Expenditures and Expenses

State and local governments apply Governmental Accounting Standards Board (GASB) guidance to distinguish expenditures from expenses. An expenditure measures a decrease in current financial resources, while an expense measures an economic cost attributable to the reporting period.

The reporting perspective determines the accounting basis.

• Governmental fund financial statements use the current-financial-resources measurement focus and modified accrual basis. Expenditures appear in the statement of revenues, expenditures and changes in fund balances.
• Government-wide financial statements use the economic-resources measurement focus and accrual basis. Expenses appear in the statement of activities, with governmental activities presented separately from business-type activities.
• Proprietary fund financial statements also use economic resources and accrual. Their expenses appear in the statement of revenues, expenses and changes in fund net position.
• Fiduciary fund financial statements use economic resources and accrual, but fiduciary activities remain outside government-wide financial statements.

To calculate expenditures recognized, the preparer identifies the governmental fund recognition rule. To calculate expenses recognized, the preparer determines current-period consumption and changes in obligations under accrual accounting.

Common mistakes

• Cash-only expenditure calculation. Example 1 cash payments total $\$90{,}000 + \$12{,}000 + \$16{,}000 + \$12{,}000 = \$130{,}000$, but fund expenditures are $133,000 after applying payable and prepaid recognition.
• All purchased supplies expensed. Using purchases for Example 1 accrual supplies expense overstates cost by $\$20{,}000 - \$17{,}000 = \$3{,}000$, the inventory increase.
• Principal included in expense. Adding Example 2's principal expenditures to accrual expenses produces the incorrect $\$80{,}000 + \$66{,}500 = \$146{,}500$.

Bottom line

• Governmental funds report expenditures under modified accrual; government-wide and proprietary fund statements report expenses under accrual.
• Ordinary incurred operating payables accrue even when unpaid, while purchase orders and encumbrances alone ordinarily create no expenditure or expense.
• Supplies and prepayments follow the governmental fund's purchases or consumption policy; accrual expense follows consumption or expiration.
• Capital outlay becomes a fund expenditure, while accrual reporting capitalizes qualifying assets and recognizes applicable depreciation or amortization.

Exam shortcut

The preparer identifies the statement and basis before calculating, then classifies each amount as an operating cost, asset acquisition, principal payment or expense-related obligation. The preparer separates receipt, service, payment and maturity dates. January debt service requires verification of the dedicated resources' actual fund location and the one-month ceiling before early-year recognition.

The full lesson (about 4,636 words, 31 min read) adds 3 worked examples, all 5 common mistakes, a self-check, free in the app.

Learning objectives

• III.C7

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