Page 54 - Burleson FY22 City Budget
P. 54
BASIS OF BUDGETING
GOVERNMENTAL FUNDS requires the City to officially identify and
appropriate funding at this early stage. The City's
CAFR contains a reconciliation between the
All budgets prepared for governmental funds are budget or financial plan and the actual results of
budgeted on a basis similar to the modified
accrual basis of accounting. Under this basis of operations. This reconciliation reflects the
accounting, revenues are recognized when they adjustments necessary to report the results of
become measurable and available to finance operations on a budgetary basis rather than a
expenditures of the current period. modified accrual basis.
Expenditures are generally recognized when the PROPRIETARY FUNDS
related fund liability is incurred. However, there
are two fundamental differences between the Budgeting for business‐like funds are called
bases used to report the City’s financial plan, (i.e., Proprietary Funds. There are two types, the
the budget) versus the basis used to report Enterprise and Internal Service Funds. Both are
the historical results of financial operations (the prepared in a manner similar to the basis used in
Comprehensive Annual Financial Report or CAFR). the accrual method of accounting but the
treatment of capital purchases represents an
Firstly, the City employs full encumbrance area in which fundamental differences exist.
accounting at the budgetary level. Encumbrances These differences are, once again related to the
represent commitments related to unperformed timing rather than the amount of expenditures.
contracts for goods or services. Encumbrances
outstanding at year end represent the estimated In an accrual accounting environment, such as
amount of expenditures ultimately to result if
that used in the preparation of appropriate
unperformed contracts in process at year‐end are
completed. Encumbrances outstanding at year‐ sections of the CAFR, capital purchases do not
end constitute neither expenditures nor liabilities immediately give rise to expenses. Instead,
on a modified accrual basis of accounting. capital items are recorded as assets and
However, on a budgetary basis these amounts are depreciated over their useful lives.
reflected as having been funded by appropriations
of the budget in force at the time the Each year an amount of depreciation is recorded
encumbrance was created. For example, assume as an expense. So, in effect, the cost of the asset
that an item was encumbered and ordered in is spread over a period equal to the life of the
20X4 then delivered and invoiced in 20X5. For asset. For budgetary purposes, the full cost of the
budgetary purposes, the transaction would be asset is charged to the budget during the period
reflected in the 20X4 budget, the year the in which the item was purchased. This method
encumbrance is established. For financial accelerates the recognition of an item's cost and
reporting purposes, the transaction would be forces the City to officially identify and
reported in 20X5; the year the item was delivered appropriate funding at the earliest possible
and the related liability was incurred. One should stage.
note that encumbrance accounting affects the
timing of expenditure recognition, not the
amount.
Employing encumbrance accounting at the
budgetary level tends to promote the earliest
possible recognition of financial obligations and
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