 Hello, and welcome to this session in which we will discuss fund accounting. It sounds like fun, but it's pronounced as fund accounting. I hope it will be fun as well. So what is fund accounting? Well, it's a specialized accounting system that's used by government, not for profit, and any other entity where the aim, the goal of this entity is to track financial resources, which is assets based on their intended purpose restriction or requirement. So as we said, it's a specialized type of accounting to do what? To keep track of your resources for a particular reason. Why? Because government, not for profit entities, they keep track of their accounting system differently than for profit accounting. For profit accounting focuses on profitability and shareholder value. Well, fund accounting, as you have learned in the prior session, the objective of governmental accounting is to do what? Is to provide accountability. It's a form of internal control mechanism is to show transparency, compliance with legal and regulatory requirement. So the purpose of accounting for governmental entities and for profit is different. Therefore, the accounting itself is different. So we use fund accounting to do what? To keep track of our resources and the purpose of these resources. So we will do is we will have different fund and think of each fund as an entity. Entity means one whole, like one whole company by itself. And each entity would have its own sets of books. It will have its own chart of accounts, general journal, the general ledger, trial balance, financial statements. So each entity will have a fund and that fund consider it as independent. Now also, you can think of a fund from an internal control perspective as a checkbook. For example, you have a fund for the police department, a fund for the elementary school, a fund for the government hospital. Why do you do so? Because you want to keep track of the resources. And this is what we meant by checkbook. Keep in track of the resources separately, because the purpose, the main purpose of governmental accounting is what? Is accountability. In fund accounting, you will see because we're keeping tracks of things separately, it's going to help us keep track of these resources separately. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. We have many types of fund accounting. We're going to break them into three categories, and under each category, I will tell you what are the sub-categories. First, we're going to have governmental funds. Now, just ignore this word modified accrual for now. The first category is governmental fund. And under governmental fund, we're going to have five different funds. One is the general fund. And we usually have only one general fund. We're going to have special revenue funds. We're going to have many funds that are considered special revenues. We're going to have capital project funds, debt funds, and permanent funds. So in this session, we're going to look at the various funds, just to define them, just so you are familiar with them. So you can answer a multiple choice question, in case you are being asked, what transaction is for this fund, or what's the definition of this fund? So this is the first category, governmental fund. We're going to have another category called proprietary funds. And the proprietary funds uses accrual accounting. Don't worry, we're going to define all of this later. Under proprietary funds, we're going to have two type of funds, enterprise funds and internal service funds. Again, we're going to define each one of those separately. Then we're going to have a third category. So we have one category, two categories. Third categories are fiduciary funds, which also uses the accrual accounting. Here we're going to have custodial funds, private purpose trust funds. We're going to have pension trust funds and investment trust funds. So we're going to go and define each fund separately so you know what's the definition of each fund, starting with governmental fund and starting with the general fund, which is one out of five. This is the primary operating fund for a government entity. It covers the day-to-day activities and services. Simply put, here's what's going to happen. Government, the general fund is anything that's not special purpose, capital, debt or permanent. Anything that's not those is the general fund. But usually what you're going to have in it is the day-to-day activities and services of the government. Now, how do they generate revenue? And don't worry, we're going to have a whole session about governmental fund. This is just an overview. Well, they get the revenue through general tax, which is basically taxing people, different various type of taxes, property sales, so on and so forth. And other unrestricted resources means somebody giving you the money. Example of the general fund expenses or expenditure include salaries for government employees, maintenance of public facilities, public safety services like police and file department. And here, I used a general fund expenses, but when it comes to government, we're going to use the term expenditure and we're going to have a whole session explaining this concept. Now, I mentioned governmental funds use modified accrual. What does that mean? All what you need to know for now for modified accrual, which we'll define later. I know we're going to say we're going to define this later because you're going to see we have to expend on this. This is a course by itself, so we're going to have to build up your knowledge slowly. So every time I say modified accrual, and I'm going to repeat this on several slides, it means the fund don't keep track of long term assets. Don't keep track of long term liabilities. What does that mean exactly? Don't worry for now. We're going to look at actual examples later on. But this is all what it what it means for now, as far as the balance sheet is concerned. The second type of governmental fund is the special revenue funds and we could have many of them here. It's where the funds are used specifically for a purpose and that purpose is either legally restricted or committed. And that purpose is other than that service or capital project because we're going to have special funds for those. An example will be a state gas tax. Basically, you're imposing when you fill out your car with gasoline, you pay a specific tax. That tax is specifically used for the transportation infrastructure or for maintaining the highway. Therefore, it will be put in a special revenue fund. An example will be a highway trust