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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

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

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Essentials of accounting for governmental and not for profit organizations l.jpg

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

Chapter 3: Budgetary Accounting for General and Special Revenue Funds


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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


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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 nonexchange transactions, Tax Revenues are not equivalent to Sales as a measure of success in the marketplace


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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


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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


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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


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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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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


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Recording the Budget

  • Assume $1,000,000 of revenues are budget along with $950,000 of estimated expenditures

    • The budget entry would be

      • Estimated Revenues1,000,000

      • Appropriations 950,000

      • Budgetary Fund Balance 50,000

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


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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 $2,800,000; 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 2,800,000

    Estimated Other Financing Use 100,000

    Budgetary Fund Balance 100,000


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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


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Recording Outstanding Orders

  • Place an order for $150,000 which consists of three mini-buses costing $50,000 each. Recorded as:

    Encumbrances150,000

    Budgetary 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. 100,000

      Encumbrances100,000

    • Second, record the actual amount of expenditure:

      Expenditure 102,000

      Accounts Payable 102,000


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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

Budget Revisions


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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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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

Budgetary Comparison Schedule


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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: Policeman’s 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


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