Embed Size (px)
DESCRIPTION
Chapter Three. Issues of Budgeting and Controls. Thought to Ponder: Chapter 3. " A budget is more than simply numbers on a page. It is a measure of how well we are living up to our obligations to ourselves and one another." President Barack Obama. Learning Objectives. - PowerPoint PPT Presentation
Citation preview
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
1
Chapter ThreeIssues of Budgeting and Controls
"A budget is more than simply numbers on a page. It is a measure of how well we are living up to our obligations to ourselves and one another."
President Barack Obama
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
2
Thought to Ponder: Chapter 3
Learning Objectives• Key Purposes of Budgets
• Various ways of classifying expenditures
• Key Phases of the Budget cycle
• Limitations of Actual-to-budget comparisons
• How an encumbrance system prevents overspending
• How budgets enhance control
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
3
Budgets
Key Purposes of Budgeting• Planning
• Controlling and Administering
• Reporting and evaluating
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
4
Budgeting: Planning for successFour Components:• Plan (1)oEstablish missionoDevelop Strategic PlanoSet Long-Range PlansoPrepare Budgets
• Implement (2)• Control (3)• Measure Results and Report (4)
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
5
Budgeting: A Part of Planning
A process of planning and control.
The Budget Cycle• Preparation obased on guidelinesonormally done by responsibility center
managers• Review and Adoption• Implementation and Control• Evaluation of Results and Feedback
Cha
pter
3G
rano
f & K
hum
awal
a - 6
e
6
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.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
7
Major types of Budgets• Appropriation Budgeto Aka the Master budget - o Monitors current or operating fund (i.e. general fund) o Typically covers one operating cycle
• Revenue and Other Support - a forecast of resource inflows into the organization.
Revenues are earned from the sale of goods and services and the receipt of contributions and grants.
Support refers to just contributions and grants.
• Expenses represent the resources that an organization uses up in carrying on its activities.
• A surplus or profit is the excess of revenues and support over expenses; a deficit or loss is an excess of expenses over revenues and support.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
8
Budgets-Cont’d
Capital BudgetoMonitors construction and acquisition of long-lived
assetsoTypically covers multiple years
Special types of BudgetsoSpecial purpose budgetsoPerformance budgetsoFlexible and Zero-based Budgets
Contains alternative budget estimates based on varying levels of output
Helps distinguish fixed and variable costsMost useful to business-type activities where level of activity
depends on customer demand
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
9
Key Phases of Budget Cycle
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
10
Preparation
Legislative adoption and
executive approval
Execution
Reporting and Auditing
Current GASB Model (#34) 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.o Journalso Ledgers
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
11
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
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
12
Budgetary and Operating Statement
Accounts• 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.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
13
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.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
14
Example A 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.
Estimated revenues $500,000Appropriations $450,000Fund balance 50,000
Next slide shows what the budgetary detail might look like
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
15
Budgetary Journal Entry & detailBudget Approved on 1-1-2013: Dr. Cr.Estimated Revenues 500,000
Appropriations 450,000Fund Balance 50,000
Revenues Ledger (detail):Taxes 300,000Licenses and Permits 50,000Intergovernmental Revenues 50,000Charges for Services 50,000Fines and Forfeits 25,000Miscellaneous Revenues 25,000Appropriations Ledger (detail): General Government 120,000 Public Safety 150,000 Public Works 100,000 Culture and Recreations 80,000
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
16
$500,000
$450,000
Budgetary and Operating Statement
Accounts (cont’d)An encumbrance is an estimated
amount recorded for purchase orders, contracts, or other expected expenditures chargeable to an appropriation.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
17
Encumbrance• Prevents overspending the budget (it’s a control
mechanism)• 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 oNo longer on the face of balance
sheet per GASB 54.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
18
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 balanceo This requirement is necessary because special purpose funds
cannot report a positive unassigned fund balance
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
19
Example with encumbrances
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
20
Based on the example posted on BlackBoard
Budgetary Control — Expenditures
• Budgetary control of expenditures is achieved by:
o ensuring that a valid appropriation exists prior to recording an encumbrance or expenditure, and
o periodically comparing encumbrances and expenditures to appropriations.
• Comparison is enhanced by using a common classification scheme for appropriations, encumbrances, and expenditures
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
21
Example B - Budgetary ControlExample: City Clerk's office orders a new
multi-purpose machine on January 2, 2014 which had a list price in the vendor's catalog of $500.
