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, Essentials of
Accounting for
Governmental and
Not-for-Profit
Organizations
Apago PDF Enhancer
Tenth Edition
Paul A. Copley,
Ph. D., CPA
KPMG Professor
Director, School of Accounting
James Madison University
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, ESSENTIALS OF ACCOUNTING FOR GOVERNMENTAL AND NOT-FOR-PROFIT
ORGANIZATIONS, TENTH EDITION
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue
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Library of Congress Cataloging-in-Publication Data
Copley, Paul A.
Essentials of accounting for governmental and not-for-profit organizations / Paul A. Copley. — 10th ed.
p. cm.
Includes index.
ISBN 978-0-07-352705-5
1. Administrative agencies—United States—Accounting. 2. Nonprofit organizations—United States—
Accounting. I. Title.
HJ9801.H39 2011
657'.83500973—dc22
2009054187
www.mhhe.com
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, Preface
Thank you for considering the tenth edition of Essentials of Accounting for Governmen-
tal and Not-for-Profit Organizations. The tenth edition is updated for recent changes
including:
• GASB Statement 54: Fund Balance Reporting and Governmental Fund Type
Definitions.
• FASB Statement 164, Not-for Profit Entities: Mergers and Acquisitions.
• IRS Form 990 Return of Organization Exempt From Income Tax.
In addition, the text includes a new chapter on Federal Government reporting.
I have used the text with stand-alone, three semester-hour classes, with half-semester
GNP courses, and as a module in advanced accounting classes. It is appropriate for
accounting majors or as part of a public administration program. The coverage is effec-
tive in preparing candidates for the CPA examination.
The focus of the text is on the preparation of external financial statements. Among
the more challenging aspects of state and local government reporting is the prepara-
tion of government-wide financial statements. Our approach is similar to that used in
practice. Specifically, day-to-day events are recorded at the fund level using the basis
of accounting for fund financial statements. Governmental activities are recorded using
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the modified accrual basis. The fund-basis statements are then used as input in the
preparation of government-wide statements. The preparation of government-wide state-
ments is presented in an Excel worksheet. This approach has two advantages: (1) it is
the approach most commonly applied in practice, and (2) it is an approach familiar to
students who have studied the process of consolidation in their advanced accounting
classes. State and local government reporting is illustrated using an ongoing example
integrated throughout Chapters 2 through 8 and 13.
Additional features of the text are available on the instructor or student Web sites and
include:
• A continuous homework problem throughout Chapters 2 through 8 and 13.
• Instructor’s guide.
• Suggested quiz and examination questions and problems.
• PowerPoint slides.
• Excel-based assignments.
• An additional practice set.
I thank Sandra Bitenc, University of Texas—Arlington; Angele Brill, Castleton State Col-
lege; Richard C. Brooks, West Virginia University; Bradley Childs, Belmont University;
Dori Danko, Grand Valley State University; Gertrude Eguae-Obazee, Albright College;
Gladys Gomez, University of Mary Washington; Marina Grau, Houston Community
iii
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, iv Preface
College; David J. Harr, George Mason University; Maggie Houston, Wright State Uni-
versity; Tom Hrubec, Franklin University; Mary Jepperson, Saint John’s University;
Beth Kern, Indiana University South Bend; John Lasik, Central Washington University;
Rodney A. Oglesby, Drury University; Jim Shelton, Harding University; Chuck Smith,
Iowa Western Community College; D. Terry Balkaran, Queens College; and Bradley
Trimble, Columbus State Community College for reviewing the ninth edition and pro-
viding suggestions. I wish to thank my colleague Loretta Manktelow; co-author of the
Instructor’s Guide and author of the Test Bank as well as Maggie Houston of Wright
State University for her work on the online quizzes. Finally, I am indebted to the many
users of the text for their comments. Additional comments and suggestions are welcome
and can be addressed to me at copleypa@jmu.edu.
