3 Accounting
3.1 Accounting Principles and Internal Control
3.1.10 Accounting Principles
3.1.10.10 The following principles are basic rules of accounting and financial reporting for cash basis cities, counties and special purpose districts.
3.1.10. 20 Common terminology and classification
A common terminology and classification should be used consistently throughout the budget, the accounts, and the financial reports of each fund. The notes to the financial statements should also include common terminology and classification.
3.1.10.30 Revenue, expenditure and transfer classifications
Governments should download the chart of accounts for the appropriate basis of accounting and government type each year by using the BARS Account Export.
Governmental and proprietary funds
Revenues should be classified by fund and by the sources indicated in the government specific chart of accounts.
Expenditures should be classified by fund and by the appropriate functional, capital, debt, or other uses indicated in the government specific chart of accounts.
Interfund transfers, proceeds from debt issuances and proceeds from capital asset disposition should be classified separately from fund revenues and expenditures as indicated in the government specific chart of accounts.
Fiduciary fund
Additions and deductions should be by fund and the sources and uses of resources as indicated in the government specific chart of accounts.
3.1.7.40 Basis of accounting
Basis of accounting refers to when revenues and expenditures are recognized and reported in the financial statements.
Revenues are recognized only when cash is received, and expenditures are recognized when chargeable against the report year’s budget appropriations as required by state law. This generally results in revenues being recognized when delivered to the government or government’s agent and expenditures being recognized when paid. Warrants and checks are considered paid when issued. An exception to expenditure recognition would be during any open period after the close of the fiscal year when expenditures can be charged against the previous period for claims incurred in the previous period. Open periods are required by statute for cities (RCW 35.33.151) and RCW 35A.33.150) and allowed for counties (RCW 36.40.200). Special purpose districts which use the county or a city as their treasurer may use the same open period as their treasurer. If a special purpose district acts as its own treasurer, no open period is allowed by statute.
Revenues and expenditures should be reported at gross amounts by account and not netted against each other.
Revenues and expenditures should be recognized for all receipts and payments of a government’s resources, including those where the cash is handled by an agent (such as a bank, underwriter, escrow, etc.) on behalf of the government rather than handled directly by the local government. For example, debt proceeds wired directly to an escrow account, payments by the State Treasurer’s Office to vendors for items purchased with LOCAL resources, etc.
Interest earned on investments may be recognized at cost, amortized cost or fair value, in accordance with the government’s disclosed accounting policy.
In addition, revenue and expenditures should also be recognized when the government agrees to forgo receiving earned revenue in exchange for reduction of expenses (offsetting agreement) or receipt of an asset (e.g., acquiring an asset in exchange for reduced permit fees, etc.). The government should also recognize transactions in which cash may have been exchanged by third parties on behalf of the government (e.g., bond issuances and bond retirement transactions, loan advances deposited and held by a trustee). In such cases, the transactions are still reportable since the government experienced a transaction of economic or legal substance that would have resulted in cash inflows and outflows into the government’s accounts if the agreement was not in place or third party had not handled the transaction on behalf of the government. The transaction should be recorded as if the cash was received and expended in order to reflect the legal transaction.
This basis results in no reported assets other than cash and investments and no reported liabilities. For example, purchases of capital assets are expensed during the year of acquisition without any capitalization of capital assets or allocation of depreciation expense. However, liabilities should be reported on Schedule 09 and in the notes in financial statements.
3.1.10.50 Interim and annual financial reports
a. Appropriate interim financial statements and reports of operating results and other pertinent information should be prepared to facilitate management control of financial operations, legislative oversight, and, where necessary or desired, for external reporting purposes. (examples of required interim reports by RCW 35.33.141, RCW 35A.33.140 and RCW 36.40.210)
b. Annual reporting requirements are prescribed by the State Auditor’s Office. See Reporting Requirements and Filing Instructions for Cities and Counties or Reporting Requirements and Filing Instructions for Special Purpose Districts for details.
3.1.10.60 Accounting changes and error corrections - definitions
Accounting changes and error corrections occur in governments in three separate situations, as listed below.
Change in accounting principle:
This occurs when switching from one generally accepted accounting principle to another or adopting a new standard as required by the BARS Manual.
Change to or within the financial reporting entity:
a. A government opens or closes a fund and needs to move all related financial activity
b. A change in reporting at the fund level. For example:
1) A government reports a fiduciary fund and moves that activity to a fund of the primary government, or vice versa.
2) A special revenue fund no longer qualifies to be a special revenue fund and will be rolled into the general fund, or vice versa.
3) A proprietary fund that was reported separately and will now be reported as part of another proprietary fund.
Error correction:
An error occurs when any of the following are identified as of the previous financial statement date:
a. Mathematical mistake
b. Mistake in the application of accounting principles
c. Oversight or misuse of facts that existed at the time the financial statements were issued about conditions that existed as of the financial statement date is identified
d. Amounts that are refunded to the government (or fund) that are material from prior year financial activity
3.1.10.70 Accounting changes and error corrections - accounting and reporting
Accounting and reporting for each change and error correction category is discussed below. If an entity is required to submit notes, a note disclosure is required to be presented with each accounting change and/or error correction that occurs during the fiscal year.
Change in accounting principle:
Governments that implement or adopt a new accounting standard should record activity as if the accounting principle was in place as of the beginning of the fiscal year. BARS code 388.50.00 or 588.50.00 should be used to restate the beginning balance as of the beginning of the year.
Change to or within the financial reporting entity:
Governments that undergo a change to or within the reporting entity should record the activity as if the change occurred as of the beginning of the fiscal year. BARS code 388.40.00 or 588.40.00 should be used to adjust the beginning balance as of the beginning of the year.
For example, if a government has opened a new fund in the fiscal year, the change in the would reflect on the financial statement as if the fund had opened on first day of the fiscal year. All activity for the year would then be captured in the appropriate fund.
Error correction:
Governments required to correct an error should record the cumulative effect of the error in the fiscal year that the error is identified. BARS code 388.30.00 or 588.30.00 should be used to restate the beginning balance as of the beginning of the fiscal year.
For example, one fund incorrectly recognized an expenditure that should have been recognized by another fund which was identified in a subsequent fiscal year. As a result, the government is required to record an error correction to reflect the expenditure in the responsible fund in the fiscal year that the error was identified. In the fund that originally recognized the expenditure, the government should record the amount of the expenditure as a credit to BARS code 388.30.00 and should record the same amount in the fund that should have recognized the expenditure as a debit to BARS code 588.30.00