CH.

1
Overview of Financial Reporting for Government
Entities

III. Budgetary Accounting & Reporting

PFM 572
 GASB Recognizes the Importance of Budgeting

• Principle No. 10 - Budgeting, Budgetary Control &

Budgetary Reporting
– Governments should adopt an annual budget
– Accounting system should provide budget control
– Budgetary comparison schedules for General Fund &
each Special Revenue Fund with a legally adopted
budget should present:
• Original budget
• Final appropriated budget
• Actual inflows, outflows and balances on budget basis

PFM 572 3-2

 Key Purposes of Budgets
• Planning—critical first step given complexity of
modern governments providing critical goods
and services provided by government that are
not evaluated through market process
• Control & Administering (Resources)—gives
Legislature control of Chief Executive, who uses
budget to control subordinates
• Reporting & Evaluation—standard for
determining legal and administrative compliance

PFM 572 3
 Budgetary Planning
Planning is important
• Not an open market profit environment
• Services critical to public interest
• Diversity requires good decision-making
• Joint process involving citizens (Bottom-up approach)
• Legislative-executive division of powers
Executive [management] proposes budgetary plans
-Written proposals are critical
-Documented plans key to public accountability
Legislative body adopts plans after
-Public hearings
-Appropriate revision

PFM 572 4
 Budgetary Control
• Control is needed
– Legislative over executive branch
– Chief executive over departments / agencies
– Legislative-approved appropriations are both
• Authorizations to spend resources and
• Expenditure limitations upon the executive branch
• Legislative appropriations enacted in –
– Broad terms provides the executive branch with
managerial discretion
– Detail terms allows little discretion to the executive
branch

PFM 572 5
 Budgetary Control
• Executive must control legislative-enacted
appropriations by –
– Restricting agencies by using allocations or
allotments
– Providing accounting system controls to
demonstrate
• Executive restrictions
• Legislative limitations

PFM 572 6
 Budgetary Evaluation
•Budgetary authority becomes a standard for -
–Measuring legal and administrative compliance or
noncompliance
–Preparing financial reports comparing budget to actual
results for the period
–Evaluating outcomes and outputs established through
dollars provided
•The budget as an information document
–Provides information to decision makers
–The chief executive decides what information will go to
the legislative body

PFM 572 7
 Budgetary Evaluation
– Documents decisions that have been made
– The final decisions represent adopted appropriations
spending legislation . . . a law
•Typical budget information provided
– Program descriptions
– Program objectives
– Service efforts (inputs) / accomplishments (outputs)
– Benefits of service level increases / decreases
– Service delivery and cost-benefit analyses
– Expenditure or cost data

PFM 572 8
 Key Phases of Budget Cycle

 Budgeting is a continuous year round process

going through five phases (see figure on next
slide)
1. Preparation /Formulation (Executive)
2. Legislative adoption and executive approval
3. Execution/Budget administration
4. Reporting and
5. Auditing (post-audit)

PFM 572 9
Key Phases of Budget Cycle

PFM 572 10
Budgetary Preparation/Formulation Process

• Overview—process starts with calendar to assure

that budget is prepared on time
• Preliminary estimates—overall budgetary
outlook and plans for increases or decreases
based on revenue growth or decline
• Prepare actual budget—examine budgetary
requests, compare to available resource
projections, make necessary adjustments, and
then prepare actual budget

PFM 572 11
 Budget Preparation
• Preliminary
– Prepare budget calendar
– Estimate expected revenues
– Develop range of expenditure changes
– Inform departments of priorities
– Project beginning and ending fund balances

PFM 572 12
 Budget Preparation
• Preparing the budget
– Chief executive communicates parameters
– Departments submit requests / exceptions
– Budget office may suggest revisions
– Budget office estimates revenues
– Budget and CEO analyze expenditure requests
– Budget office prepares the budget document

PFM 572 13
 Legislative Budget Consideration

• Review and action

– Direct or committee review of budget requests
– Conducts public hearings
– Adopts the budget, as revised
– Passes and appropriations act or ordinance
• Authorizes expenditures
• Levies general property taxes
PFM 572 14
 Budget Execution
• Carries out planned activities
– Includes decisions made during budget period
– Executes budgetary authority
– Budget recorded as part of accounting system
• Avoids overspending appropriations
• Budgeted amounts recorded and compared to actual
• Reported in financial statements

