What Is Fund Balance Accounting in Governmental Finance?

Fund balance accounting in governmental finance measures the difference between a governmental fund’s current assets and current liabilities, then sorts that difference into five categories based on how tightly the money is locked down. The Governmental Accounting Standards Board’s Statement No. 54 (GASB 54), effective for fiscal years beginning after June 15, 2010, sets the framework.¹ The five categories, running from most to least constrained, are nonspendable, restricted, committed, assigned, and unassigned. Together they answer a simple question a taxpayer, bondholder, or analyst is likely asking when they open a government’s financial report: how much of this money is actually available to spend, and on what?

How Fund Balance Is Calculated

The equation is straightforward. Total assets minus total liabilities equals fund balance. What sets it apart from corporate equity is the measurement lens. Governmental fund financial statements use the current financial resources measurement focus and the modified accrual basis of accounting, as required by GASB Statement No. 34.² Only resources that are measurable and available to pay current-period obligations count. Long-term assets such as buildings and infrastructure stay off the governmental fund balance sheet, and so do long-term liabilities such as bonds payable.

In practice, the asset side includes cash, short-term investments, and receivables expected to be collected quickly. The liability side captures obligations the government expects to settle with those current resources. The result is a figure that represents spendable equity in the near term, closer to a checking-account balance after bills come due than to a full picture of everything the government owns and owes. That fuller picture lives on the government-wide statements, which use full accrual accounting.

The Five GASB 54 Classifications

GASB 54 replaced the older reserved and unreserved framework with a five-tier hierarchy arranged by the source and strength of the constraint on the money.¹ Each classification answers a slightly different question about why the money cannot, or simply has not been, earmarked for general use.

Nonspendable

Nonspendable fund balance covers amounts that are either not in a form you can spend or that must be kept intact by law or contract. Inventories, prepaid costs, the long-term portion of loans receivable, and property held for resale sit here because they are not cash and are not expected to convert to cash quickly. The principal of a permanent endowment is the classic example of money that is legally required to remain untouched.³ One nuance: if the proceeds from collecting a receivable or selling property are themselves restricted or committed, the amount is classified in that more specific category rather than as nonspendable.

Restricted

Restricted fund balance includes resources whose use is limited by forces outside the government’s control. Those constraints come from three sources: creditors through debt covenants, grantors or contributors, and laws or regulations imposed by other governments. Constitutional provisions and enabling legislation also create restrictions.¹ Enabling legislation is a law that authorizes a government to levy a tax or charge a fee and simultaneously requires the revenues to be spent on a specified purpose. A federal highway grant that must fund road repairs and nothing else produces a restricted balance. The government cannot redirect those dollars without violating the grant terms.

Committed

Committed fund balance represents resources the government has constrained itself from spending freely, through formal action of its highest level of decision-making authority. For a city, that is usually a vote by the city council; for a county, the board of commissioners or supervisors. GASB 54 deliberately avoids naming one type of body because governmental structures vary, but it sets the bar high: the authority to commit funds “should be high enough to represent the consensus objective of the governing body as a whole.”³

Two timing rules matter. The formal action, an ordinance, resolution, or equivalent, must occur no later than the end of the reporting period. The exact dollar amount can be determined after year-end, as long as the commitment itself was in place before the fiscal year closed. Removing or changing a commitment requires the same level of formal action that created it. A finance director cannot unwind what the council approved; the council has to vote again.

Assigned

Assigned fund balance reflects the government’s intent to use money for a particular purpose, but without the formal governing-body action that committed funds require. Typically a finance director, budget officer, or designated committee makes these designations based on planned projects or anticipated needs.¹ Assigned balances are the most flexible tier for budgeting purposes because reassigning them does not require council action.

Unassigned

Unassigned fund balance is the residual. In the general fund, it represents whatever is left after nonspendable, restricted, committed, and assigned amounts are accounted for. These dollars carry no strings.¹ In other governmental funds, unassigned balances appear only when there is a deficit. A healthy unassigned balance is widely viewed as a sign of fiscal resilience and a buffer against revenue shortfalls or emergencies.

Which Pot Gets Spent First

When a government pays for something that could be covered by more than one fund balance category, it needs a policy for which category gets drawn down first. GASB 54 addresses this in two layers.³

For the first layer, restricted versus unrestricted resources, the standard imposes no default. Each government sets its own accounting policy on whether restricted or unrestricted money is considered spent first when both are available for the same purpose. For the second layer, when multiple unrestricted categories apply, the default spending order is committed first, then assigned, then unassigned. A government can override that default with its own policy, but either way, it must disclose the chosen approach in the notes to the financial statements.¹ Getting the order wrong quietly distorts the year-end classifications, so auditors check whether the policy is applied consistently.

