Archive for January, 2009

A second similar situation arises when the government writes checks prior to its year-end and reduces the book balance of its cash below zero. It can do this because it knows that all of the written checks will take some time to clear the bank, at which time the government expects that the actual balance in its bank account—its bank balance—will be sufficient to clear the checks. The difference between this case and the first situation is that, in this case the government does not physically hold onto the checks. It mails them. (more…)

Sometimes governments report both accounts payable and accrued expenses on one line on the statement of net assets. Other times, separate amounts are reported for each. For the purpose of explaining what these liabilities represent, it is helpful to discuss accounts payable and accrued expenses together. (more…)

FASB Concepts Statement No. 6 provides this definition of liabilities: “Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” While this definition is somewhat less confusing than FASB Concepts Statement No. 6’s definition of assets, it still requires a good deal of explanation. Nonaccountants generally think of liabilities as simply “money that you owe.” While this is not too far off from a GAAP perspective, there are several ideas in Statement No. 6’s definition that will make the simple definition more accurate. (more…)

Prepaid expenses are assets that arise because an organization has paid for services that it will receive in the future, with the future being defined as a time past the fiscal year-end. The most common example of a prepaid expense is an insurance premium. Let us say that a government has a June 30 fiscal year-end. It pays its general liability insurance premium (assume it is $1,000) on January 1, for the next full calendar year. By June 30, it has used up six months of insurance, but still has another six months of insurance to (more…)

It was mentioned earlier that there are two exceptions to calculating and recording depreciation on capital assets. The first involves specific accounts that are not depreciation—land and construction work-in-progress. Land is not depreciated because it is not “used up” by the government—it retains its value and usefulness even though things added to the land, such as a building, do decline in value and are depreciated. Construction work-in-progress represents a capital asset that is being built by a government (more…)

Capitalized leases (which will be discussed in greater detail in Chapter 9) are an accounting creation that recognizes the substance of some lease transactions over their form. In other words, when a government enters into a lease for an item, which, in substance, is a purchase of the item, the item is recorded as a capital asset of the organization, even though the organization does not have title to the asset. (more…)

Sometimes referred to as fixed assets or property, plant, and equipment, the capital assets of a government represent its longlived assets used in the conduct of the organization’s business. These would include land, buildings, equipment, office furnishings, computers, vehicles, and other similar assets. (more…)

Inventories are reported on the statement of net assets either at cost or at market value, whichever is lower. One important matter in accounting for inventories is referred to as the flow assumption. The flow assumption determines which items from inventory are considered to be sold or used first. The first-in, first-out (FIFO) flow assumption sounds complicated, but simply means that the oldest items from inventory (that is, the first items “in”) are the first items to be sold or used. This is the most common flow (more…)

Inventories are most often associated with manufacturing and retail operations, rather than with governments or governmental entities. Many, if not most governments, however, do maintain inventories, because the definition of what is considered inventory is somewhat broader in the governmental environment. Most inventory amounts reported by governments, however, are not significant in relation to their overall financial statements and this section is not trying to overstate the importance of this item to these financial statements. However, it is useful to understand what the inventory caption means because although not generally large, it is seen frequently. (more…)

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