Essentials of Accounting for Governmental and Not-for-Profit Organizations

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

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

Importance of Budgets • Net income is NOT a good measure of government effectiveness • Excess of revenue over expenditure does NOT mean success, but indicates • Either the taxpayers paid too much in taxes • Or, they received too few services for taxes paid • The primary means of government control is the budget • Financial statements should answer the question -- Did the government used its funds as promised?

Government and Special Revenue Uses of Budgets • Governments must adopt an annual budget • General funds and Special Revenue funds will have separate budgets . Separate budgets may be optional for other funds. • Budgetary principles are the same for any governmental type fund which adopts an annual budget

Budgets vs. Appropriations • A budget is a financial plan submitted to the appropriate body for approval • Once approved, budgets are called ‘appropriations’ and 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 • Appropriation (budget) amounts are incorporated in accounting records to provide information that will keep spending within the legal limits

Budgetary Accounting - New Account Titles • Estimated Revenues • Budgeted inflows -- debit balance • Appropriations • Budgeted spending -- credit balance • Encumbrances • Orders outstanding -- reminding ourselves we have burdened down the budget with a future expenditure -- debit balance • Reserve for Encumbrances • Restriction on fund balance -- credit balance

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 950,000 • Fund Balance 50,000 • Alternatively, estimated revenues and expenditures could be recorded in separate entries

Alternative Approach • Estimated Revenues 1,000,000 • Fund Balance 1,000,000 • Fund Balance 950,000 • Appropriations 950,000 • Approach on previous slide typically assumed on CPA exam • Text page 67, 68, etc. shows process of recording budget detail for each type of revenue and appropriation • Subsidiary details needed in practice, but CPA exam rarely considers this level of detail as method to record varies with software used

Incorporating Other Financing Sources and Uses in Budget Entry • Assume a city budgets property tax revenues of $1,000,000; bond proceeds of $2,000,000; expenditures of $1,800,000; and a transfer to another fund of $100,000 • The budget entry would be • Estimated Revenues 1,000,000 • Estimated Other Financing Source 2,000,000 • Appropriations 1,800,000 • Estimated Other Financing Use 100,000 • Fund Balance 100,000

Revenue Subsidiary Accounts • The general ledger has two separate accounts • Estimated Revenue (Dr. balance) and • Actual Revenue (Cr. balance) • However, at the subsidiary level, estimated and actual revenues need to be posted side by side in the same account per Illustration 3-1 • A Cr. balance at year end would mean actual revenues were more than budgeted • A Dr. balance at year end would mean actual revenues were less than budgeted

Why Record Encumbrances? • In business accounting, orders are not entered into the dr. and cr. system • In the government setting, an outstanding order will turn into an expenditure and a liability when the goods arrive • To prevent over-encumbering the budget with outstanding orders in excess of allowed appropriations, the orders are entered into the books in the SLG environment

Recording Outstanding Orders • Place an order for $150,000 which consists of three mini-buses costing $50,000 each. Recorded as: • Encumbrance 150,000 • Bud. 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 encumbrance: • Bud. FB Res. for Encumb. 100,000 • Encumbrance 100,000 • Second, record the actual amount of expenditure: • Expenditure 102,000 • Liability 102,000

Subsidiaries for Expenditures, Appropriations, and Encumbrances • The general ledger has separate t-accounts for expenditures (dr. balance), encumbrances (dr. balance), and appropriations (cr. balance), but in the subsidiary these need to be posted all in one account per page 73 • Keeping all three posted in the same account makes sure that the total of expenditures and encumbrances (dr. balances) do not expend the total appropriation allowed (cr. balance) • A cr. balance indicates there is still money to spend in the account. Any dr. balance would indicate the government has overspent its appropriation for that item

Budget Revisions • Budget revisions may be necessary during the year due to changes in revenue projections or operating conditions … for example, electricity price increases, more snow removal needed than normal • 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 • Entries should be made to control and subsidiary accounts for any budget revisions made

Budgetary Comparison Schedule • Both the original and the final adjusted budget is shown • The revised budget is compared to the Actual Expenditures plus Encumbrances • A variance column is typically shown, but is optional • The budget should be shown on the budget rather than GAAP basis • Another schedule will reconcile the ‘actual’ figures on the budget vs. GAAP basis

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

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 arealways: CURRENT, CAPITAL OUTLAY, and DEBT SERVICE

The General Process of Putting Together a Budget • Plan the expected inflows • Do revenue projections • May use 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

Property/ad valorem Taxes • “Ad valorem” taxes are based on the value of an underlying asset • Property taxes are a major type of tax, particularly at the city and county 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

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

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 • This would be a typical tax for a small city or rural area. Might be double in larger city.

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 shows a calculation to determine the property taxes needed to balance the budget • If a jurisdiction does not have flexibility to change property tax rates without a citizen vote, balancing the budget will mean cutting expected expenditures instead of raising property taxes.

Quasi-External Transactions • These are between funds but they are exchange-like transactions with an objective basis for determining the amount • Treated as true revenue and expense or expenditure • Example, sale of electricity by the Electricity Enterprise fund to the General Fund • Would be treated as revenue for Enterprise Fund and expenditure for General Fund • GASB 34 calls these “Interfund Services Provided & Used” instead of quasi-external

Reimbursements • Assume the UPS delivers a $10,000 shipment of supplies which are initially recorded in the General Fund as follows: • GF: Expenditures $10,000 • Liability $10,000 • Later, it is discovered that $2,000 of these supplies were for the Electricity Enterprise fund, and the supplies are given to the Electricity fund. The following would be recorded: • GF: Due from Electricity $2,000 • Expenditures $2,000 • EF: Expenditures $2,000 • Due to General Fund $2000

Reimbursements Cont’d • Reimbursements do not show up separately on the Activity or Budget statement, but are internal balance corrections • When the reimbursement is made, the expense or expenditure is recorded in the correct fund and the incorrect expense or expenditure is decreased • If reimbursement did not occur by year end, would need adjusting entries for expense/expenditure and recording Due To and Due From amount

Transfers • Any movements other than quasi-external or reimbursements are listed on the Activity and Budget statement as Transfers In or Transfers Out • Transfers In are considered Other Financing Sources • Transfers Out are considered Other Financing Uses • Recurring Transfers such as for debt service may be built into the budget

Bonds • Long-term bonds are not fund liabilities in governmental type funds • If $12,000,000 of bonds are issued you would record • Cash $12 M • Bond Proceeds $12 M • Bond proceeds are considered an Other Financing Source on the Activity and Budget Statements • Bond proceeds is not a revenue per se, but is considered an current inflow on the activity statement • Similarly, a repayment of bond principal would be considered an Other Financing Use

Capital Leases in Government Funds • A 20-year lease of a building would be considered equivalent to a purchase of the building and payment of a long-term note • In Government type funds using modified accrual • Building purchases are expenditures • Long-term note proceeds are Other Financing Sources • Therefore, the full present value of the building would be treated as an Expenditure when the lease is signed • And the full present value of the note would be treated as an Other Financing Source

Slides prepared by • Dr. Louella Moore • Arkansas State University

Essentials of Accounting for Governmental and Not-for-Profit Organizations