Accurate Government Accounting: Journal Entries and Interfund Accounting

This article is adapted from CKH Group’s CPE-accredited course, When, Where, Why: Journal Entries & Due-To/Due-From Explained, originally presented on June 24, 2026. Reading this article is not eligible for CPE credit.

Every quarter, CKH Group offers a free CPE-accredited course for local government finance professionals covering practical accounting topics that we encounter every day while working with municipalities across the Southeast. When, Where, Why: Journal Entries & Due-To/Due-From Explained explores two of the most fundamental concepts in government accounting: how to record transactions accurately through journal entries and how to properly account for activity between funds through interfund accounting.

Whether you attended the course or are discovering it for the first time, this guide brings together the key takeaways into a practical reference you can return to whenever you need a refresher. We’ll cover when different types of journal entries are used, how interfund activity and Due To and Due From relationships work, and the best practices that help keep financial records accurate, complete, and audit-ready.

You can also download or watch a recording of the presentation or other past CPE courses on our CPE program page.

Journal Entries Explained

Ask most accountants what a journal entry is, and the answer will likely involve debits, credits, and balancing the books. While technically correct, that definition only scratches the surface of what journal entries accomplish in government accounting.

What Is a Journal Entry?

A journal entry is a formal accounting transaction used to record, correct, adjust, allocate, or reclassify financial activity within the general ledger. It tells the accounting system that something needs to be recorded or changed, whether that means recognizing an accrued expense, correcting a coding error, reallocating costs between departments, or recording year-end adjustments.

Every journal entry follows one fundamental accounting principle: Total debits must always equal total credits.

A well-prepared journal entry should also include:

• A posting date
• A journal entry reference number (or another unique identifier)
• The accounts being affected
• Debit and credit amounts
• A clear description explaining the purpose of the entry

One point emphasized during the course was the importance of the posting date. The posting date (not necessarily the transaction date) determines which accounting period the activity affects. For example, a June 30 posting impacts the current fiscal year, while a July 1 posting belongs to the next reporting period. Understanding that distinction becomes particularly important during month-end and year-end close.

Purpose of a Journal Entry

During the presentation, CKH’s government accounting team pointed out that one of the most common issues encountered during audits is an entry that explains what was posted but not why. A journal entry may balance perfectly, yet still leave auditors or future staff members wondering what actually happened.

For that reason, every journal entry should answer three simple questions:

• What happened?
• Why is this entry being recorded or corrected?
• Which accounts or funds are affected?

If those questions cannot be answered by reviewing the entry and its supporting documentation, the accounting records are incomplete, even if the debits equal the credits.

Invoice descriptions are an excellent way to firmly answer these questions. Rather than vague one-word notes, a description should explain precisely what is being recorded.

For example:

Bad Description: “Adjustment”

Good Description: “To adjust payroll expense and payroll liabilities for wages earned through June 30 but not paid until July.”

That single sentence provides enough context for another accountant or auditor months later to immediately understand both the purpose and timing of the entry. As a general rule, journal entries should be written with the assumption that someone unfamiliar with the transaction may need to review them in the future.

Different Types of Journal Entries

Not every journal entry serves the same purpose. Municipal accounting requires different types of entries depending on the nature of the transaction and the timing of the adjustment. While these categories often overlap, understanding their primary purpose helps ensure transactions are recorded correctly.

Recurring Entries

Recurring entries are routine transactions that occur on a predictable schedule. Monthly payroll, debt service payments, and recurring utility expenses are common examples. Because these transactions happen consistently, they often follow standardized procedures and are among the most straightforward journal entries to prepare.

Accruals and Deferrals

Accruals and deferrals ensure revenues and expenses are recognized in the appropriate accounting period, regardless of when cash is received or paid.

An accrued payroll liability illustrates this well. Employees may earn wages before fiscal year-end, even though payroll is not processed until the following month. Recording an accrual ensures those expenses are recognized in the period in which they were incurred rather than when cash leaves the bank.

Reclassification Entries

Sometimes the transaction itself is correct, but it has been recorded in the wrong place. A reclassification entry moves the transaction to the correct account without changing its overall financial impact. Unlike an adjustment, a reclassification is not correcting the amount of the transaction. It is correcting where that transaction belongs.

Allocation Entries

Allocation entries distribute shared costs across multiple departments, programs, or funds.

For example, administrative expenses may need to be allocated among several funds that benefit from centralized services. These entries help ensure costs are fairly distributed and accurately reflected in each fund’s financial records.

Reversing Entries

Certain accruals are intended to exist only temporarily. Reversing entries automatically undo those adjustments during the next accounting period, helping prevent duplicate recognition once the actual transaction is recorded.

Adjusting Entries

Adjusting entries update account balances before financial statements are issued. They ensure assets, liabilities, revenues, and expenses are reported accurately at period-end.

