1

.
 Learning Objectives.
After studying this chapter, you should be able to:

 Identify different activities of government

 Understand the principles of accounting and financial reporting for

governments entities.

 Differentiate the categories of fund used by governmental entities.

 Describe the components of GASB‟s integrated accounting and

financial reporting model.

 Explain classification of budget and approaches to budgeting.

2
 Introduction
• We learned in the first chapter that a brief overview of the minimum

requirements for general purpose external financial reporting under

the GASBS 34 financial reporting model.

• This chapter expands the previous discussion and focuses primarily on

principles of accounting and financial reporting within the integrated

reporting model framework set forth in GASBS 34.

3
 2.1. Summary Activities of Government
• When the Governmental Accounting Standards Board (GASB) was

formed in 1984, it adopted 12 accounting and financial reporting

principles that had been established by its predecessor standard-
setting body, the National Council on Governmental Accounting
(NCGA).
• GASB 34 modifies several of the original 12 principles and adds one

principle for reporting long-term liabilities.

• GASB Concept № 1 also stated that government is engaged in the

following major 3 categories of activities: governmental, propertiary

and fiduciary activities.
4
 2.1.1 Governmental Activities
 Governmental Activities are core governmental services, such as;

 Protection of life and property

 Public works (e.g. streets and highways, bridges, and public buildings),

 Parks and recreation facilities and programs,

 Educational, cultural, and social services.

 General administrative support such as data processing, finance, and

personnel.
• These core services, together with general administrative support,

comprise the major part of what GASB Concepts Statement No. 1 refers
to as governmental activities.

5
 2.1.2 Propertiary(Business-Type) Activities
• Some readers may be surprised to learn that governments also

engage in a variety of business-type activities.

• These activities include, among others,

 Public utilities(i.e. electric, water, gas, and sewer utilities),

 Transportation services,

 Toll roads and toll bridges,

 Hospitals,

 Parking garages and lots,

 Liquor stores, golf courses, and swimming pools.

• Many of these activities are intended to be self-supporting by
charging users for the services they receive.
6
 2.1.3 Fiduciary Activities
 Governments often act in a fiduciary capacity, either as an agent or

trustee, for parties outside the government.

 For example, a government may serve as agent for other

governments in administering and collecting taxes.

 Governments may also serve as trustee for investments of other

governments in the government‟s investment pool, for escheat

properties that revert to the government when there are no legal
claimants or heirs to a deceased individual‟s estate, and for assets
being held for employee pension plans, among other trustee roles.

7
 2.2 GASB’s Integrated Financial Reporting Model.

• To understand the basic principles of accounting and financial

reporting for state and local governments, one must first understand
the GASBS 34 integrated accounting and financial reporting model
components includes;
1. The reporting entity.

2. Government-wide financial statements.

3. Fund financial statements.

4. Notes to the financial statements.

8
2.2.1.The Reporting Entity
• A reporting entity consists of the primary government and certain other

organizations, identified as component units, for which the primary

government is financially accountable.

• According to GASB standards, the “financial statements of the reporting

entity should provide an overview of the entity, yet allow users to

distinguish between the primary government and its component units.”

• The government-wide f/s meet this objective very well.

9
2.2.1.The Reporting Entity Cont…
I. A primary government:
• GASB defines a primary government as;

 A state government, or general purpose local government (e.g., a

city, town, village, township, county, etc.), or

 A special purpose government that has a separately elected

governing body, is legally separate, and is fiscally independent of

other state or local governments.

 In many states, public school systems are legally and fiscally

independent special purpose governments that are primary

governments in their own right.
10
2.2.1.The Reporting Entity Cont…
ii. A component unit:

• Is a legally separate organization for which the elected officials of a

primary government are financially accountable.

• Example: organizations such as governmental hospitals, library

districts, and public building authorities.

• Financial information of a component unit can be reported by:

 Discrete presentation (i.e., in a separate column), or k

 Blending (combined in the same columns with financial information of

the primary government) as shown below.

