1.0 INTRODUCTION

In this public sector accounting guide, you will be introduced to the concepts of funds and funds accounting in public sector accounting.

You will also learn the general classification of funds and the various types of government funds.

Specifically, you will learn about the types of funds in Nigeria. Furthermore, you will learn the advantages and disadvantages of fund accounting.

2.0 Objectives

At the end of the unit, the student should be able to understand the following:

1. The concepts of funds and fund accounting

2. The general classification of funds

3. Types of government funds

4. types of proprietary funds.

5. Types of fiduciary funds

6. Types of funds in Nigeria

7. Advantages and disadvantages of fund accounting:

8. General accounting entries in fund accounting

DEFINITIONS OF FUNDS ACCOUNTS

Funds accounting is one of the basic principles of public sector accounting. Public sector accounting systems are organized and operated on a fund basis.

A fund is the basic unit used to segregate resources and expenditures in the state treasury.

A fund is a fiscal and accounting entity that has a self-balancing set of accounts that record cash and other financial resources, as well as all related liabilities and residual equities or balances, and how they change. These accounts are kept separate for each fund.

for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, and limitations.

There are other related entities that have some of the same characteristics as a fund but do not fully meet the definition.

The general purpose of these entities is to segregate resources and restrict expenditures to clearly identifiable purposes. These groups have a lot of specific accounts, reserves, and funds that can only be spent in a certain way.

In each case, revenue is dedicated or appropriated, spending is restricted, and any balance remains in the account and does not cancel to the general or other fund. As stated above, a fund is a separate accounting and financial reporting entity.

It is a self-balancing set of accounts. In other words, a fund’s assets will equal the total of its liabilities and its fund balance (or net assets), in the same way that financial statements for a legal entity work.

This does not, however, mean that funds are always separate legal entities. It should be noted here that a fund is not the equivalent of a bank account.

The fund will have various assets and liabilities, with the difference between the assets and liabilities being called the fund balance. The fund balance does not necessarily represent “cash” that can be spent.

Not all of the assets will be in the form of cash, so it cannot be expected that the fund balance is the equivalent of the balance of cash in a bank account.

There is no limit to the number of funds that can be established by a government or an arm or unit of government. The general rule is that the number of funds should be as small as possible.

Only those funds required by law and sound financial administration should be established and maintained by the government. Unnecessary funds could result in inflexibility, undue complexity, and inefficient financial administration. When most of the following conditions are met, a fund should be set up or kept going.

1. When either the revenues or expenditures of the activity are sufficiently large, 2. When the activities create assets or liabilities that will continue beyond the normal budget cycle,

2. If multiple agencies will be involved in the collection or use of the fund’s resources,

3. If there are enough resources available to cash flow the activity when the program begins operating,

4. If a separate fund is necessary to comply with constitutional requirements, government regulatory requirements, or generally accepted accounting principles,

3.2 GENERAL FUNDS CLASSIFICATION

Funds are generally classified into three broad categories:

• government funds,

• private equity, and

• fiduciary funds Each of these fund groups has a sub-funds category as follows:

(A) Government Funding

1) The general fund

Two special revenue funds

(3) Funds for debt service

(4) Investment in capital projects

Five permanent funds

Proprietary Funds (B)

(1) Business funds

Internal service funds

(B) Fiduciary Trustee Funds

(1) Employee trust funds (pension and other benefits)

(2) Funds of Investment

(3) Special-purpose Funds

(4) Agency Resources

3.3 FEDERAL GOVERNMENT FUNDS

Govermental funds account for the activities of the government that are not regarded as proprietary (business-type) or fiduciary.

These activities are sometimes referred to as “general governmental activities.”

Government funds use the modified accrual accounting method and the current financial resources measurement method.

We shall now discuss the different types of governmental funds.

3.3.1 GLOBAL FUND

The general fund is the main operating fund of a government. Generally accepted accounting principles permit a government to have only one general fund. The general fund is a catch-all fund.

It accounts for all the current financial resources of a government, except for those current financial resources that are accounted for in another fund. Often, when governments talk about

“Balancing their budget,” what they really mean is that they are balancing the budget of their general fund.

