Governmental Budgeting Appropriations Encumbrances CPA Exam BAR

IN this session, I will discuss governmental budgeting including appropriation, encumbrances and estimated revenues. 🚀farhatlectures...
Students or CPA Candidate?
Governmental budgeting is a financial planning and management process that governments at various levels (such as federal, state, and local) use to allocate resources for specific purposes over a specified period, typically a fiscal year. This process involves several key components, including appropriation, estimated revenues, and encumbrances:
Appropriation:
Appropriation refers to the formal authorization or approval granted by a legislative body (e.g., a parliament, congress, or city council) to spend public funds for specific purposes. It essentially sets aside a certain amount of money for particular government programs, departments, or projects.
The appropriation process is a critical step in the budgeting cycle, as it allows government agencies to access and spend public funds legally. It provides the legal framework for government spending and helps ensure that funds are used for their intended purposes.
Appropriations are typically detailed in budget bills or ordinances that specify the amount of money allocated to each department or program. They are often categorized into different budget categories or line items, making it easier to track and manage expenditures.
Estimated Revenues:
Estimated revenues are the government's best forecasts or projections of the income it expects to receive during the fiscal year. These revenues can come from various sources, such as taxes, fees, grants, loans, and other sources of income.
Accurate revenue estimates are essential for developing a balanced budget. Governments need to ensure that their projected revenues are sufficient to cover their planned expenditures. If estimated revenues fall short of appropriations, it can lead to budget deficits, requiring adjustments to the budget or finding additional funding sources.
Governments often prepare revenue estimates based on historical data, economic forecasts, tax policies, and other relevant factors. These estimates help policymakers make informed decisions about the size and scope of government programs and services.
Encumbrances:
Encumbrances are commitments or reservations of funds for specific future expenditures. When a government agency intends to make a purchase or enter into a contract, it creates an encumbrance to set aside funds for that purpose, even though the actual expenditure has not yet occurred.
Encumbrances help prevent overspending by ensuring that funds are earmarked for specific obligations. This practice helps maintain budgetary control and transparency.
Once an encumbrance is created, it reduces the available budget balance, which means that the agency cannot spend those funds for other purposes. When the agency eventually incurs the expenditure, the encumbrance is converted into an actual expenditure, and the budgetary balance is adjusted accordingly.
In summary, governmental budgeting involves a structured process of allocating public funds through appropriation, forecasting revenue through estimated revenues, and managing future expenditures through encumbrances. This process helps governments plan, control, and track their finances, ensuring that resources are used efficiently and in line with policy objectives and legal requirements.