CHAPTER I

PRINCIPLES OF ACCOUNTING

Several characteristics associated with government have influenced the development ofgovernmental accounting principles and practices:

• State law usually dictates the local government accounting policies and systems, may specifythe type and frequency of financial statements, and usually defines the type and frequency ofaudits.

• Governments have no powers in the proprietary sense. Accordingly, the measurement ofearnings and the reporting of equity position is not a relevant accounting concept forgovernments.

• Governments receive substantial financial inflows for both operating and capital purposeswhich are frequently subject to restrictions that prohibit or limit the use of the resources forother than the intended purpose.

• A government’s authority to raise and expend money is based on the adoption of a budget that,by law, must balance (the estimated revenues plus prior year’s surpluses are sufficient to coverthe projected expenditures).

• The power to raise revenues and issue debt are restricted and generally defined by law. Accounting requirements for school districts in the state of Washington are in significantcompliance with generally accepted accounting principles (GAAP). Where legal requirements arein conflict with GAAP, legal requirements prevail. Sufficient additional records should exist tosatisfy GAAP reporting requirements. Government accounting principles are not a complete and separate body of accounting principles,but are part of the whole body of GAAP. The hierarchy of specific sources of GAAP that areapplicable to governmental entities are:

• Statements and interpretations issued by the Governmental Accounting Standards Board(GASB), plus statements and interpretations issued by the American Institute of CertifiedPublic Accountants (AICPA) or the Financial Accounting Standards Board (FASB) if theyhave been made applicable to state or local government by a GASB statement or interpretation.

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Technical bulletins issued by the GASB and AICPA pronouncements made specificallyapplicable to state and local government and cleared by the GASB.

• Consensus positions of the GASB Emerging Issues Task Force and practice bulletins issued bythe AICPA if they have been made specifically applicable to state and local government andcleared by the GASB.

• Questions and answers published by the GASB staff and widely recognized and prevalentindustry practices.

• GASB concept statements, pronouncements by FASB or the AICPA when not made applicableto state or local government, FASB concept statements, AICPA issues papers, InternationalAccounting Standards Committee statements, pronouncements of other professionalassociations or regulatory agencies, AICPA technical practice aids, accounting textbooks andhandbooks.

Following is a listing of the 12 basic accounting principles set forth in the 1994 edition ofGovernmental Accounting, Auditing and Financial Reporting from the Government FinanceOfficers Association (GFOA). The principles are based on material published by the GovernmentalStandards Board (BASB) in the Codification of Governmental Accounting and FinancialReporting Standards as of June 30, 1997. These are known as generally accepted accountingprinciples (GAAP) and are presented in bold print. Further discussion of these principles and ofhow they apply to school districts in the state of Washington is included in standard print.

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Principle 1 -- Accounting and Reporting Capabilities

A governmental accounting system must make it possible both: (a) to present fairlyand with full disclosure the financial position and results of financial operations of thefunds and account groups of the governmental unit in conformity with generallyaccepted accounting principles, and (b) to determine and demonstrate compliancewith finance-related legal and contractual provisions. (GASB Cod. Sec. 1100.101. Seealso Sec. 1200, "Generally Accepted Accounting Principles and Legal Compliance.")

Generally accepted accounting principles are uniform minimum standards of andguidelines to financial accounting and reporting. Adherence to GAAP assures thatfinancial reports of all state and local governments--regardless of jurisdictional legalprovisions and customs--contain the same types of financial statements and disclosures, forthe same categories and types of funds and account groups, based on the samemeasurement and classification criteria. (GASB Cod. Sec. 1200.101)

Local, state, and federal governments can impact the reporting requirements of schooldistricts. Local ordinances providing specific requirements tend to be uncommon forschool districts; the policies adopted by the school board generally act as a surrogate forsuch ordinances.

State laws and regulations govern the fiscal affairs of school districts. School districtsmust be in full compliance with all legal requirements. Fair presentation dictates thattransactions be reported on a gross basis. Offsetting entries to accounts are not permitted,except for corrections of previous transactions. In Washington, school districts arerequired to file annual financial reports with the Office of the Superintendent of PublicInstruction (OSPI) and are required to use a particular chart of accounts. Also, schooldistricts are often required to report specific data (for example, on such things as salariesand equipment purchased) to demonstrate compliance with funding provisions. Inaddition, the federal government provides various grants to school districts for specialprograms which may have spending limitations and require special documentation.

