Lesson: Governmental Revenues - Debt Service Fund

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo, CPA, dives into the financial intricacies of debt service funds within governmental accounting. He illustrates the process of managing revenues and expenses through comprehensive journal entries, focusing on transfers and the role of debt service funds as the central hub for debt-related financial activity. Nick simplifies the intricate relationships between the debt service and capital projects funds, and how they work together to manage borrowed funds used in large-scale projects. As he breaks down the transactions between the general fund, debt service fund, and capital projects fund, he ensures that the intricate web of inter-fund transfers is made clear. Whether discussing cash inflows from bond issues or investment income, Nick demystifies the accounting for these critical governmental functions with an engaging walkthrough of relevant journal entries.

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Well, what about for our debt service and capital projects funds? These next slides will be transitioning between both the debt service and capital projects funds as they are closely related and operate in conjunction with each other. Simply put, even in corporate accounting, how do you build things? You borrow money, you borrow large chunks of money and that's how you construct your projects. That's the reason for our close relationship.

All right, we're diving right into journal entries because these will show us the revenues and expenses. So governmental revenues for the debt service. In this journal entry, the general fund transfers $40,000 of cash to the debt service fund. All right, so we put cash into the debt service fund. So from the perspective of the debt service fund, we debit cash and credit inter-fund transfers from the general fund.

Now let's say a $120,000 premium included in the bonds proceeds was transferred to the debt service fund as required by the bond indenture. So a bunch of different journal entries here. This is now us borrowing money, us issuing municipal bonds. Here's the journal entry to record inter-fund from the capital project fund. So when we issue a bond, well, wouldn't you know, it usually like we debit cash, right?

We debit cash and credit. But in this case we're crediting the inter-fund transfers from the capital projects fund.

All right, now let's say we have $150,000 of interest revenue and that interest revenue was transferred from the capital projects fund as required by a bond indenture. So we'll see this as it says, elaborated on further, later on. What are we going to do with that? Well, here's the journal entry to record inter-fund transfer from the capital projects fund. You're seeing a trend here, right?

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Governmental Accounting: Part 1

Module: 3 Concepts, 29 Lessons

Governmental Assets, Liabilities, Revenues & Expenses Overview and Objectives

1:32

Governmental Fund Structure

1:12

Governmental Revenues - General Fund

1:31

Governmental Expenditures - General Fund