Chapter 5
Recognizing Expenditures in Governmental Funds

Questions for Review and Discussion

1. Expenditures are decreases in net financial resources whereas expenses are reductions in overall net assets. Expenditures are governmental fund equivalents of expenses. In effect, expenditures are expenses that are determined on the modified rather than the full accrual basis of accounting.

2. Expenditures should be recognized on an accrual basis unless they qualify as one of the exceptions specifically set forth by the GASB. Utility costs are not such an exception and should thereby be recognized as an expenditure in the period in which the utility services are used.

3. Wages and salaries are accounted for on an accrual basis. The change would have no impact on reported expenditures under GAAP. The expenditure would be charged in the year in which the employees provided their services, irrespective of when they are paid.

4. Although governments must accrue the liability for compensated absences, they should report in governmental funds only the portion of the liability expected to be liquidated with expendable available financial resources. Correspondingly, they should charge, as an expenditure in governmental funds, only the amount that would be recorded as a governmental fund liability or paid during the period. This practice reflects the significance of the budget in governmental accounting. The government would have to budget (and levy taxes to pay for) only the amount that will have to be liquidated with expendable available financial resources.

5. Current standards state that “vacation leave and other compensated absences with similar characteristics should be accrued as a liability as the benefits are earned by the employees if both of the [following] conditions are met:

a. The employees’ rights to receive compensation are