Budgetary accounting is a particular of accounting most often used by local, state and federal municipalities. Private sector companies use budgets to help guide their expenditures, but it is not the same as budgetary accounting. Government accounting uses a series of funds that represent the capital appropriated for certain uses. Other entries posted into the funds are allotments and encumbrances, which detail how the state or federal agency will spend appropriated money in each fund. One fund is typically marked as general to represent unappropriated capital.
Government accounting is often a difficult process to understand and maintain for most accountants. This is because of the budget process associated with the few sources of income earned by the government agency, such as sales, property or income tax. With each income received by the government municipality, accountants must appropriate the funds according to the predetermined budget. Most agencies or municipalities have a budget council that determines how they spend tax revenues. The budget process is typically a detailed process not necessarily governed by accountants, but the elected officials of the agency or municipality.
In some budgetary accounting forms, each appropriation made by a governing body may represent a fund. For example, appropriations can be set for payroll, maintenance, police and fire fighters, infrastructure improvements, new roads or other major projects. Appropriated accounts and funds will represent a specific purpose for the money allocated into the account. For most government agencies or municipalities, spending funds appropriated for one use on another project is illegal. For example, funds meant for street cleaning cannot go toward the repair of police cars. Appropriation funds may be limitless in the way a municipality spends capital.
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Allotments are the specific amounts of money a government agency or municipality will place into each fund in the budgetary accounting system. Allotments typically occur when the municipality receives money from tax revenues. Accountants must break out each portion of money and record it into the specific fund. This is a common process for sales tax collections. Many municipalities use sales tax revenues to pay for a number of different purposes. Accountants must create allotments to post the capital earned into each fund.
An encumbrance is a particular use of tax revenue that may or may not be paid for when the municipality makes the encumbrance. Most governments only receive tax revenues at specific times during the year. An encumbrance allows the agency or municipality to pay for goods using an accounts receivable, i.e. credit payment, system. Accountants will record the entry into the budgetary accounting system using an encumbrance. Once the tax revenue comes in, accountants will pay off the encumbrance and remove it from the accounting ledger.