A Special Revenue Fund account can simply be defined as an account that the government establishes to collect money that is generally used for a specific project.
The primary rationale behind special revenue funds is to induce a much-needed level of transparency and accountability that the amount is used in the right manner.
In this regard, the main premise behind this special revenue fund is to ensure taxpayers have a clear-cut idea of where and how their tax amount is being spent.
The concept of a special revenue fund is described using the following illustration:
The municipal city government set aside a fund directed toward the flood victims for the city. In this regard, they collected special donations, and the federal government subsequently contributed to the stated fund. In this regard, the government managed to raise $250,000 for the flood victims. They stated that this amount would be utilized to provide shelter and repair the damage caused in the slums. This amount was, therefore, added to the Special Revenue Fund.
The example above shows that the special revenue fund was created to set aside the amount required for the flood victims.
Since this is for a special cause, and the funds had been generated from elsewhere, it is included as a part of the special revenue fund.
How do Special Revenue Funds work?
In general accounting, revenues are mostly recognized when earned and can be estimated with reasonable accuracy.
In this regard, judgment plays an extremely important role because it helps determine the overall materiality involved in the collected revenues.
Special Revenue Funds mostly do not record liabilities and long-term assets. They are directed toward capturing very specific revenue sources.
They are subsequently accumulated across the accounting period, which is then used to separate different accounts for all the respective purposes in this regard.
Therefore, special revenue funds are only created when there is an inherent need to create them because of a specific cause.
Accounting Treatment for Special Revenue Funds
Given that Special Revenue Funds are mostly created to ensure that there is a stringent course of action followed, it can be seen that there are a couple of provisions within the Special Revenue Fund that need to be included for the purpose of recording them correctly.
These provisions are as follows:
- Resources meant to be committed in a special revenue feature imply that the resources are for a specific cause. The contribution towards these revenue-related resources should only be directed towards special revenue funds and not from other miscellaneous proposed activities.
- In the case where the Special Revenue Fund receives funds from other funds administered by the government, they are treated as special revenue in the special revenue fund. They are no longer categorized as revenues in the fund from which the contribution was made.
- Special Revenue Funds are not supposed to account for or keep a record of funds held in trust on behalf of any organization. They are meant to be reserved for a special purpose only.
Journal Entries for Special Revenue Funds
To record Special Revenue Funds, the following Journal Entry is made:
When the fund is created and the amount is credited to the account, the following transaction is made:
|Special Revenue Fund
Subsequently, when expenses are deducted from the Special Revenue Fund, the following transactions are made:
|Expenses – Special Revenue Fund
Importance of Special Revenue Funds
Governments need to record special revenue funds in a proper manner. This is primarily because there is a need to inculcate all revenues for a specific purpose into a separate head.
This ensures that chances of corruption or embezzlement are minimized, and a certain level of transparency is maintained.
Even though in the case of special revenue funds, almost all accountancy principles are intact, it can be seen as a project-based accounting mechanism, where all the respective revenues and expenses for the given year are clubbed together in one place.
The main premise is to club all the respective transactions in one place so that it auditing these particular accounts gets easier over the course of time.