Paul A. Copley
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In memory of those lost:
— Northern Illinois University, February 14, 2008
— Virginia Tech, April 16, 2007
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, Contents
Preface iii Chapter Two
OVERVIEW OF FINANCIAL
Chapter One REPORTING FOR
INTRODUCTION TO STATE AND LOCAL
ACCOUNTING GOVERNMENTS 20
AND FINANCIAL The Governmental Reporting Entity 21
REPORTING FOR Reporting by Major Funds 23
GOVERNMENTAL Overview of the Comprehensive Annual
AND NOT-FOR-PROFIT Financial Report (CAFR) 23
ORGANIZATIONS 1 Introductory Section 24
Financial Section: Auditor’s Report 25
Generally Accepted Accounting Management’s Discussion and Analysis
Principles 3 (MD&A) 26
Objectives of Accounting and Financial Statement of Net Assets 28
Reporting 6 Government-wide Statement of
Objectives of Accounting and Activities 30
Financial Reporting for the Federal Governmental Funds: Balance Sheet 32
Government 8 Governmental Funds: Statement of
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Objectives of Financial Reporting by Revenues, Expenditures, and Changes
Not-for-Profit Entities 8 in Fund Balance 34
Objectives of Accounting and Financial Proprietary Funds: Statement of Net
Reporting for State and Local Assets 36
Governmental Units 9 Proprietary Funds: Statement of
State and Local Government Financial Revenues, Expenses, and Changes in
Reporting 10 Fund Net Assets 38
Comprehensive Annual Financial Proprietary Funds: Statement of Cash
Report 10 Flows 40
Measurement Focus and Basis of Fiduciary: Statement of Fiduciary Net
Accounting 12 Assets 42
Fund Structure for State and Local Fiduciary: Statement of Changes in
Government Accounting and Fiduciary Net Assets 42
Reporting 13 Notes to the Financial Statements 44
Number of Funds Required 16 Required Supplementary Information
Budgetary Accounting 16 Other than MD&A 46
Additional Resources 17 Combining Statements 48
Statistical Information 48
Special-Purpose Governments 49
v
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, vi Contents
Public Colleges and Universities 49 Interfund Transfers 91
Other Governmental Not-for-Profit Interfund Reimbursements 91
Organizations 50 Illustrative Case—General Fund 91
Recording the Budget 92
Re-establishment of Encumbrances 92
Chapter Three Recording Prior-Year Property Taxes as
MODIFIED ACCRUAL Revenues 92
ACCOUNTING: Tax Anticipation Notes Payable 93
INCLUDING THE ROLE Payment of Liabilities as
OF FUND BALANCES Recorded 93
AND BUDGETARY Encumbrance Entry 93
AUTHORITY 55 Recording Property Tax Levy 94
Collection of Delinquent Taxes 94
Modified Accrual Accounts 56 Collection of Current Taxes 94
Balance Sheet Accounts 56 Other Revenues 95
Financial Statement Activity Accounts 61 Repayment of Tax Anticipation Notes 95
Budgetary Accounts 63 Recognition of Expenditures for
Expenditure Cycle 63 Encumbered Items 95
Revenue Recognition for Nonexchange Payrolls and Payroll Taxes 96
Transactions 65 Payment on Account and Other Items 97
Summary 68 Correction of Errors 97
Appendix: Budgetary Accounting Amendment of the Budget 97
Illustrated 69
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Budgets and Budgetary Accounts 69
Interfund Transactions 98
Write-off of Uncollectible Delinquent
Recording the Budget 70 Taxes 100
Accounting for Revenues 71 Reclassification of Current
Accounting for Encumbrances and Taxes 100
Expenditures 73 Accrual of Interest and Penalties 101
Budget Revisions 76 Deferral of Property Tax
Budgetary Comparison Schedule 76 Revenue 101
Classification of Estimated Revenues and Special Item 101
