LOCAL HANDLING OF FEDERAL GRANTS-IN-AID INVOLVES ACCOUNTING FOR GRANTS RECEIVED, ACCOUNTING FOR MATCHING CONTRIBUTIONS, ALTERNATIVE METHODS OF INCORPORATING GRANT REVENUES AND EXPENDITURES INTO LOCAL GOVERNMENTAL BUDGETS, AND DETERMINING ELIGIBLE PROJECT OR PROGRAM COSTS. FEDERAL GRANTS TO MUNICIPALITIES ARE EITHER FOR CAPITAL CONSTRUCTION OR THE PROVISION OF CERTAIN GOVERNMENT SERVICES (SERVICE GRANTS). IN ACCOUNTING FOR SERVICE GRANTS RECEIVED, MANY MUNICIPALITIES HAVE RECORDED THEIR RECEIPT OF SUCH GRANTS IN EITHER SOME FORM OF TRUST AND AGENCY FUND OR A SPECIAL REVENUE FUND WHILE ACCOUNTING FOR THE EXPENDITURES WITHIN THE SAME FUND, ALL OUTSIDE THE FRAMEWORK OF THEIR REGULAR BUDGETARY FUND STRUCTURE. THIS VIOLATES THE CONCEPT OF FUND ACCOUNTING, BECAUSE THE TOTAL COST OF THE APPLICABLE GOVERNMENTAL SERVICES ARE NOT REFLECTED IN THE CORRECT FUND. PROPER METHODS FOR DEALING WITH THIS PROBLEM ARE SUGGESTED. ACCOUNTING FOR MATCHING CONTRIBUTIONS INVOLVES DEALING WITH CASH AND IN-KIND CONTRIBUTIONS. WHILE CASH CONTRIBUTIONS POSE NO SPECIAL ACCOUNTING PROBLEMS, DEALING WITH IN-KIND CONTRIBUTIONS IS MORE COMPLICATED. METHODS OF DEALING WITH SUCH CONTRIBUTIONS ARE DESCRIBED. ALTERNATIVE METHODS OF INCORPORATING GRANT REVENUES AND EXPENDITURES INTO LOCAL GOVERNMENT BUDGETS ARE DESCRIBED, AND REFERENCE SOURCES FOR STANDARDS FOR DETERMINING ELIGIBLE PROJECT OR PROGRAM COSTS ARE INDICATED. REPORTING IS THE FINAL PROCESS IN THE FINANCIAL CYCLE, AND THE REPORTS ARE ADVISED TO FLOW FROM THE ACCOUNTING RECORDS. PROCEDURES FOR REPORTING TO THE LOCAL GOVERNING BODY AND THE PUBLIC, AS WELL AS TO FEDERAL AGENCIES, ARE BRIEFLY DESCRIBED. (RCB)