CHAPTER 4: ACCOUNTING
The law establishing the state and local commissions requires a high level of accountability. All Proposition 10 expenditures made by a commission must be for the purposes for which the commission was created, and in accordance with the approved commission strategic plan. As a recipient of federal, state, and other grant funds, program accounting is needed. In addition, the California Children and Families First Act requires outcome-based accountability.
Generally accepted accounting principles (GAAP) ensure the credibility and reliability of information that is critical to public support. GAAP for local governments have been established and maintained by the Governmental Accounting Standards Board (GASB). The Government Finance Officers Association (GFOA) plays a significant role in interpreting and teaching GAAP. GAAP and accounting best practices, as well as legal requirements, underlie the following policies and procedures.
Accounting policies provide high-level guidance and focus attention on critical executive responsibilities associated with accounting. Accounting policies create the environment and culture in which commissions, management, and staff members make numerous decisions and take action on a daily basis. Following are the key accounting policies suggested for First 5 commissions:
4.3. GENERAL ACCOUNTING PROCEDURES
Every commission should adopt a set of general accounting procedures to account for commission financial resources and record revenues and expenditures. The following general accounting procedures comprise the major elements that define and drive the accounting system:
Commissions that adopt these general accounting procedures will be well positioned to implement the accounting policies discussed above and meet the reporting criteria presented in the financial reporting chapter. Accounting guidance for asset, liability, revenue, and expenditure/expense accounts is presented in Section 4.4 of this chapter.
4.3.1. Generally Accepted Accounting Principles (GAAP)
Commission accounting policies, practices and systems should conform to generally accepted accounting principles in order to maintain public trust in commission operations and reporting. When new accounts are created or changes in accounting practices are made, commissions need to ensure that they continue to comply with GAAP.
The primary source of GAAP for the public sector is the Governmental Accounting Standards Board (GASB), an independent standard-setting body operating under the auspices of the Financial Accounting Foundation. GAAP for the public sector is not the same as GAAP for the private sector. GASB issues accounting standards that ensure governmental accounting and reporting is conducted effectively and in the public interest.
The GASB is aided in its work by the Governmental Accounting Standards Advisory Council (GASAC), a consultative body made up of representatives of major groups interested in governmental accounting and financial reporting, such as GFOA and the American Institute of Certified Public Accountants (AICPA).
Government accounting systems are organized and operated on a fund basis to provide strong accountability for the use of public funds. GASB defines the term “fund” as follows:
A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulation, restriction, or limitations.
Fund accounting focuses on the inflow and use of current financial resources, whereas private sector accounting focuses on profit and net worth. Commissions are government entities that are required to use fund accounting.
Fund accounting includes three broad classifications of funds. Governmental funds typically are used to account for tax-supported activities (commissions’ activities are generally tax-supported activities, therefore commissions would use a governmental fund). Proprietary funds are used to account for a government's business-type activities like a water department or an airport. Fiduciary funds are used to account for resources that are held by the government as a trustee or agent for parties outside the government. Fiduciary funds cannot be used to support the government's own programs.
One type of governmental fund is the general fund. The general fund is the chief operating fund of most governments and can be used by First 5 commissions. Another type of governmental fund used by commissions is the special revenue fund. A special revenue fund accounts for the proceeds of a specific revenue source that is restricted by law or administrative action to be expended only on a specified purpose(s). Special revenue fund accounting is commonly used when revenue sources are exclusively designated for a specific purpose. Independent commissions are more likely to use a general fund, while county commissions use a special revenue fund.
Given the legal and administrative requirements associated with Proposition 10 monies, it is advised that commissions designated as county departments establish their accounts using the special revenue fund designation. For both county and independent commissions, the state is required to transfer Proposition 10 funds into the commission trust funds. Trust funds are separate from the commissions’ general funds or special revenue funds, which are accounting entities only.
4.3.3. Modified Accrual Basis of Accounting
There are three bases of accounting: cash accounting, accrual accounting, and modified accrual accounting. Commissions should use the modified accrual method of accounting because it more effectively recognizes increases and decreases in financial resources. A conversion to the accrual basis is necessary at year-end for reporting purposes as described in Chapter 5.