School districts must ensure that their accounting systems are capable of providing theinformation necessary to satisfy the requirements of the various governing agencies andfunding sources. Consequently, school districts might prepare two sets of financialstatements--one that is in conformity with legal requirements and one that is in conformitywith GAAP. Financial statements prepared in conformity with legal requirements areconsidered to be "special reports" or "supplemental schedules" and are not basic generalpurpose financial statements.

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Financial statements of school districts in the state of Washington fall into the followingcategories:

1. GAAP basis financial statements.

a. Unqualified GAAP - Districts who issue GAAP financial statements whichinclude the General Fixed Asset Account Group.

b. Qualified GAAP - Districts who issue GAAP financial statements except thatthe General Fixed Asset Account Group is not presented (F-196 format).

2. Other Comprehensive Basis of Accounting (OCBOA) financial statements.

a. Districts who issue cash basis financial statements.

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Principle 2 -- Fund Accounting Systems

Governmental accounting systems should be organized and operated on a fund basis.A fund is defined as a fiscal and accounting entity with a self-balancing set of accountsrecording cash and other financial resources, together with all related liabilities andresidual equities or balances, and changes therein, which are segregated for thepurpose of carrying on specific activities or attaining certain objectives in accordancewith special regulations, restrictions, or limitations. (GASB Cod. Sec. 1100.102. Seealso Sec. 1300, "Fund Accounting.")

Because all governmental units receive financial resources that may be used only inaccordance with restrictions established by law or by agreements with donors or grantors,their accounting systems must enable officials to demonstrate compliance with suchrestrictions. This need led to the development of the fund accounting concept as a controldevice.

Each fund must be accounted for in a separate self-balancing set of accounts for its assets,liabilities, equity, revenues, expenditures or expenses (as appropriate), and transfers. Thisrequirement refers to identification of accounts in the accounting records, and does notnecessarily extend to physical segregation of assets or liabilities. For example, it is notnecessary to have a separate bank account for each fund unless required by law, bondindenture, or other reason. Likewise, governmental units using computerization andaccount coding techniques may treat these separate accounting entities as independentsubcomponents of a unified government accounting system. (GASB Cod. Sec. 1300.109)

When it is determined they are necessary, funds are established upon board resolutionpursuant to legal authorization as further explained in this chapter and are terminated byboard resolution when the purpose for which they were established no longer exists.

For example, the Capital Projects Fund (CPF) should not be established unless a capitalproject is planned. Once there is a firm commitment on the part of the board, the fund canbe opened and revenue collected after the county treasurer is notified to establish theproper fund. Collecting revenue without the resolution would be illegal. Likewise, when allCPF projects are completed, the fund should be terminated and any remaining moneystransferred to another fund in accordance with legal provisions. When a fund is terminated,care should be taken to ensure that all claims on the fund have been cleared.

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Principle 3 -- Types of Funds

Three categories of funds are used in governmental accounting which are thensubdivided into seven fund types for accounting and financial reporting purposes.(GASB Cod. Sec. 1100.103. See also Sec. 1300, "Fund Accounting.")

1. Governmental Funds

A. The General Fund -- to account for all financial resources exceptthose required to be accounted for in another fund. (GASB Cod. Sec.1100.103a(1). See also Sec. 1300, "Fund Accounting.")

The General Fund is financed from local, county, state, and federalsources. These revenues are generally used for financing the currentordinary normal and recurring operations of the school district such asprograms of instruction for the students, food services, maintenance, dataprocessing, printing, and pupil transportation. All school districts musthave a General Fund.

The General Fund cannot be used for those purposes for which funds havebeen established for specific activities. However, in the state ofWashington the General Fund may pay for associated student bodyexpenditures even though there is an ASB Fund. (See also Chapter IX-ASB).

B. Special Revenue Funds -- to account for the proceeds of specificrevenue sources (other than expendable trusts or for major capitalprojects) that are legally restricted to expenditure for specifiedpurposes. (GASB Cod. Sec. 1100.103a(2). See also Sec. 1300, "FundAccounting.")

In many states, special revenue funds are used to account for restricted grants. However, in thestate of Washington, restricted grants are generally accounted for in the General Fund. InWashington school districts the only fund designated as a special revenue fund is the AssociatedStudent Body Fund (ASB). This fund is financed by the establishment and collection of fees fromstudents and nonstudents as a condition of their attendance at any optional noncreditextracurricular event of the district. As a special revenue fund (as opposed to an agency fund) theASB Fund is under the control, supervision, and approval of the board of directors, and the schooldistrict legally owns the resources accounted for in the ASB Fund.

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C. Capital Projects Funds -- to account for financial resources to beused for the acquisition or construction of major capital facilities(other than those financed by proprietary funds and trust funds).(GASB Cod. Sec. 1100.103a(3). See also Sec. 1300, "FundAccounting.")

