Chapter 3 Issues of Budgeting and Control

Budgeting in nongovernmental, not-for- profit organizations (NPOs) is just as important as in businesses or governmental entities. AND Cannot be divorced from politics! Purpose of Budgeting

 Planning  How much resource will be acquired  How much resources will be expended  Control and Administration  Legislative bodies use budgets to impose spending authority over executives  Reporting and Evaluation  Goals accomplished  Efficiency  Effectiveness

Types of Budgeting  Appropriations Budget  Called operating budget – covers the general fund  In many jurisdictions this must be balanced  Determines the amount of tax that must be generated – for the year  Capital Budgeting  Typically covers multiple years  Concentrates on long-lived assets such as highways, buildings, etc  Financed with long-term debt instead of current year taxes

Types of Budgeting  Flexible Budget:  Used primarily for business-type activities that are not subject to the same budgetary requirements  Alternative budgets based on varying level of demand for services or product

Various Budgeting Approaches oIncremental budgeting. oPerformance budgeting. oProgram budgeting. oPlanning-Programming-Budgeting System (PPBS). oZero-Based Budgeting.

Incremental Budgeting oSimple and widely used. o Focuses on departmental expenditures by applying a percentage increase “across the board” to all line- items. oThe increase may be the annual rate of inflation, or specific adjustments that relate to expected salary increases or shrinkage relating to scaling back operations. oDoesn’t relate inputs to outputs or outcome, so is not considered one of the rational approaches.

Performance Budgeting oA plan for relating resource inputs to the efficient production of outputs o Dates back to the Hoover Commission in oPerformance auditing is the subsequent evaluation to determine that resources were in fact used efficiently and effectively in accordance with the plan.

Program Budgeting oDiscloses the full costs of programs or functions without regard to the number of organizational units that might be involved. oOften considered synonymous with performance budgeting; however, that method typically focuses on the relation between inputs and outputs of each organizational unit, rather than programs.

Planning-Program-Budgeting System (PPBS) oComprehensively integrates planning and control into one system. oProvides legislators and public administrators with output-oriented information that can be used in evaluating how successful the government is in meeting strategic objectives. oDeveloped in the 1960s at the federal level; however, fell out of favor in the 1970s because it is difficult to implement.

Zero-Based Budgeting oRequires that the very existence of each activity be justified each year, as well as the amount of resources that will be allocated to it. oMany organizations use combinations of budgeting techniques, such as applying ZBB to a set of programs each year so that all programs are justified over a period of time, although not each year.

Classification of Expenditures  Fund – (special revenue fund, debt service fund)  Organizational Unit – Police department, Fire department  Functions – Public Safety (police, fire, ambulance), sanitation, recreation  Activity – Highway patrol, city police, burglary investigation  Classification – Salaries, benefits, travel

Classification of Revenues  Taxes - Property, sales, hotel  Licenses and Permits – Marriage, Liquor  Intergovernmental Revenues – Water department receives money for city buildings  Charges for Services – Sanitation, bus fees,  Fines and Forfeits – Parking, speeding  ***Budgeting is very different from entity to entity!!!!!!!!

 An appropriation is a legal authorization granted by the legislative body to incur liabilities for purposes specified in the appropriation act or ordinance. (how much money can be spent in the year).  An Allotment- are internal allocations of funds by executive management to quarters or other time periods.  An encumbrance is an estimated amount recorded for purchase orders, contracts, or other expected expenditures chargeable to an appropriation. Budgetary Terms

 Distinguish between  Revenues and Other Financing Sources and Expenditures and Other Financing Uses.  Other Financing Sources represent operating transfers in from other funds and proceeds of long-term borrowing.  Other Financing Uses represent operating transfers out to other funds. Budgetary and Operating Statement Accounts (Cont’d)

 Revenues and Other Financing Sources increase fund balance when closed. Both are recognized on the Modified Accrual basis—when measurable and available to pay current period obligations.  Expenditures and Other Financing Uses decrease fund balance when closed. Both are recognized on the Modified Accrual basis—when incurred, if expected to be repaid from currently available resources of the fund. Budgetary and Operating Statement Accounts (Cont’d)

Purpose  Used to record the budgetary inflows and outflows estimated or authorized in the annual budget Accounts  Estimated Revenues, Estimated Other and Financing Sources  Appropriations, Estimated Other and Financing Uses  Encumbrances Budgetary Accounts

 Budgetary control of expenditures is achieved by:  ensuring that a valid appropriation exists prior to recording an encumbrance or expenditure, and  periodically comparing comparing encumbrances and expenditures to appropriations.  Comparison is enhanced by using a common classification scheme for appropriations, encumbrances, and expenditures Budgetary Control — Expenditures

 Accounting Control over Expenditures  Three control accounts (Appropriations, Encumbrances, and Expenditures) are used to control similarly named columns in the detail budget accounts in the subsidiary ledger (see Illustration 3-6)  The sum of the Appropriations, Encumbrances, and Expenditure account balances of the subsidiary ledger must equal the general ledger control account balances Budgetary Control — Expenditures (Cont’d)

 Periodically compare:  actual revenues (or actual other financing sources) to  estimated revenues (or estimated other financing sources)  Use a common classification scheme for revenues and estimated revenues Budgetary Control — Revenues

 Accounting Control over revenues  Two control accounts (Estimated Revenues and Revenues) are used to control similarly named columns in the detail accounts in the Revenue subsidiary ledger (see Illustration 3-5)  The sum of the Estimated Revenues and Revenues account balances of the subsidiary ledger must equal the general ledger control account balances for those accounts Budgetary Control—Revenues (Cont’d)

Government-wide Statement of Activities  Program revenues are reported in three categories: (see page 43)  Fees, Fines, and Charges for services  Operating grants and contributions  Capital grants and contributions

Budget Approved on : Dr. Cr. Estimated Revenues500,000 Appropriations450,000 Fund Balance50,000 (Or can break it up into 2 entries like the text book on page 98) Budgetary entry above must be closed at year end by reversing this entry!!!! Examples of Budgetary Journal Entries

Example: City Clerk's office orders a new printer on January 2, 2005 which had a list price in the vendor's catalog of $500. Entry in the General Fund General Journal: Dr. Cr. Encumbrance 500 **Reserve for Encumbrances 500 (Entry will be reversed when the Printer is received even if price is different from above) **Reserve for Encumbrances is a liability Account At year end any remaining balance in the encumbrance account must be closed to unreserved fund balance!!!!!!!! (See page 102) Examples of Budgetary Control

Receipt of FAX machine on , including shipping charges of $15: Entry in GF General Journal: Dr. Cr. Reserve for Encumbrances— Expenditures— Encumbrances— Accounts Payable515 (This entry combines recording of payable and reverse of encumbrance) Examples of Budgetary Control

 The General Fund and special revenue funds usually require a legally adopted budget before the government can collect revenues from taxes and other sources and incur expenditures.  Severe penalties may exist for failure to comply with the budget, so it is imperative that the accounting system facilitate accounting for the budget as well as all other operating transactions, which is why these controls have been put into place Concluding Comments