 Hello and welcome to this session in which we will discuss the elements of financial statements for governmental accounting. Now you should have learned about the elements of financial statements when it comes to for-profit accounting. Now the elements between governmental and for-profit, some of them are similar in concept, some are similar in naming and some are not similar. We're going to start to look at them. We're going to break the governmental elements of financial statements into two categories. The statement of financial position, which are the balance sheet account and resource flows, which are the income statement accounts. Now under the statement of financial position, we're going to have assets, which should be all familiar with that term, liabilities, we should all be familiar with that term. The third inflow of resources, this should be a new term. The third, I'm sorry, the third outflow, the third inflow, this should also be a new term, a net position, or sometime we're going to call it rather than net position, we're going to call it fund balance and this should be a new account, but in concept it's not going to be very new, the way it works. Resource flows, which are the income statement accounts, we're going to have outflow of resources, which are going to be equivalent or similar to expenses and inflow of resources, which are going to be familiar, which is going to be most likely resembles the term revenues. As always, once I have a list of items, I'm going to go over each item separately explaining the account that goes under this item. So when you are preparing the financial statements, when you are conducting transaction, if you have a good understanding of the elements, you'll be able to understand the concept better conceptually, theoretically, so it's easier for you to do good in your courses. 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. Starting with assets and liabilities. We should all be familiar with assets and liabilities because whether it's an asset for government or business, the term is the same, same thing for liabilities. What are assets? Assets are resources owned or controlled by the government rather than a business that are expected to provide future benefit. So assets are things that the government uses to do what? To give the government the capacity to serve resources with present service capacity, like what? Cash and cash equivalent, investments, supplies, inventories, receivable, which could include taxes receivable, account receivable, due from other government. Liabilities are simply debt and the definition of debt does not change our obligation because something happened in the past. We purchased something on account, somebody provided a service to us. It would require us because that happened to transfer an asset or provide a future service. We either have to pay cash or provide some service to that entity because they provide a service to us. So it's an obligation to sacrifice resources because something happened in the past. Examples, some common examples are accounts payable and accrued liabilities. Now let's move on to a new term called the third outflow of resources. Well, let's see. So we have resources that are leaving us. Let's assume those are the resources, but they are the third outflow. What does that mean? The definition is the consumption of a net asset. So you are using consuming net asset. Net asset means asset minus liabilities or consuming of assets. If you're not consuming liabilities, but sometimes we might consume asset and liabilities. So consuming of asset, but that consumption is applicable to future period. So we are consuming something now, but we cannot expense it until later. Well, it's an expense or a cost incurred this period, current period, but provide benefit for future period. So you incurred it here, but it won't be expense until later. Sounds to me like a prepaid. You guys remember the prepaid concept? Okay. The third outflow are not recognized as asset. They are not assets as their benefit. Do not need the definition of an asset, but we're going to list them with the assets. They sound like a prepaid prepaid account. Okay. So grant expenditure will be an example of those. Okay. When the government entity spends grant funds in advance of meeting grant eligibility, either that eligibility could be specified period or some requirement. The expenditure are recorded as the third outflow of resources. And once the eligibility has been met, the third outflow will be recognized as expenditure expenditure. Let's take a look at an example. Let's consider a city government that has applied for a federal grant to improve public transportation system. The total grant is 2 million. The grant period begins July 20 X3. The grant has a specific eligibility requirement, which include the completion of a feasibility study and the approval from the federal government before the funds can be utilized. So the city wanted to get this grant. So what they did, they started a feasibility study in April of 20 X3 and they spent $50,000 in expenditure. By June, the study is completed. The city received the approval from the federal government to use the grant funds. However, they can not start until July. So what entry do we make in April? Because in April, remember, we spent $50,000 to get all the paperwork ready and the feasibility study completed. We're going to debit at the third outflow of resources, which is this is the new account, dash grant expenditure, $50,000. And let's assume we paid credit cash $50,000. If we incurred liabilities, we credit liabilities. Now, July 1st, once the eligibility requirements are met, which is the feasibility study completed and the federal government approval, the grant period begins July 1st. Now, the city government, now they're going to recognize the 50,000 of the third outflow as a grant expenditure. This recognition, make sure that the expenditure are matched with the period in which the city received the benefit from the grant, basically matching revenues and expenses. So once we met the criteria, what's going to happen? We're going to debit this, we're going to debit the expenditure. Now we're going to expense the 50,000. So this 50,000 now expense. And this debit of the third outflow, we're going to remove it. We're going to credit. So basically the