Within the state of Washington, two funds are considered to be capitalprojects funds: the Capital Projects Fund and the Transportation VehicleFund.

(1) The Capital Projects Fund can be used for the acquisition of landor existing facilities, construction of buildings, purchase ofequipment, conducting energy audits, and making capitalimprovements which are cost effective as determined by energyaudits. In addition, under certain conditions elaborated inChapter IX-CPF, improvements to buildings and/or grounds,remodeling of buildings, and the replacement of roofs, carpets,and service systems are included in the Capital Projects Fund.

The Capital Projects Fund is generally financed from the proceedsfrom the sale of bonds, state matching revenues, and speciallevies. In all instances where moneys are raised by voter-approved bond issues, the proposition must include a descriptionof the projects for which the money is being raised.

The Capital Projects Fund is also used to record the proceedsfrom the sale of and the net proceeds from the lease of surplusreal property and to record investment earnings of the CapitalProjects Fund.

(2) The Transportation Vehicle Fund is provided to account for thestate reimbursement to school districts for approved pupiltransportation equipment and for the purchase and major repair ofsuch equipment.

D. Debt Service Fund -- to account for the accumulation of resourcesfor, and the payment of, general long-term debt principal and interest.(GASB Cod. Sec. 1100.103a(4). See also Sec. 1300, "FundAccounting.")

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In the state of Washington one debt service fund is used This fund hasbeen established to account for the payment of principal, interest, and otherexpenditures related to the redemption of outstanding bonds. Payment ofinterest and principal are made by the county treasurer or fiscal agent.

Provision must be made annually for a levy sufficient to meet the paymentsof principal, interest, and related expenditures for voted debt. The stateattorney general has ruled that it is improper to levy excessive taxes toretire bonds in advance of the redemption schedule.

Non-voted bonds are also serviced in the Debt Service Fund rather than inthe fund that received the debt proceeds. In order to provide the resourcesto retire the debt an Operating Transfer must be used by either the GeneralFund, the Capital Projects Fund, or the Transportation Vehicle Fund totransfer resources to the Debt Service Fund.

The Debt Service Fund is also used in advance bond refundings to account for the proceeds from the sale of new bonds and the use of these

proceeds to establish an escrow account with a bank. There are two methods to advance refund bonds - the regular method and the crossover method.

In the regular method of advance bond refunding the proceeds from the sale of new general obligation bonds are recorded as an “other financing source” and an “other financing use” in the Debt Service Fund. The cash

from the proceeds of the sale of the new bonds is deposited in an escrow account with a bank and invested. The investments are selected so that the cash realized from maturing investments, together with interest earned, will be available to pay the principal and interest of the refunded (old) bonds as they mature and become callable. At the time the escrow account is established, an in-substance defeasance of the old bonds occurs. This means the old bonds are no longer reported in the school district's General Long-Term Debt Account Group (GLTDAG) and the cash deposited in the escrow account is not reported as an asset of the school district. The debt service on the new bonds is recorded in the Debt Service Fund and the principal amount of the new debt is recorded in the GLTDAG. Taxes are no longer levied for the debt service requirements of the old bonds. Instead, taxes are levied for the debt service requirements of the new bonds together with any bonds that have not been refunded.

In the crossover method of advance bond refunding there is a delay in the defeasance date of the old bonds. The proceeds from the sale of the new bonds are held in escrow with a bank and invested until the crossover

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date. The investments provide interest earnings which are used to pay interest on the new bonds. After the crossover date, the proceeds from the

sale of the new bonds are used to defease the old bonds. Until the crossover date, both the new bonds and the old bonds are reported in the GLTDAG, and the debt service on the old bonds is accounted for in the Debt Service Fund. After the crossover date, only the new bonds are reported in the GLTDAG, and the debt service on the new bonds is accounted for in the Debt Service Fund. Until the crossover date, taxes are levied for the debt service on the old bonds. After the crossover date, taxes are levied for the debt service requirements of the new bonds together with any bonds that have not been refunded.

Effective with FY 1999–2000, the Bond Refunding Escrow Accounts 5(Regular Method) and 6 (Crossover Method) will not be reported throughthe County Treasurer’s Report (F-197). School districts still receiving bankescrow reports through the county treasurer may arrange to have thosereports sent directly to the district. It is the school district’s responsibilityto monitor the accuracy of the bank’s escrow reports and compliancewith the refunding escrow instructions.

