Hey, welcome to VoraPrep Audio. If you're studying for your CGFM exam—the Certified Government Financial Manager—this is for you.
Imagine you're the new finance director for a city. It's time to put together the big annual financial report. You've got the airport's numbers, the police department's vehicle maintenance garage, and the city's employee pension plan. The question is, where does it all go? If you put the airport in the wrong bucket, its finances get reported using the wrong rules, and suddenly your city's entire financial picture is distorted. An auditor will catch that. Wrong fund, wrong numbers. Simple as that. That’s why understanding fund accounting is so critical, not just for the exam, but for the real job.
So let’s get into it. State and local governments use something called fund accounting. Think of it like using different envelopes for your money. You have one for groceries and bills, one for your side business, and maybe you're holding one for your book club's treasury. You wouldn't mix them up, right? A government can't either. Each fund is its own little self-balancing accounting world, created to make sure money is spent according to the law.
The Governmental Accounting Standards Board, or GASB, sets the rules here. And under their big rule, GASB Statement 34, all those funds get sorted into three main categories: Governmental, Proprietary, and Fiduciary. Let’s walk through each one.
First up, Governmental Funds. This is the core of what you think of as "government." Police, fire, parks, the mayor's office… all the stuff paid for by taxes and grants. The mnemonic to remember the types of governmental funds is GRaSPP. G-R-a-S-P-P.
The key to understanding these funds is their mindset. They are laser-focused on the short term. Their measurement focus is on current financial resources. That just means they care about cash and things that will become cash soon, to pay this year's bills. Because of this short-term view, they use a special basis of accounting called modified accrual. It’s a bit of a hybrid. You recognize expenditures when the bill comes in, more or less. But for revenue, it's different. You can only count revenue when it's both measurable AND available. Available is the magic word. It means you have the cash now or you're going to get it very soon—usually within 60 days of year-end. If property taxes are due but you know you won’t collect them for six months, you can't count that as revenue for this year. Not available.
So, let's look inside that GRaSPP mnemonic. The G is for the General Fund. This is the main operating fund. If a transaction doesn't fit anywhere else, it probably goes here. It’s the government's checking account for day-to-day stuff. The R is for Special Revenue Funds. The name says it all. You use this when a specific revenue source, like a special gas tax, is legally required to be spent on a specific thing, like road repairs. The money is earmarked. The S is for Debt Service Funds. When a government issues bonds to build a school, it needs a place to stash the money it's setting aside to pay back the principal and interest. That place is the Debt Service Fund. The P is for Capital Projects Funds. This is for building or buying the big stuff—a new courthouse, a bridge, a major park renovation. It tracks the money for that specific project. And the last P is for Permanent Funds. This is like a government endowment. The rule is you can't spend the original money, the principal. You can only use the investment earnings from it to support a government program, like maintaining a public cemetery.
Okay, that’s the governmental bucket. Now for the second category: Proprietary Funds. The key word here is "proprietary," like a proprietor, a business owner. These funds are for government activities that are run like businesses. They charge fees for services. And because they're run like a business, they think like a business.
Their measurement focus isn't just on current cash. It’s on economic resources. That means *everything*—cash, buildings, equipment, long-term debt. It’s the whole picture. And their basis of accounting is full accrual, just like a regular company. You recognize revenue when you earn it, and expenses when you incur them. No "60-day available" rule here.
There are two types of proprietary funds, and the mnemonic is simple: SE. S-E. The S stands for Internal Service Funds. The key word is *internal*. This is a business the government runs to serve *itself*. Remember that police vehicle maintenance garage from our example? It services the city's own police cars and sanitation trucks, and it bills those departments for the work. That’s a classic Internal Service Fund.
The E is for Enterprise Funds. This is when the government runs a business that serves the public. The public pays fees. The municipal airport is the perfect example. It charges airlines landing fees and passengers for parking. A city water utility or a public transit system are also Enterprise Funds. The test is whether the fees are intended to cover the costs of the service.
