 Hello and welcome to this session. This is Professor Farhad in which we would look at a CPA simulations that deals with governmental and not for profit accounting. And specifically, the topic is budgetary accounts. This topic is covered on the FAR CPA section. If you are studying for your CPA exam, you should be taking a CPA prep course like Becker CPA, Roger, Wiley, Glyme or some other course. That's perfectly fine. You should have those. So how do I help you? How do Farhadlectures.com helps your CPA preparation? Well, your CPA courses don't cover the material in depth the way I do because it's just a review course. And sometimes, not sometimes, I would say oftentimes the CPA course moves a little bit fast. So what I would do is I can help you keep up that speed with your CPA course, check out Farhadlectures.com where I have plenty of resources for your CPA preparation, whether you're studying for FAR or the regulation or BEC. If you like my lectures, please like them and share them. I always like to connect with my followers, please connect with me on LinkedIn, YouTube and Instagram. Once again, Farhadlectures.com will have additional resources for your CPA preparation as well as your accounting and finance courses. I strongly suggest you check it out. It doesn't cost you anything to check it out. Let's take a look at this example that deals with budgetary accounts when it comes to governmental accounting. Now governmental accounting has its own language and I do have a full CPA course. I would say, I'm not going to say this, but I would say it's the best governmental accounting course on the web. Again, you should not say the best for yourself, but you can judge yourself. Check it out. Let's take a look at this example to see how this budgetary accounts work. Chester County engaged in the following transaction and summary form during its fiscal year. All amount are in millions. You need not to be concerned with the category of funds balances for which reserves for encompasses are classified in the bansheets. We don't have to worry about those reserve encompasses just to make our life easier for now. The commission approved a budget for the current fiscal year. It included total revenue of 860 million and total appropriation of 850 million. Simply put, they approved the budget. They estimate to get revenues of 860 million and they think they're appropriating. They think they will spend 850 million. Simply put, they should have a 10 million surplus if everything goes well as expected. Let's set up the budgetary accounts. We debit estimated revenue, credit fund balance. For the revenue, this is budgetary. These are budgetary accounts. Estimated revenue is a budgetary account and fund balance is a budgetary fund balance. That's the budgetary fund balance. Now, we also debit fund balance and credit appropriation. Now obviously, you should know that we can combine those two entries together by debiting estimated revenue, credited appropriation and credited a fund balance of 10 million. Basically, those two entries are modified here. This is the budgetary initial entry. Now, remember, just remember, in few minutes when we do the closing, I'm going to be closing exactly. I'm going to exit out. I'm going to be closing exactly this entry. Regardless of what happened, whether we had more revenues, less revenues, more expenditure, less expenditure, it doesn't really matter. I will be closing this entry specifically. If you want to make a note of it, make a note of it. I will remind you shortly. Now, we ordered. Ordered. Notice we just ordered or signed a contract. Just basically we ordered office supply for 20 million. That's all what we did. Means we started the process. Here's what we do when we start the process. We debit encumbrances of 20 million. We credit reserve for encumbrances for 20 million. This should be indented because this is the debit and this is the credit, but it's not, but that's fine. Basically, what does that mean? It means now what we said is we're going to put away from our appropriation. We're going to reserve the 20 million. Remember, we have appropriation, 850 million. What we did is we said, look, of that amount, 20 million is reserved for supply, for office supplies. They need a lot of office supplies, this Chester County. This is all what we did. All what they did is de-ordered. Basically, both of these are equity accounts in a sense they're equity and you're going to see later they're going to be removed later on. This is to record the order of supplies. Then we incurred the following cost paying in cash. Those we actually incurred and we paid in cash. Salaries, repairs, rent, utilities, and other operating expenses. How do we process those transactions? Simply put, expenditure is 610 debit salaries, debit repair expenditure, debit rent expenditure, debit utilities expenditure, debit operating expenditure, and credit cash. Simply put, we debit expenditure not expenses and hopefully you know the difference. If you don't know the difference, this is why farhat-lectures.com exists is to help you understand the difference. So we debit expenditure and we credit cash. Now, we ordered equipment costing of 10 million dollars. Remember, those are ordered. We did not receive anything yet. We didn't do anything. Same thing, debit encumbrances, credit reserved for reserve for encumbrances. Now, we received the equipment and we were billed 10 million. We thought it's going to cost us nine. Ha! It cost us 10 million, which is one million more than anticipated. What do we do? Now, the first thing you need to do when you receive the equipment, the first thing you do, you have to reverse the original entry. So this is the original entry. You have to reserve the original entry and hopefully you know how to reverse thing, basically the opposite. You debit reserve for encumbrances, credit encumbrances for exactly the same amount. Now, what we did is we receive and we have to pay. Now, we have an expenditure of 10 million, equipment expenditure, not equipment, equipment expenditure. We're dealing with governmental accounting and we credit accounts payable 10 million. So this is the entry. Now, to record the expenditure for the purchase. Now, we're going to be receiving the previously ordered supplies that was built for the amount originally estimated. Now, how much did we order supplies? If you remember, we ordered 20 million worth of supplies. Now, we receive them and to make our life easy, it was exactly 20 million, not like the equipment. First, we reverse the encumbrance. Debit reverse for encumbrances, credit encumbrances for 20 million. Again, debit expenditure, specifically supplies expenditure, credit accounts payable. It happens to be for the same amount. Now, the county earned and collected revenues of 865 million. We debit cash because we earned and collected and we credit revenues, 865 million. And this is basically what happened. Now, the best thing if you want, because I'm going to do the closing entries next, what you should have done is kept track of T account for everything, if you'd like to, because hopefully you can follow up with the closing entries. Now, let's do the closing entries. Remember, the first thing we do in the closing entries is to close the original budgetary entry, which is what? Which is debit appropriation, debit fund balance, credit estimated revenue. Do you guys remember when I asked that entry? That was the opposite of this. And let me show it to you just to kind of make sure we are all on the same page. So this is, if you're doing this on the CPA exam, you got a problem like this, whatever you did originally, which is this entry here, the original budgetary entry, at the end, you would reverse it exactly the same and you will earn points for that because it's supposed to be reversed for exactly the same amount. Now, that's not what actually happened, but you reverse the entry because you thought that you're going to have 860 of revenue, you got 865, the expenditure you thought 850, we're going to see that it's more than 850. So then now we have to close our revenues. We debit revenues, 865, credit fund balance, 865. So simply put, this is basically closing revenues. You debit revenues, credit equity, which is the fund balance, 865. Then you have to close all the expenditures. So you debit fund balances for the total and here are my expenditure, salaries, repairs, rent, utilities, supplies, equipment, other expenditure. Those are all my expenditure. Think about it. What end up happening? What end up happening is the county earned revenues of 865 and incurred expenses specifically of 865. Therefore, they did not have any increase. They did not have any increase in the fund balance. Initially they thought, if you remember, initially they thought they're going to be positive 10 million, but at the end they had more expenditure than they expected. Therefore, it's 865 versus 865. As always, I'm going to ask you to like this recording, share it, put it in playlist, and always I'm going to invite you to visit my website farhatlectures.com for additional resources for your CPA exam. Your CPA exam is an investment in your career. Investment means it's not an expense and as an accountant, you should know the difference between investment and an expense. Investment will pay dividend, will pay you down the road. So what should you do? Invest time and if need be, some money. My fee is nominal. My fee is not that much relative to any CPA course, relative to any type of one-on-one tutoring. Look, check it out. You won't lose anything. Meanwhile, I suggest you study hard. You stay safe and good luck.