In reference to agency funds, which of the following statements is correct? a. Agency funds are fiduciary funds used to account for resources that governments hold in a custodial capacity. b. Agency funds can arise from the normal and recurring operations of other funds. c. Agency funds can be used when the governmental entity undertakes necessary administrative duties, such as determining the eligibility of potential recipients. d. All of the above are
The correct answer and explanation is:
Correct Answer: d. All of the above are
Agency funds are a category within fiduciary funds used by governments to account for assets held temporarily in a custodial capacity for other parties. These funds do not belong to the government itself and are not used for its own operations. Instead, the government serves as a middleman, receiving and disbursing funds on behalf of other entities or individuals.
Each of the statements in the options is correct and explains an aspect of how agency funds function:
- Option a is correct because agency funds are indeed fiduciary in nature. They are used to account for resources that the government holds purely in a custodial role. Examples include taxes collected on behalf of other governments or employee payroll withholdings before they are sent to external parties.
- Option b is correct because agency funds often emerge from the routine operations of other governmental funds. For example, property taxes collected by a county government on behalf of a city within the county result in the creation of agency fund transactions.
- Option c is also accurate. Even though agency funds typically involve limited discretion, governments might have minor administrative responsibilities like verifying eligibility, ensuring proper documentation, or determining the timing of disbursement. However, these administrative tasks must not involve policy-setting decisions or significant discretion over the funds, as that would require classification under a different fiduciary fund type, such as a trust fund.
Therefore, all the statements provided are true and collectively describe the proper use and scope of agency funds in governmental accounting. Because each option is valid, the correct answer is d. All of the above are.