Which condition would require a credit to Fund Balance—Unassigned of a governmental fund when operating statement accounts are closed at year end, assuming there are no other financing sources or uses?

• A. Revenues exceed expenditures
• B. Expenditures exceed revenues
• C. Encumbrances outstanding
• D. Transfers in exceed transfers out

Answer: (A)

At year-end in a governmental fund, the operating accounts are closed to Fund Balance—Unassigned, so the net effect on fund balance equals revenues minus expenditures. When revenues exceed expenditures, the closing entries increase the fund balance. Revenues have credit balances and are closed by debiting them and crediting Fund Balance—Unassigned, which raises the fund balance (a credit to Fund Balance—Unassigned). The overall result is a net increase in Fund Balance—Unassigned, hence a credit is required.

If expenditures exceeded revenues, the closing would push the fund balance down, requiring a debit to Fund Balance—Unassigned. Encumbrances outstanding are a reservation of resources and do not, by themselves, drive the closing of operating accounts. Transfers in exceeding transfers out involve financing sources/uses not present here.