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Budgetary Considerations in Governmental Accounting

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The main purpose of government is to provide a variety of services to their citizens.
Most of governmental resources are derived from those who pay taxes, but most tax payer do not pay taxes.
Therefore, It can be said that the various services provided by government must compete with each other for scarce resources.
Budget is a process that provides for accumulating resources and for allocating them among competing programs.

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Budgetary Considerations in Governmental Accounting

  1. 1. Chapter 3 Budgetary Considerations in Governmental Accounting
  2. 2. Overview: • The main purpose of government is to provide a variety of services to their citizens. • Most of governmental resources are derived from those who pay taxes, but most tax payer do not pay taxes. • Therefore, It can be said that the various services provided by government must compete with each other for scarce resources. • Budget is a process that provides for accumulating resources and for allocating them among competing programs.
  3. 3. A Budget -Is a formal estimates of resources that an organization plan to expend for specific purpose during known time, and the proposed means of acquiring these resources. -Budget contains activities the organization plan to undertake and how the organization expect to finance its activities. - Once approved, the budget represents a public policy in that its adoption implies certain objectives, as well as the means of accomplishing those objectives, as determined by the legislative body. - It is a framework for operations, the budget has the force of law in most local governments.
  4. 4. A Budget • This means that Revenue can be raised from authorized sources and that Expenditures can be incurred only for authorized purposes and in amounts not to exceed authorized maximums, which is called Appropriations. • Budget is standard to measure the efficiency and effectiveness can be measured.
  5. 5. 1. Budget Laws These laws deal with: types of budget, fund required to have budget, and putting budget into effect. Budget law encourages and requires a balanced budget which means the proposed expenditures do not exceed estimated money available of the budget year. Often not balanced Available money means fund balance and estimated revenue.
  6. 6. 2. Types of Budgets a. Operating Budget: It is budget for General and Special Revenue Funds. Also called current budget, it represents activities proposed to accomplish for the period. It displays actual revenue and expenditures for prior period, the current year to date, and anticipated revenue and expenditures for budget period. It contains the following information: (1) personnel and salaries (2) proposed bonds issues (3) methods of reducing costs (4) cost of operating specific activities.
  7. 7. b. Capital Budget Plans of expenditures in form of long lived or capital assets. It usually covers 4-6 years. Capital budget are especially helpful when as organization needs to determine when and if it will be necessary to incur debt.
  8. 8. c. Cash forecasts: - Predict the amount of cash to be received and expended during a period of time. - Gives anticipation of cash surplus and shortage and the method of financing. Formula: Cash Beginning + Cash Receipts = Cash Available Cash Disbursement + Minimum Cash = Cash required Cash available- Cash required = (deficit) Surplus. Deficit + net financing + minimum cash = Cash End Surplus + Minimum cash = Cash End. See Table 3-1 Page 62
  9. 9. Budgetary Approaches • Object of Expenditures approach: Budget are prepared to show as line item every category of expenditure to be made during the year in term of: (1) physical goods or services (2) Performance or programs. Expenditures differ from department to other. Example every department needs Current operation expenditures such as salaries, utilities, and supplies. Some department such as police, fire and street are capital intensive this called capital outlay appropriations. • Performance and planning-programming budgeting • Zero-based budgeting
  10. 10. 2. The Budget Process: 1. Budget Policy Guidelines: Discussion by officers abut the policies must be followed to prepare budget. Such as discussion of the current condition and forecasting for future. This step contains the following: * Level of Revenue and Expenditures. * Possible decrease or increase in tax. * Types of programs will undertake. * Financing Issues. * Current Economic Conditions. • Capital Spending. • Policies regarding allowable: Salary adjustments and Inflationary adjustments
  11. 11. 2. The Budget Process: 2. The budget calendar: • When each step must be completed • Who is responsible • Dates may be in the laws It lists the steps of budgeting preparation with dates on which each of step must be performed.
  12. 12. 3. Budget Instruction: • Instruction should be prepared and send to responsible persons. • It contains the following documents: • (1) budget calendar (2) policy guideline (3) summarization of anticipated fiscal condition (4) policies to be followed when preparing expenditures request (5) inflationary guidelines to estimate the future cost (6) Instruction on how each step should be completed (7) Instruction on where to seek help of any ambiguities.
  13. 13. 3. Revenue Estimates: Estimate total revenue available for spending. The responsible person requires to do the following: * Estimate the fund balance in each fund. * Project revenue to be realized. * Summarize the estimates in a statement of estimated revenue.
  14. 14. 5. Expenditures Request Expenditures classified into two categories: a. Departmental Expenditures. b. Non Departmental Expenditures. a. Departmental Expenditures. -Should be prepared by each department or unit. -These documents show the total expenditures for prior year, total estimated expenditure for current year, and proposed amount of expenditures. -Detailed supporting schedule for each major object of expenditure. - Expenditure request enable legislative body to evaluate the performance of each subunit. - Force managers to take a close look at the objectives.