PFM 572 15
 Budgeting Practices
• NACSLB(*) opinion of a good budget process
– Incorporates a long-term perspective
– Establishes links to organizational goals
– Focuses decisions on results and outcomes
– Promotes effective communication
– Provides management and employee incentives
• NACSLB(*) recommended practices
– Establish broad goals to guide government decision
making
– Develop approaches to achieve goals
– Develop a budget consistent with approaches to
achieve goals
– Assess performance and make adjustments
(*) National Advisory Council on State and Local Budgeting
PFM 572 16
 Budget Types
• Capital or Current
• Tentative or Enacted
• General or Special
• Fixed or Flexible
• Executive or Legislative

PFM 572 17
 Comparison of Different Budget Types

Current
Capital
• Also known
Typically as for
used operating budget
acquisitions requiring
• several
Containsyears
proposed expenditures for current
• operations, debt service,
Typically contains portionand estimates
for current of and
year
expendable resources to be available during
for future years
– the year a multi-year plan
Commonly
– Frequently a 5-year capital program
– Current year’s plan adopted as the “capital budget

PFM 572 18
 Comparison of Different Budget Types
Legal status of budgets
Tentative Enacted
• Plans that are • Appropriation
subject to change enacted by
(not final) legislative branch
• Also includes that provides legal
proposals & requests basis for control over
from departments to the executive branch
Chief Executive
PFM 572 19
 Comparison of Different Budget Types

General
Special
• Budget
Typicallyenacted
used forfor any other
(finance) type of activity
general
• governmental
Finance any other funds financed through
activities
• Capital projects
General funds Revenue Funds, and
Fund, Special
• Sometimes enterprise & internal service funds
Debt Service
• Rarely Funds
fiduciary funds

PFM 572 20
 Comparison of Different Budget Types

Fixed
• Appropriations are for
specific dollar amounts of
expenditures/ expenses
• Appropriated amount may
not be exceeded without
amendment
• Do not fluctuate with
service demands
• Limit flexibility of Chief
Executive
PFM 572
Flexible
• Typically fixed per unit of
goods or services but vary in
total based on demand for
goods or services
• More appropriate for
Proprietary Funds or use
usually limited to business /
enterprise type activities
(Example – utilities:
appropriations vary with
volume of water or electricity
demands )
21
 Comparison of Different Budget Types

Categorized by preparer
Executive Legislative
• Prepared by executive • Prepared and approved
branch but approved by by legislative branch
the legislature – Occasionally, legislature will
– Budget preparation is prepare
commonly an executive • Budgets also prepared
function jointly or through a
– Legislature may revise or committee (joint budget;
amend committee budget)
PFM 572 22
 Alternative Budgetary Approaches

• Alternative approaches have a different emphasis

on planning, control and evaluation
– Object-of-expenditure budgeting (OOE)
– Performance budgeting (PB)
– Planning-program-budgeting (PPB)
– Zero-base budgeting (ZBB)

• Each approach may be implemented different

• Must look to substance of the process
PFM 572 23
 Alternative Budgetary Approaches
• Object of expenditure (traditional) approach
– Focus on what is spent (control oriented)
– Most widely used, but often incorporated within
other approaches
– Basic steps in the budget process
• Agencies submit requests on type of
expenditures
• Chief executive compiles and modifies requests
• Chief executive submits requests in same format
• Legislature makes line-item appropriations

PFM 572 24
 Alternative Budgetary Approaches
• Object of expenditure (traditional) approach
– Advantages
• Simplicity, ease of preparation and understanding
• Fits organizational responsibility
• Facilitates accounting control and trend
comparison
– Disadvantages
• Provides no useful information for decision makers
• Overly control focused
• Ignores long-term impacts
• Neglects planning
• Encourages spending rather than economizing

