Governmental Accounting for CPA Candidates Who Have Never Seen a Fund

A city pays 10 million for a road. In one set of its financial statements the whole 10 million is an outflow of the year, the road is not an asset, and nothing is ever depreciated. In a second set, published in the same annual report for the same year, the road is capitalised and depreciated over thirty years. Both are correct. Both are audited. The gap between them is a required schedule.

That is what US state and local government accounting looks like to someone trained on IFRS, and it is why the topic is abandoned more often than failed. It is not harder than leases or deferred tax; it is a different system with its own vocabulary, met for the first time in a study guide. The nearest thing an IFRS reader has seen is IPSAS, the public-sector standards derived from IFRS; the resemblance is real, but IPSAS is not examined.

How much of the exam this is

Section	Where it sits	Weight	What the blueprint asks
FAR	Group C of Area I, Financial Reporting	Inside Area I's 30 to 40%; no sub-weight published	Recall the measurement focus and basis of accounting; determine the appropriate fund
BAR	Area III, State and Local Governments	10 to 20%	Prepare all four sets of statements, the reconciliation, net position and fund balance components, capital assets, long-term liabilities and pensions

FAR's governmental content is two topics, one at Remembering and Understanding and one at Application, with no weight published below the Area, so any figure for its share of FAR is an estimate and a fraction of Area I. BAR is where the volume lives: Area III is a fifth of the section at the top of its range, asked at Application level as statements and journal entries. If your Discipline is BAR, this is a foundation; if it is TCP or ISC, the FAR topics are all you will be asked.

Why governments account differently

A company exists to earn a return for owners, so its accounting measures profit. A city exists to spend money it was given for stated purposes, and the givers want to know whether it went on those purposes within the amounts they authorised. The primary user is a taxpayer or a bondholder, and the primary question is accountability, not performance.

That produces two features with no commercial counterpart. The first is the fund: a self-balancing set of accounts segregated for a purpose or a restriction, so that a grant spendable only on roads shows its compliance in the ledger. The second is the legally adopted budget, recorded in the books, not merely compared against them. Appropriations are the legal ceiling on spending, and the books show at any moment how much of it is used, committed or free.

Three categories, eleven fund types

Every activity belongs in exactly one fund type; the categories follow whether the government is governing, running a business, or holding money for someone else.

Category	Fund type	What goes in it
Governmental	General	Everything not reported elsewhere; every government has exactly one
	Special revenue	Revenue restricted to a purpose other than debt service or capital projects, such as a fuel tax for roads
	Capital projects	Resources for acquiring or building major capital assets
	Debt service	Resources for principal and interest on general long-term debt
	Permanent	Principal preserved, earnings spent, for the benefit of the government or its citizens
Proprietary	Enterprise	Activities charging external users a fee: a water utility or an airport
	Internal service	Services to the government's own departments at cost: a motor pool or self-insurance
Fiduciary	Pension and other employee benefit trust	Assets held in trust for employee retirement and benefit plans
	Investment trust	The external portion of an investment pool run for other governments
	Private-purpose trust	Trusts benefiting individuals, private organisations or other governments
	Custodial	Assets held briefly for others without a trust agreement, such as taxes collected for another government; replaced agency funds under GASB 84

Two distinctions do most of the work in "which fund" questions. A permanent fund and a private-purpose trust both preserve principal and spend earnings; the difference is who benefits. An enterprise fund and an internal service fund both charge for what they do; the difference is who pays.

Measurement focus and basis of accounting

The exam treats these as two questions. The measurement focus is what the statements measure; the basis is when transactions are recognised.

Reporting	Measurement focus	Basis	Consequence
Governmental funds	Current financial resources	Modified accrual	No capital assets or long-term debt; a capital purchase is an expenditure of the year; bond proceeds are an other financing source, not a liability
Proprietary funds	Economic resources	Accrual	Looks like a company, cash flow statement included
Fiduciary funds	Economic resources	Accrual	Net position and changes in it; excluded from the government-wide statements
Government-wide statements	Economic resources	Accrual	The whole government on one basis, split into governmental and business-type activities

Only one row is unfamiliar, and it generates the marks. Modified accrual recognises revenue when it is both measurable and available, and expenditures when the liability is incurred and payable from current resources. The word is deliberate: governmental funds have expenditures, not expenses, because they answer what was spent, not what was consumed.

What "available" means

Available means collected within the period, or soon enough afterwards to pay the period's liabilities. For property taxes the standard fixes the limit: under NCGA Interpretation 3, as amended by GASB Interpretation 5, tax collected more than 60 days after year end is not available and is carried as a deferred inflow of resources until collected. The cap is mandatory only for property taxes; for other revenues the government sets its own period by policy, and most adopt 60 days, so a question either states the policy or expects you to know property tax is the case the standard settles. Government-wide, the whole levy is revenue when levied, one of the reconciling items below.

Two sets of statements for one entity

The fund statements give each major fund its own column on its own basis. The government-wide statements report the whole government, minus the fiduciary funds, in a statement of net position and a statement of activities on full accrual, the latter laid out as expenses by function less programme revenues, with general revenues such as taxes below.

Governmental funds are therefore reported twice on two bases, and GASB Statement 34 requires a schedule reconciling fund balance to the net position of governmental activities, and the change in one to the change in the other. Internal service funds sit with proprietary funds in the fund statements but mostly serve governmental departments, so government-wide they join governmental activities: the fourth reconciling item.

