392

PUBLIC SECTOR ACCOUNTING

OBJECTIVES

At the end of this lesson you should be able to meet these objectives:

 State the accounting concepts, bases and policies of relevance to government accounting.

 Prepare analyse and interpret financial statements of government units.

 Public sector accounting; the development of accounting standards and their applicability to the public
sector.

 Fund accounting and its relationship to entity theory

 Income measurement and valuation in the public sector.

 Prepare the accounts of state corporations and similar organisations.

CONTENTS

 Public Sector Accounting

 Fund Accounting
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PUBLIC SECTOR ACCOUNTING

Public sector accounting is necessary because of the central rule it plays both politically and in economic
terms. The public sector is composed of the following:
 Central Government
 Local government
 Parastatals
 Charitable organisations
All public sector organisations have one characteristic, namely they derive their specific power from
Parliament, and as a result they are represented in Parliament. The accountability of public sector to
Parliament takes a variety of forms. For example, under central government, the department heads are
directly accountable to Parliament for the activities of their organisation, such as the PS of a given ministry is
accountable to Parliament through what is known as Parliamentary Accounts Committee for the proper
management of his ministry. The Parastatals are accountable through their ministries, while local authorities
are partially accountable to Parliament, and to some extent, to the local electorate. Typically a local authority
can set out policies necessary for the improvement of services to the local population, and will look for funds
either directly or from Parliament.

The accountability to Parliament will then set the basis for objectives for different organisations. For the central
government, the objectives are directly set by Parliament, while the parastatals (e.g. KPLC) will have general
objectives set by Parliament, but specific operational objectives are to be set by the Board of Directors
appointed by the minister to oversee the operations of the Parastatal.

The following are objectives of Public Sector Accounting:

 To provide financial information useful for the determination and predicting of the cash inflows, the
balances and financial requirements to meet the short term needs of the organisation, i.e. the
accounting information should be able to provide adequate information regarding the tax base as the
main source of income to the organisation.

 To provide financial information useful for determination and predicting the economic condition of the
organisation.

 To provide information useful for determining and evaluating the performance of the organisation in
terms of legal, contractual and statutory requirements, i.e. the financial statements should be able to
indicate whether the transactions of the organisation have been carried out legally and in accordance
with statutory requirements and contractual terms.

 To provide financial information necessary for the preparation of the budget-planning and to predict the
impact of the acquisition and allocation of resources to the organisation.

 To provide information necessary for evaluating the managerial performance of the organisation.

The users of public sector accounts can be summarised as follows:

 Parliament – for control purposes
 Government departments – to evaluate performance.
 Tax payers – to confirm how tax has been used
 Voters – to decide whether to elect a parliament back and evaluate government performance.
 Investors and persons giving grants – such as donors.

FUND ACCOUNTING
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A fund is defined as a distinct accounting entity with a self balancing set of accounts which has objectives set
out to be met. In commercial accounting, a fund may be equated to a specific division of the company; that
division being charged with specific responsibilities or given specific objectives, such as would be the case for
a production department.
In government accounting the emphasis is based on the fund as a part of an entity contributing to the overall
objectives of the organisation. For this reason, a fund account will be set to receive cash inflows, record
expenditures, show assets, as well as liabilities. An example would be a library fund A/C.
An organisation may be composed of various fund entities, each fund will have its own books of account as if it
was completely independent from the whole organisation.
Accounting Theory
Accounting theory refers to the financial reporting that may be adopted by the organisation. It is necessary to
note that fund accounting is the representation of the entity accounting theory as used in commercial
accounting. This means a fund will be considered a distinctive unit separate from the people related to it. The
financial statements prepared for each fund will be for use of those who are interested in the fund. The parallel
in commercial accounting is that a company is a separate entity from shareholders, directors, debtors and
creditors. The financial statements of the company are prepared to be used by such people.
In public sector accounting, the main accounting concepts used are that of stewardship and accountability.
Under the stewardship accounting concept, the steward is charged with the responsibility of making sure that
the assets of an organisation are not misappropriated. Under accountability, the head of department is
accountable for his actions regarding the management of the organisation as whole.

Financial Accounting Techniques

Public sector organisations may adopt different accounting techniques; the most important listed are below:
1) Budgetary accounting
2) Cash Accounting
3) Accruals Accounting
4) Commitment Accounting (encumbrances)
5) Fund Accounting

1) Budgetary Accounting
Refers to the preparation of operating accounts in form of budgets. A budget is a management plan
that has been transformed into figures necessary to evaluate the achievement of the organisations’
objectives.
Under budgetary accounting, the concept is based on the forecasted cash flows, and operations must
be limited to the budget estimates. The organisation cannot overspend above budget restrictions
without Parliamentary approval.

Budgetary accounting therefore, aims at achieving the following:

(a) Ensure efficiency of managers.

(b) Communicate the objectives of the organisation to the employees
(c) Provide controls
(d) Provide a yardstick for measuring performance of employees.

2) Cash Accounting
Under this system only cash inflows and outflows are recognised and recorded. The system does not
recognise any revenue or expenditure that has not been received or paid. (i.e. accrued)

3) Accrual Accounting
The accruals concept states that revenues and costs are recognised as they are earned and incurred.
Most of the organisations in the private sector prefer this method. However, under public sector
accounting, both cash and accrual accounting can be used by different entities or kinds of
organisations; e.g. if a part of an organisation is charged with the responsibility of running activities on
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the same basis as commercial organisations, such an entity may adopt accrual accounting irrespective
of the accounting techniques adopted by the main organisation.

4) Commitment Accounting
This accounting system recognises transactions when the organisation is committed to them. It means
the transaction is not recognised when cash is paid or received, nor when an invoice is received or
issued, but at an early stage where orders are received and placed. This accounting method is meant
to ensure that government units do not overspend because transactions will only be entered into after
checking committed balances.

5) Special funds
Some specific departments of a governmental organisation may adopt special fund accounting
according to the set objectives they have to meet. The following are some common special funds to
governmental organisations:

(a) Trust funds: These are those funds where the government receives money in the capacity of a trustee.
They are also referred to as Agency funds, or Fiduciary funds. Examples of such funds include NSSF
and NHIF. The governmental organisation does not have absolute title to the assets held; there are
statutory restrictions upon their use.
(b) Sinking funds: These are funds created to account for the accumulation of resources for retiring term
bonds at their maturity. Thus their main purpose is the repayment of public debts. Such funds are set
up through the approval by the Parliament, and some appropriation may be made from these funds.
The amounts appropriated are invested to earn interest; when public debt matures, the sinking fund is
used to redeem this debt.
(c) Working capital funds/Revolving funds: They are also known as internal service funds and
enterprise funds. They are used to account for services provided to other departments (internal
departments – internal service funds, external services = Enterprise funds) for a fee – usually cost-
reimbursement basis. They are set up through the approval of Parliament to have the necessary
resources for achieving their specific objectives.
(d) Capital Project Funds: This provides resources for the completion of some specific capital projects.
The main sources of financing such funds include proceeds from treasury bonds, grants, and transfers
from other ministries and funds. This category excludes any capital projects under trust funds or
revolving funds.
(e) Specific Revenue funds or special funds: Funds of this class are created and operated to account
for revenue designated by law for specific purpose. An example of this would be library services.
(f) General funds: These are funds established to account for resources devoted to financing the general
services which the governmental units perform for its citizens. These include general administration,
protection of life and property etc.

Note: In government accounting, sources of income can be divided into 2, namely

1) Recurrent expenditure income;
2) Development expenditure income.

Recurrent expenditure income can be equated to operating income in financial accounting. Development
expenditure income can be equated to capital income in commercial accounting.

CONSOLIDATED FUND
All Revenues for the government are recorded into a fund known as a consolidated fund. The consolidated
fund account is kept by the treasury under the ministry of finance, and all revenues and grants received by the
Government are paid into this account. No money can be withdrawn from this account without approval of
Parliament, i.e. Parliament is the sole signatory to this account. This is necessary to ensure that all
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government incomes are used to carry out activities of public interest; and interests are represented in such
decision making through the MPs. It is also important to note that each governmental unit may be in a position
to raise funds from its local activities (e.g. Ministry of Education – Fees from students, Ministry of Health –
Hospital fees).
Money realised in this manner is called Appropriations-In-Aid (A-I-A). Each governmental unit is expected to
make a budget of its estimated Appropriation-In-Aid and submit the budget to Parliament through the relevant
ministry. Appropriations-In-Aid is supposed to be retained by the government unit that generated it. It will be
added to the appropriation (allocation by Parliament) to cover the expenditure of the governmental unit.
The following books of accounts are kept by each department (governmental unit) to record the transactions of
the organisation:

1. Cash Book
The cash book is that book in which all receipts and payments are recorded. Each accounting unit will
maintain a cash book. There are different types of receipts and payments in different ministries, and
the general point is that all receipts whether in cash or cheque will be recorded in the cash book.

Illustration
The following cash transactions (cash) took place for a government unit for the month of January 19X8
Sh.
02/01/119X8 Opening balance: Cash 4,000
Bank 25,000
02/01/19X8 Received cheque in respect of trading license 62,500
03/01/19X8 Paid Peter and Sons (cheque for goods supplied) 20,000
05/01/19X8 Cash received in respect of fees 2,500
05/01/19X8 Paid telephone charges (cheque) 8,700
06/01/19X8 Paid AB Ltd by cheque 52,000
06/01/19X8 Paid cash to James Burton 2,800
08/01/19X8 Received cheque for Licenses 210,000
09/01/19X8 Paid wages in cash 5,000
10/01/19X8 Kept a cash balance 10,000 and banked rest together
with all cheques in hand.
Required: Prepare a cash book for the governmental unit.
Solution
CASHBOOK
Jan CASH BANK Jan CASH BANK
19X8 Shs. Shs. 19X8 Shs. Shs.
2 Jan Balance b/d 4,000 25,000 3 Jan Peter & Sons 20,000
2 Jan Trade Licenses 62,500 5 Jan Telephone chg. 8,700
8 Jan Licenses 210,000 6 Jan AB Ltd 52,000
10 Jan Cash 261,200 6 Jan James Burton 2,800
9 Jan Wages 5,000
10 Jan Bank 261,200
10 Jan Balance c/d 4,500 10 Jan Balance c/d 10,000 -__
279,000 290,700 279,000 290,700
11 Jan Balance b/d 10,000 - 11Jan Balance b/d - 4,500

Note: In the illustration, the government unit has a debit balance in the bank – meaning they have an
overdrawn account with the bank. For control purposes and using the cash accounting technique,
such a situation is not allowed. The accounting officer should only release government cheques when
there is at least an equivalent amount in the bank, otherwise such cheques may be dishonoured.

2. Vote book
In commercial accounting, ledgers are a set of accounts; entries being recorded in such accounts. Under
public sector accounting, ledgers are substituted with an equivalent called the vote book. In this book,
various accounts are opened. These accounts relate to various expenditure heads and sources of
revenue. In the vote book, the vote number of any particular department or ministry is used. This is an
equivalent to a folio number under commercial accounting. The common head numbers include:
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110 – Travelling and accommodation

120 – Postal and telegram expenses
121 – Telephone expenses
130 – Official entertainment
174 – Stationery etc.
These vote heads are necessary to speed up the processing and posting of various expenditures.
Note: The vote book accounts are not to be balanced off as would be in the case of commercial accounting
(personal or real accounts) but is a statement to indicate the total amount committed together with the
payments that have been made against a given vote. It is presented generally in the form of a T- Account with
commitments indicated on the left hand side, and actual payments and balances on the right thereof, i.e.

Commitments Payment Balance

Illustration
Vote head – Ministry of Public Works
A I E (Authority to incur expenditure) No. 225 – 35.
A I E (Authority to incur expenditure) K£5,000 (or Ksh100,000)

Transactions (Dec 19X6)

1 Dec Ordered for iron sheets and cement from Ton & Co. for Sh.25,000;
L.P.O. No. 5213
6 Dec Paid Sh.3,000 for lorry hire to transport cement; PV No. 357
Transactions (Jan 19X7)
10 Jan Paid Ton & Co. Sh.15, 000 being part payment for goods ordered through LPO No. 5213; PV No. 358.
15 Jan Purchased goods from AB & Co. for Sh.5,000 (timber); PV No. 359
20 Jan Issued LPO No. 5214 to Patel & Sons for windows and doors for Sh.20,000.
25 Jan Part payment to Patel & Sons Sh.7,000; PV No. 360.
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Solution

Commitment Payment
Date Ref Estimated Date PV No. Amount Balance
19X6 Cost 19X6
Shs. Shs. Shs.
1 Dec Tom & Co. LPO 5213 25,000 100,000
th
6 Dec 357 3,000 97,000
19X7 19X7
th th
20 Patel & Co. LPO 5214 20,000 10 Jan 358 15,000 82,000
th
15 Jan 359 5,000 77,000
th
25 Jan 360 7,000 70,000

On 25th January the balance on the vote book will indicate Sh.70,000 with a commitment of Sh.23,000. (Tom =
10,000; Patel = 13,000) Any other commitment must take into account the only expendable amount in
the vote is Sh.70,000 – 23,000 = Sh47,000.

