© The McGraw-Hill Companies, Inc., 2004
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Chapter Eleven
Accounting for
State and Local
Governments
(Part 1)
© The McGraw-Hill Companies, Inc., 2004
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Governmental Accounting
Focuses on financial
reporting for non-profit
governmental agencies.
Many concepts are
similar to financial
accounting, but
terminology and
procedures differ.
Governmental
Accounting Standards
Board (GASB) generates
standards.
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Governmental Accounting User Needs
In Concepts Statement #1,
GASB identified 3 basic
groups of users of
governmental
accounting information:
Citizenry
Legislative and oversight
bodies
Investors and creditors
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Government-wide
Financial Statements
GASB Statement No. 34
Requires the production of two sets of
statements:
Fund-Based Financial
Statements
Reports all revenues
and all costs of
providing services each
year and all resources
available to the
governmental unit.
Shows restrictions on
the use of resources
and measures, in the
short run, revenues and
expenses from certain
activities.
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Reporting Diverse Governmental Activities - Fund Accounting
Governmental units
have many different
types of activities.
No common
motivation links
these activities.
Therefore, each
activity operates
quasi-independent,
self-balancing sets of
accounts called
funds.
Examples include:
Public Safety
Sanitation
Health & Welfare
Education
Parks & Recreation
Judicial System
Water and Sewer
Employee Pensions
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Accountability and Governmental Accounting
Governmental Accounting Statements
attempt to answer 3 questions related
to accountability:
Where did the
financial resources
come from?
Where did the
financial
resources go?
What amount of
financial resources
is presently held?
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Governmental
Funds
Accounting for
activities related
to serving the
public.
Proprietary
Funds
Accounting for
business-type
activities.
Fiduciary
Funds
Accounting for
financial
resources held
for others in a
trustee capacity.
Fund Accounting Classification
All funds fall into one of three
broad classifications.
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Fund Accounting Classification Governmental Funds
General
Fund
Special
Revenue
Fund
Capital
Projects
Fund
Debt
Service
Fund
Permanent
Fund
(Endowments)
Governmental Funds
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Governmental Funds General Fund
Used to account for all
financial resources
except those
accounted for in other
funds.
In 2001, 60% of
Baltimore’s
governmental funds
were accounted for in
the General Fund.
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Governmental Funds Special Revenue Fund
Expenditures are
legally restricted.
Revenues that must be
spent for specific
purposes.
St. Paul, MN, requires
that money received
for the sale of zoo
animals, must be
spent to acquire NEW
animals for the zoo.
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Governmental Funds Capital Projects Fund
Used to account for
costs to acquire or
build major
governmental
facilities.
The asset is not
recorded in this
account, but the funds
to acquire or build it
are accounted for
here.
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Governmental Funds Debt Service Fund
Used to account for
financial resources
collected to pay long-
term liabilities and
interest.
In 2001, Birmingham
reported paying out
$11 million in principal
payments and $15
million in interest from
its debt service funds.
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Governmental Funds Permanent Fund (Endowments)
Used to account for
funds donated to the
government by
external donors.
In 2001, Dallas
reported nearly $8
million in funds
donated to take care of
city parks.
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Fund Accounting Classification Proprietary Funds
Enterprise Fund Internal Service
Fund
Proprietary Funds
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Proprietary Funds Enterprise Fund
Used to account for any government activity that is
financed by user charges.
An activity MUST be accounted for here if any one of
the conditions below are met . . .
Net revenues
provide the
security for the
activity’s debts.
The the law
requires costs to
be recovered
from user fees.
Fees are set high enough to
recover costs..
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Proprietary Funds Internal Service Fund
Used for any unit that provides services to the OTHER governmental departments.
Inter-departmental fees are charged.
Tennessee Tech University charges the departments for the use of University vehicles.
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Fund Accounting Classification Fiduciary Funds
Investment
Trust Funds
Private Purpose
Trust Funds
Pension
Trust Funds
Agency
Funds
Fiduciary Funds(Only used for funds
held for external parties)
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Coverage of Fund Accounting Procedures
Fund-Based Financial
Statements
Government-Wide
Financial Statements
Governmental
Funds
Use the current financial
resources measurement focus
and modified accrual
accounting for the timing of
revenue and expenditure
recognition.