fund, where it's funded by gasoline taxes and used to finance transportation project. Again, governmental fund, as I mentioned, they use modified accrual. The third type of governmental fund is capital project fund, which is fund. We are keeping track of our funds. Notice it's capital project fund, not keeping track of our assets. These funds are used to account for financial resources, money, not building. Remember, governmental funds use modified accrual. Therefore, when you think about capital project, you're thinking about buildings, you're not keeping track of the building itself because we don't keep track of our long term assets because building is a long term asset in governmental fund. We are keeping track of the money. Funds are used to account for financial resources that are designated for the acquisition, construction or improvement of capital asset, building, roads, bridges, infrastructure project for the government. So the city might establish a capital project fund to finance the construction of a new public library or the renovation of the park. Again, modified accrual. It's a governmental fund, no long term assets, no long term debt. So hold on a second. How am I going to be doing this from an accounting perspective? Just hold on. We're going to have a whole separate session about capital project funds. The fourth type of governmental fund is debt service funds and we could have many of those. Again, these funds are used to account for the accumulation of resources. Again, keeping track of the money for what purpose, for the payment of principal and interest. So we put money in this account for the sole purpose and keep track of it for paying our long term debt such as bonds and loans when the government borrows money. For example, a school district might issue a bond, borrow money to do what? To finance the construction of a new school building. Well, and use the debt service fund to repay the bondholders over time. So we'll have an account keeping track of that money that's going to pay back the bondholders and pay the interest. Once again, we use modified accrual. So how are we using modified accrual and keeping track of the bondholders that don't worry, we'll look at that later. The fifth governmental fund is a permanent fund. And as the word suggests, permanent fund is a fund that don't go away. Now, so how useful is it? Why are we keeping track of it? We don't care about the fund itself. We're going to use its revenue, you know, permanent funds will generate investments revenue, like interest, dividend, okay, permanent funds are type of funds used by government or other organization to account for resources that are restricted. So here's what happened. You have an individual that contribute a million dollar to the government says, I want this million dollar to maintain the park, but you cannot touch the million dollar. So how good is it? So here's what's going to happen. You're going to preserve the million dollar, you're going to keep the million dollar, you're going to invest the million dollar. And from the investment, you're going to get interest, you're going to get dividend, whether you invest in stocks or bonds, you can spend, you can spend the earnings to maintain the park, but not the million dollar. You cannot touch the million dollar. It's called a permanent fund. So the primary objective is to generate continuous source of income from this money to support the designated activity, maintaining the parks or a program without depleting the original amount. So the original amount will be there for generation to come. What's going to happen is the money generated from that ink from that principal amount from that original amount can be used. Another example will be an endowment. For example, a university, a wealthy individual might contribute money to your university. University might receive a donation to create an endowment fund, which is a form of a permanent fund for scholarship. So how am I helping if I said don't touch the amount? Well, don't touch the principal, invest the money and the earnings from the investment can be used to help students with their education provide scholarship. Another one could be what's called a trust fund. Again, another wealthy individual may create a trust fund to support local museum or maintaining the park. So the principal amount is invested and only the investment income can be used. So be careful about the permanent fund. You can only use the interest or the revenue from that fund. You cannot use, you cannot touch the original principal amount. What type of accounting do we use for this? Modify the cruel, no long term assets, no long term debt. We'll look at those later. Now we're going to move to another type of another group of funds, which is called the proprietary funds. Under the proprietary funds, we have the enterprise funds one of two, and we have the internal service funds starting with the enterprise fund. Once you hear the word enterprise, it sounds like entrepreneur. Exactly. It's basically a business like funds like you are here. The government is running a business. These funds are used to account for government activity activities that operate like a business. Once we get to the enterprise funds, I'm going to tell you this is easy because you already know all about the enterprise fund. It's accounting exactly like what you learned for a cruel, charging fees for goods and services provided to the public. All the prior funds, like for example in the general fund, the government might provide service, but they don't provide a service in exchange for an equal revenue. For example, if there's a fire, they're going to go ahead and treat that fire, but they're not going to charge the people. But for example, if the government is running the airport, for example, the Port Authority of Philadelphia runs the airport. That's an enterprise fund. They run it like a business. You pay for your goods and services. So enterprise fund would include water, sewer, electricity, if the government is in charge of this public transportation system. As I told you, for example, the Philadelphia International Airport or parking facilities maintained by the municipality, they will charge you fair market value. However, it's government run. For example, in the state of Pennsylvania, the liquor is, all the liquor stores are operated by the state, which is an enterprise fund. A cruel accounting is used here. What does that mean? It means, from a balance sheet perspective, we're going to be accounting for long-term assets, long-term