Wilson Kattelus CR82 Chap003 000

User Manual: CR82

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McGraw-Hill/Irwin
Chapter
3
Governmental Operating Statement
Accounts; Budgetary Accounting
3-2
Learning Objectives
After studying Chapter 3, you should be able to:
Explain how operating expenses and revenues related
to governmental activities are classified and reported
in the government-wide financial statements
Distinguish, at the fund level, between revenues and
other financing sources and between expenditures
and other financing uses
Explain how revenues and expenditures are classified
in the General Fund
3-3
Learning Objectives (Cont’d)
Explain how budgetary accounting contributes to
achieving budgetary control over revenues and
expenditures, including such aspects as:
-Recording the annual budget
-Accounting for revenues
-Accounting for encumbrances and expenditures
-Accounting for allotments
-Reconciling GAAP and budgetary accounts
3-4
Learning Objectives (Cont’d)
Describe computerized accounting information
systems
Explain the classification of revenues and expenditures
of a public school system
3-5
Government-wide Statement of Activities
Expenses should be reported by
function or program
Direct expenses - those associated with a
function or program
Indirect expenses - those that are not
directly linked to an identifiable function
3-6
Government-wide Statement of Activities
Revenues should be distinguished
between
Program revenues - reported in the
program/functions section of the statement
General revenues - not directly linked to
any program/function and reported in the
bottom section of the statement
3-7
Government-wide Statement of Activities
(Cont’d)
Program revenues are reported in three
categories:
-Charges for services
-Operating grants and contributions
-Capital grants and contributions
A net expense or revenue format is used in
the top section of the statement of activities:
Expenses - Program revenues = Net
(expense) Revenue
3-8
Government-wide Statement of Activities
(Cont’d)
Extraordinary items, special items, and transfers are
reported as separate line items near the bottom of
the government-wide statement of activities (see
Ills. 3-1 and A1-2)
Extraordinary items—both unusual in nature and
infrequent in occurrence; usually beyond the
control of management
Special items—either unusual or infrequent; must
be within the control of management
3-9
Purpose
Used to account for the general administration
and most traditional services of government
Examples of traditional services
Public safety (e.g., police and fire)
Public works (e.g., maintenance of buildings,
roads, and bridges)
Culture and recreation (e.g., promotion of the arts,
parks, and youth activities)
Health and welfare (e.g., public health, food
facilities inspection, and juvenile counseling)
The General Fund
3-10
Purpose
Used to record the budgetary
inflows and outflows estimated or
authorized in the annual budget
Accounts
Estimated Revenues, Estimated
Other Financing Sources
Appropriations, Estimated Other
Financing Uses
Encumbrances
Budgetary Accounts
3-11
ASSETS = LIABILITIES + FUND BALANCES
Balance
Sheet Reserved Unreserved Budgetary
Accounts Fund Balances Fund Balance Fund Balance
(permanent)
Budgetary/
Operating Operating Statement
Statement Accounts Budgetary Accounts
Accounts
(temporary)
Fund Equation for the General Fund
3-12
Distinguish between Revenues and Other
Financing Sources and Expenditures and Other
Financing Uses
Other Financing Sources mainly represent
operating transfers in from other funds and
proceeds of long-term borrowing
Other Financing Uses represent operating
transfers out to other funds
Operating Statement Accounts
3-13
Revenues and Other Financing Sources
Increase fund balance when closed
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
Recognized on the Modified Accrual basis—when
incurred, if expected to be repaid from currently
available resources
Operating Statement Accounts (Cont’d)
3-14
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
3-15
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 3-7)
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)
3-16
By Fund
By Source
-Taxes (ad-valorem and self-assessing)
-Special Assessments
-Licenses and Permits
-Intergovernmental Revenues
-Charges for Services
-Fines and Forfeits
-Miscellaneous Revenues
Classification of Revenues and
Estimated Revenues
3-17
Ad valorem taxes are assessed on the value
of underlying property—e.g. personal and
real property taxes
Self-assessing taxes are based on income
or sales. Taxes due on sales or earnings
that have occurred but have not yet been
reported at the end of an accounting period
are usually estimated and accrued
Revenues—Taxes (Ad valorem and
Self-assessing)
3-18
Revenues—Property Taxes (Cont’d)
If rates are below the statutory limit,
property taxes may be viewed as a
residual source of revenues (see Ill.
3-6)
The gross tax levy is calculated as
the amount of revenue required
from property taxes divided by the
estimated collectible portion of the
levy (e.g., required revenues / .96 =
gross levy)
3-19
Levied against certain properties that
receive a particular benefit that not all
taxpayers receive
Examples include street repair,
street cleaning, or snow plowing
for taxpayers who live
outside the normal service area.
Revenues—Special Assessment Taxes
3-20
Includes items such as vehicle licenses,
business licenses, liquor licenses,
marriage licenses, animal licenses,
building permits, zoning variances, etc.
Ordinarily not measurable in advance of
transactions; thus, recorded when
received in cash
Revenues—Licenses and Permits
3-21
Revenues—Intergovernmental
Includes grants and other financial
