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Accounting for
Governmental and
Nonprofit Entities
Fifteenth Edition

Earl R. Wilson, Ph.D., CPA
Professor Emeritus
University of Missouri—Columbia

Jacqueline L. Reck, Ph.D.,
CPA
Associate Professor and James E.
and C. Ellis Rooks
Distinguished Professor in Accounting
University of South Florida

Susan C. Kattelus, Ph.D.,
CPA, CGFM
Professor of Practice
Michigan State University

Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto


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ACCOUNTING FOR GOVERNMENTAL AND NONPROFIT ENTITIES
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020.
Copyright © 2010, 2007, 2004, 2001, 1999, 1995, 1992, 1989, 1985, 1980, 1974, 1969, 1961, 1956, 1951 by The McGraw-Hill Companies,
Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or
retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other
electronic storage or transmission, or broadcast for distance learning.
American Institute of Certified Public Accountants, Inc. materials reproduced are copyright © 2008 by AICPA, reproduced with permission.
Portions of various GASB documents, copyright by the Governmental Accounting Standards Board, 401 Merritt 7, PO Box 5116, Norwalk,
CT 06856-5116, U.S.A., are reproduced with permission. Complete copies of these documents are available from the GASB.
Portions of various ICMA documents are adapted/reprinted with permission of the International City/County Management Association,
777 North Capitol Street, NE, Suite 500, Washington, DC 20002. All rights reserved.
Some ancillaries, including electronic and print components, may not be available to customers outside the United States.
This book is printed on acid-free paper.
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ISBN 978-0-07-337960-9
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Library of Congress Cataloging-in-Publication Data
Wilson, Earl Ray, 1939Accounting for governmental and nonprofit entities / Earl R. Wilson, Jacqueline L. Reck,
Susan C. Kattelus.—Fifteenth ed.
p. cm.
Includes index.
ISBN-13: 978-0-07-337960-9 (alk. paper)
ISBN-10: 0-07-337960-3 (alk. paper)
1. Finance, Public—Accounting. 2. Nonprofit organizations—Accounting. 3. Nonprofit
organizations—United States—Accounting. I. Reck, Jacqueline L. II. Kattelus, Susan C. (Susan
Convery) III. Title.
HJ9733.W48 2010
657'.825—dc22
2009000175

www.mhhe.com


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About the Authors
In Memoriam: This edition is dedicated to the memory and long service
of Dr. Leon E. Hay as an author of the third through twelfth editions of
Accounting for Governmental and Nonprofit Entities. Dr. Hay was a
nationally recognized leader and educator in the field of governmental and
not-for-profit accounting.

Earl R. Wilson

Is Professor Emeritus of Accountancy at the University of Missouri—Columbia. He
received his BA and MBA from Chapman University and his MA and PhD in Accountancy from the University of Missouri—Columbia. He is a certified public accountant
(Missouri).
Professor Wilson has contributed substantially to standards setting in governmental
accounting and auditing, having served as an academic fellow with the Governmental
Accounting Standards Board (GASB) and as a member of the Governmental Accounting
Standards Advisory Council, the U.S. Comptroller General’s Advisory Council on
Governmental Auditing Standards, the American Institute of CPAs Government
Accounting and Auditing Committee, and as chair of the Missouri Society of CPAs
(MSCPA) Government Accounting Committee and president of the American Accounting
Association Government and Nonprofit (AAA-GNP) Section. In addition, he has served
on several GASB task forces and conducted financial reporting research for the GASB.
Dr. Wilson has published numerous research articles in journals such as The
Accounting Review; Journal of Accounting Research; Contemporary Accounting
Research; Journal of Accounting and Public Policy; Journal of Accounting, Auditing,
and Finance; Research in Governmental and Nonprofit Accounting; Public Budgeting
and Finance, and others. Many of these articles are frequently cited as influential
studies of the municipal bond market. He has been an author of this text since the ninth
edition in 1992. He has extensive experience teaching governmental and nonprofit
accounting, including online courses.
Professor Wilson has received a number of awards for his teaching and research,
including the Enduring Lifetime Contribution Award from the AAA-GNP section, the
2003 Cornelius Tierney/Ernst & Young Research Award from the Association of
Government Accountants, Outstanding Teacher of the Year for 2002 from the Kansas
City MU Business Alumni Association, and the 2000 Outstanding Educator of the Year
and 2008 Outstanding CPA in Government awards from the MSCPA. He has chaired
or served as reader of more than 30 doctoral dissertations, many in the area of
governmental accounting.

Jacqueline L. Reck

Is an associate professor and the James E. and C. Ellis Rooks Distinguished Professor
in Accounting for the School of Accountancy at the University of South Florida. She
received a BS degree from North Dakota State University, BS and MAcc degrees from
the University of South Florida, and her PhD from the University of Missouri–Columbia.
She is a certified public accountant (Florida).
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iv About the Authors

Dr. Reck worked for state government for several years before joining academia.
Currently, she is active in several professional associations. In addition to teaching
governmental and not-for-profit accounting, Dr. Reck frequently presents continuing
professional education workshops and sessions. She has provided workshops on
governmental and not-for-profit accounting for local accounting firms and the state
auditor general’s staff. Dr. Reck has received several teaching and research awards, is
currently the doctoral program coordinator for the School of Accountancy, and has
chaired or served on several doctoral dissertation committees.
Dr. Reck has published articles in The Journal of Accounting and Public Policy;
Research in Governmental and Nonprofit Accounting; Journal of Public Budgeting,
Accounting and Financial Management; and the Journal of Information Systems,
among others. She joined as an author on the 14th edition.

Susan C. Kattelus
Is Professor Emeritus of Accounting at Eastern Michigan University and currently a
Professor of Practice at Michigan State University. She received her BBA and PhD
from Michigan State University and MSA from Eastern Michigan University. Professor
Kattelus is a certified public accountant (Michigan) and a certified government

financial manager.
Professor Kattelus has served on the Governmental Accounting Standards Advisory
Council as the academic representative of the American Accounting Association
(AAA), president of the Government and Nonprofit Section of the AAA, and chair of
the Nonprofit Task Force of the Michigan Association of CPAs. She teaches the public
and nonprofit accounting course for accounting majors and the principles of managerial
accounting course for business students.
Dr. Kattelus has published articles in The Accounting Review; Research in
Governmental and Nonprofit Accounting; Journal of Government Financial Management;
Public Budgeting and Finance; Issues in Accounting Education; Journal of Accounting
Education; and Journal of Public Budgeting, Accounting and Financial Management,
among others. She joined as an author on the 11th edition in 1999.