Annual Accounts
Every governmental unit will prepare financial statements to account for the money allocated to them. The
financial statements differ according to the nature of the activities undertaken by the governmental unit.
However, the following types of accounts are common among government units:

1) Income and expenditure accounts;

2) Statement of assets and liabilities,
3) General Accounts of Vote (GAV)
4) The exchequer account
5) Paymaster General Account (PMG)
6) Appropriation account
7) Revenue Account

The techniques involved in preparation of the account shall be given by means of the following worked
examples:

1) Income & Expenditure A/C

This is similar to income and expenditure accounts for non-profit making organisations. It is however
prepared by governmental units, which provide commercial services e.g. a staff canteen or students
welfare canteen (at governmental colleges).

Illustration
The following account balances were extracted form the books of a pension fund for the year ended 30th June
19X7:

Dr (Shs) Cr(Shs)
Payments to members 500,000
Members’ contributions 800,000
Payment for management 150,000
expenses 400,000
Interest on investment by fund 1,800,000
Fund Account 350,000
Cash balance (PMG) 2,000,000 ________
Investment A/C
3,000,000 3,000,000
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Requitred: Prepare an income and expenditure account for the year ended 30th June 19X7 and a balance
sheet as at that date.

Note: The fund is the amount set aside to meet the specific objectives of the governmental unit. It is equal to
the capital in a business in commercial accounting.

Solution
Income and Expenditure account for the year ended 30th June 19X7
Income Sh.‘000 Sh.‘000
Members’ contribution 800
Interest income from investments 400
1,200
Payments to members 500
Expenses of management 150
(650)
Surplus 550

Balance Sheet as at 30 June 19X7

Assets Sh.‘000 Sh.‘000
Investment A/C 2,000
Cash balance _350
2,350
Fund Account B/F 1,800
Add Surplus 550 2,350
2,350

2) General Account of Vote (GAV)

During a budget speech, the Minister for Finance will give detailed appropriations (allocations) of funds
to different governmental units. Through an appropriation bill, The Parliament will approve different
estimates to individual governmental units. The amount approved to each governmental unit by
Parliament is then recorded into a particular account known as “General Account of Vote” (GAV). This
account therefore records funds allocated to various governmental units.

All incomes of the government are received and recorded into an account called the “Exchequer account”.
The total amount available in the exchequer represents the consolidated fund, i.e. the consolidated fund
operates an account called exchequer.

Illustration
The approved estimates and actual details of the Ministry of Culture and Social Services for the year
19X6/19X7 were as follows:

Gross estimated expenditure K£640,000

Estimated Appropriation-In-Aid K£ 40,000
Drawings from exchequer K£530,000
Gross Expenditure K£480,000
Actual appropriations in aid K£30,000

Required: Prepare a) i) The General Account of Vote

ii) The exchequer account
iii) Paymaster General Account

b) A statement of assets and liabilities as at 30-6-19X7

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Solution
Note: (i) The exchequer account records the amount accrued by the consolidated fund to a particular
government unit

(ii) The GAV account will record amounts approved by Parliament to a particular governmental unit.
However, the consolidated fund will issue different amounts for a given period of time to a
particular government unit subject to the maximum, which was approved by Parliament. E.g.
Parliament may approve K£600,000 for a particular governmental unit, but due to various
reasons, the consolidated fund may issue a different amount to the unit, but not exceeding
K£600,000.

(iii) The Paymaster General Account (PMG) is the cash account operated by the individual
governmental units. It records amounts so far withdrawn from the exchequer.

All money approved for a governmental unit is intended to meet a specific purpose. This means each
governmental unit will maintain an expenditure account, in which shall be recorded debits for various expenses
incurred. The corresponding credit is in the PMG account (cash account). The expenditure account will then
be closed to GAV. The difference between the amount approved by Parliament and total expenditure will then
represent a fund balance, that should be surrendered back to the treasury at year end if not used.

GENERAL ACCOUNT OF VOTE

K£ K£
30 June 19X7 Expenditure 1 July 19X6 Exchequer
480,000 640,000
30 June 19X7 Balance c/d 30 June 19X7 Appropriation in Aid
190,000 30,000
670,000 670,000

EXCHEQUER ACCOUNT
K£ K£
1 July 19X7 General Account for vote 30 June 19X7 PMG A/C
640,000 530,000
30 June 19X7 Balance c/f
_______ 110,000
640,000 640,000

PAYMASTER GENERAL ACCOUNT

K£ K£
30 June 19X7 Exchequer 30 June 19X7 Expenditure
530,000 480,000
30 June 19X7 Appropriation In Aid 30 June 19X7 Balance c/d
30,000 80,000
560,000 560,000

EXPENDITURE ACCOUNT
30 June 19X7 PMG A/C 30 June 19X7 General Account of Vote
480,000 480,000

Notes:
1) Appropriation-In-Aid (AIA) is the amount to be generated by the governmental unit from its internal
activities. It is subtracted from the gross estimate (gross vote) to arrive at net estimate of (net vote) which
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is approved by Parliament to be released from the consolidated fund. An A-I-A account may be
maintained,
Where: When A-I-A is received from own operations:
Dr PMG Account
Cr A-I-A Account
At the year end:
Dr A-I-A Account
Cr GAV Account

2) At the beginning of each year, each governmental unit has an estimated Appropriation-In-Aid which will
guide them on the total amount expected to be generated internally. Thus the sum of net estimates
approved and actual appropriation in aid will constitute the total funds allocated to each governmental unit.
This sum constitutes the credit side of the GAV account.

STATEMENT OF ASSETS AND LIABILITIES AS AT 30-6-19X7

Assets K£ K£
Exchequer (Amount not yet drawn) 110,000 ______
Paymaster General (PMG) 80,000 190,000
Funded by
General Account of Vote 190,000

Thus funds allocated have been adequately accounted for and the balance of K£190,000 will be
surrendered back to the Treasury.

In this case, the government unit will surrender the Sh80,000 from the PMG, while the exchequer will
surrender Sh 110,000 on behalf of the ministry.

Illustration:
The following information relates to a governmental unit for the fiscal year 19X6/19X7.
Gross estimates: K£720,000
Appropriation-In-Aid estimated: K£90,000
Drawings from the exchequer K£450,000
Actual gross expenditure K£520000
Actual appropriation-in-aid K£120,000

Required:
a) Prepare the following accounts: i) General Account of vote (GAV)
ii) Exchequer A/C
iii) PMG A/C
b) Statement of assets and liabilities as at 30 June 19X7.

Solution:
For clear accounting procedure it is necessary to distinguish between the proportion of gross estimate that will
be generated internally and that proportion that is expected from the treasury after Parliamentary approval.

GENERAL ACCOUNT OF VOTE

K£ K£
30 June 19X7 Excess in A-I-A 1 July 19X6 Exchequer A/C
30,000 630,000
30 June 19X7 Expenditure 30 June 19X7 A-I-A
52,000 120,000
30 June 19X7 Balance c/d
20,000 ______
750,000 750,000
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Note: To simplify accounting entries, the A-I-A is recorded in the GAV at the end of the fiscal year.
This will enable us to determine whether there was a shortfall (deficiency) in A-I-A from the expected
amount, or there was a surplus.

EXCESS APPROPRIATION-IN-AID
K£ K£
30 June 19X7 Balance c/d 30 June 19X7 GAV A/C
30,000 30,000

EXCHEQUER ACCOUNT
K£ K£
1 July 19X6 General Account of 30 June 19X7 PMG
vote630,000 450,000
30 June 19X7 Balance c/d
______ 180,000
630,000 630,000

PMG ACCOUNT
K£ K£
30 June 19X7 Exchequer A/C 30 June 19X7 Exchequer A/C
450,000 520,000
30 June 19X7 A-I-A 30 June 19X7 Balance
120,000 50,000
570,000 570,000

APPROPRIATION IN AID ACCOUNT

K£ K£
30 June 19X7 GAV 30 June 19X7 PMG
120,000 120,000

Note: amounts to be surrendered back to the exchequer will be £230,000. The governmental unit is also
expected to remit any A-I-A to the consolidated fund – This is more apparent in a statement of appropriation.
(also known as appropriation A/C).

STATEMENT OF ASSETS AND LIABILITIES AS AT 30th June 19X7

Assets K£ K£
Exchequer A/C 180,000 ______
Paymaster General (PMG) 50,000 230,000
Funded by
Excess in AIA 30,000 ______
General Account of Vote 200,000 230,000

Appropriation Accounts
These may be drawn in two different ways (one being a slight variation from the other).
An example of an appropriation account would be as follows:

APPROPRITATION ACCOUNT FOR THE YEAR ENDED 30TH JUNE 19X4 (K£)
Details Approved estimate Actual Amount Amount
Expenditur under- overspent
e spent
Personal emoluments:
- original estimate 80,000
- supplementary estimate 8,000 88,000 90,000 2,000
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House allowance 15,000 13,000 2,000

Passage and Leave 5,000 4,500 500
Travelling expenses:
- original estimate 22,000
- supplementary estimate (2,000) 20,000 23,000 3,000
Electricity & Water 6,000 6,500 500
Purchase of plant & mach. 50,000 40,000 10,000 _____
Gross Appropriation 184,000 177,000 12,500 5,500
Appropriation-In-Aid (15,000) (12,000)
Net Appropriation 169,000 165,000

Note:

1) Net estimate exceeds actual expenditure by K£4,000. This indicates that there was no over expenditure
for the governmental unit as a whole. However, there are some over-expenditures on individual items; but
since these are not significant, no explanations are required by the accounting officer.
2) The gross estimates and gross actual expenditures are recorded before taking into account the effect of A-
I-A. In this case gross expenditure estimate exceeds the gross actual expenditure by K£7,000. But in
order to determine the surplus to be returned to the treasury or over-expenditure, we must take into
account the effects of either surplus AIA or deficiency of AIA. In this case, there is a shortage in AIA of
K£3,000. The deficiency must be netted off from the surplus of “approved estimates and actual
expenditure”:
Surplus of estimates over actual expenditure
K£7,000
Less deficiency in A-I-A (3,000)
Expendable balance K£4,000

Therefore there is no net over-expenditure by the ministry.

Illustration
The approved estimates and actual expenditure details of the Ministry of Agriculture for the year 19X7/19X8
were as follows:

CODE Details Approved estimates Actual Expenditure

K£ K£
000 Personal emoluments 123280 97,520
050 House Allowance 19,550 14,260
080 Passage and Leave 41,040 667
100 Travelling and accommodation 1,334 1,656
110 Transport and maintenance 16,100 13,593
120 Postal and Telecom expenses 4,600 3,312
190 Miscellaneous charges 17,480 16,882
196 Training expenses 5,980 4,738
230 Purchase of equipment 21,000 39,800
620 AIA (Realised income) 1,000 5,560

The ministry made fair equal withdrawals from the exchequer in July 19X7, October 19X7, January 19X8 and
May 19X8. In total, the ministry had drawn K£200,000 by the year-end.
Required:
a) The general account of vote
b) The exchequer account
c) The PMG account
d) Statement of assets and liabilities as at 30th June 19X8.

Solution
It would help if an appropriation account is drawn up. In this illustration it is drawn in a slightly varied version:
CODE Details Approved Actual Over/Under
Estimates K£ Expenditure K£ Expenditure K£
000 Personal emoluments 123280 97,520 25,760
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050 House Allowance 19,550 14,260 5,290

080 Passage and Leave 41,040 667 40,373
100 Travelling and accommodation 1,334 1,656 (322)
110 Transport and maintenance 16,100 13,593 2,507
120 Postal and Telecom expenses 4,600 3,312 1,258
190 Miscellaneous charges 17,480 16,882 598
196 Training expenses 5,980 4,738 1,242
230 Purchase of equipment 21,000 39,800 (18,800)
Gross Appropriation 250,364 192,428 57,936
620 A-I-A (1,000) (5,560) 4,560
Net Appropriation 249,364 186,868 62,496

GAV ACCOUNT
K£ K£
30 June 19X8 Excess A – I – A A/C 1 July 19X7 Exchequer A/c
4,500 249,364
30 June 19X8 Expenditure A/c 30 June 19X8 A – I – A A/C
192,428 5,560
30 June 19X8 Balance c/d
57,936 _______
254,924 254,924

Excess Appropriation in Aid Account

K£ K£
30 June 19X8 Balance c/d 30 June 19X8 GAV A/C
4,560 4,560

Exchequer Account
K£ K£
1 July 19X7 GAV A/C 30 June 19X8 Expenditure
249,364 200,000
30 June 19X8 Balance c/d
49,364
249,364 249,364

PMG Account
K£ K£
30 June 19X8 Exchequer (Total) 30 June 19X8 PMG (Total)
200,000 192,428
30 June 19X8 A – I – A A/C 30 June 19X8 Balance c/d
5,560 13,132
205,560 205,560

Expenditure
K£ K£
30 June 19X8 PMG 30 June 19X8 GAV A/C
192,428 192,428

Appropriation-In-aid Account
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K£ K£
30 June 19X8 GAV 30 June 19X8 PMG
5,560 5,560

STATEMENT OF ASSETS AND LIABILITIES AS AT 30 JUNE 19X8

Assets K£ K£
Exchequer A/C 49,364 _____
Paymaster General A/C 13,132 62,496
Funded by
General Account of Vote 57,936 ______
Excess appropriation-in-aid 4,560 62,496

Revenue Accounts
A revenue account records only the estimated revenue and actual revenue from each particular revenue source
for the governmental unit. The difference between the two, if significant must be explained by the accounting
officer. Alternatively the significant difference between the two can be used to correct future estimations by the
governmental unit. It could also represent new factors emerging during the year which were not taken into
account during the previous budget.

