Primary Accounting Emphasis of Fund-Based Reports.

The primary accounting emphasis has traditionally been on reporting short-term results that were directed toward answering the following three basic questions:

  • Where did the financial resources come from?
  • Where did the financial resources go?
  • What amount of financial resources is presently held?


One of the unique aspects of governmental accounting is the use of fund accounting. Each fund is a separate accounting entity and all the funds taken together make up the government’s financial reporting system. The GASB defines a fund as “an independent fiscal and accounting entity with a self-balancing set of accounts recording cash 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 certain objectives in accordance with special regulations, restrictions, or limitations.”

Because the accounting for the police department, the school systems, the motor pool, trust funds, and the water system have such diverse objectives, the funds are divided into three categories:

  • Governmental Funds, which account for activities primarily designed to serve the public.
  • Proprietary Funds, which are business-type activities which are supported by user charge.
  • Fiduciary Funds are activities in which the government accounts for monies it holds in a trustee capacity to benefit others. These funds cannot be used for government purposes.


1. Governmental Funds account for activities primarily designed to serve the public and are generally financed through taxes. For example, governmental funds would account for activities of the fire and police departments.

Governmental funds and fund-based reporting focus on short-term results (current resources management focus) and use a modified accrual approach for the recognition of revenues and expenditures. These funds are often called “expendable” funds because of the focus on current resources such as cash, investments, and receivables and the current claims against them. The difference between the current assets and current liabilities is called fund balance. Because of its short-term focus, governmental funds do not account for non-current fixed assets or non-current debt.

There are five governmental funds:

General Fund – to account for all financial activities and resources not required to be accounted for in another fund. All accounts are “current”.
Capital Projects Funds – to account for financial resources to be used for the acquisition or construction of major capital facilities other than those financed by proprietary funds and trust funds.
Special Revenue Funds – to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specified purposes (roads, bridges). For example: A federal grant restricted for road repairs.
Debt Service Funds – to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest.

The Permanent Funds category is a new fund type within the governmental funds. It accounts for assets contributed to the government by an external donor with the stipulation that the principal cannot be spent, but any income can be used within the government, often for a designated purpose. (These contributions were formerly reported in the non-expendable trust fund.) Permanent Funds are unusual in that the funds include long-term assets from the non- expendable portion of the external donations. Most governmental funds include only current assets and current liabilities.

The first three funds, the General Fund, Special Revenue Funds and the Capital Projects Funds, are unique in that budgets are recorded in the fund and encumbrances are used for accruals. Budgets and encumbrances are not needed in the Debt Service Funds and Permanent Funds because their transactions are prescribed by contract or agreement.

2. Proprietary Funds are business-type activities run by the government and supported by user charge. These funds have a long-term focus (economic resources focus) and use accrual accounting. Their accounting is similar to the accounting for business and the equity section of these funds use terms such as contributed capital and retained earnings. There are two types of proprietary funds:

Enterprise Funds are governmental operations that benefit the general public and are financed by user charges. Examples are the water and sewer systems, public golf courses, public swimming pools, and an airport.

Internal Service Funds – to account for the financing of goods or services provided by one department or agency to other departments or agencies of the government unit, or to other governmental units, on a cost-reimbursement basis. Examples are a centralized motor pool, engineering pool, and centralized data processing facility.

3. Fiduciary Funds are assets that are held in a trustee capacity for external parties and the funds should not be used to support the government’s own programs. Fiduciary Funds use accrual accounting and the economic resources measurement focus for the reporting of revenues and expenses. The fiduciary funds consist of three trust funds and the agency fund.

Investment Trust Funds - This fund type accounts for the outside portion of investment pools where the reporting government has accepted funds from other governments to have more money to invest and, hopefully, earn a higher return.

Private-Purpose Trust Funds – This fund type accounts for any monies held in a trustee capacity where principal and interest are for the benefit of external parties outside of the government, such as individuals, private organizations, or other governments.

Pension Trust Fund Accounts – This fund type accounts for employee retirement funds.

Agency Funds – This fund type accounts for assets held on a purely custodial basis (assets equal liabilities) and thus do not involve measurement of results of operations. For example, the money withheld from employees’ paychecks for health insurance premiums would be recorded in an agency fund.


The above article is about Fund Accounting that is tested on the FAR CPA Exam. Hope this helps. If you have any queries, feel free to comment in the section below. Happy Learning!

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  1. suma

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  2. Aakanksha

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