Accounting for Governmental and Nonprofit Organizations, COMING SPRING 2018

by Patton, Patton, Ives

| ISBN: 978-1-61853-210-7 | Copyright 2019


Welcome to the first edition of Accounting for Governmental and Nonprofit Organizations!

With extensive experience in teaching, working at all three levels of government, setting accounting standards, and auditing financial statements, we know that accounting standards have become increasingly complex in an increasingly complex world. Therefore, we wrote this text on governmental and nonprofit financial accounting and reporting with one key objective: to make it easy to read and understand. To accomplish this objective, we followed this general approach: discuss the accounting principle, show the journal entry, provide an illustration.

We attempt to cover the basic accounting and financial reporting principles in as comprehensive a manner as possible. To keep the text practical and “real world,” we enhanced the discussion of the principles with numerous illustrations drawn from financial reports prepared by actual governments and nonprofit organizations. We cover the latest accounting standards issued by the standards-setting bodies. Finally, we designed the end-of-chapter review questions, exercises, problems, and cases specifically to help students better understand the material covered in the text.

Target Audience

This text is written for college students (both accounting and public administration majors) and for practitioners.

To permit use by different types of readers, its 15 chapters cover not only the specialized financial accounting and reporting standards applicable to the governmental and nonprofit sectors, but also the basic processes of business-type accounting. Those who have not had a course in basic accounting or who need a brief refresher can start with Chapter 15 (Fundamentals of Accounting) and draw selectively on the governmental, nonprofit, health care, and financial statement analysis chapters. Because of its flexibility, this text can be used by all of the following:

1. Accounting majors who wish to learn the fundamentals of governmental and nonprofit accounting in either a full semester or less than a full semester undergraduate course

2. Public administration majors who have had no previous accounting training but who need a basic understanding of general, governmental, nonprofit, and health care accounting; financial reporting; and financial statement analysis

3. Persons employed by governments and nonprofit organizations, including the federal government, health care entities, colleges and universities, and voluntary health and welfare organizations

4. Persons preparing for the Uniform Certified Public Accountant (CPA) examination, Certified Government Financial Manager (CGFM) examination, and civil service examinations

5. Persons who wish, on their own, to learn about the financial accounting and reporting practices of governments and nonprofit organizations

Real-World Situations Illustrate the Application of Theory

To prepare for the practice of accounting, auditing, and financial management, students must be able to visualize the application of accounting theory to real-world situations. Therefore, we use illustrations based on financial statements issued by actual governments and nonprofit organizations. For example:

1. Throughout the text we use the financial statements of governments and nonprofit organizations to illustrate governmental transactions, events, use of funds, and financial reporting. For example, we used the notes to the financial statements of the American Museum of Natural History to illustrate accounting for collections held by museums; the financial statements of New York’s Metropolitan Transportation Authority to illustrate how various types of subsidies are reported by governmental enterprises; and the notes to Fordham University’s financial statements to show how colleges and universities account for some of the more complex contributions they receive.

2. To enliven the text, we include a special feature that we call Governmental (or Nonprofit) Accounting in Practice. For example, our detailed discussion of the financial status of Social Security helps illustrate the extensive amount of detail provided in the annual financial report prepared by the United States government; and our discussion of the procedures used by Charity Navigator to assess the financial performance of nonprofit entities helps illustrate the nature of the data provided in nonprofit financial statements.


User-Friendly Discussion of Modified Accrual Basis of Accounting

Governmental accounting is generally taught after students have learned the theory of accrual accounting and the journal entries needed to record accrual-related transactions and events. Because of this, some students have difficulty grasping both the concepts underlying the modified accrual basis/financial resources measurement focus used in governmental-type funds and the accounting and financial reporting implications. Therefore, Chapter 4 introduces the topic and Chapter 5 reinforces and expands upon the discussion in Chapter 4.

Chapter 5 contains extensive discussion of why modified accrual accounting is used, the basic principles of modified accrual accounting, and—in a Governmental Accounting in Practice illustration—a discussion of how financial statements prepared using modified accrual accounting can mislead the unwary reader because modified accrual does not always measure the economic substance of transactions and events. We believe our frank coverage of the subject—and the classroom discussion it should foster—will help the student better understand it. Chapter 5 also includes detailed discussion of the accounting entries needed to record transactions and events under modified accrual accounting, a comprehensive end-of-chapter illustration that covers the entire accounting and financial reporting cycle, including many exercises, and problems.

