 Hello, and welcome to this session in which we would look at an exercise that deals with governmental transaction. Specifically, we're going to be looking at budgetary accounts as well as non-budgetary accounts. So this exercise, it's going to illustrate the concept of governmental budgeting and how the money is spent, and how the money is collected through journal entries and subsidiary ledgers. Now, if you are an accounting student, you'll be taking this course, governmental accounting. If you're a CPA candidate, you have to understand governmental accounting and not for profit. So what I suggest you do is take a look at my website, farhatlectures.com. I don't replace your CPA review course if you're a CPA candidate, but I can be a useful addition. I can add 10 to 15 points to your CPA exam score by explaining the material differently. Maybe better, maybe not better than your CPA review course, but at least differently. And helping you understand the material better could make your CPA review course more beneficial because the CPA review course gives you the condensed conversion of things. If I can show you the theory behind it, then you can learn the condensed portion to sit for the exam. Your risk is one month of subscription. If you want to try me, your potential gain is passing the exam. Many people use my system before and past. You want to give it a chance? I would say that's a good idea. If not for anything, take a look at my website to find out how well or not well is your university doing on the CPA exam. I do have resources for other accounting and CPA section. Please connect with me on LinkedIn. And on LinkedIn, you can look at my recommendation to see how others use my system to pass the exam. Please like this recording, connect with me on Instagram and Facebook. So what we are looking here is transaction and event of the general fund of the city of Springfield. And what's going to happen, we're going to look at each item and we need to prepare the journal entry. So we're going to be preparing the journal entry. And we also going to show how this is listed in the subsidiary ledger because it's just, it's better to see the subsidiary ledger just for things to make more sense. Then we're going to prepare a budgetary comparison schedule for the general fund and we'll do that at the end. So what we're going to do, we're going to go through the series of transactions and make sure you want to be 100% comfortable with these transactions. First, the first transaction. Estimated revenue, legally budgeted. So this is based on the budget. Property taxes, they estimate to collect $5,641,000. Sales tax, license and permit $1.5 million and miscellaneous revenue of half a million. So what do we have to do once the budget is adopted? Once the budget is legally adopted, we have to book estimated revenue. And what do we mean by estimated revenue? It's the revenue that we estimate to have. Well, guess what? When we add up all our revenue that we estimated equal to $12,471,000. So what we have to do is we have to debit a budgetary account called estimated revenue. And notice, this is a budgetary account. It's a revenue, but it's being estimated. So notice it's a debit. What we have to do, although I'm not going through the closing entry in this example, I go with the closing entries and other examples, you have to remove this account at the end for the same amount. So what we do is we debit estimated revenue for $12,471,000 and we credit a budgetary fund balance. Think of the budgetary fund balance as an equity account. Basically, we're bringing revenue. Therefore, it's going to be increasing our equity for the government. Think of it that way. Now, so we're done. So we adopted the budget, and this is what we have to record. And notice the subsidiary ledger. We have a debit for the estimated revenue ledger. Two, appropriation. General government appropriation, $5,285,000. Cultural and recreation, $4,210,000. Health and welfare, $1,000,000. Now the government, just like as they estimated the revenue, they have to also estimate or plan their expenses. Well, appropriation means it's not an expense yet, but this is what we plan to expense. This is what we plan to spend our money on. And to be more specific, they're going to be expenditure because government don't use expense. Expense is an accrual. Expenditure is modified accrual language. So this is what they plan to spend the money on. General government. So here's what we have to do. We have to have an appropriation, a budgetary fund balance. So simply put, you see this budgetary fund balance? Now, since we are accounting for our future expenditure, we have to reduce budgetary fund balance and increase in appropriation control. So this is what we expect to spend. And we have an appropriation ledger of $10,950,000. So notice right from the get-go, we estimate our expenditure to be $12,471,000. Our appropriation, $10,495,000. It looks good. It means we have access revenue of expenditure. This is the estimate. Again, why is this estimate? Because this is all based on budget. And budget, we estimate. So this is what we are planning to do. Those are budgetary accounts. 