Question Of The Week

• Explanation

Government units prepare budgetary entries at the beginning of each reporting period. When recording an entry, estimated revenues and estimated other financial sources (ie, inflows) are debited. Appropriations and estimated other financial uses (ie, outflows) are credited. These estimated accounts are used for planning purposes to control expenditures, account for levied taxes, and estimate transfers in and out.

The normal balances of these accounts vary from regular revenue and expense accounts because they are based on what the expected change in the budgetary fund balance account (ie, retained earnings equivalent) will be. For example, if a government's estimated outflows exceed estimated inflows, a budgetary deficit is expected, and the budgetary fund balance account is decreased, or debited (like recording a net loss).

In this scenario, the City of Goodville showed a debit balance of $50,000 in the budgetary fund balance account when preparing the year's budget (ie, estimated outflows exceed estimated inflows). Appropriations (estimated expenditures, credit balance) exceeding estimated revenues (debit balance) by $50,000 would result in this debit balance (Choice B).

(Choices C and D) When recording a budget, a government unit records estimated revenues and appropriations. Actual revenues have not yet been earned and therefore are not considered in the budgeting entry.

Things to remember:
Estimated revenues and estimated other financial sources (ie, inflows) have normal debit balances, and appropriations and estimated other financial uses (ie, outflows) have normal credit balances. A debit balance in the budgetary fund balance account (ie, retained earnings equivalent) occurs when estimated outflows exceed estimated inflows.

Lecture References :

• FAR 20.01 : Governmental Accounting: Overview of Governmental Accounting