Governmental Accounting and Reporting: Putting It All Together

• Chapter 0 - A Roadmap for Today’s Course
• Chapter 1 - A Good Place to Start
  • Learning Objectives
  • How We Arrived at the Starting Line
  • The Funds
    • The Governmental Funds
    • The Proprietary Funds
    • The Fiduciary Funds
  • Measurement Focus and Basis of Accounting
    • The Governmental Funds
    • The Proprietary Funds
    • The Fiduciary Funds
  • Summary
  • Questions
  • Appendix 1A
• Chapter 2 - Fund Accounting
  • Learning Objectives
  • Introduction
  • Budgeting
    • The Governmental Funds
    • The Proprietary Funds
    • The Fiduciary Funds
  • Revenues
    • Taxes
    • Charges for Services
    • Fines and Forfeitures
    • Intergovernmental Revenues
    • Licenses and Permits
    • Other Revenues
    • Fiduciary Funds
  • Expenditures/Expenses
    • Operating Expenditures/Expenses
    • Capital Outlay Expenditures/Expenses
    • Debt Service Expenditures/Expenses
  • Transfers and Contributions
    • Transfers
    • Contributions
    • Sales of Capital Assets
  • Other Transactions and Events
    • Short-Term Financing
    • Issuing Long-Term Debt
    • Advance Refunding of Debt
  • Summary
  • Questions
  • Appendix 2A
• Chapter 3 - Fund Reporting
  • Learning Objectives
  • Introduction
  • The Concept of Major Funds
  • Governmental Funds
    • Balance Sheet
    • Operating Statement
    • Budget-to-Actual Statement (or Schedule)
  • Proprietary Funds
    • Statement of (Fund) Net Assets
    • Operating Statement
    • Statement of Cash Flows
  • Fiduciary Funds
    • Statement of Fiduciary Net Assets
    • Statement of Changes in Fiduciary Net Assets
    • Agency Fund Reporting
  • Summary and Overtime
    • A Brief Review from Chapter 2
    • Additional Information
    • Now the Statements
  • Questions and Exercises
    • Exercise – Fund Financial Statements Scramble
  • Appendix 3A
  • Appendix 3B
  • Appendix 3C
  • Appendix 3D
• Chapter 4 - Preparing the Government-Wide Financial Statements
  • Learning Objectives
  • Introduction
  • Reviewing the Government-Wide Financial Statements
    • Capital Asset Schedule
    • Long-Term Liabilities Schedule
    • Statement of Net Assets
    • Statement of Activities
    • The Reconciliations
  • Preparing the Government-Wide Financial Statements
    • Statement of Net Assets
    • Reconciling the Internal Service Funds
    • The Statement of Activities
  • Summary
  • Questions
• Chapter 5 - A Good Place to Stop
  • Learning Objectives
  • Introduction
  • The Notes to the Financial Statements
  • Required Supplementary Information
    • Management’s Discussion and Analysis (MD&A)
    • Other RSI
  • Other Information
  • The Statistical Section
    • Financial Trends Information
    • Revenue Capacity Information
    • Debt Capacity Information
    • Demographic and Economic Information
    • Operating Information
    • Narrative Explanations
  • Summary
  • Questions
  • Appendix 5A
  • Appendix 5B
  • Appendix 5C
• Chapter 6 - Latest Developments

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Budgeting

It has been the author's observation that budgeting is a topic most accountants would just as soon not talk about. However, it is hard to understand why. Budgeting is crucial to all organizations, not just governments. No business or individual could have an efficient operation without some form of budgeting.

As luck would have it, governments do have some specific rules about budgeting, but those relate more to reporting budgets than preparing them; budgetary reporting is a topic for the next chapter. When it comes to preparing budgets, there are many options available. All of the aforementioned accounting textbooks do a good job in covering the different approaches to budgeting, including:

- Planning, Programming, Budgeting System (PPBS) - A system that was very popular in the Federal government for many years. As an experienced budget person for the U.S. Army, the author saw this system up close and personal. While the current year was always the most important year, much of the emphasis here was in long-range planning. The budget documents would often include the results of the previous year, the current year, next year's budget, and a 5-year projection for a total of 8 years in a single budgetary document.

- Performance Budgeting - Based on measuring performance of individual governmental activities. This might be a very good approach to use with the new government-wide Statement of Activities, where the focus is on reporting by programs, functions, and identifiable activities.

