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State funds can be described according to the Governmental Accounting Board as the funds that are formed by the government through tax activities. State funds accounting is commonly utilized to account for tax-supported (I.e., state) activities. The state funds are categorized in terms of five categories. First, the certain revenue funds that are state funds intended to be utilized to report specific revenue sources that are quite limited to being used for a particular direction, such as transportation aid. In practice, states use them also to report: all the financial activities associated with a single function (such as road maintenance); types of revenues (for example, all federal grants); and “rainy day” funds.
Secondly, the public fund is a government’s basic operating fund and accounts for everything not accounted for in another fund. Thirdly, the debt service funds account for the repayment of debt. If a government is accumulating resources for the purpose of making debt service payments, it should report them in a debt service fund. In reality, some resources intended to finance debt service payments can be found in other governmental funds. The other type of governmental funds is the capital projects funds which account for the construction, rehabilitation, and acquisition of capital assets, such as buildings, equipment, and roads. Governments are not required to account for all capital expenditures in this fund type, however, and therefore it may also appear in the general fund or even special revenue funds. Lastly, the fifth category of governmental funds is the Permanent funds account for resources that cannot be expended, but must be held in perpetuity. Generally, these resources are invested and a government may spend the earnings, often for a purpose specified by the provider of the resources.
Activities in the governmental funds
The Statement of Revenues, Expenditures, and Changes in Fund Balances. This is the government funds’ statement of income and show cash inflows and cash outflows. Revenues have been shown by source or type, such as various taxes, interest and penalties on taxes, licenses and permits, fines and forfeitures, intergovernmental and investment income. Expenditures have been shown by function and object with the current operating expenditures presented apart from debt service and capital expenditures. The operating expenses included: general government expanse, expenses on public safety, highway and street, health and sanitation and operating expenses on parks and recreation. There is also capital expenditure used to finance debt and included: principle amount, interest paid on loans bond issue cost and payment to refunding Bond Escrow Agent.
Revenues and expenditures are not the only inflows and outflows of resources reported in this statement. Other financing sources and uses include the cash received when bonds are issued, as well as transfers between funds. Apart from the fact that these resource flows are not revenues or expenditures, they are shown apart to assist the reader of the statement in assessing the balance between ongoing revenues and expenditures related to the basic operations of the government.
The balance sheet. The “balance” in the balance sheet is between assets on the one hand and liabilities and fund balances on the other. The liabilities are expected to be satisfied within a year. Fund balance is the difference between assets and liabilities—in essence, what would be left over if the assets were used to satisfy the liabilities. Non-spendable fund balance is related to resources that cannot be spent, i.e. inventory. It also indicate resources on which restrictions on their expenditure has been paced. Assigned fund balance represent balance for which funds has been assigned whereas unassigned fund balance show balance of funds that has no yet been assigned.
Financial position of the government
The governmental funds’ statement of revenues, expenditures, and changes in fund balances and the balance sheet give critical information about the financial position of the government funds raised from taxes and how they are spent. They indicate the activities of the government in undertook that were supported by taxes.
Proprietary funds
Proprietary funds are the funds used when the government acts like a business in either providing goods and services to other government entities or when the government provide goods and services to private parties. The two types of proprietary funds are enterprise funds and internal service funds. An enterprise fund is used to account for any activity for which external users are charged a fee for goods and services. An activity must be reported in an enterprise fund under any of the following circumstances:
• The activity is funded with debt that is only secured by a pledge of the net proceeds from the activity.
• The activity’s service provision costs must be recovered with fees, as stipulated by laws and regulations.
• The activity’s pricing policy is designed to recover its costs.
An internal service fund is used to account for activities that provide goods or services to other funds, as well as departments or agencies of the primary government, or to other government entities on a cost-reimbursement basis. This fund should only be used when the reporting government is the primary participant in the activity. When this is not the case, an enterprise fund should be used instead.
The required financial statements for a proprietary fund are as follows:
• Statement of net position
• Statement of revenues, expenses, and changes in fund net position
Activities in proprietary funds.
Statement of revenues, expenses and changes in net position. Include operating revenues and operating expenses. Operating revenues are water sales and sewage fees which represent government good and services provided to the private parties at a fee and then an operating expense, the billing to departments which is a transaction between government entities.
Statement of net position. The net position amount represent the difference between the assets and the liabilities. Assets have classes mainly current and non-current. Liabilities are either current or long-term liabilities. Restricted Assets are assets available only for designated purposes.
Financial position of the government.
Proprietary fund help taxpayers to understand the net position of the government in term of activities for which a fee is charged to external users for goods or services and also the governments’ financial position in relation to the activities that provides goods or services on a cost-reimbursement basis to other funds, departments, or agencies of the primary government and its component units, or to other governments.
Fiduciary funds
Fiduciary funds are used to report assets held in a trustee or agency capacity for others and therefore cannot be used to support the government’s own programs. The key distinction between trust funds and agency funds is that the former normally are subject to a trust agreement that affects the degree of management involvement and the length of time that the resources are held. The fiduciary fund category includes:
• Agency funds
• Pension and other employee benefit trust funds
• External investment trust funds
• Private-purpose trust funds
Activities in fiduciary funds
Agency funds do not recognize revenues, expenditures or expenses. On the statement of fiduciary net position, the assets must equal liabilities. The departmental suspense fund is used as a clearing account to distribute financial resources to other funds of the agency. Private-purpose trust funds report all other trust arrangements under which the principal and income benefits individuals, private organizations or other governments.
Financial position of the government
Agency funds are used to report resources held by the agency in a purely custodial capacity (assets held for others that cannot be used to support the agency’s own programs). Agency funds typically involve only the receipt, temporary investment and remittance of fiduciary resources to individuals, private organizations or other governments. GAAP requires the use of an agency fund to account for debt service transactions involving special assessment debt for which the state is not obligated in any manner.
Pension and other employee benefit trust funds are used to report resources required to be held in trust for the members and beneficiaries of:
• Defined benefit pension plans
• Defined contribution plans
• Other postemployment benefit plans
• Other employee benefit plan

References
Anandarajan, M., Anandarajan, A., & Srinivasan, C. A. (Eds.). (2012). Business intelligence techniques: a perspective from accounting and finance. Springer Science & Business Media.
Chan, J. L. (2003). Government accounting: an assessment of theory, purposes and standards. Public Money & Management, 23(1), 13-20.
Cheng, R. H. (1992). An empirical analysis of theories on factors influencing state government accounting disclosure. Journal of Accounting and Public Policy, 11(1), 1-42.
Drucker, P. F. (1995). Managing the non-profit organization: Practices and principles. Taylor & Francis.
Ingram, R. W. (1984). Economic incentives and the choice of state government accounting practices. Journal of Accounting Research, 126-144.
Ridder, H. G., Bruns, H. J., & Spier, F. (2005). Analysis of public management change processes: the case of local government accounting reforms in Germany. Public administration, 83(2), 443-471.
Caperchione, E., & Mussari, R. (Eds.). (2012). Comparative issues in local government accounting. Springer Science & Business Media.

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