The modified accrual basis of accounting is a method of accounting in which expenditures are recorded at the time liabilities are incurred and revenues are recorded when earned so long as they are both measurable and available to finance expenditures of the current period. For example, under the modified accrual basis of accounting, local commissions would:
The budget document should include a clear definition of the basis of accounting used for budgetary purposes. If the budgetary basis of accounting and the GAAP basis of accounting are the same, this fact should be clearly stated. If the budgetary basis of accounting and the GAAP basis of accounting are different, major differences and similarities between the two bases of accounting should be noted. Disparities may include basis differences, timing differences, fund structure differences, and entity differences
Commissions engage in a wide range of financial activities. An account classification system called a chart of accounts is used to record and organize this financial activity. A well-organized chart of accounts provides the organizing framework for budgeting, and substantially enhances reporting capabilities. Each commission should utilize a standard chart of accounts along with an accompanying definition of each account.
A chart of accounts can be tailored to an organization’s specific needs. In order to decide what to include in a chart of accounts, each of the following questions should be considered:
• What reports do you want to prepare?
• What financial decisions, evaluations, and assessments do you need to make on a regular basis?
• What level of detail do you require?
• What is your capacity for tracking financial information?
The chart of accounts includes all accounts in the general ledger—assets, liabilities, fund balance, revenues, and expenditures. Asset, liability, and fund balance accounts reflect the financial resources of the commission and are referred to as balance sheet accounts. An excellent source for developing balance sheet accounts is Appendix E in GFOA’s GAAFR.
Revenue and expenditure accounts reflect the operations of the commission and need to meet management’s reporting needs. Below is a suggested list of revenue and expenditure accounts.
General-Purpose Revenue Examples:
Special Purpose Revenue Examples:
Periodically, revenues are transferred to fund program activities from other financing sources. Below are examples of accounts used to make these transfers. Chapter 5, Financial Reporting, will provide more information on transferring funds.
Program Expenditure Examples
For each of the outcome categories below, identify each program/project (summary format) that outlines the areas the local commission is focused on to achieve the respective outcome. Use the categorization you have used in your strategic plan.
Commissions will need to add to and delete from their chart of accounts based on their strategic plans, funding strategies, business plans, and external/internal reporting requirements. (Note: Refer to Appendix E in GFOA’s GAAFR for additional examples.)
4.3.4.2. Object of Expenditures
In addition to developing a chart of accounts, government entities often code expenditure information to identify the “character” or “object” of the expenditure. It is recommended that each commission use eight major object classifications for services or commodities, with subcategories as needed (e.g., travel and meetings). Potential subcategories are provided in Appendix E in GFOA’s GAAFR.
Account classification creates a structure to account for assets, liabilities, fund balance, revenues, and expenditures. In addition, commissions often need information on programs. A program is a set of specific activities funded or provided by the commission to accomplish a particular purpose. Program activities may have more than one revenue source, and may require expenses from multiple organizational units. The crosscutting nature of program revenues and expenditures requires commissions to take added steps to collect and store information by program.
To establish program accounting, some organizations create transaction codes to capture program activity, while others create additional accounts. In cases where county accounting services are used, the county may have transaction codes or accounts to collect program (or project) information. In other cases, commissions may have to develop program accounting information in their internal accounting systems. For example, in Yolo County, School Readiness Initiative program costs are paid partly out of the county share of tobacco tax revenues and partly from State Commission matching funds, so the same program code (SRIPRO) has been set up for use in each of two different organizational units. Pure administrative costs, not directly attributable to a program, are charged to program code CFCADM. Funds that have not yet been committed through commission decision to any specific purpose are coded to program code UNCM00.
Because of the commission’s legal mandate for outcome-based accountability, and the program evaluation requirements associated with the grant funds, commissions are encouraged to employ program accounting.
4.3.6. Cost (Expense) Allocation
Most of the accounting for commission activities is accomplished by charging directly to programs. However, certain situations require special allocation of administrative and indirect costs to accurately account and report the cost of commission activities.
Cost items that comport to the commission’s definition of administrative costs are charged directly to an administrative area in the accounting system. During the year, however, it may be necessary to apply these administrative costs to specific programs to determine “total” program costs.These indirect costs are allocated to individual programs or to general program categories.