General Fund General Journal: Dr. Cr.
Encumbrances--2014 $500Reserve for Encumb.--2014 $500
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
22
Accounting Control over Expenditures• Appropriations (expenditure budget)
• Estimated revenues & other sources of financing (revenue budget)
• Encumbrances (unfilled orders)oThe sum of the detailed Appropriations,
Encumbrances, and Expenditure account balances of the subsidiary ledger must equal the general ledger control account balances
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
23
Classification of ExpendituresGASB suggestions classifying expenditures by any of the
following:• Fund
o Ex. general fund, special revenue fund, etc.• Function or Program
o Def. Group of activities carried out with the same objectiveo Ex. general government, public safety, sanitation, etc.
• Organization Unito Ex. police department, fire department, etc.
• Activityo Def. Line of work contributing to a function or programo Ex. highway patrol, burglary investigations, etc.
• Character o Def. The fiscal period presumed to benefito Ex. Current, Capital, Debt Service
• Objecto Def. The types of items purchased or services obtainedo Ex. Salaries, fringe benefits, travel, etc.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
24
Budgeting Formats• Line item or object of expense o Ex. - salaries, benefits, supplies, rent, etc.
• Responsibility Center - units for which individual managers are held accountableo Ex. - custodial services, maintenance, public relations,
development, ticket sales, etc.
• Program Budgets include both revenues and expenseso Ex. - ballet, opera, philharmonic, etc.
• Generally, both Responsibility Center and Program budgets are supported by line item detail.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
25
Most Commonly Used Budget . .Object Classification Budget
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
26
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
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
27
Classification of Revenues and Estimated Revenues GASB Suggestion:
• 1st classify by fund• 2nd classify by source
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
28
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
On What Basis of Accounting are Budgets
Prepared?
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
29
Basis of Accounting• Neither GASB nor FASB have control over
budgeting principleso Budgeting principles are directly 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.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
30
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.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
31
Cash Basis Budgeting (Cont’d)
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 to 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.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
32
Cash Basis
Disadvantages:• 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 inter-period 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.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
33
Legally adopted budgets vs. GAAP-based Financial Statements
• Differences arise between the legally adopted budgets and GAAP-based financial statements.
• They are caused by:oBasis of accountingoTimingoPerspectiveoReporting entity
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
34
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.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
35
Recording Budgets Example
Additional examples to study (beyond textbook and ones we did
in class)
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
36
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. 109-111 for budgeting entries.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
37
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
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
38
Example - C (cont’d)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 $3,000.
Encumbrances$3,000Reserve for encumbrances 3,000
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
39
Example – C (cont’d)JE 4: During the year it received and paid for $2,800
of goods and services that had been previously encumbered. It expects to receive the remaining $200 in the following year.
a: Expenditures $2,800Cash 2,800
b: 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
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
40
Example –C (cont’d)Prepare end of year closing entries.
JE 6: Revenues $5,800 Estimated revenues 5,600 Fund balance 200
JE 7: Appropriations $5,550 Expenditures 5,300 Encumbrances 200 Fund balance 50
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
41
Supporting Computations – original style
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
42
Reserve for Encumbrances
dr cr balancebal 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)
dr cr balancebal fwd 0
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 300
Total 500
This should equal revenues – expenditures (since bal fwd in FB was 0)
Revenue – Expenditures = 5,800 – 5,300 = $500
Example C (alternate style closing)
Fund= General Fund Debit Credit
JE 6 Reverse original budgetary entry:
Appropriations $5,550
Fund balance (unassigned) 50
Estimated revenues 5,600
JE 7 Close revenue, expenditure & encumbrance accounts
Revenues $5,800
Expenditures 5,300
Encumbrances 200
Fund balance (unassigned) 300
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
43
Supporting Computations – alternate style
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
44
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)
dr cr balancebal fwd 0
1 50 (50)
6 50 -
7
300 (300)
Total fund balance at year end: Fund Balance –committed (Reserved for encumbrances)
200
Fund Balance -Unassigned 300
Total 500
This should equal revenues - expenditures 5,800
since balance fwd was zero 5,300 TRUE 500
Summary
• 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.
Cha
pter
3G
rano
f & K
hum
awal
a -6
e
45