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2. Proprietary Funds

A. Enterprise Funds–to account for operations (a) that are financed and operated in a manner similar to private business enterprises–where the intent of the governing body is that the costs (expenses,including depreciation) of providing goods or services to the generalpublic on a continuing basis be financed or recovered primarilythrough user charges; or (b) where the governing body has decidedthat periodic determination of revenues earned, expenses incurred,and/or net income is appropriate for capital maintenance, publicpolicy, management control, accountability, or other purposes. (GASBCod. Sec. 1100.103b(1).. See also Sec. 1300, “Fund Accounting.”")

Currently, the state of Washington does not allow use of enterprise fundsby school districts. Activities that would typically be accounted for inenterprise funds (such as food services) are instead accounted for in theGeneral Fund.

B. Internal Service Funds–to account for the financing of goods orservices provided by one department or agency to other departmentsor agencies of the governmental unit, or to other governmental units,on a cost-reimbursement basis. (GASB Cod. Sec. 1100.103b(2). Seealso Sec. 1300, “Fund Accounting.”)

Currently, the state of Washington does not allow use of internal servicefunds by school districts. Activities that would typically be accounted forin internal service funds (such as printing, word processing, and motorpool) are accounted for in the General Fund instead.

3. Fiduciary Funds

A. Trust and Agency Funds–to account for assets held by agovernmental unit in a trustee capacity or as an agent for individuals,private organizations, other governmental units, and/or other funds.These include (a) expendable trust funds, (b) nonexpendable trustfunds, (c) pension trust funds, and (d) agency funds. (GASB Cod. Sec.1100.103c(1)). See also Sec. 1300, “Fund Accounting.”)

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(1) The purpose of the Expendable Trust Fund is to account formoneys or other assets donated to school districts for scholarship,student aid, charitable, and other similar purposes. Anexpendable trust fund is established when both the principal andthe earnings of the trust can be spent. The authority to use theresources comes from the donor who specifies a use or range ofallowed uses for assets to be held in trust. Accordingly, theschool board has the authority to determine the use of the assetsonly within the confines of the original trust agreement.

(2) The purpose of the Nonexpendable Trust Fund is to account formoneys or other assets donated to school districts for scholarship,student aid, charitable, and other similar purposes. Anonexpendable trust fund is established when only the earnings ofthe trust may be spent and the principal (corpus) must bemaintained intact. The authority to use the resources comes fromthe donor who specifies a use or range of allowed uses for assetsto be held in trust. Accordingly, the school board has theauthority to determine the use of the assets only within theconfines of the original trust agreement.

(3) The Pension Trust Fund is not reported by Washington schooldistricts. Since Washington school districts contribute to a multi-employer, cost-sharing statewide retirement system managed bythe State of Washington Department of Retirement Systems(DRS), they do not operate individual pension trust funds. TheDRS is a component of the State of Washington and, as such, itsfinancial activities are included in the financial statements of theState of Washington.

(4) The purpose of the Agency Fund is to account for activities inwhich the district is acting in an agent capacity for some otherorganization, government, individual, or fund. Agency funds arepurely custodial in nature (i.e., assets equal liabilities) and thus donot focus on the measurement of operations (i.e., there are norevenues, expenditures, or fund balance).

Washington school districts who issue GAAP statements mustuse agency funds to account for their deferred compensationplans. All other school districts may use the General Fund.

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Principle 4 -- Number of Funds

Governmental units should establish and maintain those funds required by law andsound financial administration. Only the minimum number of funds consistent withlegal and operating requirements should be established, however, becauseunnecessary funds result in inflexibility, undue complexity, and inefficient financialadministration. (GASB Cod. Sec. 1100.104. See also Section 1300, "FundAccounting.")

The seven fund types defined in Principle 3 (General, Special Revenue, Capital Projects,Debt Service, Enterprise, Internal Service, and Fiduciary Funds) are to be used if neededby a governmental unit to demonstrate compliance with legal requirements or to facilitatesound financial administration. A given fund type should only be used when required bylaw or to facilitate sound financial administration. In the simplest possible situation, agovernmental unit could be in conformity with GAAP if it used a single fund, the GeneralFund, to account for all events and transactions.

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Principle 5 -- Accounting for Fixed Assets and Long-Term Liabilities

A clear distinction should be made between (a) fund fixed assets and general fixedassets and (b) fund long-term liabilities and general long-term debt. (GASB Cod. Sec.1100.105. See also Sec. 1400, "Fixed Assets", and Sec 1500, "Long-Term Liabilities.")

1. Fixed assets related to specific proprietary funds or trust funds should beaccounted for through those funds. All other fixed assets of a governmentalunit should be accounted for through the General Fixed Assets AccountGroup. (GASB Cod. Sec. 1100.105a. See also Sec. 1400, "Fixed Assets.")