Many times, when it is said that a government is over budget or has a deficit, the meaning is not for the government as a whole, but for the government’s general fund, since this is usually considered the main operating fund of a government.

The balance sheet of the general fund will include those current financial resources related to transactions that will be accounted for in the general fund. Usually, the asset side of the balance sheet consists of cash, investments, receivables, and inventories.

In Nigeria, the general fund of the Federal Government is the consolidated Fund. It is the fund that holds all forms of money that belong to the federal government, except revenue and other money:

• payable by or under an Act of Parliament into some other fund established for a specific purpose (i.e., Contingency Fund, Road Fund, etc.; or

• (ii) that may, under an Act of Parliament, be retained by the department or agency of the government that received them for the purpose of defraying the expenses of that department or agency.

In Nigeria, Section 120 of the 1999 Federal Constitution specifies the Consolidated Revenue Fund as the main fund of the Federal Government into which all revenues generated for the State should be paid into and out of which all legally authorized expenditures should be paid from.

3.3.2 FUNDING FOR SPECIAL REVENUE

These types of funds are used to account for the proceeds of specific revenue sources that are committed to be used for specific purposes other than capital projects and debt service.

The creation and use of special revenue funds is optional unless there is a legal requirement by the government that a special revenue fund be created.

The fact that a certain amount of money must be used for a certain thing doesn’t mean that this money and the money it costs can’t be put into the government’s general fund.

Governments have to use a certain number of funds, according to common accounting rules.

However, a government may feel that a special revenue fund improves accountability over compliance with a special revenue source’s requirements.

In these cases, the government will set up one or more special revenue funds to account for these types of resources.

There are two common types of revenue that are kept track of in special revenue funds.

The first are for grants received from other levels of government, such as a federal or state grant, or from individuals or foundations that restrict the use of the funds for specific purposes. For

For example, a city may receive a state grant to build a state library in a particular location.

A special revenue fund may be set up to keep track of money from the state and money spent on building the library.

Another example of where special revenue funds are used is where the proceeds from specific taxes are restricted for certain purposes.

For example, a state may charge a tax on people who go to school. The money from that tax must be used to improve university education.

3.3.3 FUND FOR CAPITAL PROJECTS

This fund is established into which moneys are accumulated to undertake projects or for the acquisition of capital assets.

Capital Projects Funds are used to account for the development of capital facilities other than those financed by special assessments or the operations of an Enterprise Fund. In many cases, the use of capital project funds is optional.

Most governments use capital project funds to account for the acquisition and/or construction of capital assets. The amount of money flowing through the capital projects fund can sometimes overshadow the general governmental activities reported in the general fund.

The only instance where GAAP requires that a government use a capital projects fund is where capital grants or shared revenues are restricted for capital acquisition or construction.

Once a government determines that it desires to establish a capital projects fund (or is required by GAAP to establish one), the government then needs to decide how many capital projects funds will be established.

A government may determine that it can adequately account for and manage its capital projects with one capital projects fund.

However, a government may decide that establishing a number of capital project funds will better serve its accountability and financial management needs.

3.3.4 FUND FOR DEBT SERVICE

Debt service funds are a type of governmental fund that is used to account for resources that are restricted, committed, or assigned for debt service. The debt service fund is kept as an alternative to the loans fund, where the policy of the government is to keep any loan contracted in the consolidated fund. The fund is for the service of both the principal and interest payments. Hence, transfers into this are purely money from the Consolidated Fund necessary for the principal and interest payments.

The government should determine whether it has a legal obligation to establish debt service funds. If it is not, the government should then decide whether it would be useful from a managerial point of view.

perspective to establish such a fund or funds. From a practical perspective, most governments that have long-term debt outstanding do use debt service funds.

Debt service funds are used to keep track of money that will be used to pay off debt and interest in the future.

3.3.5 LONG-TERM FUNDS

To describe resources that are legally limited, permanent funds are used. Only the earnings, not the principal, can be used for government programs, which are programs that benefit the government or its citizens.

