Chap003.ppt presentation of something real

Ppt

1. Chapter
3
Issues of Budgeting and
Control

2. 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

3. 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

4. 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

5. 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

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

7. 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.

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

9. 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.

10. 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.

11. 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.

12. 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

13. 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!!!!!!!!

14. 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

15. 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)

16. 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)

17. 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

18. 
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

19. 
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)

20. 
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

21. 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)

22. 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

23. Budget Approved on 1-1-2005: Dr. Cr.
Estimated Revenues 500,000
Appropriations 450,000
Fund Balance 50,000
(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

24. 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

25. Receipt of FAX machine on 1-15-2005, including shipping
charges of $15:
Entry in GF General Journal:
Dr. Cr.
Reserve for Encumbrances—2005 500
Expenditures—2005 515
Encumbrances—2005 500
Accounts Payable 515
(This entry combines recording of payable and reverse of encumbrance)
Examples of Budgetary Control

26. 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