Revenues 77 Preclosing Trial Balance 101
Classification of Appropriations and Closing Entries 103
Expenditures 78 Year-End Financial Statements 105
Illustrative Case—Special Revenue
Chapter Four Fund 108
Motor Fuel Tax Revenues 108
ACCOUNTING FOR THE
Expenditures for Road Repairs 108
GENERAL AND SPECIAL
Reimbursement to General
REVENUE FUNDS 87 Fund 109
Overview of Modified Accrual Reimbursement Grant Accounting 109
Accounting 88 Closing Entry 109
Interfund Transactions 89 Year-End Financial Statements 110
Interfund Loans 89 Recognition of Inventories in
Interfund Services Provided and Used 91 Governmental Funds 111
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, Contents vii
Chapter Five Chapter Six
ACCOUNTING FOR OTHER PROPRIETARY FUNDS 154
GOVERNMENTAL Internal Service Funds 156
FUND TYPES: Establishment and Operation of Internal
CAPITAL PROJECTS, Service Funds 157
DEBT SERVICE, AND Illustrative Case—Supplies
PERMANENT 122 Fund 157
Other Issues Involving Internal Service
Capital Projects Funds 124
Funds 161
Illustrative Case 125
Risk Management Activities 161
Other Issues Involving Acquisition of
Implications for Other Funds 162
Capital Assets 130
Enterprise Funds 162
Acquisition of General Fixed Assets by
Illustrative Case—Water Utility
Lease Agreements 130
Fund 164
Construction of General Fixed Assets
Financed by Special Assessment
Proprietary Fund Financial
Debt 131
Statements 168
Statement of Net Assets 170
Debt Service Funds 132
Statement of Revenues, Expenses,
The Modified Accrual Basis—As
and Changes in Fund Net Assets 170
Applied to Debt Service
Statement of Cash Flows 170
Funds 132
Accounting for Municipal Solid Waste
Additional Uses of Debt Service
Apago PDF Enhancer Landfills 174
Funds 133
Pollution Remediation Costs 175
Debt Service Accounting for Serial
Bonds 133
Summary 176
Illustrative Case—Regular Serial
Bonds 134 Chapter Seven
Other Issues Involving Payment of FIDUCIARY (TRUST)
Long-Term Debt 136 FUNDS 189
Debt Service Accounting for Deferred
Serial Bonds 136 Agency Funds 190
Debt Service Accounting for Term Tax Agency Funds 192
Bonds 136 Accounting for Tax Agency Funds 192
Debt Service Accounting for Capital Financial Reporting for Agency
Lease Payments 137 Funds 194
Bond Refundings 137 Private-Purpose Trust Funds 194
Permanent Funds 138 Accounting for Investments 194
Financial Reporting for Governmental Illustrative Case—Private-Purpose
Funds 140 Trust Funds 197
Balance Sheet—Governmental A Note about Escheat Property 199
Funds 140 Investment Trust Funds 199
Statement of Revenues, Expenditures, Public Employee Retirement Systems
and Changes in Fund Balances— (Pension Trust Funds) 200
Governmental Funds 144 Accounting and Reporting for Defined
Summary 144 Benefit Pension Plans 201
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, viii Contents
A Note about Other Postemployment Accounting for General Capital Assets,
Benefits 205 Including Infrastructure 248
Summary of Employer The Modified Approach for Reporting
Reporting 206 Infrastructure 249
A Note about IRS 457 Deferred Collections 250
Compensation Plans 209 Asset Impairment 251
A Final Comment on Fund Accounting for Long-Term Debt 251
Accounting and Types of General Long-Term
Reporting 209 Debt 252
Debt Disclosures and Schedules 252
Chapter Eight
GOVERNMENT-WIDE Chapter Nine
STATEMENTS, FIXED ACCOUNTING FOR
ASSETS, LONG-TERM SPECIAL-PURPOSE
DEBT 220 ENTITIES, INCLUDING
PUBLIC COLLEGES AND
Conversion from Fund Financial UNIVERSITIES 267
Records to Government-wide
Financial Statements 221 Gasb Statement 34 Reporting Rules for
Capital Asset–Related Entries 223 Special-Purpose Entities 267
