Number of Funds to Be Established (2)
A few words are needed on the accounting for inventories in the general fund. These accounting rules would also apply to other governmental funds discussed in this section of the chapter, but inventories are most often found in the general fund.
There are two acceptable accounting methods for inventories in the general fund and other governmental funds. The first is called the purchase method. This method simply records an expenditure for materials and supplies when they are purchased. The second method is called the consumption method. This method records an expenditure for inventories when they are consumed. Under this method, when inventories are purchased, they are recorded on the balance sheet as an asset. As they are used during the year, the asset account is reduced and an expenditure is recorded. At the fiscal year-end, the amount recorded as “inventory” on the balance sheet represents the cost of the inventory that the government still has on hand, which are those that it has not consumed during the year. While GAAP does permit either the purchase method or the consumption method to be used, it should be noted that GAAP also requires that when a government has significant amounts of inventory at year-end, those inventories should be recorded on the balance sheet. This would point to the use of the consumption method in order to accomplish this.
In reading a government’s fund financial statements, the fund balance of the general fund usually has an amount as one of its components called “reserved for inventories” that is equal to the amount of inventories recorded as an asset on the same balance sheet. The reason this is done is to alert the financial statement reader that the balance sheet contains an asset, inventories, that is technically not a current “financial” resource that is available to be spent or to pay the fund’s current liabilities.
Taken From : Governmental Accounting Made Easy