Page 30 - CityofForestHillFY25AdoptedBudget

Accounting and Budgeting Basis and Control

All governmental funds are budgeted and accounted for using a current financial resources
measurement focus. This means, only current assets and liabilities are included on the balance
sheet. Operating revenues of governmental funds present increases (revenues and other
financing sources) and decreases (expenditures and other financing uses) in net current assets.

Proprietary fund types, including enterprise funds (i.e., Water and Sewer, Drainage Utility), are
accounted for on a flow of economic resources measurement focus. All assets and liabilities
associated with the operation of these funds are included on the balance sheet. Fund equity
(assets net of liabilities) is segregated into invested in capital assets, net of related debt and
unrestricted net asset components. Proprietary fund type operating statements present
increases (revenues) and decreases (expenses) in net assets.
Financial information is presented using the modified accrual basis of accounting for all
governmental fund types and agency funds. Under the modified accrual basis of accounting,
revenues are recognized when susceptible to accrual (when they become both measurable and
available). "Measurable" means the amount of the transaction can be determined, and
"available" means the amount is collectible within the current accounting period, or soon enough
thereafter to be used to pay liabilities of the current period. Ad valorem, franchise and sales tax
revenues are recognized under the susceptible to accrual concept, since they are both
measurable and available within 60 days after year end. Licenses and permits, charges for
services (except for water and sewer billings), fines and forfeitures, and miscellaneous revenues
are recorded as revenues when received in cash because they are generally not measurable until
received. Expenditures are recorded when the related fund liability is incurred. Interest on long-
term debt is recorded as a liability when due in the debt service fund for payments to be made
early in the following years.

The accrual basis of accounting is used in Proprietary Fund types, i.e., Enterprise Funds for
financial reporting purposes. Under the full accrual basis of accounting, revenues and expenses
are identified with a specific period of time, and are recorded as incurred, without regard to the
date of receipt or payment of cash. For example, water and wastewater service charges are
customarily recognized as revenues when billed, rather than at the time when the actual
payment of the bill is received, in contrast to license and permit fees, which are recognized as
revenues when payment is received in cash. This method of accounting is used for financial
reporting purpose in the City's comprehensive annual financial report; however, for budget
presentation purposes, working capital is recognized as fund balance. Working capital, rather
than unrestricted net assets, is used to represent fund balance in Enterprise Funds (which is
similar to using the modified accrual basis). Using the working capital approach, depreciation
expense is not budgeted, and capital outlay and debt service principal are budgeted as expenses.
Working capital is generally defined as the difference between current assets and current
liabilities, and provides a more thorough analysis of proprietary fund reserves for budget
purposes than does the presentation of net assets. In addition, budgeting capital outlay as an
expense for budgetary purposes allows the proposed capital purchases to be reviewed and
authorized by City Council.

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