Chapter 3 – Part B - University of Idaho · E.g. Current, Capital, Debt Service Object Def. The...

Chapter 3 Granof-4e 1

Chapter 3 – Part B

Budgets & Other Issues

Government Budgets Phases of Budget

Cycle Preparation Legislative adoption

and executive approval

Execution Reporting and auditing

• Types of Budgets– Appropriation– Capital– Flexible



Appropriations (expenditure budget) Estimated revenues & other sources of

financing (revenue budget) Encumbrances (unfilled orders) The sum of the detailed Appropriations,

Encumbrances, and Expenditure account balances of the subsidiary ledger must equal the general ledger control account balances

Accounting Control over Expenditures


ASSETS = LIABILITIES + FUND BALANCE

Balance Sheet Reserved (Nonspend, Rest. + Unreserved (Unassig’d) Accounts Comm’d and Assigned) F Bal Fund Balance(permanent)

Budgetary/Operating Budgetary Accounts Operating AccountsStatementAccounts(temporary)

Accounting model for the General Fund


Current GASB Model Vs. Old Model

Old model: governments reported only their amended budget.

Current model: requires the actual results and both the original and final appropriated budgets.

Budgetary compliance can be assured by building safeguards in the accounting systems.

---Journals---Ledgers


Classification of ExpendituresGASB’s suggestions for classifying expenditures by any of the

following: Fund

E.g. general fund, special revenue fund, etc. Function or Program

Definition: Group of activities carried out with the same objective E.g. general government, public safety, sanitation, etc.

Organization Unit E.g. police department, fire department, etc.

Activity Def. Line of work contributing to a function or program E.g. highway patrol, burglary investigations, etc.

Character Def. The fiscal period presumed to benefit E.g. Current, Capital, Debt Service

Object Def. The types of items purchased or services obtained E.g. Salaries, fringe benefits, travel, etc.


**Various expenditures by function breakdowns shown on next 3 slides**


Most Commonly Used Budget . . .

Object Classification Budget


Object Classification Budget Traditional and most common Facilitates control

Drawbacks: Discourages planning Promotes bottom-up budgeting than top-

down budgeting Overwhelms top-level decision-makers with

details Limits post-budget evaluation

Chapter 3 Granof-4e13

Classification of Revenues and Estimated Revenues

GASB Suggestion: 1st classify by fund 2nd classify by source

FUND

SOURCE

Sources include: Taxes (Ad-valorem and self-assessing) Special Assessments Licenses and Permits Intergovernmental Revenues Charges for Services Fines and Forfeits Miscellaneous Revenues


FUND

SOURCE


On What Basis of Accounting are Budgets Prepared?


Basis of Accounting• Neither GASB nor FASB have control over

budgeting principles– Budgeting principles are set by either the

government/organization or the government/organization that supervises them

• GASB recommends using modified accrual basis of accounting.

• However, most governments use the cash basis for their budgets.


• The Monthly Treasury Statement is a monthly report of the government's receipts and outlays

• The information is presented on a modified cash basis.

• Presented on next slide.


Cash Basis Budgeting

Budgeting principles are established by individual governments or organizations and not by GASB nor FASB.

Although GASB recommends the use of modified accrual basis in preparing the annual budgets, many governments adopt cash basis or modified cash basis.


Cash Basis Budgeting

Governments using cash basis: Assign revenues and expenditures

to the period during which the cash is expected to be received or disbursed.

Treat encumbrances equivalent of actual purchases.

Recognize taxes and other revenues in the year in which they are due and not in the year in which they are expected to be collected.


Cash BasisDisadvantages:

May distort the economic impact of planned fiscal activities. May be unbalanced as to economic costs and

revenues. It may give an appearance of a budget that

has achieved interperiod equity when it really has not. Makes it easier to transfer resources from a

fund that has a budget surplus to one that needs extra resources. Complicates financial accounting and

reporting.


Differences arise between the legally adopted budgets and GAAP-based financial statements.

They are caused by: Basis of accounting Timing Perspective Reporting entity

Legally adopted budgets vs. GAAP-based Financial Statements


Performance Budgets

Supplement to object classification budgets Focus on measurable units of

efforts Institutionalize effective decision

process The most common type of

performance budget is program budget.


Recording Budgets ExampleAdditional examples

to study (beyond textbook and ones

we did in class)

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Recording Budgets Estimated revenues (DB) – Actual

Revenues (CR) = Remaining revenue to be recognized Appropriations (CR)-Actual

expenditures (DR) = Balance available for expenditure Refer to pgs. 98-104 for budgeting

entries.


