Budget and Budgetary Accounting

CHAPTER -4
BUDGETING, BUDGETARY ACCOUNTING
BUDGETARY REPORTING&
PERFORMANCE MANAGEMENT
Teklu K. (PhD)
1
Teklu K.(PhD) teklukasu@gmail.com

1. What is Budget?
The word budget originated from A Latin
word called Bougots which means small
bag containing financial plan .
Budget is quantitative expression of
government’s plans
Budget is the main instrument for
managing Public Finance

1.What is Budget?
a government’s important reference book
(legal document) which Provides for
coordination of expenditure and revenue
and consolidation/combination/ of them
into a single document.

1.What is Budget?
Various scholars have defined it differently.
Snyder(1977): budgeting is an allocation of
resources and preparation of specific
documents
It is complex process that involve aspects of
planning, politics, economics and
accounting.
Wildavisky (1979): document which
contain words and figures of proposed
expenditures for a purpose

1.What is Budget?
Axelrod (1988): nerve center of
government.
It an answer to a big political question of
:who gets how mach, for what purpose
and who pays for it.
Hyde (1992):Governments most important
reference document which record policy
outcomes, cite priorities, measure
performance.

1.What is Budget?
Cleveland (1992):Approved plan for
financing enterprises (government)for
specific period.
Public Budget is financial plan of
government dealing with where public
money comes and goes among with its
philosophy.

2.Functions of Government Budgeting
Allocation of resources
Means of raising funds
Means of stabilizing the economy
Means of holding operating agencies
accountable
Means of controlling expenditures
Mechanism of transferring funds
Means of achieving socialgoal
Enhances leverage
Instructor: Teklu K.

3. Components of public budget
Public budget has two components.
1.Public Expenditure budget
2. Public Revenue budget
In public finance ,unlike that of private
finance, expenditure is adjusted to
revenue.

3.1.Revenue Budget
It represents the annual forecast of revenues to
be raised by government through taxation and
other discretionary measures.
In Ethiopia, the revenue budget is usually
structured into three major headings:
Ordinary revenue: include domestic revenue
both tax and not tax revenues.
External assistance: It includes: Grants from
multilateral and bilateral donors in cash & kind.
Capital revenue: domestic sales of properties,
internal &external loan.

3.2.Expenditures Budget
Expenditure budget is categorized into .
Recurrent expenditure: budget which
covers the current expenditures
Is financed in principle by domestic
revenue from tax and non tax sources
Capital expenditures. which covers the
acquisition of newly produced assets in the
economy
Iis financed through external borrowing and
grants.

4.Principles of sound budget
The principles of sound budgeting include:
 Comprehensiveness
 Transparency
 Accountability -.
 Contestability
 Honesty
 Flexibility.
 Discipline
 Information
11

5.Approaches to budget
Line item budget: Traditional Focus on what was
spent
Program budget: Relates all activities to
governmental objectives.
Performance budget: Based on measurable
performance of activities
Zero based budget: start from scratch. Every
service justified every year
Program performance budget combination of two
Lump sum budget: Assign lump sum to finance all
approaches have a different emphasis on planning,
control and evaluation.

6. BUDGETARY PLANNING
Planning is important
Services critical to public interest
Diversity requires good decision-making
Joint process involving citizens
Teklu K.(PhD) teklukasu@gmail.com 13

6.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

7.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

7.BUDGETARY CONTROL
Legislative appropriations enacted in –
Broad terms provides the executive
branch with managerial discretion
Detail terms allows little discretion to
the executive branch

7.BUDGETARY CONTROL
Executive must control legislative-
enacted appropriations by :
Restricting agencies by using allotments
Providing accounting system controls to
demonstrate
Executive restrictions
Legislative limitations

8.BUDGETARY TERMINOLOGY
Capital or current
Tentative or enacted
General or special
Fixed or flexible
Executive or legislative

8.1.CAPITAL vs. CURRENT
BUDGETS
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”

8.2.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

8.3.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

8.4.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 are not fixed
Usually used to business / enterprise type
activities

8.5.EXECUTIVE vs. LEGISLATIVEBUDGETS
Categorized by preparer
Executive budgets
Budget preparation is commonly an executive
function
Legislature may revise or amend
Legislative budgets
Rarely, legislature will prepare
joint budget : Budgets can also prepared jointly
through a committee & called joint budget

9.Budget cycles
Budgeting is a continuous year round
process going through five phases
Budget Preparation (Formulation)
Budget Adoption (Approval):
Budget Implementation (Execution)&
Reporting
 Budget Evaluation (Audit)
24

10.Participation in budgeting
Top down (imposed budget)
Bottom up (participatory budget).
Negotiated budget.
Many writers refer negotiated budget.

