Why Fund Accounting?
If you've ever wondered why a government's financial statements look nothing like a corporation's 10-K, the answer is fund accounting. Unlike businesses that operate as a single economic entity, governments must track resources that are legally restricted to specific purposes. Fund accounting is the mechanism that ensures taxpayer dollars are spent only as authorized.
A city might have dozens of funds: a General Fund for core operations, a Capital Projects Fund for infrastructure, a Debt Service Fund for bond payments, a Water Enterprise Fund, a Self-Insurance Internal Service Fund, and numerous Special Revenue Funds for restricted grants and programs. Each fund is a separate accounting entity with its own chart of accounts, budget, and financial statements.
Fund Types
Governmental Funds
Governmental funds use the modified accrual basis of accounting, which recognizes revenues when they are both measurable and available, and expenditures when the related liability is incurred (with some exceptions for long-term obligations).
The five types of governmental funds are:
General Fund — The primary operating fund of the government. All transactions not required to be accounted for in another fund are reported here. Every government has exactly one General Fund.
Special Revenue Funds — Used to account for revenues that are legally restricted or committed to specific purposes other than debt service or capital projects. Examples include grant funds, tourism taxes, and impact fees.
Capital Projects Funds — Account for financial resources used for the acquisition or construction of major capital facilities and improvements.
Debt Service Funds — Account for the accumulation of resources for, and the payment of, principal and interest on long-term debt.
Permanent Funds — Account for resources that are legally restricted so that only earnings (not principal) may be used for the benefit of the government or its citizens.
Proprietary Funds
Proprietary funds use the full accrual basis of accounting — the same basis used by private businesses. These funds account for activities that operate like businesses.
Enterprise Funds — Account for activities that provide goods or services to external users for a fee. Airports, water utilities, transit systems, and parking garages are common enterprise funds.
Internal Service Funds — Account for activities that provide goods or services to other departments within the government. Fleet management, central printing, and self-insurance pools are typical internal service funds.
Fiduciary Funds
Fiduciary funds account for resources held in trust or as an agent for others and cannot be used to support the government's own programs.
Modified Accrual vs. Full Accrual
The dual basis of accounting is perhaps the most confusing aspect of governmental financial reporting for those accustomed to private-sector GAAP.
| Feature | Modified Accrual (Governmental Funds) | Full Accrual (Government-Wide, Proprietary) |
|---|---|---|
| Revenue recognition | Measurable and available | Earned |
| Availability period | Typically 60 days | Not applicable |
| Long-term debt | Not recognized | Recognized |
| Capital assets | Not recognized (expenditure when acquired) | Recognized and depreciated |
| Focus | Current financial resources | Economic resources |
| Statement name | Balance Sheet | Statement of Net Position |
Fund Balance Classifications
Under GASB 54, fund balance in governmental funds is classified into five categories based on the extent to which the government is constrained in how the resources can be used:
- Nonspendable — Resources that cannot be spent (inventory, prepaid items, principal of permanent funds)
- Restricted — Resources constrained by external parties (grantors, creditors) or by law
- Committed — Resources constrained by the government's highest level of decision-making authority
- Assigned — Resources intended for a specific purpose by someone authorized to do so
- Unassigned — The residual classification in the General Fund (can be negative in other funds)
The Dual-Perspective Reporting Model
GASB 34 established the dual-perspective model that remains (with modifications from GASB 103) the foundation of governmental financial reporting:
Government-Wide Statements present the entire government on a full accrual basis, similar to a corporation. These include the Statement of Net Position and the Statement of Activities.
Fund Financial Statements present individual funds on their respective basis of accounting — modified accrual for governmental funds, full accrual for proprietary and fiduciary funds.
The reconciliation between these two perspectives — showing how fund-level results convert to government-wide results — is one of the most important (and most misunderstood) elements of a government's ACFR.
Why This Matters
Understanding fund accounting is essential for anyone working with government financial data. Bond analysts reading official statements, auditors planning engagements, finance directors preparing ACFRs, and consultants advising on rate-setting all need to navigate this unique reporting framework.
GovtIntel provides tools and analysis that account for these complexities, ensuring that our intelligence is grounded in how governments actually report their finances.