Breaking Down Fund Accounting Basics: Chapter 2

Government-wide vs. Fund Financial Statements

David Miller: Alright, welcome back folks to Government & Non-Profit Accounting! If you’re tuning in for the first time, I’m David Miller—Midwest born and bred, and today we’re diving into what I think is the backbone of public sector reporting: fund accounting basics. Maya’s with me, as always. Hey, Maya!

Maya Collins: Hey, David! I’m excited about this one—I mean, if you want to understand how governments keep their financial houses in order, this stuff is like, absolutely essential. And you know, last episode we talked about those big-picture differences between governments and nonprofits, but now we’re really getting into how the financial reporting’s structured, right?

David Miller: Exactly! I want to start by clearing up what sometimes—even for people who’ve worked in the public sector a while—gets mixed up: the difference between government-wide statements and fund financial statements. So basically, the government prepares two separate sets. The government-wide statements, or GWS, give you the full picture of the primary government—including both governmental and business-type activities—but not fiduciary activities.

Maya Collins: And just to jump in, those GWS use the economic resources measurement focus and the full accrual basis of accounting, which is pretty similar to what you’d see in the for-profit world—so you’re looking at long-term assets and liabilities, not just what’s due or available this year.

David Miller: Right, so the two big statements you see there are the Statement of Net Position and Statement of Activities. But then, on the other hand, fund financial statements look at individual chunks, or “funds,” each with their own set of books. These use different measurement focuses—a lot of the time you’ll see the current financial resources focus and modified accrual basis, which, well, is a mouthful but basically means you’re only tracking current assets and liabilities. You remember my story about that city utility investigation, Maya?

Maya Collins: Oh yeah! You mentioned how a misunderstanding about what counted as a business-type activity landed the city in hot water. People assumed, “Hey, it’s all city money,” but in reality, reporting proprietary funds under the wrong section skewed the entire compliance review. Like, proprietary funds really belong under business-type activities in the GWS, not just lumped into governmental activities.

David Miller: That’s it. So, if you’re listening at home and thinking, “Do I need to worry about police and pensions showing up in the same place as water utilities?” Well...no, because GWS splits them out: governmental activities for core services like police and roads; business-type activities for those utilities and, say, city-operated golf courses; and fiduciary activities—those are trust or custodial roles—don’t show up in GWS at all. Covers the bases, I think.

Maya Collins: Super clear! And, I mean, tying it back to transparency—which we hit on last time—these distinctions really make sure users can see exactly how resources are flowing and for what purpose. Ok, David, do you wanna lead us into how these funds are actually sorted out in practice?

Types of Government Funds and Their Uses

David Miller: Sure thing. So, within fund financial statements, “funds” are classified into three buckets: governmental, proprietary, and fiduciary. Let’s start with the governmental funds—there are five main ones, and honestly, thinking through examples really helps here. The General Fund is your all-rounder—covers police, public works, all those day-to-day city services. Special Revenue Funds? Those are when you’ve got money set aside, like a grant, for a specific project—like maintaining roads.

Maya Collins: Or like if someone gives the city money specifically to build a new dog park and says, “You can only spend it on the dog park,” boom—Special Revenue. Debt Service Funds are used to pay off the city’s general long-term debt—not the debt for a specific water project, but, like, overall city bonds. Then you’ve got Capital Projects Funds, which are for, well, capital projects—like a new library or city hall.

David Miller: And don’t forget Permanent Funds. These are kind of cool—say someone creates an endowment for the city, but the rules say you can never spend the original gift, just the earnings. That’s a Permanent Fund as long as the interest helps the public in some way. If the earnings have to go to a private cause—maybe scholarships for the children of firefighters—that’s not a Permanent Fund, it’s a Private-Purpose Trust Fund, which is fiduciary.

Maya Collins: That’s actually a perfect segue. Proprietary funds come in two flavors: internal service, which is like, say, the city’s IT department serving city hall and the police, and enterprise funds, which are used when the government is charging the public for services—water utilities, airports, things like that. Both are accounted for almost the same way as a for-profit company: full accrual, economic resources basis.

David Miller: Yup, and then there are fiduciary funds. These are just the city holding money for someone else—like property taxes collected for the local school district (custodial funds), pension trust funds for employee retirement, or where the city is managing an investment pool for other governments. All this stuff is reported separately from the main activities because it isn't the government's own money to spend.

Maya Collins: And really, getting the classification right is crucial. I remember a case where a city got a big donation—the donor wanted the principal left untouched but the investment earnings could help build public hiking trails. Simple, right? But the finance team originally reported it as a regular donation in Special Revenue, not as an endowment in the Permanent Fund. There was confusion for years until auditors flagged it. It matters!

David Miller: I hear about that way more often than you’d think. Plus, proper fund designation isn’t just good practice, it’s required by standards—especially when we get into how funds are shown in reports, which we’re actually gonna dig into right now by breaking down fund balances and figuring out which ones are considered “major.” Ready, Maya?

Classifying Fund Balances and Determining Major Funds

Maya Collins: Oh, I love this part. So let’s get into fund balance classifications. There’s five categories—nonspendable, restricted, committed, assigned, and unassigned. Think of nonspendable as things you physically can’t use: inventory, prepaid expenses, or the principal of a Permanent Fund endowment. Then, restricted balances are locked in for a purpose by someone outside the government—like if a grant specifies the money has to go toward tornado relief.

David Miller: Committed is where the government’s own formal actions come into play. If the city council passes an ordinance reserving cash for a new park, that’s committed. Assigned is a step down—intended for a purpose but not officially locked in, like money set aside for debt payments at the mayor’s discretion. Unassigned is just, well, the “everything else” bucket—basically your general fund leftovers after all other buckets have been filled. I always mix up the assigned and committed, but it comes down to how formal the approval process is, right?

Maya Collins: Yeah, spot on! And why does it matter? Well, fund balances by category show stakeholders how locked-down the resources are—meaning how much is truly available to use for whatever surprise comes next.

David Miller: Now, to the good stuff—determining which funds are major. This is where those GASB 10% and 5% rules come in. The General Fund is always a major fund, period. But for the rest, you’ve gotta look at whether the fund’s assets, liabilities, revenues, or expenditures make up at least 10% of the category (all governmental or all enterprise funds), and that same number is at least 5% of the combined total for all governmental and enterprise funds. Both, not just one. It gets technical but stick with us—

Maya Collins: Let’s walk through a quick example! Say a city has total governmental funds of $26.3 million and, combining enterprise funds, the whole pool is $51.25 million. If the Library Fund has $2.9 million in assets, that’s more than 10% of the governmental category, but you check if $2.9 million is also at least 5% of the $51.25 million government-and-enterprise total. If both are true, the Library Fund is major. Mistakes here aren’t rare—one city I reviewed missed reporting a Debt Service Fund as major because they checked only the 10% but not the 5%, and that small error led to way less public disclosure than there should have been.

David Miller: Exactly, and it ties directly back to citizen oversight. If you bury a big fund in a lumped “other,” people can’t tell what’s going on. That’s why you do the math and report it separately—keeps the government accountable. And on that note, I think we’ve covered the basics for today. Anything you wanna add before we sign off, Maya?

Maya Collins: Just that, as complicated as it sounds, it gets a lot easier with practice—and understanding these basics means you’re well on your way to reading and questioning real government reports. We’ll keep building on this in the next episode—thanks for breaking it down with me, David!

David Miller: Always a pleasure, Maya. Thanks for tuning in, everyone—catch us next time on Government & Non-Profit Accounting! Have a great week!

Maya Collins: Bye, everybody!