Discussion question
Axelrod (1988): Public budget is the nerve
center of government. It an answer to a big
political question :WHO GETS HOW MACH?,
FOR WHAT PURPOSE? and WHO PAYS FOR IT.
Do you agree with his conclusion?, why or why
not? Discuss its application in any level of
government in Ethiopia. Support your argument
with practical example.

GASB Principle about Public Budget
According to Principle No. 10 of GASB:
Original budget 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:
• Final appropriated budget
• Actual inflows, outflows and balances on budget basis

Budgetary processes(broader)
Even though various budgetary approaches
the basic Budgetary processes include:
Budgetary planning
Control, and
Evaluation considerations

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

BUDGETARY APPROACHES AND EMPHASES…
Typical budget information provides:
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

Budgeting practices
National Advisory Council on State and Local
Budgeting (NACSLB) stated that 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

Budgeting practices …
• National Advisory Council on State and Local
Budgeting (NACSLB) recommended good budget
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

ALTERNATIVE BUDGETARY APPROACHES
Alternative approaches have a different emphasis
on planning, control and evaluation
Object-of-expenditure budgeting (Incrementalor
Traditional)
Performance budgeting
Planning-program-budgeting (PPB)
Zero-base budgeting (ZBB)
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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

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
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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

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

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

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

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

BUDGET PREPARATION
Preliminary Activities:
Prepare budget calendar
Estimate expected revenues
Develop range of expenditure changes
Inform departments of priorities
Project beginning and ending fund
balances

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

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

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

BUDGETARY ACCOUNTING
 The most distinguishing feature of
governmental accounting is the use of the
modified accrual basis (and current financial
resources measurement focus) of accounting.
 The account categories, Expenditures and
Fund Balance , are unique to governmental
funds.

Expenses should be reported by function or
program
Direct expenses - those associated with a
function or program
Indirect expenses - those that are not directly
linked to an identifiable function. Example;
Interest expenses on long-term debt.
Government-wide Statement of Activities
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Revenues should be distinguished between
Program revenues - reported in the
program/functions section of the statement
General revenues - not directly linked to any
program/function and reported in the bottom
section of the statement

 Program revenues are reported in three categories:
 Charges for services
 Operating grants and contributions
 Capital grants and contributions
 A net expense or revenue format is used in the top
section of the statement of activities: Expenses -
Program revenues = Net (expense) Revenue
(Cont’d)

 Extraordinary items, special items, and transfers are
reported as separate line items near the bottom of
the government-wide statement of activities.
 Extraordinary items—both unusual in nature and
infrequent in occurrence; usually beyond the control
of management
 Special items—eunusual or infrequentither; must be
within the control of management.
Government-wide Statement of Activities (Cont’d)

Budgetary Accounting
Purpose of Budgetary accounts
 Used to record the budgetary inflows and
outflows estimated or authorized in the
annual budget
Budgetary Accounts
 Estimated Revenues, Estimated Other
Financing Sources
 Appropriations, Estimated Other Financing
Uses
 Encumbrances

 Distinguish between Revenues and Other
Financing Sources, and Expenditures and Other
Financing Uses
 Other Financing Sources mainly represent
operating transfers in from other funds and
proceeds of long-term borrowing
 Other Financing Uses represent operating
transfers out to other funds
Operating Statement Accounts

Revenues and Other Financing Sources
 Increase fund balance when closed
 Recognized on the Modified Accrual basis—
when measurable and available to pay current
period obligations
Expenditures and Other Financing Uses
 Decrease fund balance when closed
 Recognized on the Modified Accrual basis—
when incurred, if expected to be repaid from
currently available resources
Operating Statement Accounts (Cont’d)

 Periodically compare actual revenues (or
actual other financing sources) to
estimated revenues (or estimated other
financing sources)
 Use a common classification scheme for
revenues and estimated revenues
Budgetary Control—Revenues

