1. Chapter 3 1. Learn the purposes and types of budgets
2. Learn how to classify expenditures
3. Learn the budget cycle
4. Learn the benefits of budgets
5. Learn the encumbrance system
6. Learn the benefits of performance
budgets

2. Accounting Cycle Record the budget
Encumber orders for goods and services
When good/services received
Reverse encumbrance
Recognize Expenditure
Record Revenue when measurable and available
Record transfers in and out
Record other financing sources and uses

3. Accounting Cycle, continued
Close encumbrances at end of year
Adjusting entries
60 day rule
Create reserve for supplies and other prepaids
Reverse budgetary entry
Close actual accounts
Debit revenue, OFS, transfers in
Credit expenditures, OFU, transfers out

4. Purposes of Budgets Planning of programs, acquisitions,
resource allocations
Control and administration
Creating reports and evaluation

5. Types of Budgets Appropriation Budgets - details for current
operations (this will be our main focus)
Capital Budgets- for acquisition and
construction of long term assets
Flexible Budgets - relates to costs for certain
levels of outputs, used to control costs in
proprietary funds

6. Object vs. Program
Object classification is what you are used to…. Salaries, supplies, etc.
This doesn’t allow for analysis of programs
But does foster control of overall expenditures
Uses bottom up budgeting…why is this good?
Produces lots of detail
Program budgeting allows analysis of programs using program specific inputs and outputs, or SEA

7. Budget Cycle Preparation Legislative adoption and Executive approval
Execution
Reporting and Auditing

8. Recording the Budget Record the revenue side of the budget:
Estimated Revenues 1,000,000
Budgetary Fund Balance 1,000,000
Transfers in ,000
Estimated Other Fin.Sources 500,000
Budgetary Fund Balance ,000
Recording the budget serves as an internal control

9. Recording Appropriations
Budgetary Fund Balance 1,400,000
Appropriations ,300,000
Other Fin. Uses ,000
Transfers Out ,000
If the inflows > outflows, then there is a
budget surplus. If the inflows < outflows,
there is a budget deficit.

10. Closing Budget entries
At the end of the fiscal year, the budgetary
entries are reversed.
Budgetary Fund Balance 1,525,000
Estimated Revenue 1,000,000
OFS ,000
Transfers in ,000
Appropriations 1,300,000
Estimated OFU ,000
Transfers Out ,000
Budgetary Fund Balance 1,400,000

11. Execution Appropriations are apportioned by time
periods in allocations (to agencies) then by
allotment to units within the agency.
Entities, agencies integrate their budgets
into their accounts.
Most agencies make sure they spend their
budgets even if they stock up on supplies to
insure that in the next year their budgets
won’t be cut.

12. Analysis Budget to Actual
If an entity records a budget, part of their
end of year statements includes a budget-to-
actual comparisons. Use caution in assessing
this because:
Budgets might have been revised
Differences in Basis
Differences in timing
Differences in reporting level (Perspective)
Differences in reporting entity

13. Steps in the order/receipt process:
Encumbrance system
Steps in the order/receipt process:
Purchase Request
Purchase Order
Receiving Report
Vendor’s Invoice Paid

14. Purchase Order Encumbrances 950 Reserve for Encumbrances 950
This creates a reserve in the fund balance
section of the balance sheet, so
Fund Equity = Assigned + Fund Balance

15. Receipt of Order Two Parts: Reverse the reserve for encumbrances:
Record the receipt of the shipment:
Expenditures
Vouchers Payable
Notice that the encumbrance is reversed for
its original amount, not the amount of the bill

16. Payment of Voucher Voucher Payable 970 Cash 965 Expenditures 5
The entity took a discount!

17. Open Encumbrances
What was shown on the previous slides assumes that orders are received within the same year and all at once.
What happens if an encumbrances is still open at the end of the fiscal year?
What happens if a partial order is received?

18. Open encumbrances
Think about the accounts you used to establish an encumbrance:
Encumbrance
Reserve for encumbrance
The government wants to show the reserve in the fund balance section of the balance sheet, but is encumbrance an asset? Should it be closed with expenditures?
Encumbrances is like a notation, but is not a permanent account. Therefore, if an encumbrance is open at the end of the year, it needs to be closed.

19. Closing an encumbrance
Assume you have established an encumbrance:
Encumbrance 5,000
Reserve for Encumbrance 5,000
And some of the order is received:
Reserve for encumbrance 2,500
Encumbrance 2,500
Expenditure 2,500
Vouchers Payable 2,500
There is still $2,500 in an encumbrance open at the end of the fiscal year. It needs to be closed.

20. Encumbrances, FY 2 First, reestablish the encumbrance in FY 2:
Unreserved Fund balance 2,500
Then complete the process as already illustrated:
When the order is received:
Reserve for encumbrance 2,500
Encumbrance 2,500
Expenditure 2,500
Vouchers payable 2,500

21. Closing an encumbrance
Close the remaining amount at the end of the fiscal year:
Unreserved fund balance 2,500
Encumbrance 2,500
But what happens when the rest of the order comes in?

22. Review Why governments record budgets How to record the budget
How to record encumbrances