11
2.2.1.The Reporting Entity Cont…
• Two sets of “basic financial statements” required in addition to MD&A

and other required supplementary information are;

• Government-wide financial statements(see Illus.1-4,1-5,&2-1)

• Fund financial statements (see Ill. 1-6 through 1-14 & 2-1) from the

text book.
• These two kinds of statements are integrated in the sense that the total

fund balances of governmental funds and changes in fund balances

must be reconciled to total net assets and changes in net assets of
governmental activities reported in the government-wide financial
statements as depicted in Illustration 2.1 below.
12
13
2.2.2. Government-Wide Financial Statements
• Government-wide financial statement are intended to report an

aggregated government‟s net assets and changes in net assets and

used to assessing operational accountability whether the government
has used its resources efficiently and effectively in meeting operating
objectives in the long run.
• As shown in illustration 2.1, it report on the governmental reporting

entity as a whole but focus on the primary government are prepared

on accrual basis and focus economic resources measurement presents
into two sections the financial information of the governmental activities
and business-type activities of the primary government in separate
columns, although there is a total column for the primary government.14
2.2.3. Fund Financial Statements
 Is a category of the basic financial statements that assist in assessing

fiscal accountability of the government entities uses modified accrual

basis and focus on current financial resources.
 Fund financial statements presents more precisely, three sets of fund

financial statements, one set for each of the three fund categories;
governmental, proprietary, and fiduciary (see the lower half of
illustration 2.1 above).
 Fund financial statements assist in assessing whether the government

has raised and spent financial resources in accordance with budget

plans and in compliance with pertinent laws and regulations.

15
2.3. Fiscal Accountability and Fund Accounting
 Fiscal Accountability is current-period financial position and budgetary

compliance reported in fund-type financial statements of governments

in a given fiscal period.
 Fiscal period is any period at the end of fiscal year which a

government determines its financial position and the results of its

operations.
 Fiscal year is a 12-months follows period of time to which the annual

budget applies and at the end of which a government determines its

financial position and the results of its operations.
 For example, FY10 refers to the year that ends in 2010.

16
2.3. Fiscal Accountability and Fund Accounting
 Fund Accounting is an accounting system organized on the basis of

funds, each of which is considered a separate accounting entity.

 Accounting for the operations of each fund is accomplished with a

separate set of self-balancing accounts that comprise its assets,

liabilities, fund equity, appropriations, encumbrances, revenues, and
expenditures, or expenses, as appropriate.
 There are a summary statement of accounting and financial reporting

principles for governmental entities, as modified by GASB Statement

No. 34.

17
2.3.1.Accounting and Reporting Capabilities(Principle 1)
GASB‟s first accounting and financial reporting principle states:
• A governmental accounting system must make it possible both:

(a) To present fairly and with full disclosure the funds and activities of the

governmental unit in conformity with generally accepted accounting

principles, and
(b) To determine and demonstrate compliance with finance-related legal

and contractual provisions.

• In the governmental environment, legal and contractual provisions

often conflict with the requirements of generally accepted accounting

principles (GAAP).
18
2.3.1. Accounting and Reporting Capabilities(Principle 1) Cont…

 However, as the first principle stated, the accounting system must make

it possible to present f/information that meets both requirements.

 Legal provisions related to budgeting revenues and expenditures,

often differ from GAAP accounting requirements and revenues may

be legally or contractually restricted for a particular purpose.
 The government controlled these restricted and unrestricted financial

resources through a mechanism the fund.

 The accounting system that make possible preparation of financial

statements based on GAAPs; adhering to internally or nationally

adopted requirements rules, policies, or procedures so called legal
provisions. 19
2.3.2. Fund and Fund Accounting System(Principle 2)
 Governmental accounting systems should be organized and operated

on a fund basis.

 A fund is a fiscal and accounting entity with a self-balancing set of

accounts recording cash and other financial resources, together with all
related liabilities and residual equities or balances and changes therein,
which are segregated for the purpose of carrying on specific activities or
attaining certain objectives in accordance with special regulations,
restrictions, or limitations.

 The concept of fund is fundamental to governmental accounting and

reporting.
20
 2.3.2. Fund and Fund Accounting(Principle 2) Cont…
• As the definition states, a fund is a separate fiscal entity with its own

resources, its own liabilities, and its own operating activity for the fiscal
year.
• Has its own set of accounting records (e.g., journals and ledgers) and

can have prepared for it separate financial statements it is a separate

accounting entity as well.
• Assists in carrying on specific activities or attaining certain objectives in

accordance with special regulations, restrictions, or limitations.

