Chapter 3 Granof & Khumawala 5th ed 1

Chapter 3 (part a)

Issues of Budgeting and Control

Chapter 3 Granof-4e 2

Budgets

Key Purposes of Budgets

Planning

Controlling and Administering

Reporting and evaluating

Chapter 3 Granof-4e 3

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.

Budgets in Government are MUCH MORE IMPORTANT than they are in Business

Chapter 3 Granof-4e 4

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 5

CITY OF HOUSTONGENERAL 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 2,070Designated "Rainy Day" Amount 20,000Budgeted Ending Fund Balance as of June 30, 2008 193,656

Total Budgeted Expenditures and Reserves $ 1,984,199

Chapter 3 Granof-4e 6

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

Budgetary Accounts

Chapter 3 Granof-4e 7

Revenues and Other Financing Sourcesincrease 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 Usesdecrease 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.

Budgetary and Operating Statement Accounts (cont’d)

Chapter 3 Granof-4e 8

An appropriation is a legal authorization granted by the legislative body to incur liabilities for purposes specified in the appropriation act or ordinance.

Budgetary and Operating Statement Accounts (cont’d)

Let’s do a simple example (excel file)

Chapter 3Granof-4e 9

Budget Approved on 1-1-2008: 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

$450,000

$500,000

Chapter 3 Granof-4e 10

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.

Budgetary and Operating Statement Accounts (cont’d)

Chapter 3 Granof-4e 11

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

Budgetary Control — Expenditures

Chapter 3 Granof-45 12

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.

Impact of GASB 54Significant 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

Chapter 3 Granof-5e 14

Under GASB 54, encumbrances will be reported only in the notes

Let’s do an example with encumbrances

Based on Exercise 3-7 in textGo to Excel File

Chapter 3 Granof-4e 15

Chapter 3 Granof-4e 16

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

Budgetary Control — Expenditures (cont’d)

Chapter 3 Granof-4e 17

Under GASB 54, encumbrances will be reported only in the notes

Chapter 3 Granof-5e 18

ASSETS = LIABILITIES + FUND BALANCE

Balance Sheet Reserved (Nonspend + Unreserved (Unassig)Accounts + Rest., Comm., & Assign) FB Fund Balance(permanent)

Budgetary/Operating Budgetary Accounts Operating AccountsStatementAccounts(temporary)

Accounting model for the General Fund