How are compensated absences treated in government-wide statements versus governmental funds?

How are compensated absences treated in government-wide statements versus governmental funds?

• A. In government-wide statements, compensated absences are accrued as a liability and expense; in governmental funds, they are recognized as expenditures when paid or matured.
• B. In government-wide statements, compensated absences are recognized as revenue; in governmental funds, they are liabilities.
• C. Compensated absences are not recognized in either set of statements.
• D. Compensated absences are recorded only as a liability in governmental funds.

Answer: (A)

Compensated absences are treated according to the accounting basis of the financial statements. In government-wide statements, these obligations are handled on an accrual basis: as employees earn vacation or other paid time off, the government records a liability for the earned, unused absences and also recognizes a corresponding expense in that period. This shows the full economic burden of the obligation. In governmental funds, which use a modified accrual focus on current financial resources, the liability isn’t carried on the balance sheet. Expenditures are recognized when resources are disbursed to satisfy the obligation—essentially when the paid time off is used or when the obligation matures and payment is due.

Compensated absences are treated according to the accounting basis of the financial statements. In government-wide statements, these obligations are handled on an accrual basis: as employees earn vacation or other paid time off, the government records a liability for the earned, unused absences and also recognizes a corresponding expense in that period. This shows the full economic burden of the obligation.

In governmental funds, which use a modified accrual focus on current financial resources, the liability isn’t carried on the balance sheet. Expenditures are recognized when resources are disbursed to satisfy the obligation—essentially when the paid time off is used or when the obligation matures and payment is due.