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Preface
For almost 60 years, Accounting for Governmental and Nonprofit Entities has been the
leader in the market. It is a comprehensive governmental and not-for-profit accounting
text written for students who will be auditing and working in public and not-for-profit
sector entities. Originally published in 1951 and written by Professor R. M. Mikesell,
this book—and the several subsequent editions revised by Professor Leon E. Hay—has
given generations of instructors and students a comprehensive knowledge of the specialized accounting and financial reporting practices of governmental and not-forprofit organizations, as well as an understanding of how those organizations can better
meet the information needs of a diverse set of financial statement users and decision
makers. The vision of these original authors continues to be reflected in this 15th edition,
and their strategy of providing a large and innovative set of instructional support
materials prepared and tested in the classroom by the authors continues to be a guiding
principle today. The current author team brings to this edition their extensive experience teaching government and not-for-profit courses as well as insights gained from
scholarly writing and professional activities. The result is a relevant and accurate text
that includes the most effective instructional tools.


ORGANIZATION AND CONTENT
The 15th edition of Accounting for Governmental and Nonprofit Entities is separated
into three parts: Part I covers state and local governments (Chapters 2 through 10), Part
II focuses on accountability for public funds (Chapters 11 through 13), and Part III
examines not-for-profit organizations (Chapters 14 through 17). Chapter 1 continues
to form a broad foundation for the more detailed material in Chapters 2–17. The order
of the chapters is similar to previous editions, but some topics and chapters have been
rearranged to facilitate a variety of courses and formats used by adopters of the text.
For example, a course focused on state and local governments may cover Chapter 1 and
Parts I and II, while a course focused on not-for-profit organizations may cover
Chapter 1 and Parts II and III. Part II is a bridge between the public and not-for-profit
sectors that includes accountability topics (e.g., federal government, auditing, and
budgeting) applicable to all types of entities that receive public funds.

KEY CHANGES IN THIS EDITION
As always, readers can count on this edition to include authoritative changes from the
Financial Accounting Standards Board, Governmental Accounting Standards Board,
Federal Accounting Standards Advisory Board, American Institute of Certified Public
Accountants, Office of Management and Budget, Internal Revenue Service, and
Government Accountability Office. Update bulletins will be provided periodically on
the text Web site as new authoritative statements are issued.
Several significant changes have been made in this edition of the text. The sample
financial statements have been moved to an appendix in Chapter 1 and the management’s discussion and analysis (MD&A) has been moved to an appendix in Chapter 9
for easier reference. A new appendix on managing investments has been added to
Chapter 8. In a slight reorganization of coverage, what was formerly Chapter 11,
“Auditing of Governmental and Not-for-Profit Organizations,” is now Chapter 12. This
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vi Preface

chapter also has been modified to increase its focus on generally accepted government
auditing standards. In Chapter 13, more emphasis has been placed on performance
given the unique nature of governments. In addition, an appendix on cost and budget
issues in grant accounting has been added to Chapter 13. Illustrative financial
statements for the American Heart Association and related discussion have been
incorporated into Chapter 14.
In addition to these changes, all chapters have been updated to reflect changes in the
areas of accounting and auditing affecting governments and not-for-profit entities.
Based on comments received and the collective experience of the authors, some items
in this edition have received increased attention (e.g., major funds and postemployment
benefits). A most significant enhancement is that this edition now features a second
computerized practice set, the City of Bingham, which is equally as comprehensive
and effective as the widely used City of Smithville practice set. Both practice sets are
now downloadable from the publisher’s Web site (for more information, see inside the
front cover of this text).

INNOVATIVE PEDAGOGY
For state and local government accounting, the authors have found that dual-track
accounting is an effective approach in showing the juxtaposition of government-wide
and fund financial statements in GASB’s integrated model of basic financial statements. It allows students to see that each transaction has an effect on the fund financial
statements (that are designed to show fiscal compliance with the annual budget), on the
government-wide financial statements (that demonstrate accountability for operational
performance of the government as a whole), or both. This approach better serves
students who will design and use accounting information systems, such as enterprise
systems, to allow information to be captured once and used for several purposes.
Accounting for federal agencies as well as nongovernmental, not-for-profit entities

closely parallels this approach as traditional fund accounting may be appropriate for
keeping track of resources with restricted purposes, but citizens and donors also need
to see the larger picture provided by the entity as a whole. The dual-track approach is
further described inside the front cover of this text.
Governments may continue to prepare fund-based statements throughout the year
and convert to accrual-based government-wide statements at the end of the year until
they invest in information systems that can deliver real-time information for decision
making. We want students to think beyond being transaction-bookkeepers and aspire to
design and use the systems that will make government-wide financial information
available when managers and citizens need it. The City of Bingham and City of
Smithville Continuous Computerized Problems are teaching tools that develop these
skills and perspective. The authors feel so strongly that this general ledger software tool
helps students understand the material that we again provide it with the text. Students
have enthusiastically told us that they like “learning by doing” and that these continuous
computerized problems helped them to understand the concepts in the book.

TARGET AUDIENCE
The text continues to be best suited for senior and graduate accounting majors who
plan to sit for the certified public accountant (CPA) exam and then audit governmental
or not-for-profit entities. Public administration and other students who plan to provide
financial management or consulting services to government and not-for-profit entities
report that the text provides a more comprehensive set of competencies than traditional


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Preface vii

public budgeting texts. Students in not-for-profit management education programs
find that the coverage of accounting, financial reporting, auditing, taxation, and information systems for both governmental and not-for-profit entities provides the exposure

they need to work across disciplines and sectors. Finally, students preparing for the
certified government financial manager (CGFM) exam will also find Chapters 1
through 12 useful for Examination 2. We encourage all students who use this book to
consider the challenges and rewards of careers in public service—in federal, state, and
local governments as well as not-for-profit organizations.