Example AQ: A city government incorporates its budget in its

accounting system and encumbers all commitments. Prior to the start of the year, the city council adopted a budget in which city revenues were estimated at $500,000 and expenditures of $450,000 were appropriated. Record the budget using only the control accounts.

A: Estimated revenues $500Appropriations $450Fund balance 50

Next slide shows what the detail might look like


Budget Approved on 1-1-2009: Dr. Cr.Estimated Revenues 500,000

Appropriations 450,000Fund Balance 50,000

Revenues Ledger:Taxes 300,000Licenses and Permits 50,000Intergovernmental Revenues 50,000Charges for Services 50,000Fines and Forfeits 25,000Miscellaneous Revenues 25,000Appropriations Ledger:

General Government 120,000Public Safety 150,000Public Works 100,000Culture and Recreations 80,000

Examples of Budgetary Journal Entries (A)

$500,000

$450,000


Revenue Subsidiary LedgerAcct No. XXX

Account Name: Charges for ServicesEstimated ActualRevenues Revenues Balance

Date Explanation Folio DR CR DR (CR)

1-1-2008 Budget authority GJ71 50,000 50,0001-31-2008 Various items CR82 4,000 46,0002-28-2008 Various items CR87 5,000 41,000

Subsidiary Ledgers for Budgetary Control (A)


Example: City Clerk's office orders a new multi-purpose machine on January 2, 2009 which had a list price in the vendor's catalog of $500.

Entry in the General Fund General Journal:Dr. Cr.

Encumbrances--2009 $500Reserve for Encumb.--2009 $500

Example B - Budgetary Control


Example CA government health care district incorporates its budget in its accounting system and encumbers all purchase orders and contracts. Prior to the start of the year, the governing board adopted a budget in which agency revenues were estimated at $5,600 and expenditures of $5,550 were appropriated. Record the budget using only the control accounts.

JE 1 Estimated revenues $5,600Appropriations $5,550Fund balance 50


Example C (con’t)JE 2: During the year, the government health care

district collected $5,800 in fees, grants, taxes, and other revenues. Prepare journal entries.

Cash $5,800Revenues $5,800

JE 3: It ordered goods and services for $3000.

Encumbrances $3,000Reserve for encumbrances $3,000


Example C (Cont’d)JE 4: During the year it received and paid for $2,800 of

goods and services that had been encumbered. It expects to receive the remaining $200 in the following year.

Expenditures $2,800Cash 2,800

Reserve for encumbrances $2,800Encumbrances 2,800

JE 5: It incurred $2500 in other expenditures for goods and services that had not been encumbered.

Expenditures $2,500Cash 2,500


Example C (cont’d)

Prepare end of year closing entries.

JE 6 Revenues 5,800Estimated revenues 5,600Fund balance 200

JE 7 Appropriations 5,550Expenditures 5,300Encumbrances 200Fund balance 50

Supporting Computations – original style


Reserve for Encumbrancesdr cr balance

bal fwd $0 3 3,000 (3,000)

4b 2,800 (200)(200)

Encumbrances (temporary acct)

dr cr balancebal fwd 0

3 3,000 3,000 4b 2,800 200 7 200 0

Fund balance (unassigned, unreserved)


1 50 (50)6 200 (250)7 50 (300)

Total fund balance at year end:Fund balance –committed (Reserved for encumbrances ) 200 Fund Balance Unassigned (unreserved) 300 Total 500 This should equal revenues – expenditures (since bal fwd in FB was 0)

Revenue – Expenditures = 5,800 – 5,300 = $500

Chapter 3 Granof-4e - revised 36

Example C (alternate style closing)

Fund= General Fund Debit Credit 6 Reverse original budgetary entry:

Appropriations 5,550 Fund balance (unassigned) 50

Estimated revenues 5,600

7 Close revenue, expenditure & encumbrance accountsRevenues 5,800

Expenditures 5,300 Encumbrances 200 Fund balance (unassigned) 300

Supporting Computations – alternate style


Reserve for Encumbrancesdr cr balance

bal fwd $0 3 3,000 (3,000)

4b 2,800 (200)(200)

Encumbrances (temporary acct)


3 3,000 3,000 4b 2,800 200 7 200 0

Fund balance (unassigned, unreserved)


1 50 (50)6 50 -

7 300 (300)

Total fund balance at year end:Fund Balance –committed (Reserved for encumbrances) 200 Fund Balance -Unassigned (unreserved) 300 Total 500

This should equal revenues - expenditures 5,800 since balance fwd was zero 5,300

TRUE 500


The General Fund and special revenue funds usually require a legally adopted budget before the government can collect revenues from taxes and other sources and incur expenditures.

Severe penalties may exist for failure to comply with the budget, so it is imperative that the accounting system facilitate accounting for the budget as well as all other operating transactions.

END!

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