Chapter 3

Modified Accrual Accounting: Including

the Role of Fund Balances and Budgetary Authority

Lecture Notes

Budgets

  • Legal document that estimates the expenditures of a fiscal year

and the means proposed to finance them.

  • Estimated revenues are resources that have been or are expected

to be made available to the organization.

  • Appropriations are allocations of resources that will be used to

carry out the activities of the organization, and are usually broken

down by category or object.

  • Estimated Other financing sources (uses) are receipts disburse-ments) of resources that are not revenue (expenditures). Normally consists of (1) transfers between funds and (2) proceeds from bond issuance or payments on bonds.

Opening entries

  • Prepare budgetary entries for coming year of estimated revenues,

appropriations, and fund balance.

Estimated Revenue control1,000,000

Est. Other Fin. Sources control 70,000

Appropriations control950,000

Est. Other Fin. Uses control 40,000

Budgetary Fund Balance 80,000

(To record estimated revenues and appropriations for the year.)

  • Used to reflect the formally adopted annual budget into the

general ledger. Entry may be changed during the year, and is

closed out at the end of the year. See journal entry 1 and 2 to

record budget on pp. 68-69

  • May use two journal entries as in the textbook, or one entry as

shown above.

  • Reference to ‘control’ in account title indicates control/subsidiary

relationship. Control account is a summary account whose

balance is equal to the total individual balances of the subsidiary

accounts. We normally will ignore this relationship, but you

should recognize that in the real world control/subsidiary

relationships would have to be maintained.

  • Budgetary interfund transfers (to or from the fund) and proceeds from the issuance of debt are recorded in the Estimated Other Financing Sources/Uses accounts. ‘Estimated’ in account title indicates that it is a budgetary account and will have to be reversed out at end of year.
  • Fund Balance is broken up into five categories (see Il. 3-1 & 2):
  • Nonspendable – assets are not in spendable form, e.g., inventory or prepaids, or permanently restricted.
  • Restricted - restrictions are imposed by law or by external parties.
  • Committed – resources formally committed by the government body for a specific purpose and resources specifically committed to meet a contractual obligation.
  • Assigned – resources that the government intends for a particular purpose.
  • Unassigned – residual category for the General Fund.

Recording Revenues

  • Actual revenues are recorded in nominal accounts during the year. See journal entry 3 on page 69.

-Cash500,000

A/R – Taxes100,000

Revenues control340,000

OFS-Transfer In 60,000

OFS-Bond Proceeds 200,000

(To record revenues received during year).

Revenues Ledger
  • Governments keep up with actual and estimated revenue during

the year through the use of a ledger, i.e., Ill. 3-6.

Encumbrances

  • Are budgetary entries used to control expenditures for goods

ordered through requisitions and issuance of purchase orders,

e.g., purchase of supplies. See journal entry 4, 5a and 5b on pages

71-72.

Encumbrance-control 2,500

Bud. Fund Bal-Reserve for encumbr. 2,500

(To record the ordering of supplies).

Bud. Fund Bal-Reserve for for encumbr. 2,500

Encumbrances-control 2,500

(To record receipt of the goods.)

Expenditures-control 2,600

Cash or Vouchers Payable 2,600

(To record purchase of supplies.)

  • The purpose of encumbrances and setting up the reservation is to

recognize that a portion of the spendable Budgetary Fund

Balance has been committed, so that the governmental unit knows

how much spendable resources remain. The calculation is:

appropriations less expenditures to date less outstanding

encumbrances is equal to the remaining unencumbered,

spendable resources.

  • Not all expenditures are encumbered by a governmental entity, e.g., salaries. See journal entry 6 on page 73.

Expenditures90,000

Cash 90,000

(To record salary expenditures made during year).

Appropriations/Expenditure Ledger
  • Governmental units keep up with the available amount and the amount that has been encumbered or spent using a ledger, i.e.,
  • Ill. 3-7.

Budget Revisions

  • Budgets of governmental units can be revised during the year as the actual amount of revenue realized from the tax funding becomes better known. See journal entry 7 on page 74.

Budgetary Fund balance200,000

Appropriations control100,000

Est. Other Fin. Use Control 10,000

Estimated revenues control290,000

Est. Other Fin. Sources control 20,000

(To revise budgetary estimates downward.)

  • Budget revisions can also increase estimated revenues and authorized appropriations, as well as decrease them, though that occurs less often.

Budgetary Comparison Schedule

  • The Budgetary Comparison Schedule (Ill. 3-8) should include the original as well as the final budgeted figures, as compared to the actual amount spent. The actual amount spend and the revenue

recognized is to be prepared on the same basis as the budget, in

order to be consistent with it.

  • Governments are required to prepare a schedule to reconcile the

difference between GAAP expenditures in the basic financial

statements and the amount shown in the budgetary comparison

schedule. Differences are caused by budgetary amounts following

different rules than GAAP, and a reconciliation of the differences

must be shown directly on the budgetary comparison schedule or

on a separate schedule.

  • Other Financial Sources and Uses from interfund transfers and bond proceeds are to be shown separately on the schedule from other revenues and expenditures.

Classification of Revenue

  • The primary classification of governmental revenue is by fund,

and next by source. Within each major source, it is desirable to

have as many secondary classes as is useful for budgeting and

accounting purposes.

  • Some of the major revenue sources are: taxes, licenses and permits, intergovernmental revenues, charges for services, fines and forfeits, and miscellaneous revenues. Special assessments are also sometimes included as a source of funds.

Classification of Appropriations and Expenditures

  • When an appropriations is passed by the legislature, it is

authorization for a governmental entity to spend up to a

certain amount of money on a specified purpose. When liabilities

are incurred or monies spend, the appropriation is said to be

expended.

  • Classification of appropriations and expenditures is first by fund,

and then uses one or more of the following classification methods

based upon what is most useful to the user of the financial

information.

1)Function or program, e.g., public safety

2)Organizational unit, e.g., police department

3)Activity, e.g., line of work performed by organizational unit, such as protection by police department

4)Character, concerns the time period involved, and included current expenditures, capital outlays, and debt service

5)Object, reports the inputs or the items of service received, e.g., personal services, supplies, capital outlays, debt service

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