Overview:
Fund balance can simply be referred to as the difference between assets and liabilities in a government fund. The governmental funds account for the tax-supported activities of a given government. It comprises resources that are used by the government to meet their day-to-day expenses. It includes the following reserves, which include the following:
- The general fund – this is the fund where the government accounts for everything that is not reported in another fund.
- Special revenue fund – this is the fund that is used for reporting specific revenue sources that are limited to being used for a particular purpose.
- Debt service fund – this is the fund that is used for purposes of repayment of debt.
- Capital project fund – this fund tracks the accumulation and the use of revenue utilized for constructing, acquiring, as well as rehabilitating capital assets.
- Permanent funds – this is the fund that is used where governments report principal amounts that are restricted for a particular purpose.
In financial reporting, the term fund balance is referred to describe the net position of the governmental funds that are calculated in accordance with the acceptable accounting rules.
Types of Fund Balance
Fund balance is mostly reported in two components, restricted and unrestricted. In the case of restricted fund balance, the amount disclosed cannot be used for any other purpose other than the resources designated for the particular purpose.
In other words, those particular resources cannot be spent elsewhere. Restricted fund balance also includes the nonexpendable part of the balance sheet. This includes resources that can be invested, but not spent in the form of a restricted fund balance.
Alternatively, a portion of the fund balance that is not restricted for any particular cause is referred to as unrestricted fund balance. This is also referred to as a debt service fund, which can be used to pay any outstanding debt. It represents the resources that are spent on any purpose of the fund they are reported in. An unrestricted fund balance that is placed in the general fund can be used for any purpose at all.
What are the 5 Classifications of Fund Balance?
Based on the two broader categories of fund balances mentioned above, it can be seen that there are 5 further classifications of the fund balance:
- Non-spendable fund balance: This is the fund balance that is reserved, not to be spent. This amount can be invested, but it cannot be spent altogether.
- Restricted fund balance: This fund balance is reserved for a very specific cause. This implies that the amount in this particular balance is reserved for a given cause, and therefore, it cannot be used for any other cause.
- Committed fund balance: The committed fund balance implies that organizations have ensured that these resources are specifically designated, and put aside for a specific cause. Therefore, these funds cannot be used for any other purpose, and hence, it is imperative for organizations to realize that these funds are not supposed to be used elsewhere.
- Assigned fund balance: Assigned fund balance, just like restricted fund balance, is a reserve that is kept and maintained for a particular cause. The expense however, has not yet been incurred, and therefore, the amount lies in the respective fund only. For example, the government might choose to finance a housing project. The amount, however, has not yet been spent, and therefore, it is considered to be categorized as assigned fund balance.
- Unassigned fund balance: Unassigned fund balance is also referred to as the fund balance that is reserved, but has not yet been assigned for any particular cause.
What is Unrestricted Fund Balance? Definition and Explanation?
Unrestricted fund balance is referred to as the portion of the total fund balance that is not reserved for any specific use. An unrestricted fund balance that is available in the general fund is considered to be viewed under the rating agencies, as well as finance professionals as an indicator of the financial health of the company.
As a general rule, governments mostly maintain unrestricted fund balance equivalent to two months of revenue or 16.7 percent.
Any resources that are present in a fund other than the general fund are supposed to be used for any purpose behind the fund, or however, the government chooses to utilize them. Any given portion of the fund balance that comes without any restrictions on how this amount is supposed to be spent is categorized as an unrestricted fund balance.
Within unrestricted funds, there are several different types that are categorized as such. For example, if a government has an unrestricted fund balance in a debt service fund, that particular amount can be used to service any liability that the company has. Alternatively, if the company has an amount in the general fund, then that amount can be used for any expense that the company might want to honor.
Therefore, when categorizing funds, it is important to understand the underlying implications of an unrestricted fund balance of the country. The implications of unrestricted fund balance and what it really means are covered in the next section.
Implications and Analysis of Unrestricted Fund Balance
Unrestricted fund balance is the money that is set aside by the government without any specific cause. Given the fact that governments have numerous different obligations to fulfill, having money set aside for an unprecedented cause is always a healthy sign. This is because it means that the government has spare money to put aside in the first place. This can only happen if the government has a surplus of funds – i.e. an excess of revenue over expenses.
Hence, this justifies the attempt undertaken by governments to ensure that they maintain a specific amount for any unforeseen circumstances. It just mitigates the risk of default, and inability to meet an unprecedented circumstance when incurred.
However, it must also be noted that in the case where governments have excess unrestricted fund balances, it might imply that the government is not spending enough, or the government is not investing the fund to generate higher returns.
Difference between cash balance and fund balance
There are numerous differences between cash balance and fund balance. It can be seen that the cash balance represents a summary of all the cash accounts. On the other hand, fund balances represent the total net worth of a given fund. This is the net amount between total assets and liabilities.
The difference between cash balance, and fund balance is the underlying liquidity present in a given situation. Factually, it can be seen that cash balance involves liquid resources, whereas the fund balances mostly comprise both, cash, as well as non-cash reserves within the government.