Chapter FIVE

ACCOUNTING FOR GENERAL &

SPECIAL REVENUE FUNDS
 Budgets & Budgetary
Accounting
Definition & Importance of
Budget
The budget serves as a master blueprint for planning,
controlling and evaluation of funds financial operation
According to GASB
1. every governmental entity should adopt an annual
budget
2. Long term budget is used to plan projects that span
several fiscal years
 Budgets & Budgetary
Accounting
Fixed budgets: - are adopted for specific dollar amounts
-used by governmental fund category
Flexible budget: is a budget that can increase or
decrease spending in response to the demand for the
goods and services they provide to customers on a fee
basis
oIt is adopted by proprietary funds
Final Budget: incorporates all of the changes of the
original budget that are made during the fiscal year
The general ledger budgetary accounts are:-
•Estimated revenues: expected financial resources in the
budget year. The normal balance is debit
•Estimated other financing sources Estimated revenues
sources other than common sources. Normal balance
is debit
•Appropriations: authorized spending for the budget year
The normal balance is credit
•Estimated other financing uses Estimated expenditures
that may come up during the fiscal year out of plan.
Normal balance credit
•Encumbrance: Commitment to spend Normal
balance is debit

•Budgetary fund balance reserved for encumbrance.

Normal balance credit

•Budgetary fund balance: credit or debit

Recording the Budget
The government estimates that it will receive $5,000,000
in general revenue sources. It also estimates that it will
receives, $20,000 proceeds from sale of surplus
equipment. The legislative body of the government
decides to grant spending authority of $4,800,000 to
executive body to provide public service. In addition the
legislative unit estimates that it will spend $10,000 to
settle law suits.
Record the necessary journal entry.
 Budgets & Budgetary
Accounting
Recording the Budget

Estimated revenue ---------------------- $5,000,000

Estimated other financing source --- 20,000
Appropriation ----------------------------- $4,800,000
Estimated other financing use ---------- 10,000
Budgetary fund balance ----------------- 210,000
(Combined journal entry)
A governmental fund accounts only for cash & other assets
that may be expected to be converted into cash in the
normal operation of the governmental unit

Fund balance Reserve accounts are established to disclose

fund that are not available for appropriation

The portion of equity that is available for appropriation at

the year end disclosed in an account called fund balance
unreserved.
Revenues are increase in fund financial resources other
than from inter-fund transfer & debt proceeds. It
includes:

Taxes
Fees
Charges for services by other government
Donation, Grant, entailment
Shared revenues
Fines and forfeits
Transfers received from other fund & debt issue
proceeds received by a fund are classified as other
financing sources

Expenditure: here is defined as a decrease in fund

financial resource other than thorough inter-fund
transfers

Transfers out of a fund to other fund are classified as

other financing uses.
Balance sheet accounts

•Current assets (Debit)

•Current liabilities (Credit)

•Fund balances :
•Reserved for Encumbrance (credit)
•Unreserved for Encumbrance (debit or credit)
1. NOMINAL (ACTIVITY) ACCOUNTS:
•Revenue (Credit)
•Other financing sources control
•Transfer in (Credit)
•Long term debt proceeds (Credit)
•Expenditures (Debit)
•Other financing uses (Debit)
•Transfers out (Debit)
2. BUDGETARY ACCOUNTS:
•Estimated revenues (debit)
•Estimated other financing sources (debit)
•Appropriation (credit)
•Estimated other financing use (credit)
•Encumbrance (debit)
•Budgetary fund balance reserved for encumbrances (credit)
•Budgetary fund balance (debit or credit)
Other financing sources:- are transfers in from another
fund & debt issue proceed
Expenditure:- includes both cost and expenses of
business organization.
is a decrease in fund financial resource other than
though inter fund transfer.
Other financing Uses:- it refers to transfer out of fund to
other fund
Recording a budget
Example: Assume that the amounts appearing below have been
legally approved as the budget for General fund of a certain
government for the fiscal year ending Dec 31, 2011. As of Jan 1,
2011 total estimated revenue is 1,350,000 (from taxes 882,500,
Licenses and permits 125,500, Intergovernmental revenues 200,
000, Charges for services 90,000, Fines and forfeits 32,500, and
Misc. revenues 19,500), this total estimated revenue should be
recorded in the General fund general ledger accounts as follows:
Entry 1: Estimated revenues 1,350,000
Budgetary fund balance 1,350,000
The total appropriations legally approved for 2011 is birr
1,225,500; (General government 129,000; Public safety
277,300; High ways & streets 84,500; Sanitation 50,000;
Health 47,750; Welfare 51,000; Culture & recreation 44,
500; Education 541,450; and Estimated other financing
uses (Transfers out) birr 74,500 for the General Fund of
the same governmental unit.
The GF should record in the control account as follows:
 Budgets & Budgetary
Accounting
2. Budgetary fund balance 1,300,000
Appropriations control 1,225,500
Estimated OFU 74,500
Accounting for Revenues
The actual revenues should be recognized as credits to
the revenues control accounts.