Land, buildings, machinery, vehicles, furniture, and other equipment which theschool district intends to hold or continue to use over a long period of time."Fixed" denotes probability or intent to continue to use or possess and does notindicate immobility of an asset. Fixed assets may be reported in the F-196financial statements for school districts and accounted for and reported in theGeneral Fixed Assets Account Group (GFAAG).

Use of the General Fixed Asset Account Group is required for school districtsissuing GAAP basis financial statements and is optional for all other schooldistricts

2. Long-term liabilities of proprietary funds and trust funds should be accountedfor through those funds. All other unmatured general long-term liabilities ofthe governmental unit, including special assessment debt for which thegovernment is obligated in some manner, should be accounted for through theGeneral Long-Term Debt Account Group. (GASB Cod. Sec. 1100.105b. Seealso Sec.1500, "Long-Term Liabilities.")

General long-term debt includes the unmatured principal of bonds, warrants,notes, and other forms of noncurrent or long-term indebtedness that have amaturity of at least one year from the financial statement date and are otherwisenot defined as "current debt." While long-term debt is a legal obligation of theabove-listed funds, the long-term unmatured principal is recorded in an accountgroup and not a fund because it does not require current appropriation orexpenditure of a school district's financial resources. This account group does notinclude any interest payable or refunded debt.

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Principle 6 -- Valuation of Fixed Assets

Fixed assets should be accounted for at cost or, if the cost is not practicablydeterminable, at estimated cost. Donated fixed assets should be recorded at theirestimated fair value at the time received. (GASB Cod. Sec. 1100.106. See also Sec.1400, "Fixed Assets.")

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Principle 7 -- Depreciation of Fixed Assets

1. Depreciation of general fixed assets should not be recorded in the accounts ofgovernmental funds. Depreciation of general fixed assets may be recorded incost accounting systems or calculated for cost finding analyses, andaccumulated depreciation may be recorded in the General Fixed AssetsAccount Group. (GASB Cod. Sec. 1100.107a. See also Sec. 1400, "FixedAssets.")

Currently, in the state of Washington depreciation is not recorded by schooldistricts.

2. Depreciation of fixed assets accounted for in a proprietary fund should berecorded in the accounts of that fund. Depreciation is also recognized in thosetrust funds where expenses, net income, and/or capital maintenance aremeasured. (GASB Cod. Sec. 1100.107b. See also Sec. 1400, "Fixed Assets.")

A. Proprietary Funds -- Since the state of Washington does not currentlyallow use of proprietary funds by school districts, this provision does notapply.

B. Trust Funds -- When the district has assets in trust funds where expenses,net income, and/or capital maintenance are measured depreciation isrecorded.

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Principle 8 -- Accrual Basis in Governmental Accounting

The modified accrual or accrual basis of accounting, as appropriate, should be used inmeasuring financial position and operating results. (GASB Cod. Sec. 1100.108. Seealso Sec. 1600, "Basis of Accounting.")

Exception for Cash Basis

In general, school districts are in compliance with this principle. The exception in the stateof Washington is that those school districts with under one thousand full-time equivalentstudents for the preceding fiscal year may make a uniform election for all funds to be on acash basis of accounting. (RCW 28A.505.020 and WAC 392-123-049) Under this basisof accounting revenue means the receipt of cash or noncash donations and expendituremeans the disbursement of cash or noncash donations, except that deferred compensationmust be accrued.

Modified Accrual and Accrual Basis

Accrual accounting means that:

a. Revenues should be recorded in the period in which the goods and/orservices are provided, although payment is received in a prior orsubsequent period.

b. Expenses should be recorded in the period in which the benefit is received,although payment is made in a prior or subsequent period.

In business enterprise accounting, the accrual basis is employed to obtain a matching ofcosts against the revenue flowing from those costs, thereby producing a more usefulincome statement. In governmental entities, however, even for those funds that do attemptto determine net income using the accrual basis (Nonexpendable Trust, Internal Service,and Enterprise Funds), only Nonexpendable Trust Funds have a major interest in thelargest possible amount of gain. Internal Service and Enterprise Funds are operatedprimarily for service. These funds make use of revenue and expense accounts to promoteefficiency of operation and to guard against impairment of ability to render the servicesdesired.