debt, just like any other business. Another proprietary fund is called the internal service funds. And this is the second one. These funds accounts for goods and services provided by one department or one agency to another department or agency within the government on a cost reimbursement basis. If we go back here, for example, we said, for example, electricity. For example, you could have the enterprise fund generating electricity. And you're going to have that electricity than another agency using this electricity. Well, guess what? We're going to account through this through the internal service fund. So you're going to pay for those services. Okay? So this includes centralized services such as vehicle maintenance. For example, for the vehicle maintenance, you could have the police department. You could have the fire department. You could have the inspection department. They all have vehicles. They all have vehicles to maintain. And what you're going to do, you're going to create an internal service fund where all these vehicles are maintained. So if anything goes wrong, they need to change their tires. They need to change oil, so on and so forth. They go to this internal service fund and they pay and they pay on a cost reimbursement basis. So they go in there and this fund is used as it is for a business, but the customers are internal. All the customers, so they don't service external to the government because if they service people who are external, they sounds like an enterprise fund. Okay? Or for example, you could have an information technology support where this IT department is helping the police department, maintaining the IT for the police department, for the fire department, for the inspection department, for all departments in the government. That's an internal service fund. So your customers are other government entities. Here, again, we use accrual accounting, which we are accounting for long-term assets, long-term liabilities. Now, let's move to the third categories, which are the fiduciary funds. And here, we're going to have four of them. The first one is the custodial funds, also known as agency funds or fiduciary funds. But the technical word I like the word agency because as an agency, you are an agent and an agent represents someone else. Those are fund held by an organization or a government as a custodian or trustee on behalf of another entity or another individual. I'll give you an example of this. So in this arrangement, the organization has the responsibility to manage, invest and disperse the funds according to the terms of the agreement, legal requirement or designated purpose, but the funds do not belong to the organization itself. For example, you could have a county, okay? For example, in the US, we have local government. We would have a county government. We would have a state government. And the reason I am, you know, local is the smallest county, is a little bit larger in the state. For example, the county could collect state taxes. Well, hold on a second. State taxes belongs to the state. Why is the county collecting them? Well, the county is collecting them for the sole purpose of transferring this money to the state, just helping the state out. So what they do when they collect this money, they put it in an agency fund because it's not their money, they're agent. They're basically representing the state. That could be an example of it. Or domestic relationship payment on behalf of the state. For example, when you have a dispute between a husband and a wife, they sue each other and I work in this department domestic relationship in one of the counties in Pennsylvania. And what happened is this, the state maintained the program, but the county collects the money. So the county collects the money, then they send the money to the state or they disperse the money in between the different spouses. But it's not really the county has nothing to do, except they are a middle person, a person in the middle holding the money for another party. And this is what we buy custodial or agency funds. Here we use a cruel accounting. Another furishery fund is private purpose trust fund. It's private purpose. The keyword here is private. This is used by the government to account for resources held in a trust for the benefit of specific individual, private organization or other entities rather than the general public. So let's assume you're a wealthy individual and you want to give money to help a specific organization or specific group of people. Well, you can set up your own trust or you can give this money to the government and tell them, look, you maintain this for me. So it's called a private purpose trust fund. In this arrangement, the government is working as a trustee. So rather than having a lawyer or having your own entity, you'd say, I want the government to maintain this for me. Okay, the government is working as a trustee. They manage, invest and burst the funds according to the terms, whatever you told them or the legal agreement. So those funds, because they are private purpose trust funds, they are not owned by the government because it's a wealthy individual. The reason I say wealthy because usually wealthy people set up those private trust fund and they are separate funds from any other government fund. So that's why we have to keep track of them separately in a fund called private purpose trust. So this money is used specifically for a purpose. What could be that purpose? Give you an example, scholarship funds. For example, the government now is a trustee is responsible for managing and investing the funds, selecting scholarship recipient according to the criteria established by this donor, that wealthy donor, and dispersing the scholarship fund to the recipient. So rather than giving this money to the government, you could create your own organization and have people take care of this, or you could say, I want the government to do so. When you give this money to the government, the government will have to keep it in a separate fund. And what's that fund called? Private purpose trust fund. What's the purpose? Scholarship funds. Or you want to create a fund where they maintain the cemeteries for specific individuals, for all the people with your last name. That's a special purpose trust fund. So how do you know it's a special purpose? It's for a specific purpose. And that purpose is not the general public. You are specifying who you want to benefit from this money. That's how you know it's a special private purpose trust fund. Again, you would use the cruel