E.g: The actual revenue collated during period is 1,314,

500 (Taxes 881,300; Licenses & permits 103,000;
Intergovernmental revenues 186,500; services charge 91,
000; Fines & forfeits 33,200 and Miscellaneous revenues
19,500)
Cash------------------------------------------1,314,500
Revenue control-------------------------------1,314,500
Accounting for Encumbrance & Expenditure
An appropriation is an authorization for administrator to incur
expenditures on behalf of the government in the amounts
specified for the purpose set forth during the period of time
specified.
An appropriation is considered to be expended when authorized
liabilities are incurred.
Purchase orders and contracts are commitments that will result
in liabilities when the purchase orders are filled and the
contracts executed. Such expected liabilities are called
encumbrances.
 Budgets & Budgetary
E.g. Assume thereAccounting
is issue of purchase orders at 500,
100 (for General government 73,200; Public safety 115,
100; Highways & streets 34,600; Sanitation 29,300;
Health 16,500; Welfare 18,700; Culture & recreation 14,
800; and Education 197,900). The entry to record this is:

Encumbrance 500,100
BFB, reserved for encumbrance 500,100
(to record PO)
Example 2- When a purchase orders for goods or
services is issued to a supplier by one of those funds, a
journal entry similar to the following is prepared for the
fund.
Encumbrance-------------------------------------150,000
FB Reserved for Encumbrances----------------150,000
(to record encumbrances for PO no. 001 issued to X company)
When the suppliers invoice for the ordered merchandise
or services is received by the governmental unit, it is
recorded and the related encumbrance is reversed as
seen below:
FB reserved for Encumbrances 150,000
Encumbrances 150,000
(To reverse encumbrance for PO no. 001 issued to X Company)
Expenditures 180,500
Vouchers payable 180,500
(to record an invoice received from Wilson company under PO no. 001)
Two journal entries are needed for encumbrances: one
when the order is placed and another when the goods are
received.
When the order is placed, encumbrance is debited and
Reserve for Encumbrance (a fund balance account) is
credited.
When the order is received, the entry is reversed.
As indicated by the example above the invoice amount
may differ from the amount of the governmental units PO
because of such items as shipping charges, Sales Taxes,
and price changes
If the estimated revenue and estimated other financing
sources of the budget exceed appropriations and
estimated other financing uses (as required by law for
many governmental units), there will be budgetary
surplus, if vice-versa, there will be budgetary deficit.

Surplus- budgetary fund balance with credit balance

Deficit- budgetary fund balance with debit balance
 Inter-fund transactions
⃝ •are classified intotwo major and two sub categories:
1. Reciprocal inter fund transactions: are the internal
counterpart exchange & exchange-like transactions
and includes:
1. Inter fund loans:- are resources provided from one fund
to another with the requirement for repayment.
The fund providing the resources records an inter fund
receivable (Due from other funds) and the fund receiving the
resources record an inter fund payable (Due to other funds).
Long-term loans use the terms advance to, & advance from.
Inter fund loans affect only assets and liabilities accounts.
 Inter-fund transactions
⃝ 2. Inter fund services provided & used:- represent
transactions involving sales and purchase of goods
and services between/among funds.
An example is the sale of water from a water utility
(enterprise fund) to general fund EF to Gf
In those transactions, one fund records revenue
(enterprise in this example) and the other fund
records expenditure or expense (the general fund)
⃝ 2. Non reciprocal inter fund transactions:
1. Inter fund transfers:- represent flows of cash or
other assets without the requirement for repayment.
An example would be an annual transfer of resource from
the general fund to the debt service fund

