Demystifying Government Operating Statements: Chapter 3

Understanding Government-Wide Operating Statements

David Miller: Alright, everyone—welcome back to another episode of Government & Non-Profit Accounting. I’m David Miller, and as always, I’m joined by my wonderful co-host, Maya Collins. Maya, you ready to nerd out a little over operating statements today?

Maya Collins: You know I am, David! This is the episode I wish I had back when I was cramming for my first big accounting exam. Operating statements just seemed like a swamp of numbers, but—stick with us, listeners—they really tell the story of how governments use taxpayers’ money, right?

David Miller: Exactly. And today, we're starting at the top with government-wide operating statements—specifically, the statement of activities in those government-wide statements. Think of this one as the overall scoreboard for how well a local government, county, or even your state is spending and earning.

Maya Collins: Right! The key thing here is, this statement reports net expense or revenue for each function or program. So, you see things broken down—public safety, health, sanitation, culture and recreation, all that.

David Miller: And you get this nice, clear view of which programs are really relying on taxpayer dollars versus which bring in their own cash. There’s a distinction between program revenues—like charges for services, grants, or contributions—and general revenues, such as property taxes or investment earnings.

Maya Collins: Oh, that’s a good call-out. Program revenues are reported within each program line, whereas those classic, catch-all general revenues line up at the bottom. It makes it a lot easier to see the financial burden of each program, kind of like, is the Parks & Rec department living large off tax dollars or making money from summer camps and pool passes?

David Miller: Exactly, and don't forget about expenses, which are split between direct and indirect. Direct expenses are tied to a specific function, while indirect expenses—like interest on debt—get their own line. Now, here's where a lot of folks get tripped up: those special and extraordinary items—

Maya Collins: Oh, the ones that sound so dramatic! Special items are unusual or infrequent things the government actually chooses to do, like selling off land. Extraordinary items are things beyond anyone’s control—like a tornado tearing up city hall. They both get separate lines, but special items go up first.

David Miller: And let me tell you, this part is not just academic. Back when I was investigating a mid-sized city’s financial reports, they lumped a big gain from a property sale in with regular revenue. That created all sorts of confusion for their city council—they thought their ongoing revenues had magically spiked. It made it tough to plan for next year’s budget, not to mention, eroded some trust among stakeholders. Don’t underestimate the damage a misreported special item can do—folks start questioning everything.

Maya Collins: Wow, and honestly, when you look at that big statement of activities table, it’s so important those unusual things stand out. Especially if you’re comparing this year to last—otherwise you might think your city’s getting rich off random windfalls every year!

David Miller: Exactly. And just to drive it home, when you’re reading a government-wide operating statement: look for net expense or revenue by program, check what’s being covered by program revenues versus what’s falling back on taxpayers, and don’t let those special or extraordinary items slip by unnoticed. It’s your roadmap to government resource use, for sure.

Governmental Fund Operating Statements and Fund Balances

Maya Collins: Let’s get granular for a second and narrow it down to governmental fund operating statements—they’re a bit different, right? In these, we're looking at how the money actually comes and goes out of specific funds, which is way more detailed than just the “big picture” government-wide stuff.

David Miller: That’s right. So, the star of the show here is the “statement of revenues, expenditures, and changes in fund balances.” And here, “expenditures” means outflows to actually purchase goods and services—not the same as expenses in government-wide statements, since it’s measured when resources actually leave.

Maya Collins: For all you accounting students out there—don’t mix up expenditures with expenses! I did this constantly during my first internship. Expenditures only show up when actual money leaves the fund, like, when you finally pay that invoice for new library books or equipment, not just when you order them.

David Miller: Plus, you see all those revenue categories—property taxes, sales taxes, fines. That “other financing sources” line? That’s for things like interfund transfers or proceeds of debt—not really revenue in the classic sense, but money moving into the fund all the same.

Maya Collins: There’s also “other financing uses”—so sending money out to another fund, not an actual expenditure for buying stuff, but definitely important. Oh, and fund balances! That's a big one. You end up with a fund balance after all the activity for the year—starting balance, plus revenues, minus expenditures, add any incoming or outgoing transfers. It’s basically the pot of money left at the end of the year.