New Accounting Standards

Keeping an accounting text up-to-date can be challenging because accounting standards-setters are invariably working on new standards while the text is being written. This edition takes account of all standards issued by the Governmental Accounting Standards Board through GASB Statement No. 87 and even refers to statements and concepts statements in progress while the text was being written.

Coverage of Other Types of Entities

Although most of this text (Chapters 2 through 10) is devoted to state and local government accounting, we provide extensive coverage of the unique aspects of accounting and financial reporting for the federal government and nonprofit entities, including nonprofit hospitals. In Chapter 11 (federal government), we cite specific references to the government’s Standard General Ledger. Exploring the citations included in this chapter will give students greater insight into federal government finances; our Federal Financial Reporting in Practice provides an accounting perspective on the growth of the federal deficit.

We also include illustrations for the material covered in the chapters on nonprofit organizations. These illustrations and related discussion conform to the new FASB standards for nonprofits issued in August 2016.

Actual Financial Statements Analyzed

Accounting and public administration students need to understand not only how accounting information is gathered and reported, but also how it is used. Therefore, the chapter on financial statement analysis (Chapter 14) includes a discussion of the principles of financial statement analysis, which is supplemented with our own analysis of a real government and a real hospital. As a basis for analyzing the financial position of the hospital, we used “indicators” and “norms” taken from data on actual hospitals, available at various websites. Our objective here is to provide the inquisitive student with sufficient data to “do it yourself.”

Continuing Problem

This text has a “continuing problem” for instructors who like to reinforce the discussion of accounting principles with problems that carry throughout the text. The continuing problem includes assignments for four governmental funds, enterprise and internal service funds, and a pension or OPEB trust fund. Assignments for the continuing problem appear at the end of Chapters 3, 5, 6, 9, and 10—going from budgetary accounting to the preparation of fund and government-wide financial statements.


Reviews for Each Learning Objective

Governmental and nonprofit accounting can be difficult for students who have been exposed only to commercial accounting. To help students comprehend the governmental and nonprofit accounting concepts, a guided example is included with each learning objective. The guided examples allow students to do an exercise that reinforces the accounting concept or application discussed in that section. Answers for the guided examples are provided at the end of each chapter, and a corresponding Guided Example video can be accessed through myBusinessCourse, Cambridge Business Publishers' online homework platform, where the authors explain the thought process used to solve the review.


Case Study

Each chapter's end of chapter content includes a case study featuring a real-world governmental accounting scenario that requires students to access reports and complete a series of requirements. 

Online Content

The following online content is available through Cambridge Business Publishers’ online homework platform, myBusinessCourse (

  • eLecture videos cover each chapter’s learning objectives and concepts. Consistent with the text and created by the authors, these videos are ideal for online learning and review, as well as online instruction.
  • Guided Examples are narrated video demonstrations created by the authors that show students how to solve the in-chapter Reviews.
  • Auto-graded homework and test bank questions for easy assignment, quiz, and test creation. Grades feed to your instructor gradebook with immediate results.
  • eBook version that is HTML-based, our eBook can be viewed on any Internet-enabled device regardless of operating system. Features include:
    • Integrated eLectures and Guided Examples
    • Bookmarking
    • Note taking

Visit to test drive our eBooks by clicking on the book cover.

CHAPTER 1 Governmental and Nonprofit Accounting Environment and Characteristics 

CHAPTER 2 The Use of Funds in Governmental Accounting 

CHAPTER 3 Budgetary Considerations in Governmental Accounting 

CHAPTER 4 The Governmental Fund Accounting Cycle: An Introduction to General and Special Revenue Funds

CHAPTER 5 The Governmental Fund Accounting Cycle: General and Special Revenue Funds (Continued) 

CHAPTER 6 The Governmental Fund Accounting Cycle: Capital Projects Funds, Debt Service Funds, and Permanent Funds

