CHAPTER 3

BUDGETING, BUDGETARY
ACCOUNTING AND
BUDGETARY REPORTING

CHAPTER3 GOVT & NFP Accounting 3-1

 GASB RECOGNIZES THE
IMPORTANCE OF BUDGETING
 Principle No. 10 - BUDGETING, BUDGETARY
CONTROL AND 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
CHAPTER3 GOVT & NFP Accounting 3-2
 BUDGETARY PROCESSES

 Budgetary planning, control, and evaluation

considerations
 Basic budgetary terminology
 Various budgetary approaches and emphases
found in practice
 Budget preparation, enactment, and execution

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 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

CHAPTER3 GOVT & NFP Accounting 3-4

 BUDGETARY PLANNING

Legislative-executive division of powers

– Executive proposes budgetary plans
Written proposals are critical
Documented plans key to public accountability
– Legislative body adopts plans after
Public hearings
Appropriate revision

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 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

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 BUDGETARY CONTROL

Legislative appropriations enacted

in –
– Broad terms provides the executive
branch with managerial discretion
– Detail terms allows little discretion to
the executive branch

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 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

CHAPTER3 GOVT & NFP Accounting 3-8

 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
CHAPTER3 GOVT & NFP Accounting 3-9
BUDGETARY TERMINOLOGY

Budgeting is a continuous year round

process going through five phases
(Figure 3-1)
– Executive budget preparation
– Legislative enactment
– Budget administration
– Reporting
– Postaudit
CHAPTER3 GOVT & NFP Accounting 3 - 10
BUDGETARY TERMINOLOGY
Important to distinguish different
types of budgets
– Capital or current (operating)
– Tentative or enacted
– General or special
– Fixed or flexible
– Executive or legislative

CHAPTER3 GOVT & NFP Accounting 3 - 11

 CAPITAL vs. CURRENT
BUDGETS (Figure 3-2)
Capital budget
– Commonly a multi-year plan
– Frequently a 5-year capital program
– Current year’s plan adopted as the “capital
budget”
Current budget
– Current operations and debt service adopted
as the “operating budget”
– The annual capital budget

CHAPTER3 GOVT & NFP Accounting 3 - 12

 TENTATIVE vs. ENACTED
BUDGETS
Legal status of budgets

– Budget proposals and requests are not final

– Only a legally enacted budget is final
– Becomes the legal basis of control
– Only legislative branch may modify

CHAPTER3 GOVT & NFP Accounting 3 - 13

 GENERAL vs. SPECIAL
BUDGETS
General budgets
– Finance governmental activities
General fund
Special revenue funds
Debt service funds
Special budgets
– Finance any other funds
Capital projects funds
Sometimes enterprise & internal service funds
Rarely fiduciary funds
CHAPTER3 GOVT & NFP Accounting 3 - 14
 FIXED vs. FLEXIBLE
BUDGETS
 Fixed budgets
– Appropriations are for fixed dollar amounts
– Do not fluctuate with service demands
– May not be exceeded without amendment
– Used to control expenditures
 Flexible budgets
– Appropriations not fixed; demand fluctuation
– Use usually limited to business / enterprise type
activities (Example – utilities: appropriations vary
with volume of water or electricity demands )
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EXECUTIVE vs. LEGISLATIVE
BUDGETS
 Categorized by preparer
 Executive budgets
– Budget preparation is commonly an
executive function
– Legislature may revise or amend
 Legislative budgets
– Occasionally, legislature will prepare
 Budgets also prepared jointly or
through a committee (joint budget;
committee budget)
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BUDGETARY APPROACHES
AND EMPHASES

Budget practices vary widely

– Budget system designed to fit local
requirements
– There are no uniform “standards”
– However, should provide appropriate –
Planning processes
Control features
Evaluation reviews
CHAPTER3 GOVT & NFP Accounting 3 - 17
 BUDGETARY APPROACHES
AND EMPHASES
The budget as an information document
– Provides information to decision makers
– The chief executive decides what information
will go to the legislative body

– Documents decisions that have been made

– The final decisions represent adopted
appropriations spending legislation . . . a law

CHAPTER3 GOVT & NFP Accounting 3 - 18

 BUDGETARY APPROACHES
AND EMPHASES
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
CHAPTER3 GOVT & NFP Accounting 3 - 19
 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

(*) National Advisory Council on State and Local Budgeting

CHAPTER3 GOVT & NFP Accounting 3 - 20
 BUDGETING PRACTICES
 NACSLB(*) recommended practices (Figure 3-3)
– 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

CHAPTER3 GOVT & NFP Accounting 3 - 21
 ALTERNATIVE
BUDGETARY APPROACHES
 Alternative approaches have a different
emphasis on planning, control and evaluation
– Object-of-expenditure budgeting
– Performance budgeting
– Planning-program-budgeting (PPB)
– Zero-base budgeting (ZBB)

 Each approach may be implemented different

 Must look to substance of the process
CHAPTER3 GOVT & NFP Accounting 3 - 22
 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
(Figure 3-4)
Chief executive compiles and modifies requests
Chief executive submits requests in same format
Legislature makes line-item appropriations

CHAPTER3 GOVT & NFP Accounting 3 - 23

 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
CHAPTER3 GOVT & NFP Accounting 3 - 24
 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

CHAPTER3 GOVT & NFP Accounting 3 - 25

 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
CHAPTER3 GOVT & NFP Accounting 3 - 26
 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

CHAPTER3 GOVT & NFP Accounting 3 - 27

 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
CHAPTER3 GOVT & NFP Accounting 3 - 28
 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

CHAPTER3 GOVT & NFP Accounting 3 - 29

 BUDGET PREPARATION

Preliminary
– Prepare budget calendar
– Estimate expected revenues
– Develop range of expenditure changes
– Inform departments of priorities
– Project beginning and ending fund balances
CHAPTER3 GOVT & NFP Accounting 3 - 30
 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

CHAPTER3 GOVT & NFP Accounting 3 - 31

 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
CHAPTER3 GOVT & NFP Accounting 3 - 32
 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

CHAPTER3 GOVT & NFP Accounting 3 - 33

 BUDGETARY ACCOUNTING

Budget control requires integrating

budgetary accounts in the general ledger
or subsidiary ledgers for
– Revenues
– Expenditure appropriations
– Encumbrances (estimated cost of committed
expenditures not yet received)
 As much detail as the legally adopted budget

CHAPTER3 GOVT & NFP Accounting 3 - 34

 BUDGETARY ACCOUNTING

Revenue budget actions

– Upon budget adoption

– When revenues are recognized

– Controls - Balances and unrealized revenues

CHAPTER3 GOVT & NFP Accounting 3 - 35

 BUDGETARY ACCOUNTING

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

CHAPTER3 GOVT & NFP Accounting 3 - 36

 BUDGETARY REPORTING

GASB standards require extensive

budgetary reporting in the
comprehensive annual financial report
(CAFR) which includes:
– Basic financial statements (BFS)
– Required supplementary information (RSI)

CHAPTER3 GOVT & NFP Accounting 3 - 37

 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
CHAPTER3 GOVT & NFP Accounting 3 - 38
 INTERIM BUDGETARY
STATEMENTS
 GASB has not set standards for interim
financial statements
 Revenue statements
– Revenues realized to date
– Estimated annual revenues

 Expenditure statements
– Expenditures & encumbrances to date
– Annual appropriations

CHAPTER3 GOVT & NFP Accounting 3 - 39

 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
CHAPTER3 GOVT & NFP Accounting 3 - 40