Common Year-End Adjustments:

1. Accrued Payroll – recording payroll in the correct fiscal year for employees who earned wages before year-end that will not be paid until the following payroll cycle.
2. Accounts Payable Accruals – records invoices received after year-end for services performed before year-end. Legal fees, audit fees, utilities, and vendor invoices are common examples.
3. Grant Receivables- Many governmental grants operate on a reimbursement basis. Eligible expenditures may occur weeks or months before reimbursement is received. Recording a grant receivable allows grant revenue to be recognized in the same period as the related expenditures.
4. Due To / Due From Adjustments – When one fund pays expenses or receives resources on behalf of another fund (which we will dicuss in more detail), the resulting interfund balances often require adjustment before year-end.
5. Capital Asset and Depreciation Entries- Capital assets should be recorded as long-term assets rather than current expenses, while depreciation allocates those costs over the assets’ useful lives in accordance with governmental accounting standards.

Proposed Audit Adjustments

During an audit, auditors may identify transactions that require correction or adjustment. These proposed journal entries help improve compliance with accounting standards and ensure financial statements fairly present the municipality’s financial position.

Opening and Closing Entries

At the end of each fiscal year, closing entries finalize the current year’s activity while opening entries establish beginning balances for the next reporting period. Together, they create a clean transition between fiscal years.

Why Journal Entries Matter and Where They Impact

It is easy to think of journal entries as isolated accounting transactions that simply update the general ledger. In reality, every journal entry creates a ripple effect throughout the municipality’s financial reporting system.

The general ledger serves as the master record of financial activity, with every journal entry becoming part of that permanent accounting history. Those balances then flow into the trial balance, which functions as a checkpoint to verify that the books remain mathematically balanced. From there, the information ultimately appears throughout the municipality’s financial statements, including the balance sheet, statements of revenues and expenditures, fund statements, and budget-to-actual reports.

Because journal entries affect every stage of financial reporting, even a seemingly minor error can have significant downstream consequences. An incorrect account number, an inaccurate fund designation, or an incomplete description can influence management reports, budget monitoring, audit procedures, and public financial reporting.

One reminder from the presentation is particularly worth repeating:

Balanced does not always mean correct.

A journal entry may satisfy the accounting equation while still being posted to the wrong account or wrong fund. For that reason, accountants should verify more than just the math before posting an entry. The amount, account number, fund number, and description should all be reviewed carefully to ensure the transaction accurately reflects what occurred.

Interfund Accounting Explained

Many journal entries affect only a single fund. An expense is recorded, revenue is recognized, or an asset is adjusted, all within the same set of accounting records.

Local governments, however, rarely operate that simply.

Most municipalities manage multiple funds, each established for a specific purpose and often subject to its own legal restrictions. However, these funds frequently interact, exchange resources, or pay on behalf of another. Those transactions introduce another layer of accounting responsibility.

If journal entries record what happened, interfund accounting records who is responsible. Without it, the financial records may accurately reflect that money was spent, but they won’t necessarily show which fund ultimately owns the expense or is responsible for repayment.

What Is Interfund Activity?

Interfund activity is the financial activity between different funds within the same government entity. Although those funds belong to the same municipality, they operate independently for accounting and reporting purposes. Each maintains its own assets, liabilities, revenues, expenditures, and fund balance.

Whenever one fund pays for something that benefits another fund—or resources move between funds—the transaction must be reflected in both sets of accounting records. This is where interfund accounting comes into play- recording and tracking all interfund activity.

This is not to be confused with intergovernmental activity:

• Interfund activity occurs between funds within the same government.
• Intergovernmental activity occurs between separate governments or organizations.

Public funds are often legally or administratively restricted. Resources collected for one purpose generally cannot be treated as though they belong to another simply because they exist within the same bank account or government.

This is why every interfund transaction results in at least two journal entries. One fund records its side of the transaction, while the corresponding fund records the other. If only one side is recorded, the accounting records immediately fall out of balance, creating discrepancies that frequently surface during reconciliations and annual audits.

Different Types of Interfund Activity

Not every transaction between funds represents the same type of financial relationship. During the course, interfund activity was divided into two broad categories: reciprocal and nonreciprocal activity.

Reciprocal Activity

Reciprocal activity occurs when one fund provides something of value and another fund receives it. In most cases, there is an expectation that the transaction will be settled or repaid.

Common examples include:

• Interfund loans, where one fund temporarily lends resources to another.
• Interfund services provided and used, such as a Utility Fund charging another department for water usage or internal services.

Because both funds receive value from the transaction, reciprocal activity often creates a Due To or Due From relationship.

Nonreciprocal Activity

Nonreciprocal activity involves the permanent movement of resources between funds without an expectation of repayment.

The most common example is an interfund transfer. A municipality may transfer money from its General Fund to a Debt Service Fund to make scheduled bond payments or move resources into a Capital Projects Fund to finance infrastructure improvements.