2. Inter fund reimbursements:- represent repayments

to funds that initially recorded expenditure by the
funds responsible
E.g, assume the GF had previously debited
expenditures to acquire some supplies, but the
supplies should have been charged to the special
revenue fund.
The reimbursement entry would have one fund (the
special revenue fund) debit an expenditure
(expense) and the other fund ( the general fund)
credit an expenditure or expense.
 Inter-fund transactions
a) GF
Office supplies expenditure----------- Birr12,390
Cash-----------------------------------------------Birr12,390
b) GF
Cash------------------------Birr12,390
Office supplies expenditure--------------Birr12,390
c) SRF
Office supplies expenditure----------- Birr12,390
Cash-------------------------------Birr12,390
 Recording prior year property taxes as revenue
• GASB standards for property tax revenues recognition
under the modified accrual basis of accounting provide
that revenue should not be recognized for property
taxes expected to be collected more than 60days
beyond the end of fiscal year.
• In fact, some governments defer all of their property
taxes receivable at year end.
• At the end of 2010, the typical general fund deferred 20,
000 in property taxes and the amount is reflected in the
beginning trial balance.
 Recording prior year property taxes as revenue
property taxes receivable-------------20,000
Differed revenues –property taxes---------20,000
The following entry is to recognize that amount as
revenues for 2011.
Differed revenues- property taxes-------------20,000
Revenues control----------------------------------------20,000
When the tax is actually collected
Cash------------20,000
property taxes receivable- --------20,000
 Tax anticipated notes payable
Local banks customarily meet the working capital
requirements of governmental units by accepting a “tax
anticipation notes” (a short term note) from the
governmental officials.
If the amount of 200,000 Br is borrowed at this time the
necessary entry as follows:

Cash-----------------------------------200,000
Tax anticipation notes payable---------------------200,000
 Recording Property Tax levy
Assume that the budgeted revenue form real
property taxes, included in the total estimated
revenues was 3,200,000 excluding prior year
property taxes (20,000). Further assume that 2% of
these taxes are estimated to be uncollectible due
to tax collection policy and local economic
conditions. Therefore, when the taxes are levied,
the following entry should be made:
 Recording Property Tax levy
Taxes receivable (current)-------------------3,265,306
Uncollectible current Taxes--------------- 65,306
Revenues control----------------------------3,200,000

In order to generate revenues of 3,200,000 the

gross levy must be in the amount of 3,265, 306 (3,
200,000 ÷98%).
 Collection of Delinquent Taxes
• Delinquent taxes are subject to interest and
penalties that most be paid at the time the tax bill
is paid. It is possible for a government to record
the amount of the penalties at the time that taxes
become delinquent.

• Interests must also be computed and recorded

for the period from the date of last recording to
the date when a tax payer pays the delinquent
taxes.
 Collection of Delinquent Taxes
In the current year, the typical general fund collected
delinquent taxes in the amount of 330,000 on which
interest and penalties of 20,000 had been accrued at the
end of 2010. Further, 3,000 additional interest was
collected for the period from the first day of 2011 to the
dates on which the delinquent taxes were collected.

These events will be recorded as follows:

 Collection of Delinquent Taxes
a. Interest &penalties receivable on taxes---20,000
Revenue control--------------------------------------20,000

b. cash----------------------------------353,000
Tax receivable diligent-------------------------------330,000
Interest and penalties receivable on taxes----- 23,000
 Payment of Vouchers and other items
Payment is made on 770,000 of the outstanding
accounts payable, and the amounts due to the federal
and state government is 942,000 and 245,000,
respectively.