- Zero-Based Budgeting (ZBB) - Made popular by then Governor of Georgia, and later President, Jimmy Carter, this system makes each agency start with zero every year and justify their entire budget. When adopted by the Federal government, it quickly became MZBB, or modified zero-based budgeting, where an incremental budget was applied to each activity. In this process, the previous year's budget was used as a starting point, and then programs were added or deleted in increments for different funding levels. It made program managers examine where effective cuts could be made and what could be added to enhance the program's operations.

- Object-of-expenditure - Very widely used, this system is an expenditure control approach to budgeting by looking at the various types of expenditures incurred by each program (e.g. salaries, supplies, capital asset purchases, utilities, travel, and other items) and budgeting for them for the coming fiscal year. This form of budgeting is the simplest of the four methods, which probably accounts for its widespread use.

Regardless of which approach is used, governments will usually spend much more time and effort preparing their budget before the start of the fiscal year than they will spend on their annual financial report at the end of the fiscal year. After all, the budget is essential to the operation of the government. Most governments are not allowed to spend money until an approved budget is in place.

The budgets can be quite lengthy. Recently, the author contacted the finance director for the City of Collierville, TN (near Memphis), about the City's Comprehensive Annual Financial Report (CAFR) for FY 2007. The CAFR receives the Government Finance Officers Association (GFOA) Certificate of Achievement for Excellence in Financial Reporting, indicating that it is a well-prepared document. The report is for a city of about 42,000 residents, and covers 152 pages. In contrast, the government publishes three budgetary documents:

- Approved Annual Financial Plan and Annual Budget, 183 pages.

- Capital Investment Plan, 79 pages.

- Line Item Supplement to the Operating Budget, 195 pages.

Just in the total number of pages, the budgetary documents are three times larger than the CAFR. Where do you think the government spends most of their time and effort?

The Governmental Funds

Accounting for budgets typically starts with recording the approved budget into the accounting records of the government. After all, if a government is going to report compliance with legal provisions (the budget), having the budget in the system is an essential first step. In its simplest form, the budgetary entry can look like this:

1. Estimated Revenues - 500,000
Appropriations - 500,000

Naturally, this is only part of the entry; the two budgetary accounts shown here general ledgertype accounts. The real controls will be in the subsidiary ledger accounts where the detail will be recorded. For the sake of brevity, we will not go to that level of detail.

This would be the entry for a balanced budget in a governmental fund. Unfortunately, balanced budgets are a seldom occurrence. Usually, one amount will be greater than the other. In that event, there has been considerable discussion on just what the balancing account should be. There is certainly no agreement among the three textbooks mentioned earlier in this chapter. Freeman uses Unreserved Fund Balance; Wilson uses Fund Balance; and Copley and the GAAFR use Budgetary Fund Balance. Whatever account is used, the effect on the account will be eliminated at year-end when the budgetary entry is reversed.

When a governmental fund places an order for goods and services, it has, in effect, spent part of its budget. This decline in available dollars is true even though no expenditure or liability has been incurred. Also, the decrease in the budgetary authority is often for an estimated amount. This amount will be adjusted when the order is received. The entry to record these orders is:

2. Encumbrances - 1,000
Reserve for Encumbrances - 1,000

If we assume this activity had a budgetary authority of $10,000, the activity would now have $9,000 ($10,000 - $1,000) left to spend.

When the order is filled, the encumbrance is reversed and the expenditure (or asset) and related liability are recognized for the actual amount which may or may not be the same as the original estimate. The entry for completion of the order is:

3. Reserve for Encumbrances - 1,000
Encumbrances - 1,000

Expenditures - 1,050
Accounts Payable - 1,050

The first entry temporarily increases the budgetary spending authority back to the original $10,000, but this authority is quickly decreased by the actual amount to $8,950 ($10,000 - $1,050).

At the end of the fiscal year, the government must make a decision on what it will do with outstanding orders. There are essentially two choices: (1) the government can cancel all outstanding orders; or (2) the government can honor outstanding orders in the following fiscal year. With either option, the first step is to eliminate the outstanding encumbrances at year-end.

The entry to record this action is:

4. Reserve for Encumbrances - 1,500
Encumbrances - 1,500

In the first option, that would be the only entry. In the second option, a second entry is made to create a formal reserve to cover the amount of outstanding orders at year-end. This entry would be:

5. Unreserved Fund Balance - 1,500
Reserve for Encumbrances - 1,500

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