Expenditure and Acquisition Cycle (purchasing, payables, and disbursements),
Expenditure and Acquisition Cycle (purchasing, payables, and disbursements),
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Vendor Invoice: This is the formal document received from a supplier to request payment.
Blind Purchase Order: A version of the PO where quantities are omitted to ensure the receiving staff performs an independent count.
Voucher Package: A complete set of documents including the Purchase Requisition, PO, Receiving Report, and Vendor Invoice.
Purchasing Agent Controls: Using job rotation or competitive bidding helps prevent vendor favoritism and kickbacks.
The "Three-Way Match": The process of comparing the Purchase Order, Receiving Report, and Invoice before a payment is authorized.
Check Signing Protocol: The person signing the check should cancel the voucher package (mark it "paid") and mail the check themselves.
Unrecorded Liabilities Search: Auditors find these by reviewing cash disbursements made shortly after the fiscal year-end.
Accounts Payable Confirmation: This audit procedure is primarily used to search for understatement (finding liabilities the client left out).
Separation of Duties (AP): To prevent fraud, the person authorizing a purchase must be different from the person recording it in the books.
Debit Memo: An internal document used to notify a vendor that the company is reducing the balance owed (usually due to a return).
Purchase Requisition: The internal document used by a department to request that the purchasing process begin.
Accrued Liabilities Audit: These are verified by calculating the accuracy of the estimate and checking payments made after the year ends.
Accounts Payable Ledger: A record that contains all the individual vendor accounts and exactly how much is owed to each.
Receiving Report Responsibility: This document must be prepared by the receiving department immediately upon the delivery of goods.
Payroll Separation of Duties: The person in charge of hiring employees should never be the same person who distributes payroll checks.
Inventory Production Control: A Production Order is the specific document used to authorize and start the manufacturing process.
Payroll Bank Reconciliation: Companies should use an imprest account (an account with a fixed balance) to make it easier to spot unauthorized checks.
Audit of Fixed Assets: To ensure all major purchases or loans were properly approved, auditors review the minutes of the Board of Directors meetings.
Inventory Observation Role: During a physical count, the auditor’s job is to observe the client’s procedures and perform their own test counts.
Payroll Tax Compliance: Auditors verify that taxes were paid by comparing Payroll Register totals to the official Tax Returns (Form 941).
Employee Master File Security: Access to change pay rates or add employees should be restricted strictly to the HR Department.
Inventory Obsolescence Risk: Auditors identify old or damaged stock by reviewing turnover ratios and performing physical tours of the warehouse.
Capital Stock Transactions: Auditors ensure stock issuances are authorized by tracing them back to the Board of Directors' meeting minutes.
Payroll "Ghost Employee" Audit: The most effective way to find fake employees is to personally observe a surprise payroll check distribution.
Manufacturing Overhead Allocation: Auditors check if overhead is reasonable by recalculating the allocation rates based on the chosen cost driver.
Compensated Absences: Auditors ensure vacation and sick pay liabilities are correct by reviewing company policy and testing the math of the accrual.
Financing Cycle (Debt Compliance): When checking bonds or notes, auditors look for restrictive covenants in the original loan agreements.
Inventory Transfer Controls: Any movement of inventory from the warehouse to the factory floor must be documented with a Material Requisition form.
1. Consolidated Balance Sheet Values In an acquisition, the subsidiary's assets and liabilities are recorded at their fair values on the consolidation date.
2. Goodwill vs. Gain on Bargain Purchase
Goodwill: Occurs when the price paid is greater than the fair value of net assets acquired.
Gain on Bargain Purchase: Occurs when the price paid is less than the fair value of net assets acquired.
3. Contingent Performance Liabilities The present value of probable future payments (like meeting revenue goals) is included as part of the total consideration transferred at the acquisition date.
4. Acquisition Expenses Costs such as legal, accounting, and investment banking fees are recorded as Professional Services Expense and do not increase the investment value.
5. In-Process Research & Development (R&D) The appraised value of R&D projects is recorded as an asset even if technological feasibility hasn't been reached, provided the project has alternative future use.
6. Stock Issuance Costs These costs reduce the Additional Paid-In Capital (APIC) of the parent company rather than being recorded as an expense.
The Concept of Fund Accounting Unlike a private corporation that uses one set of books, a government operates as a collection of separate "funds." Each fund is a self-balancing set of accounts used to track resources designated for specific purposes.
Purpose: To ensure that "restricted" money (like a gas tax meant only for road repairs) is not accidentally spent on general administrative costs.