During the year some costs will occur that have both a program and an administrative component, and other costs may involve more than one program. Cost allocation is used when costs need to be estimated and apportioned among different programs or organizational units. Examples of costs that may need to be allocated include office rent, telephone, and personnel costs.
Once it is determined that costs need to be allocated or apportioned, an allocation formula is created to obtain a reasonable estimate. For example, assume a three-person administrative staff had annual rental costs of $12,000, personnel and benefit costs of $150,000, commodity costs of $8,000, and telephone costs of $10,000. During the year the three-person staff maintained time records that showed administrative services were provided to five separate programs. Total administrative costs of $180,000 would be allocated to each program by percentage as shown below:
|
Program |
Total Admin Hours |
% of Hours |
Allocated Costs |
| 1 |
1,000 |
20 |
$ 36,000 |
| 2 |
2,000 |
40 |
72,000 |
| 3 |
500 |
10 |
18,000 |
| 4 |
500 |
10 |
18,000 |
| 5 |
1,000 |
20 |
36,000 |
| Total |
5,000 |
100% |
$180,000 |
State and local governments receiving large federal grants generally are required to maintain formal cost allocation plans. Specific guidance on cost allocation plans can be found in OMB Circular A-87. However, the cost of maintaining a formal cost allocation plan is prohibitive for smaller government entities. It is recommended that local commissions use the cost categories described in Section 4.3.4.
Where a commission does not use an ongoing time system, time studies can be conducted. For example, a commission may conduct a time study of all staff positions in order to properly compute expenses that can be submitted for reimbursement under the Medi-Cal Administrative Activities (MAA) federal entitlement program. The time study would show the percentage of each staff person’s time spent on each commission program and on internal administrative activities. The results of this time study can be also used for internal allocation of costs across program codes.
Cost allocation may differ among commissions, and some commissions allocate indirect and administrative costs only at year end. Commissions are advised to develop and follow a procedure for cost allocation that establishes a consistent and transparent process with an auditable trail. A sample cost allocation methodology and sample forms are included in the model documents at the end of this chapter.
The adopted budget approved by the commission (including amendments) creates a formal revenue and expenditure plan. As described in Chapter 3, Planning and Budgeting, staff members administer and monitor the adopted budget during the year to establish budgetary control. Specific steps need to be taken to establish that control.
Initially, the budget needs to be aligned with the accounting system. The budget includes estimated allocations to the various program components that support the commission’s goals for early childhood development. The program accounting structure needs to be aligned with the programs in the budget. Also, the revenue and expenditure items in the budget need to be aligned with the chart of accounts to effectively compare “actual” revenues and expenditures with “budgeted’ revenues and expenditures.
Second, a formal and informal encumbrance system can be used to control the expenditure side of the budget. Encumbrances represent the estimated amount of future expenditures that will result when unperformed contracts are completed. Essentially the encumbrance reserves a portion of a budget. When the contract is performed, an expenditure will be recorded in the accounting system (and the encumbrance will be reversed). Until the expenditure is recorded encumbrances are used so the commission does not over commit funds. Following are examples of where encumbrances are used:
Third, a monthly reporting system is used to identify budgeted and actual amounts and the fund balance, ensure resources are used for the appropriate purposes, and ensure resources are not expended too quickly. Chapter 5, Financial Reporting, discusses the monthly reporting system.
Fourth, during the year amendments are made to the original budget as circumstances change. Records of the original budget and all amendments need to be maintained. At year-end both the “original” budget and “final amended” budget amounts will be needed for financial reporting purposes.
Internal control refers to procedures or systems designed to promote efficiency, assure the implementation of a policy, safeguard assets, and/or avoid fraud and error. More detailed information about internal controls can be found below and in chapter six of this guide.
4.4. SPECIFIC ACCOUNTING PROCEDURES
The following accounting procedures provide guidance for particular asset, liability, revenue, and expenditure/expense accounts. In many cases, the guidance presented focuses on procedures to safeguard financial resources. The examples of procedures provided illustrate steps that can be taken to establish internal control. In practice commissions may use other procedures to establish internal control.
