Chapter 3 (part a) Issues of Budgeting and Control Chapter 3 Granof & Khumawala 5 th ed 1
Budgets Key Purposes of Budgets Planning Controlling and Administering Reporting and evaluating Chapter 3 Granof-4e 2
Budgets in Government are MUCH MORE IMPORTANT than they are in Business 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. Chapter 3 Granof-4e 3
Major Types of Budgets Appropriation Budget Monitors current or operating fund (i.e. general fund) Typically covers one operating cycle Appropriations related to funds with annual budgets lapse at yearend except for Capital Outlay appropriations, which cover multiple years. Capital Budget Monitors construction and acquisition of long-lived assets Typically covers multiple years Flexible Budget Contains alternative budget estimates based on varying levels of output Helps distinguish fixed and variable costs Most useful to business-type activities where level of activity depends on customer demand Chapter 3 Granof-4e 4
CITY OF HOUSTON GENERAL FUND BUDGET FOR FISCAL YEAR 2008 (unaudited) (amounts expressed in thousands) Total Budgeted Resources $ 1,984,199 Total Budgeted Expenditures 1,768,473 Designated "Sign Abatement" Amount 2,070 Designated "Rainy Day" Amount 20,000 Budgeted Ending Fund Balance as of June 30, 2008 193,656 Total Budgeted Expenditures and Reserves $ 1,984,199 Chapter 3 Granof-4e 5
Budgetary Accounts Purpose: Used to record the budgetary inflows and outflows estimated or authorized in the annual budget Accounts: Estimated Revenues, Estimated Other Financing Sources Appropriations, Estimated Other Financing Uses Encumbrances Chapter 3 Granof-4e 6
Budgetary and Operating Statement Accounts (cont d) Revenues and Other Financing Sources increase fund balance when closed. Both are recognized on the Modified Accrual basis--when measurable and available to pay current period obligations. Expenditures and Other Financing Uses decrease fund balance when closed. Both are recognized on the Modified Accrual basis--when incurred, if expected to be repaid from currently available resources of the fund. Chapter 3 Granof-4e 7
Budgetary and Operating Statement Accounts (cont d) An appropriation is a legal authorization granted by the legislative body to incur liabilities for purposes specified in the appropriation act or ordinance. Let s do a simple example (excel file) Chapter 3 Granof-4e 8
Examples of Budgetary Journal Entries Budget Approved on 1-1-2008: Dr. Cr. Estimated Revenues 500,000 Appropriations 450,000 Fund Balance 50,000 Revenues Ledger: Taxes 300,000 Licenses and Permits 50,000 Intergovernmental Revenues 50,000 Charges for Services 50,000 $500,000 Fines and Forfeits 25,000 Miscellaneous Revenues 25,000 Appropriations Ledger: General Government 120,000 Public Safety 150,000 Public Works $450,000 100,000 Culture and Recreations 80,000 Chapter 3 Granof-4e 9
Budgetary and Operating Statement Accounts (cont d) An appropriation is a legal authorization granted by the legislative body to incur liabilities for purposes specified in the appropriation act or ordinance. An encumbrance is an estimated amount recorded for purchase orders, contracts, or other expected expenditures chargeable to an appropriation. Chapter 3 Granof-4e 10
Budgetary Control Expenditures Budgetary control of expenditures is achieved by: ensuring that a valid appropriation exists prior to recording an encumbrance or expenditure, and periodically comparing encumbrances and expenditures to appropriations. Comparison is enhanced by using a common classification scheme for appropriations, encumbrances, and expenditures Chapter 3 Granof-4e 11
Encumbrance Prevents overspending the budget Entry to record encumbrance is made when purchase order is issued, a contract is signed, or a commitment is made. Entry that records encumbrance reduces the budget available for expenditure. Outstanding encumbrances are reported in the notes to the entity s financial statements No longer on face of balance sheet per GASB 54. Chapter 3 Granof-45 12
Impact of GASB 54 Significant encumbrances must be reported in the notes to the financial statements A separate display of encumbrances within fund balance categories is not permitted In the general fund: add encumbrances not related to restricted, committed or assigned purposes to the unassigned fund balance In special purpose funds: add encumbrances for specific purposes to the appropriate committed or assigned fund balance This requirement is necessary because special purpose funds cannot report a positive unassigned fund balance Chapter 3 Granof-5e 13
Under GASB 54, encumbrances will be reported only in the notes Chapter 3 Granof-5e 14
Let s do an example with encumbrances Based on Exercise 3-7 in text Go to Excel File Chapter 3 Granof-4e 15
Budgetary Control Expenditures (cont d) Accounting Control over Expenditures Three control accounts (Appropriations, Encumbrances, and Expenditures) are used to control similarly named columns in the detail budget accounts in the subsidiary ledger The sum of the Appropriations, Encumbrances, and Expenditure account balances of the subsidiary ledger must equal the general ledger control account balance Chapter 3 Granof-4e 16
Under GASB 54, encumbrances will be reported only in the notes Chapter 3 Granof-4e 17
Accounting model for the General Fund ASSETS = LIABILITIES + FUND BALANCE Balance Sheet Reserved (Nonspend + Unreserved (Unassig) Accounts + Rest., Comm., & Assign) FB Fund Balance (permanent) Budgetary/ Operating Budgetary Accounts Operating Accounts Statement Accounts (temporary) Chapter 3 Granof-5e 18