• As this sentence implies, different funds are intended to achieve

different objectives.
21
 2.3.3. Types of Funds (Principle 3)
• There are three categories of funds: governmental, proprietary, and

fiduciary.
• Accounting characteristics and principles unique to each fund category

are discussed in the following sections.

1. Governmental Funds

2. Proprietary Funds

3. Fiduciary Funds

1.Governmental Funds:- a generic classification used by the GASB to

refer to all funds other than proprietary and fiduciary funds
comprised five types of funds: the General Fund, special revenue
funds, debt service funds, capital projects funds, and permanent funds.
22
 2.3.3.1.1.General Fund (GF)

• General fund account all current financial resources except those

required to be accounted for in another funds.
• Is used for the general activities of a government.

• Also called General Revenue Fund, General Operating Fund, or

Current Fund.
• General fund is created at beginning of the “Unit” and it exists

throughout the life of that unit.

• Other governmental funds will be created as needed.

23
 2.3.3.1.2.Special Revenue Funds (SRF)

 Special revenue fund (SRF) in contrast to GF are used to account for

resources, which are collected for a specified purpose and from specific
sources and not under the account of other fund type.
 For example, When tax or grant revenues or private gifts are legally
restricted for particular operating purposes, such as the operation of a
library or maintenance of roads and bridges, a special revenue fund is
created..
 A separate special revenue funds are established by governmental units,
as mandated by legislative enactments to account for the receipts and
expenditures associated with specialized revenue sources.
24
2.3.3.1.3.Debt Service Funds (DSF)
 A fund established to finance and account for the payment of interest

and principal on all tax-supported debt, serial and term, including

that payable from special assessments.

 For the purpose of administering government kept repayment plan

with sufficient resources designated to repay the debt with its interest
which should not be used for any other purpose so called the debt
service funds.

25
 2.3.3.1.4. Capital Projects Funds (CPF)

 A fund created to account for all resources to be used for the

construction or acquisition of designated capital assets by a

government except those financed by proprietary or fiduciary funds.

 Governments often engage in capital projects to accommodate a

growing population or to replace existing major capital facilities such

as buildings, civic centers libraries, roads, highways, bridges, or parks.

 These funds do not account for the acquisition of smaller fixed assets,

such as vehicles, machinery & office equipment which are normally

budgeted for & recorded as expenditures in the general fund.
26
 2.3.3.1.5.Permanent Funds
 A permanent fund is governmental-type funds used to account for
public-purpose trusts for which the earnings are expendable for a
specified purpose like maintenance of a cemetery or aesthetic
enhancements to public buildings but the principal amount is not
expendable ( an endowment) reinvested and preserved.
 If the earnings from a permanent fund can be used to benefit only

private individuals, organizations, or other governments, rather than

supporting a program of the government and its citizenry, a private-
purpose trust fund a fiduciary fund is used instead of a permanent
fund.
27
 Governmental Funds Characteristics
• Evolved to meet the budgetary and financial compliance needs of

government focuses on inflows & outflows of current financial resources.

• Uses modified accrual basis of accounting that assist to recognizing as

revenues only those inflows that are measurable and available to pay
current-period obligations and recognizing as expenditures only
obligations that will be paid from currently available financial
resources.
• Account for expenditures of financial resources not expenses and

• The b/ sheet for governmental funds reports only current assets and

current liabilities and fund balances or fund equity which is the

difference between current assets and current liabilities.
28
 2.3.3.2.Proprietary Funds
 Governmental units use proprietary funds to account for business-type

activities that provide goods and services to users for charges.

 The accounting and financial reporting principles are similar to those for

commercial business entities.

• As of business, the government needs to know the full cost of goods and

services in order to determine appropriate prices or fees and to deciding

whether the government should continue to produce or provide the goods
and services or to contract for them with an outside vendors.
• Thus the objective of proprietary funds is to maintain capital or to produce

income, or both, and full accrual accounting procedures apply and

• Uses revenue and expense accounts not expenditure accounts.
29
 2.3.3.2.Proprietary Funds Cont…
• It consists internal service and enterprise funds

• The two funds differ primarily in terms of their objectives and the way

the financial information of each type of fund is reported in the fund

and government-wide financial statements.

