Fundamentals of Governmental Accounting and Reporting

Chapter 3Budgeting

Learning objectives

• Determine the unique role of budgets in the governmental environment.
• Distinguish how budgets are recorded in the accounting system.
• Determine what encumbrances are and how they are used.
• Identify how budget information is reported in the financial statements.

No taxation without representation

What does that historic phrase have to do with budgets? A great deal, as it turns out. Many services of government are paid for with taxes, something most people have to pay. However, only people who we elect can impose those taxes on us. They also are the ones who decide how those resources are to be spent by legally adopting a budget. Governments must show that they spent resources only for purposes approved by our elected officials.

The role of budgets

Why are budgets so important in government? The answer is that budgets are based on the historic notion of “no taxation without representation.” Governments can raise taxes only for purposes approved (appropriated) by the elected representatives of the people.

Matters related to the budget are some of the most important decisions that elected officials make. Generally, it is a legally adopted budget that confers authority to levy taxes and spend money. The budget process typically lasts for months and involves public hearings. Elected officials have to balance the need for services against how much taxpayers are willing to provide.

Once approved, budgets become legal contracts between the government ...