CGFM Exam 2 Practice Test 2026 – Complete Guide to Governmental Accounting and Financial Reporting

Recognizing expenditures in a governmental fund involves recording the amount spent for goods or services, which directly impacts the fund's financial position. In governmental accounting, expenditures are debited to reflect an increase in spending, while the corresponding credit reflects the decrease in available resources or fund balance.

When a governmental entity incurs an expenditure, such as for employee salaries, supplies, or operating costs, the accounting entry is to debit the Expenditures account. This indicates that the entity has spent resources and increased its expenditure level. The corresponding credit is made to Fund Balance, which signifies that the resources previously available in the fund have decreased due to the expenditure.

This accounting practice aligns with the modified accrual basis used in governmental accounting, where expenditures are recognized when the related liability is incurred, regardless of the timing of cash flow. The approach emphasizes accountability for public funds, ensuring that expenditures reflect the use of resources in fulfilling governmental responsibilities.