David Miller: And there's that balance sheet piece, too. Remember, in fund statements, you only account for current financial resources, so assets plus deferred outflows, minus liabilities and deferred inflows equals fund balance. Those Dir and Dor pieces—deferred inflows and outflows—can sound like alphabet soup, but they’re just timing differences. For example, property taxes received before you’re allowed to spend them show up as deferred inflows. They don't beef up the fund balance until the right fiscal year.

Maya Collins: Totally! I still remember wrestling with this in my first really big example—Westover Village, anyone? I had these selected account balances, and had to see how the different revenue, expenditure, and fund balance pieces all fit. As tedious as it felt, following the format helped me see that flow: what comes in, what goes out, what’s left. And honestly, it helped me avoid some classic student mistakes, like thinking a prepaid revenue automatically made the fund balance bigger.

David Miller: Yeah, fund accounting is kind of a language of its own, especially when you stack it up against the government-wide statements. But getting these mechanics right is so critical for transparency—and for making sure resources are used as intended. And if you ever have to walk a stakeholder or auditor through the numbers, it pays to understand where things get deferred or classified. Makes those meetings a heck of a lot shorter.

Budgetary Accounting, Appropriations, and Encumbrances

David Miller: So, Maya, we’ve dug into what happens after the money starts moving, but let’s rewind to the very beginning: budgets. In the government world, budgets aren’t just wish lists—they’re legally binding, and budgetary accounts are key to making sure nobody spends more than they’re allowed to.

Maya Collins: Yes! This is where all those extra accounts come in—estimated revenues, appropriations, encumbrances. You usually see these in the general fund or other funds that are legally required to have a budget. Every year, the government adopts its budget, which kicks off a series of journal entries to record those estimated revenues and appropriations right at the start.

David Miller: I’m thinking of that good ol’ Town of Willingdon example—let’s say, they budgeted $16.65 million in estimated revenues, with appropriations of $16.6 million. There’d be a general ledger entry debiting estimated revenues and crediting the budgetary fund balance, and then a separate credit entry for appropriations. It’s double-entry, but totally different from “ordinary” accounting.

Maya Collins: Right, and once the budget’s in place, every purchase order or contract that gets approved is an “encumbrance”—a promise to spend, not an actual outflow yet. So you debit encumbrances, credit encumbrances outstanding, and track all this using the subsidiary ledger to keep an eye on each department’s available balance.

David Miller: Here’s where things get messy if you’re not careful. I actually uncovered a case in my compliance days—city’s Public Safety department kept bypassing the encumbrance process. No record of commitments meant their appropriations always looked “unused,” so they kept spending, not realizing they'd overspent by several thousand dollars. The audit at year-end? Brutal. Ended up freezing hiring until it sorted out. That’s why, after a purchase order is issued and encumbrance recorded, you have to reverse the encumbrance entry and record the expenditure when goods or services are actually received. Encumbrances are your “warning track”—they let everyone know what’s spoken for, even if the check hasn’t cleared.

Maya Collins: Oh, I love that analogy—like the warning track in baseball; you know you’re close to the wall before you smack into it. That’s exactly how encumbrances are supposed to keep spending in check. For students, be sure to practice those journal entries where you issue a purchase order, then make partial payments, and finally reverse encumbrances and record the final expenditure. That City of Greenville supplies order we looked at? Perfect practice, with different amounts received and paid over time—it really helps you see the full lifecycle of an appropriation, an encumbrance, and an actual expenditure.

David Miller: Yeah, and don’t forget—at the end of the year, budgetary accounts mostly get reversed, except for those encumbrances. They stick around, since governments plan to honor those outstanding commitments, and you’ll see them disclosed in the notes rather than the main financial statements. It’s all about making sure no one games the system or overspends.

Maya Collins: And, just a quick quiz for our listeners—what budgetary account doesn’t affect the General Fund’s budgetary fund balance? The answer is encumbrances! They’re a commitment, not an immediate outflow. Hold onto that—trust me, your future self will thank you.

David Miller: Love that. Alright, folks, that’s all for this episode on demystifying government operating statements. We hope it helped you see these statements as the practical tools they really are, not just abstract forms.

Maya Collins: Thanks for hanging out with us. Next time we’ll dive into some more hands-on reporting topics, so don’t forget to subscribe and stay curious!

David Miller: Always a pleasure, Maya—take care everyone, and see you next time.

Maya Collins: Bye, David! Bye, everyone!