PFM 572 3 - 25
 Alternative Budgetary Approaches
• Performance budgeting approach
– Based on measurable performance of activities
– Classifies expenditures by function / activity
– Measures activities to obtain maximum efficiency
– Bases budget on unit cost standards
– Advantages
• Narrative description of activities
• Organized by activities
• Measures output as well as input
– Limitations
• Requires added budgetary staff
• Many activities are not readily measurable
• True expense / cost data not always available
PFM 572 26
 Alternative Budgetary Approaches
• Performance budgeting approach
– Advantages
• Narrative description of activities
• Organized by activities
• Measures output as well as input
– Limitations
• Requires added budgetary staff
• Many activities are not readily measurable
• True expense / cost data not always available

PFM 572 27
 Alternative Budgetary Approaches

• Planning-program-budgeting (PPB) approach

– Deals with broad planning and costs of activities
– Crosses organizational lines
– Relates all activities to governmental objectives
– Identifies future implications
– Considers all costs
– Analyzes alternatives / cost-benefits

PFM 572 28
 Alternative Budgetary Approaches

• Planning-program-budgeting (PPB) approach

– Advantages
• States goals and objectives
• States alternative costs and benefits to achieve goals
– Limitations
• Goals and objectives difficult to formulate
• Elected officials prefer not to commit to specifics
• Limited data and staff available to evaluate
• Costs difficult to measure over time
PFM 572 3 - 29
 Alternative Budgetary Approaches

• Zero-base budgeting (ZBB) approach

– Every service justified every year
– Government divided into decision units and
subsequently into “decision packages”
– Best options selected to provide services
– Service level options then costed
– Decision packages are then ranked

PFM 572 30
 Budgetary Accounting
• Accounting serves an important control function in SLGs-namely, to aid in
ensuring that resources are spent in compliance with legal requirements
• Legal restrictions on spending are usually expressed in the form of budget-
in government, the budget is more than a managerial plan; it is a legal
constraint-it establishes legal spending limits, which must not be exceeded
• In governmental accounting, budget activity formally recorded in order to:
–Help ensure/assure compliance with spending limits (budgets)
–Enable reporting to help management adjust for revenue shortfalls
• Budget control requires integrating budgetary accounts in the general
ledger or subsidiary ledgers for (building safeguards in the accounting
systems in as much detail as the legally adopted budget)
– Revenues
– Expenditure appropriations
– Encumbrances (estimated cost of committed expenditures not yet
received)

PFM 572 31
 Budgetary Accounting
• GASB standards require governments to
present a comparison of budgeted and actual
results for the General Fund and special
revenue funds with legally adopted budgets.
• While GASB standards guide the format of this
comparison, the GASB does not prescribe
budgetary accounting practices and does not
require governments to maintain budgetary
accounts.
PFM 572 32
 Budgetary Accounting
• A budget has two elements:
– Planned (Budgeted) revenues=Estimated Revenues A/c
– Planned (budgeted) expenditures=Appropriations A/c
• In fund accounting the budget is recorded in the accounts to aid in
control of revenues and expenditures at the beginning of the year.
• Revenue budget actions
– Upon budget adoption
– When revenues are recognized
– Controls - Balances and unrealized revenues
• Expenditure budget actions
– Upon budget adoption
– When services are ordered (encumbered)
– When ordered services are delivered, expenditures are incurred
– When expenditures incurred that were not encumbered
– Controls - unencumbered balances
PFM 572 33
 The Budgetary Basis
• Governing body can choose the basis on which its
annual budget is –Prepared, Adopted, Controlled, &
Reported
• Examples:
– Modified accrual (GAAP) basis, Cash basis,
Encumbrance basis
 Neither GASB nor FASB have control over budgeting
principles
– Budgeting principles are set by either the
government/organization itself or the
government/organization that supervises them

PFM 572 34
 Basis of Accounting
 GASB recommends using modified accrual basis of
accounting.
 However, most governments use the cash basis for
their budgets which involves:
− Assign revenues and expenditures to the period
during which the cash is expected to be received or
disbursed.
− Treat encumbrances equivalent to actual purchases.
− Recognize taxes and other revenues in the year in
which they are due and not in the year in which
they are expected to be collected.

