Chapter 3

Issues of Budgeting and Controls

1
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.
Major types of Budgets
Appropriation 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.

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Budgets-Contd
Capital Budget
o Monitors construction and acquisition of long-lived
assets
o Typically covers multiple years
Special types of Budgets
o Special purpose budgets
o Performance budgets
o Flexible and Zero-based Budgets
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 4
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 Journals
o Ledgers
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

3-
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.
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Budgetary and Operating Statement
Accounts (contd)
An appropriation is a legal authorization
granted by the legislative body to incur
liabilities for purposes specified in the
appropriation act or ordinance.

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 CITY OF HOUSTON
GENERAL FUND BUDGET FOR FISCAL YEAR 2012
(unaudited)
(amounts expressed in thousands)

Total Budgeted Resources $1,930,641,326

Total Budgeted Expenditures 1,827,997,595

(this is $85.8 million (4.5%) below the FY 2011 budget)

Budgeted Ending Fund Balance Unassigned

as of June 30, 2012 102,643,731

Total Budgeted Expenditures and FB $ 1,930,641,326

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Basis of Accounting
Neither GASB nor FASB have control over
budgeting principles
o 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.
Recording Budgets
Example

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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 journal entries.

Estimated revenues $500,000

Appropriations $450,000
Fund balance 50,000

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Budgetary Journal Entry & detail
Budget Approved on 1-1-2013: Dr. Cr.
Estimated Revenues 500,000
Appropriations 450,000
Fund Balance 50,000
Revenues Ledger (detail):
Taxes 300,000
Licenses and Permits 50,000
Intergovernmental Revenues 50,000 $500,000
Charges for Services 50,000
Fines and Forfeits 25,000
Miscellaneous Revenues 25,000
Appropriations Ledger (detail):
General Government 120,000
Public Safety $450,000 150,000
Public Works 100,000
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Culture and Recreations 80,000
Recording Budgets -
Practice Question

14
 Recording Budgets
1. A municipality gives recognition to the adoption of its general fund
budget. Estimated total revenues are $706 million and appropriated
total expenditures are $700 million.

2. It records revenues and expenditures during the year all in cash

and all as estimated.

3. It makes year-end closing entries.

4. It records revenues and expenditures assuming instead that actual

revenues were $702 million and actual expenditures were $670
million.

5. It makes year-end closing entries.

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Budgetary and Operating Statement
Accounts (contd)
An encumbrance is an estimated
amount recorded for purchase orders,
contracts, or other expected expenditures
chargeable to an appropriation.
Encumbrance
Prevents overspending the budget (its 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 entitys financial statements
o No longer on the face of balance
sheet per GASB 54.
 Example with
encumbrances

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Example B - Budgetary Control
Example: 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 $500
Reserve for Encumb.--2014 $500
Example C
A 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 $5,600

Appropriations $5,550
Fund balance 50
Example - C (contd)
JE 2: During the year, the government health
care district collected $5,800 in fees, grants,
taxes, and other revenues. Prepare journal
entries.

Cash $5,800
Revenues 5,800

JE 3: It ordered goods and services for

$3,000.

Encumbrances $3,000
Reserve for encumbrances 3,000
Example C (contd)
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 $2,800
Cash 2,800
b: Reserve for encumbrances $2,800
Encumbrances 2,800

JE 5: It incurred $2500 in other expenditures for

goods and services that had not been encumbered.

Expenditures $2,500
Cash 2,500
Example C (contd)
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
 Supporting Computations original
style
Encumbrances
Reserve for (temporary acct)
Encumbrances dr cr balance
dr cr balance bal fwd 0
bal fwd $0
3 3,000 3,000
3 3,000 (3,000)
4b 2,800 200
4b 2,800 (200)
7 200 0
(200)
Fund balance Total fund balance at year end:
(unassigned) Fund balance committed
dr cr balance (Reserved for encumbrances ) 200
bal fwd 0
Fund Balance Unassigned 300
1 50 (50)
Total 500
6 200 (250) This should equal revenues expenditures
(since bal fwd in FB was 0)
7 50 (300) 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
Supporting Computations alternate
style Encumbrances
(temporary acct)
dr cr balance
Reserve for Encumbrances bal fwd 0
dr cr balance
3 3,000 3,000
bal fwd $0
4b 2,800 200
3 3,000 (3,000)
7 200 0
4b 2,800 (200)
Total fund balance at year end:
(200) Fund Balance committed
(Reserved for
Fund balance encumbrances) 200
(unassigned)
dr cr balance Fund Balance -Unassigned 300
bal fwd 0
Total 500
1 50 (50) This should equal revenues -
6 50 - expenditures 5,800

7 300 (300) since balance fwd was zero 5,300

TRUE 500
Practice Question-
encumbrances

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Example - encumbrances
1. A city issues purchase orders for goods and services, $6,000.
2. It receives (and pays for) goods and services, $5,000. The
remaining goods and services are expected to be received next
year.
3. Actual revenues for the year (all in cash) are $6,000.
4. It closes the accounts at year-end.

Year 2

5. It restores encumbrances of the previous year.

6. It receives and pays for the remaining goods and services.
Actual cost was $950 (not $1,000 as estimated and encumbered). 28
7. It closes the accounts at year-end.
END OF CHAPTER 03