Debt Service Funds
Debt service funds are a type of governmental fund that is used to account for—you guessed it—debt service. Debt service is simply a fancy way of saying “making principal and interest payments on the government’s debt.” Once again, the government should determine whether it is legally obligated to establish debt service funds. If it is not, the government should decide whether it would be useful from a managerial perspective to establish such a fund or funds. From a practical perspective, most governments that have long-term debt outstanding do use debt service funds.
One thing to keep in mind is that establishing debt service funds as an accounting and financial reporting tool is different from the requirement in many bond indentures or similar agreements that establishes reserve funds, or other financial requirements. For example, a bond indenture (contract) may require that one year’s worth of debt service be maintained in a restricted cash account to be used only in the event of default by the government on the debt. This is not a debt service fund. This is a restricted cash account often called a debt service reserve fund. A debt service fund is an accounting mechanism used to account for transactions involving making normal principal and interest payments on a government’s debt. A debt service reserve fund is money kept out of the reach of the government that will be used to pay bondholders in the event that a government defaults on its debt.
As a governmental fund, the debt service fund uses the modified accrual basis of accounting and the current financial resources measurement focus. There are three accounting issues that are often encountered relating to debt service funds.
- Whether and when tax revenues should be recorded directly in a debt service fund
- Expenditure recognition for debt service payments
- Advance refunding of debt issues
Taken From : Governmental Accounting Made Easy