Illustration
From the following data, prepare a statement of revenue for the year ended 30th June 19X7.

Estimated Revenue Actual Receipts

Renting building and equipment K£850,000 K£870,000
Fee for trading licenses K£430,000 K£400,000
Fees for import/export licenses K£470,000 K£480,000
Other receipts K£235,000 K£210,000

The following additional details are available: -

(i) Balance on hand on 30th June 19X6 K£247,000
(ii) Balance on hand on 30th June 19X7 K£160,000

REVENUE A/C FOR THE YEAR ENDED 30TH JUNE 19X7

Details Estimate Actual £ Details £
£
Balance b/d (30-June-19X6) 247 Payment to Treasury 2,047
Rent for building/machinery 850 870
Fees for trading licenses 430 400
Fees for import/export 470 480
Others 235 210
Balance c/f (30.6.19X7) 160
1,985 1,960
2,207 2,207

Note: There are no serious differences between estimate and actual receipts, hence no explanation is
required by the accounting officer.

Illustration:
The following are extracts from the trial balance for revenue head No. 180 – 240, Airport revenue collection for
the year ended 30th June 19X8:
Code Details Dr(£) Cr (£)
630 Renting building and equipment 807,456
631 Rent from land 3,796,205
651 Aviation landing fee 3,542,221
 406

652 Airport passenger tax 3,991,029

670 Other airport receipts 798,144
Payment of revenue to exchequer 13,288,687

The following additional details are made available:

i) Balance in hand at 30th June 19X7 £2,568,242.

ii) Estimated receipts for the year:
CODE AMOUNT
630 £1,000,000
631 £2,500,000
651 £3,000,000
652 £3,600,000
670 £1,100,000

Required:
a) A statement of revenue for the year ended 30th June 19X6
b) Give appropriate footnotes for material differences between estimates and the actual receipts.
Solution

REVENUE ACCOUNT FOR THE YEAR ENDED 30TH JUNE 19X8

Details Estimate £ Actual £ Details K£
Balance b/d (30-June-19X7) 2,568,242 Payment to Treasury 13,288,687
Renting building/machinery 1,000,000 807,456
Rent for land 2,500,000 3,796,205
Aviation landing fees 3,000,000 3,542,221
Airport passenger tax 3,600,000 3,991,029 Balance c/f 30.6.19X8 2,214,610
Other airport receipts 1,100,000 798,144 160
_________
11,200,000 12,935,055
15,503,297 15,503,297

Note: There may have been a significant increase in the volume of business at the airport. It is possible that a
new airline (previously not operational to Kenya) has decided to make Kenya one of its destinations/stopovers.
It is also possible that some land and buildings have been sold, thus leading to a fall in rental income.

GENERAL AND SPECIAL FUNDS ACCOUNTS

In carrying out its functions to meet both economic and political needs of the country, the government sets out
various funds that are charged with specific governmental units, ministries or departments that will oversee the
operations of the fund.
Note: A fund is an entity with self-balancing books to meet specified objectives. For proper accounting,
different funds are named in accordance with the activities they are supposed to undertake. For example, the
general fund of a governmental unit is the entity that accounts for all resources and assets used for financing
the general administration of the unit. The general administration of the unit is for traditional services provided
to the people, such as security, health, education and eradication of poverty.

In some cases, the government may set aside funds to meet special duties or activities which are different from
ordinary traditional services being offered to the people. This means whenever a tax or other revenue source
is authorised by Parliament to be used for a specified purpose, then a governmental unit avails itself of that
source, and may create what is known as a Special Revenue Fund.

The purpose of a special revenue fund is to show that the revenue from such sources was used for a specific
purpose only; and the governmental unit will then operate what is known as a special fund account to record
the resources and liabilities for such an entity.
 407

The general fund and special funds are commonly known as revenue funds of a governmental unit. Thus,
where there is no specification, the revenue fund of a governmental unit may refer either to the general fund or
the special fund.

It is important to note that the general fund as well as special revenue fund only record current assets and
current liabilities of the governmental unit. Long term assets as well as long term liabilities for governmental
units are covered under different funds e.g. property funds. The difference between current assets and current
liabilities of a general or special fund constitute what is known as “fund equity”. Fund equity would thus be an
equivalent of net working capital in commercial accounting. However from the governmental accounting point
of view, fund equity represents the fund balance that has not been directly used or committed. The fund equity
can further be divided into two parts:
i) Fund balance
ii) Reserves

The reserves part of a fund equity represents funds that have been committed but the liability not yet incurred.
For example, where a contract has been entered into, and the contractor has been issued with an LPO, but he
has not yet supplied or provided the service; the amount committed to the LPO will be represented in form of a
reserve to indicate that it is fund balance which cannot be distributed/utilised. The other distributable amounts
are listed under fund balance.

Budgetary Accounting
All funds set up by the government to meet different objectives will have a budget as a source of control with
regard to estimated revenue as well as estimated expenditure (appropriations). In order to record transactions
of a governmental unit, the following general ledger control accounts are recommended:

i) Estimated revenue A/C

ii) Appropriation A/C
iii) Encumbrances A/C

These three accounts are general ledger control accounts which must be supported by the relevant subsidiary
accounts as illustrated below:

Illustration
The expected revenue source of a particular governmental unit were as shown below:

Revenue Ledger
Taxes £882,500
Licenses and permits £125,500
Intergovernmental revenues £200,000
Charges for services rendered £90,000
Fines and forfeitures £32,500
Miscellaneous revenues £19,500
Total Expected Revenue £1,350,000

The Expected revenue would be recorded in the general ledger control accounts as £1,350,000; being the sum
of individual expected revenue. The journal entry to record this transaction is:

Dr £ Cr £
Estimated Revenue 1,350,000
Fund balance 1,350,000
To record approved revenue to a
governmental unit
 408

Subsidiary ledgers will however record details of individual sources of revenue.

Note: Estimated revenues are potential assets for the non-governmental organisation and are comparable to
debtors in commercial accounting; hence the debit entry in the estimated revenue control account. On the
other hand, appropriations are potential liabilities and are recorded through credit entries in the appropriations
control A/C.

Estimated revenues represent what the government unit expects from various sources. At the end of year, the
actual revenue realised may be different from the estimated revenue. The revenue realised is recorded through
the following entries:

Debit Cash
Credit Revenue A/c (This also acts as a control A/C)
The revenue account is then closed to estimated revenue account to indicate whether estimated revenue
exceeds actual revenue or vice versa.

Expenditure Account
This account records actual liability incurred as opposed to the appropriation account which records estimated
or potential liability. The corresponding credit is in the individual liability accounts, e.g.

Expenditure Account
£ £
Wages payable Appropriations A/C
60,000 74,000
Postage payable
14,000
74,000 74,000

The total expenditures incurred will then be compared with appropriations (or estimated expenditure). For this
reason, the expenditure account is closed to appropriations A/C.

Wages Payable
£ £
Cash Expenditure A/C
60,000 60,000

Postage payable
£ £
Cash Expenditure A/C
14,000 14,000

Encumbrances
Encumbrances record the commitments that have been entered into but services are yet to be received. The
purpose of recording the commitments is to ensure that the budgeted appropriations are not exceeded. In this
way, accounting officers may guard against over expenditure.
E.g. assume that approved estimates for a governmental unit was Sh1,000,000, and so far during the year
Sh800,000 had already been incurred. Also assume that LPOs amounting to Sh120,000 have been committed
to vote books. This therefore means that out of the Sh1,000,000, only Sh80,000 is available either to be
retained to the treasury or to be expended by the governmental unit.
The commitments are recorded in:
i) Encumbrances accounts;
ii) Fund balance reserved for encumbrances A/C

In the above example, the encumbrances of Sh120,000 will be recorded as follows:

 409

Encumbrance
Sh Sh
Fund balance reserved...
120,000

Fund balance reserved for encumbrance

Sh
Encumbrance
120,000

After the expenditure has been incurred (commitments have been fulfilled). The above entries are reserved.
At the same time, the expenditure is fully recorded. Assume the encumbrance of Sh120,000 was in respect of
pool chlorine for training governmental unit forces; and the supplier has already fulfilled the commitment and
has been paid:
Encumbrance A/C
Sh Sh
Fund balance reserved... Fund balance reserved…
120,000 120,000

Fund balance reserved for encumbrance

Sh Sh
Encumbrance Encumbrance
120,000 120,000

Expenditure A/C
£ £
Pool Chlorine Appropriations
120,000 120,000

Pool Chlorine A/C

Sh Sh
Cash Expenditure
120,000 120,000

Sometimes there is an overlap between the end of the accounting period and when the commitments are
fulfilled. Assume that the governmental unit accounting period ends on 30th June every year, and a
commitment entered into during the month of April for Sh250,000 have been partially services to the tune of
Sh210,000 at the end of the accounting period to 30th June 19X7. From the point when commitment was
entered into, the following entries shall be made:
 410

Encumbrance A/C
Sh Sh
Fund balance reserved... Fund balance reserved…
250,000 210,000
Fund balance
_____ 40,000
250,000 250,000

This account is not to be balanced but closed to fund A/C

Fund balance reserved for encumbrance

Sh Sh
Encumbrance Encumbrance
210,000 250,000
Balance c/d
40,000 ______
250,000 250,000
Balance b/d
40,000

The fund balance reserve for encumbrances will then appear in the statement of assets and liabilities at the
end of the period.

Comprehensive illustration
The city of Westcycle fiscal period ends on 30th June. The trial balance of the general fund as on 1 July 19X7
was as follows:
Dr £ Cr £
Cash Balance 12,600
Savings A/C 66,800
Property tax receivable 480,000
Accounts payable 7,300
Wages payable 4,450
Fund balance 548,250
560,000 560,000

The operations for the year ended 30th June 19X8 are summarised as follows:
i) Estimated revenues: £2,400,000; Appropriations: £2,350,000
ii) Revenues from property taxes levy: £1,925,500
iii) Cash received from property taxes: £2,005,600; and other revenues: £485,700
iv) Expenditures encumbered and evidenced by purchase orders: £1,760,000
v) Liquidation of encumbrances and vouchers prepared for purchase order billings: £1,755,000.
vi) Expenditure for payroll £602,000
vii) Cash disbursed for vouchers: £1,740,000
Cash for payment of wages: £598,000
Cash transferred to savings A/C: £150,000.

Required:
a) Open the ordinary ‘T’ accounts for the accounts appearing in the trial balance and enter the balances as at
1 July 19X7.
b) Open ‘T’ accounts for: Fund balance reserves for encumbrances
: Estimated revenues
: Revenues
: Appropriations
: Expenditure
 411

: Encumbrances
c) Prepare journal entries to post the foregoing summarised operations.
d) Post the entries recorded in (c) above into the accounts.
e) Record appropriate entries to dwell the accounts as at 30th June 19X8.
f) Prepare a balance sheet as at 30th June 19X8.