  15. 15. b. Nondepartmental Expenditures. This type of expenditures that do not relate to any one specific department or activity. They benefit the organization as a whole. For example: utilities, maintenance used for several department or programs such as a city hall or cleaning after flood. It also includes the inter fund transfer which mean transfer existing resource from fund to another.
  16. 16. 6. Service Efforts and Accomplishments • Many supplement budget requests with data showing what they expect to accomplish during the year. • Description of function • Inputs (service efforts): number of personnel, amount of material, supplies, and equipments. • Outputs: quantities of services expected to be performed. • Outcomes: the results expected to be achieved during the budget year. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 3-16
  17. 17. 7. Budgetary Review: This step in budget preparation is very important to ensure: * All supported documents for expenditures properly prepared. * No errors have been made when information transferred. * Whether each requested item justifiable and realistic. * Ensure that total proposed expenditures do not exceed total budgeted resources. The purpose of review is to obtain the input of the CEO into budgeting process and enable CEO to prepare specific budget recommendation.
  18. 18. 8. The Budget Document: The budget document should contain the following: 1. A budget message. which discuss the following: * The fiscal experience of current year. * Present financial condition. * Major financial issues during past year. * Assumptions used in budget preparation. * Significant revenue and expenditures changes. * New programs anticipated to accomplish. * Future Economic outlook.
  19. 19. 2. A budget summary •Which lists the total estimated revenue by sources. •The total budgeted expenditures by program or department and for the organization as a whole. 3. Detailed support schedules. 4. Capital Project schedules. 5. Supplementary Information. 6. Drafts of appropriations and tax levy acts.
  20. 20. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 3-20 Legislative Review • Legislative body receives completed budget document – Review, modify, approve, and adopt • Public hearings – Modifications • Budget ordinance enacted to provide legal authorization for expenditures • Next: Publish budget, enter into accounts
  21. 21. Property Tax Levy: Two approaches can be used to determine the taxes to be assessed: First: Use of flat or fixed rate determined by law. Second: Subject to fiscal needs of government. In second approach tax determined by desired amount of revenue as a part of revenue estimation with legal limit. This calculation requires consideration of: 1. Uncollectable taxes percentage. 2. Property exempt from taxation (such as land belong to religious organization)
  22. 22. Computation: 1. Compute the required tax levy as a follows: Amount of tax to be collected / (1-uncollectable %) Ex. Tax to be collected $3,500,000 uncollectable% =5% 3,500,000 1-5% (0.95) = $3,684,210 2. Compute Net assessed value of property equal: Total assessed value of property – property not taxable – Exemptions. Ex. Property assessed value = 50,000,000. Property not taxable = 2,000,000 Exemptions = 1,500,000. 50,000,000 – 2,000,000 – 1,500,000 = 46,500,000
  23. 23. Cont. Tax Rate = Required tax levy Net assessed value of property = 3,684,210 / 46,500,000 = 7.9% If owner of property has assessed value of 200,000 will require to pay property taxes of (200,000 * 7.9% = 15,846)
  24. 24. Using Budgetary Information • Control mechanism – Department and activity heads, central budget office • Monthly statements show amounts available for spending by object • Compares actual to budget, by line, favorable/unfavorable variances – Need to adjust future spending plans? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 3-24
  25. 25. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 3-25 Classifying Revenues and Expenditures Revenue Classifications BY SOURCE EXAMPLES: Taxes Licenses Intergov. transfers BY FUND EXAMPLES: General Fund Special Rev. Fund Capital Projects Debt Service BY SUBCATEGORY EXAMPLES: Property Taxes Sales Taxes
  26. 26. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 3-26 Classifying Revenues and Expenditures Expenditure Classifications BY FUND EXAMPLES: General Fund Special Rev. Fund Capital Projects Debt Service Legal level of budgetary control? BY FUNCTION/ PROGRAM EXAMPLES: Public Safety Parks and Rec. Health BY ORG. UNIT EXAMPLES: Police Fire BY ACTIVITY EXAMPLES: Investigation Patrol BY OBJECT EXAMPLES: Personnel Vehicles
  27. 27. 2. Expenditures Classification: Expenditures classified by the concept of (Legal Level of Budgetary Control). This refers to the level of expenditures cannot legally exceed budgeted amounts. The level of control is defined in budgetary or organizational term as a following: 1. Fund: Highest level. 2. Government Department: Intermediate Level and classified to: (a) Function/Program (b) Organizational Unit (c) Activity 3. Object of Expenditures: Low level.
  28. 28. 2. Expenditures Classification: Cont. * Function/ Program: Group of activities intended to accomplish specific objectives. Example: Public Safety, Education, and Health Care. * Organizational Unit: Specific departments of the government. Example: Fire, Police, and Education Ministry. * Activity: Example: Investigations of Crimes, Teaching, and Supervision.
  29. 29. Example: Fund General Function Public Safety, Roads (within A Fund) Department Police Department (within a Function) Activities Investigation (within a Department) Objects of Expenditures Salaries Expenditures (within Activity)

The main purpose of government is to provide a variety of services to their citizens. Most of governmental resources are derived from those who pay taxes, but most tax payer do not pay taxes. Therefore, It can be said that the various services provided by government must compete with each other for scarce resources. Budget is a process that provides for accumulating resources and for allocating them among competing programs.

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