Chapter 3: Budgetary Accounting for General and Special Revenue Funds

1
Chapter 3 Budgetary Accounting for General and
Special Revenue Funds
2
What is the Budget?

• A budget is a financial plan submitted to the
  appropriate body for approval
• Once approved, budgets carry the status of law
• When voted upon, an appropriation act gives the
  legal authority to spend and generally sets the
  maximum limit for spending

3
Importance of Budget Reporting

• The primary means of financial control by the
  government is the budget
• The financial report should answer the question
  -- Did the government use its funds as promised?
• Budget amounts are incorporated in accounting
  records of the General Fund and special revenue
  funds to provide information that will keep
  spending within the legal limits

4
Uses of Budgets

• Governments must adopt an annual budget
• General funds and Special Revenue funds will have
  separate budgets . Separate budgets are optional
  for other governmental funds and are not used for
  proprietary and fiduciary funds.
• Budgetary accounting principles are the same for
  any governmental type fund which adopts an annual
  budget

5
The General Process of Putting Together a Budget

• Plan the expected inflows
• Project revenues based on past history, economic
  models, etc
• Plan the expected outflows
• Ask departments for their projected needs
• Balance the inflows and the outflows
• Look for places to increase revenues or to cut
  spending
• Governments may also borrow or use accumulated
  surpluses to balance inflows and outflows

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Permanent Accounts
Current Assets
Current Liabilities
xxx
xxx
Fund Balance
xxx
Note balances are the same as we are used to
7
Nominal Accounts
Revenues
Other Financing Sources
xxx
xxx
Expenditures
Other Financing Uses
xxx
xxx
Note balances are the same as we are used to
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Budgetary Accounts
Estimated Revenues
Est. Other Financing Sources
xxx
xxx
Note balance is opposite Related nominal account
Appropriations
Est. Other Financing Uses
xxx
xxx
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Budgetary Accounts, cont.
Encumbrances
Reserve for Encumbrances
xxx
xxx
Budgetary Fund Balance
xxx (as long as E(inflows) gt E(outflows)
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Summary Normal Balances

• Permanent Accounts
• Current assets debit
• Current liabilities credit
• Fund balance credit
• Nominal Accounts
• Revenues credit
• Other financing sources credit
• Expenditures debit
• Other financing uses debit

• Budgetary Accounts
• Est. revenues debit
• Est. other fin. src. debit
• Appropriations credit
• Est. other fin. uses credit
• Encumbrances debit
• Reserve for encumb credit
• Budgetary fund bal. credit
• (if Est. Rev. gt Approp.)

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Example Budget Approval

• The city council approves a budget with estimated
  revenues of 1,350,000, appropriations of
  1,225,000 and transfers out of 74,500
• 1. Est. Revenues 1,350,000
• Budgetary Fund Bal. 1,350,000
• 2. Budgetary FB 1,300,000
• Appropriations 1,225,000
• Est. Other Fin. Uses 74,500

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Budgetary Accounts
Estimated Revenues
Est. Other Financing Sources
xxx
1) 1,350,000
Appropriations
Est. Other Financing Uses
2) 1,225,000
2) 74,500
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Budgetary Accounts, cont.
Encumbrances
Reserve for Encumbrances
xxx
xxx
Budgetary Fund Balance
1) 1,350,000
2) 1,300,000
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Example Revenues Realized

• During the year 1,314,500 of revenues are
  realized
• 3) Cash 1,314,500
• Revenues 1,314,500

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Permanent Accounts
Cash
Current Liabilities
xxx
3) 1,314,500
Fund Balance
xxx
16
Nominal Accounts
Revenues
Other Financing Sources
xxx
3) 1,314,500
Expenditures
Other Financing Uses
xxx
xxx
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Example Purchase Orders Approved

• POs for 500,100 are issued
• 4) Encumbrances 500,100
• Reserve for Enc. 500,100

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Budgetary Accounts, cont.
Encumbrances
Reserve for Encumbrances
4) 500,100
4) 500,100
Budgetary Fund Balance
1) 1,350,000
2) 1,300,000
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Example Most POs Filled

• Goods that were expected to cost 492,300 were
  received. The actual cost, 491,800, was paid.
• 5a) Reserve for Enc. 492,300
• Encumbrances 492,300
• 5b) Expenditures 491,800
• Cash 491,800

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Budgetary Accounts, cont.
Encumbrances
Reserve for Encumbrances
4) 500,100
4) 500,100
5a) 492,300
5a) 492,300
Budgetary Fund Balance
1) 1,350,000
2) 1,300,000
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Nominal Accounts
Revenues
Other Financing Sources
xxx
3) 1,314,500
Expenditures
Other Financing Uses
xxx
5b) 491,800
22
Permanent Accounts
Cash
Current Liabilities
xxx
5b) 491,800
3) 1,314,500
Fund Balance
xxx
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Example Salaries Recorded, not Encumbered