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Funds of other types (General, Special Revenue, Capital Projects, Debt Service, andExpendable Trust Funds) are not concerned with income determination. They are, instead,concerned with matching expenditures of legal appropriations or legal authorizations withrevenues available to finance those expenditures. Therefore, standards recommend that the"governmental" funds and Expendable Trust Funds use the "modified accrual" basis ofaccounting. The modified accrual basis recognizes that it is not practicable to account onan accrual basis for self-assessed revenues, such as income taxes, gross receipts taxes,sales taxes, and property taxes. For such taxes, recognition of revenue is ordinarily madeat the time of collection (i.e., when it is measurable and available), thus placing the fundpartially on a cash basis in respect to revenue recognition. In respect to expenditurerecognition, however, the modified accrual basis is almost identical with the accrual basis.The primary exception to the general rule of expenditure accrual relates to unmaturedprincipal and interest on general long-term debt.

Identification of Modified Accrual or Accrual Basis by Fund or Transaction Type

1. Governmental fund revenues and expenditures should be recognized on themodified accrual basis. Revenues should be recognized in the accountingperiod in which they become available and measurable. Expenditures shouldbe recognized in the accounting period in which the fund liability is incurred,if measurable, except for unmatured interest on general long-term debt, whichshould be recognized when due. (GASB Cod. Sec. 1100.108a. See also Sec.1600, "Basis of Accounting.")

2. Proprietary fund revenues and expenses should be recognized on the accrualbasis. Revenues should be recognized in the accounting period in which theyare earned and become measurable; expenses should be recognized in theperiod incurred, if measurable. (GASB Cod. Sec. 1100.108b. See also Sec.1600, "Basis of Accounting.")

Since the state of Washington does not currently allow use of proprietary funds byschool districts, this provision does not apply.

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3. Fiduciary fund revenues and expenses or expenditures (as appropriate)should be recognized on the basis consistent with the fund's accountingmeasurement objective. Nonexpendable trust and pension trust funds shouldbe accounted for on the accrual basis; expendable trust funds should beaccounted for on the modified accrual basis. Agency fund assets and liabilitiesshould be accounted for on the modified accrual basis. (GASB Cod. Sec.1100.108c. See also Sec. 1600, "Basis of Accounting.")

4. Transfers should be recognized in the accounting period in which theinterfund receivable and payable arise. (GASB Cod. Sec. 1100.108d. See alsoSec. 1600, "Basis of Accounting.")

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Principle 9 -- Budgeting, Budgetary Control, and Budgetary Reporting

1. An annual budget(s) should be adopted by every governmental unit. (GASBCod. Sec. 1100.109a. See also Sec. 1700, "The Budget and BudgetaryAccounting," and Sec. 2400, "Budgetary Reporting.")

The standards do not require that a budget be adopted by governmental funds. Itis recommended, however, as an essential element of the financial planning,control and evaluation processes of governments. Many believe that the budget isthe most important financial document produced by the governmental entity. Abudget, when adopted according to procedures specified in state law, is bindingupon the governmental unit and must conform to 9.2 and 9.3 below.

In the state of Washington, school district budgets are required to be adopted inthe General, Capital Projects, Transportation Vehicle, Debt Service, and ASBFunds on the same basis of accounting as the financial statement presentation.

2. The accounting system should provide the basis for appropriate budgetarycontrol. (GASB Cod. Sec. 1100.109b. See also Sec. 1700, "The Budget andBudgetary Accounting," and Sec. 2400, "Budgetary Reporting.")

Accounting systems of funds for which budgets are required (General, CapitalProjects, Transportation Vehicle, Debt Service, and ASB Funds) shouldincorporate budgetary accounts. Only three general ledger control accounts areneeded--Estimated Revenues, Appropriations, and Encumbrances--to provideappropriate budgetary control. All three must be supported by subsidiary ledgerdetail.

Budgetary detailed accounts for revenue are required in both the budget andaccounting systems and reports.

An appropriation is an authorization for the district to incur expenditures in theamounts specified in the district's budget for the fiscal year. In the state ofWashington, by law, total appropriations may not exceed the sum of EstimatedRevenues and the beginning Unreserved, Undesignated Fund Balance. Theresulting Unreserved, Undesignated Fund Balance account, after recordingEstimated Revenues and Appropriations, must have a zero or credit balance.

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The use of an encumbrance accounting system as an element of control in formalbudgetary integration is widespread in governments. Such a system acts as anearly warning device by controlling expenditure commitments; the governmentthereby significantly reduces the opportunity to overexpend an appropriation.Encumbrances are defined in the 1987 GASB Cod. Sec. 1700.129, as"commitments related to unperformed (executory) contracts for goods or services."They are not GAAP expenditures or liabilities, but represent the estimated amountof expenditures ultimately to result if unperformed contracts in process arecompleted. When these commitments are realized, a liability is recognized for thegoods and services received.

