1. Chapter 3: Budgetary Accounting for General and Special Revenue Funds
Essentials of Accounting for Governmental and Not-for-Profit Organizations
Chapter 3: Budgetary Accounting for General and Special Revenue Funds

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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 ,000
Budgetary Fund Balance ,000
Alternatively, estimated revenues and appropriations could be recorded in separate entries

10. 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 ,000,000
Estimated Other Financing Source ,000,000
Appropriations ,800,000
Estimated Other Financing Use ,000
Budgetary Fund Balance ,000

11. 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

12. Recording Outstanding Orders
Place an order for $150,000 which consists of three mini-buses costing $50,000 each. Recorded as:
Encumbrances 150,000
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 ,000
Encumbrances ,000
Second, record the actual amount of expenditure:
Expenditure ,000
Accounts Payable ,000

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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.

20. 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

21. 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

22. 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 3-4 presents a calculation to determine the property taxes needed to balance the budget