Chapter 3

1. Learn the purposes and types of budgets 2. Learn how to classify expenditures 3. Learn the budget cycle4. Learn the benefits of budgets 5. Learn the encumbrance system 6. Learn the benefits of performance budgets

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

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

Purposes of Budgets

• Planning of programs, acquisitions, resource allocations• Control and administration • Creating reports and evaluation

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

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

Budget Cycle

• Preparation• Legislative adoption and Executive approval• Execution• Reporting and Auditing

Recording the Budget

Record the revenue side of the budget:

Estimated Revenues 1,000,000Budgetary Fund Balance 1,000,000

Transfers in 25,000Estimated Other Fin.Sources 500,000

Budgetary Fund Balance 525,000

Recording the budget serves as an internal control

Recording Appropriations

Budgetary Fund Balance 1,400,000Appropriations 1,300,000Other Fin. Uses 50,000Transfers Out 50,000

If the inflows > outflows, then there is a budget surplus. If the inflows < outflows,there is a budget deficit.

Closing Budget entriesAt the end of the fiscal year, the budgetaryentries are reversedreversed. Budgetary Fund Balance 1,525,000

Estimated Revenue 1,000,000OFS 500,000Transfers in 25,000

Appropriations 1,300,000Estimated OFU 50,000Transfers Out 50,000

Budgetary Fund Balance 1,400,000

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.

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

Encumbrance system

Steps in the order/receipt process:

• Purchase Request • Purchase Order• Receiving Report

• Vendor’s Invoice Paid

Purchase Order

Encumbrances 950Reserve for Encumbrances 950

This creates a reserve in the fund balance section of the balance sheet, so Fund Equity = Assigned + Fund Balance

Receipt of Order

Two Parts: Reverse the reserve for encumbrances:Reserve for Encumbrances 950

Encumbrances 950Record the receipt of the shipment: Expenditures 970

Vouchers Payable 970

Notice that the encumbrance is reversed forits original amount, not the amount of the bill

Payment of Voucher

Voucher Payable 970Cash 965Expenditures 5

The entity took a discount!

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?

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.

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 2,500Encumbrance 2,500

Expenditure 2,500Vouchers Payable 2,500

There is still $2,500 in an encumbrance open at the end of the fiscal year. It needs to be closed.

Encumbrances, FY 2

First, reestablish the encumbrance in FY 2:

Encumbrance 2,500Unreserved Fund balance 2,500

Then complete the process as already illustrated: When the order is received:

Reserve for encumbrance 2,500Encumbrance 2,500

Expenditure 2,500Vouchers payable 2,500

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?

Review

Why governments record budgets How to record the budget How to record encumbrances