Accounting control over revenues
 Two control accounts (Estimated Revenues
and Revenues) are used to control
similarly named columns in the detail
accounts in the Revenue subsidiary ledger
 The sum of the Estimated Revenues and
Revenues account balances of the
subsidiary ledger must equal the general
ledger control account balances for those
accounts
Budgetary Control—Revenues (Cont’d)

 Revenues and Estimated revenues can be classified by:
 By Fund – by major funds and with in major fund,
 By Source
 Taxes (ad-valorem –value based and self-assessing on
income or sale)
 Special Assessments- for special service
 Licenses and Permits
 Intergovernmental Revenues
 Charges for Services
 Fines and Forfeits(contract)
 Miscellaneous Revenues
Classification of Revenues and
Estimated Revenues

 The general ledger accounts needed to provide
appropriate budgetary control are:
– Estimated Revenues – is a budget
– Appropriations,
– Estimated Other Financing Sources and
– Estimated Other Financing Uses control accounts,
– supported by subsidiary accounts as needed
Governmental Funds Budgetary Accounts

 An appropriation budget, when enacted into a
law, is a legal authorization granted by the
legislative body to incur liabilities for purposes
specified in the appropriation act or ordinance
 An encumbrance is an estimated amount
recorded for purchase orders, contracts, or
other expected expenditures chargeable to an
appropriation
Budgetary Control—Expenditures

 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 to prevent
overspending
 Comparison is enhanced by using the same account
classification scheme for appropriations,
Budgetary Control—Expenditures (Cont’d)

 Three control accounts (Appropriations,
Encumbrances, and Expenditures) are used to
control similarly named columns of the detail
budget accounts in the subsidiary ledger.
 The detail account totals for Appropriations,
Encumbrances, and Expenditure in the subsidiary
ledger must equal the corresponding general ledger
control account balances.
Budgetary Control—Expenditures (Cont’d)

Budgetary Control Over Expenditures usually
follows the following procedures:
Appropriations
Encumbrance
Expenditure
Disbursement
Procedures of Budgetary Control Over Expenditures

Budget Approved on 1-1-2011: 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 Services 50,000
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
Recording Budget

Revenue Subsidiary Ledger
Acct No. XXX
Account Name: Charges for Services
Estimated Actual
Revenues Revenues Balance
Date Explanation Folio DR CR DR (CR)
1-1-2011 Budget authority GJ71 50,000 50,000
1-31-2011 Various items CR82 4,000 46,000
2-28-2011 Various items CR87 5,000 41,000
Subsidiary Ledgers for Budgetary Control

Example: City Clerk's office orders a new printer
on January 2, 2011 which had a list price in the
vendor's catalog of $500.
Entry in the General Fund General Journal:
Dr. Cr.
Encumbrances—2011 500
Reserve for Encumbrances—2011 500
Examples of Budgetary Control

Printer is received on 1-15-2011, including
shipping charges of $15:
Entry in GF General Journal:
Dr. Cr.
Reserve for Encumbrances—2011 500
Expenditures—2011 515
Encumbrances—2011 500
Vouchers Payable 515
Examples of Budgetary Control

Appropriations/Encumbrances/Expenditures
Subsidiary Ledger
Acct No. XXX
Account Name: General Government, City Clerk, Equipment
Available
Appropriations Expenditures Encumbrances Balance
Date Explanation CR (DR) DR (CR) DR (CR) CR (DR)
1-1-11 Budget authority 1,500 1,500
1-2-11 P.O. No. 11-41 500 1,000
1-15-11 Voucher No. 1125 515 (500) 985
Subsidiary Ledgers for Budgetary Control

 Allotments are internal allocations of funds by executive
management to quarters or other time periods
 Some modification of the appropriations subsidiary ledger
is required to add Un allotted Appropriations column in
each detail account i.e.
 Allotments may be formally recorded in ledger accounts.
This procedure might begin with the budgetary entry, in
which Un allotted funds would replace Appropriations.
Accounting for Allotments

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)

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

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

Some of the managerial tools being used to
improve performance by leaders in Non-profit
organizations are:
– Total Quality Management (TQM)
– Customers Relationship Management (CRM)
– Service Efforts and Accomplishments (SEA)
– Activity Based Costing (ABC) and
– Balanced Score Cards (BSC).
Managerial Tools to Improve Performance

Budget and Budgetary Accounting

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