PFM 572 35
 Basis of Accounting
Disadvantages of Cash Basis:
 May distort the economic impact of planned fiscal
activities.
 May be unbalanced as to economic costs and
revenues.
 It may give an appearance of a budget that has
achieved inter-period equity when it really has not.
 Makes it easier to transfer resources from a fund
that has a budget surplus to one that needs extra
resources.
 Complicates financial accounting and reporting.

PFM 572 36
 Budgetary Terminology
Appropriations
− Authorizations to spend
− Is the legal authorizations for the government to spend or
incur liabilities for purposes specified in the appropriations
statute or ordinance as well as limits on spending by
governing body
- budgeted expenditures
Expenditures
− liability incurred upon vendor or contractor performance
Disbursements
− actual payment of liability
Encumbrances
− commitment to spend by issuing purchase orders or signing
contracts
PFM 572 37
 Budgetary Terminology
• Encumbrance:
– Items ordered but not yet received (issuance of purchase order or contract as
authorized by an appropriation)
– Expenditure-to-be
– Estimated expenditures in process
– Obligations or commitments to purchase
– is an estimated amount recorded for purchase orders, contracts, or other
expected expenditures chargeable to an appropriation.
– is not a liability because the goods or services have merely been ordered,
not received
– Commitments are reflected in the budgetary accounts through the
recording of Encumbrances and the corresponding Budgetary Fund
Balance - Reserve for Encumbrances
• When equipment or supplies are ordered:
– Part of appropriation is used up encumbered
PFM 572 38
 Budgetary Terminology
 Prevents overspending the budget
 Entry to record encumbrance is made when purchase
order is issued, a contract is signed, or a commitment is
made.
 Entry that records encumbrance reduces the budget
available for expenditure.
 Outstanding encumbrances are reported in the notes to
the entity’s financial statements
 Budgetary control of expenditures is achieved by:
− ensuring that a valid appropriation exists prior to
recording an encumbrance or expenditure, and
− periodically comparing encumbrances and expenditures
to appropriations
PFM 572 39
 Why Record Encumbrances?
• In business accounting, orders are not entered
into the general ledger
– Governments recognize that an outstanding order
will turn into an expenditure and a liability when
the goods arrive
– To prevent over-spending, outstanding orders are
entered into the books

PFM 572 40
 Recognition
Recognitionof
ofExpenditures
Expenditures

Appropriation Encumbrance Expenditure

Authorized to Purchase Order or

Receipt of Goods
Spend Contract

Encumbrances and expenditures are

Disbursement
classified on the same basis (by fund,
function, organizational unit, activity,
character, or object class) as Payment
appropriations.

PFM 572 41
Expenditure Cycle

PFM 572 42
 Budgetary Accounts
Purpose: Used to record the budgetary inflows and outflows estimated or authorized in
the annual budget & do not appear in the general purpose financial statements.
Accounts:
 Estimated Revenues
 Roughly analogous to receivables or pseudo asset controlling a/c
 Reflects/Represents expected inflow of resources to the fund during the fiscal year
 In substance a memorandum a/c useful for control purposes only
 Estimated Other Financing Sources
– are budgetary accounts reflecting anticipated inflows from sources other than revenues
(include transfers in from other funds and the proceeds of long-term borrowing)
 Appropriations
 Roughly analogous to payables or pseudo liability controlling a/c
 Represents the expected outflow of resources from the fund
 Estimated Other Financing Uses
– are budgetary accounts reflecting anticipated outflows of resources other than
expenditures (include transfers out of a fund to other funds)
 Encumbrances (Expenditure-to-be)
 Budgetary Fund Balance – Reserve for Encumbrances
PFM 572 43
 Budgetary Accounting
• Budgetary Fund Balance
– In practice, many governments make budget entries
directly to Fund Balance. Since the budgetary accounts are
closed at year-end, the choice of account title has no
financial statement effect.
• Budgetary accounting entries
– Record budget
– Record changes to budget
– Record setting aside of resources
(encumbrances)
– Reverse encumbrances to record actual receipt