SUPPLEMENT PACKAGE
The following ancillary materials are prepared by the authors to ensure consistency and
accuracy and are available on the Instructor’s Resource CD-ROM and the textbook’s
Web site, www.mhhe.com/wilson15e.
•
•
•
•

Instructor’s Guide and Solutions Manual.
PowerPoint lecture presentations.
Test Bank (including a computerized version using E-Z Test software).
The City of Bingham and City of Smithville Continuous Computerized
Problems––general ledger practice sets, downloadable from the publisher’s Web site.
• The City of Bingham and City of Smithville Instructor’s Version software, providing
guidance for instructors, solution data files, and solution page image (.pdf) files for all
required financial statements, schedules, and reports.
Students can access the PowerPoint lecture presentations, flashcards of key terms, and
multiple-choice practice quizzes for each chapter at the Online Learning Center on the
text’s Web site, www.mhhe.com/wilson15e.


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Acknowledgments
We are thankful for the encouragement, suggestions, and counsel provided by many
instructors, professionals, and students in writing this book. They include the following professionals and educators who read portions of this book and previous editions
in various forms and provided valuable comments and suggestions:
Kelli A. Bennett
City and County of Denver
Dr. Barbara Chaney
University of Montana
Mr. Jeremy Craig
Chesterfield, Missouri
Ms. Rebecca Craig
St. Charles County, Missouri
Mr. Michael Crawford
Crawford & Associates
Ms. Mary Foelster
American Institute of Certified Public
Accountants
Ms. Kristen Hockman
University of Missouri—Columbia
Ms. Marie Hunniecutt
Formerly, University of South Florida
Mr. Roger P. Murphy
Iowa State University, retired
Ms. Melanie Nelson
California State University—
San Marcos

Dr. David O’Bryan
Pittsburgh State University
Dr. Suzanne M. Ogilby

California State University—Sacramento
Dr. James Patton
Federal Accounting Standards Advisory
Board and University of Pittsburgh
Ms. Janet Prowse
University of Nevada, Las Vegas
Dr. Walter A. Robbins
University of Alabama
Ken Schermann
Governmental Accounting Standards
Board
Dr. Mark Sutter
Las Cruces, New Mexico
Dr. Relmond P. Van Daniker
Association of Government Accountants
Mr. Jay Wahlund
Minot State University
Mr. James F. White
Harvard Extension School

We acknowledge permission to quote pronouncements and reproduce illustrations
from the publications of the Governmental Accounting Standards Board, American
Institute of Certified Public Accountants, International City/County Management
Association, and Crawford and Associates. Dr. Wilson would like to give special
thanks to his wife, Florence J. Wilson, for her patience, support, and understanding in
completing this and several prior editions of the book. Dr. Reck dedicates the book in
memory of her husband, Albert F. Hohenstein.
Although we are extremely careful in checking the text and end-of-chapter
material, it is possible that errors and ambiguities remain in this edition. As readers
encounter such, we urge them to let us know so that corrections can be made. We

also invite every user of this edition who has suggestions or comments about the
material in the chapters to share them with one of the authors, either by regular mail
or e-mail. The authors will continue the service of issuing Update Bulletins to
adopters of this text that describe changes after the book is in print. These bulletins
viii


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Acknowledgments ix

can be downloaded from the text Web site at www.mhhe.com/wilson15e or any of
the authors’ Web sites:
Dr. Earl R. Wilson
School of Accountancy
University of Missouri––Columbia
303 Cornell
Columbia, MO 65211

/>Dr. Jacqueline L. Reck
School of Accountancy
University of South Florida
4202 East Fowler Avenue, BSN 3403
Tampa, FL 33620

/>faculty/reck
Dr. Susan C. Kattelus
Department of Accounting and Information Systems
Michigan State University
N235 Business College Complex

East Lansing, MI 48824

/>

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Brief Contents
Preface v
1 Introduction to Accounting and Financial
Reporting for Governmental and Not-forProfit Entities 1

13 Budgeting and Performance
Measurement 529

PART THREE
Not-for-Profit Organizations 577

PART ONE
State and Local Governments 35
2 Principles of Accounting and Financial
Reporting for State and Local
Governments 37

15 Not-for-Profit Organizations—
Regulatory, Taxation, and Performance
Issues 629

3 Governmental Operating Statement
Accounts; Budgetary Accounting 65


16 Accounting for Colleges and
Universities 661

4 Accounting for Governmental Operating
Activities—Illustrative Transactions and
Financial Statements 111

17 Accounting for Health Care
Organizations 701

5 Accounting for General Capital Assets
and Capital Projects 169

GLOSSARY 741

6 Accounting for General Long-term
Liabilities and Debt Service 211

GOVERNMENTAL AND NOT-FORPROFIT ORGANIZATIONS 769

7 Accounting for the Business-type
Activities of State and Local
Governments 255

INDEX

8 Accounting for Fiduciary Activities—
Agency and Trust Funds 305
9 Financial Reporting of State and Local
Governments 353

10 Analysis of Governmental Financial
Performance 407

PART TWO
Accountability for Public Funds 445
11 Accounting and Reporting for the
Federal Government 447
12 Auditing of Governmental and Not-forProfit Organizations 493
x

14 Accounting for Not-for-Profit
Organizations 579

773


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Table of Contents
Preface v
Chapter 1
Introduction to Accounting and Financial
Reporting for Governmental and Not-forProfit Entities 1
What Are Governmental and Not-for-Profit
Organizations? 2
Distinguishing Characteristics of Governmental and
Not-for-Profit Entities 3
Sources of Financial Reporting Standards 4
Determining Whether a Not-for-Profit Organization Is
Governmental 5


Objectives of Financial Reporting 6
Financial Reporting of State and Local
Governments 8
Illustrative Financial Statements—City and County of
Denver 9
Major Funds 12
Comprehensive Annual Financial Report 13

Expanding the Scope of Accountability
Reporting 14
Overview of Chapters 2 through 17 14
GASB Statement No. 34 Principles, Standards, and
Financial Reporting 14
Accountability for Public Funds 15
Not-for-Profit Organizations 15