Cash
£ £
Balance b/d Accounts payable
12,600 174,000
Property tax Wages
2,005,600 598,000
Other revenue Savings
485,700 150,000
Balance c/d
________ 15,900
2,503,900 2,503,900

Savings
Sh Sh
Balance b/d
66,800 Balance c/d
Cash 216,800
150,000
216,800 216,800

Fund Balances
Sh Sh
Appropriations Balance b/d
2,350,000 548,250
Encumbrance Estimated revenue
5,000 2,400,000
Appropriation Estimated revenue
7,000 11,200
Balance c/d ________
597,450
2,959,450 2,959,450
Balance b/d
597,450

Fund Balance reserved for encumbrances

Sh Sh
Encumbrances Encumbrances
1,755,000 1,760,000
Balance c/d ________
5,000
1,760,000 1,760,000
Balance b/d
5,000

Estimated revenue
Sh Sh
 412

Fund balance Revenue

2,400,000 2,411,200
Fund balance ________
11,200
2,411,200 2,411,200

Property taxes
Sh Sh
Balance b/d Cash
480,600 2,005,600
Revenue A/C Balance c/d
1,925,500 400,500
2,406,100 2,406,100
Balance b/d
405,500

Wages payable
Sh Sh
Cash Balance b/d
598,000 4,450
Balance c/d Expenditure
8,450 602.000
606,450 606,450
Balance b/d
8,450

Accounts payable
Sh Sh
Cash Balance b/d
1,740,000 7,300
Balance c/d Expenditure
22,300 1,755,000
1,762,300 1,762,300
Balance b/d
22,300

Encumbrances
Sh Sh
Fund reserved … Fund reserved …
1,760,000 1,755,000
________ Fund balance
5,000
1,760,000 1,760,000

Appropriations
Sh Sh
Expenditure A/C Fund balance
 413

2,357,000 2,350,000
________ Fund balance
7,000
2,357,000 2,357,000

Revenue A/C
Sh Sh
Property tax
Estimated revenue 1,925,500
2,411,200 Other revenue
485,700
2,411,200 2,411,200

Expenditure A/C
Sh Sh
Wages payable
602,000 Appropriations
Accounts payable 2,357,000
1,755,000
2,357,000 2,357,000

Other revenue
Sh Sh
Revenue account Cash
485,700 485,700
 414

The Journal Dr (Sh) Cr (Sh)

Estimated Revenue A/C 2,400,000
Fund Balance A/C 2,400,000
Fund Balance A/c 2,350,000
Appropriations A/C 2,350,000

Property Taxes receivable A/C 1,925,500

Revenue A/C 1,925,500
Cash 2,005,600
Property taxes receivable A/C 2,005,600

Cash 485,700
Other Revenue A/C 485,700
Other revenue A/c 485,700
Revenue A/C 485,700

Encumbrances 1,760,000
Fund balance reserved for encumbrances 1,760,000
Fund balance reserved for encumbrances 1,755,000
Encumbrances 1,755,000
Fund balance 5,000
Encumbrances 5,000

Expenditure A/C 602,000

Wages Payable 602,000

Wages payable 598,000

Accounts payable 1,740,000
Savings bank A/C 150,000
Cash 2,488,000

Expenditure A/C 1,755,000

Accounts payable 1,755,000
Revenue A/C 2,411,200
Estimated Revenue A/C 2,411,200
Estimated Revenue 11,200
Fund Balance 11,200

Appropriations A/C 2,357,000

Expenditure 2,357,000
Fund Balance 7,000
Appropriations 7,000

Balance Sheet as at 30th June 10X8

Assets Liabilities
Sh Sh
Cash Wages payable
15,900 8,450
Savings A/C Accounts payable
216,800 Property taxes receivable 22,300
400,500 Fund Balance
_______ 597,450
Reserve for encumbrances
5,000
633,200 633,200

Illustration
The following data relates to the city of Kababwe:

Trial Balance As At 1 – 7 – 19x7 Dr (Shs) Cr (Shs)

Cash 242,500
 415

Savings A/C 250,000

Property taxes receivable 185,000
Investment in government Treasury Bills 350,000
Accounts payable 162,600
Wages payable 30,000
Fund Balances ________ 834,900
1,027,500 1,027,500

The transactions completed during the year for the general fund are summarised and recorded as follows for
the year ended 30 – June – 19X8.
JOURNAL Sh Sh
a) Estimated Revenue A/c 9,100,000
Appropriations 9,070,000
Fund Balance 30,000
b) Property Taxes receivable
Revenue
c) Cash 9,105,000
Property taxes receivable A/C 6,470,000
Other revenue 2,635,000
d) Expenditure 3,280,000
Wages payable 3,280,000
Encumbrances 5,800,000
Fund balance reserved for encumbrances 5,800,000
Fund balance reserved for encumbrances 5,785,000
Encumbrances 5,785,000
Expenditure 5,785,000
Accounts payable 5,785,000
Accounts payable 5,800,000
Wages payable 3,270,000
Cash

Estimated Revenue 9,100,000

Fund balances 38,000
Appropriations 9,070,000
Expenditure 9,065,000
Fund Balance 5,000
Fund balance 15,000
Encumbrances 15,000

Required:
a) Open appropriate accounts, post entries therein, and balance them at the year end
b) Draw a trial balance as at 30.6.19X8
c) Prepare a statement of assets and liabilities.

Solution
Cash A/C
Sh Sh
Balance b/d 242,500 Accounts payable 5,800,000
Property taxes 6,470,000 Wages payable 3,270,000
Other revenue 2,635,000 Balance c/d 277,500
9,347,500 9,347,500

Property tax receivable

Sh. Sh.
Balance b/d 185,000 Cash 6,470,000
Revenue 6,500,000 Balance c/d 215,000
6,685,000 6,685,000

Wages payable
Sh. Sh.
Cash 3,270,000 Balance b/d 4,450
Balance c/d 40,000 Expenditure 602.000
 416

3,310,000 3,310,000

Revenue A/C
Sh. Sh.
Estimated revenue 9,135,000 Property tax 6,500,000
________ Cash other revenue 2,635,000
9,135,000 9,135,000

Encumbrances
Sh. Sh.
Fund reserved … 5,800,000 Fund reserved … 5,785,000
________ Fund balance 15,000
5,800,000 5,800,000

Fund reserved for encumbrances

Sh. Sh.
Encumbrances 5,785,000 Encumbrances 5,800,000
Balance c/d 15,000 ________
5,800,000 5,800,000

Savings A/C
Sh. Sh.
Balance b/d 250,000 Balance c/d 250,000

Treasury Bills A/C

Sh. Sh.
Balance b/d 350,000 Balance c/d 350,000

Accounts payable
Sh. Sh.
Cash 5,800,000 Balance b/d 162,600
Balance c/d 147,600 Expenditure 5,785,000
5,947,600 5,947,600

Fund Balances
Sh. Sh.
Appropriations 9,070,000 Balance b/d 834,900
Encumbrance 5,000 Estimated revenue 9,100,000
Appropriation 7,000 Estimated revenue 35,000
Balance c/d 889,450 Appropriations 5,000
9,974,900 9,974,900

Expenditure A/C
Sh. Sh.
Wages payable 3,280,000
Accounts payable 5,785,000 Appropriations 9,065,000
9,065,000 9,065,000

Appropriations
Sh. Sh.
Expenditure A/C 9,065,000 Fund balance 9,070,000
Fund balance 5,000 ________
9,070,000 9,070,000
 417

Estimated revenue A/C

Sh. Sh.
Fund balance 9,100,000 Revenue 9,135,000
Fund balance 35,000 ________
9,135,000 9,135,000
Trial Balance As At 30 – 6 – 19x8 Dr Cr
Cash 277,500
Savings A/C 250,000
Treasury Bills 350,000
Property taxes receivable 215,000
Accounts payable 147,600
Wages payable 40,000
Fund balance reserved for encumbrances 15,000
Fund balance ________ 889,900
1,092,500 1,092,500

Balance Sheet as at 30 – 6 – 19X8

ASSETS Shs. Shs. Shs.
Cash 277,500
Savings A/C 250,000
Treasury Bills 350,000
Property taxes receivable 215,000
1,092,500
LIABILITIES
Wages payable 40,000
Accounts payable 147,600 (187,600)
904,900
FUND EQUITY
Unreserved fund balance 889,900
Fund balance reserved for encumbrances 15,000
904,900

Illustration:
The city’s general fund trial balance as at 1 June 19X7 is as follows:
Dr £ Cr £
Cash 225,000
Savings A/C 80,000
Property taxes receivable 122,500
Investment in treasury bills 100,000
Accounts payable 52,700
Wages payable 19,200
Fund balance 455,600
527,500 527,500

The following data summarises operations for the current fiscal year that ends operations on 30 – 6 – 19X8:
£
a) Estimated: Revenues 2,180,000
: Appropriations 2,115,000
b) Revenue from property tax levy 1,450,000
Cash received from property taxes 1,460,000
Other revenues received 760,000
c) Expenditure on payroll 1,150,000
Expenditure encumbered and evidenced by LPOs 1,210,000
 418

Liquidation of encumbrance vouchers for order billings 1,050,000

d) Cash disbursed: for vouchers 1,065,000
: for payment of wages 1,155,800
: for savings A/C 40,000

Cash A/C
£ £
Balance b/d Accounts payable
225,000 1,065,000
Property taxes Wages payable
1,460,000 1,155,800
Other revenue Savings A/C
760,000 40,000
________ Balance c/d
184,200
2,445,000 2,445,000

Savings A/C
£ £
Balance b/d
80,000 Balance c/d
Cash 120,000
40,000
120,000 120,000

Property tax receivable

£ £
Balance b/d Cash 1,460,000
122,500 Balance c/d 112,500
Revenue
1,450,000
1,572,500 1,572,500

Accounts payable
£ £
Cash Balance b/d 52,700
1,065,000 Expenditure 1,050,000
Balance c/d
37,700
1,102,700 1,102,700

Wages payable
£ £
Cash Balance b/d 19,200
1,155,800 Expenditure 1,150,000
Balance c/d
13,400
1,169,200 1,169,200

Estimated revenue A/C

£ £
Fund balance Revenue A/C
2,180,000 2,210,000
Fund balance ________
30,000
 419

2,210,000 2,210,000

Revenue A/C
£ £
Property tax
Estimated revenue 1,450,000
2,210,000 Cash (other revenue)
760,000
2,210,000 2,210,000

Appropriations
£ £
Expenditure A/C 2,200,000 Fund balance
________ 2,115,000
Fund balance
85,000
2,200,000 2,200,000

Encumbrances
£ £
Fund reserved … 1,210,000 Fund reserved …
________ 1,050,000
Fund balance
160,000
1,210,000 1,210,000

Fund Balances
£ £
Appropriations Balance b/d 455,600
2,115,000 Estimated revenue
Appropriations 2,180,000
85,000 Estimated revenue 30,000
Encumbrance ________
160,000
Balance c/d
305,600
2,665,600 2,665,600

Expenditure A/C
£ £
Wages payable
1,150,000 Appropriations
Accounts payable 2,200,000
1,050,000
2,200,000 2,200,000

Fund reserved for encumbrances

£ £
Encumbrances Encumbrances
 420

1,050,000 1,210,000
Balance c/d 160,000 ________
1,210,000 1,210,000

BALANCE SHEET AS AT 30 – 6 – 19X8

Assets £ £
Cash 184,200
Savings A/C 120,000
Treasury bills 100,000
Property Taxes receivable 112,500
516,700
Liabilities
Accounts payable 37,700
Wages payable 13,400 (51,100)
465,600
Financed by
Unreserved fund B/F 305,600
Fund balance reserved for encumbrances 160,000
465,600
SPECIAL FUNDS

Special fund accounts are created by governmental units to account for the revenues and expenditures of
specialised governmental unit operations, which are outside the traditional services offered by the government.
Once a particular activity is identified, a special fund account is created to ensure that revenues allocated to
this account are properly received and accounted for; and that expenditure from this fund must be incurred in
respect of activities associated with the special fund.
Once identified, the special operation necessitating creation of special fund will be treated exactly in the same
way as general fund accounting, i.e. estimated revenue, revenue, appropriations and expenditure will be
recorded in the same way as was done with the general fund. This also applies to encumbrances.

Common examples of activities that require creation of special funds are:

1) Construction and maintenance of streets, roads and bridges
2) Libraries
3) Grants received either from foreign countries or specific government bodies that are geared towards
specified operations.

Note: Grant accounting requires a slightly different approach in the sense that the grantor would require the
grantee to use the grants for a specified purpose; and in order to attain this objective, grant accounting is on
the basis of reimbursement. This means that grant revenue will only be recognised as having been received
after actual expenditure has been incurred.
It is only then the grantor will release the grant revenue. However, for any given period it is possible for the
grantee to account for any grant receivable by creating an account known as deferred revenue.

The deferred revenue account is a liability account showing that there is a potential revenue which will only be
recognised upon meeting certain conditions. Relevant entries are as follows:

Assume that Town X was given a grant of Sh.50,000,000 for construction of streets in a particular region of the
town. Upon receiving this information, the governmental unit will record the transaction as follows:
Dr Grant receivable 50,000,000
Cr Deferred Revenue A/C 50,000,000
The basis of this entry is that the recognised accounting principles under special funds/general funds in the
“modified accrual basis of accounting”. Under this principle, both revenues and expenditures are only
recognised when the possibility of their realisation is certain.
 421

Grants will normally be released under specified conditions are being met; and under modified accrual basis of
accounting such revenues cannot be recognised until the conditions required have bee fulfilled.

In the above example, assume that 3 months later, Town X has identified the contractor and given out
contracts to construct streets in the required region to the tune of Sh.30,000,000. When this is done, then the
specified conditions have been met and the grant receivable revenue is recognised. The following entries are
then made:

1. Dr Deferred Revenue 30,000,000

Cr Revenue Account 30,000,000

2. Dr Expenditure 30,000,000
Cr Accounts payable 30,000,000

The second entry is required to enter the liability incurred when the contract is entered into while the first entry
is now to recognise part of the grant revenue as receivable revenues under the modified accrual basis.
However, where the contract has been entered into but the work is not yet performed, the encumbrance entries
will be recorded instead of (2) above.

The concept of modified acrrual basis of accounting is used in many other governmental units funds that will
require the revenue to be recognised when there is uncertainty regarding their realisation.

One such fund is the capital projects fund. The capital projects fund is a fund created to cater/account for
revenues and resources that are associated with capital projects of a governmental unit. The capital projects
fund is an equivalent to capital budgeting/ financing under commercial accounting.

General funds and special funds are not normally used to finance capital projects. Major sources of financing
capital projects of a governmental unit are as follows:
(1) Long-term debt
(2) Governmental treasury bonds
(3) Grants from other governmental units or foreign governments.
(4) Transfer from other funds within the government.
(5) Gifts (from individuals or organisations) that are specified to be used in particular projects.

Once the sources of funds have been identified and set aside, a special account called the capital project fund
account will be created to ensure proper utilisation of resources. The capital project fund will then operate on
the basis of modified accrual principles of accounting, whereby related revenues and expenditures are
recognised when there is a certainty of their occurrence.