PFM 572 44
 Budgetary Reporting
• GASB standards require extensive budgetary reporting in the
comprehensive annual financial report (CAFR).
• Options for Placement in Report
– Basic financial statement (BFS)—placed with other
Governmental Funds statements
– Required Supplementary Information (RSI) schedule—after
notes but part of minimum external reporting
• Columns Used in Presentation
– Original budget
– Final budget
– Actual on a budgetary basis (if not GAAP, reconciliation
must be included in notes (if BFS) or with schedule (if
RSI)
– Most governments include optional Variance column

PFM 572 45
 Annual Budgetary Statements
• GASB budgetary reporting requirements
– Budget comparison schedule (prepared on the
government’s budgetary basis to show –
• Original budget
• Final budget
• Actual
• Variances
– Explanation of budget basis
– Disclosure of any excess expenditures
– Reconciliation of budget basis and GAAP basis

PFM 572 46
 Interim Budgetary Statements
• GASB has not set standards for interim financial
statements
• Revenue statements
– Revenues—includes actual revenues collected to date and
estimates for the rest of the year
• Expenditure statements
– Expenditures—includes appropriations for the year,
expenditures to date, encumbrances outstanding at interim
date, and amount available for spending for each
appropriation

PFM 572 47
 Annual Budgetary Statements
Significant encumbrances must be reported in the notes to
the financial statements (GASB 54)
 separate display of encumbrances within fund balance
categories is not permitted
Impact of GASB 54
 In the general fund: add encumbrances not related to
restricted, committed or assigned purposes to the
unassigned fund balance
 In special purpose funds: add encumbrances for specific
purposes to the appropriate committed or assigned fund
balance
This requirement is necessary because special purpose funds
cannot report a positive unassigned fund balance
PFM 572 48
 GASB 54 – Fund Balances Encumbrances

• Encumbrances
 Under past reporting practices, outstanding encumbrances at year end
were reported in the governmental funds as fund balance: reserve for
encumbrances.
 Statement 54 requires that significant encumbrances be disclosed in the notes
along with required disclosures about other commitments.

 However, there is no separate reporting of encumbrances within the fund

balance section of the governmental funds’ balance sheet.
 Rather, encumbered resources should be reported within the restricted,
committed or assigned categories in a manner consistent with the criteria for
those classifications.

PFM 572 49
 Budgetary Accounting: Example A
Budget Entry
Case 1. Assume that expenditures of Br.800,000 are budgeted, and
revenues are also expected to be Br.800,000, so that the budget is
balanced.
Estimated Revenues800,000
Appropriations 800,000
Case 2. Assume that expenditures of Br.800,000 are budgeted, and
revenues are expected to be Br.810,000, so that the budget is balanced.
Estimated Revenues810,000
Appropriations 800,000
Budgetary Fund Balance 10,000
Case 3. Assume that expenditures of Br.800,000 are budgeted, and
revenues are expected to be Br.785,000, so that the budget is balanced.
Estimated Revenues 785,000
Budgetary Fund Balance 15,000
Appropriations 800,000
PFM 572 50
 Budgetary Accounting: Example A
N.B. It is not necessary that the budget be balanced in a particular
fiscal period, although the concept of interperiod equity-whether
current revenues are sufficient to pay for current period services-
calls for overall balance during consecutive fiscal periods.

Budget Revisions
−In most cases, governments will prepare and adopt budget revisions.
Assume the government in the case 3 example decided to revise the
Estimated Revenues budget downward by Br.36,000 and the
Appropriations Budget upward by Br.8,000:

Budgetary Fund Balance 44,000

Appropriations 8,000
Estimated Revenues 36,000
PFM 572 51
 (Further
Budgetary Example)
Accounting: Example B
 Recording the budget
Estimated Revenues 12,000,000
Estimated Other Financing Sources 500,000
Appropriations 11,700,000
Estimated Other Financing Uses 250,000
Budgetary Fund Balance (FB-U) 550,000
In the above entry, Budgetary Fund Balance is the expected change
in fund balance assuming actual amounts are exactly as budgeted. It
may be either a credit or debit balance in the entry.
Budgetary Fund Balance 150,000
Appropriations 70,000
Estimated Revenues 80,000
In the above entry, the budget reflects a decrease in estimated
revenues of br 80,000 and an increase in appropriations of 70,000.
PFM 572 52
 Budgetary Accounting: Example C
 Recording Encumbrances

Assume that an order is made for purchase of cars for br46,000.