A Caveat 15
Appendix: Illustrative Financial Statements—City
and County of Denver 15
Key Terms 29
Questions 29
Cases 30
Exercises and Problems 31

PART ONE
State and Local Governments 35
Chapter 2
Principles of Accounting and Financial
Reporting for State and Local

Governments 37
Activities of Government 38
Governmental Financial Reporting Entity 38

Integrated Accounting and Financial Reporting
Model 39
Government-wide and Fund Financial
Statements 40
Fiscal Accountability and Fund Accounting 41
Fund Categories 42

Major Fund Reporting 49
Determination of Major Funds 49
Nonmajor Fund Reporting 50

Appendix: Summary Statement of Governmental
Accounting and Financial Reporting Principles 52
Key Terms 56
Selected References 56
Questions 56
Cases 57
Exercises and Problems 59

Chapter 3
Governmental Operating Statement
Accounts; Budgetary Accounting 65
Classification and Reporting of Expenses and
Revenues at the Government-wide Level 66
Reporting Direct and Indirect Expenses 66
Program Revenues and General Revenues 68

Reporting Special Items and Transfers 69

Structure and Characteristics of the General Fund;
Classification and Description of Operating
Statement Accounts 70
Governmental Fund Balance Sheet and Operating
Statement Accounts 70

Budgetary Accounts 75
Terminology and Classification for Governmental
Fund Budgets and Accounts 78
Classification of Appropriations and
Expenditures 78
Classification of Estimated Revenues and
Revenues 81

Budgetary Accounting

86

Recording the Budget 87
Budgetary Control of Revenues 88
Budgetary Control of Encumbrances and
Expenditures 89
Accounting for Allotments 92
Accounting Information Systems 92

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xii Contents

Concluding Remarks 95
Appendix: Accounting for Public School
Systems 95
Key Terms 99
Selected References 99
Questions 99
Cases 100
Exercises and Problems 102

Chapter 4
Accounting for Governmental Operating
Activities—Illustrative Transactions and
Financial Statements 111
Illustrative Case 112
Measurement Focus and Basis of Accounting 112

Dual-track Accounting Approach 114
Illustrative Journal Entries 115
Recording the Budget 115
Interfund Transfer to Create a New Fund 115
Encumbrance Entry 117
Payment of Liabilities 119
Payrolls and Payroll Taxes 120
Revenues Recognized as Received in Cash 121

Accounting for Property Taxes 123

Recording Property Tax Levy 123
Collection of Current Taxes 124
Collection of Delinquent Taxes 125
Tax Anticipation Notes Payable 127
Repayment of Tax Anticipation Notes 128
Other Taxes 129

Interim Financial Reporting 129
Special Topics 131
Correction of Errors 131
Receipt of Goods Ordered in Prior Year 131
Revision of the General Fund Budget 133
Internal Exchange Transactions 134
Adjusting Entries 135
Pre-Closing Trial Balance 138
Closing Entries 138
Year-end Financial Statements 140

Special Revenue Funds 143
Accounting for Operating Grants 144
Financial Reporting 144

Interfund Activity 145
Reciprocal Interfund Activity 145
Nonreciprocal Interfund Activity 147

Intra- versus Inter-Activity Transactions
(Government-wide Level) 148
Intra-Entity Transactions 148


Permanent Funds 148
Budgetary Accounts 149
Illustrative Case 149

Appendix: Concepts and Rules for Recognition of
Revenues and Expenses (or Expenditures) 153
Key Terms 156
Selected References 156
Questions 157
Cases 157
Exercises and Problems 160

Chapter 5
Accounting for General Capital Assets and
Capital Projects 169
Accounting for General Capital Assets 170
Required Disclosures about Capital Assets 171
Classification of General Capital Assets 172
General Capital Assets Acquired under
Capital Lease Agreements 177
Costs Incurred after Acquisition 179
Reduction of Cost 179
Asset Impairments and Insurance Recoveries 180
Illustrative Entries 180

Capital Projects Funds 182
Legal Requirements 183
Illustrative Transactions—Capital Projects
Funds 183
Illustrative Financial Statements for a Capital

Projects Fund 189
Alternative Treatment of Residual Equity or
Deficits 189
Bond Premium, Discount, and Accrued Interest on
Bonds Sold 190
Retained Percentages 192
Claims and Judgments Payable 193
Bond Anticipation Notes Payable and the Problem of
Interest Expenditures 193
Investments 195
Multiple-Period and Multiple-Project Bond
Funds 195
Reestablishment of Encumbrances 196
Capital Projects Financed by Special
Assessments 197


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Contents xiii

Financial Reporting for Capital Projects
Funds 198

Key Terms 199
Selected References 199
Questions 199
Cases 200
Exercises and Problems 201


Chapter 6
Accounting for General Long-term
Liabilities and Debt Service 211
General Long-term Liabilities 212
Accounting for Long-term Liabilities 212
Pollution Remediation Obligations 213
Long-term Liability Disclosures 214
Debt Limit and Debt Margin 214
Overlapping Debt 215

Debt Service Funds 221
Number of Debt Service Funds 221
Use of General Fund to Account for
Debt Service 221
Budgeting for Debt Service 221
Types of Serial Bonds 222
Debt Service Accounting for Term Bonds 228
Financial Reporting 232
Valuation of Debt Service Fund Investments 232
Deposit and Investment Disclosures 235
Debt Service Accounting for Special Assessment
Debt 236
Use of Debt Service Funds to Record Capital Lease
Payments 238
Accounting for Debt Refunding 239
Advance Refunding of Debt 240

Key Terms 241
Selected References 241
Questions 241

Cases 242
Exercises and Problems 245

Illustrative Case—Supplies Fund 261
Illustrative Statements Using Supplies Fund 265
External Financial Reporting of Internal Service
Funds 267
Internal Service Funds with Manufacturing
Activities 268
Internal Service Funds as Financing Devices 269
Dissolution of an Internal Service Fund 270

