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What the cash? PART 2
The Fun(d) Side


Just for review sake, last week we broke down the Governmental Cash Accounting Equation;
 

But we can’t just leave the equation to one side. This equation is a fundamental component of government cash basis accounting. Since we only covered the cash side of the equation, it’s also important that we understand the right side (fund balance) of this equation.

So why do funds and fund accounting exist for governments?

This circles us back to the core purpose of government entities. Government entities exist to provide services to citizens in a cost-efficient manner. Whenever public money is being used, there is an emphasis on resource tracking. Fund accounting makes it easier to keep track of financial information.

A good analogy of funds is Dave Ramsey’s envelope budgeting and expense tracking method. His method allocates specific amounts of money into different envelopes. The money in each envelope has a specific purpose. The envelopes give users a clear picture of how much money is being used on specific types of expenses. Envelope users also know exactly how much money they have left to spend. Funds for a government entity function similarly. Funds are used to help keep track of financial information effectively.

Here are three examples of funds a government could use:

1. Governmental funds are used to record all activities that aren’t required to be in a different fund. A common governmental fund is the general fund.

2. Proprietary funds are used to account for business-type activities. An example of a proprietary fund would be a water fund.

3. Fiduciary funds are used to keep track of assets that don’t belong to your government.

Regardless of your government size or type, you will have at least one fund. This will be a governmental fund. Determining the number of funds needed depends upon the situation of each entity.

How many funds do most small government entities have?

Some governments will need just one fund, and some will need many. When deciding how many funds to use, keep in mind you want to track resources in an efficient and effective manner. By establishing additional funds you may be creating more work for yourself. If the benefits of creating new funds don’t outweigh the costs, then additional funds shouldn’t be created. An exception to this would be if you’re legally required to have a fund.

Let’s recap some key concepts from the past two weeks. Think of cash basis accounting like your personal finances. Until you receive cash or pay something, you don’t have revenue or expenses. Funds are used to help keep track of financial activity and the number of funds used are dependent on your situation.

Lastly, always remember the golden rule. The accounting equation, cash + investments = fund balance, must remain in balance at all times.

 

Author:
My name is Seth. I am a Professional Service Specialist at BIAS Software and currently working on my Master of Accounting Degree from Florida Atlantic University. To clear my mind, I love to get out of town and go fishing. I would appreciate your feedback. If you have a suggestion or a topic you’d like me to cover, please send it to me at seth@biassoftware.com

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