Rainy Day Funds Under the Hierarchy

Many governments set aside money for economic downturns or emergencies. GASB 54 does not automatically give these stabilization arrangements a high classification. To qualify as restricted or committed, the arrangement must define the specific circumstances under which the money can be spent, and those circumstances cannot be things that happen routinely.³

This is where governments trip up. A resolution allowing spending “in an emergency” is too vague to qualify as committed, because emergencies of some kind are not unusual. A policy triggered by an “anticipated revenue shortfall” fails unless the shortfall is quantified at a magnitude clearly beyond normal year-to-year fluctuations. If the stabilization arrangement does not meet the restricted or committed criteria, GASB 54 requires it to be reported as unassigned in the general fund. Governments must also disclose the legal authority establishing the arrangement, the conditions under which the money can be spent, and the dollar amounts involved.⁴

Encumbrances and Deficits

Encumbrances are outstanding purchase orders or contracts where the government has committed to spend money but has not yet received the goods or services. Their classification depends on which resources will ultimately pay for them. If restricted or committed resources will cover the encumbered expenditure, no reclassification is needed because the constraint is already reflected. If an encumbrance would otherwise come from unassigned amounts, it should be classified as assigned, since issuing a purchase order is essentially earmarking that money for a specific purpose.³ Governments that carry large year-end encumbrances will see a noticeable shift from unassigned to assigned on their balance sheets.

Deficits carry their own rule. In any governmental fund other than the general fund, if spending for a restricted or committed purpose exceeds the resources available for that purpose, the resulting negative balance must first reduce any amounts assigned to other purposes within the same fund. If assigned amounts are not enough to absorb the deficit, or none exist, the remaining negative balance is reported as unassigned.³ You will never see a negative number in the restricted, committed, or assigned rows. Unassigned is the only line where a deficit can land, and in funds other than the general fund, that line only appears when there is a deficit.

Where Fund Balance Appears in the Financial Statements

Fund balance data appears in the Annual Comprehensive Financial Report (ACFR), which GASB renamed from “Comprehensive Annual Financial Report” in 2021.⁵ Within the ACFR, the balance sheet for governmental funds breaks out each of the five hierarchy categories, running from nonspendable down to unassigned. The standardized format lets readers compare how different governments allocate their resources and how much genuine spending flexibility each one retains.

The note disclosures are where the real story lives. Governments must disclose the processes through which committed and assigned constraints are imposed, including which body or official has the authority to make those designations. They must disclose their spending-order policy for deciding whether restricted or unrestricted resources are used first. And they must separately describe any stabilization arrangements, including legal authority, spending conditions, and amounts.¹ Anyone analyzing a government’s finances should read those notes alongside the balance sheet.

Fund Balance vs. Net Position

Fund balance and net position are not interchangeable. They measure different things on different statements. Fund balance appears on the governmental fund balance sheet and reflects only current financial resources under modified accrual accounting. Net position appears on the government-wide statement of net position and uses full accrual accounting, capturing long-term assets such as buildings and infrastructure alongside long-term liabilities such as bonds payable.⁶ Net position breaks into three components: net investment in capital assets, restricted net position, and unrestricted net position. A government can show a healthy general fund balance while its government-wide net position tells a very different story once pension liabilities and deferred infrastructure maintenance enter the picture. Reading only one statement gives an incomplete view of financial health.

How Much Fund Balance Is Enough

GASB 54 defines how to classify and report fund balance but says nothing about how much a government should hold. That guidance comes from the Government Finance Officers Association, which recommends that all general-purpose governments maintain unrestricted budgetary fund balance in their general fund equal to at least two months of regular operating revenues or expenditures.⁷ Two months works out to roughly 16.7 percent of annual operating costs.

The GFOA acknowledges that states and the largest cities, counties, and school districts may reasonably operate with a lower percentage because their revenue streams are more diversified and their size makes contingencies more predictable. A formal fund balance policy should specify the target level, describe the conditions under which reserves can be tapped, and lay out a replenishment timeline, typically one to three years. Governments that let their unassigned balance fall well below these benchmarks risk credit-rating pressure and reduced financial flexibility when emergencies arrive.

1
Governmental Accounting Standards Board. Summary of Statement No. 54 – Fund Balance Reporting and Governmental Fund Type Definitions
2
Governmental Accounting Standards Board. Summary of Statement No. 34 – Basic Financial Statements and Management Discussion and Analysis for State and Local Governments
3
Governmental Accounting Standards Board. Statement No. 54 – Fund Balance Reporting and Governmental Fund Type Definitions
4
Governmental Accounting Standards Board. GASB Statement No. 54 – Fund Balance Reporting and Governmental Fund Type Definitions
5
Governmental Accounting Standards Board. GASB Changes Name of Report to Annual Comprehensive Financial Report
6
National Center for Education Statistics. Chapter 5 Financial Reporting – Fund Balance and Net Assets
7
Government Finance Officers Association. Fund Balance Guidelines for the General Fund