Part of the overall maintenance of adequate accounting procedures is the ability to control cash collections and disbursements. Account procedures for cash should emphasize timely processing and recording. Specific procedures include:
• Segregation of duties in the cash collection and disbursements process, to the greatest extent possible. Ideally, the duties of authorization, custody, record keeping, and reconciliation should be segregated. In those instances where these duties cannot be fully segregated, mitigating controls should be established;
• Review by check signers and approvers of supporting documentation for all disbursements;
• All cash collections, whether in the form of checks or currency, deposited in a timely manner, safeguarded until properly deposited, and accurately recorded in the accounting records;
• Restrictive endorsement of checks upon receipt;
• Bank reconciliations performed on a timely basis and reviewed on a timely basis by individuals not involved in the cash collection or disbursement process;
• Investigation of variances between bank statements and commission records;
• Cash and checkbooks secured with as limited access as possible;
• Disbursements, whether in the form of checks, electronic transfers, or other means, approved, adequately documented, and accurately recorded in the accounting records; maintenance of a process for retaining and retrieving supporting disbursements documentation;
• Authorization and recording of account transfers required for wire transfers.
Petty cash funds facilitate the purchase of goods and services under limited circumstances. Commissions are not required to maintain petty cash funds. However, if a commission chooses to maintain a petty cash fund, detailed procedures are needed to account for and safeguard petty cash, such as:
• Dollar limits established for petty cash funds;
• Funds kept in a locked location;
• Receipts required for all disbursements;
• Periodic surprise cash counts performed by supervisors;
• Petty cash custodian independent of the approval and accounting functions;
• Identification of allowable and unallowable use of the petty cash fund;
• Establishment of reconciliation procedures, with reconciliation performed by someone other than the custodian;
• Replenishment of fund as needed by processing a request for payment form with attached paid receipts.
An accounts receivables process will be maintained that identifies and bills all amounts due on a timely basis. The process will identify overdue receivables and provide timely collection notices. The primary receivable of most commissions is the state disbursement of tobacco revenues.
Specific procedures inlcude:
• Creation of procedures to prepare and send billings in a timely manner;
• Approval of billing information, including rates and amounts;
• Daily deposit of collections;
• Billing, collection, and cash application performed by different people;
• · Effective steps take to collect past due accounts, with uncollectible accounts written off after a certain period of time;
• Approvals required to write off accounts.
Financial information on effective managing of commission investments can be found in Chapter 2, Investment Management. From an accounting standpoint:
• Investments should be properly authorized and accurately recorded;
• Investments should be properly safeguarded;
• Sales of investments should be properly authorized and accurately recorded;
• Rate of return on investments should be appropriate and effective.
Capital assets include such items as land, structures and improvements, furniture, and equipment owned by the commission. Under the modified accrual basis of accounting, commissions charge capital asset purchases as expenditures.
Most commissions have few capital assets, although some have purchased assets such as buildings and other facilities. The 80 percent of the Proposition 10 tobacco revenue that is distributed to local commissions per Section 130105(d)(2) of the state code can be used to purchase capital assets. However, the 20 percent allocated to accounts of the state commission, which may be distributed to local commissions for various purposes, cannot be used for purchase of capital assets.
Procedures to safeguard and control capital assets are as follows:
• All capital assets having a value of more than a specified dollar amount and a useful life of one year or more monitored through inventory controls;
• Management and commissioner approval of all capital asset purchases, depending on dollar amount;
• Pertinent data on capital assets (including description, cost, source of funds, and data acquired) recorded as soon as capital assets are acquired and data is available;
• All items tagged with a pre-numbered identification sticker;
• Performance of periodic physical inventories;
• Maintenance of a listing of expendable equipment (assets that do not meet the specified dollar amount to be classified as a capital asset, but require control) that could easily be misappropriated, as well as a periodic inventory of this equipment;
• Recording of donated capital assets at fair market value as of date of donation.
4.4.6. Purchasing and Payables
A purchasing process shall provide for the efficient purchasing of commission needs, prevent unnecessary purchase of materials and supplies, and provide compliance with budgetary requirements. Chapter 1 of this financial management guide includes more detailed information about procurement and contracting.
