Essentials of Accounting for Governmental and Not-for-Profit

Organizations

Chapter 3: Budgetary Accounting for General and Special

Revenue Funds

Overview of Chapter 3

Importance of budgets in government accounting

Recording the budget in the accounts Overview of property taxes Interfund transactions and other

financing sources

Importance of Budgets

Net income is NOT a good measure of government effectiveness Excess of revenue over expenditure

does NOT mean success, but indicates whether the funds received are in excess of the funds expended

Since the funds received are often the result of non-exchange transactions, Tax Revenues are not equivalent to Sales as a measure of success in the marketplace

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

Importance of Budget Reporting

The primary means of government control is the budget Financial statements should answer the question

-- Did the government used 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

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 funds.

Budgetary accounting principles are the same for any governmental type fund which adopts an annual budget

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

Budgetary Accounting - New Account Titles

Estimated Revenues Budgeted inflows -- debit balance

Appropriations Budgeted spending -- credit balance

Encumbrances Commitments (e.g. purchase orders)

outstanding -- reminding ourselves we have entered a commitment for a future expenditure -- debit balance

Reserve for Encumbrances Restriction on fund balance -- credit

balance

Recording the Budget Assume $1,000,000 of revenues are budget

along with $950,000 of estimated expenditures The budget entry would be

Estimated Revenues 1,000,000 Appropriations 950,000 Budgetary Fund Balance 50,000

Alternatively, estimated revenues and appropriations could be recorded in separate entries

Incorporating Other Financing Sources and Uses in Budget Entry

Assume a city budgets property tax revenues of $2,000,000; bond proceeds of $1,000,000; expenditures of $3,800,000; and a transfer to another fund of $100,000

The budget entry would be Estimated Revenues 2,000,000

Estimated Other Financing Source 1,000,000

Appropriations 3,800,000

Estimated Other Financing Use 100,000

Budgetary Fund Balance 100,000

Why Record Encumbrances? In business accounting, orders are

not entered into the general ledger Governments recognize that an

outstanding order will turn into an expenditure and a liability when the goods arrive

To prevent over-spending outstanding orders are entered into the books

Recording Outstanding Orders Place an order for $150,000 which consists of

three mini-buses costing $50,000 each. Recorded as:

Encumbrances 150,000Budgetary FB Res. for Encumb. 150,000

Assume two of the buses arrive, but with freight, they cost $102,000 instead of $100,000. First, reverse a part of the encumbrances:

Budg. FB Res. for Encumb. 100,000Encumbrances 100,000

Second, record the actual amount of expenditure:Expenditure 102,000

Accounts Payable 102,000

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

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

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

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

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: Policeman’s salary, gas for automobiles

Character groupings are always: CURRENT, CAPITAL OUTLAY, and DEBT SERVICE

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

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.

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

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

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 3-4 presents a calculation to determine the property taxes needed to balance the budget