Government projects often require rigorous planning and budgeting. In this regard, it is important to consider the fact that these projects require a significant amount of funds that need to be planned well in advance. Therefore, it is essential for organizations to account for these changes, so that they are able to avoid any unprecedented circumstance later on during the course of the project.
In order to effectively plan and execute the required projects, a capital projects fund is drawn. The main premise of the capital projects fund is to enable proper record keeping and transaction for acquisitions, as well as for other capital assets.
Therefore, it can be seen that capital projects fund is used in governmental accounting in order to track the financial resources that are used to acquire or construct a major capital asset. Given the fact that it is considered to be a substantial investment, it needs to be recorded properly, so that there are no chances of any kind of fraud or embezzlement. These funds are normally temporary in nature, and once the asset or the project gets completed, the fund stands terminated.
The example of capital fund, and how it is maintained by organizations is explained via the following illustration.
The City District Government is entrusted with the responsibility of ensuring that all the roads of the city are duly maintained before the monsoon season. In this regard, they got funds amounting to $300,000 from the Federal Government and a couple of other agencies.
They planned to utilize this budget in the road construction project, by outsourcing this to a construction contractor via a tender. The tender adverts and admin costs amounted to $1000. Additionally, the constructor agreed on the price of $250,000. The City District Government then decided to utilize the remaining funds for signboards, as well as for trees alongside the new roads.
The example provided above is a classic example of a Capital Project Fund, and how Capital Fund Projects are created in order to record transactions and records for a specific particular project. After the project (the road construction) is completed, the account is closed. This is further included in the following manner.
Capital Projects Fund
|Funds Received from Federal||$300,000|
In order to record the journal entries, for a Capital Fund Project, the accounting treatment is similar to that of a normal revenue and expense journal. In order to record the transaction where the funds are received, the following journal entry is made.
This is basically to record the incoming of funds. From the perspective of the organization, it is treated as revenue incoming. Therefore, the accounting treatment requires the bank to be debited and the revenue (funds received) to be credited.
On the other hand, when these funds are utilized or duly expensed, the following journal entry is made:
The journal entry above shows how expenses are recorded in the form of journal entries. The main journal entry that is recorded when recording Capital Projects Fund is as follows:
|Capital Project Fund||xxx|
Purpose of Capital Project Fund
Therefore, Capital Project Fund can be termed as one of the essential fund management techniques today. There are numerous reasons as to why Capital Project Fund is managed:
- Capital Project Fund accurately records the incoming and outgoing transactions. It is important to note down all the expenses, to properly show how the fund was utilized within the capital process.
- Capital Project Fund helps in the audit process. Even though Capital Project Fund is for a special designated purpose, external auditors still need to see how expenses were distributed across the course of time. In this regard, it becomes essential to ensure that all the relevant invoices are intact. Capital Project Fund reconciliation is an important part of the overall audit of the organization.
- Capital Project Fund is important because it helps to segregate normal procedural tasks from special tasks. For government-run organizations, there is a separate fund for generic activities. On the other hand, there is a specific fund that is directed towards these special projects. It is a good idea to separate both of them in order to avoid any confusion.
- Capital Project Funds also help in budgeting and future planning for organizations and special projects.