Measurement Focus & Basis of Accounting Governments use two different "lenses" to view their finances:
Modified Accrual Basis (Short-term focus): Used for Governmental Funds. It tracks "current financial resources"—basically, cash and things that will become cash soon.
Revenue: Recognized only when it is "measurable and available."
Expenditures: Recognized when the fund liability is incurred.
Full Accrual Basis (Long-term focus): Used for government-wide statements and proprietary funds. This looks like standard corporate accounting, tracking all "economic resources" including long-term assets (buildings) and long-term debt (bonds).
The Three Fund Categories
Governmental Funds: The "core" of the government (e.g., Police, fire, and parks).
Includes: General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds.
Proprietary Funds: "Business-type" activities where the government charges a fee (e.g., a city-owned water utility or a municipal parking garage).
Fiduciary Funds: Money the government holds for someone else (e.g., employee pension funds).
Budgetary Reporting In governmental accounting, the Budget is a legal document.
Journal Entries: Governments actually record their budgets in the accounting system using "Estimated Revenues" and "Appropriations."
Encumbrances: When the government signs a contract or places an order, they "reserve" that money in the books using an Encumbrance entry to prevent overspending.
a. The Budget Entry
To Record the Annual Budget:
Debit: Estimated Revenues
Credit: Appropriations
Credit: Estimated Other Financing Uses—Transfers Out
Debit/Credit: Budgetary Fund Balance (as the balancing amount)
b. & d. The Encumbrance/Expenditure Cycle
When a Contract is Signed:
Debit: Encumbrances
Credit: Encumbrances Outstanding
When the Project is Completed/Invoice Received:
Debit: Encumbrances Outstanding (to reverse)
Credit: Encumbrances (to reverse)
Debit: Expenditures
Credit: Contracts Payable (or Cash)
c. Issuance of Long-Term Debt
To Record Bond Proceeds:
Debit: Cash
Credit: Other Financing Sources—Bond Proceeds
e. Interfund Transfers
To Record Transfer Out (Giving Fund):
Debit: Other Financing Uses—Transfers Out
Credit: Cash
To Record Transfer In (Receiving Fund):
Debit: Cash
Credit: Other Financing Sources—Transfers In
f. Debt Service Payment
To Record Payment of Principal and Interest:
Debit: Expenditures—Bonds (for principal)
Debit: Expenditures—Interest (for interest)
Credit: Cash
g. Property Tax Levy
To Record Tax Assessment:
Debit: Property Taxes Receivable (Gross amount)
Credit: Allowance for Uncollectible Taxes (Estimated loss amount)
Credit: Revenues—Property Taxes (Net measurable and available amount)
h. Restricted Revenue Receipt
To Record Special Revenue:
Debit: Cash
Credit: Revenues—(Specific Source, e.g., Tolls)
i. Permanent Fund Donation
To Record Receipt of Non-Expendable Principal:
Debit: Investments
Credit: Revenues—Donations
e. Interfund Transfer (General Fund to Debt Service Fund)
General Fund Entry:
Debit: Other Financing Uses—Transfers Out—Debt Service Fund
Credit: Cash
Debt Service Fund Entry:
Debit: Cash
Credit: Other Financing Sources—Transfers In—General Fund
f. Debt Service Payment (Debt Service Fund)
To Record Payment of Bonds and Interest:
Debit: Expenditures—Bonds
Debit: Expenditures—Interest
Credit: Cash
g. Property Tax Assessment (General Fund)
To Record Tax Levy and Revenue:
Debit: Property Taxes Receivable
Credit: Allowance for Uncollectible Taxes (Current)
Credit: Revenues—Property Taxes
Note: Revenue is recognized net of the uncollectible portion.
h. Toll Road Receipts (Special Revenue Fund)
To Record Collection of Restricted Funds:
Debit: Cash
Credit: Revenues—Toll Receipts
i. Stock Donation (Permanent Fund)
To Record Donation of Non-Expendable Principal:
Debit: Investments
Credit: Revenues—Donations
e. Interfund Transfer (General Fund to Debt Service Fund)
General Fund Entry:
Debit: Other Financing Uses—Transfers Out—Debt Service Fund
Credit: Cash
Debt Service Fund Entry:
Debit: Cash
Credit: Other Financing Sources—Transfers In—General Fund
f. Debt Service Payment (Debt Service Fund)
To Record Payment of Bonds and Interest:
Debit: Expenditures—Bonds
Debit: Expenditures—Interest
Credit: Cash
g. Property Tax Assessment (General Fund)
To Record Tax Levy and Revenue:
Debit: Property Taxes Receivable
Credit: Allowance for Uncollectible Taxes (Current)
Credit: Revenues—Property Taxes
Note: Revenue is recognized net of the uncollectible portion.