Assume that a governmental unit gets authority to issue long-term bonds to finance a particular capital project.
Once authority is granted, the concerned governmental unit will only record the request’s acceptance, but the
revenue arising thereon will only be recognised when bonds are issued and sold to the public.

Under capital project funds, contracts will be entered into, and there may be a time lapse from when the
contract is granted and when services are received. Such activities will be recorded as encumbrances in
respect of the particular capital project. Actual expenditure incurred will be recorded against account payable.
At the conclusion of the capital project comparison will have to be carried to between:

1) Sources of funds identified to finance the project;

2) Total expenditure – including the encumbrance incurred.

The difference between (1) and (2) represents the excess/deficit of funds arising from a particular project; and
is transferred to the governmental unit’s fund balance in the year in which the project was completed, e.g.
suppose a particular capital project was to last 5 years, the financial statements for the interim period (1 – 4)
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will not include the balance in the capital project fund account. The surplus/deficit will be transferred to fund
account at the end of year 5. Such transfers are known as equity transfers.

FUND ACCOUNTING
The accounts of a government unit are partitioned into segments called funds, and separate financial
statements are prepared for each fund. A fund accounting system is a collection of distinct entities or funds in
which each fund reflects financial aspects of a particular segment of the organisation’s activities. Separate
funds are used to aggregate activities by functions because of the diverse nature of the services offered and
because it is necessary to comply with legal provisions regarding activities of the government unit. Although
funds are separate entities, the structure of funds is such that a single transaction may occasion entries in the
accounts of several funds.

Definition
A fund is defined as a distinct 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 charges therein.

In other words, a fund is a segregated collection of both assets and equity accounts, together with related
revenue and expenditure accounts that describe a particular aspect of the organisation. Each fund is
established to account for specific activities or objectives in accordance with applicable regulations and
restrictions. Since each fund represents a distinct reporting entity, separate financial statements are prepared
for each fund, in addition combined financial statements may also be prepared.

Types of funds
The types of funds recommended for use by central and local governments are classified in three categories:
(i) Government funds;
(ii) Proprietary funds; and
(iii) Fiduciary funds.

In the first group, governmental funds, are: -

1. General Funds
General funds are funds established to account for resources devoted to financing the general services
which the governmental unit performs for its citizens.
These include general administration, protection of life and property, sanitation and similar broad services.
The general fund is sometimes described as the one use to account for all financial transactions not
properly accounted for in another fund. Some activities, such as governmentally supported liberties, are
often of sufficient importance and magnitude to have a special fund; when this is not true they become a
function and responsibility of the general fund.

2. Special Revenue, or Special, Funds

Funds of this class are created and operated to account for revenue designated by law for a particular
purpose. For the specific purpose of function to which it is devoted, a special revenue fund is much in
the nature of a general fund. Some of the governmental services for which special funds are frequently
established are education, libraries, streets and bridges, welfare, etc.

3. Capital Projects Funds

The receipt and disbursements of all financial resources to be used for the acquisition of capital
facilities other than those financed by special assessment funds, proprietary funds and trust funds is
accounted for by capital projects funds.

4. Debt Service Funds (Sinking funds)

A debt service fund is created to account for the resources devoted to the payment of interest and
principal on long-term general obligation debt other than that payable from special assessments and
that serviced by governmental enterprises.
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5. Special Assessment Funds

Special assessment funds are designed to account for the construction, or purchase through contract,
of public improvements-streets, sidewalks and sewer systems, for example – which are financed in
whole or in part by special levies against property owners adjudged to receive benefits from the
improvements materially in excess of benefits received by the general body of taxpayers, and for the
maintenance and upkeep of such assets.

The following two fund types are referred to as proprietary funds: -

6. Internal Service Funds (Working capital/Revolving funds)

Internal service funds are established by governmental units as a means of providing services to other
funds or departments of the same unit, or to other governmental units, on a cost-reimbursement.

7. Enterprise Funds
Internal service funds are established to provide services for governmental customers, but enterprise
funds are operated to provide electric, water, gas, or other services to the general public. Except for
ownership, they bear a close resemblance to investor-owned utility or other service enterprises.
Enterprise funds are also used to account for activities for which the governmental body desires
periodic computation of revenues earned, costs incurred, or net income. The third category of funds
recommended for use by state and local governmental units is fiduciary funds.

8. Fiduciary Funds (Trust/Agency funds) E.g. NSSF, NHIF

Fiduciary funds are used to account for transactions related to assets held by a governmental unit as a
trustee or agent. In most cases the governmental unit does not have absolute title to the assets held;
and in the remainder, they are owned with specific restrictions upon their use.

In addition to the eight generally recognised types of funds, governmental units employ two self-
balancing groups of accounts which are accounting entities, but which are not fiscal entities and
therefore, are not funds. These groups are called the “general fixed assets group” and the “general
long-term debt group”. General fixed assets are those not used exclusively by any one fund, and
general long-term debt is that long-term debt which is presently a liability of the municipality as a whole
and not of individual funds.

Although funds are employed extensively and effectively to promote the use of governmental resources
for their intended purposes, the practice can be carried to extremes. In the opinion of many, accounting
and reporting are facilitated through use of the minimum number of funds consistent with legal and
operating requirements.

Integration of budgetary Accounts

A second distinctive characteristic of governmental accounting resulting from the need to demonstrate
compliance with laws governing the sources of revenues available to governmental units, and laws governing
the utilisation of those revenues, is the formal recording of the legally approved budget in the accounts of funds
operated on annual basis.

Briefly, Budgetary accounts are opened as of the beginning of each fiscal year and closed as of the end of
each fiscal year; therefore they have no balances at year-end. During the year, however the budgetary
accounts of a fund are integrated with its proprietary accounts. Proprietary accounts, in the governmental
sense, include accounts similar to the real and nominal groups found in accounting for profit-seeking entities –
that is, asset, liability, net worth, revenue, and expense (or expenditure) accounts.

The Basis of Accounting

Use of the accrual basis of accounting is considered appropriate for proprietary funds, non-expendable trust
funds, and pension trust funds of governmental units. Accrual accounting means: -
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1. That revenues should be recorded in the period in which the service is given, although payment is received
in a prior or subsequent period, and

2. That expenses should be recorded in the period in which the benefit is received, although payment is made
in a prior or subsequent period.

In business enterprise accounting, the accrual basis is employed to obtain a matching of costs against the
revenue flowing from those costs, thereby producing a more useful income statement. In governmental
entities, however, even for those funds which do attempt to determine net income, only certain trust funds have
major interest in the largest possible amount of gain. Internal service and enterprise funds are operated
primarily for service; they make use of revenue and expense accounts to promote efficiency of operations
and to guard against impairment of ability to render the services desired. For these reasons, operating
statements of proprietary funds, non-expendable trust funds, and pension trust funds are called statements of
revenue and expenses, rather than income statements.
Funds of other types (general funds, special revenue funds, capital projects funds, debt service funds, special
assessments funds, and expendable trust funds) are not concerned with income determination. These funds
are concerned with matching expenditure of legal appropriations, or legal authorisations, with revenues
available to finance expenditures. Accordingly, the “governmental” funds and expendable trust funds should
use the “modified accrual” basis. The modified accrual basis is defined as:
Revenues should be recognised in the accounting period in which they become available and
measurable. Expenditures should be recognised in the accounting period in which the fund liability is
incurred, if measurable, except for unmatured interest on general long-term debt and on special
assessment in-debtness secured by interest-bearing special assessment levies, which should be
recognised when due.

The modified accrual basis is accepted by the American Institute of Certified Public Accountants as being
consistent with generally accepted accounting principles. The AICPA recognises that it is not practicable to
account on an accrual basis for revenues generated on a self assessed basis such as income taxes, gross
receipts taxes, and sales taxes. For such taxes, determination of the amount of revenue collectible is ordinarily
made at the time of the collection, thus placing the fund partially on the cash basis.

Number of Funds
Government units should establish and maintain those funds required by law and sound financial
administration. Only the minimum number of funds consistent with legal and operating requirements should be
established, since unnecessary funds result in inflexibility, undue complexity, and inefficient financial
administration.

Accounting for Fixed Assets and Long-term Liabilities

A clear distinction should be made between;
(A) Fund fixed assets and general fixed assets; and
(B) Fund long-term liabilities and general long-term debt
(i) Fixed assets related to specific proprietary funds or Trust Funds should be accounted for through
those funds. All other fixed assets of a governmental unit should be accounted for through the
General Fixed Assets Accounts Group.

(ii) Long-term liabilities of proprietary funds, special assessment funds, and Trust Funds should be
accounted for through those funds.

All other unmatured general long-term liabilities of the governmental unit should be accounted for
through the General long-term debt account group.

Valuation of Fixed Assets

Fixed assets should be accounted for at cost or, if the cost is not practicably determinable, at estimated cost.
Donated fixed assets should be recorded at their estimated fair value at the time received.
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Depreciation of Fixed Assets

(a) Depreciation of general fixed assets should be recorded in the accounts of governmental funds.
Depreciation of General Fixed Assets may be recorded in cost accounting systems or calculated for cost
finding analysis; and accumulated depreciation may be recorded in the General Fixed Assets Account
Group.

(b) Depreciation of fixed assets accounted for in a proprietary fund should be recorded in the accounts of that
fund. Depreciation is also recognised in those Trust Funds where expenses, net income and/or capital
maintenance are measured.

Accrual Basis in Governmental Accounting

The modified accrual or accrual basis of accounting as appropriate, should be utilised in measuring financial
position and operating results.
(a) Governmental fund revenues and expenditures should be recognised on the modified accrual basis.
Revenues should be recognised in the accounting period in which they become available and measurable.
Expenditures should be recognised in the accounting period in which the fund liability is incurred, if
measurable, except for unmatured interest on general long-term debt and on special assessment
indebtness secured by interest-bearing special assessment levies, which should be recognised when due.

(b) Proprietary fund revenues and expenses should be recognised on the accrual basis. Revenues should be
recognised in the accounting period in which they are earned and become immeasurable; expenses
should be recognised in the period incurred, if measurable.

(c) Fiduciary fund revenues and expenses or expenditures (as appropriate) should be recognised on the basis
consistent with funds accounting measurement objective. Non expendable Trust and Pension Trust Funds
should be accounted for on the accrual basis; Expendable Trust Funds should be accounted for on the
modified accrual basis. Agency Fund assets and liabilities should be accounted for on the modified
accrual basis.

(d) Transfer should be recognised in the accounting period in which the interfund receivable and payable
arise.

Budget and Budgetary Controls

Budgets are key elements of legislative control over government units. The executive branch of a government
unit proposes the budget, the legislative branch reviews, modifies and enacts the budgets and finally the
executive branch implements the budget. The two basic classifications of budgets for governmental units are
the same as for commercial enterprises;

(i) Annual budgets – which include the estimated revenues and Appropriations for a specific fiscal year
end;

(ii) Capital budgets – which are used to control the expenditures for construction projects or other planned
asset acquisitions.

The operations of the two proprietary funds (i.e. enterprise and internal service) are similar to those of business
enterprises. Consequently, annual budgets are used by these funds as a managerial planning and control
rather than a legislative control tool. Thus, annual budgets of enterprise funds and internal service funds are
NOT Recorded in ledger accounts by these funds.

PUBLIC SECTOR ACCOUNTING

The Consolidated fund

This is the main fund operated by the government. The Exchequer and Audit Act states that all government
revenue excluding income which a ministry is allowed to keep a cover part of its own expenses (i.e.
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Appropriation-In- Aid) must be put into this fund, and no money may be withdrawn form this fund without the
authority of parliament.
Each year, the Parliament votes on the appropriations bill, which sets out:
a) The estimated total revenue of the government for the coming fiscal year (1st July – 30th June) and;
b) The amount of money which each ministry expects to be allocated for its needs in that fiscal year.

Thus the Appropriation Act for 1986/1987 Parliament authorised a gross sum f K£95,002,150 for the Ministry of
Health in respect of recurrent expenditure. This was described in the 1986/87 estimates of recurrent
expenditure as follows:

K£
Gross vote 95,002,150
Appropriations-In-Aid (2,280,250)
Net Vote K£ 92,721,900

The above description means that the Ministry was authorised to spend K£92,721,900 being supplied form the
consolidated fund, and the remainder coming from the ministry’s own Appropriations-In-Aid. Examples of
Appropriations-In-Aid within Ministry of Health would include Hospital Boarding fees, X-ray fees, Lab fees etc.

Consolidated Fund Services

Certain government expenditure does not have to be voted every year by Parliament because Parliament has
already given its approval for the specific items concerned in the past. These items are known as consolidated
fund services, and include salaries and allowances of the Judiciary, subscriptions to international
organisations, such as OAU, UN etc., payment of pension to civil servants, payments of national debt, etc.