Enterprise Funds 270
Water Utility Funds 272
Current and Accrued Assets 273
Restricted Assets 273
Utility Plant 274
Current Liabilities 274
Liabilities Payable from Restricted Assets 275
Long-term Liabilities 275
Net Assets 275
Illustrative Case—Water Utility Fund 276
Illustrative Statements Using Water Utility Fund 281
External Financial Reporting of Enterprise
Funds 285
Regulatory Accounting Principles (RAP) 285
Accounting for Nonutility Enterprises 286
Accounting for Municipal Solid Waste Landfills 287
Required Segment Information 288


Key Terms 289
Selected References 289
Questions 289
Cases 290
Exercises and Problems 292

Chapter 8
Accounting for Fiduciary Activities—Agency
and Trust Funds 305
Agency Funds

306

Agency Fund for Special Assessment Debt
Service 306
Tax Agency Funds 307
“Pass-through” Agency Funds 313
Financial Reporting of Agency Funds 314

Chapter 7
Accounting for the Business-type Activities of Trust Funds 314
State and Local Governments 255
Investment Pools 315
Proprietary Funds 256
Assets Acquired under Lease Agreements 256
Financial Reporting Requirements 257

Internal Service Funds

259


Creation of an Investment Pool 315
Operation of a Cash and Investment Pool
Withdrawal of Assets from the Pool 323
Closing Entry 323

319


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xiv Contents

Illustrative Financial Statements 324

Private-Purpose Trust Funds
Pension Funds 326

325

Required Financial Reporting for Defined Benefit
Pension Plans 327
Evaluating the Status of a Pension Plan 332
Illustrative Transactions for a Defined Benefit
Pension Plan 332
Employer’s Pension Accounting 334
Employer Recording and Reporting of Pension
Expenditure/Expense 337

Other Postemployment Benefits (OPEB) 338

Termination Benefits 338
Appendix: Managing Investments 338
Key Terms 340
Selected References 340
Questions 340
Cases 341
Exercises and Problems 342

Chapter 9
Financial Reporting of State and Local
Governments 353
Concepts Related to Financial Reporting 353
The Governmental Reporting Entity 354
Defining the Financial Reporting Entity 355
Component Units 356
Reporting by Other Government Organizations 358

Key Terms 392
Selected References 392
Questions 392
Cases 393
Exercises and Problems 397

Chapter 10
Analysis of Governmental Financial
Performance 407
The Need to Evaluate Financial Performance 407
Government Financial Performance Concepts 409
Financial Position versus Financial
Condition 409

Economic Condition 410

Internal Financial Trend Monitoring 411
Environmental Factors 413
Organizational Factors 416
Financial Factors 416

Analyzing Government-wide Financial
Statements 418
Use of Benchmarks to Aid Interpretation 421
Sources of Governmental Financial Data 425
Credit Analyst Models 427

Key Terms 428
Selected References 428
Questions 428
Cases 429
Exercises and Problems 431

Governmental Financial Reports 359
Need for Periodic Reports 359
Interim Financial Reports 359
Annual Financial Reports 360

Preparation of Basic Financial Statements 363
Fund Financial Statements 368
Required Reconciliations 371

Current Financial Reporting Topics and Issues 373
Popular Reporting 374

Other Comprehensive Basis of Accounting
(OCBOA) 374
International Accounting Standards 375

Appendix A: Converting Accounting Information
from the Modified Accrual to the Accrual Basis of
Accounting 376
Appendix B: Management’s Discussion and
Analysis (MD&A)—City and County of
Denver 380

PART TWO
Accountability for Public Funds 445

Chapter 11
Accounting and Reporting for the Federal
Government 447
Federal Government Financial Management
Structure 448
Comptroller General 450
Secretary of the Treasury 450
Director of the Office of Management and
Budget 451
Director of the Congressional Budget Office 451

Generally Accepted Accounting Principles for the
Federal Government 451


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Contents xv

Hierarchy of Accounting Principles and
Standards 452

Other Single Audit Requirements 516
Single Audit Quality 517

Conceptual Framework 453

Impact of SOX on Governments and Not-forProfits 518

Concepts Statements 453
Funds Used in Federal Accounting 455

Required Financial Reporting—U.S.
Government-wide 456
Required Financial Reporting—Government
Agencies 458
Management’s Discussion and Analysis 459
Performance Reports 459
Financial Statements 459
Other Accompanying Information 469

Dual-Track Accounting System 469
Illustrative Transactions and Entries 471
Adjusting Entries 476
Illustrative Financial Statements 477


Summary of Accounting and Reporting for Federal
Government Agencies 481
Key Terms 483
Selected References 483
Questions 483
Cases 484
Exercises and Problems 485

Chapter 12
Auditing of Governmental and Not-for-Profit
Organizations 493
Financial Audits by Independent CPAs

494

Generally Accepted Auditing Standards 494
Format of the Audit Report 495
Types of Opinions 497
The Audit Process 498
Materiality for Government Audits 500
Required Supplementary Information 500

Government Auditing Standards 501
Types of Audits and Engagements 502
GAGAS Financial Audits 503
Ethics and Independence 505

Single Audits

507


History of the Single Audit 507
Single Audit Act Amendments of 1996 507
Determining who Must Have a Single Audit 508
Single Audit Requirements 511
Selecting Programs for Audit 512
Reports Required for the Single Audit 514

Best Practices—Audit Committees 518
Best Practices—Internal Controls 518

Key Terms 519
Selected References 519
Questions 519
Cases 520
Exercises and Problems 524

Chapter 13
Budgeting and Performance
Measurement 529
Objectives of Budgeting

530

Compliance with Laws 530
Communicate Performance Effectiveness 531

Integration of Planning, Budgeting, and Performance
Measurement 533
Budgeting Approaches 535

Line-item Budgeting 535
Performance Budgeting 536
Program Budgeting 536
Entrepreneurial Budgeting 537

Budgeting Process in a State or Local
Government 537
Budgeting Governmental Appropriations 537
Budgeting Governmental Revenues 541
Budgeting Capital Expenditures 542
Budgeting Cash Receipts 542
Budgeting Cash Disbursements 543