Encumbrance – police cars 46,000
Budgetary fund balance reserved for encumbrances 46,000
Debit: Reduces amt. available for spending
Credit: Placeholder for the liability
When Encumbered Items Received
1.Reverse the encumbrance
Budgetary fund balance reserved for encumbrances 46,000
Encumbrances – police cars 46,000
2.Record the expenditure
Expenditures – police cars 45,000
Cash (or vouchers payable) 45,000

Encumbrances Summary -Thus:

Total appropriation ……………………………………….xxx

Encumbrances balance…………………………………-xxx
Expenditures balance……………………………………-xxx
Available for appropriation……………………..…….xxx
PFM 572 53
 Budgetary Accounting: Example C
 Appropriations Ledger

Police Cars
Date Item Appropriation Encumbrances Expenditures Available Appropriation
CR DR CR DR CR
XX Budget 100,000 100,000
XX Order 46,000 54,000
XX Receipt 46,000 100,000
XX Expenditure 45,000 55,000

PFM 572 54
 Budgetary Accounting: Summary
 Predictable expenditures (e.g. salaries) don’t require
encumbering
 Encumbrances not equal to expenditures
– Reverse encumbrance for originally encumbered
amount—not expenditure amount
 Partial orders
– Reverse encumbrance for only amount encumbered for
items received
 Estimated revenues (DB) – Actual Revenues (CR) =
Remaining revenue to be recognized
 Appropriations (CR) – Actual expenditures (DR) = Balance
available for expenditure
PFM 572 55
 Budgetary Accounting: Example D
A government health care district incorporates its budget in its accounting system and
encumbers all purchase orders and contracts. Prior to the start of the year, the governing
board adopted a budget in which agency revenues were estimated at br5,600 and
expenditures of br5,550 were appropriated. Record the budget using only the control
accounts.
JE 1: Estimated revenues 5,600
Appropriations 5,550
Fund balance 50
JE 2: During the year, the government health care district collected br5800 in fees,
grants, taxes, and other revenues. Prepare journal entries.
Cash 5,800
Revenues 5,800
JE 3: It ordered goods and services for br3,000.
Encumbrances 3,000
Reserve for encumbrances 3,000
JE 4: During the year it received and paid for br2,800 of goods and services that had
been previously encumbered. It expects to receive the remaining br200 in the
following year.
a: Expenditures 2,800
Cash 2,800
b: Reserve for encumbrances 2,800
Encumbrances 2,800
PFM 572 56
 Budgetary Accounting: Example D
JE 5: It incurred br2500 in other expenditures for goods and
services that had not been encumbered.
Expenditures 2,500
Cash 2,500
 Prepare end of year closing entries.
JE 6: Revenues 5,800
Estimated revenues 5,600
Fund balance 200
JE 7: Appropriations 5,550
Expenditures 5,300
Encumbrances 200
Fund balance 50

PFM 572 57
 Budgetary Accounting: Example D
alternate style closing
Fund= General Fund Debit Credit
JE 6 Reverse original budgetary entry:
Appropriations 5,550
Fund balance (unassigned) 50
Estimated revenues 5,600

JE 7 Close revenue, expenditure & encumbrance accounts

Revenues 5,800
Expenditures 5,300
Encumbrances 200
Fund balance (unassigned) 300
PFM 572 58
 Budgetary Accounting: Example E
• Assume that budgeted revenues were br785,000 & budgeted expenditures
were br800,000, & that actual revenues amounted to br787,000, while actual
expenditures amounted to br791,000.
Budget entry
Estimated revenues 785,000
Fund balance-Unreserved 15,000
Appropriations 800,000
Closing entries
Revenues 787,000
Estimated revenues 785,000
Fund balance-U 2,000
Appropriations 800,000
Expenditures 791,000
Fund balance-U 9,000
Budgetary comparison

Budget Actual Variance

Revenues Br785,000 Br787,000 (Br2,000)
Expenditures (800,000) (791,000) (9,000)
Change in FB (Br15,000) (Br4,000) (Br11,000)
PFM 572 59
 Budgetary Accounting: Example E
Budget Approved on 1-1-2014: 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 Services50,000
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