Use the economic resources
measurement focus and
accrual accounting for the
timing of revenue and expense
recognition.
Proprietary
Funds
Fiduciary
Funds
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Coverage of Fund Accounting Procedures
Fund-Based Financial
Statements
Government-Wide
Financial Statements
Governmental
Funds
Use the current financial
resources measurement focus
and modified accrual
accounting for the timing of
revenue and expenditure
recognition.
Use the economic resources
measurement focus and
accrual accounting for the
timing of revenue and expense
recognition.
Proprietary
Funds
Use the economic resources
measurement focus and
accrual accounting for the
timing of revenue and expense
recognition.
same
Fiduciary
Funds
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Coverage of Fund Accounting Procedures
Fund-Based Financial
Statements
Government-Wide
Financial Statements
Governmental
Funds
Use the current financial
resources measurement focus
and modified accrual
accounting for the timing of
revenue and expenditure
recognition.
Use the economic resources
measurement focus and
accrual accounting for the
timing of revenue and expense
recognition.
Proprietary
Funds
Use the economic resources
measurement focus and
accrual accounting for the
timing of revenue and expense
recognition.
Use the economic resources
measurement focus and
accrual accounting for the
timing of revenue and expense
recognition.
Fiduciary
Funds
Use the economic resources
measurement focus and
accrual for the timing of
revenue and expense
recognition.
Not applicable
© The McGraw-Hill Companies, Inc., 2004
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Let’s look at
an overview of
the
Government-
Wide
Statements.
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Government-Wide Financial Statements
Two separate statements are
required:
Statement of Net Assets
& Statement of
Activities
The economic
resources
measurement focus
requires reporting of
ALL assets and
liabilities.
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Statement of Net Assets
Governmental
Activities
Business-Type
Activities Total
ASSETS:
Cash 100$ 130$ 230$
Other Current Assets 1,580 430 2,010$
Capital Assets 2,950 2,750 5,700$
Total Assets 4,630$ 3,310$ 7,940$
LIABILITIES:
A/P 750$ 230$ 980$
Noncurrent Liabilities
- Due within one year 400 180 580$
- Due in more than one year 1,800 700 2,500$
Total Liabilities 2,950$ 1,110$ 4,060$
NET ASSETS:
Invested in Capital Assets, Net of Debt 1,410$ 2,110$ 3,520$
Restricted for:
Capital Projects 50 - 50$
Debt Service 140 60 200$
Unrestricted 80 30 110$
Total Net Assets 1,680$ 2,200$ 3,880$
Note that we
keep the
Governmental
Activities
separate from
the Business-
Type Activities.
Exh.
11-1
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Statement of Net Assets
Governmental
Activities
Business-Type
Activities Total
ASSETS:
Cash 100$ 130$ 230$
Other Current Assets 1,580 430 2,010$
Capital Assets 2,950 2,750 5,700$
Total Assets 4,630$ 3,310$ 7,940$
LIABILITIES:
A/P 750$ 230$ 980$
Noncurrent Liabilities
- Due within one year 400 180 580$
- Due in more than one year 1,800 700 2,500$
Total Liabilities 2,950$ 1,110$ 4,060$
NET ASSETS:
Invested in Capital Assets, Net of Debt 1,410$ 2,110$ 3,520$
Restricted for:
Capital Projects 50 - 50$
Debt Service 140 60 200$
Unrestricted 80 30 110$
Total Net Assets 1,680$ 2,200$ 3,880$
Also note that
this statement
does not give
information
about
Fiduciary
Funds
This is consistent with the
economic resources
management focus which only
includes assets and liabilities
that are available to use for
governmental purposes.
Exh.
11-1
© The McGraw-Hill Companies, Inc., 2004
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Statement of Activities
Function Expenses
Program
Revenues
Governmental
Activities
Business-Type
Activities Total
Governmental Activities:
- General Government 3,200$ 1,400$ (1,800)$ (1,800)$
- Public Safety 9,700 880 (8,820) (8,820)
- Public Works 2,600 600 (2,000) (2,000)
- Education 8,400 300 (8,100) (8,100)
Total Gov't Activities 23,900$ 3,180$ (20,720)$ -$ (20,720)$
Business-Type Activities:
- Water 3,600 4,030 430 430
- Sewer 4,920 5,610 690 690
- Airport 2,300 3,120 820 820
Total Business-Type
Activities $ 10,820 $ 12,760 $ - $ 1,940 $ 1,940
Total Government 34,720$ 15,940$ (20,720)$ 1,940$ (18,780)$
Net (Expense) Revenue
The net for a given
function is determined
horizontally, while the
totals for expenses
and revenues are
determined vertically.