CHAPTER 7 Proprietary-Type Funds 

CHAPTER 8 Fiduciary Funds 

CHAPTER 9 Reporting Principles and Preparation of Fund Financial Statements 

CHAPTER 10 Government-Wide Financial Statements 

CHAPTER 11 Analysis of Financial Statements and Financial Condition

CHAPTER 12 Federal Government Accounting and Reporting

CHAPTER 13 Accounting for Nonprofit Organizations

CHAPTER 14 Accounting for Health Care Organizations

CHAPTER 15 Fundamentals of Accounting

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Expand/Collapse All
About the Authors (pg. iii)
Preface (pg. iv)
Brief Contents (pg. vii)
Contents (pg. viii)
Chapter 1: Governmental and Nonprofit Accounting Environment and Characteristics (pg. 1-1)
Governmental and Nonprofit Organizations (pg. 1-3)
The Operating Environment (pg. 1-4)
Organizational Purposes (pg. 1-4)
Sources of Revenue and Relationship with Stakeholders (pg. 1-4)
Potential for Longevity (pg. 1-5)
Role of the Budget and Legal Requirements (pg. 1-5)
Users and Uses of Accounting Information (pg. 1-6)
Objectives of Financial Reporting (pg. 1-7)
State and Local Government Financial Reporting (pg. 1-7)
Federal Government Financial Reporting (pg. 1-7)
Nonprofit Organization Financial Reporting (pg. 1-8)
Distinctive Accounting and Financial Reporting Characteristics (pg. 1-8)
Use of Fund Accounting (pg. 1-8)
Incorporation of Budgets into Accounting Systems (pg. 1-9)
Measurement Focus and Basis of Accounting (pg. 1-9)
Entity-Wide and Fund-Level Reporting (pg. 1-9)
Financial Reporting of Restricted Resources (pg. 1-10)
Accounting Principles and Standards (pg. 1-10)
Establishing Generally Accepted Accounting Principles (pg. 1-10)
Hierarchy of Generally Accepted Accounting Principles (pg. 1-11)
Organization of This Textbook (pg. 1-13)
Questions (pg. 1-13)
Multiple Choice  (pg. 1-14)
Exercises (pg. 1-15)
Solutions to Chapter 1 In-Chapter Review Questions  (pg. 1-16)
Chapter 2: The Use of Funds in Governmental Accounting (pg. 2-1)
Fund Accounting—The Fund Categories (pg. 2-3)
Funds as Subdivisions of an Entity (pg. 2-3)
Why Governments Use Fund Accounting (pg. 2-4)
Fund Categories (pg. 2-5)
Financial Reporting with the Use of Funds (pg. 2-6)
Measurement Focus and Basis of Accounting (pg. 2-7)
Governmental-Type Funds (pg. 2-9)
Measurement Focus, Basis of Accounting, and Financial Reporting (pg. 2-10)
General Fund (pg. 2-13)
Special Revenue Funds (pg. 2-16)
Capital Projects Funds (pg. 2-16)
Debt Service Funds (pg. 2-17)
Permanent Funds (pg. 2-18)
Proprietary Type Funds (pg. 2-19)
Enterprise Funds (pg. 2-20)
Internal Service Funds (pg. 2-20)
Reporting on Proprietary Type Funds (pg. 2-20)
Fiduciary Type Funds (pg. 2-24)
Pension (and Other Employee Benefit) Trust Funds (pg. 2-24)
Investment Trust Funds (pg. 2-25)
Private-Purpose Trust Funds (pg. 2-25)
Custodial Funds (pg. 2-25)
Reporting on Fiduciary Type Funds (pg. 2-26)
Questions  (pg. 2-28)
Multiple Choice  (pg. 2-28)
Exercises (pg. 2-31)
Problems (pg. 2-33)
Chapter 2 Case Study  (pg. 2-36)
Solutions to Chapter 2 In-Chapter Review Questions  (pg. 2-36)
Chapter 3: Budgetary Considerations in Governmental Accounting (pg. 3-1)
Balanced Budget Laws (pg. 3-3)
Budgetary Types and Approaches (pg. 3-4)
General Fund and Special Revenue Fund Budgets (pg. 3-5)
Capital Budgets and Plans (pg. 3-5)
Budgetary Approaches (pg. 3-5)
The Budget Process—Enactment Phase (pg. 3-6)
Illustrations of Budget Documents (pg. 3-7)
Service Efforts and Accomplishments (pg. 3-8)
Financing the Budget (pg. 3-9)
Raising Revenues (pg. 3-9)
Preparing Cash Forecasts to Determine Temporary Borrowing Needs (pg. 3-10)
The Budget Process—Execution Phase (pg. 3-11)
Classifying Revenues and Expenditures (pg. 3-13)
Revenue Classification (pg. 3-13)
Expenditure Classification (pg. 3-15)
Budgetary Accounting (pg. 3-16)
Recording the Adopted Budget (pg. 3-16)
Recording Budgetary Interchanges and Other Revisions (pg. 3-17)
Recording Encumbrances (pg. 3-19)
Recording Differences between Purchase Order and Invoice (pg. 3-20)
Allotment Systems (pg. 3-21)