Permanent funds operate in a manner similar to endowments, where the investment earnings, and not the principal, can be spent. Note that the earnings of a permanent fund are used to support the government’s activities.

3.4 PRIVACY FUNDS

Proprietary funds are used to account for a government’s ongoing organizations and activities that are similar to those found in the private sector.

These activities resemble commercial activities performed by governments, and the basis for the accounting and measurement focus of these funds reflects this resemblance.

There are two types of proprietary funds: enterprise funds and internal service funds.

Proprietary funds use the accrual basis of accounting and economic resource measurement focus. Proprietary funds recognize revenues when they are earned and recognize expenses when a liability is incurred.

This means that the balance sheets of proprietary funds will reflect both current and noncurrent assets and liabilities. In other words, the fund records the value of things like infrastructure, buildings, equipment, and so on.

In addition, debts that are related to the activities of the proprietary fund are also shown on the balance sheet of the proprietary fund as a debt.

(Keep in mind that the assets and liabilities of the proprietary funds are also included in the assets and liabilities of the government-wide statement of net assets.) In addition to recording noncurrent assets and liabilities, which is basically a result of their measurement focus, proprietary funds also recognize revenues and expenses on an accrual basis of accounting, which means that revenues and expenses are recorded in different accounting periods than they would be by governmental funds.

3.4.1 BUSINESS FUNDS

Enterprise funds are used to account for operations that fall into two basic categories:

1. Activities that are financed and operated in a manner similar to private business enterprises, where the intent of the governing body is to finance or recover the cost of providing goods or services to the general public on a continuing basis, primarily through user charges.

2. Operations where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes

Enterprise funds are mostly used to keep track of things that are paid for by people who use the service.

However, the total cost of the activity does not have to be paid for by the user charges.

The government (or another government entity) may pay for a lot of the costs of the enterprise fund.

Typical activities accounted for in enterprise funds include those that are similar to utilities, such as water and sewer funds and electric utility funds. The parking lots run by governments are another example of a “proprietary” activity that can be tracked in a fund.

3.4.2 INTERNAL SERVICE FUNDS

Internal service funds are used to keep track of how much money is spent on goods or services that one department or agency of a government unit gives to another department or agency of the same government unit on a cost-reimbursement basis.

They can charge the full cost of giving goods or services to other departments or agencies because internal service funds use a focus on economic resources and an accrual accounting method.

As the main purpose of internal service funds is to identify and allocate the costs of goods or services to other departments, it is generally recommended that governments use separate internal service funds for different activities.

Keep in mind, however, that GAAP does not require the use of internal service funds, nor does it require that the internal service fund include the full cost of services that are provided.

A government may choose to leave some of the related costs out of the internal service fund, such as a rent charge or a utility charge.

Internal service funds are often used to determine and allocate the costs of a diverse group of activities, such as

• Duplicating and printing services

• Motor pool

• Central Garages Information Processing

• Purchasing

(v) Warehousing and central stores

Many of the transactions between internal service funds and other funds take the form of quasi-external transactions. The funds that get goods or services from the internal service fund report an expense or a cost. The internal service fund, on the other hand, reports a profit.

3.5 FUNDS FOR FIDUCIARY ADMINISTRATION

Fiduciary funds are used to report assets held in a trustee or agency capacity for others and, therefore, cannot be used to support the government’s own programs.

Fiduciary funds are reported using the economic resources measurement focus and the accrual basis of accounting, except for the recognition of certain liabilities of defined benefit pension plans and certain post-employment healthcare plans.

Trust funds are used to report resources held and administered by the reporting government when it is acting in a fiduciary capacity for individuals, private organizations, or other governments.

There is a trust agreement that affects how much management involvement there is and how long the resources are held. Trust funds are different from agency funds because there is a trust agreement.

3.5.1 AGENCY FINANCES

Agency funds are used to account for assets held solely in a custodial capacity. As a result, assets in agency funds are always matched by liabilities to the owners of the assets.

Accounting and financial reporting for agency funds are unique and do not really follow those of governmental funds or proprietary funds. People who work for government agencies use the modified accrual basis of accounting to figure out what assets and liabilities they have, like receivables and payables.