Exh.
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© The McGraw-Hill Companies, Inc., 2004
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Statement of Activities
Continued
Function Expenses
Program
Revenues
Governmental
Activities
Business-Type
Activities Total
Total Government 34,720$ 15,940$ (20,720)$ 1,940$ (18,780)$
General Revenues:
- Property Taxes 20,400$ 20,400$
- Investment Earnings 420 70 490
- Transfers 600 (600) -
Total Gen'l Revenues 21,420$ (530)$ 20,890$
Change in Net Assets 700$ 1,410$ 2,110$
Beginning Net Assets 980 790 1,770
Ending Net Assets 1,680$ 2,200$ 3,880$
Net (Expense) Revenue
The general
revenues are
shown
separately at
the bottom of
the
statement.
Exh.
11-2
© The McGraw-Hill Companies, Inc., 2004
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Fund-Based Financial Statements
Two separate statements are required:
Balance Sheet
& Statement of Revenues,
Expenditures, and Changes in Fund
Balance
Fund-Based
statements
include
information on
fiduciary funds.
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Fund-Based Financial Statements
These
statements will
differ from the
Government-
Wide financial
statements for
three reasons.
3
The proprietary funds
are reported in a
separate statement.
The current financial
resources
measurement basis is
used.
The modified accrual
accounting approach
is used.
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Fund Accounting Balance Sheet Example
General Fund
Library
Program
Other Gov't
Funds
Total Gov't
Funds
ASSETS:
Cash 40$ 10$ 50$ 100$
Investments 580 120 200 900
Receivables 120 200 210 530
Supplies & Materials 10 10 10 30
Total Assets 750$ 340$ 470$ 1,560$
LIABILITIES:
A/P 230$ 170$ 110$ 510$
Notes Payable 300 - 100 400
Total Liabilities 530$ 170$ 210$ 910$
FUND BALANCES
Reserved for:
Supplies 10$ 10$ 10$ 30$
Encumbrances 120 30 40 190
Debt Service - - 110 110
Unreserved: -
General Fund 90 - - 90
Special Revenue Fund - 130 20 150
Capital Projects Fund - - 80 80
Total Fund Balances 220$ 170$ 260$ 650$
Total Liabilities and Fund Balances 750$ 340$ 470$ 1,560$
Exh.
11-3
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Fund Accounting Balance Sheet Example
General Fund
Library
Program
Other Gov't
Funds
Total Gov't
Funds
ASSETS:
Cash 40$ 10$ 50$ 100$
Investments 580 120 200 900
Receivables 120 200 210 530
Supplies & Materials 10 10 10 30
Total Assets 750$ 340$ 470$ 1,560$
LIABILITIES:
A/P 230$ 170$ 110$ 510$
Notes Payable 300 - 100 400
Total Liabilities 530$ 170$ 210$ 910$
FUND BALANCES
Reserved for:
Supplies 10$ 10$ 10$ 30$
Encumbrances 120 30 40 190
Debt Service - - 110 110
Unreserved: -
General Fund 90 - - 90
Special Revenue Fund - 130 20 150
Capital Projects Fund - - 80 80
Total Fund Balances 220$ 170$ 260$ 650$
Total Liabilities and Fund Balances 750$ 340$ 470$ 1,560$
Internal Service Funds
are included in separate
statements for
Proprietary Funds.
The “current financial
resources”
measurement is used.
Modified accrual
accounting is used.
Exh.
