3 Chapter Issues of Budgeting and Control

Purpose of Budgeting in nongovernmental, not-forprofit 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 o Incremental budgeting. o Performance budgeting. o Program budgeting. o Planning-Programming-Budgeting System (PPBS). o Zero-Based Budgeting.

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

Performance Budgeting o A plan for relating resource inputs to the efficient production of outputs o Dates back to the Hoover Commission in 1949. o Performance auditing is the subsequent evaluation to determine that resources were in fact used efficiently and effectively in accordance with the plan.

Program Budgeting o Discloses the full costs of programs or functions without regard to the number of organizational units that might be involved. o Often 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) o Comprehensively integrates planning and control into one system. o Provides legislators and public administrators with output-oriented information that can be used in evaluating how successful the government is in meeting strategic objectives. o Developed in the 1960 s at the federal level; however, fell out of favor in the 1970 s because it is difficult to implement.

Zero-Based Budgeting o Requires that the very existence of each activity be justified each year, as well as the amount of resources that will be allocated to it. o Many 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 entity!!!! is very different from entity to

Budgetary Terms ¡ 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 and Operating Statement Accounts (Cont’d) ¡ Distinguish between Ø 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 Accounts 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 Control — Expenditures ¡ Budgetary control of expenditures is achieved by: Ø Ø ¡ ensuring that a valid appropriation exists prior to recording an encumbrance or expenditure, and periodically comparing encumbrances and expenditures to appropriations. Comparison is enhanced by using a common classification scheme for appropriations, encumbrances, and expenditures

Budgetary Control — Expenditures (Cont’d) ¡ Accounting Control over Expenditures Ø Ø 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 — Revenues ¡ Periodically compare: Ø Ø ¡ 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 (Cont’d) ¡ Accounting Control over revenues Ø Ø 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

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

Examples of Budgetary Journal Entries Budget Approved on 1 -1 -2005: Estimated Revenues Appropriations Fund Balance Dr. Cr. 500, 000 450, 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 Control 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 1 -15 -2005, including shipping charges of $15: Entry in GF General Journal: Dr. Cr. Reserve for Encumbrances— 2005 Expenditures— 2005 515 Encumbrances— 2005 Accounts Payable 500 515 (This entry combines recording of payable and reverse of encumbrance)

Concluding Comments ¡ 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