Long-Term Debt–Related Reporting by Special-Purpose
Entries 228 Local Governments Engaged in
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Adjusting to Convert Revenue Governmental Activities 268
Recognition to the Accrual Reporting by Special-purpose Local
Basis 229 Governments Engaged Only in
Adjusting Expenses to the Accrual Business-type Activities 270
Basis 231 Reporting by Special-purpose Local
Adding Internal Service Funds to Governments Engaged Only in
Governmental Activities 231 Fiduciary-type Activities 273
Eliminating Interfund Activities and Accounting and Financial Reporting
Balances within Governmental for public Colleges and
Activities 236 Universities 274
Worksheet to Illustrate the The Environment of Public Higher
Adjustments 237 Education 274
Government-wide Financial Accounting and Financial Reporting
Statements 237 for Public Institutions of Higher
Statement of Net Assets 237 Education 275
Statement of Activities 241 Illustrative Case—Northern State
Required Reconciliation to University—Beginning Trial
Government-wide Balance 276
Statements 244 Illustrative Case—Journal Entries 278
Summary 247 Illustrative Case—Closing Entries 284
Appendix: Accounting for Capital Illustrative Case—Financial
Assets and Long-Term Debt in Statements 286
Governmental Activities 248 Summary 291
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, Contents ix
Chapter Ten Illustrative Transactions 341
ACCOUNTING FOR PRIVATE Illustrative Financial
Statements for Private Colleges
NOT-FOR-PROFIT
and Universities 348
ORGANIZATIONS 300
Split-Interest Agreements 348
Organizations Covered in this Summary—Private College and
Chapter 302 University Reporting 353
Overview of Not-for-Profit
Accounting 302
Three Classes of Net Assets 302 Chapter Twelve
Financial Reporting 303 ACCOUNTING FOR
Note Disclosures 304 HOSPITALS AND
Accounting for Contributions, Including OTHER HEALTH CARE
Reclassifications of Net Assets 304 PROVIDERS 362
Reporting of Expenses and Assets 305
Special Topics: Accounting for Accounting and Reporting Requirements
Contributions 306 of the Health Care Guide 364
Illustrative Transactions and Financial Financial Statements 364
Statements 308 Revenues 366
Beginning Trial Balance 308 Classifications 366
Transactions 309 Illustrative Transactions and Financial
Financial Statements 315 Statements 367
Beginning Trial Balance 367
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Alternative Procedure for Recording
Fixed Assets 320 Illustrative Statements for Private-Sector
Performance Evaluation 320 Not-for-Profit Health Care Entities 373
Mergers and Acquisitions 321 Financial Reporting for Governmental
Summary of Not-for-Profit Accounting Health Care Entities 375
and Reporting 323 Financial Reporting for Commercial
(For-Profit) Health Care Entities 378
Summary and Conclusions Regarding
Chapter Eleven
Health Care Accounting and
COLLEGE AND UNIVERSITY Reporting 378
ACCOUNTING—PRIVATE
INSTITUTIONS 335
Chapter Thirteen
Overview of Private College and AUDITING, TAX-EXEMPT
University Accounting 337 ORGANIZATIONS,
Financial Statements 337
AND EVALUATING
Net Asset Classification 338
PERFORMANCE 386
Revenue Reduction versus Expenses 339
Academic Terms Encompassing More Governmental Auditing 387
Than One Fiscal Year 339 The Single Audit Act and Amendments 393
Expenses 339 The Sarbanes-Oxley Act 396
Other Accounting Guidance 340 Tax-Exempt Organizations 397
Illustrative Transactions and Financial Applying for Tax-Exempt Status 398
Statements 341 Federal Filing Requirements 398
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