Sources of Government Revenue

Government revenue falls into two categories
a) Recurrent
b) Development

The main source of revenue are taxes, government borrowings (both domestic and foreign) and grants.
An example of revenue estimates for the year 1986/87 is:

Recurrent Revenue Estimates (K£ Millions)

Customs and excise duty 298.5
Income tax 370.0
Sales tax /Value Added Tax 437.0
Export duty and other taxes 107.4
Miscellaneous (15 categories) 160.9
1,373.8
The development revenue estimates were 64.5
1,438.3

The annual estimates of expenditure for the fiscal year 1986/1987 were:
Recurrent expenditure 1,420.8
Development expenditure 292.6
1,713.4
There is a shortfall of K£275.1m expected for the 1986/87 fiscal year. The gap is normally closed by borrowing
either from abroad or from the domestic market. Domestic borrowings usually take the form of Treasury Bills.

Government Expenditure
As with revenue, expenditure falls into two categories
(i) Recurrent expenditure
(ii) Development expenditure
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Recurrent Expenditure
This is expenditure on the day to day business of the government. In commercial accounting, it could be called
revenue expenditure.
Recurrent expenditure may be referred to as maintenance expenditure as it covers items concerning the
maintenance and operation of existing government services e.g. salaries to government officers, electricity,
water, telephone etc.

Development Expenditure
This is expenditure concerning new projects e.g. construction of hospitals, roads, bridges etc.

Recording Government expenditure and revenues:

(1) Government accounting is “cash-based” i.e. limits itself to transactions which have been entered in the
cash book. Thus government accounting has no personal accounts for debtors/creditors, nor does it have
accruals/prepayments. The only debtor-creditor relationship arises in transactions between the
government and the ministries, but not third parties.

(2) Government Accounting does not make any distinction between fixed assets and a day-to-day expense.
Both are treated as expenditure in the period in which they are paid (properly classified as either recurrent
or development expenditure) and hence there are no fixed asset accounts.

(3) Since there are no fixed asset accounts, there is no such thing as depreciation in governmental accounting.
The effect of passing fixed assets through the usual expenditure accounts is to write them off in the
year of purchase.

The reason for this treatment of fixed assets is that the government is not aiming at realising profits or
quantifying losses, and hence does not need to divide the benefits of capital expenditure over the financial
years, nor to assess the loss of value in that asset in a given year.

There is also the difficulty of trying to value assets such as Nairobi-Mombasa Road etc.

Accounting for and individual ministry

In accordance with the normal rules of double entry book-keeping cash received is debited to the cash account
(PMG) and the revenue account is credited. Thus in the books of Ministry X, the receipt of Ksh5,000 will be
recorded as:

Pay Master General A/C (Cash)

Revenue A/C Exchequer
5,000 5,000

Revenue
Pay Master General
5,000

The paymaster General is the cash account of all ministries. Since all revenue (apart from Appropriation-In-
Aid) must be transferred immediately to the consolidated fund, funds received will be paid over immediately to
the Treasury which administers the consolidated fund on behalf of the government. The Account within which
the Treasury administers the consolidated fund is called the Exchequer Account.

Exchequer A/C
Pay Master General
5,000
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At the end of each financial year, each ministry which has collected funds on behalf of the government makes
out a “statement of revenue”.
Expenditure
A ministry operates within the strict limits of the vote allocated to it by Parliament. The Accounting system is
merely used to reveal whether the ministry is keeping within the limits of voted expenditure or not. The ministry
has no authority to spend over parliamentary allocations, and the authority to spend is only for the duration of
the financial year.
If a ministry underspends in a financial year, or if there are any excess receipts, it may not retain the available
funds, but must surrender them to the exchequer to be reincorporated into the consolidated fund and
eventually re-distributed to the ministries as determined by Parliament.

If the ministry overspends, the only body empowered to ratify this overspending is Parliament. In the
subsequent financial year the matter is presented in Parliament in the form of “excess vote” and Parliament
decides whether to approve the excess vote or to recover it from the officers responsible for exceeding the
vote.

The Pay Master General (PMG)

The PMG is an office rather than an officer, and no person bears the title “Pay-Master General”. The functions
of the PMG are carried out by a section of the treasury.
The PMG is subordinate to the treasury and has the following functions: (which are regulated by the Minister of
Finance)
1) It is the principal paying agent for the government and banker of all government departments as regards
voted expenditures and payments on consolidated fund services.
2) It arranges with the treasury at regular intervals (usually twice a month) for funds to be withdrawn from the
exchequer and put to the credit of the PMG’s account in the Central Bank of Kenya;
3) It allows authorised signatures from these ministries to draw cheques on this account;
4) It keeps a record of the above transaction and sends statements on a monthly basis to the accounting
officers (i.e. the Permanent Secretaries) of each accounting unit together with supporting vouchers;
5) It receiver monthly reconciliations of these statements from accounting officers;
6) It supplies the treasury with the following:
a) A monthly statements and balance sheet
b) Annual statements and balance sheet.

It should be noted that the PMG is just a single account kept at the Central Bank of Kenya and
administered by the PMG’s office in the treasury.

All ministries are authorised to draw on this single PMG account. The PMG’s office is able to analyse
the different payments and receipts to allocate to various ministries, and to send them monthly
statements.

Cash book
There are significant differences between commercial accounting and government accounting as regards
operation of the cash book.
These are: -
(1) Restricted analysis – The government cash book makes an analysis between “cash” and “bank” only,
i.e. there is no further analysis into categories/classes of expenditure.
(2) The usage of the cash column – Cheques received are considered cash until they are banked. The
book-keeping entry is: -
Debit Cash (Cash column of cash book)
Credit Revenue (or Appropriation- In-Aid)

When a cheque is banked,

Debit Bank Column
Credit Cash Column
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A dishonoured cheque can be recorded as:

Debit Cash Column
Credit Bank Column
Three cash books are maintained:
(i) Current revenue and expenditure cash book.
(ii) Development revenue and expenditure cash book
(iii) Deposits cash book.

Vote books: -
The cash book and vote book from the bank-bone of the accounting system. The vote book is essentially a
book of prime entry, and does not form part of the double entry system. The totals of the vote book are
transferred to the ledger:
Debit Expenditure item (as per vote book)
Credit Cash book

Year-end Accounts: -
By 31 October each year, 4 months after the end of the financial year, each ministry must present its final
accounts to the Auditor General. These consist of
(a) Statements of Revenue
(b) Appropriation Accounts
(c) Final Accounts – These refer to the various funds administered by different ministries and require an
income and expenditure A/C as well as a statement of assets and liabilities for each fund.

Illustration 1:
Prepare a statement of revenue for the year ended 30.6.97 for Ministry of Domestic Affairs:
Exchange Control fees (Code 740) – Estimated receipts K£300,000
- Actual receipts K£3,460,968

Insurance premiums (Code 750) - Estimated receipts K£130,000

- Actual receipts K£174,000

Other income (Code 679) - Estimated receipts K£20,000

- Actual receipts K£10,334

Extra exchequer income (Code 999) – Estimated receipts K£1,055,000

- Actual receipts K£6,843,238

Payments to exchequer K£8,68,422

Balance due to exchequer (1 July 96) K£249,529

Public Sector Accounting: Theory

This part of the lesson has been built up using the question and answer approach.

QUESTION ONE
Discuss the role and functions of the Treasury and its relationship with other Government department, in
planning and controlling government expenditure.

Solution
The role and functions of the treasury include:

(1) Advising on the setting of objectives for economic policy.

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(2) Coordinating government expenditure towards the achievement of economic policy.

(3) Ensuring the execution of Policies in the most economic fashion by Government Departments.
(4) The overall supervision of national finance.
(5) Involvement in the process of settlement of levels of national expenditure and the raising of revenue.
(6) Controlling Government borrowing.
(7) Management of pensions
(8) Administration of contingency funds e.g. disbursements, distaden funds etc.
(9) Payments forward – chief cashier to the government debts, incomes expenditures etc.

Links with other Government Departments

(1) Involvement in scrutinizing of annual estimates
(2) Consultation on possible revisions of estimates.
(3) Ensuring adequate financial controls exists within departments including adequate staffing and accounting
procedures.
(4) Involvement jointly in preparation of annual budget.

Further points for Discussion

(1) Importance of Treasury control during periods of economic stringency.
(2) Financial specialisation and expertise needed in dealing with estimates and financial control.
(3) Criticism of Treasury
- Too much Treasury Control and interference stifling departmental initiative.
- Staffing by career civil servants and injection of specialists from outside often resented.
- Too narrow a view taken by Treasury is often over-cautious.

QUESTION TWO
Discuss the role of the Controller and Auditor General.

Solution
The Controller and Auditor General is an officer of Parliament (not a civil servant) who has two main functions:-
(1) As controller, he acts as Paymaster, controlling receipts and payments of public money through various
accounts.
(2) As External Auditor, he audits the various departmental accounts reporting on the Appropriation Account,
etc. to the parliament, which refers them to the Public Accounts Committee. This is a Select Committee
whose duty is to consider the report and issues arising from it.

From Audit point of view, his work covers the following:

Financial and Regularity Audit

(a) Financial: - to ensure that accounting and financial control systems operate correctly so that all financial
transactions are both properly authorised and properly accounted for.
(b) Regularity: - to ensure that expenditure is incurred on approved matters and is legal.
(c) Value for money audit: - an examination based on economy and efficiency to curb extravagance
expenditure and maximise receipts. The Public Accounts Committee also tends to concentrate on this
question.
(d) Effectiveness of audit: - An examination to assess whether programmes undertaken to meet established
policy objectives have achieved those objectives.

QUESTION THREE
Explain the main functions of an annual Budget for a public sector organisation with which you are familiar.

Solution
A budget may be defined as a financial and quantitative statement prepared prior to a definite period of time of
the policy to be perused during that time for the purposes of attaining a given objective.
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A statement of the organisation’s intention against which its achievement can be measured.

Main function of an annual budget of local authority:

1. To assist in fixing the general rate, local authority is required to levy a rate sufficient to cover the needs of
the year.
2. To assist Policy making - to help members to making decisions on the provision of services.
3. To assist control – or Income and expenditure.
4. To authorise expenditure – authority to incur the expenditure or collect the income.
5. To provide a standard against which to judge performance.

QUESTION FOUR
The independence of Internal Audit in a public sector organisation is considered to be essential to its
effectiveness.

Explain what is meant by independence in this context and give examples of circumstances which might impair
independence.

Solution
As the internal auditor is appointed within the organisation he cannot be completely independent of the
organisation but he must be sufficiently independent to allow him to carry out his duties in a manner which
allows his professional judgement and recommendations to be effective and impartial.
In order to operate effectively, the internal auditor should:
1) Be independent of all staff whose operations are under review.
2) Not be involved in routine financial systems.
3) Have direct access to all department heads, chief executive and the management board.
4) Have full rights of access to records, assets and personnel and receive such information and explanation
as are necessary for the performance of their duties.

The chief internal auditor should have the right to report under his own name on any aspect of the financial
work including that of finance department.

Impairment of Independence

(a) Having an interest in business which is involved in any way with the audit.
(b) Having been previously involved e.g. as accountant in the operations; or
(c) Personal relationship e.g. a spouse or other relative of persons being audited.

QUESTION FIVE
Discuss the main reasons for the growth in public expenditure.

Solution
1) Increase in range and volume of state activity – inflation.
2) The effect of economic ideas and political theories – use of public expenditure by state as a weapon of
economic control.
3) The effects of wars and social crises.
4) With the development of the state has tended to come an increased expectation by the public of more state
activities: - Roads, transport, energy, water and sewerage services.
5) The introduction and maintenance of the Welfare State.
6) External involvement such as membership of OAU etc.
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7) Internal involvement in industry and commerce including nationalisation and control of socially significant
industries and commerce and support for industries incurring heavy research and development costs,
particularly new technology industries.

QUESTION SIX
(a) Explain the role and objectives of internal audit in a public sector organisation.

(b) What factors influence the size and organisation of an internal audit section in a Public Sector organisation.

Solution
The role and objectives of internal audit may vary between different parts of the Public Sector, depending on
attitudes, statutory requirements, size etc. Definition of internal audit – Statement of internal audit practice.

“An independent appraisal function within an organisation for the review of activities as a service to all levels of
management. It is a control which measures, evaluates and reports upon the effectiveness of internal controls,
financial and otherwise as a contribution to the effective use of resources within an organisation.

It is the responsibility of internal audit to review, appraise and report upon the following matters:

a) The soundness, adequacy and application of internal controls – internal controls can be said to comprise
the whole system of controls established by management in order to

1) Safeguard its assets

2) Ensure reliability of records
3) Promote operational efficiency and
4) Monitor adherence to policies and directives.

b) The extent to which the organisation’s assets and interests are accounted for and safeguarded from losses
of all kinds from:

Factors:
1) Fraud and other offences and
2) Waste, extravagance and inefficient administration, poor value for money and other causes. In recent
years, increasing emphasis has been put on audits role in connection with avoidance of waste and
obtain value for money.
3) The suitability and reliability of financial and other management data developed within the organisation.

Detailed procedures should exist for initiating, authorising, carrying through and recording transactions.
These procedures will allow the principles of internal check and will be kept under review by internal
auditor.

Factors:
1) Type of organisation
2) The size
3) The scope and objectives of internal audit
4) Managerial attitude to internal audit
5) The adequacy of internal control system

QUESTION SEVEN
Outline the differences between the financial objectives of:
1) Public Corporation i.e. state owned corporations, nationalised industries, and
2) Limited companies

Solution
Financial objectives of commercial concerns:
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- To maximise the value of the firms to its owners

- Determined by management team
- More financial than theoretical objective
- Management is concerned with firms and share valuation as an indication of the level of reward to
shareholders group.
- Management concentrate on the theoretical objectives – reporting on firm and share valuation helps
management in decision making and policy formation process.

