About the paper
The paper discusses the use of funds in government accounting and will delineate how the fund balance represents the available spending resources of the entity. In addition, we will also comment on the special purpose fund in government accounting.
Government Fund and Balance of Fund
With regards to government accounting, Funds refer to the independent accounting mechanism with a self balancing set of accounts. The equity account, that represent the difference between assets and liabilities, refers to the fund balance, which the government or the respective department can use for future investment or to meet working capital needs. In fact, the overall objective of fund balance is to provide the government and the users of its financial records, with the clear picture as what level of funds are available for future use. As per the current practice mandated by US GAAP, the fund balance is further categorized into unreserved fund balance account and reserved fund balance account. While the reserved fund balance isolates the portion of fund balance that is not available for appropriation till the next budget, on the other hand, unreserved fund balance represents the remaining fund balance available for use. Another related mechanism is the budget control where the executive branch of the government can control the amount of funds allocated to each specific purpose through issue of a fixed-dollar budget amount. These fixed-dollar budget amounts are prepared by the executive branch only and limit the use of funds for a specific purpose.
Important to note, the balance of fund for each fund is estimated with the modified accrual basis of accounting, which is predominantly used in the government accounting in order to fit the specific characteristics of governmental operations as it allows to introduce exceptions and modifications. Use of the modified accrual basis of accounting here is justified because of the the specific characteristics of governmental operations, in which most of the revenues and expenses only become measurable and available when they come due.
Rationale for set up of Special Funds in Government Units
Every government sets up separate funds in the different units to allocate a specific amount for each project. Some of the specialized funds are debt service funds, special revenue funds, capital project funds and permanent fund. From the perspective of the government, each of these special funds are imperative in order to ensure appropriate allocation of funds in order to support daily operations of the unit. Below discussed are the three special funds, along with their characteristics and avenue of use:
a) Capital Project Funds
Capital Project Funds are special government accounts created in order to restrict the financial resources for creation of capital assets and related outlays. For instance, the state government willing to set up a sports stadium, should use the funds from the capital project funds for all the expenses related to the construction of a sports stadium.
b) Debt Service Funds
Debt service funds are set up to account for financial resources that are set aside for principal and interest payments of long-term liabilities of the government. This special fund is kept as an alternative to Loan Funds, where the policy of the government is to keep any loan contracted in the Consolidated Fund. When a loan is due for repayment, Government can use these funds for the liquidation of the loan through the sale of investments to make the money available.
c) Special Revenue Funds
Special Revenue Fund is an account set up by the government to collect money in order to support the specific projects. However, fund collected in this fund should not serve the specific purpose related to debt service and capital projects. For instance, if the mayor of the city decides to collect additional tax to improve the drainage system in the city, then the amount collected should only be used for the activities related to subject project only and not for meeting principal and interest obligations relating to long-term liabilities or for the construction of capital assets. In addition, as per the latest regulation mandated by GAAP, the subject government will need to publicly report on the avenues from where the fund amount was collected and how it was spent. This largely promotes accountability and transparency in government accounting as with public reporting of each data, tax payers are aware as how and where their tax dollars are being spent by the government.
References
Investopedia. (n.d.). Special Revenue Fund. Retrieved January 5, 2017, from http://www.investopedia.com/terms/s/special-revenue-fund.asp
Ives, M. (2013). Introduction to Government and Non-Profit Accounting. Pearson Education.