So, Internal Service is for internal customers. Enterprise is for the external public. That's a huge distinction on the exam.
The third and final category is Fiduciary Funds. The word "fiduciary" comes from the Latin word for trust. That's exactly what these are. This is the government holding money *in trust* for someone else—individuals, other organizations, or other governments. This is not the government's money. They can't use it to pave roads or pay firefighters. Because they’re just a custodian, they have to be very careful with the accounting. Like Proprietary Funds, they use the economic resources focus and full accrual accounting.
The mnemonic here, which reflects some newer GASB rules, is CIPPOE. C-I-P-P-O-E. The C is for Custodial Funds. This is the new name for what used to be called Agency Funds. A common example is a county collecting property taxes for itself, the local school district, and the library district all at once. The county is just holding the school's and library's money before passing it along. That's a custodial role. The I is for Investment Trust Funds. This is when a government pools investments for other, smaller governments. Think of a state government running a big investment pool where local towns can invest their money. The state is just managing it on their behalf. The P is for Pension Trust Funds. This is a big one. It's the fund that holds all the assets for employee retirement plans and other benefits like retiree healthcare, known as OPEB. The government is holding and investing this money for the future benefit of its employees. And the other P is for Private-Purpose Trust Funds. This is for all other trust arrangements that benefit specific individuals, private organizations, or other governments. A scholarship fund for local students, established by a donor's will and managed by the city, would go here.
So how do you decide where an activity goes? It’s a pretty logical flow. First, ask: who is this activity for? Is the government just holding assets for others? If yes, it's a Fiduciary Fund. Done. If no, ask the next question: is the government charging a fee for a service, like a business? If yes, it’s a Proprietary Fund. Then you just have to figure out if it's for internal customers (Internal Service) or the public (Enterprise). And if the answer to both of those is no, then it’s a core government function, and it belongs in one of the Governmental Funds.
Okay, let’s try a quick knowledge check. Imagine you're taking the exam. A county operates a central printing shop. It provides services *exclusively* to its various county departments, and it bills them to cover its costs. What fund should be used, and what's the basis of accounting? Is it A) Enterprise Fund, Full Accrual... B) Internal Service Fund, Modified Accrual... C) Internal Service Fund, Full Accrual... or D) Special Revenue Fund, Modified Accrual?
Think about it. The shop serves other departments *within the same government*. That's the key. That makes it an Internal Service Fund. And what kind of fund is that? It’s a Proprietary Fund. And all Proprietary Funds use full accrual accounting. So the answer is C, Internal Service Fund, Full Accrual. It’s not an Enterprise Fund because it doesn't serve the public. And it's not a Governmental Fund, so modified accrual is out.
Let’s do one more. The City of Evergreen levies property taxes. Part of that tax is legally restricted to repay some bonds. Separately, the city collects taxes for other local governments and just passes the money along. What are the two fund types here?
The money to repay bonds is for general long-term debt. That goes in a Debt Service Fund. That's a governmental fund. The money the city is just collecting for other governments… that’s not its money. It’s acting as a custodian. So that goes in a Custodial Fund, which is a fiduciary fund. So the right answer is Debt Service Fund and Custodial Fund.
One last thing to keep in your back pocket. All this talk about modified accrual for Governmental Funds... it’s true for the fund-level statements. But when the government creates its big, consolidated, government-wide financial statements—which look a lot like a Fortune 500 company's annual report—everything gets converted to full accrual. Those statements are meant to show the big picture, the long-term operational health of the government. So they use that economic resources focus and full accrual basis for everything. Don't forget that conversion.
Look, this is one of those foundational topics. If you get the fund types straight, a huge chunk of government accounting will just click into place. If you want more practice on this, VoraPrep is a full exam-prep app. It’s got lessons, thousands of practice questions, and an AI tutor you can talk to, all in one place. You can get started and try it out for free over at Vora Prep dot com.
Alright, that's all for today. Keep up the great work. You've got this.