Detailed Illustration (pg. 3-21)
Questions  (pg. 3-26)
Multiple Choice  (pg. 3-26)
Exercises (pg. 3-27)
Problems  (pg. 3-30)
Continuing Problem  (pg. 3-32)
Chapter 3 Case Study—Central Falls Bankruptcy (pg. 3-33)
Solutions to Chapter 3 In-Chapter Review Questions (pg. 3-35)
Chapter 4: An Introduction to General and Special Revenue Funds (pg. 4-1)
Background (pg. 4-3)
The General Fund (pg. 4-3)
Special Revenue Funds (pg. 4-4)
Revenue and Expenditure Recognition (pg. 4-5)
Short-Term Financing and Investing (pg. 4-6)
Basic Entries in General and Special Revenue Funds (pg. 4-7)
The Scenario and the Budgets (pg. 4-7)
Transactions and Events and Resulting Journal Entries (pg. 4-8)
Fund Financial Statements (pg. 4-14)
Closing the Accounts (pg. 4-16)
Control Accounts and Subsidiary Ledgers (pg. 4-17)
Concluding Comments (pg. 4-18)
Questions (pg. 4-19)
Multiple Choice (pg. 4-19)
Exercises (pg. 4-21)
Problems (pg. 4-23)
Solutions to Chapter 4 In-Chapter Review Questions  (pg. 4-26)
Chapter 5: General and Special Revenue Funds (Continued) (pg. 5-1)
Recognition and Measurement—General Principles (pg. 5-3)
Property Tax Revenues and Receivables (pg. 5-6)
Basic Principles and Journal Entries (pg. 5-6)
Year-End Adjustments (pg. 5-7)
Summary Results, Prior Year Tax Levy, and Subsequent Year Transactions (pg. 5-8)
Tax Discounts (pg. 5-9)
Interest on Delinquent Taxes and Tax Liens (pg. 5-9)
Sales Tax and Personal Income Tax Revenues and Receivables (pg. 5-11)
Intergovernmental Grants and Other Revenues (pg. 5-13)
Intergovernmental Grants (pg. 5-13)
Fines, Fees, Licenses, and Miscellaneous Revenues (pg. 5-15)
Payments in Lieu of Taxes (pg. 5-15)
Expenditures and Fund Liabilities (pg. 5-16)
Recognizing Expenditures and Liabilities in Governmental Funds (pg. 5-16)
Applying Expenditure Recognition Standards to Specific Transactions and Events (pg. 5-17)
Interfund Transactions (pg. 5-20)
Interfund Services Provided and Used (pg. 5-20)
Interfund Transfers (pg. 5-21)
Interfund Loans (pg. 5-22)
Interfund Reimbursements (pg. 5-23)
Other Accounting Matters (pg. 5-24)
Acquiring and Disposing of Capital Assets (pg. 5-24)
Inventories and Prepayments (pg. 5-25)
Warrants (pg. 5-27)
Year-End Financial Statements (pg. 5-27)
Statement of Revenues, Expenditures, and Changes in Fund Balance (pg. 5-27)
Balance Sheet (pg. 5-28)
Classifications of Fund Balance in the Balance Sheet (pg. 5-29)
Effect of Year-End Encumbrances on Fund Balance Classification (pg. 5-31)
Comprehensive Problem on the General Fund (pg. 5-33)
The Problem (pg. 5-33)
The Solution to the Problem (pg. 5-36)
Closing Journal Entries (pg. 5-43)
Questions  (pg. 5-44)
Multiple Choice  (pg. 5-44)
Exercises  (pg. 5-46)
Problems (pg. 5-49)
Continuing Problem  (pg. 5-52)
Solutions to Chapter 5 In-Chapter Review Questions (pg. 5-53)
Chapter 6: Capital Projects Funds, Debt Service Funds, and Permanent Funds (pg. 6-1)
Measurement Focus and Basis of Accounting (pg. 6-3)
Overview (pg. 6-4)
Capital Budgets (pg. 6-4)
Capital Projects Funds (pg. 6-4)
Summary of Fund Activities (pg. 6-5)
Control of Fund Activities (pg. 6-5)
Accounting for Fund Activities (pg. 6-5)
Financial Statements Illustration (pg. 6-9)
Completing the Project: The Following Year (pg. 6-10)
Issuance of Bonds at a Premium or Discount (pg. 6-12)
Issuance of Bonds between Interest Payment Dates (pg. 6-13)
Arbitrage (pg. 6-13)
Debt Service Funds (pg. 6-15)
Overview (pg. 6-15)
Types of Government Debt (pg. 6-16)
Summary of Fund Activities (pg. 6-18)
Control of Fund Activities (pg. 6-18)
Accounting for Fund Activities (pg. 6-18)
Financial Statements Illustration (pg. 6-22)
Leased Assets (pg. 6-25)
Permanent Funds (pg. 6-27)
Control of Fund Activities (pg. 6-27)
Accounting for Fund Activities (pg. 6-27)
Concluding Comment (pg. 6-29)
Questions  (pg. 6-30)
Multiple Choice (pg. 6-31)
Exercises (pg. 6-33)
Problems (pg. 6-35)
Continuing Problem  (pg. 6-40)
Chapter 6 Case Study—Having Faith in “Full Faith and Credit” Debt  (pg. 6-40)
Solutions to Chapter 6 In-Chapter Review Questions  (pg. 6-41)

