Permanent Fund – Definition, Example, And How does Permanent Fund work?

Definition:

Government budgeting and accounting are slightly different from the general accounting practices for private organizations. In this regard, it is rudimentary to realize the fact that there are numerous different categories of funds that are established in this regard. Permanent Fund is one such category of funds that are created by governments.

The permanent fund can simply be defined as investments or resources that the government is not mostly allowed to use in the form of cash. In other words, these are the resources that cannot be liquidated by the government, and they are supposed to be kept intact for future usages.

However, the return that is generated on those particular investments can be used. The principal amount itself is not usable for the business.

Example:

The classification and usages of permanent funds is explained via the following illustrations:

Example 1

The Alaska Permanent Fund is defined as a constitutionally established permanent fund that is managed by state-owned operations. It was established in 1976. The fund itself has been funded by oil revenues. Every year, there are dividends that are paid to Alaska residents that have stayed in Alaska for the relevant year. In this aspect, a permanent fund is created in order to compensate the residents for the oil extraction, and other related activities that take place in their neighborhood. Hence, this permanent fund stays intact and is managed by a Board of Trustees. The fund itself cannot be liquidated, and it is audited every year to make sure there have been no withdrawals.

Example 2

The city established a permanent fund in order to compensate the residents of the city because of the disruption they face in daily affairs. Since it is a city built on the port, they decided to take a certain percentage of customs from every other city using this port. The permanent fund grows every year. The government has invested this amount into low-yield Treasury bills yielding interest of 2% per annum. The interest generated is then distributed among all households living in the city.

In the examples above, it can be seen that a permanent fund is established as a protection for the residents. Only the returns that are generated from the permanent funds are distributed out as dividends.

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The permanent fund itself is not ever distributed as dividends. In other words, the principal amount is intact whereas the variable returns are then distributed amongst the public.

How does Permanent Fund work?

Permanent Funds are mostly created when there needs to be a special division made for the particular funds. It is essential for organizations to segregate this particular fund, and only disburse the returns that are generated from the investment.

The main premise behind the creation of permanent funds lies in the realms of long-term security of funds. Normally, it is created for projects or for revenues where the revenue generated belongs to the public, but it comes at an expense of disturbing certain people.

Therefore, this specific fund is created so that the revenue from the major activity is kept intact, whereas the affected people are compensated via the variable returns generated.

The reason why permanent funds are used is mainly because of the fact that governments want to keep their funds intact, thereby ensuring that they are invested somewhere.

There is no apparent urgency of those funds, and hence they are parked in an investment vehicle that would not only secure the stated investment but would also generate some degree of return that would be positive from the perspective of the government and the citizens.

Journal Entries for a Permanent Fund

Permanent Fund is managed in a similar manner as other funds normally are managed. Mostly, these funds involve two main components: Incoming Revenues (both the principal and the interest), and Dividend Payouts.

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In order to record the incoming principal to a fund, the following journal entry is made:

ParticularsDebit Credit
Bankxxx 
Permanent Fund (Principal) xxx

Subsequently, when an investment is made from the principal to the investment agency, the following journal entry is made:

ParticularsDebit Credit
Investmentsxxx 
Bankxxx

In the same manner, when return is received on the investment amount, the following journal entry is made:

ParticularsDebitCredit
Bank (Return on Investment)xxx 
Revenue Earned from Investment xxx

Lastly, when this dividend is paid out to the shareholders (or the people between which the return is supposed to be shared), the following journal entry is made:

ParticularsDebit Credit
 
Dividend Paidxxx 
Bank xxx
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