Consider an obligation that owes tax liability and then incurs a collection fee. Note that penalty and interest would also accrue, but are not shown in this example.
The accounts receivable (A/R) distribution code to use for financial transactions that affect A/R is linked to the obligation type. The assumption is that the fund for this distribution code is the same "revenue" fund.
For this example, three funds exist:
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Tax (fund 01)
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Collections (fund 39)
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General (fund 99)
When a tax is levied, the following adjustments are made to the tax fund account producing the following GL entries.
For the tax fund, the GL details of the bill include a debit to the accounts receivable (A/R) account and credits to the revenue account. The taxing authority is owed the entire portion of the adjustment by the taxpayer. The tax fund is balanced.
The following diagram illustrates the initial GL accounting that occurs when a collection fee is levied.
Because A/R is added to the tax fund and the revenue is added to the collections fund, the funds are out of balance.
As the tax authority takes on the responsibility to collect the fee, additional entries are created to balance the funds.
The following diagram illustrates the initial GL accounting that would occur when the payment arrives.
The tax authority's general cash account is debited, and the tax fund's A/R account is credited.
If the accounting were left in this state, the fund accounting principal - that each fund represents an independent entity with a self-balancing chart of accounts - would be violated. This violation is caused due to the fact that cash is recorded on the general fund, not the tax fund, causing the general fund to have an excess debit and the tax fund to have an excess credit.
From an organizational viewpoint, to make the tax fund whole, the tax fund needs to note what portion of the cash it owns, and correspondingly, the tax authority needs to note what portion of the cash is owed to each fund. The following diagram illustrates this point.
To maintain a balance of debits and credits within each fund, the tax and collection funds have an "equity in pooled cash" (EPC) account and the general fund has a liability account for each fund. In addition to debiting the general fund's cash account and crediting the tax fund's A/R accounts, the tax and collection funds' EPC accounts are debited and the general funds liability accounts are credited.
And so, with the additional GL entries, all funds have matching debits and credits.