As mentioned, the debt service fund, as a governmental fund, uses the modified accrual basis of accounting. However, generally accepted accounting principles for governments result in debt service expenditures being recorded on an accounting basis similar to the cash basis. Unmatured (meaning that they are not yet due) principal and interest payments on general long-term debt, including special assessment debt for which the government is obligated in some manner, are not recorded as a liability and expenditure of the debt service fund. In other words, if a government with a June 30, 20X1, fiscal year-end makes a debt service principal and interest payment on July 1, 20X1, the principal payment would not be recorded as a liability and an expenditure for the year that ends June 30, 20X1. Nor would the government accrue interest expense for this payment for the year ended June 30, 20X1. Interest would not be accrued at June 30, 20X1, even if the interest paid on July 1, 20X1 was earned by the bondholders during the previous six months, which is often the case. As long as the interest and principal payment is not due until July 1, 20X1, neither would be recorded as a liability and expenditure of a debt service fund on June 30, 20X1.

The preceding discussion assumes that debt service payments are being made on a timely basis. If the principal and interest payment became due and were not paid, the debt service fund would record a liability for the due but unpaid debt service payment. One other consideration is the situation where a government has transferred resources into a debt service fund before the debt service payment has become due. In this case, the debt service fund would reflect the resources available for the debt service payment, but not the liability for the payment itself. Generally accepted accounting principles permit governments to record the liability and expenditure for the debt service payment in this case. Given that the fund has the resources, the liability will be satisfied with current financial resources, consistent with recording a liability in the fund under the current financial resources measurement focus. It is important to note that recording the liability and expenditure for debt service in this limited exception is optional and not required.

Taken From : Governmental Accounting Made Easy

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