Chapter 3
Issues of Budgeting and Control
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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
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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
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Budgets
Key Purposes of Budgets
 Planning
 Controlling and Administering
 Reporting and evaluating
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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.
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Major types of Budgets
 Appropriation Budget
 Monitors current or operating fund (i.e. general fund)
 Typically covers one operating cycle
 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
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Key Phases of Budget Cycle
 Preparation
 Legislative adoption and executive
approval
 Execution
 Reporting and auditing
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Current GASB Model 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.
 Journals
 Ledgers
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CITY OF HOUSTON
GENERAL 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
Designated "Rainy Day" Amount
Budgeted Ending Fund Balance as of June 30, 2008
2,070
20,000
193,656
Total Budgeted Expenditures and Reserves
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$ 1,984,199
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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
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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 (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.
Let’s do a simple 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 budget using only the control
accounts.
Estimated revenues
Appropriations
Fund balance
$500
$450
50
Next slide shows what the detail might look like
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Examples of Budgetary Journal Entries (A)
Budget Approved on 1-1-2010:
Estimated Revenues
Appropriations
Fund Balance
Revenues Ledger:
Taxes
Licenses and Permits
Intergovernmental Revenues
Charges for Services
Fines and Forfeits
Miscellaneous Revenues
Appropriations Ledger:
General Government
Public Safety
Public Works
Culture and Recreations
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Dr.
500,000
Cr.
450,000
50,000
300,000
50,000
50,000
50,000
25,000
25,000
$500,000
$450,000
120,000
150,000
100,000
80,000
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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.
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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.
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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 balance
 This requirement is necessary because special purpose funds
cannot report a positive unassigned fund balance
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Let’s do an example with
encumbrances
Based on the Example posted on
Blackboard
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Budgetary Control — Expenditures


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
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Example B - Budgetary Control
Example: City Clerk's office orders a new multipurpose machine on January 2, 2010 which
had a list price in the vendor's catalog of
$500.
General Fund General Journal:
Dr.
Encumbrances--2010
$500
Reserve for Encumb.--2010
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Cr.
$500
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Accounting Control over Expenditures
 Appropriations (expenditure budget)
 Estimated revenues & other sources of
financing (revenue budget)
 Encumbrances (unfilled orders)
The sum of the detailed Appropriations,
Encumbrances, and Expenditure account
balances of the subsidiary ledger must
equal the general ledger control account
balances
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Accounting model for the General Fund
ASSETS = LIABILITIES + FUND BALANCE
Balance
Sheet
Accounts
Reserved (Nonspend
+ Rest., Comm., & Assign) FB
+ Unreserved (Unassig)
Fund Balance
(permanent)
Budgetary/
Operating
Budgetary Accounts
Operating Accounts
Statement
Accounts
(temporary)
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Classification of Expenditures
GASB suggestions classifying expenditures by any of the following:






Fund
 Ex. general fund, special revenue fund, etc.
Function or Program
 Def. Group of activities carried out with the same objective
 Ex. general government, public safety, sanitation, etc.
Organization Unit
 Ex. police department, fire department, etc.
Activity
 Def. Line of work contributing to a function or program
 Ex. highway patrol, burglary investigations, etc.
Character
 Def. The fiscal period presumed to benefit
 Ex. Current, Capital, Debt Service
Object
 Def. The types of items purchased or services obtained
 Ex. Salaries, fringe benefits, travel, etc.
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Most Commonly Used Budget . . .
Object Classification Budget
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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
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Classification of Revenues and
Estimated Revenues
GASB Suggestion:
 1st classify by fund
 2nd classify by source
FUND
S
O
U
R
C
E
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Sources include:
 Taxes (Ad-valorem and self-assessing)
 Special Assessments
 Licenses and Permits
 Intergovernmental Revenues
 Charges for Services
 Fines and Forfeits
 Miscellaneous Revenues
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On What Basis of Accounting
are Budgets Prepared?
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Basis of Accounting
 Neither GASB nor FASB have control over
budgeting principles
– Budgeting principles are 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.
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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.
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Cash Basis Budgeting
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.
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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.
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Legally adopted budgets vs.
GAAP-based Financial Statements
Differences arise between the legally adopted
budgets and GAAP-based financial
statements.
They are caused by:
 Basis of accounting
 Timing
 Perspective
 Reporting entity
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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.
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Recording Budgets Example
Additional examples
to study (beyond
textbook and ones
we did in class)
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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. 105-108 for budgeting
entries.
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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
Appropriations
Fund balance
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$5,600
$5,550
50
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Example - C (cont’d)
JE 2: During the year, the government health
care district collected $5800 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
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3,000
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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
Cash
b: Reserve for encumbrances
Encumbrances
$2,800
2,800
$2,800
2,800
JE 5: It incurred $2500 in other expenditures for goods and
services that had not been encumbered.
Expenditures
Cash
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$2,500
2,500
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Example –C (cont’d)
Prepare end of year closing entries.
JE 6: Revenues
Estimated revenues
Fund balance
JE 7: Appropriations
$5,550
5,300
200
50
Expenditures
Encumbrances
Fund balance
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$5,800
5,600
200
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Supporting Computations – original style
Reserve for Encumbrances
dr
cr
balance
$0
3,000
(3,000)
bal fwd
3
4b
2,800
(200)
(200)
bal fwd
1
6
7
Fund balance
(unassigned, unreserved)
dr
cr
balance
0
50
(50)
200
(250)
50
(300)
bal fwd
3
4b
7
Encumbrances
(temporary acct)
dr
cr
balance
0
3,000
3,000
2,800
200
200
0
Total fund balance at year end:
Fund balance –committed (Reserved
for encumbrances )
Fund Balance Unassigned
(unreserved)
Total
This should equal revenues – expenditures
(since bal fwd in FB was 0)
200
300
500
Revenue – Expenditures = 5,800 – 5,300 = $500
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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
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5,300
Encumbrances
200
Fund balance (unassigned)
300
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Supporting Computations – alternate style
Reserve for Encumbrances
dr
cr
balance
$0
3,000
(3,000)
bal fwd
3
4b
2,800
(200)
(200)
bal fwd
1
6
7
Encumbrances
(temporary acct)
dr
cr
balance
bal fwd
3
4b
7
3,000
Fund balance
(unassigned, unreserved)
dr
cr
balance Total fund balance at year end:
Fund Balance –committed
0
50
(50) (Reserved for encumbrances)
Fund Balance -Unassigned
50
(unreserved)
300
(300) Total
2,800
200
200
300
500
This should equal revenues - expenditures
since balance fwd was zero
TRUE
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0
3,000
200
0
5,800
5,300
500
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City of Houston - Facts
Did you know?
 The final sales tax revenue for FY 2009 was $507
million, 2.4 % more than FY 2008 amount.
 Sales taxes comprise 21% of the city’s revenue
source for governmental activities.
 Total unreserved fund balance of the General
Fund for FY 2009 was $281 million.
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Summary


Chapter 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.
END!
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