30
2.3.3.2.1.Internal Service Funds (ISF)

• Are created to improve the management of resources and generally

provide goods or services to departments or agencies of the same

government and sometimes to other governments on a cost-
reimbursement basis.
• The account classifications used by an ISF are those that would be

used in accounting for similar operations of a private business

enterprise.
• Usually reported as governmental activities in the government-wide

statements because they primarily serve departments financed by

governmental funds. 31
 2.3.3.2.2.Enterprise Funds

• Account for activities in which goods or services are provided to the

general public for a fee that is the principal source of revenue for the
fund.
• Examples: electric and water utilities, airports, parking garages,

transportation systems, and liquor stores.

• Reported as business-type activities in the government-wide financial

statements.
• Governments may use enterprise funds to record any business activities

for which a user fee is charged.

32
 Proprietary Funds Characteristics
 Accounting and reporting are similar to those of for-profit entities,

including full accrual accounting.

 Capital assets and long-term liabilities are recorded in the funds.

 Depreciation expense is recorded in the funds.

 Expenses are recorded, not expenditures.

 Account for both current and noncurrent assets and liabilities.

 Statement of net assets-proprietary funds

 Statement of revenues, expenses, and changes in net assets-

proprietary funds
 Statement of cash flows-proprietary funds
33
 2.3.3.3. Fiduciary Funds
 The fiduciary funds consists agency funds and, trust funds which are

similar in the sense that the governmental unit acts in a fiduciary

responsibility for both types of funds.
I. Agency funds:- funds consisting of resources received and held by the

government as an agent for others; for example, taxes collected and

held by a municipality for a school district.
 Note: Sometimes resources held by a government for other
organizations are handled through an agency fund known as a pass-
through agency’

 Are more temporary in nature.

34
 2.3.3.3. Fiduciary Funds
 Reported using the economic resources measurement focus and

accrual basis of accounting.

• Are used when the government holds cash on a custodial basis for an

external party(individual, organization or government).

• All assets = liabilities

• No revenue and expense accounts used since there are no net assets.

• For example, a local government acts as an agent for the federal

government when it withholds income and social security taxes, which

will later be remitted to other government agencies, from employee
payrolls and pass through agency funds

35
 2.3.3.3. Fiduciary Funds Cont...
II. Trust Funds:- funds consisting of resources received and held by the

government as trustee, to be expended or invested in accordance

with the conditions of the trust.
 It is differ from agency funds primarily in the length of time and the

manner in which resources are held and managed.

 In most cases, trust fund assets include investments whose earnings

add to the net assets of the fund and which can be used for a
specified purpose and can be;
a) Public-Purpose Trust (Pension Trust Funds
b) Investment trust fund and
c) Private-Purpose Trust Funds,
36
 2.3.3.3. Fiduciary Funds Cont...
a) Public-Purpose Trust:- contributions received under a trust agreement

in which the investment income or an endowment must be used to

benefit a public program or the citizenry.

 A trust fund whose principal, earnings, or both must be used for a

public purpose, for example, a pension or retirement fund.

 Pension trust funds are funds holds in trust to provide retirement

benefits for employees.

37
 2.3.3.3. Fiduciary Funds Cont...
b) Investment Trust Funds:- funds used to account the equity of external

participants typically other governments in a sponsoring government‟s

investment pool.

• Account for external investment pools in which the assets are held for

other (external) governments, along with funds of the sponsoring

government.

• Assets, liabilities, net assets, and changes in net assets related to the

equity of the external participants are reported in this fiduciary fund

38
 2.3.3.3.Fiduciary Funds Cont...
c) Private-purpose Trust Funds:- funds that account for contributions

received under a trust agreement in which the investment income of

an endowment is intended to benefit an external individual,
organization, or government.

 Example a fund created to provide scholarships for the children of

firefighters and police officers killed in the line of duty.

 An endowment means a gift whose principal must

be must be maintained inviolate but whose
income may be expended.