assistance from higher levels of
government
Intergovernmental revenues such as
grants are not recognized until all
time and eligibility requirements have
been met. Expenditure-driven
(reimbursement-type) grants require
qualifying expenditures be made
before recognizing revenues
3-22
Many governments have shifted
revenues from taxes on all
taxpayers to charges to recipients
of services, including charges for
recreational services, building
inspections, etc.
Accrue if billings for service occur
before receipt of cash
Revenues—Charges for Services
3-23
Fines are amounts assessed by the courts
against those guilty of statutory offenses and
neglect of official duties
Forfeits arise from deposits or bonds made by
contractors, accused felons, and others to
assure performance on contracts or
appearance in court
Accrue if the amount is known prior to the
receipt of cash
Revenues—Fines and Forfeits
3-24
These are revenues that do not fall into one of
the other categories, such as:
-proceeds from the sale of government assets
(if immaterially small in amount; other
financing source otherwise)
-investment income
Accrue if the amount is known prior to the
receipt of cash
Revenues—Miscellaneous
3-25
An appropriation is a legal authorization
granted by the legislative body to incur
liabilities for purposes specified in the
appropriation act or ordinance
An encumbrance is an estimated amount
recorded for purchase orders, contracts,
or other expected expenditures
chargeable to an appropriation
Budgetary Control—Expenditures
3-26
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 to prevent
overspending
Comparison is enhanced by using the same
account classification scheme for appropriations,
encumbrances, and expenditures
Budgetary Control—Expenditures (Cont’d)
3-27
Accounting control over expenditures
Three control accounts (Appropriations,
Encumbrances, and Expenditures) are used to
control similarly named columns of the detail
budget accounts in the subsidiary ledger (see
Illustration 3-8)
The detail account totals for Appropriations,
Encumbrances, and Expenditure in the subsidiary
ledger must equal the corresponding general
ledger control account balances
Budgetary Control—Expenditures (Cont’d)
3-28
Fund
Function or program
Organization unit
Activity
Character (current, capital, debt
service)
Object
Classification of Expenditures
and Appropriations
3-29
Fund—Identifies which fiscal and accounting
entity was affected
Function or program—Assists in budgeting
resources for carrying out major areas of
service activities or goals
Organization unit —Assists in enhancing
managerial control over departments and
divisions, and responsibility accounting
Purpose Served by Each Classification
3-30
Activity—Assists in assessing performance
on specific lines of work and determining cost
of activities
Character—Assists in evaluating which
period is benefited by an expenditure: past,
current, or future
Object—Assists in determining how much
was expended for specific things, such as
personnel and equipment
Purpose Served by Each Classification
(Cont’d)
3-31
Budget Approved on 1-1-2011:Dr. Cr.
Estimated Revenues 500,000
Appropriations 450,000
Budgetary Fund Balance 50,000
Estimated Revenues Ledger:
Taxes 300,000
Licenses and Permits 50,000
Intergovernmental Revenues 50,000
Charges for Services 50,000
Fines and Forfeits 25,000
Miscellaneous Revenues 25,000
Appropriations Ledger:
General Government 120,000
Public Safety 150,000
Public Works 100,000
Culture and Recreation 80,000
Examples of Budgetary Journal Entries
3-32
Revenue Subsidiary Ledger
Acct No. XXX
Account Name: Charges for Services
Estimated Actual
Revenues Revenues Balance
Date Explanation Folio DR CR DR (CR)
1-1-2011 Budget authority GJ71 50,000 50,000
1-31-2011 Various items CR82 4,000 46,000
2-28-2011 Various items CR87 5,000 41,000
Subsidiary Ledgers for Budgetary Control
3-33
Example: City Clerk's office orders a new printer
on January 2, 2011 which had a list price in the
vendor's catalog of $500.
Entry in the General Fund General Journal:
Dr. Cr.
Encumbrances—2011 500
Reserve for Encumbrances—2011 500
Examples of Budgetary Control
3-34
Printer is received on 1-15-2011, including
shipping charges of $15:
Entry in GF General Journal:
Dr. Cr.
Reserve for Encumbrances—2011 500
Expenditures—2011 515
Encumbrances—2011 500
Vouchers Payable 515
Examples of Budgetary Control
3-35
Appropriations/Encumbrances/Expenditures
Subsidiary Ledger
Acct No. XXX
Account Name: General Government, City Clerk, Equipment
Available
Appropriations Expenditures Encumbrances Balance
Date Explanation CR (DR) DR (CR) DR (CR) CR (DR)
1-1-11 Budget authority 1,500 1,500
1-2-11 P.O. No. 11-41 500 1,000
1-15-11 Voucher No. 1125 515 (500) 985
Subsidiary Ledgers for Budgetary Control
3-36
Allotments are internal allocations of funds by
executive management to quarters or other time
periods
Some modification of the appropriations
subsidiary ledger is required to add an
Unallotted Appropriations column in each detail
account (see text)
Accounting for Allotments
3-37
Computerized Accounting Systems
Computerized accounting systems have
evolved to meet the fund accounting
needs of government
Revenue and expenditure classifications are
achieved through the use of an account
number having different segments or fields
A continuing challenge is to redesign fund-
based accounting information systems to
accommodate the government-wide
accounting and financial reporting required by
GASBS 34
3-38
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
Legal 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
END
Concluding Comments

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