However, agency funds do not have or report operations, and accordingly, they are said to not have a measurement focus.

In determining whether an agency fund or a trust fund is used to account for various types of transactions, there are no clear-cut distinctions for selecting the proper fund to account for a particular transaction.

The degree of the government’s management involvement and discretion over assets is generally much greater over trust fund assets than over agency fund assets. Private purpose trust funds, for example, may require a government’s management to identify eligible recipients, invest funds in the long or short term, or monitor regulatory compliance.

Agency funds, on the other hand, usually only involve receiving, investing for a short time, and sending money back to their owners.

Agency funds are often used by school districts to account for student activity funds that are held by the school district but whose assets legally belong to the students.

Agency funds can also be used to track taxes that one government collects on behalf of another government.

The collecting government has virtually no discretion on how the funds in the agency fund are to be spent.

They are simply collected and then remitted to the government on whose behalf they were collected. Other than this, there are three times when the use of an agency fund is required.

3.5.2 TRUST FUNDS FOR PENSIONS (AND OTHER EMPLOYEE BENEFITS)

Pension (and other employee benefit) trust funds are used to report resources that are required to be held in trust for the members and beneficiaries of defined benefit pension plans, defined contribution plans, or other employee benefit plans.

Governments almost always offer pension benefits to their employees. The pension plans related to these benefits are reported as pension trust funds in the government’s financial statements if either of the following criteria is met:

• The pension plan qualifies as a component unit of the government.

(ii)  The pension plan does not qualify as a component unit of the government, but the plan’s assets are administered by the government. Pension (and Other Employee Benefit) Trust Funds, is used to account for other employee benefit funds held in trust by a government.

Pension (and other employee benefit) trust funds use the flow of economic resources as their measurement focus and the full accrual basis of accounting, similar to nonexpendable trust funds and proprietary funds. A separate pension (and other employee benefit) trust fund should be used for each separate plan. Separate pension (and other employee benefit) trust funds may also be set up to keep track of extra pension benefits that people get.

Governmental pension plans are usually administered by public employee retirement systems.

3.5.3 TRUST FUND FOR INVESTMENT

Investment trust funds should be used to report the external portion of investment pools reported by the school district.

A special type of trust fund, the investment trust fund, is used by governments that sponsor external investment pools and that provide individual investment accounts to other legally separate entities that are not part of the same financial reporting entity.

The investment trust funds report transaction balances using the flow of economic resources measurement focus and the accrual basis of accounting. Therefore, the accounting and financial

Investment trust fund reporting is similar to that used by nonexpendable trust funds (and proprietary funds).

3.5.4 TRUST FUNDS FOR PRIVATE PURPOSE

These are used to report any other trust arrangements in which the principal or income benefits individuals, private organizations, or other governments.

They are used to report all trust arrangements (other than pension and other employee benefits and investment trust funds) under which principal and income benefit individuals, private organizations, or other governments.

Similar to other trust funds, private-purpose trust funds can’t be used to pay for government programs.

It is therefore important to make sure that an activity is absent from any public purpose of the government before it is accounted for as a private-purpose trust fund, even if individuals, private organizations, or other governments receive direct or indirect benefits from the activity. The distinction that a private-purpose trust fund should not be used to account for a grant program that supports a government’s own programs is an important one.

if a donor gives a government money, the government should record that money as grant revenue in its general fund.

As a result, the government’s general fund now has to pay for the costs of this example project.

However, if the grant does not directly benefit the government or go to support its own programs, then the grant is properly accounted for as a private-purpose trust fund.

Generally, because of their nature, there are no legal budgetary appropriations for these types of fiduciary funds, and the program is administered essentially only in accordance with the grant agreement.

3.6 TYPES OF FUNDS IN NIGERIA

We have already examined the broad categories of funds. Within these broad categories, different types of funds exist.

The funds commonly used in Nigeria are summarized below.

3.6.1 Combined revenue fund

In Nigeria, Section 120 of the 1999 Federal Constitution specifies the Consolidated Revenue Fund as the main fund of the Federal Government into which all revenues generated for the State should be paid into and out of which all legally authorized expenditures should be paid from.