39
 Fiduciary Funds Characteristics
• Uses full accrual accounting and focus on flows of economic resources

• Capital assets and long-term liabilities are recorded in the funds, if

applicable
• Additions (to net assets) and deductions (from net assets) are recorded

instead of revenues and expenses

• Fiduciary activities are reported in two fund financial statements:

statement of fiduciary net assets and statement of changes in

fiduciary net assets
• Table 2.2 below presents Summary of each fund characteristics

40
2-41
2.3.4. Number of Funds (Principle 4)
• Governmental units should establish and maintain those funds required

by law and sound financial consistent with legal and operation

requirements.
• As unnecessary funds result in inflexibility, undue complexity, and

inefficient financial administration, only the minimum number of

funds consistent with legal and operating requirements should be
established.
• Maintaining too many funds may be as disadvantageous as

maintaining too few funds.

42
2.3.5. Reporting Capital Assets (Principle 5)
 There should be a clear distinction should be made between general

capital assets and capital assets of proprietary and fiduciary funds.

 Capital assets of proprietary funds should be reported in both the

government-wide and fund statements.

 Capital assets of fiduciary funds should be reported in only the

statement of fiduciary net assets.

 All other capital assets of the governmental unit are general capital

assets and should be reported in the Governmental Activities column in

the government-wide statement of net assets but not be reported as
assets in governmental funds.

43
2.3.6. Valuation of Capital Assets (Principle 6)
• Fixed Assets should be reported at historical cost or, if the cost

is not practicably determinable, at estimated cost.

• The cost of a capital asset should include capitalized interest and any

ancillary charges necessary to place the asset into its intended location
and condition for use.
• Donated fixed assets should be recorded at their estimated fair value

at the time of receipt plus ancillary charges, if any.

44
 2.3.7. Depreciation of Capital Assets (Principle 7)
• Capital assets should be depreciated over their estimated useful lives

unless they are either inexhaustible or are infrastructure assets using the
modified approach as set forth in GASBS 34.
• Inexhaustible assets such as land and land improvements should not be

depreciated.
• Depreciation of general fixed assets should not be recorded in

the accounts of governmental funds instead it should be recorded in

government-wide statement of activities, proprietary and fiduciary and
• Accumulated depreciation is recorded in the General Fixed Assets

Account Group.

45
2.3.8. Reporting Long-Term Liabilities (Principle 8)
 A clear distinction should be made between fund long-term liabilities

and general long-term liabilities.

 Long-term liabilities directly related to and expected to be paid from

proprietary funds should be reported in the proprietary fund

statement and in the government-wide statement of net assets.
 Long-term liabilities directly related to and expected to be paid from

fiduciary funds should be reported in the statement of fiduciary.

 All other unmatured general long-term liabilities of the government

should be reported in the government-wide statement of net assets.

46
2.3.9. Basis of Accounting and Measurement focus(Principle 9)

 Table below shows measurement focus and basis of accounting of

different funds
Measurement Basis of
Focus Accounting

Government-wide Economic resources Accrual

statements
Governmental fund Current financial Modified accrual
statements resources
Proprietary fund Economic resources Accrual
statements
Fiduciary fund Economic resources Accrual
statements

47
2.3.10. Budgeting and Budgetary Control(Principle 10)

a) An annual budget (s) should be adopted by every governmental unit.

b) The accounting system should provide the basis for appropriate

budgetary control.
c) A common terminology & classification should be used consistently

throughout the budget, accounts, and financial statements.

48
 2.3.11. Budgetary Reporting(Principle 11)
a. Budgetary comparison schedules should be presented for the General

Fund and each major special revenue fund that has a legally adopted
budget as part of the required supplementary information (RSI).

b. Governments may elect to present the budgetary comparisons as part

of the basic financial statements.

