A city's General Fund lends $500,000 to the Water Enterprise Fund. On the fund financial statements, both funds show the receivable and payable. On the government-wide statement of net position, should that $500,000 appear twice, or disappear entirely? The answer depends on whether both funds sit within governmental activities, within business-type activities, or straddle the two columns. That distinction drives every interfund elimination the exam tests.
AICPA Representative Tasks (verbatim). "Prepare eliminations of interfund activity in the government-wide financial statements of state and local governments." "Prepare journal entries to recognize interfund activity within state and local governments."
GASB Statement No. 34 classifies interfund activity into four mutually exclusive categories. The exam expects you to identify which category applies and then apply the correct accounting treatment.
KEY: Reimbursements never appear as interfund activity. The paying fund reduces its expenditure or expense; the reimbursing fund records the expenditure or expense. The exam will offer a trap answer showing "due to/due from" for a reimbursement. Reject it.
Common mistakes
- Recording reimbursements as interfund loans. Reimbursements are not reported as interfund activity. The reimbursing fund records the expenditure directly; the fund that initially paid reverses its expenditure. No "due from/due to" accounts appear.
- Eliminating interfund services provided at external prices. When an internal service fund charges other funds at rates approximating market prices, the transaction mirrors an external exchange. GASB generally does not require elimination, the revenue and expense remain in the government-wide statements.
- Failing to reserve nonspendable fund balance for long-term advances. When a governmental fund makes a noncurrent advance to another fund, the lending fund must report nonspendable fund balance equal to the advance. The receivable is not available for current appropriation.
Bottom line
- Four categories of interfund activity: loans/advances, services provided and used, transfers, and reimbursements, each with distinct journal entry treatment.
- Interfund loans create receivables and payables; transfers create "transfers in" and "transfers out" with no expectation of repayment.
- Interfund loans use due from/due to for current amounts and advance from/advance to for noncurrent amounts; noncurrent advances require nonspendable fund balance in governmental funds.
- Transfers appear as other financing sources and uses on the governmental fund operating statement and must net to zero across all funds.
Exam shortcut
When the exam describes a flow of resources and asks for the journal entry, ask: is repayment expected? If yes, it is a loan, record due from/due to. If no, it is a transfer, record transfer in/transfer out. Reimbursements are the edge case: they reverse an incorrect initial entry and create no interfund accounts. For government-wide eliminations, draw a two-column diagram (governmental | business-type) and place each fund.
The full lesson (about 2,885 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.C5
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