Transfers vs. Due To / Due From

Because both involve transactions between funds, interfund transfers and Due To/Due From relationships are frequently confused. Yet they represent two very different accounting events.

The simplest way to determine the correct treatment is to ask a single question:

Is repayment expected?

If the answer is yes, the transaction generally creates a Due To and Due From relationship.

If the answer is no, the transaction is generally an interfund transfer.

Interfund transfers represent the permanent movement of resources from one fund to another. The sending fund records a Transfer Out, while the receiving fund records a Transfer In. Because repayment is not expected, no receivable or payable is created. Instead, transfers affect fund balance by permanently decreasing available resources in one fund and increasing them in another.

Due To and Due From accounts, on the other hand, recognize that one fund is only temporarily covering costs for another. The paying fund expects reimbursement, while the receiving fund has an obligation to repay those resources. Rather than affecting fund balance, these transactions create assets and liabilities that remain on the balance sheet until repayment

Due To and Due From Accounts

The simplest way to think about Due To and Due From accounts is as internal IOUs between funds. They allow governments to maintain separate accounting records while recognizing that one fund may temporarily pay expenses or provide resources on behalf of another.

A simple way to remember the terminology is:

• Due To means this fund owes another fund. It functions as an interfund payable and is reported as a liability.
• Due From means another fund owes this fund. It functions as an interfund receivable and is reported as an asset.

One of the key points emphasized during the course is that auditors are rarely concerned simply because a Due To or Due From balance exists. Instead, they want to understand where the balance originated, why it exists, and whether sufficient documentation supports it. Unsupported balances, long-outstanding receivables, or interfund accounts that cannot be reconciled often become audit concerns because the municipality can no longer explain the underlying transaction.

Pooled Cash

Many local governments operate with a single physical bank account that holds cash belonging to multiple funds. Although there may only be one bank account, each fund still owns its respective share of those cash resources. This can sometimes cause interfund activity.

Problems arise when one fund spends more cash than it currently has available. Without properly recording the resulting Due To or Due From relationship, management may incorrectly assume every fund has sufficient available cash simply because the overall bank account remains positive.

Why Interfund Accounting Matters and Where It Impacts

Interfund accounting impacts multiple financial reports, not just the balance sheet. Due To and Due From accounts appear as interfund assets and liabilities and should reconcile between funds, making them a key area of audit review.

Beyond the balance sheet, recording transactions in the wrong fund can distort both the statement of revenues and expenditures and the budget-to-actual reports by overstating or understating expenditures, or making one department appear to be significantly over or under budget.

These inaccuracies can lead management to question spending patterns when the underlying issue is simply an accounting error. In other words, poor interfund accounting doesn’t just affect year-end audits, it can influence operational decisions throughout the fiscal year. Department heads, finance directors, and elected officials rely on these reports to allocate resources and monitor spending. If interfund activity is inaccurate, those decisions may be based on incomplete or misleading information.

Best Practices for Journal Entries and Interfund Accounting

Whether you’re recording a routine adjustment or an interfund transaction, following consistent accounting practices throughout the year can improve financial reporting and reduce issues during audit. A few key habits can make a significant difference:

• Write clear journal entry descriptions that explain what happened and why the entry was necessary.
• Maintain supporting documentation for every journal entry and interfund balance so transactions can be easily traced and verified.
• Verify the details before posting, including the account number, fund number, amounts, and descriptions. Remember, a balanced journal entry isn’t always a correct one.
• Distinguish between transfers and Due To/Due From activity by asking whether repayment is expected. If it is, a Due To/Due From relationship is generally appropriate. If not, the transaction is typically a transfer.
• Reconcile interfund balances regularly rather than waiting until year-end or audit fieldwork to identify discrepancies. Monthly at minimum!
• Preserve a complete audit trail by correcting or reversing entries instead of deleting them, and following established approval procedures when appropriate.

Many audit findings stem from small, avoidable mistakes rather than complex accounting issues. Recording transactions in the wrong fund, misclassifying transfers, failing to reconcile interfund balances, or maintaining incomplete documentation can all create unnecessary challenges during financial reporting and audit. By following the practices above consistently, municipalities can improve accuracy, strengthen internal controls, and make year-end close significantly more manageable.

If your government needs assistance with Journal Entries, interfund accounting, completing the RLGF, or getting audit-ready, please feel free to reach out to CKH Group if you would like to engage with us, or if you have an open RFP/RFQ you would like us to submit for.

The information provided is for general educational and informational purposes only and does not constitute financial, legal, or tax advice. The tax rules and regulations are complex and subject to change. Before taking any form of action, you should consult your own tax, legal, and accounting advisors who understand your particular situation. CKH Group will not be held liable for any harm/errors/claims arising any tax, legal, or financial consequences you may incur. Whilst every effort has been taken to ensure the accuracy of the contents, we will not be held accountable for any changes that are beyond our control.