h. Toll Road Receipts (Special Revenue Fund)
To Record Collection of Restricted Funds:
Debit: Cash
Credit: Revenues—Toll Receipts
i. Stock Donation (Permanent Fund)
To Record Donation of Non-Expendable Principal:
Debit: Investments
Credit: Revenues—Donations
1. General Fund: Annual Budget
To Record the Budget:
Debit: Estimated Revenues
Credit: Appropriations
Debit/Credit: Budgetary Fund Balance (as the balancing amount)
2. General Fund: Property Tax Levy
To Record the Tax Assessment:
Debit: Property Taxes Receivable—Current
Credit: Allowance for Uncollectible Taxes—Current
Credit: Revenues—Property Taxes
3. General Fund: Ordering Supplies (Encumbrance)
To Record the Purchase Order:
Debit: Encumbrances
Credit: Encumbrances Outstanding
4. General Fund: Receiving Supplies
To Reverse the Encumbrance:
Debit: Encumbrances Outstanding
Credit: Encumbrances
To Record the Actual Expenditure:
Debit: Expenditures
Credit: Vouchers Payable
5. General Fund: Interfund Transfer Out
To Record Cash Sent to the Debt Service Fund:
Debit: Other Financing Uses—Transfers Out
Credit: Cash
6. Debt Service Fund: Interfund Transfer In
To Record Cash Received from the General Fund:
Debit: Cash
Credit: Other Financing Sources—Transfers In
7. Debt Service Fund: Bond Payment
To Record Payment of Principal and Interest:
Debit: Expenditures—Bonds
Debit: Expenditures—Interest
Credit: Cash
8. Capital Projects Fund: Construction Contract
To Record the Encumbrance for the Building:
Debit: Encumbrances—Office Building
Credit: Encumbrances Outstanding
9. Capital Projects Fund: Bond Issuance
To Record Proceeds from Long-Term Debt:
Debit: Cash
Credit: Other Financing Sources—Bond Proceeds
10. Special Revenue Fund: Toll Collection
To Record Restricted Revenue:
Debit: Cash
Credit: Revenues—Toll Receipts
1. General Fund: Annual Budget
To Record the Budget:
Debit: Estimated Revenues
Credit: Appropriations
Debit/Credit: Budgetary Fund Balance (as the balancing amount)
2. General Fund: Property Tax Levy
To Record the Tax Assessment:
Debit: Property Taxes Receivable—Current
Credit: Allowance for Uncollectible Taxes—Current
Credit: Revenues—Property Taxes
3. General Fund: Ordering Supplies (Encumbrance)
To Record the Purchase Order:
Debit: Encumbrances
Credit: Encumbrances Outstanding
4. General Fund: Receiving Supplies
To Reverse the Encumbrance:
Debit: Encumbrances Outstanding
Credit: Encumbrances
To Record the Actual Expenditure:
Debit: Expenditures
Credit: Vouchers Payable
5. General Fund: Interfund Transfer Out
To Record Cash Sent to the Debt Service Fund:
Debit: Other Financing Uses—Transfers Out
Credit: Cash
6. Debt Service Fund: Interfund Transfer In
To Record Cash Received from the General Fund:
Debit: Cash
Credit: Other Financing Sources—Transfers In
7. Debt Service Fund: Bond Payment
To Record Payment of Principal and Interest:
Debit: Expenditures—Bonds
Debit: Expenditures—Interest
Credit: Cash
8. Capital Projects Fund: Construction Contract
To Record the Encumbrance for the Building:
Debit: Encumbrances—Office Building
Credit: Encumbrances Outstanding
9. Capital Projects Fund: Bond Issuance
To Record Proceeds from Long-Term Debt:
Debit: Cash
Credit: Other Financing Sources—Bond Proceeds
10. Special Revenue Fund: Toll Collection
To Record Restricted Revenue:
Debit: Cash
Credit: Revenues—Toll Receipts
Annual Budget:
Debit: Estimated Revenues
Credit: Appropriations
Debit/Credit: Budgetary Fund Balance (the balancing amount)
Property Tax Levy:
Debit: Property Taxes Receivable—Current
Credit: Allowance for Uncollectible Taxes—Current
Credit: Revenues—Property Taxes
Ordering Supplies or Equipment (Encumbrance):
Debit: Encumbrances
Credit: Encumbrances Outstanding
Receiving Supplies or Equipment:
Debit: Encumbrances Outstanding (to reverse)
Credit: Encumbrances (to reverse)
Debit: Expenditures
Credit: Vouchers Payable (or Cash)
Salaries Paid:
Debit: Expenditures—Salaries
Credit: Cash
Interfund Transfer Out:
Debit: Other Financing Uses—Transfers Out