49
2.3.12. Transfer, Revenue, Expenditure, and Expense Account
Classification (Principle 12)
a. Transfers should be classified separately from revenues and expenditures or
expenses in the basic financial statements.
b. Proceeds of general long-term debt issues should be classified separately from
revenues and expenditures in the governmental fund financial statements.
c. Governmental fund revenues should be classified by fund and source.
Expenditures should be classified by fund, function (or program), organization
unit, activity, character, and principal classes of objects.
d. Proprietary fund revenues should be reported by major sources, and expenses
should be classified in essentially the same manner as those of similar business
organizations, functions, or activities.
e. The statement of activities should present governmental activities at least at the
level of detail required in the governmental fund statement of revenues,
expenditures, and changes in fund balance at a minimum by function.
Governments should present business-type activities at least by segment.
50
 2.3.13. Annual Financial Reports(Principle 13)
a. A comprehensive annual financial report (CAFR) should be prepared
and published, covering all activities of the primary government
(including its blended component units).
b. The minimum requirements for general purpose external financial
reporting are:
(1) Management‟s discussion and analysis.
(2) Basic financial statements includes:
(a) Government-wide financial statements.
(b) Fund financial statements.
(c) Notes to the financial statements.
c. The reporting entity consists of (1) the primary government, (2)
organizations for which the primary government is financially
accountable, and (3) other organizations. 51
2.4 Uses of Budgets
 Budget is a plan of financial operation embodying an estimate of

proposed expenditures for a given period of time and the means of

financing them.
 The primary usefulness of budgets is planning and a control devices ,

i.e. “What resources do we have, and how can we plan to spend them
in order to attained our goal(s)?”
 The government will have certain objectives, and it assigns resources–

money, personnel, etc. for the accomplishment of those objectives.

 The budget is a way of controlling the assigned resources; ensuring

that they are used for the intended purpose.

52
2.5. Classifications of Budgets
• Government entities prepare and utilize several types of financial
plans.

• It is therefore important to distinguish among the various types of

budgets, to understand the phases through which each may pass and
to be familiar with commonly used budgetary terminology.

• There are five classifications of budgets and two types within each

classification.

53
 i. Capital or Current

Capital Current

Account for the acquisition of fixed Are concerned with the current
assets. year„s operating expenditures.

The legislature will likely approve Sometimes called recurring

the acquisitions one year at a time expenditures.

Need multi-year schedule for Similar-sorts of expenditures are

acquisition of capital items is called needed year after year.
capital program.

54
ii. Tentative or enacted

• One key distinction among budgets is their legal status.

• Various documents may be called budgets prior to approval by the
legislative body.
• As the name implies, the tentative budget is still in process.
• It has not yet been officially approved.
• An enacted budget has been officially approved and is a binding
legal document.

55
iii. General or Special
• The names of this classification are not quite as they sound.
• Budgets of governmental activities commonly financed through the
General, Special Revenue, and Debit Service Funds are referred as
General budges.
• A budget prepared for any other fund is Special budgets.
• Special budgets are commonly limited to Capital project funds,
though Enterprise and Internal service funds do sometimes
formally budgeted.

56
iv. Fixed or Flexible
• Fixed budgets are for a fixed total dollar (or Birr) amount and cannot
be exceeded but vary for the cost per unit of goods and services.
• A flexible budget, on the other hand, fixes the cost per unit of goods
and services vary for amount because it change in circumstances.
• Fixed budgets are simple to prepare and administer and are
more understood than flexible budgets.
• Flexible budgets are more realistic when changes in quantities of
goods or services provided directly affect resource availability and
need change in outlay pattern.

57
v. Executive or Legislative
• Budgets are also sometimes categorized by the preparer.
• Budget preparation is usually an executive„s function, though the
legislature may revise the budget prior to approval.
• In some instances the legislative branch may prepare budget, possibly
subject to executive veto.
• Executive budgets are, as the name implied, budgets originated from
the executive branch and
• Legislative budgets from the legislation branch.

58
2.6 Approaches to Budgeting
• There are different types of budgetary approaches which differ to

each other in their emphasis on planning, control and evaluation.

• These approaches fall in to two categories: Modern and Traditional

1.The modern also called rational approach consists of:

 Performance Budgeting

 Planning-Programming-budgeting (PPB)

 Zero-Base-Budgeting (ZBB)

2. Traditional Approach- Object-Of-Expenditure (OOE) budgeting

59
2.6 Approaches to Budgeting :Modern
1. Performance Budgeting
• Is a budget that bases expenditures primarily up on measurable

performance of activities and work programs.

• It focuses on the outputs generated, rather than looking primarily

at the cost of the inputs.

• In this type budgets attempt will be made to relate the input of

governmental resources to the output of governmental services.