Terry Patton

Robert Madera Distinguished Professor of Accounting and Chair of the Accounting, Management Information Systems, and Legal Studies Department of the Dillard College of Business Administration at Midwestern State University in Wichita Falls, Texas

He received his bachelor’s degree from Midwestern State University, a master’s degree from the University of North Texas, and a PhD from Texas Tech University. He teaches governmental accounting, auditing, and accounting research and communications. 

Dr. Patton began his career in public accounting, where he audited local governments. Later, he served as a project manager and as the research manager for the Governmental Accounting Standards Board. He has coauthored a governmental accounting book for practitioners, Guide to Governmental Financial Reporting Model: Implementing GASBS No. 34, and another governmental accounting textbook published by Pearson Prentice Hall.

He has published articles in the Accounting Review, Accounting Horizons, the Journal of Accounting and Public Policy, and the Journal of Public Budgeting, Accounting, and Financial Management, among others. Dr. Patton regularly speaks to accounting professionals on state and local governmental accounting topics.

Suesan Patton

National Director of Quality Initiatives for UHY LLP. Mrs. Patton also currently serves as a member of the Association of Government Accountants Financial Management Standards Board.

Most of Mrs. Patton’s career has been spent in standards-setting, beginning as a Manager with the American Institute of CPAs Accounting Standards Division and continuing with a 15-year stint with the Governmental Accounting Standards Board as a Senior Project Manager. She received a Bachelor of Arts degree in English Literature with a Concentration in Accounting from the University of Cincinnati. For several years, she was the principal author of two PPC Thomson practitioner guides on governmental accounting and financial reporting—Preparing Governmental Financial Statements under GASBS No. 34 and Governmental Financial Statement Illustrations and Trends.

Martin Ives

Martin Ives, MBA, CPA (inactive), CGFM (retired), CIA , served for 16 years as Distinguished Adjunct Professor of Public Administration at New York University’s Wagner Graduate School of Public Service.

Before entering the academic world, Mr. Ives was Vice Chair and Director of Research of the Governmental Accounting Standards Board, First Deputy Comptroller of the City of New York, Deputy Comptroller of the State of New York, and a member of the Federal Accounting Standards Advisory Board.

In addition to this text, Mr. Ives is the author of the textbook Assessing Municipal Financial Condition, coauthor of the textbook Government Performance Audit in Action, and coauthor of Program Control and Audit and Financial Condition Analysis and Management. He has also written chapters for books on auditing and municipal finance, has authored about 30 articles for the Journal of Government Financial Management, the Journal of Accountancy, the Internal Auditor, and other professional journals, and has spoken to numerous professional and civic organizations.

Mr. Ives was founding president of the Albany chapter of the Institute of Internal Auditors, president of the Capital District Chapter of the American Society for Public Administration, and a member of the founding board of the Association of Government Accountants’ Certified Government Financial Manager program. He has received many honors and awards, including the Public Service Award (Fund for the City of New York); the Governor Charles Evans Hughes Award (Capital District Chapter of the American Society for Public Administration); and the S. Kenneth Howard Award (Association for Budgeting and Financial Management). He has also been voted Adjunct of the Year by the students at NYU’s Wagner Graduate School.