Credit: Cash
Internal Service Transaction (Paying another fund):
Debit: Expenditures
Credit: Due to Enterprise Fund
Interfund Transfer In:
Debit: Cash
Credit: Other Financing Sources—Transfers In
Payment of Debt:
Debit: Expenditures—Bonds (Principal)
Debit: Expenditures—Interest
Credit: Cash
Construction Commitment:
Debit: Encumbrances—Office Building
Credit: Encumbrances Outstanding
Issuing Debt for Project:
Debit: Cash
Credit: Other Financing Sources—Bond Proceeds
Toll Road Collection (Special Revenue):
Debit: Cash
Credit: Revenues—Toll Receipts
Stock Donation (Permanent):
Debit: Investments
Credit: Revenues—Donations
Services Provided (Enterprise Fund):
Debit: Due from General Fund
Credit: Revenues—Charges for Services
Taxes Collected for Others (Custodial Fund):
Debit: Cash
Credit: Due to Other Governments
Closing the Budget:
Debit: Appropriations
Debit/Credit: Budgetary Fund Balance (to reverse)
Credit: Estimated Revenues
Closing Actual Activity:
Debit: Revenues
Credit: Expenditures
Credit: Other Financing Uses
Debit/Credit: Fund Balance—Unassigned (the balancing amount)
Internal Service Transaction (Payment for Services):
Debit: Expenditures
Credit: Due to Internal Service Fund
Note: This represents the General Fund's obligation to pay another fund for services like motor pool or data processing.
Closing Budgetary Accounts:
Debit: Appropriations
Debit/Credit: Budgetary Fund Balance (to reverse the original plug)
Credit: Estimated Revenues
Note: This entry "wipes the slate clean" for the budget at the end of the fiscal year.
Closing Actual Activity Accounts:
Debit: Revenues
Credit: Expenditures
Credit: Other Financing Uses—Transfers Out
Debit/Credit: Fund Balance—Unassigned (the balancing amount)
Revenue Recognition:
Debit: Due from General Fund
Credit: Operating Revenues—Charges for Services
Note: Proprietary funds use full accrual accounting, so this looks more like a standard business entry.
Tax Collection for Other Governments:
Debit: Cash
Credit: Due to Other Governments
Note: Fiduciary funds do not have revenues; they only record the increase in assets and the corresponding liability to the entities that will eventually receive the cash.
Construction Completion:
Debit: Encumbrances Outstanding (to reverse)
Credit: Encumbrances—Office Building (to reverse)
Debit: Expenditures—Office Building
Credit: Contracts Payable
Note: This follows the "reverse encumbrance, record expenditure" rule once the building is finished.
Payment of Salaries:
Debit: Expenditures—Salaries
Credit: Cash
Recognition of Supplies Consumption:
Debit: Expenditures—Supplies
Credit: Supplies Inventory
Note: This entry reflects the "consumption method" where supplies are recorded as an expenditure when used.
Transfer to Debt Service Fund:
Debit: Other Financing Uses—Transfers Out—Debt Service Fund
Credit: Cash
Receipt of Transfer:
Debit: Cash
Credit: Other Financing Sources—Transfers In—General Fund
Payment of Bond Principal and Interest:
Debit: Expenditures—Bonds
Debit: Expenditures—Interest
Credit: Cash
Recognition of Construction Expenditure:
Debit: Expenditures—Office Building
Credit: Vouchers Payable
Recording Bond Issuance:
Debit: Cash
Credit: Other Financing Sources—Bond Proceeds
Note: In this fund, the bond proceeds provide the financial resources to pay for the construction.
Collection of Tolls:
Debit: Cash
Credit: Revenues—Toll Receipts
Note: These funds are restricted for specific uses like highway maintenance.
Collection of Taxes for Other Entities:
Debit: Cash
Credit: Due to Other Governments
Note: Because the city is acting only as an agent, no revenue is recognized; it is simply a liability to pass the cash along.
Closing Budgetary Accounts:
Debit: Appropriations
Debit/Credit: Budgetary Fund Balance (reversing original entry)
Credit: Estimated Revenues
Closing Activity Accounts:
Debit: Revenues
Credit: Expenditures
Credit: Other Financing Uses
Debit/Credit: Fund Balance—Unassigned (balancing amount