third outflow was created, the third inflow was removed. And what's left is debit expenditure. And we're going to talk about expenditure later while we call it expenditure, not expenses. And we're going to credit cash. And what we did is we made sure the expenditure is being recorded in the proper period as the grant, which is the revenue, which is complying with the matching principle. That's the third outflow of resources. How about the third inflow of resources? Well, here, rather than the consumption of net asset, it's the acquisition of net asset. But this acquisition, guess what? It's applicable to future period. So we're getting an asset, but we cannot use it now. Or we cannot, since we're getting the asset, we cannot consider it revenue now because it's applicable to future period. In simple terms, it's revenue or income received or earned in the current period that's related to future period. The third inflow are not recognized as liabilities because if someone paid their taxes, you have no obligation to, the government have no obligation to serve them. Because let's assume you paid your property taxes, then you move out of the city. You don't get your money back because someone else will have to pay those taxes anyway. So the obligate, so the third inflow of resources, they take a credit balance, they act like a liability, but we cannot consider them a liability. So basically the government received taxes from future period that should be spent in future period. So somebody prepaid their taxes, but we cannot call this a liability. So property taxes are typically levied for a specific period. For example, for a particular fiscal year, what we're looking at is something like this. Let's assume the fiscal year start from July 1st till the end of June. So this is the fiscal period. So someone might pay their taxes for this period here. So before the fiscal period start, that's fine. The portion of the taxes related to this period will have to be considered a deferred inflow until we go into this period. So it cannot be a revenue until we go into the period. So let's assume somebody paid us $600,000 in cash, or receive $600,000 in cash. Before the fiscal period started, we're going to debit cash, credit the third inflow. Then once the fiscal period kicks in, we're going to debit the third inflow to remove the deferred inflow. And what's left is debit cash, credit to tax revenue, but the tax revenue will be reported in the proper period. Let's take a look at another example. If a government entity receives a grant before meeting the grant's eligibility requirement or the specified period. Well, guess what? Here we receive the money. The grant proceeds are recorded as a deferred inflow. The funds are recognized as revenue only once we meet those eligibility. Remember, in the government, you have to meet your eligibility. So let's assume we receive half a million on June 1st. Well, before meeting the grant eligibility criteria or the specified period. So somebody transferred to us $500,000, the federal government or the state government. We debit cash. What do we credit? The third inflow of resources, advance the grant payment. It's not revenue yet. Now, once we meet the criteria, which is the criteria will begin September 1st, we meet the eligibility criteria. Now we are going to remove the deferred inflow. We're going to debit the deferred inflow and credit the revenue. Now we met the revenue criteria. Now we're going to say assets plus the third outflow of resources minus liabilities minus the third inflow of resources. When we net those out, now we know what each one of them is, we're going to get to net position or fund balance. You're going to see what we call net position or fund balance. But we're going to devote one whole session for net position. We have two more accounts to cover, which are the outflow of resources. And what do we mean by outflow? Outflow means leaving us. Resources are leaving us. Broadly refers to consumption. We are spending assets that result from transaction events or other circumstances. Well, what are we talking about here? We need to run the government on a day-to-day basis. It represents the cost of providing services or fulfilling other governmental responsibilities. Now bear in mind, every time we recognize outflow of resources, our net asset will go down because we are consuming. We are consuming. It's going to reduce our net asset. Examples are expenses if we are using accrual accounting, expenditure if we're using modified accrual. Don't worry, we have a whole session to explain modified accrual. If we incur losses, other financing uses, if we are financing something, paying off loans, it's an outflow of resources. When we pay off loan, money is leaving us. Then we have inflow of resources. It's the opposite of outflow. So rather than consumption, inflow of resources refer to the acquisition. Now we are getting the money. We are getting net asset resulting from transaction or event or some other circumstances. So what do you think? What are we talking about here? It's the inflow of resources from income, revenue, financial resources that the government entity receive or earns during a reporting period, usually from taxes. The recognition of inflow affect the government financial position as it increases net assets. When we have inflow of resources, our net asset goes up. We have more resources. Our fund balance, our net position improves. Examples of inflow of resources are revenues, which could take the form of tax, grants, fees, charges, investment income, gain, intergovernmental revenues, penalty, other financing sources. Other financing sources means when we finance ourselves, borrowing money. Again, we're going to have to do what? Keep the net position as a separate session or fund balance because it's important because we're going to have to talk about this much, much further in details. What should you do now? Go to Farhat Lectures and look at additional resources through false multiple choice questions. That's going to do what? That's going to help you understand governmental accounting, whether you are an accounting student taking this course or a CPA candidate. Go to Farhat Lectures to take advantage of the resources that's going to help you do better. Invest in yourself. Good luck. Study hard and of course, stay safe.