accounting. Another fiduciary fund is the pension trust funds. And from the name pension trust fund, what are we maintaining the pension? What is the pension? It's the retirement plans type of fiduciary fund used by government to manage resources dedicated. Notice all you are managing the resources of providing retirement benefit to their employees. So it's basically you're putting money away in a special fund called the pension trust fund to do what? To finance the retirement of your employees. So these funds are held in a trust with government or organization acting as a trustee managing investing and dispersing the funds according to the terms of the pension plan and the requirement. Now also pension trust fund are not owned by the government because once you put that money in the pension, it belongs to the pensioners who are the pensioners, the employees, the future retirees of the government or organization and are segregated from other operating fund. That's why you have them in a separate fund. That's why these are called funds. Hey, for example, public employee retirement system. For example, I am part of the public employee retirement system in Pennsylvania. Many government have established a pension trust funds for their employees, such as PERS or a teacher retirement system. That's fine. These pensions funds are designated to provide me when I retire benefit as an employee to government employees such as teachers, police officers and firefighters. The fourth type of fiduciary fund is the investment trust fund. Well, this fund is sometimes referred to as investment polls or polled investment fund. So what would happen is this. These type of fiduciary funds are used to consolidate and manage the investment from multiple funds or participating entities. So you might have a city and in that city you might have many boroughs. Okay. One, two, three, four, five different boroughs. And each borough is an independent entity. What they can do, they can pull all their money together for investment purposes. They can pull all their money. So each one, for example, this, this borrow in the city, they have a million dollars. This one has 3 million. This one has 6 million so on and so forth extra money that they can invest. So rather than each borrow investing the money, it doesn't have to be borrowed. It could be two or three cities or two or three counties, you know, multiple, multiple government. And what they do is they create one trust fund and they invest older money together. Why would they do that? Why would they do that? Is to achieve economies of scale. What does that mean? When you have a lot of money and you're given it to a professional organization, a finance professional organization, and you've given them, for example, if you're investing a million dollars, it's different than investing 100 million. If you're investing 100 million, they're going to treat you differently. They're going to lower your transaction cost. They're going to give you more advice. They're going to take care of you. Why? Because you are investing a larger amount. So what they do, they pull all this money together and they invest it together. Why? To gain economies of scale, to lower their, to save money, simply put, to save money and have a better service. So state or local government, that's what they do. They pull their money together. So many state and local government in the U.S. operates investment pool, which allows various government entities, such as even school district, many municipalities within the same city, special district to pull their idle cash for investment purposes. For example here, a state treasurer office may establish an investment pool to manage short-term investments of funds from multiple government agencies. You're going to say, okay, how are we going to keep track of this? Well, you're going to allocate the earnings from this fund based on your proportionate share of the pool. So if you have 100 million dollars and your county contributed 15 million from that pool, and we made $10,000 of revenue, well, you're going to get 1,500 of income, which is 15 million is 15% of the 100 million. Well, you're going to get this amount because proportionally you own 15% of the fund. So this is how they distribute the fund. Now from a CPA or an accounting perspective, what do you need to know about this? You need to answer multiple choice questions such as this one about the various funds. So which of the following is not a characteristic of a private purpose trust fund? Now you have the options, A, B, C, D. The first thing I want you to be aware of is not. So be careful about these questions. Is not a private purpose trust fund? What am I honing on? The word private, it's not. So you have to be careful. A government acts as a trustee managing and dispersing the funds on behalf of a specific individual organization or entities. Well, yeah, this could be, this is a private purpose trust fund. The government is acting as a trustee, but that's not the answer. It's a correct answer, but that's not what I'm looking for. If it says which of the following is a characteristic, that will be A, but A is not the correct answer because that's not the correct answer. Let's move to D. The government is responsible for managing, investing and dispersing the funds according to the terms of the trust agreement or legal requirement. Very similar to A, very similar to A. It is a characteristic. So out. Okay. Let's look at C. The funds are not owned by the government and are segregated from other funds. Well, money from a private purpose trust fund or private purpose, so the government doesn't own the money, so they are not owned by the government. Yeah, that's correct. And are segregated. They're supposed to be segregated. They're private. Well, that's also a correct statement about the private trust fund. Funds are held in a trust for the benefit of the general public. No, no, that's incorrect. That's not a characteristic of a private purpose trust fund. Why? Because one definition of a private purpose trust fund is it doesn't benefit the general public by its definition. Therefore, B is not a characteristic of this private purpose trust fund. What should you do? Go to Fahat Lectures to look at additional MCQs similar to this one that's going to help you understand these concepts better. Invest in yourself. Don't shortchange yourself. Whether you are studying for your CPA exam, you're an accounting student or some other professional organization. Invest in your career. Good luck. Study hard and stay safe.