PFM 572 60
 Example E-Subsidiary Ledgers for Budgetary Control
Revenue Subsidiary Ledger
Acct No. XXX
Account Name: Charges for Services
Estimated Actual
RevenuesRevenues Balance
Date Explanation Folio DR CR DR (CR)
1-1-2014 Budget authority GJ71 50,000 50,000
1-31-2014Various items CR82 4,000 46,000
2-28-2014Various items CR87 5,000 41,000

PFM 572 61
 Revenues Ledger Format

Taxes
Dr. (Cr.) Dr. (Cr.)

Date Estimated Revenues Revenues Balance

A B C D

Use of Each Column

A. Date of transaction
B. Records initial budget and changes in it
C. Records actual revenues
D. Reports positive balance when amount must still be collected;
negative balance when collections exceed budgeted amount

PFM 572 62
 Example E- Budgetary Control
 Assume that City X's office orders a new printer on January 2,
2014, which had a list price in the vendor's catalog of Br500.
Entry in the General Fund General Journal:
Encumbrances—2014 500
Encumbrances Outstanding—2014 500
Printer is received on 1-15-2014, including shipping charges of 15:
Entry in GF General Journal:
Encumbrances Outstanding—2014 500
Expenditures—2014 515
Encumbrances—2014 500
Vouchers Payable 515

PFM 572 63
 Subsidiary Ledgers for Budgetary Control
Appropriations/Encumbrances/Expenditures
Subsidiary Ledger
Acct No. XXX

Account Name: General Government, City X, Equipment

Available
Appropriations Expenditures Encumbrances Balance
Date Explanation CR (DR) DR (CR) DR (CR) CR (DR)

1-1-14 Budget authority 1,500 1,500

1-2-14 P.O. No. 14-41 500 1,000
1-15-14 Voucher No. 1125 515 (500) 985

PFM 572 64
 Expenditures Ledger Format

General Government
Dr. (Cr.)
Dr. (Cr.) (Cr.) Unencumbered
Dr.
Date Encumbrance Expenditures Appropriation Balance
A B C D E
Use of Each Column
A. Date of transaction
B. Records estimated amount for issuance of (debit) or receipt of (credit) order
C. Records actual expenditure
D. Records initial budget and changes to it
E. Reports positive balance when budget is over-expended;
negative balance when spending authority remains

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 Outstanding Encumbrances at Year-End
• When encumbrances are outstanding at the end of the year, it means that a
purchase order was issued, but the goods were not received as of year-end.
Governments must make a choice in accounting for encumbrances at year-end:
1. All unexpended appropriations lapse, even if encumbered and all
encumbrances are null & void after year end Cancel outstanding orders
Recording Encumbrances
Encumbrances 30,000
Encumbrances Outstanding 30,000
Receipt of order
a.Reverse estimate
Encumbrances outstanding 10,000
Encumbrances 10,000
b.Record the actual
Expenditures 10,000
Cash (V/P) 10,000
Close encumbrances
Encumbrances outstanding 20,000
Encumbrances 20,000