3.6.2 The Contingency Fund.

This is the Fund established for any unbudgeted expenditure which comes up as very urgent or were unforeseen during the budgeting period, for instance for unexpected flood disaster, or outbreak of some disease in certain part of the Nation. In Nigeria, the setting up of such Contingency Fund is authorised in Section 123 (1) of the Federal Constitution.

3.6.3 Reserve Fund for Unforeseen Circumstances

It is that part of the normal approved appropriation which is set aside by the Executive. It is normally part of the planned expenditure, which is deducted and reserved, with the aim of helping out any spending Organization in the future to meet any unexpected spending.

This reserve is within the control of the Executive and can help out a spending organization in the event of the need for extra funds and significantly reduce the problem of going through either supplementary requests from the Legislature or the issue of looking for areas for possible virement.

This can be a good way to plan for any unexpected shocks, though its existence can also encourage misuse of funds especially when the reserve swells over the years and proper guidelines and control for its use are not affected.

3.6.4 Internally Generated Funds:

This means revenue generated from the activities of a government agency from its operations other than taxes collected by the revenue agencies and includes non-tax revenues.

3.6.5 Capital Project Fund

This fund is established into which money is accumulated to undertake projects or for the acquisition of capital assets. It is also known as the Development Fund.

3.6.6 National Loans Fund.

Where the policy of the government is to keep such separate account, it accounts for the receipts of loans that are contracted, both foreign and local and the payments of interest on such loans and the repayments of the principal sums.

Transfers are made out of this into a consolidated fund to meet any budget deficits. Monies for the loan liquidation in terms of both principal and interest payments are also made from the consolidated fund into this account.

3.6.7 Trust and Agency Fund.

This fund is established to hold moneys that the government holds in trust for some institution or body.

The government holds this money as a trustee or an agent for the owner. An example could be the money that the government holds from international bodies as rewards to the national armed forces for international peacekeeping assignments.

3.6.8 Debt Service Fund/Sinking Fund.

This special fund is kept as an alternative to the Loans Fund, where the policy of the government is to keep any loan contracted in the debt service fund to ease its repayment.

3.6.9 Consolidated Fund.

The fund is for the service of both the principal and interest payments. Hence, transfers into this are purely money from the Consolidated Fund necessary for the principal and interest payments.

Alternative to this is the creation of a Sinking fund into which amount is paid annually for a specific loan redemption with the annual payment calculated in such a way that the annual payment (the principal) plus the interest earned which is reinvested will be sufficient for the future liquidation of the loan.

3.6.10 Substitute Fund

This is a fund, which is set established by governments and is used to support projects which are funded by foreign donations. Foreign donations can be made either by cash or at times by goods.

Where donors, at times, donate goods rather than giving physical cash towards some specific projects, a fund is created for any money generated from such goods.

The government makes a contribution, in addition to the foreign donations, towards the completion of the project.

3.6.11 Intra-governmental Service Fund.

A fund can be created as a unit with a central function of providing some basic services among government Organizations or departments to ensure economy and efficiency.

A stationery depot can be set up at a government publishing house to help different departments get the stationery they need.

3.6.12 Revolving Fund 

Such a fund is an established fund out of which spending organizations can borrow money for a particular project or activity that will be sold later, and once sold, the funds generated are paid back into the fund.

3.6.13 Fund for Local Government

This fund is established specifically for the activities of the local government and is to be used by the local authorities for the social and economic development of the individual localities and districts.

3.7 Benefits of Fund Accounting

1. It ensures financial control. When a fund is created, the purpose of the fund is expressly state and as such money meant for a project can only be used for the project.

2. It can be used to stress government policy.

3. It can be used for sympathetic purposes.

4. It can be used for control purposes.

3.8 Fund Accounting Disadvantages

1. There is no provision for debtors and creditors.

2. Assets are not capitalized. They are written off in the year of purchase.

3. Effective financial control of all funds may be difficult. 5. It makes consolidation of government accounts difficult.