Accounts payable-------------------770,000
Due to federal government-----942,000
Due to state Government-------245,000
Cash------------------------------1,957,000
 Payroll and Payroll taxes
• The gross pay of employees of general fund departments
amounted to 3,345,000. Deductions from gross pay for
the period amounted to 256,000 for employees’ pension
contribution and Medicare tax 430,000 for employees’
federal withholding tax; and 78,000 for employees’ for
state withholding tax.
• The first two have to be remitted to the federal
government, and the last item has to be remitted to the
state government.
Expenditures control-----------------------3,345,000
Due to federal Government----686,000
Due to state Government------- 78,000
Voucher payable------------------2,581,000
When the liability is actually paid
Due to federal government----------------686,000
Due to state government-------------------- 78,000
cash--------------------------------------------764,000
Payment of the vouchers for the net pay results in the following
entry:
Voucher payable----------------------2,581,000
Cash-------------------------------------2,581,000
• In as much as the recorder is liable for the employee’s share
of the tax and Medicare tax (256,000) and for contribution to
additional retirement funds established by the state law,
assumed to amount 167,000 for the year, the liabilities for the
contribution must be recorded as:
Expenditure control--------------------423,000
Due to federal government------------------256,000
Due to state government-------------------- 167,000
When the liability is actually paid
Due to federal government------------------256,000
Due to state government-------------------- 167,000
cash--------------------------------------------423,000
 Amendment of Budget
For example, Assume that the estimated revenues
budget increased by 50, 000 in the charges for services
sources category and that the appropriation for the
public works department was increased by 100, 000.the
amendments to the budget would be record when they
are legally approved, as follows:
Estimated Revenue control----------------50,000
Budgetary found Balance------------------50,000
Appropriation control----------100,000
 Inter fund Transactions
• Assume that the amount charged by the water utility to
the General fund was 80, 000 Br. The General fund
entry would be
GF
Expenditure ------------------80,000
Due to water utility fund--------------80,000
WUF
Due From general fund------------------80,000
Revenue-------------80,000
• Assume the General fund received 377,000 in supplies
from the supplies fund and later made the partial
payment of 322,000 in cash. The entries would be as
follows:
GF
Expenditure -------------------377,000
Due to supplies fund------------------377,000
Due to supplies fund-------------------322,000
Cash------------------------------------322,000
 SF
Due from general fund -------------------377,000
Revenue-----------------377,000
Cash------------------322,000
Due from general fund--------------322,000
 Inter fund Transfers
•Assuming that the General fund made the budgeted transfer to a
debt service fund for the payment of debt service, the General
fund entry would be as follows:
GF
other financing uses- Transfers out 204,000
cash 204,000
DSF

cash 204,000
other financing source-Transfers in 204,000
Recognition of inventories in Governmental Funds
Generally, inventories of supplies are insignificant
relative to governmental fund balances.
In any case, GAAPs permit two methods of accounting
for inventories.
1. Under the Purchase Method of accounting of inventories, the
expenditure account is debited when supplies are received.
2. Under the Consumption Method of accounting for inventories,
an asset is debited when inventories acquired, and the
expenditure account is debited and the asset credited when
inventories are consumed, the same as in business
accounting.
Purchase Method: at the time of acquisition, supplies
are recorded as a debit to expenditure account.
Expenditures----------------------------------xx
Voucher payable/cash-----------------------------------xx
If inventories are significant, GAAPs require that a
yearend adjustment to be made in which an asset
account is debited and an equal amount set aside as a
fund balance reserve.
Inventory of supplies--------------------xx
FB reserved for inventory of supplies xx
At the end of the next accounting period
1. When ending inventory of supplies increases
Inventory of supplies------------------------------xx
FB reserved for inventory of supplies-------xx
2. When ending inventory of supplies decreases
FB reserved for inventory of supplies-------xx
Inventory of supplies ----------------------------------------xx
 Consumption Method
At the time of acquisition, supplies are recorded as a debit
to supplies inventory account
Inventory of supplies------------------------------xx
Voucher payable/cash---------------------------------------------xx

At the end of the budget year calculate the amount of

supplies consumed and record them as expenditures
Expenditures---------------------------------------------xx
Inventory of supplies------------------------------------------------xx
For the unconsumed amount of supplies, reduce the
unreserved fund balance:

Unreserved FB----------------------------------xx
FB reserved for inventory of supplies-----------------xx

At the end of the next accounting period

1. When ending inventory of supplies increases:
Unreserved FB-------------------------------------------xx
FB reserved for inventory of supplies-----------------------xx
2. when ending inventory of supplies decreases

FB reserved for inventory of supplies-------------xx

Unreserved FB------------------------------------------------xx
The End!!