Managerial Tools to Improve Performance 545
Total Quality Management 545
Customer Relationship Management 546
Service Efforts and Accomplishments (SEA) 547
Activity-based Costing 550
Balanced Scorecards 554

Conclusion 555
Appendix: Budget and Cost Issues in Grant
Accounting 556
Key Terms 561
Selected References 561
Questions 561
Cases 562
Exercises and Problems 564



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xvi Contents

PART THREE
Not-for-Profit Organizations

577

Chapter 14
Accounting for Not-for-Profit
Organizations 579
Characteristics of the Not-for-Profit Sector 580
GAAP for Nongovernmental NPOs 580
Financial Reporting and Accounting 582
Financial Reporting 582
Accounting for Revenues and Gains 590
Accounting for Expenses 595
Accounting for Assets 597

Financially Interrelated Entities 599
Investments in For-Profit Entities 599
Financially Interrelated NPOs 599
Funds Received as an Intermediary 600
Funds Held in Trust by Others 600
Combinations of NPOs 601
Component Units of Governmental Entities 601

Optional Fund Accounting 602
Illustrative Transactions—Voluntary Health and

Welfare Organizations 603
End-of-the-Year Adjusting Journal Entries 608
End-of-the-Year Reclassification Journal
Entries 609
End-of-the-Year Closing Journal Entries 610

Key Terms 616
Selected References 616
Questions 616
Cases 617
Exercises and Problems 620

Chapter 15
Not-for-Profit Organizations—Regulatory,
Taxation, and Performance Issues 629
Oversight Authority 630
State Regulation 631
Not-for-Profit Incorporation Laws 631
Registration, Licenses, and Tax Exemption 632
Lobbying and Political Activity 633

Federal Regulation 634
Tax-exempt Status 634
Unrelated Business Income Tax 639
Political Activity 640

Intermediate Sanctions 641
Reorganization and Dissolution 642
Emerging Issues 642


Governance 643
Incorporating Documents 643
Board Membership 643

Benchmarking and Performance Measures 644
Financial Performance Measures 645
Nonfinancial Performance Measures 647

Uniform Policies across States 648
Summary 648
Key Terms 649
Selected References 649
Questions 650
Cases 650
Exercises and Problems 652

Chapter 16
Accounting for Colleges and
Universities 661
Accounting and Financial Reporting
Standards 662
Public Colleges and Universities 663
Private Colleges and Universities 663
Fund Accounting 667

Accounting and Reporting Issues

668

Statement of Net Assets or Financial Position 668

Statement of Revenues, Expenses, and Changes in
Fund Net Assets 672
Statement of Cash Flows 676
Segment Reporting 676

Illustrative Transactions for Private Colleges and
Universities 676
Adjusting Entries 682
Closing Entries 682

Other Accounting Issues 683
Performance Measures 683
Auditing Colleges and Universities 687
Federal Financial Assistance 687
Related Entities 688

Key Terms 689
Selected References 689
Questions 689
Cases 689
Exercises and Problems 693


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Contents xvii

Chapter 17
Accounting for Health Care
Organizations 701

GAAP for Health Care Providers 702
Financial Reporting 704
Balance Sheet or Statement of Net Assets 705
Operating Statement 708
Statement of Changes in Net Assets 709
Statement of Cash Flows 709

Accounting and Measurement Issues 710
Revenues 710
Assets 711
Expenses 712
Liabilities 712

Illustrative Case for a Not-for-Profit Health Care
Organization 713
Financial Reporting for a Governmental Health Care
Organization 721
Related Entities 723

Other Accounting Issues

723

Budgeting and Costs 723
Auditing 724
Taxation and Regulatory Issues 724
Prepaid Health Care Plans 725
Continuing Care Retirement Communities 725

Financial and Operational Analysis 725

Conclusion 726
Key Terms 727
Selected References 727
Questions 727
Cases 728
Exercises and Problems 730

Glossary 741
Governmental and Not-for-Profit
Organizations 769
Index 773


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Chapter One
Introduction to
Accounting and
Financial Reporting
for Governmental and
Not-for-Profit Entities
Learning Objectives
After studying this chapter, you should be able to:
1. Identify and explain the characteristics that distinguish governmental and
not-for-profit entities from for-profit entities.
2. Identify the authoritative bodies responsible for setting financial reporting
standards for (1) state and local governments, (2) the federal government,

and (3) not-for-profit organizations.
3. Contrast and compare the objectives of financial reporting for (1) state and
local governments, (2) the federal government, and (3) not-for-profit
organizations.
4. Explain the minimum requirements for general purpose external financial
reporting for state and local governments and how they relate to
comprehensive annual financial reports.
5. Explain the different objectives, measurement focus, and basis of accounting
of the government-wide financial statements and fund financial statements
of state and local governments.

Welcome to the strange new world of accounting for governmental and not-for-profit
organizations! Initially, you may find it challenging to understand the many new
terms and concepts you will need to learn. Moreover, if you are like most readers,
you will question at the outset why governmental and not-for-profit organizations
find it necessary to use accounting practices that are very different from those used
by for-profit entities.
As you read this first chapter of the text, the reasons for the marked differences
between governmental and not-for-profit accounting and for-profit accounting
1


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2 Accounting for Governmental and Nonprofit Entities

should become apparent. Specifically, governmental and not-for-profit organizations serve entirely different purposes in society than do business entities. Furthermore, because such organizations are largely financed by taxpayers, donors,
and others who do not expect benefits proportional to the resources they provide,
management has a special duty to be accountable for how those resources are used
in providing services. Thus, the need to report on management’s accountability to

citizens, creditors, oversight bodies, and others has played a central role in shaping the accounting and reporting practices of governmental and not-for-profit
organizations.
This first chapter will give you a basic conceptual foundation for understanding
the unique characteristics of these organizations and how their accounting and financial reporting concepts and practices differ from those of for-profit organizations.
By the time you finish subsequent chapters assigned for your course, you should
have an in-depth practical knowledge of governmental and not-for-profit accounting
and financial reporting.