Public Corporations
Financial objectives are specified by government rather than determined by management.

Such objectives are difficult to specify in value terms as:

- There is usually no observable market value of claims on, or right to participate in the entity.
- It is difficult to identify the ownership group, whose value should be maximised.

Financial objectives are usually specified in ‘non-value’ financial terms such as target, sometimes better
described as financial constraints.

Main difference in objectives of Commercial/Public Corporations:

1. The freedom of the entity’s management determine the firm objectives.

2. The nature of objectives set – value or accounting measures.

Financial management should be integrated with the firm and designed to assist in meeting the firm’s
objectives.

Difference is due to considerable differences in the operation of firm.

- Technology
- Type of market

QUESTION EIGHT
Outline the role played in Government accounting by:
(a) The Public Accounts Committee
(b) The controller and auditor general
(c) The government Ministries Accounting Officers.

Solution
Accounting has been described as a process whereby transactions of an operating entity are documented,
classified and recorded for the purposes of accumulating and providing financial information essential to the
conduct of designated activities. Government accounting is an essential element of the financial management
function of government. In the main government accounting is directed towards satisfying the accountability
and management requirements of officials responsible for the conduct of government activities and operations.
It is therefore concerned with the proper recording of all receipts of government, with the maintenance of
records that reflect the propriety of transactions and give evidence of accountability for assets and other
resources available for use and with the classification of data in a way that provides useful information for
control and effective and efficient management of government programme operations. Amongst the features
of government accounting, are the specific roles played by the Public Accounts committee, the Controller and
Auditor-General and the Ministries Accounting Officers to which we turn.

a) The Public Accounts Committee

- A standing committee of a few selected members of Parliament.

- Charged with reviewing financial matters of government.

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- This is in line with the constitutional requirement that all financial matters in government are subject to
consideration, approval and review by the legislature.

- The deliberations and recommendations of the Public Accounts Committee are based on the report on
funds and accounts by the Auditor-General.

- The proceedings at the meeting are recorded verbatim, the Auditor-General’s staff and those of
accounting unit responsible for the deliberations reacting to the points raised in the report.

- Matters deliberated upon include serious ones concerning losses on a large scale, cases of thefts and
Misappropriation, failure to observe regulations and ensure propriety of expenditure, cases of waste
and other administrative inefficiencies which have led to wastage of funds and failure to obtain value for
money.

- These serious matters require proper explanation on the part of the Accounting Officer and the reaction
of the Public Accounts Committee in recommending surcharge of the principle of personal
accountability of government officers handling public funds.

- The Public Accounts Committee’s recommendations are then debated in Parliament which often insists
that the government takes necessary corrective action which often is done.

- The role played by the Public Accounts Committee ensures that the government be made accountable
for financial matters to the legislature. It is a control measure ensuring that public funds are protected
and used only for purposes intended by Parliament. It curbs any tendency by public officers to be lax
and wasteful in their handling and management of public funds. It ensures that proper accounting
methods and procedures and controls are instituted to safeguard public funds.

b) The Controller and Auditor General is appointed by the President and reports to Parliament.
- He functions independently of executive council.

- He controls issues of funds from exchequer that is funds voted for use by Parliament and intended for
by spending units to be withdrawn from the exchequer, must be sanctioned for by the controller who
satisfies himself that there are adequate funds and that they will be used for the purpose intended by
Parliament.

- He carries out both statutory and non statutory audit.

- The more serious audit queries known reference sheets are compiled in an audit report which is
presented to Parliament for reviewing the government’s financial management.

- The institution of the office of the Controller and Auditor-General plays a very effective role in the
management of public funds.

- The Controller and Auditor-General plays the role of a watchdog and the fact that he reports to
Parliament ensures that spending units are not lax in handling public funds.

- His independence in performance of his duties ensures that he is not subjected to undue influence by
the executive. He carries out his duties without fear or favour, he expresses his opinion, qualifies his
report and on the whole the powers conferred upon him by the exchequer and Audit Act, ensures the
accountability of the executive to the legislature. Without any doubt, the role of the Controller and
Auditor-General is very essential in ensuring proper financial management.

- Although the role may be that of making of the report to Parliament, his officers carry out continuous
audit inspection on the records of accounting units of the government, this minimises incidents of fraud,
thefts and other misappropriations.
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- The recent creation of the Auditor-General for statutory boards underscores the importance the
government attaches to the auditing function, it is indispensable.

c)
- The voted funds or the grants given by Parliament for use by the accounting officer should be properly
handled to ensure regularity and propriety of expenditure.

- The accounting officer is appointed by the Permanent Secretary Treasury personally and under the
principle of personal accountability.

- The letter of appointment spells out his duties and functions, emphasising the fact he is answerable to
the Public Accounts Committee on serious matters raised by the controller and Auditor-General.

- His responsibilities in management of public funds, safeguarding public property and running his
accounting unit must be carried out with diligence, dedication, with due regard for efficiency and
effectiveness.

- Amongst his duties are to organise his accounting unit to ensure that functions are carried out properly,
to ensure that public property are safeguarded, to ensure that staff under him have the necessary
technical skills for the proper performance of their duties, to plan and budget for the financial
requirements of his unit as directed by Treasury, to instil cost-consciousness in the at all levels of
management, to answer audit queries, to sign the appropriation accounts and so on.

The accounting officer

- The salient point of the role of the Accounting Officer is that he is personally held responsible for any
undue happenings affecting public funds in his control. For example, should he differ with the Minister,
his political head, on how to spend certain funds he has to obey the Minister’s directives but should
write to Treasury, giving details of the dispute. This will absolve him of blame should a query arise.

- Public servants handling public funds should be held wholly responsible. As head of his accounting
unit, this requirement ensures that funds are not handled with laxity, that services are provided
efficiently and effectively, that evidence is produced on how the funds were spent and last but not least,
the taxpayers have got value for money with regard to the taxes they pay.

QUESTION NINE
In relation to fund accounting, explain what is meant by the following special funds and explain fully how they
are operated.
a) Revolving funds
b) Trust funds
c) Sinking funds

One basic feature amongst others, of government accounting, is the concept of fund entities, which has its
origin in the fact that financial powers of the executive are subject to the control of the legislature. There is for
example, a constitutional requirement that government receipts from revenue and borrowing should be
accumulated into a general fund (consolidated fund) for use of the government as a whole, and any
withdrawals from fund be subjected to sanction by the legislature.

Provision has also been made for separate treatment of monies received by the government in a trustee
capacity. These are known as trust funds from which withdrawals are made in accordance with specific
statutory provisions. Funds may also be established by law from the proceeds of earmarked taxes, with
provisions for using such receipts to attain specified programme objectives – either with or without prior grant
of authority from the legislature. Additionally, in some cases a contingency fund may be created to enable
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advances to be made for meeting necessary and unforeseen expenditures, subject to subsequent
authorisation by the legislature. Funds are also established by legislative action which grants authority to
spend for specified purposes and objectives. Such funds are legal entities. Like the National Social Security
Fund and the National Hospital Insurance Fund, they have their own resources which include property,
receivables, investments and other accountable assets. Any liabilities are set off against the assets to
determine the network of the fund. Such a fund therefore is an independent accounting entity. An example of
a trust fund is the Widows and Children’s Pension Fund to which all married Civil Servants must contribute a
certain amount of their monthly salaries and on retirement or leaving the service, refunds are made.

Revolving Funds are also entities set up by legislative action to provide agencies with resources for the
attainment of specified objectives. Government enterprises are usually set up in this manner. The initial
appropriation is made out of the consolidated fund. The receipts generated in such funds are automatically
used by the agency in accordance with the law that set up the fund. Annual legislative appropriations are not
therefore required for the operation of such funds. However, the original financing required to the financing of
a programme increase or an incurred deficit would be appropriated out of the central funds of the government.
Similarly, any surplus that may result from the operations carried out under such authority should be deposited
in the central fund as receipts of the government.

Sinking Funds are also entities set up by legislative action with the purpose of eventual liquidation or extinction
of public debt. This requires annual appropriations into the fund thus building up the fund as maturation of the
debt approaches, until the principal sum is repaid. There is necessity of investing the appropriations on a
special account as the Sinking Fund is built up. Debt requiring such fund is known as Funded Debt. There is
less use of these Funds these days as they entail tying down funds which would have been used elsewhere.

QUESTION TEN
One of the principle differences between non-profit and commercial organisations is that they have different
reasons for their existence. Consequently, non-profit making organisations follow some accounting principles
which differ from accounting principles followed by commercial organisations.

You are asked to state which are the principles followed by non-profit making organisations and why you think
they are more appropriate than corresponding principles applicable to commercial organisations.

Solution
Types of non-profit making organisations are the Central Government. Local Authorities, Trade associations,
welfare clubs, religious organisations, and so on, whose motive of existence is not profit but to advance the
welfare of the members or some other.

Take the example of the government accounting system (which includes Local Government accounting). The
accounts are maintained on a receipts and payments basis. Actual receipts of revenues and actual
expenditures incurred are the basis of the financial statements. These statements are produces by each
accounting unit, not by the government as a whole. Each unit is charged with the task of providing a service, a
function during a financial year, of a current or development nature. Since authority to raise revenue and
spend public funds is vested in the legislature, the accounting unit merely has to satisfy accountability
requirements while assuming that services were actually rendered. Any shortfalls in revenue collections or
amounts owed to or by the accounting unit are not debtors or creditors per se but are a mere reflection on the
performance of the unit. Its financial position at the end of the year is known as a statement of assets and
liabilities vis a vis other units or balances held on hand (its assets) and any unused funds (its liabilities).

Revenues to be collected by way of taxes, fees and charges, rates borrowing etc. are estimated for, and also
how those revenues will be expended are also estimated for. It would be difficult to single out individual
taxpayers as debtors or some unpaid bill at the end of the year as a creditor, since the functions of the state do
not stop, but are continuous. The reason for having a financial year is to emphasize the constitutional
requirement that Parliament is supreme in finance matters and the government must receive annual authority
(by way of the Appropriation Act) to raise and expend public funds). In this case, it would appear that the
receipts and payments basis of accounting is appropriate.
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The other non-profit accounting system is the income and expenditure system of accounting. Welfare clubs,
Members clubs and religious organisations and trade associations rely mainly on member’s contributions and
necessarily some members will default payment of their dues or the members may sometimes pay in advance.
This is a clear case of creditors and debtors or accruals. A surplus or deficit may be reflect and a balance
sheet drawn.

This income and expenditure accounting system would appear to be appropriate for such organisations in view
of the fact that their area and scope of activities is limited, its assets are identifiable, and liabilities can be
ascertained.

Although we have outlined the differences in approach between accounting in commercial and non commercial
organisations, the dividing line is not straight and clear. It should be remembered that public sector accounting
includes government commercial enterprises with a profit motive. More over, accounting by non-profit
organisations is increasingly adopting practices similar to those employed in private industry. Such an
operation involves setting up a “business type” financial system in which the relationship of receipts and
expenditures and the financial results obtained continuously are highlighted for the attention of agency
management and legislative review.

QUESTION ELEVEN
(a) “Without the profit motive there is an inevitable lack of budget motive”. Do you agree?

(b) Explain the administrative and accounting controls used to achieve the budgeted level of expenditure by
the Government Ministries.

Solution
(a) Planning and control are two important management functions and accounting in the present day
conceptions lays emphasis on these two functions.

In this sense, accounting is described as management accounting, which is any form of accounting
which enables a business to be conducted more efficiently. This emphasis on accounting for efficiency,
is in every area where accounting must be used, whether in an organisation with the profit motive or in
non-profit motive organisations like the government.

Budgetary control refers to the use of budgets to control the activities of an organisation. Take the case
of the government, the idea of budgetary control is in fact extensively used. Finance being such a
scarce resource, no government can afford not to budget. Basically, the annual budget consists
estimates of revenue and expenditure and each accounting unit or cost centre has to show its
operational costs being limits beyond which no expenditure should be incurred without Treasury or
Parliamentary approval. The government budget as whole should not be exceeded without
parliamentary approval. All the estimates are broken up into minor budgets for ministries and/or
departments. Vote control is in essence budgetary control and this is carried on without profit motive.

Therefore, we can emphasize that the profit motive is not necessary for the use of budgetary control.

(b) Budgeted levels of expenditure normally represent ceilings over and above which spending units of
government must not go, without approval either by Parliament or Treasury.
It is both legally and administratively binding for the government to present expenditure estimates to
Parliament.

The expenditure estimates are both of recurrent and development nature and pertain to one financial
year.

Sitting as a committee of supply, parliament approves the estimates by way of the appropriation bill
which is signed by the President to become an act.
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QUESTIONTWELVE
(a) Compare and contrast the role of an accountant in a governmental accounting with that of an accountant in
commercial accounting.

(b) Explain and illustrate the distinction extraordinary items and exceptional items.