Notwithstanding its control advantages, encumbrances are not recorded for allexpenditures. For example, encumbrances are not normally used to control salaryexpenditures because they are generally fixed for the year and can be ascertainedin advance.

See Chapter VII - Journal Entries for more information on the use of budgetaryaccounts.

3. Budgetary comparisons should be included in the appropriate financialstatements and schedules for governmental funds for which an annual budgethas been adopted. (GASB Cod. Sec. 1100.109c. See also Sec. 1700, "TheBudget and Budgetary Accounting," and Sec. 2400, "Budgetary Reporting.")

In recognition of the importance of budgets, a Combined Statement of Revenues,Expenditures, and Changes in Fund Balances--Budget and Actual is one of thefive combined statements required for conformity with GAAP. The budgetarycomparison statement must include the General Fund, special revenue fund types,and all other governmental fund types for which annual budgets have been legallyadopted.

For additional budgeting information see Chapter II - Budgeting.

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Principle 10 -- Transfer, Revenue, Expenditure, and Expense Account Classification

1. Interfund transfers and proceeds of general long-term debt issues should beclassified separately from fund revenues and expenditures or expenses.(GASB Cod. Sec. 1100.110a. See also Sec. 1800, "Classification andTerminology.")

Under most circumstances, transfers and transactions between funds are notnecessary because revenues are recorded into funds established for specificpurposes and the use of the resources is restricted to those purposes. However,certain types of interfund transactions have been deemed acceptable. They can beclassified into three categories: (A) quasi-external, (B) reimbursements, and (C)interfund transfers.

A. Quasi-external interfund transactions are reported as revenues,expenditures or expenses for both the fund and the governmental unit as awhole. Specifically, these are transactions that would be treated asrevenues, expenditures, or expenses if they involved organizationsexternal to the governmental unit.

For example, sales to the Associated Student Body Fund of itemsmanufactured in the General Fund are accounted for as revenue to theGeneral Fund and expenditures to the Associated Student Body Fund.

B. Reimbursements are transactions which are reflected only once for thegovernmental unit as a whole and are expenditures or expenses initiallymade from one fund that are properly applicable to another fund.

An example is when the General Fund processes the Capital ProjectsFund payroll and then is reimbursed by the Capital Projects Fund.

C. Interfund Transfers are all other interfund transactions except loans,advances, and the types of transactions noted above. Interfund transfersare divided into two major categories: (1) residual equity transfers and (2)operating transfers.

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(1) Residual equity transfers are nonrecurring or nonroutine transfersof equity between funds, such as the distribution of discontinuedfunds' remaining balances. They should be reported as additionsto or reductions from beginning fund balances in governmentalfunds. Since revenues, expenditures, and other financingsources/uses are not involved, budgetary accounts are not used.These transfers are initiated by board action, generally throughthe adoption of the district's budget.

An example of a residual equity transfer is the transfer of residualbalances of funds that are discontinued to the General Fund orDebt Service Fund, as appropriate.

Care should be taken to ensure that surplus moneys originallyacquired by bond proposition in the Capital Projects Fund arefirst transferred to the Debt Service Fund for payment of anyremaining debt. Any remaining surplus bond moneys must betransferred to the General Fund to reduce General Fund levies.Subsequent tax collections should be credited to the GeneralFund.

Moneys remaining in the Debt Service Fund after all bonds havebeen redeemed and interest and transfer fees paid should betransferred to the General Fund.

(2) Operating transfers are defined as all other interfund transactionswhich are not residual equity transfers. These transactions, likeresidual equity transfers, require board action.

Examples of operating transfers are:

(a) The General Fund transferring moneys to theTransportation Vehicle Fund to subsidize the purchasedbuses.

(b) The Capital Projects Fund, Transportation Vehicle Fund,or General Fund transferring moneys to the Debt ServiceFund to meet payment requirements of nonvoted debt.

(c) The General Fund transferring a portion of the stateannual basic education allocation to the Capital ProjectsFund and/or the Debt Service Fund.

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2. Governmental fund revenues should be classified by fund and source.Expenditures should be classified by fund, function (or program),organization unit, activity, character, and principal classes of objects. (GASBCod. Sec. 1100.110b. See also Sec. 1800, "Classification and Terminology.")

For state reporting purposes, revenue is categorized by local, state, federal, andother sources, which are further broken down by type of revenue (e.g., taxes,interest, sale of supplies). Expenditures are also categorized and reported byprogram, activity, and object.

3. Proprietary fund revenues and expenses should be classified in essentially thesame manner as those of similar business organizations, functions, oractivities. (GASB Cod. Sec. 1100.110c. See also Sec. 1800, "Classification andTerminology.")