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 Outstanding Encumbrances at Year-End
2. Honor outstanding orders in the following fiscal year or
encumbered appropriations continue or do not lapse at year end
(carryover encumbrance)—requires
• Special reporting in Fund Balance
• Reversing above entry at start of next fiscal year
• Assume that purchase orders amounting to br27,000 are issued
late in 20X1 and are still outstanding at year-end. When the orders
were issued, the encumbrance entry was as follows:
Encumbrances 27,000
Fund Balance-Reserved for Encumbrances 27,000
• Treatment of encumbrances outstanding at year-end depends on
the governmental unit’s basis of reporting.
– GAAP Budgetary Basis
– Legal Budgetary Basis
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 Outstanding Encumbrances at Year-End
A.GAAP Budgetary Basis
−Views Appropriations for the year are as authority to spend then outstanding
encumbrances are not equivalent to expenditures
−The budget is viewed in terms of modified accrual accounting-the authority to
spend (use) resources in a given period of time.
−Budgetary comparison statements compare expenditures recorded during the
year (which do not include o/s encumbrances) with a budget figure that indicates
authority to spend during the year.
−GAAP budget –one that measures authority to spend during the current year-
consists of the current year’s legal budget plus prior year appropriations carried
over to the current year in the form of o/s encumbrances.
−A budgetary comparison statement shows actual expenditures only, &
outstanding encumbrances are removed from the appropriations bal.
−Next year, expenditures include the actual expenditures associated with last
year’s encumbrance, & appropriations include the outstanding encumbrance
from last year, effectively moving the appropriation & the expenditure to the year
when the goods are received & the resources spent.
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 Outstanding Encumbrances at Year-End
• Closing the encumbrances @ end of 20X1
Fund balance-Unreserved 27,000
Encumbrances 27,000
• Next FY—Reestablish Encumbrances(Effectively reversing part of the 20X1
closing entry):
Encumbrances 27,000
Fund Balance-Unreserved(O/S) 27,000
 This entry reestablishes budgetary accounts for outstanding orders. Necessary
only if government is honoring outstanding orders at end of previous fiscal
year.
 The expenditure signifying receipt in 20X2 of the goods & services ordered in
20X1 is recorded in the same manner as all other 20X2 expenditures. The
encumbrance is reversed in the amount of 27,000, and the expenditure is
recorded at the actual amount owed.
 The encumbrances are not included in the 20X1 budgetary comparison
statement.

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 Outstanding Encumbrances at Year-End
B. Legal Budgetary Basis
− Views appropriations as authority to encumber or obligate then outstanding
encumbrances are equivalent to expenditures, since the obligation arises at the
time of the purchase order.
− Budget is viewed in legal terms, namely as the authority to commit (encumber)
resources during a given period.
− Thus an encumbrance-a commitment to spend-constitutes a charge against the
annual budget, irrespective of when the expenditure occurs.
− In terms of their effect on spending authority, o/s encumbrances are equivalent
to expenditures; that is, they are closed to the fund bal. & are included in the
budgetary comparison stat. in the succeeding year, the expenditures related to
year-end encumbrances are recorded separately & are charged against the
reserve portion of fund bal. rather than against subsequent year’s budget.
• A budgetary comparison statement at year-end shows the actual expenditures
and encumbrances versus appropriations, including the appropriation
connected with the outstanding encumbrance.

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 Outstanding Encumbrances at Year-End
• Entries to record to record the encumbrance in 20X1 and close the accounts
are the same under the GAAP budgetary basis. At the beginning of 20X2, the
reserved fund balance is reclassified, indicating that it is set aside to cover
purchase orders issued in 20X1.
• Fund balance-reserved for encumbrances 27,000
Fund balance-reserved for encumbrances (prior year) 27,000
• Receipt of goods & services ordered in 20X1 in 20X2 at a cost of br26,600.
Expenditures-Prior year encumbrances 26,600
Vouchers payable 26,600
• Additional closing entry @ end of 20X2
Fund balance-reserved for encumbrances (prior yr) 27,000
Expenditures-prior year encumbrances 26,600
Fund balance-unreserved 400
 The 400 credit to the unreserved fund balance effectively corrects the 20X1
closing entry. Even though that entry charged 27,000 of 20X1 encumbrances
against the unreserved fund balance, the actual cost of these goods & services
was only 26,600.
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 Outstanding Encumbrances at Year-End
• Laps of Appropriations
– The lapse of appropriations & encumbrances (obligations or commitments) accounts at
year end are based on certain assumptions about the laws & policies of a governmental
unit as follows:
• Assumption A
– All unexpended appropriations lapse at year end, even if encumbered;
– The unit is committed to accept the goods or service on order at year end
– Expenditures resulting from encumbrances o/s at year end must be charged (&
authorized by ) against the next year’s appropriations
• Assumption B
– All unexpended appropriations lapse, even if encumbered; &
– All encumbrances are null & void after year end.
• Assumption C
– Encumbered appropriations continue (do not lapse at year end) to the next period; that
is, only unencumbered appropriations lapse at year end.
• Assumption D
– Unexpended appropriations continue (do not lapse at year end) to the next period (s);
that is, only expended appropriations lapse at year end.
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