3. Revenue received in cash. Now we're starting to receive this revenue. Property taxes, sales tax, license and permit, and miscellaneous. Now we are actually, the government is actually collecting their money. So remember, they planned this money here, they planned this revenue and now they're actually collecting it. Are they going to collect everything that they planned for? Not necessary. Sometimes they may collect a little bit more, sometimes they collect a little bit less, sometimes much more or much less. It doesn't matter, but it doesn't have to be the same. So I just want to show you now they are collecting their money. What do we do when we collect their money? We debit cash and we credit actual revenue. So let's do that. We're going to debit cash and credit actual revenue. And the actual revenue, if we add up all these revenue, maybe you cannot see it here, it's 12,745. And this is actual. 12,745. And notice, what did we estimate? So this is the revenue. When we estimated revenue, we thought it's going to be 12,471. Is this good or bad? That's good. We collected revenue more than what we expected to collect. What was the estimated? That's really good. We want that. We want that. It's better than the opposite. Then we could not collect as much as we estimated. So this is the revenue. Transaction for encumbrances. Well, it's on the second slide. Encumbrances issued include salaries and other recurring expenses. Now we are starting to encumbrances. Well, encumbrances. We did not do them yet. What are encumbrances? The expected expenditure. Simply put, what we do is once we make a commitment to buy something, well, we have to kind of set aside that amount. So now, encumbrances issued. That means we issued encumbrances. We did not spend the money yet. General government, 5,275, cultural and recreation and health services. Once again, we did not spend any money, but we said, okay, now we organize it. Now we know what we're going to spend it and we allocate that money. Simply put, it's a sort of an allocation. Now we know what we're spending the money. Let's encumbrance it. Let's put it aside. Okay? So when we encumbrance, when we say we're going to spend this money, we have to set it aside. So we have the encumbrance ledger. This is the encumbrance ledger and general government, cultural and recreation, health and welfare. Now let me compare this to what we're saying here. Remember for the general government, we plan to spend 5,285,000. Now we put aside 5,275,000. So what we planned, we haven't even decided to spend all of it yet. Notice because we still under the amount that we initially thought we are going to spend. For cultural and recreation, we only appropriated. We thought we're going to spend 4,210,000 when it comes down to starting to allocate the money. We are allocating more, 4,630,000. I just wanted to show you what's going on here. And for health and welfare, we allocated less. So we encumbered that much. Now, if we look at transaction 5, we paid for goods and services in cash. Now transaction 5, we paid for them in cash. So here's what's going to happen. They told us, remember we thought first for general government, we appropriated 5,285,000. We thought we're going to spend this much. We only encumbered 5,275,000 when the actual bill came. Actually, it came at 5,285,000. I don't know what happened. We thought we're going to save $10,000 when the bill actually came. Actually, we had to pay that additional $10,000. So the actual. So what do we have to do when the bill comes for those encumbrances, when we encumbered those amount? Notice it's estimated. Encumbrance, notice encumbrance, it says estimated. Okay. Well, what we have to do first is we have to reverse this entry. So before we pay the cash, look, we have to reverse this entry 100%. So notice what we did here. We debited encumbrances. Once we receive the bill, we credit encumbrance for the same amount. We credited budgetary fund balance. We debit budgetary fund balance for the same amount. Simply put, this entry has to be gone because this was just an estimate. We estimated it's going to be 10,810,000 broken down for government, cultural and health. Well, once we paid the money, the first thing we have to reverse this entry and what we actually paid is 10,785. 