Essentials of accounting for governmental and not for profit organizations
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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

Chapter 3: Budgetary Accounting for General and Special Revenue Funds


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Overview of Chapter 3 Organizations

  • 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 Organizations

  • Net income is NOT a good measure of government effectiveness

    • Excess of revenue over expenditure does NOT mean success, but indicates

      • Either the taxpayers paid too much in taxes

      • Or, they received too few services for taxes paid

  • The primary means of government control is the budget

    • Financial statements should answer the question -- Did the government used its funds as promised?


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Government and Special Revenue Uses of Budgets Organizations

  • Governments must adopt an annual budget

  • General funds and Special Revenue funds will have separate budgets . Separate budgets may be optional for other funds.

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


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Budgets vs. Appropriations Organizations

  • A budget is a financial plan submitted to the appropriate body for approval

  • Once approved, budgets are called ‘appropriations’ and 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

  • Appropriation (budget) amounts are incorporated in accounting records to provide information that will keep spending within the legal limits


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Budgetary Accounting - New Account Titles Organizations

  • Estimated Revenues

    • Budgeted inflows -- debit balance

  • Appropriations

    • Budgeted spending -- credit balance

  • Encumbrances

    • Orders outstanding -- reminding ourselves we have burdened down the budget with a future expenditure -- debit balance

  • Reserve for Encumbrances

    • Restriction on fund balance -- credit balance


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Recording the Budget Organizations

  • 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

      • Fund Balance 50,000

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


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Alternative Approach Organizations

  • Estimated Revenues 1,000,000

  • Fund Balance 1,000,000

  • Fund Balance 950,000

  • Appropriations 950,000

  • Approach on previous slide typically assumed on CPA exam

  • Text page 67, 68, etc. shows process of recording budget detail for each type of revenue and appropriation

  • Subsidiary details needed in practice, but CPA exam rarely considers this level of detail as method to record varies with software used


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    Incorporating Other Financing Sources and Uses in Budget Entry

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

    • The budget entry would be

      • Estimated Revenues 1,000,000

      • Estimated Other Financing Source 2,000,000

        • Appropriations 1,800,000

        • Estimated Other Financing Use 100,000

        • Fund Balance 100,000


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    Revenue Subsidiary Accounts Entry

    • The general ledger has two separate accounts

      • Estimated Revenue (Dr. balance) and

      • Actual Revenue (Cr. balance)

    • However, at the subsidiary level, estimated and actual revenues need to be posted side by side in the same account per Illustration 3-1

      • A Cr. balance at year end would mean actual revenues were more than budgeted

      • A Dr. balance at year end would mean actual revenues were less than budgeted


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    Why Record Encumbrances? Entry

    • In business accounting, orders are not entered into the dr. and cr. system

    • In the government setting, an outstanding order will turn into an expenditure and a liability when the goods arrive

    • To prevent over-encumbering the budget with outstanding orders in excess of allowed appropriations, the orders are entered into the books in the SLG environment


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    Recording Outstanding Orders Entry

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

      • Encumbrance 150,000

        • Bud. 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 encumbrance:

      • Bud. FB Res. for Encumb. 100,000

      • Encumbrance 100,000

    • Second, record the actual amount of expenditure:

      • Expenditure 102,000

        • Liability 102,000


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    Subsidiaries for Expenditures, Appropriations, and Encumbrances

    • The general ledger has separate t-accounts for expenditures (dr. balance), encumbrances (dr. balance), and appropriations (cr. balance), but in the subsidiary these need to be posted all in one account per page 73

    • Keeping all three posted in the same account makes sure that the total of expenditures and encumbrances (dr. balances) do not expend the total appropriation allowed (cr. balance)

    • A cr. balance indicates there is still money to spend in the account. Any dr. balance would indicate the government has overspent its appropriation for that item


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    Budget Revisions Encumbrances

    • Budget revisions may be necessary during the year due to changes in revenue projections or operating conditions … for example, electricity price increases, more snow removal needed than normal

