In the governmental fund (such as the debt service fund), modified accrual accounting is used. Under this basis:
Payment of principal and interest is recorded as expenditures, not reductions of liabilities or interest expense.
No long-term liabilities (e.g., bonds payable) are recorded in governmental funds.
So, the correct journal entry is:
Debit: Expenditures – Principal
Debit: Expenditures – Interest
Credit: Cash
Relevant References:
GASB Codification Section 1300 – Fund Accounting and Modified Accrual Basis
GASB Statement No. 34 – Fund-Level Reporting
GFOA Accounting and Reporting for Debt Service Funds
Answer: A. expenditures – principal and expenditures – interest
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