required in the governmental fund statement of revenues, expenditures, and changes in fund balances.

(2) Activities accounted for in enterprise funds by different identifiable activities.

three.1.1.140 Common terminology and classification

A common terminology and classification should exist used consistently throughout the budget, the accounts, and the fiscal reports of each fund.

Dorsum to peak

3.i.1.150 Annual financial reports

a. General purpose external financial reports should be prepared and published. Governments engaged in governmental and business-type activities should include, at a minimum:

(1) Management'due south discussion and assay (Md&A).

(ii) Basic financial statements. The basic financial statements should include:

(a) Government-wide financial statements.
(b) Fund financial statements.
(c) Notes to the financial statements.

(3) Required supplementary data (RSI) other than Medico&A.

Governments engaged only in business-blazon activities should nowadays simply the fiscal statements required for proprietary funds. They should include:

(i) Management's discussion and analysis (MD&A)

(2) Proprietary fund financial statements consisting of:

(a) Statement of internet position
(b) Statement of revenues, expenses, and changes in fund internet position
(c) Statement of cash flows

(3) Notes to the financial statements

(iv) Required supplementary information (RSI) other than Md&A, if applicable.

b. The statements and reports listed to a higher place follow national standards of fiscal reporting. They should not be confused with legal reporting requirements , which are prescribed by the Country Accountant's Role for all local governments in Washington Land. The legal requirements are consistent with these national standards, but they are not identical. Specific legal reporting requirements are contained in reporting part of this Manual.

c. An ACFR may be prepared and published, covering all activities of the chief government (including its blended component units) and providing an overview of all discretely presented component units of the reporting entity including introductory section, management'south discussion and assay (MD&A), basic financial statements, required supplementary information other than MD&A, combining and individual fund statements, schedules, narrative explanations, and statistical section. The reporting entity is the chief government (including its blended component units) and all discretely presented component units.

d. The financial reporting entity consists of (ane) the primary government, (2) organizations for which the primary regime is financially accountable, and (iii) other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity' bones financial statements to exist misleading or incomplete. The reporting entity's regime-wide financial statements should display information about the reporting government equally a whole distinguishing between the total primary government and its discretely presented component units as well as between the primary regime's governmental and business-type activities. The reporting entity's fund financial statements should present the chief government's (including its blended component units, which are, in substance, office of the primary government) major funds individually and nonmajor funds in the aggregate. Funds and component units that are fiduciary in nature should be reported only in the statements of fiduciary internet position and changes in fiduciary net position.

e. The nucleus of a financial reporting entity usually is a primary regime. However, a governmental organization other than a primary authorities (such as a component unit, joint venture, jointly governed organization, or other stand-alone government) serves as the nucleus for its own reporting entity when information technology issues separate financial statements. For all of these entities, the provisions the GASB Statement 14 should be applied in layersfrom the bottom up. At each layer, the definition and display provisions should exist applied before the layer is included in the financial statements of the next level of the reporting regime.

This section was last edited by SAO on 01/06/22