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Accounts Required in a Capital Project Fund

written by: •edited by: Marjory Pilley•updated: 7/1/2011

The aim of a capital project fund is to ensure that the authority or non-profit organization raising funds for a project is accountable for the use of those funds. The accounts set up in a capital project fund must, therefore, clearly show how the funds have been used.

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    Purpose of a Capital Projects Fund

    The accounts in a capital projects fund differ from those found in a normal set of financial statements because they only relate to the purpose for which a capital projects fund is set up. The capital projects fund is set up by a government, local authority or non-profit organization for the purpose of a particular capital project. The purpose of the capital projects fund is accountability to the persons who have provided the funds for the capital project, who may be local taxpayers or the purchasers of bonds in connection with the project. Only certain specified earnings are included in the capital projects fund and only certain capital payments and expenses may be made out of the fund. Certain expenses that may be incurred in the course of a project would need to be made from a general fund rather than the capital projects fund if those expenses are not authorized to be made from the capital projects fund.

    Construction Project The accounts that will appear in the capital projects fund are determined by the regulations under which the capital project is being undertaken. The funds for the project will have been raised from certain groups of investors, such as taxpayers and bondholders, and when the funds are raised the body undertaking the project clarifies the purpose for which the funds will be used. Taxpayers and bondholders will, therefore, expect their funds to be used in the way specified when the funds were raised. The capital projects fund and the accounts set up as part of the fund will serve as a vehicle for accounting to those stakeholders for the way the funds are used. Capital projects fund accounts are, therefore, a way of ensuring that the use of funds for the project is transparent and that the stakeholders in the project may obtain full information on how funds are being used while the project is in progress.

    The type of account set up in the capital projects fund is therefore a reflection of the legal obligations of the body carrying out the project. Where a capital project is financed from a sale of bonds, the purposes for which the funds are raised will be set out for the bond holders and the funds will be used for certain specified categories of expenditure for which accounts will be set up. Similar transparency is necessary where funds are raised by other means such as a special levy.

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    Revenues and Expenditures in the Capital Projects Fund

    A modified accrual basis of accounting is generally used to determine when an entry is made to a particular revenue account. This stricter than normal accrual accounting requires that the revenue be earned, measurable and available before it is recorded in the relevant account. Under normal accrual accounting, funds that are earned and measurable are entered in the appropriate revenue account, but for a capital projects fund the revenue must be actually available for use on the project before it is recorded.

    Capital Project A revenue account is required for investment revenue earned on the funds available to the capital projects fund. As not all of the funds raised would be used immediately, it may be expected that some funds are put on deposit or invested in another way to earn investment returns. These would need to be shown in a separate account and would only be used for the purposes of the capital project. If insurance proceeds are received as a result of damage to property that is part of the project, these would be accounted for in a separate account within the capital projects fund.

    The revenue raised from a bond issue may only be used on certain specific items such as the construction, addition or structural changes to buildings and sites. Certain other improvements to the buildings, such as the installation of systems to improve energy efficiency, might also be permitted as part of the project and accounts would be set up to show this type of expenditure from the capital projects fund. Expenditure on certain initial equipment may also be permitted within strictly regulated limits and this expenditure would also be accounted for as part of the capital project fund expenditure.

    Certain types of projects might be authorized to use funds for a wider range of expenditures, for example a local authority project related to a school might be authorized to spend funds on renewing playing fields, purchasing computer hardware and software or making purchases of furniture or equipment for the school. It might also be possible for initial expenditure on books for a school library to be made from the capital projects fund. This should all be made clear to the taxpayers before the project begins. For example, if the funds are raised by a special levy, the purposes for which funds are raised would be clarified when the levy is announced. The items of expenditure would be accounted for in the capital projects fund under the relevant expense account headings. However, repairs to a building that do not actually add to the existing facilities would normally be paid out of a general fund and would not be included in a capital projects fund account.

    Certain accounts would be set up to record necessary expenses of the project. It may be necessary to find a specialized project manager for carrying out the project and the expenses of hiring the manager would be accounted for in an expense account in the fund. People working or studying in buildings may need to be relocated while a capital project is under way and the cost of hiring additional facilities for this would be accounted for under a separate heading. Professional fees in connection with arranging to lease additional premises or renting out surplus property would be chargeable to the capital projects fund.

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    Accounting for the Use of Project Funds

    School Grounds A method of early accounting for expenses called encumbrance accounting provides for early detection of expenditures going over budget. In this accounting method, expenditures are recorded when the commitment is made, for example by means of an order, rather than when the invoice is received. By recording expenditures in accounts as early as possible it is possible to flag budgetary problems at an early stage and, if necessary, investigate the causes.

    The reasoning behind each separate account in a capital projects fund is to clarify the use of funds for the project. The accounts in a capital projects fund should, therefore, provide as much detail as possible about the revenues and expenditures. The more information provided to stakeholders in the project the more transparent the use of funds in the project will be. This ensures that the bodies carrying out the projects are accountable for the use of the funds they have raised.

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    References

    WE Papers on http://www.wepapers.com/Papers/83246/Capital_Project__Fund_Accounting_powerpoint_presentation.ppt

    "Capital Project Fund" on www.classof1.com

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    click on morguefile

    kconnors on morguefile

    wallyir on morguefile