Governmental Fund Accounting Under GASB: Core Concepts and MCQs
By SimplyCPA · 11 October 2026
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- Standard-setter: State and local governments follow the Governmental Accounting Standards Board (GASB), not the FASB.
- Three fund categories: Governmental (general, special revenue, capital projects, debt service, permanent), proprietary (enterprise, internal service) and fiduciary (trusts and custodial funds).
- Governmental funds: Current financial resources focus, modified accrual basis — revenue when measurable and available; expenditures when the liability is incurred.
- Fund balance (GASB 54): Nonspendable, restricted, committed, assigned and unassigned.
- New reporting model: GASB 103 applies from fiscal years beginning after June 15, 2025 — restructured MD&A, separate unusual or infrequent items, and defined operating income for proprietary funds.
Why governments are different
Governments raise money through taxes rather than sales, and they're accountable for spending it as the legislature authorised. So GASB standards focus on accountability: showing whether resources were raised and spent in line with legal and budgetary limits. On the CPA Exam, state and local government accounting is tested in FAR and in more depth in the BAR Discipline.
The fund structure
| Category | Funds | Measurement focus / basis |
|---|---|---|
| Governmental | General, special revenue, capital projects, debt service, permanent | Current financial resources / modified accrual |
| Proprietary | Enterprise (services to the public for a fee, such as water utilities), internal service (services to other departments) | Economic resources / full accrual |
| Fiduciary | Pension and other employee benefit trust, investment trust, private-purpose trust, custodial | Economic resources / full accrual |
Memory aid for governmental funds: GRSPP — General, special Revenue, capital Projects, debt Service, Permanent.
Modified accrual in practice
- Revenues are recognised when measurable and available — collectible within the current period or soon enough after to pay current liabilities. For property taxes, "available" means collected within 60 days after year-end.
- Expenditures (not "expenses") are recognised when the liability is incurred. Exception: principal and interest on general long-term debt are recognised when due.
- Capital assets are expenditures when bought — they're not capitalised or depreciated in governmental funds.
- Long-term debt is not a fund liability. Bond proceeds are an other financing source.
Fund balance classifications (GASB 54)
- Nonspendable — not in spendable form (inventory, prepaids) or legally required to be kept intact (permanent fund principal).
- Restricted — constrained by external parties (creditors, grantors, other governments) or by law.
- Committed — constrained by formal action of the government's highest decision-making authority.
- Assigned — intended for a specific purpose, by the governing body or an official it delegates to.
- Unassigned — the residual. Only the general fund reports positive unassigned fund balance.
What GASB 103 changes
GASB Statement No. 103, Financial Reporting Model Improvements, is effective for fiscal years beginning after June 15, 2025. Key changes:
- Management's discussion and analysis (MD&A) follows five defined sections and must explain why amounts changed, not just by how much.
- Unusual or infrequent items are reported separately.
- Proprietary funds present a defined operating income (loss) subtotal and a separate line for noncapital subsidies.
- Information about each major component unit must be presented.
- Budgetary comparison information is presented as required supplementary information.
Practice questions
1. A city's general fund buys a fire truck for $400,000 cash. In the general fund, the purchase is recorded as:
(A) a capital asset (B) an expenditure (C) an expense (D) a deferred outflow
Answer: B. Governmental funds record capital outlays as expenditures. The truck is capitalised and depreciated only in the government-wide statements.
2. Which fund accounts for resources that must be held intact, with only the earnings used to support the government's programmes?
(A) Special revenue (B) Private-purpose trust (C) Permanent (D) Debt service
Answer: C. If the earnings benefit individuals or other organisations rather than the government's own programmes, it would be a private-purpose trust.
3. Property taxes levied for the current year are expected to be collected as follows: $900,000 during the year, $40,000 within 60 days after year-end and $60,000 later. How much property tax revenue does the general fund recognise this year?
(A) $900,000 (B) $940,000 (C) $1,000,000 (D) $960,000
Answer: B. Only amounts collected during the year or within 60 days after are "available". The remaining $60,000 is a deferred inflow of resources.
Continue with government-wide vs fund statements and budgetary accounting and encumbrances, or study the full FAR governmental accounting topic.