WHAT ARE GOVERNMENTAL AND
NOT-FOR-PROFIT ORGANIZATIONS?
Governmental and not-for-profit organizations are vast in number and range of services provided. In the United States, governments exist at the federal, state, and
local levels and serve a wide variety of functions. The most recent census of governments reports 89,476 local governmental units, in addition to the federal government and 50 state governments. These 89,476 local governments consist of 3,033
counties, 19,492 municipalities, 16,519 towns and townships, 13,051 independent
school districts, and 37,381 special district governments that derive their power from
state governments.1
States, counties, municipalities (for example, cities and villages), and townships
are general purpose governments—governments that provide many categories
of services to their residents (such as police and fire protection; sanitation; construction and maintenance of streets, roads, and bridges; and health and welfare).
Independent school districts, public colleges and universities, and special districts
are special purpose governments—governments that provide only a single function or a limited number of functions (such as education, drainage and flood control, irrigation, soil and water conservation, fire protection, and water supply).
Special purpose governments have the power to levy and collect taxes and to raise
revenues from other sources as provided by state laws to finance the services they
provide.
Not-for-profit organizations also exist in many forms and serve many different
functions. These include private colleges and universities, various kinds of health
care organizations, certain libraries and museums, professional and trade associations, fraternal and social organizations, and religious organizations. Currently, there
are nearly 2 million not-for-profit organizations in the U.S.2
1
U.S. Department of Commerce, Bureau of the Census, 2007 Census of Governments, vol. 1, no. 1
(Washington, DC: U.S. Government Printing Office), p. v.

2
The Independent Sector and Urban Institute estimate that there are about 1.8 million organizations in
the not-for-profit sector. (Urban Institute, The New Nonprofit Almanac & Desk Reference, Washington,
D.C., 2007).


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Chapter 1 Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities 3

DISTINGUISHING CHARACTERISTICS OF GOVERNMENTAL AND
NOT-FOR-PROFIT ENTITIES
Governmental and not-for-profit organizations differ in important ways from business
organizations. Not surprisingly then, accounting and financial reporting for governmental and not-for-profit organizations are markedly different from accounting and
financial reporting for businesses. An understanding of how these organizations differ
from business organizations is essential to understanding the unique accounting and
financial reporting principles that have evolved for governmental and not-for-profit
organizations.
In its Statement of Financial Accounting Concepts No. 4, the Financial Accounting Standards Board (FASB) noted the following characteristics that it felt distinguished governmental and not-for-profit entities from business organizations:
a. Receipts of significant amounts of resources from resource providers who do
not expect to receive either repayment or economic benefits proportionate to
the resources provided.
b. Operating purposes that are other than to provide goods or services at a profit
or profit equivalent.
c. Absence of defined ownership interests that can be sold, transferred, or
redeemed, or that convey entitlement to a share of a residual distribution of
resources in the event of liquidation of the organization.3
The Governmental Accounting Standards Board (GASB) distinguishes governmental entities in the United States from not-for-profit entities and from businesses
by stressing that governments exist in an environment in which the power ultimately
rests in the hands of the people. Voters delegate that power to public officials through

the election process. The power is divided among the executive, legislative, and
judicial branches of the government so that the actions, financial and otherwise, of
governmental executives are constrained by legislative actions, and executive and legislative actions are subject to judicial review. Further constraints are imposed on state
and local governments by the existence of the federal system in which higher levels
of government encourage or dictate activities by lower levels and finance the activities (partially, at least) by an extensive system of intergovernmental grants and subsidies that require the lower levels to be accountable to the entity providing the
resources, as well as to the citizenry. Revenues raised by each level of government
come, ultimately, from taxpayers. Taxpayers are required to serve as providers of
resources to governments even though they often have very little choice about which
governmental services they receive and the extent to which they receive them.4
In the GASB’s view, accounting and financial reporting standards for governments
must be separate and distinct from those for business organizations because the needs
of users of financial reports are unique and different. This view is clear from a recent
3
Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 4, “Objectives
of Financial Reporting by Nonbusiness Organizations” (Norwalk, CT, 1980), p. 3. In 1985 the FASB
replaced the term nonbusiness with the term not-for-profit. Other organizations use the term nonprofit
as a synonym for not-for-profit. The term not-for-profit is predominantly used in this text.
4
Based on discussion in GASB Concepts Statement No. 1, pars. 14–18. Governmental Accounting
Standards Board, Codification of Governmental Accounting and Financial Reporting Standards as of
June 30, 2008 (Norwalk, CT, 2008), Appendix B.


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4 Accounting for Governmental and Nonprofit Entities

GASB white paper which notes that “governments do not operate in a competitive
marketplace, face virtually no threat of liquidation, and do not have equity owners.”5
Consequently, governmental financial reporting focuses on a government’s stewardship of public resources, ongoing ability to raise taxes and manage resources, and

compliance with legal spending limits, rather than on information about earnings.
More specifically, the white paper states:
Governmental accounting and financial reporting standards aim to address [the] need for
public accountability information by helping stakeholders assess how public resources are
acquired and used, whether current resources were sufficient to meet current service costs
or whether some costs were shifted to future taxpayers, and whether the government’s
ability to provide services improved or deteriorated from the previous year.6

SOURCES OF FINANCIAL REPORTING STANDARDS
Illustration 1–1 shows the primary sources of accounting and financial reporting
standards for business and not-for-profit organizations, state and local governments,
and the federal government. Specifically, the FASB sets standards for for-profit business organizations and nongovernmental not-for-profit organizations; the GASB sets
standards for state and local governments, including governmental not-for-profit
organizations; and the Federal Accounting Standards Advisory Board (FASAB) sets
standards for the federal government and its agencies and departments.
Authority to establish accounting and reporting standards for not-for-profit organizations is split between the FASB and the GASB because a sizeable number of
ILLUSTRATION 1–1 Primary Sources of Accounting and Financial Reporting Standards for Businesses,
Governments, and Not-for-Profit Organizations
• Comptroller General
• Director of the Office of
Management and Budget
• Secretary of the Treasury

Financial
Accounting
Foundation

Financial Accounting
Standards Board
(FASB)


Business
(for-profit)
organizations

Nongovernmental
not-for-profit
organizations

Governmental
Accounting Standards
Board (GASB)

State and local
governmental
organizations

Governmental
not-for-profit
organizations

Federal Accounting
Standards Advisory Board
(FASAB)

Federal government
and its agencies
and departments

Source: Statement on Auditing Standards (SAS) 69, amended by SAS 91, April 2000, AICPA Professional Standards, as of June 1, 2008, v.1, Au Sec. 411.