• To provide the legislative body with a reasonable justification for

its budget requests, each department must do some clear thinking

about what it is trying to do and how best to do it.

60
 2.6 .Approaches to Budgeting: Modern
a. Performance Budgeting Cont…
• The performance budget is mainly concerned with only one year at a
time and the process of making the budget may be summarized as
follows:
 what type of services to offer?
 how many units of the service to offer?
 How much cost of one unit of the service is consumed?
 What total amount of budget is required? (determined as units of
service * the cost per unit)
For example, a prison holds 1,000 inmates. The cost of keeping a prisoner is
estimated at $5,000 per year. The budget for the prison for 2009 then would be
$5,000,000 for a year. However, if the prison actually incarcerated 800
prisoners in 2009, then the budget would be reduced to $4,000,000, and
the head of the prison would be expected to return the extra $1,000,000.
61
2.6 .Approaches to Budgeting: Modern
b. Planning-Programming-Budgeting (PPB)
• PPB emphasizes broad policy goals, strategies and objectives, rather

than details of spending and outcomes.

• In looking at these broad goals and objectives, it considers long-range

plans.
• In those long range plans both ultimate goals and intermediate
objectives must be explicitly stated.
• After formulating the long-range plans, it then evaluates costs and

benefits of different ways of meeting the goals and objectives.

• It also emphasized on overall programs, rather than a specific

departments/units.
62
2.6 .Approaches to Budgeting: Modern
b. Planning-Programming-budgeting (PPB) Cont…
• Distinctive characteristics of PPB

 It focuses on identifying the fundamental objectives of the government

and then relating all activities to them.

 Future year implications are explicitly identified.

 All pertinent costs are considered.

 Systematic analysis of alternatives is performed.

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2.6 .Approaches to Budgeting: Modern
c. Zero-Base-Budgeting (ZBB)
• ZBB is method of continually evaluating programs and services.

• The primary idea of ZBB is that each program must justify its existence

every year.
• No program is assumed to be continuing from one year to the next.

• In this approach, the starting point for the budget each year is zero.

• First the program itself must be justified, then different ways of

carrying out the program are examined and the best is chosen.

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2.6 .Approaches to Budgeting: Modern
• All of these modern approaches are theoretically sound.

• They have very good ideas about improving performance and

analyzing existing programs, which may be used in budgeting.

• However, they ignore three practical realities of budgeting.

1. The budget process itself is expose to be manipulated because are

often not rely on inputs.

2. They need high level trained human power to implement these
approaches.
3. Carrying out any of these approaches consumes many resources.

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2.6 .Approaches to Budgeting: Traditional
• For the reasons stated above, the modern approaches have not been

adopted as widely as might be expected.

• The traditional approach, called object-of-expenditure (OOE) is still

the most widely used approach to budgeting.

• The objective of the OOE budget has an expenditure control

orientation.

• It is to simply list expected expenditures, and then say how much

is required for each one.

• This approach involves the following three facets:

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 2.6 .Approaches to Budgeting: Traditional
i. First, subordinate agencies submit budget requests to the chief

executive in terms of the type of expenditures to be made.

ii. Next, the chief executive compiles and modifies the agency budget

requests and submits an overall request for the organization to

the legislature in the same object of expenditure terms.

iii. Finally, the legislative body usually makes line item appropriations,

possibly after revising the requests, along object of expenditure

lines.

• Consider the following example of OOE on dept of Science

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 2.6 .Approaches to Budgeting: Traditional
• Then the details information required in the budget will depend on

how much control the budget authority wants to exercise over the
department and the level of details shown above can summarized
and provided to the higher officials for fairly high degree of control.

• And finally the budget authority the approved budget for Department

of Science would be $472,000

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 2.6 .Approaches to Budgeting: Traditional
 Advantages of OOE
 It is simple for preparation and understanding
 It allows a great deal of control over expenditure, and
 It fits with practical realities.
 Limitations of OOE
1. It is overly control centered, to the detriment of the planning and
evaluation process.
• The long range planning, program, and outputs achieved are not
formally considered.
• In other words, it doesn„t encourage asking of the questions such as
 Why really spending the money?
 What is getting for the money spending?
 Could this objective be better met by another means?
 In spite of its weaknesses however, OOE is the most common approach.
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