    • 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

    • Entries should be made to control and subsidiary accounts for any budget revisions made


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    Budgetary Comparison Schedule Encumbrances

    • Both the original and the final adjusted budget is shown

    • The revised budget is compared to the Actual Expenditures plus Encumbrances

    • A variance column is typically shown, but is optional

    • The budget should be shown on the budget rather than GAAP basis

    • Another schedule will reconcile the ‘actual’ figures on the budget vs. GAAP basis


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    Classification of Inflows and Outflows on Budget Schedule Encumbrances

    • 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 Encumbrances

    • 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 arealways: CURRENT, CAPITAL OUTLAY, and DEBT SERVICE


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    The General Process of Putting Together a Budget Encumbrances

    • Plan the expected inflows

      • Do revenue projections

      • May use 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


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    Property/ Encumbrancesad valorem Taxes

    • “Ad valorem” taxes are based on the value of an underlying asset

    • Property taxes are a major type of tax, particularly at the city and county 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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    Millage and Assessed Value Encumbrances

    • 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 Encumbrances

    • 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

    • This would be a typical tax for a small city or rural area. Might be double in larger city.


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    How Is the Millage Rate Set? Encumbrances

    • 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 shows a calculation to determine the property taxes needed to balance the budget

      • If a jurisdiction does not have flexibility to change property tax rates without a citizen vote, balancing the budget will mean cutting expected expenditures instead of raising property taxes.


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    Quasi-External Transactions Encumbrances

    • These are between funds but they are exchange-like transactions with an objective basis for determining the amount

    • Treated as true revenue and expense or expenditure

      • Example, sale of electricity by the Electricity Enterprise fund to the General Fund

      • Would be treated as revenue for Enterprise Fund and expenditure for General Fund

  • GASB 34 calls these “Interfund Services Provided & Used” instead of quasi-external


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    Reimbursements Encumbrances

    • Assume the UPS delivers a $10,000 shipment of supplies which are initially recorded in the General Fund as follows:

      • GF: Expenditures $10,000

      • Liability $10,000

    • Later, it is discovered that $2,000 of these supplies were for the Electricity Enterprise fund, and the supplies are given to the Electricity fund. The following would be recorded:

      • GF: Due from Electricity $2,000

      • Expenditures $2,000

      • EF: Expenditures $2,000

      • Due to General Fund $2000


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    Reimbursements EncumbrancesCont’d

    • Reimbursements do not show up separately on the Activity or Budget statement, but are internal balance corrections

    • When the reimbursement is made, the expense or expenditure is recorded in the correct fund and the incorrect expense or expenditure is decreased

    • If reimbursement did not occur by year end, would need adjusting entries for expense/expenditure and recording Due To and Due From amount


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    Transfers Encumbrances

    • Any movements other than quasi-external or reimbursements are listed on the Activity and Budget statement as Transfers In or Transfers Out

    • Transfers In are considered Other Financing Sources

    • Transfers Out are considered Other Financing Uses

    • Recurring Transfers such as for debt service may be built into the budget


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    Bonds Encumbrances

    • Long-term bonds are not fund liabilities in governmental type funds

      • If $12,000,000 of bonds are issued you would record

        • Cash $12 M

        • Bond Proceeds $12 M

    • Bond proceeds are considered an Other Financing Source on the Activity and Budget Statements

      • Bond proceeds is not a revenue per se, but is considered an current inflow on the activity statement

      • Similarly, a repayment of bond principal would be considered an Other Financing Use


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    Capital Leases in Government Funds Encumbrances

    • A 20-year lease of a building would be considered equivalent to a purchase of the building and payment of a long-term note

    • In Government type funds using modified accrual

      • Building purchases are expenditures

      • Long-term note proceeds are Other Financing Sources

    • Therefore, the full present value of the building would be treated as an Expenditure when the lease is signed

    • And the full present value of the note would be treated as an Other Financing Source


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