Each of these will be discussed briefly in the following sections.

Whether and When Tax Revenues Should Be Recorded Directly in a Debt Service Fund

This is a fairly narrow issue of situations where a specific revenue source, such as property taxes or sales taxes, is restricted for debt service on general long-term debt. Assuming that the government has established a debt service fund, the accounting question is whether these restricted tax revenues should be recorded directly as revenue of the debt service fund or whether they should be recorded as revenue of the general fund and then recorded as a transfer to the debt service fund.

When taxes are specifically restricted for debt service, they may be reported directly as revenue in the debt service fund, rather than in the general fund with a subsequent transfer to the debt service fund. However, circumstances such as a legal requirement to account for all revenues, including restricted taxes, in the general fund may sometimes require that restricted taxes be first reported in the general fund. In this case, an operating transfer from the general fund to the debt service fund would be recorded for the amount of the specific tax. The accounting may be influenced by the manner in which these revenues are budgeted. For example, the restricted tax revenue and the transfer to the debt service fund may both be part of the budget of the general fund, in which case it may make more sense to have the accounting follow that track than to record the revenue directly in the debt service fund. This will also be true for taxes that are partially restricted for debt service. For example, a property tax may be used to fund current debt service requirements, with any excess property tax revenue over the amount needed for debt service to be used for general operations or other functions of the government. Accounting for the entire property tax in the general fund, with a transfer of the required debt service amount to the debt service fund makes more sense than splitting the tax revenues into two funds. It will also facilitate a financial statement reader’s being able to determine how much property tax revenue was recognized during the year without having to add up amounts from two different funds.

Taken From : Governmental Accounting Made Easy

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