The reconciliation, with a worked example

A town's governmental funds report fund balance of 400. Its records show capital assets costing 1,800 less accumulated depreciation of 600, bonds of 900 with accrued interest of 15, an internal service fund with net position of 60, and 25 of property tax deferred as unavailable.

Item	Amount	Why it reconciles
Total fund balance, governmental funds	400	Starting point
Add capital assets, net	+1,200	Not a financial resource
Deduct general long-term debt	(900)	Not payable from current resources
Deduct accrued interest	(15)	Expenditure when due in the funds, expense when incurred
Add internal service fund net position	+60	Serves governmental activities
Add revenue deferred as unavailable	+25	Availability is a modified accrual test only
Net position, governmental activities	770	The government-wide figure

The change-in-balance reconciliation applies the same logic to flows: add back capital outlay, deduct depreciation, deduct bond proceeds, add back principal repaid, move interest from paid to accrued, add the internal service funds' net income. Learn the balance version and the flow version comes free.

Budgetary accounting and encumbrances

Governmental funds record the budget itself. When the council adopts estimated revenues of 5,000 and appropriations of 4,900, the fund books it, in capitals by convention to mark budgetary accounts:

Dr ESTIMATED REVENUES        5,000
    Cr APPROPRIATIONS                4,900
    Cr BUDGETARY FUND BALANCE          100

An encumbrance is recorded when a purchase order or contract is issued, before anything arrives, so the same appropriation cannot be committed twice. For an 80 order:

Dr ENCUMBRANCES               80
    Cr ENCUMBRANCES OUTSTANDING       80

When the goods arrive with an invoice for 78, the encumbrance is reversed at its original amount and the expenditure recorded at the invoiced amount:

Dr ENCUMBRANCES OUTSTANDING   80
    Cr ENCUMBRANCES                   80
Dr Expenditures               78
    Cr Vouchers payable               78

The credit in the encumbrance entry goes by several names: "fund balance reserved for encumbrances" in older texts, "encumbrances outstanding" in most review materials, "budgetary control" in the GFOA's illustrative entries. The exam tests the mechanism, not the label: an encumbrance is neither an expenditure nor a liability but a reservation of appropriation, gone once the real expenditure is recorded. At year end the budgetary entries are reversed, and any encumbrance still open is shown as committed or assigned fund balance under GASB Statement 54.

The ACFR and the major-fund test

The annual comprehensive financial report has three sections: an introductory section with the transmittal letter; a financial section with the auditor's report, management's discussion and analysis, the basic statements and notes, and required supplementary information; and a statistical section of trend data. Only the basic statements carry the audit opinion. GASB Statement 98 renamed the report, effective for fiscal years ending after 15 December 2021, and the exam has used the new name since July 2022.

Not every fund gets a column. The general fund is always major. Any other governmental or enterprise fund is major if one element (assets plus deferred outflows, liabilities plus deferred inflows, revenues, or expenditures or expenses) is at least 10% of that element for all funds in its category, and the same element is at least 5% of the combined governmental and enterprise total. A government may also present any fund it considers important as major; the rest share one column.

The five question patterns

Which fund. A fact pattern describes an activity and asks where it is recorded. The cues are the table's: who benefits, who pays, whether principal is preserved, whether the resource is tied to debt service or capital outlay. This is FAR's question; expect two plausible funds separated by one detail.

Which basis. The question names a fund or statement and asks for the focus, the basis or a consequence: is the road an asset, is the bond a liability, is the tax revenue this year or deferred. Everything except governmental funds is economic resources and accrual, and the 60-day rule is the most repeated detail.

The reconciling item. A BAR question gives fund balance and a handful of facts and asks for net position, or the change in one for the change in the other. The trap is direction: capital outlay added back, depreciation deducted, bond proceeds deducted, principal repaid added back. Work from the reason, not a memorised sign.

The budgetary entry. Which account is debited when the budget is adopted, what happens to an encumbrance when the invoice differs, what year-end closing does. The reliable error is treating an encumbrance as an expenditure or a liability; it is neither.

The government-wide effect. Given a transaction, how the statement of activities or of net position shows it: which function, programme or general revenue, governmental or business-type activities, and the fact that fiduciary funds do not appear at all. This is the Analysis-level version, and BAR territory.

Where to practise this

Governmental accounting is finite, rules driven and asked in recognisable shapes: one of the cheapest blocks of marks on the exam for anyone who learns the vocabulary once. Prepito's FAR course covers the fund and basis questions in Area I, and the BAR course takes it through statement preparation, the reconciliation and the government-wide effects, in English with practice questions, timed simulations and full explanations.

CPA questions and written explanations are in English. Prepito’s interface is available in English and Arabic, and the AI tutor can respond in either language.

For where this sits in each blueprint, see the CPA FAR Study Guide: Blueprint, Topics and a Study Plan and the CPA BAR Study Guide: Blueprint, Topics and a Study Plan, or start with the CPA programme.

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Sources: AICPA Uniform CPA Examination Blueprints, effective January 1, 2026; GASB Statement No. 98; Washington State Auditor, BARS GAAP Manual, Major Funds and Conversion and Reconciliation (GASB 34 criteria and reconciling items); Texas Comptroller, Non-Exchange Transactions (availability under GASB 33 and NCGA Interpretation 3). Blueprint weightings are ranges revised annually and GASB issues new statements every year; confirm the current Blueprint for your window and treat the fund list and thresholds as the position as of 2026.