11-3
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Fund Accounting Balance Sheet Example
General Fund
Library
Program
Other Gov't
Funds
Total Gov't
Funds
ASSETS:
Cash 40$ 10$ 50$ 100$
Investments 580 120 200 900
Receivables 120 200 210 530
Supplies & Materials 10 10 10 30
Total Assets 750$ 340$ 470$ 1,560$
LIABILITIES:
A/P 230$ 170$ 110$ 510$
Notes Payable 300 - 100 400
Total Liabilities 530$ 170$ 210$ 910$
FUND BALANCES
Reserved for:
Supplies 10$ 10$ 10$ 30$
Encumbrances 120 30 40 190
Debt Service - - 110 110
Unreserved: -
General Fund 90 - - 90
Special Revenue Fund - 130 20 150
Capital Projects Fund - - 80 80
Total Fund Balances 220$ 170$ 260$ 650$
Total Liabilities and Fund Balances 750$ 340$ 470$ 1,560$
Note that the
statement has a
separate column
for the General
Fund and for each
fund identified as
a “major” fund.
Two criteria determine whether
a fund is classified as
“major”:
1. Total assets, liabilities,
revenues, or expenditures
are at least 10% of the
corresponding total for all
funds of the same category.
2. Total assets, liabilities,
revenues, or expenditures
are at least 5% of the
corresponding for all other
funds combined.
Exh.
11-3
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Statement of Revenues, Expenditures, & Changes in Fund Balances - Example
General Fund
Library
Program
Other Gov't
Funds
Total Gov't
Funds
REVENUES
- Property Taxes 17,200$ 900$ 2,300$ 20,400$
- Investment Earnings 100 200 180 480
- Program Revenues 500 100 2,500 3,100
Total Revenues 17,800$ 1,200$ 4,980$ 23,980$
EXPENDITURES:
Current:
General Government 3,400$ -$ 100$ 3,500$
Public Safety 5,100 - 400 5,500
Education 6,700 800 - 7,500
Debt Service: -
Principal - - 1,000 1,000
Interest - - 600 600
Capital Outlay 1,100 300 3,300 4,700
Total Expenditures 16,300$ 1,100$ 5,400$ 22,800$
Continue
Exh.
11-4
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Statement of Revenues, Expenditures, & Changes in Fund Balances - Example
Continued General Fund
Library
Program
Other Gov't
Funds
Total Gov't
Funds
OTHER FINANCING SOURCES:
Bond Proceeds -$ -$ 1,000$ 1,000$
Transfers In - 20 580 600
Transfers Out (1,300) - (1,000) (2,300)
Total Other Financing Sources and
Uses $ (1,300) $ 20 $ 580 $ (700)
Change in Fund Balance 200$ 120$ 160$ 480$
Fund Balances - Beginning 20 50 100 170
Fund Balances - Ending 220$ 170$ 260$ 650$
Exh.
11-4
© The McGraw-Hill Companies, Inc., 2004
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Let’s look at the
accounting
procedures for the
Governmental
Accounts for both
the Fund-Based and
Government-Wide
Statements.
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Recording Budgetary Entries
Purposes of the budget, per the GASB:
1. Expresses public policy.
2. Serves as an expression of financial intent.
3. Provides control by establishing spending limits.
4. Offers a means of evaluating performance.
Budget
information
for the
General Fund
and for each
of the major
Special Funds
must be
presented.
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Date Description Debit Credit
Prepare the journal entry to
record the Special Revenue
Fund budget.
For example, assume a town enacts a motel excise tax to
promote tourism and conventions. For 2004, the tax is
expected to generate $490,000 in Special Revenues. Of
the total, $200,000 is designated for salaries, $30,000 for
utilities, $80,000 for advertising, and $90,000 for supplies.
Recording Budgetary Entries
Date Description Debit Credit
Estimated Revenues - Tax Levy 490,000
Appropriations - Salaries 200,000
Appropriations - Utilities 30,000
Appropriations - Advertising 80,000
Appropriations - Supplies 90,000
Fund Balance 90,000
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Budget Encumbrance Actual
Encumbrances
In a governmental unit, purchase commitments and contracts are recorded, even though they may not yet represent liabilities.
A recorded commitment or contract is called an “encumbrance”.
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Encumbrances
For Fund-Based Financial Statements:
An entry is required to record the encumbrance.
An entry is required when the bill is received.
For Government-Wide Financial Statements:
No entry is required to record the encumbrance.
An entry is required when the bill is received.
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General Fund - Drye TownshipDate Description Debit Credit
General Fund - Drye TownshipDate Description Debit Credit
15-May Encumbrances Control 16,000
Fund Balance - Reserve
For Encumbrances 16,000
Record the order in Drye Township’s books.