Since the state of Washington does not currently allow use of proprietary funds byschool districts, this provision does not apply.

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Principle 11 -- Common Terminology and Classification

A common terminology and classification should be used consistently throughout thebudget, the accounts, and the financial reports of each fund. (GASB Cod. Sec.1100.111. See also Sec. 1800, "Classification and Terminology.")

In order for Principle 9 to be implemented, persons responsible for preparing the budgetsand for preparing the financial statements and reports should work with those responsiblefor designing and operating the accounting system. Agreement on a common terminologyand classification scheme is needed to make sure that the accounting system produces theinformation needed for budget, financial statements, and financial report preparation.

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Principle 12 -- Interim and Annual Financial Reports

1. Appropriate interim financial statements and reports of financial position,operating results, and other pertinent information should be prepared tofacilitate management control of financial operations, legislative oversight,and, where necessary or desired, for external reporting purposes. (GASBCod. Sec. 1100.112a. See also Sec. 1900, "Financial Reporting," and Sec. 2100 -2900.)

Interim financial reports required in the state of Washington are the MonthlyBudget Status Report and the Statement of Financial Condition. (For moreinformation, see Chapter II - Budgeting.)

2. A comprehensive annual financial report [CAFR] covering all funds andaccount groups of the reporting entity--including introductory section;appropriate combined, combining, and individual fund statements; notes tothe financial statements; required supplementary information; schedules;narrative explanations; and statistical tables--should be prepared andpublished. The reporting entity is the oversight unit and all other componentunits combined in accordance with Section 2100, "Defining the ReportingEntity." (GASB Cod. Sec. 1100.112b. See also Sec. 1900, "FinancialReporting," and Sec. 2100 - 2900.)

A CAFR is not required in the state of Washington. School districts preparing aCAFR may seek a Certificate of Excellence in Financial Reporting from theGovernment Finance Officer's Association (GFOA) and/or the Association ofSchool Business Officials (ASBO).

3. General purpose financial statements [GPFS] of the reporting entity may beissued separately from the comprehensive annual financial report. Suchstatements should include the basic financial statements and notes to thefinancial statements that are essential to fair presentation of financial positionand results of operations (and cash flows of proprietary fund types andnonexpendable trust funds). Those statements may also be required to beaccompanied by required supplementary information, essential to financialreporting of certain entities. (GASB Cod. Sec. 1100.112c. See also Sec. 1900,"Financial Reporting," and Sec. 2100 - 2900.)

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General purpose financial statements include the following:

a. Combined Balance Sheet--All Fund Types and Account Groups.

b. Combined Statement of Revenues, Expenditures, and Changes in FundBalances--All Governmental Fund Types.

c. Combined Statement of Revenues, Expenditures, and Changes in FundBalances--Budget and Actual--General and Special Revenue Fund Types(and similar governmental fund types for which annual budgets have beenlegally adopted).

d. Combined Statement of Revenues, Expenses, and Changes in RetainedEarnings (or Equity)--All Proprietary Fund Types and NonexpendableTrust Funds.

e. Combined Statement of Cash Flows--All proprietary Fund Types andNonexpendable Trust Funds.

f. Notes to the Financial Statements.

g. Required Supplementary Information.

In the state of Washington, the F-196 parts I and II represent items "a" through "e"identified above. Sample "Notes to the Financial Statements" are included inAppendix F of this manual.

4. A component unit financial report [CUFR] covering all funds and accountgroups of a component unit--including introductory section; appropriatecombined, combining, and individual fund statements; notes to the financialstatements; schedules; narrative explanations; and statistical tables--may beprepared and published as necessary. (GASB Cod. Sec. 1100.112d. See alsoSec. 1900, "Financial Reporting," and Sec. 2100 - 2900.)

In the state of Washington, school districts are primary governments and,accordingly, issue a CAFR or GPFS. A district may be financially accountablefor a component unit which could prepare a CUFR or CUFS.

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5. Component unit financial statements [CUFS] of a component unit may beissued separately from the component unit financial report. Such statementsshould include the basic financial statements and notes to the financialstatements that are essential to fair presentation of financial position andresults of operations (and cash flows of proprietary fund types andnonexpendable trust funds). Those statements may also be required to beaccompanied by required supplementary information, essential to financialreporting of certain entities. (GASB Cod. Sec. 1100.112e. See also Sec. 1900,"Financial Reporting," and Sec. 2100 - 2900.)

In the state of Washington, school districts are primary governments and,accordingly, issue a CAFR or GPFS. A district may be financially accountablefor a component unit which could prepare a CUFR or CUFS.

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