Solution
In order to clearly understand the role an accountant plays in both government and commercial accounting, we
need to make a brief comparison and contrast between the two accounting systems. Unlike private
businesses, government activities are not governed by the profit motive. Private firms essentially are
concerned with profits made, for such purposes as return on investment and expansion in a selected field of
activity. In contrast, functions are undertaken by government in multiple fields of activity, for a variety of
broader purposes such as service to the public, maintaining the financial stability of the nation, promoting trade
and commerce, stimulating private action of national importance and accelerating the development of the
economy and social welfare. Government activities encounter many kinds of problems that are of greater
complexity. Costs of performance are of significant interest to management, but they are of importance
primarily as a measure of operational efficiency and the degree to which planned programme results are
achieved with funds made available. The above description highlights the environment in which an accountant
works, both in private commercial sector and government.

In all government activities, accounting has to place emphasis on three aspects:

a) Control of the acts of public bodies and officers in their raising and expending of public funds.

b) Provide information that will assist in the economic planning of government functions and activities.

c) Provide information to parliament and the public relating to the activities of government operations in
whatever form.

The last aspect is in fact a statutory requirement that the accounting officers should produce financial
statements in the form of revenue accounts, fund accounts, appropriation accounts in order to satisfy the
accountability requirements. However, it has been argued that the role of the accountant in the government
accounting system has been more or less that of a bookkeeper, having no central role of management
decision-making. That view is slowly changing. The accountant is, owing to more sophisticate nature of his
work, now more appreciated, considered as an expert, one of the management team. He is required to
provide information that will assist in the economic planning of government functions and activities.

The role of the accountant in the commercial sector is of no less importance. Apart from the purpose for which
financial statements are usually required, for example, under the Companies Act, or some other legislations,
for assessments of taxation on profits or to support loans from banks or similar financial institutions, accounting
in the present day conception lays particular emphasis on its use of two of the important management
functions of planning and control. In this sense it is described as “Management Accounting” which may be
very briefly referred to as any form of accounting which enables a business to be conducted more efficiently.
These two management functions of planning and control are used in both government and commercial sector
accounting. Accounting therefore serves the same purpose for all undertakings, both private and public. The
accountant in all cases has to classify, record, summarise the many transactions and events usually in terms of
money or money’s worth. The most important difference in the role of the accountant in government and
commercial accounting is that profit is not the end product in government. But they use the same techniques
and overall achievements of efficiency and effectiveness.

Example 1
(a) In accounting for Central Government and Local Government units, a fund called Capital Project Fund is
usually created. What is the purpose of this fund? (5 marks)
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(b) The City Council of Matopeni authorises the construction of a new city hall on 1 January 1991. This hall is
expected to cost sh.100,000,000. Financing for the project is to beSh50,000,000 from 6½ per cent serial
bond issue, Sh.40,000,000 from a Government Grant, and Sh.10,000,000 from the general fund (GF).
Transactions and events during 1991 are as follows:
(i) The city transfers Sh.10,000,000 from the GF to the City Hall Capital Project Fund (a CPF created for
the construction).
(ii) Planning and architect’s fees are paid in the amount of Sh.4,000,000.
(iii) The contract is awarded to the lowest bidder for Sh.95,000,000.
(iv) The bonds are sold for Sh.50,200,000.
(v) The amount of the premium is transferred to the debt service fund.
(vi) The construction is certified to be 50 percent compete and a bill for Sh.47,500,000 is received from
the contractor.
(vii) Contracts payable, less a 10 percent retained percentage, is paid.
(viii) The books are closed and financial statements are prepared.

Required:
(i) Journal entries to record the above transactions. (10 marks)
(ii) Financial statement of the capital project fund for the year 1991. (5 marks)
(20 marks)
Solution
(a) Capital project fund (CPF)
The purpose of capital project fund is to provide resources for the completion of some specific capital
project. The main sources of financing include the proceeds of bond issues, grants and transfers from
other funds. A separate capital project fund is created for each major project.
 440

(b)
(i) JOURNAL ENTRIES
NO. PARTICULARS F Dr Cr
1. Transfers to city call CPF (Sh ‘000’) (Sh ‘000’)
General Fund 10,000
Cash A/C 10,000
(Being the transfer to city hall CPF)

2. Capital project fund (CPF):

Cash account 10,000
General Fund (GF) A/C 10,000
(Being the receipt of funds from G.F)

3. CPF
Planning and architect’s fees A/C 4,000
Cash A/C 4,000
(Being the payment of planning and
architect’s fees)

4. CPF
Encumbrances 95,000
Reserve for encumbrances 95,000
(Being the recording of encumbrances
for the amount of contract)

5. CPF
Cash account 50,200
Bonds account 50,000
Premium on bonds etc. 200
Being the proceeds from the issue of
bonds)
6. Premiums on bonds A/C 200
Cash A/C 200
(Being the transfer of premium bonds to
City Hall debt service fund)

7. Reserve for encumbrances A/C 47,500

Encumbrances A/C 47,500
(Being the transfer of half of the amount
encumbered)

8. Contract expenditures A/C 42,500

Contract payable A/C 42,750
Contract payable – retention A/C 4,750
(Being the expenditure on the City Hall
contraction recorded)

9. Contract payable A/C 42,750

Cash A/C 42,750
(Being the partial payment to the
contractor)

10. CPF – Adjusting entry due from

government grant 40,000
Revenue A/C 40,000
(Being the accrued revenue from the
government grant.)

11. CPF (Closing Entries)

Revenue A/C 40,000
General Fund A/C 10,000
Proceeds from issue 50,000
Expenditures 46,750
Encumbrances 47,500
Fund balance 5,750
(To close the books at the end of 1994)
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(ii) CITY COUNCIL OF MATOPENI

A statement of Revenue and Expenditure and charges in the Fund Balance for the year ended
31st December 1991.

(Sh ‘000’)
Project authorisation 100,000
Sources of Financial Funds
Revenue from government grant 40,000

Transfers:
Proceeds from fund issue 50,000
Transfers from general fund 10,000
100,000
Use of Financial Resources
Expenditures 51,500

Excess of Revenue and Transfers over expenditure 48,500

Less: Increase in encumbrances 47,500
Fund Balances as at 31st December 1994 1,000

CITY OF MATOPENI

City Hall Capital Project Fund

Balance Sheet as at December 31, 1991

(Sh ‘000’)
Assets
Cash 13,250
Due from government grant 40,000
53,250
Liabilities:
Contracts payable – retention money 4,750
Fund equity:
Reserve for encumbrance 47,500
Fund balance 1,000 48,500
53,250

Example 2
The Ministry of Trade and Commerce had the following estimated revenues to collect during the financial year
ended 30 June 1993.
Sh.
Hotel and Restaurant licences 900,000
Cattle traders licences 1,000,000
Licences under Trade Licensing Act 765,000
Liquor licenses 500,000
Professional licences 75,000
Licenses for registration of Insurance Companies 320,000

During the year and prior to any issue of licences, it was found necessary to suspend the issue of liquor
licences and professional licences. The Receiver of Revenue further found out that more people were
interested in scrap metal business. The Treasury authorised the Receiver of Revenue to open a new head for
scrap metal licences with an estimated collection of Sh.955,000.
 442

At the close of the financial year, the Receiver of Revenue had collected the following amounts:

Sh.
Hotel and Restaurant licences 1,131,250
Cattle traders licences 2,261,250
Licences under Trade Licensing Act 705,000
Liquor licences -
Professional licenses -
Registration of insurance companies 255,000
Scrap metal licences 1,117,500

The Receiver of Revenue had provided the following additional information:

(i) The ministry had a balance of Sh.33,750 at the beginning of the financial year.
(ii) An amount of Sh.335,000 in respect of scrap metal licences was still in the hands of agents as at 30 June
1993.
(iii) A sum of Sh.8,750 was due to the Exchequer at the end of the year.

Required
(a) A Statement of Assets and Liabilities for the year ended 30 June 1993 (5 marks)

Ministry Of Trade and Commerce

Statement of Assets and Liabilities as at 30 June 1992

Assets Sh.
Cash balance 5,503,750
Receivable from agents 335,000
5,838,750
Fund Balance and Liabilities
Fund balance (brought forward) 33,750
Fund balance (current year) (W – 1) 5,796,250
Payable to the exchequer 8,750
5,838,750

(b) STATEMENT OF REVENUE

For the year ended 30 June 1993

Head Estimates Actual Over (under)

Estimated
Sh. Sh. Sh.
011 – Hotel & Restaurants 900,000 1,131,250 (231,250)
012 – Cattle traders licences 1,000,000 2,261,250 (1,261,250)
013 – Licences under Trade
Licensing Act 765,000 705,500 60,000
014 – Liquor Licences 500,000 - 500,000
021 – Professional licences 75,000 - 75,000
022 – Registration of Insurance
Companies 320,000 255,000 65,000
031 – Scrap metal licences 955,000 1,117,500 (162,500)
4,515,000 5,470,000 (955,000)

Balance b/f from previous year 33,750

 443

Amount payable to the exchequer 5,503,750

Amount transferred to exchequer (Bal. Fig) 5,495,000
Amount due to exchequer 8,750

(W – 1) Fund Balance Current year:

Amount transferred to exchequer 5,495,000
Add: Amount receivable from agents 335,000
5,830,000
Less: Balance b/f from previous year 33,750
5,796,250

(c) Footnotes:
1. Introduction of a new source of revenue i.e. scrap metal licences.
2. Withdrawal of two revenue sources i.e. liquor licences and professional licences.
3. Reasons for material variations in actual receipts.
4. Details about revenue with collector’s agents.

Example 3
The following data were taken from the accounting records of the Town of Ole Meka General Fund after the
accounts had been closed for the fiscal year ended 30 September 1991.

Balances Fiscal Year 1991 Changes Balances

1 October 1990 Debit Credit 30 Sept. 1991

Assets Sh. Sh. Sh. Sh.
Cash 180,000 955,000 880,000 225,000
Taxes Receivable 20,000 809,000 781,000 48,000
Estimated uncollected tax (4,000) 6,000 9,000 (7,000)
196,000 296,000
Liabilities, Reserves & Funds
Balances:
Vouchers payable 44,000 880,000 889,000 53,000
Due to intra governmental
Service fund 2,000 7,000 10,000 5,000
Due to Debt Service Fund 10,000 60,000 10,000 50,000
Reserve for encumbrances 40,000 40,000 47,000 47,000
Fund balance 100,000 20,000 61,000 141,000
19,000 2,777,000 2,777,000 296,000

The following additional data is available:

(i) The budget for fiscal year 1991 provided for estimated revenues of Sh.1,000,000 and appropriations of
Sh.965,000.
(ii) Expenditure totalling sh.895,000 in addition to those chargeable against Reserve for Encumbrances,
were made.
(iii) The actual expenditure chargeable against Reserve for Encumbrances was Sh.37,000.

Required:
Show journal entries to record the above transactions in the books of Town of Ole Meka General Fund.
(20 marks)
 444

Solution
TOWN OF OLE MEKA GENERAL FUND ----Journal Entries
S. No Dr Cr
Sh. Sh.
(i) Cash 995,000
Revenue 995,000
(Being revenue received)

(ii) Expenditure 858,000

Encumbrances 22,000
Bank 880,000
(Being the record of payment made)

(iii) Tax receivable 28,000

Fund Balance 28,000
(Being the record of the increase in tax
receivable)

(iv) Fund Balance 3,000

Incollectable taxes 3,000

Fund Balance 9,000

Vouchers 9,000
(Being increase of vouchers payable)
(v) Fund Balance 3,000
Intra: government 3,000
(Being the record of the net increase)

(vi) Fund Balance 40,000

Debt Servicing Fund 40,000
(Being the record of net appropriation to debt
service fund).

(vii) Encumbrances 15,000

Fund 15,000
Fund 44,000
Encumbrances 44,000
(Being the record of net changes in
encumbrances)

(viii) Revenue 858,000

Expenditure 858,000
(Being the record of expenditure incurred
against the revenue).
(ix) Revenue 97,000
Fund 97,000
(Being the transfer of net revenue to the Fund
A/C).

FINANCIAL STATEMENT
Town of Ole Meka
Assets
Sh.
Cash 225,000
Tax received 48,000
Estimated uncollected tax ( 7,000)
296,000

Fund Balances
Sh. Sh.
Uncollected Tax Balance b/f 100,000
3,000 Tax receivable 28,000
Voucher Reserve for Encumbrances
9,000 15,000
Intra Reserve 97,000
3,000
 445

Debt fund ______

40,000
Encumbrances
44,000
Balance c/d
141,000
240,000 240,000
446
 447

Actual 1992/93

Gross Net
Expenditure Income Expenditure
Current Expenditure/Income 26,593,1465 920,951 25,672,194
Other direct costs 334,692 - 334,692
Capital Expenditure 1,082,683 ______- 1,012,000
28,010,520 920,951 27,089,569

These accounts were audited by the Controller and Auditor General who issued a clean certificate of
findings.

Required
Discuss the usefulness of these published accounts from the point of view of:

(i) A Member of Parliament. (3 marks)

(ii) A taxpayer. (3 marks)
(iii) A patient of one of the hospitals. (3 marks)
(iv) A creditor to one of the hospitals. (3 marks)
(Total: 20 marks)