Financial Accounting for Local and State School Systems: 2009 Edition
NCES 2009-325
June 2009

Chapter 4: Governmental Accounting — Fund Structure

For governmental entities to ensure the proper segregation of resources and to maintain proper accountability, the accounting system should be organized and operated on a fund basis. Each fund is a separate fiscal entity and is established to conduct specific activities and attain objectives in accordance with statutes, laws, regulations, and restrictions or for specific purposes. A fund is defined in GASB Codification Section 1300 as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.

GASB Statement 34 modified the structure of two categories of funds used by local governmental entities. Specifically, the following two new types of funds were introduced:

  • Permanent Funds (in the governmental fund category). Permanent funds are required to be used to report resources that are legally restricted to the extent that only earnings (and not principal) may be used for purposes that support the reporting government programs.
  • Private-Purpose Trust Funds (in the fiduciary fund category). Private-purpose trust funds should be used to report all other trust arrangements under which both principal and income benefit individuals, private organizations, or other governments.

GASB Statement 34 eliminated expendable and nonexpendable trust funds to focus fiduciary reporting on resources held for parties external to the reporting government: individuals, private organizations, and other governments. Fiduciary funds, therefore, cannot be used to support the government's own programs. As noted above, a nonexpendable trust fund that supports the government's own programs is reported as a permanent fund. It should be noted that an expendable trust that supports a government's own programs would be reported as a special revenue fund.

In summary, there are three categories of funds as follows:

  • Governmental funds are those through which most governmental functions are accounted for. The acquisition, use, and balances of the government's expendable financial resources and the related current liabilities—except those accounted for in proprietary funds—are accounted for through governmental funds (general, special revenue, capital project, debt service, and permanent funds).
  • Proprietary funds are used to account for a government's ongoing activities that are similar to those often found in the private sector. All assets, liabilities, net assets, revenues, expenses, and transfers relating to the government's business and quasibusiness activities—in which changes in net assets or cost recovery are measured—are accounted for through proprietary funds (enterprise and internal service funds). Generally Accepted Accounting Principles for proprietary funds are similar to those applicable to private-sector businesses; the measurement focus is on determining operating income, financial position, and cash flows.
  • Fiduciary funds are used to account for assets held by a government in a trustee capacity or as an agent for individuals, private organizations, or other governmental units. The fiduciary fund category includes pension (and other employee benefits, as well as other postemployment benefits) trust funds, investment trust funds, private-purpose trust funds, and agency funds.

Additional information on governmental fund structure may be found in chapter 5.

Major Funds

The concept of major fund reporting was introduced and defined by GASB Statement 34 to simplify the presentation of fund information and to focus attention on the major activities of the reporting entity. Rather than requiring each type of fund to be individually presented, Statement 34 requires the individual presentation of only major funds, with all other funds combined into a single column. This reduces the number of funds presented on the face of the financial statement and directs the focus to the significant funds of the reporting entity. Major fund reporting is applied only to governmental funds (i.e., general, special revenue, debt service, capital project, and permanent funds) and enterprise funds. Internal service funds are excluded from the major fund reporting requirements. Fiduciary fund information is presented by type of fund rather than by major funds.

GASB defines major funds as those meeting the following criteria:

  • The total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or enterprise fund are at least 10 percent of the corresponding total (assets, liabilities, etc.) for all funds in that category (governmental funds) or of that type (enterprise funds).
  • The total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or enterprise fund are at least 5 percent of the corresponding total for all governmental and enterprise funds combined.

Both criteria must be met in the same element (assets, liabilities, etc.) for a fund to be defined as major. However, GASB Statement 34 permits a government to designate a particular fund that is of interest to users as a major fund and to individually present its information in the basic financial statements, even if it does not meet the criteria. However, a government does not have the option to not report a fund as major if it meets the criteria above.

It should be noted that in applying the major fund criteria to enterprise funds, the reporting entity should consider both operating and nonoperating revenues and expenses, as well as gains, losses, capital contributions, additions to permanent endowments, and special items. When the major fund criteria are applied to governmental funds, revenues do not include other financing sources and expenditures do not include other financing uses. However, special items would be included.