10,785. Although we spent a little bit more, although we spent a little bit more on governmental expenditure, we spend less on cultural and recreation. We thought we're going to spend 4,630,000. We saved 20,000. And the same thing for health and welfare. We thought we're going to spend 905. The actual bill was 890. So now we debit expenditure, not expenses because we're dealing with governmental accounting and we actually credit cash. And we debit the dose expenditure account, governmental expenditure, cultural and recreation and health and welfare. Now, transaction six, the government decided to do a budget revision and they increased appropriation for the general government. Somehow they thought we're going to need more money. We're going to have more expenditure. Therefore, we're going to increase our appropriation and that's normal. Sometimes they increase their appropriation. Sometimes they reduce it. Sometimes they increase their estimated revenue. Sometimes they reduce it depending on what's going on. It seems they need more expenditure and they're going to increase their expenditure for cultural and recreation. Okay, that's fine. So here's what we do. We debit budgetary fund balance 250 and we credit appropriation control 250. Simply put, let me show you where we did this entry. Okay. If you remember here, we debited budgetary fund balance credit appropriation. Simply put, we decided to increase our appropriation. We decided to spend more money for on cultural and recreation and increase government expenditure. And this is what happened. And we have now credit the subsidiary for the appropriation ledger. And this is those are the entries. The fund balance on January 1st was 735. This is at the beginning of the year. There were no outstanding encumbrances at that date. Prepare the transaction. We did that. Prepare the budgetary comparison. Okay. So in the end, I'm going to show you what happened at the end of the day. For revenues first, this was the original amount, the original budgeted amount, 5,641. The final budget was 5,641 because we did not do any revision. And we collected in property taxes, 5,545. We collected $96,000 less sales tax. We budgeted 4,830. We did not do any revision. The actual collection was less. We collected $130,000 less licenses and permit. We estimated or the original amount was 1.5 million. We did not do any revision. The actual amount was 1.7. That's a good variance. And you can look at miscellaneous. Let's look at expenditure. The general government original budget was 5,285. Then the final budget was 5,425. Remember in the last entry, we increased our appropriation for general government expenditure. That's why the final budget was higher. The actual amount that we spent was 5,285, which is good. This is a good variance. Why it's a good variance? Because we spend less money than what we appropriated. For cultural and recreation, the original amount was 4,210. The final budget for cultural and recreation, remember, we also increased this to 4,320. And we actually spend 4,610. So this is a negative or unfavorable variance. We spent 290,000 more even after the final budget. So we really blew it here in a sense that we did not know how much we were going to spend on cultural and recreation. Health and welfare. Originally, we started with 1 million. We did not revise the budget. The actual amount that we spent is 890, which is good. We have 110,000 less in expenditure for health and welfare. Now this is the total expenditure. And this is the difference, the access or deficiency of revenue over expenditure. The original amount was 1,976. Again, the difference here, the difference between revenues and expenditure. Initially it was 1,976 when we started the budget. After we revised the budget, it went down to 1,726. The actual amount under the actual column, we had 1,960. We are still better off. And the variance is a positive variance of 234,000. Do you remember they're giving us in the problem that the fund balance at the beginning was 753? So that's good. So we had 1,960,000 this year. Revenues more than expenditure. The fund balance was 753. The ending fund balance is 2,713. So this is basically, if you can follow this exercise, then you should have a good understanding of the basic. This is only basic budgeting. There are other transactions that deals with governmental accounting. I did not go over. The reason I wanted to work this exercise is just to show you the journal entries and the subsidiary ledger. But remember, there are more to this. Much, much more like closing entries. There are other transactions that we did not go over. So please, if you want more additional information, go to farhatlectures.com. Whether you are a governmental accounting student or a CPA candidate. Especially if you are a CPA candidate. I can help you tremendously learn governmental accounting. CPA review courses do not, I repeat, do not give enough explanation for governmental accounting. They really, they really give you the shortcut. And the reason is because they assume you learn it in college. Oftentimes, you did not learn it because you did not take the course or if you took the course, it was your senior year. You did not really pay attention. You already had a job offer. If you took the course, the school did not do a good job teaching you the material. But I can help you. Good luck, study hard and stay safe.