A city council adopts a $50 million general fund budget. Two months later, a department issues a purchase order for $200,000 in equipment. The equipment arrives in month four, and the invoice totals $195,000. Governmental accounting must track each of these events separately: the legal authority to spend, the commitment of funds before spending, and the actual expenditure, because the budget itself is a legally binding document, not merely a planning tool.
AICPA Representative Tasks (verbatim). "Recall and explain the types of budgets used by state and local governments." "Prepare journal entries to record budgets (original and final) of state and local governments." "Prepare journal entries to record encumbrances of state and local governments."
State and local governments use several budget types, but only appropriated budgets are recorded in the general ledger. Understanding which budget is which prevents misapplication on the exam.
KEY: The exam tests whether you know that only appropriated budgets generate journal entries. Flexible and performance budgets are management tools. They do not touch the accounts.
Common mistakes
- Recording flexible or performance budgets in the general ledger. Only appropriated (legal) budgets generate journal entries. Flexible and performance budgets are internal planning tools. They never hit the accounts.
- Confusing Budgetary Fund Balance with actual Fund Balance. Budgetary Fund Balance is a temporary nominal account that closes at year-end. Fund Balance is a permanent equity account. The exam will test whether you know the difference when asking about year-end fund balance.
- Reversing encumbrances at actual cost instead of estimated cost. Always reverse at the originally encumbered amount. The difference between estimated and actual automatically flows to unencumbered appropriations without a separate adjustment entry.
Bottom line
- Only appropriated (legal) budgets are recorded in the general ledger; flexible and performance budgets are internal planning tools that never hit the accounts
- Budgetary entries use contra accounts: Estimated Revenues (debit), Appropriations (credit), and Budgetary Fund Balance to plug the difference
- Budget amendments are recorded as separate entries that adjust the budgetary accounts to the final adopted budget
- Encumbrances reserve spending authority when a purchase order or contract is issued, before goods or services arrive
Exam shortcut
When the fact pattern says "the council adopted the budget," immediately set up the entry: DR Estimated Revenues, CR Appropriations, plug Budgetary Fund Balance. If the plug is a credit, the budget projects a surplus; if a debit, a planned deficit.
The full lesson (about 2,701 words, 18 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.C8
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