5
Governmental Accounting Standards Board, White Paper “Why Governmental Accounting and
Financial Reporting Is—and Should Be—Different” (Norwalk, CT, 2006), Executive Summary, pp. 1–2.
6
Ibid.


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Chapter 1

Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities 5

not-for-profit organizations are governmentally owned, particularly public colleges
and universities and government hospitals. The FASB is responsible for setting
accounting and reporting standards for the great majority of not-for-profit organizations, those that are independent of governments. Governmental not-for-profit organizations follow standards established by the GASB.
The GASB and the FASB are parallel bodies under the oversight of the Financial
Accounting Foundation. The foundation appoints the members of the two boards and
supports the boards’ operations. The federal Sarbanes-Oxley Act greatly enhanced financial support for the FASB by mandating an assessed fee on corporate security offerings.
The GASB, on the other hand, relies mainly on contributions from state and local government organizations and sales of publications for financial support of its operations.
Because of the breadth of support and the lack of ties to any single organization
or governmental unit, the GASB and the FASB are referred to as “independent
standards-setting boards in the private sector.” Before the creation of the GASB and
the FASB, financial reporting standards were set by groups sponsored by professional organizations: The forerunners of the GASB (formed in 1984) were the
National Council on Governmental Accounting (1973–84), the National Committee
on Governmental Accounting (1948–73), and the National Committee on Municipal
Accounting (1934–41). The forerunners of the FASB (formed in 1973) were the
Accounting Principles Board (1959–73) and the Committee on Accounting Procedure
(1938–59) of the American Institute of Certified Public Accountants.

Federal statutes assign responsibility for establishing and maintaining a sound
financial structure for the federal government to three officials: the Comptroller General, the Director of the Office of Management and Budget, and the Secretary of the
Treasury. In 1990, these three officials created the Federal Accounting Standards
Advisory Board (FASAB) to recommend accounting principles and standards for
the federal government and its agencies. It is understood that, to the maximum extent
possible, federal accounting and financial reporting standards should be consistent
with those established by the GASB and, where applicable, by the FASB.
In Rule 203 of its Code of Professional Conduct, the American Institute of Certified Public Accountants (AICPA) has formally designated the GASB, the FASAB,
and the FASB as the authoritative bodies to establish generally accepted accounting
principles (GAAP) for state and local governments, the federal government, and
business organizations and nongovernmental not-for-profit organizations, respectively.
“Authority to establish accounting principles” is interpreted in practice to mean
“authority to establish accounting and financial reporting standards.”7

Determining Whether a Not-for-Profit Organization
Is Governmental
Illustration 1–1 suggests that the kinds of organizations for which the FASB and GASB
are responsible for setting standards are clearcut. Unfortunately, this is sometimes not
the case. In practice, it may be difficult to determine whether some not-for-profits are
governmental in nature or not, and thus which standards-setting body to look to for
authoritative guidance.
7

Statement on Auditing Standards (SAS) 69, as amended by SAS 91, April 2000, specifically establishes
the FASB, the GASB, and the FASAB as the bodies to establish GAAP for their respective organizations.
Other literature, such as AICPA Audit and Accounting Guides, are afforded secondary status as sources
of authoritative guidance. These sources are discussed more fully in the “GAAP Hierarchy” section of
Chapter 12.



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6 Accounting for Governmental and Nonprofit Entities

The U.S. Bureau of the Census defines a government as:
An organized entity which, in addition to having governmental character, has sufficient
discretion in the management of its own affairs to distinguish it as separate from the
administrative structure of any other governmental unit.8

This definition, though helpful, provides insufficient guidance because it fails to
explain the meaning of “having governmental character.” In order to provide additional guidance for auditors on this issue, two audit and accounting guides of the
AICPA, with the tacit approval of both the FASB and the GASB, state:
Public corporations and bodies corporate and politic are governmental organizations.
Other organizations are governmental organizations if they have one or more of the
following characteristics:
a. Popular election of officers or appointment (or approval) of a controlling majority
of the members of the organization’s governing body by officials of one or more
state or local governments,
b. the potential for unilateral dissolution by a government with the net assets reverting
to a government, or
c. the power to enact and enforce a tax levy.9

Furthermore, organizations are presumed to be governmental if they have the
ability to issue directly (rather than through a state or municipal authority) debt that
pays interest exempt from federal taxation. However, organizations possessing only
that ability (to issue tax-exempt debt) and none of the other governmental characteristics may rebut the presumption that they are governmental if their determination
is supported by compelling, relevant evidence. Colleges and universities, hospitals,
museums, and social service agencies are examples of organizations that may be
either governmental or nongovernmental.


OBJECTIVES OF FINANCIAL REPORTING
GASB Concepts Statement No. 1, “Objectives of Financial Reporting,” states that
“Accountability is the cornerstone of all financial reporting in government. . . .
Accountability requires governments to answer to the citizenry—to justify the raising of public resources and the purposes for which they are used.”10 The board
elaborated:
Governmental accountability is based on the belief that the citizenry has a “right to
know,” a right to receive openly declared facts that may lead to public debate by the
citizens and their elected representatives. Financial reporting plays a major role in
fulfilling government’s duty to be publicly accountable in a democratic society.11

Illustration 1–2 shows several ways that state and local governmental financial
reporting is used in making economic, social, and political decisions and assessing
accountability. Closely related to the concept of accountability as the cornerstone of
8

U.S. Department of Commerce, Bureau of the Census, 2007 Census of Governments, p. ix.
American Institute of Certified Public Accountants, Audit and Accounting Guide, Health Care
Organizations (New York, 2007), par. 1.02c; and American Institute of Certified Public Accountants,
Audit and Accounting Guide, Not-for-Profit Organizations (New York, 2008), par. 1.03.
10
GASB, Codification, Appendix B, Concepts Statement No. 1, par. 56.
11
Ibid.
9