Essentials of Accounting for Governmental and NotforProfit Organizations

1
Essentials of Accounting for Governmental and
Not-for-Profit Organizations

• Chapter 3 Budgetary Accounting for General and
  Special Revenue Funds

2
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

3
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

4
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

5
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

6
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

7
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

8
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

9
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

10
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

11
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

12
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

13
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

14
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

15
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

16
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

17
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.