Encumbrances – Example Fund-Based Statements
Drye Township has budgeted office supplies
for $180,000 for 2004. On May 15, Drye
Township places an order for $16,000 office
supplies with Ye Olde Office Supplies.
Remember, this entry is only recorded for Fund-Based
Financial Statements.
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General Fund - Drye Township
Date Description Debit Credit
Record the receipt of the supplies in
Drye Township’s books for the Fund-
Based Statements.
General Fund - Drye Township
Date Description Debit Credit
17-May Supplies Inventory 15,680
Vouchers Payable 15,680
Fund Balance - Reserve
For Encumbrances 16,000
Encumbrance Control 16,000
On May 17, the supplies are received with a bill for
$15,680 (some of the items went on sale on May 16,
and the city was given the sale price).
Encumbrances – Example Fund-Based Statements
This is the account title typically
used in governmental accounting in
place of Accounts Payable.
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General Fund - Drye Township
Date Description Debit Credit
Record the receipt of the supplies in
Drye Township’s books for the
Government-Wide Statements.
General Fund - Drye Township
Date Description Debit Credit
17-May Supplies Inventory 15,680
Vouchers Payable 15,680
Note that with the Government-Wide
Financial Statements, no entry is
necessary for the encumbrances used
with the Fund-Based Statements.
Encumbrances – Example Government-Wide Statements
On May 17, the supplies are received with a bill for
$15,680 (some of the items went on sale on May 16,
and the city was given the sale price).
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Fund-Based Statements Fixed Assets
While the expenditure for a
fixed asset is usually recorded
in the General Fund . . .
. . . the fixed asset itself is
recorded in the General Fixed
Assets Account Group.
Depreciation is not recorded in
the governmental fund, since
net income is not a concept
relevant to governmental
units.
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Government-Wide Statements Fixed Assets
Historically, recording of fixed assets
in the General Fixed Assets Account
Group was optional.
GASB Statement No. 34 requires a
record of ALL capital assets in the
Statement of Net Assets in the
government-wide statements.
Depreciation expense is recorded.
Governments have 4 years to
capitalize previously acquired
assets.
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Classifications
Derived Tax Revenues
Imposed Nonexchange
Revenues
Government-mandated
Nonexchange
Transactions
Voluntary Nonexchange
Transactions
Recognition of Revenues Nonexchange Transactions
For Government-
Wide Statements,
record the revenues
at the “time of
eligibility”.
For Fund-Based
Statements, record
the revenues when
they become
“available for
recognition”.
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Date Description Debit Credit
Prepare the journal entry to record the
bonds for government-wide statements.
Date Description Debit Credit
Cash 50,000
Bonds Payable 50,000
Issuance of Bonds
Government-Wide
Financial Statements
Increase the Cash and
the Debt.
Fund-Based Financial
Statements
Increase Cash and Other
Financing Sources.
Drye Township issues $50,000 in bonds for new
sidewalks.
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Date Description Debit Credit
Prepare the journal entry to record the
bonds for fund-based statements.
Date Description Debit Credit
Cash 50,000
Other Financing
Sources 50,000
Issuance of Bonds
Government-Wide
Financial Statements
Increase the Cash and
the Debt.
Fund-Based Financial
Statements
Increase Cash and Other
Financing Sources.
Drye Township issues $50,000 in bonds for new
sidewalks.
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Date Description Debit Credit
Prepare the journal entry to record the loan
payment for government-wide statements.
Date Description Debit Credit
Note Payable 9,000
Interest Expense 1,000
Cash 10,000
Payment of Long-Term Liabilities
Government-Wide
Financial Statements
Record principle and
interest as with GAAP.
Fund-Based Financial
Statements
Record expenditures in
the Debt Service Fund.
Drye Township makes a $10,000 payment on a loan that
includes $1,000 in interest.
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Date Description Debit Credit
Prepare the journal entry to record the loan
payment for fund-based statements.
Date Description Debit Credit
Expenditure - N/P 9,000
Expenditure - Interest 1,000
Cash 10,000
Payment of Long-Term Liabilities
Government-Wide
Financial Statements
Record principle and
interest as with GAAP.
Fund-Based Financial
Statements
Record expenditures in
the Debt Service Fund.
Drye Township makes a $10,000 payment on a loan that
includes $1,000 in interest.