• Salaries of 663,600 were recorded. Since
  salaries are recurring and predictable, there is
  no need to encumber them
• 6) Expenditures 663,600
• A/P 663,600

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Nominal Accounts
Revenues
Other Financing Sources
xxx
3) 1,314,500
Expenditures
Other Financing Uses
xxx
5b) 491,800 6) 663,600
25
Permanent Accounts
Cash
Current Liabilities
6) 663,600
5b) 491,800
3) 1,314,500
Fund Balance
xxx
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Budget Revisions

• Budget revisions may be necessary during the year
  due to changes in revenue projections or
  operating conditions for example, electricity
  price increases, decrease in sales taxes due to
  low consumer spending

• Budget revisions usually are taken back to the
  appropriate legislative body for approval,
  although some jurisdictions may allow some
  percentage of the budget to be transferred
  between accounts

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Example Budget Revision

• The city council revised the budget. Estimated
  revenues were decreased 36,000, and
  appropriations were increased 8,000
• 7) Budgetary FB 44,000
• Est. Revenues 36,000
• Appropriations 8,000

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Budgetary Accounts, cont.
Encumbrances
Reserve for Encumbrances
4) 500,100
4) 500,100
5a) 492,300
5a) 492,300
Budgetary Fund Balance
1) 1,350,000
2) 1,300,000 7) 44,000
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Budgetary Accounts
Estimated Revenues
Est. Other Financing Sources
xxx
1) 1,350,000
7) 36,000
Appropriations
Est. Other Financing Uses
2) 1,225,000 7) 8,000
2) 74,500
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Account Balances

• Cash 822,700
• A/P 663,600
• Revenues 1,314,500
• Expenditures 1,155,400
• Encumbrances 7,800
• Res. For Enc. 7,800
• Budget FB 6,000
• Appropriations 1,233,000

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Budgetary Comparison Schedule

• Both the original and the final adjusted budget
  is shown
• The revised appropriations are compared to the
  Actual Expenditures for the current period plus
  Outstanding Encumbrances
• A variance column is typically shown, but is
  optional

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Budgetary Comparison Schedule

• The actual column should use the basis of
  accounting assumed in the budget. This may be
  different than GAAP basis

• Another schedule will reconcile the actual
  figures on the budgetary vs. GAAP basis

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Classification of Inflows and Outflows on Budget
Schedule

• Revenues are classified by source
• Where the money came from taxes, licenses and
  permits, charges for service, etc
• May be subdivided further such as by type of tax,
  sometimes shown in separate schedule
• Expenditures and Encumbrances may be classified
  by
• function, program, department, activity,
  character, or object

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Outflow Classifications

• Examples of function General government, public
  safety, streets and highways
• Public safety could be subdivided by department
  Police and fire
• Police could be subdivided further by activity
  Traffic and drug enforcement
• Activities in the traffic area could be divided
  into objects of expenditure Policemans salary,
  gas for automobiles
• Character groupings are always CURRENT, CAPITAL
  OUTLAY, and DEBT SERVICE

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Property/ad valorem Taxes

• Ad valorem taxes are based on the value of an
  underlying asset and are a major type of tax,
  particularly at the local government level
• All real property bought and sold is typically
  registered at the county courthouse and subject
  to property tax
• The tax is based on the tax rate, often expressed
  as a millage rate, times the assessed value

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Property Taxes 60 Day Rule

• Under modified accrual accounting, property tax
  revenues may not exceed the amount received
  during a fiscal year plus the amount expected to
  be received during the first 60 days after the
  end of the fiscal year.

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Millage and Assessed Value

• A mill is
• 1/1000 of a dollar, or 1/10 of a penny
• In other words, .001 times some amount
• Appraised value
• Is calculated based on size of home, lot, etc.
• Ideally, should approximate market value
• Assessed value is usually less than appraised
  value often around 20 of appraised value

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Property Tax Calculation

• Assume a home has an appraised value of 100,000
  20 assessed value rate tax rate is 45 mills
• Assessed value
• 100,000 X .20 20,000
• Tax amount would be
• 45 mills X 20 thousands 900
• Or, 20,000 X .045 900

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How Is the Millage Rate Set?

• In some areas all property taxes are subject to a
  direct vote
• In other areas the property tax is adjusted each
  year (subject to possible maximum amounts) to
  meet expenditure needs
• Illustration 3-5 presents a calculation to
  determine the property taxes needed to balance
  the budget