The authorization to purchase supplies and services should be reflected in the accounting records and should include the following:
• Compliance with requirements for formal or informal bids;
• Approval of purchase orders based on available budget;
• Expenditures consistent with the purpose of the organization and the approved strategic plan (California Codes, Health and Safety Code, Section 130100-130155);
• Establishment of purchase prices, terms, and commitments;
• Requisitioning of supplies and services;
• Recording of purchases in the correct time period and amount with sufficient documentation.
All expenditures made should be reflected in the accounting records – including the payment amount and allocation – in the correct time period, to the appropriate fund or account, and with sufficient information to identify the payee.
A complete accounts payable ledger should be maintained that shows liabilities to be paid in the future, when each one is due, and whether it has been paid. The following safeguards should be put in place:
• Review of invoices for calculation accuracy and payment approval;
• Comparison of invoice quantities, prices, and terms with purchase orders;
• Comparison of invoice quantities with receiving report.
The payroll accounting procedure needs to ensure that paychecks are issued to employees on time and are accurate. All payroll liabilities should be reflected in the accounting records, including 1) the amount of the liability and 2) allocation to the appropriate fund, program, or expenditure account and time period. All recorded liabilities should be supported by appropriate evidence showing that the liability is for authorized work actually performed by authorized employees, temporaries, or consultants. Procedures to ensure reliable payroll accounting include:
• Time cards prepared and signed by employees and approval by the supervisor and executive director prior to payroll preparation;
• Proper documentation of changes in salaries and wages in the personnel file;
• Payroll and benefit calculations and eligibility for benefits verified periodically.
Compensated absences are absences for which employees will be paid, such as vacation and sick leave. A liability for compensated absences for services already rendered and that are not contingent on a specific event should be accrued as employees earn the rights to the benefits. The compensated absence liability should be calculated based on the pay or salary rates in effect at the balance sheet date. See GASB Statement No. 16 for further guidance.
Construction projects may be funded based on the completed contract method and invoices submitted by the contractor. An initial advance payment may be issued.
Leases entered into by the commission are classified as capital leases or operating leases. Leases that represent substantially the entire benefits and risks incident to ownership of the property, such as a capital lease, are accounted for as the acquisition of an asset and the incurrence of an obligation. Other types of leases should be classified as operating leases.
4.4.11. Travel and Business Expense
Commissioners and staff are authorized to receive reimbursement for travel and business expenses incurred while attending official functions, as long as the expenses are reasonable, prudent, and appropriate. Reimbursement for expenses associated with other related training, seminars, or meetings must have prior approval from the executive director, in the case of commission staff, or the commission chair, in the case of commissioners.
4.4.12. Restricted Funds Accounting
Most commission funds come from distributions of the tobacco tax revenues collected by the state. However, commissions also may receive funds from the State Commission, other state departments, the federal government, private foundations, or other sources. These funds normally are restricted in how they may be used and require special accounting information to be collected and reported periodically. Funds from the State Commission cannot be used for the purchase of capital assets.
Procedures needed to record and safeguard restricted funds include:
• A budget or plan is prepared when a grant or funding agreement is established, including restrictions and parameters of the funding agreement. Account numbers are created to track funding and expenses in accordance with the agreement.
• Procedures are established for receipts to be recorded accurately, deposited in a timely manner, and where appropriate, allocated to the correct account.
• Projects with matching fund requirements are tracked in a manner that allows verification that the matching fund requirements have been met. Certain State Commission funds carry restrictions requiring the local commission to match the state funds with local funds according to a pre-defined ratio, such as one local dollar for every state dollar or three local dollars for every state dollar. Matching fund requirements also occur with federal grants, and can also be found in grant agreements with private foundations.
Commissions should use the accounting procedure that works best for tracking matching funds. For example, if three local dollars must be used for every state dollar, the transaction would be coded to allocate 75 percent of the expense amount to the cost center corresponding to the source(s) of local funding being used as the match and 25 percent of the expense amount to the cost center holding the funds with the matching fund requirement.
• A review procedure is used to review expenditures to ensure they meet the requirements of the funding agreement, in addition to meeting the purposes of the commission as expressed in the strategic plan.
• A review procedure is used to ensure payroll costs charged to a restricted fund are based on only the time spent working on grant programs.
• Periodic reviews are conducted to determine that audit requirements are met and follow-up is performed on audit recommendations.
• Periodic management reports are generated to analyze compliance with funding agreements and matching fund requirements.