The Board of Aldermen of Finchville approved the appropriations budget for its General Fund for the year ending December 31 as shown below.
General government.............................................. $ 600,000
Public safety.......................................................... 3,100,000
Public works.......................................................... 1,400,000
Health and welfare................................................ 800,000
Culture and recreation........................................... 400,000
Contributions to retirement fund........................... 700,000
Total General Fund appropriations....................... $ 7,000,000
At the same time the Board approved a revenue budget that indicated that General Fund revenues, which are generated solely from property taxes, would exceed appropriations by five percent.
a. Explain the legal significance of an appropriation and why city officials and the city’s auditors need to know the meaning of the term.
b. It is illegal for a government to spend money for any purpose unless a valid appropriation for that purpose exists. Does this legal rule assure good financial management for each government? Why or why not?
c. Provide an entry in general journal form to record the budget.
d. Illustrate a form of an expenditures subledger account (i.e., list the column headings) that would provide the information needed by a government finance director to ensure that legal requirements concerning appropriations are complied with.
a. The legal significance of an appropriation is that it is a legal authorization for a government entity to spend money for specific purposes. It allows city officials to allocate and control the use of funds for various departments or functions within the government organization. City officials and auditors need to understand the meaning of the term to ensure that spending is in line with the approved budget and that funds are used for the intended purposes. It also helps in financial planning, transparency, and accountability.
b. Yes, the legal rule that prohibits spending money without a valid appropriation is an important measure for good financial management. It ensures that government spending is done within approved budgets and in accordance with the needs and priorities set by the governing body. This helps in preventing misuse or misallocation of funds, promoting transparency, and holding officials accountable for their spending decisions.
c. General Journal Entry to Record the Budget:
Date: [Date of Approval of Budget]
Account Debit Credit
---------------------------------
General government $600,000
Public safety $3,100,000
Public works $1,400,000
Health and welfare $800,000
Culture and recreation $400,000
Contributions to retirement fund $700,000
Appropriations Budget $7,000,000
d. Expenditures Subledger Account:
Column Headings:
1. Department/Function: Indicates the specific department or function for which the expenditure is being made (e.g., General Government, Public Safety, Public Works, Health and Welfare, Culture and Recreation, etc.).
2. Budgeted Amount: Represents the approved amount allocated for each department or function.
3. Expenditures: Reflects the actual amount spent for each department or function.
4. Remaining Balance: Shows the remaining balance of the budgeted amount for each department or function after accounting for the expenditures.
5. Remarks/Comments: Provides additional information or details related to specific expenditures or budget adjustments.
a. The legal significance of an appropriation is that it is the authorization by a legislative body, such as the Board of Aldermen, to spend a certain amount of money for a specific purpose. It is a formal action taken to allocate funds from the budget for specific activities and services. City officials and auditors need to understand the meaning of the term because it sets the legal framework for spending and helps ensure that funds are used properly and within the approved budget.
b. Yes, the legal rule that a government cannot spend money unless a valid appropriation exists can assure good financial management. This rule helps ensure that spending is authorized and that funds are allocated according to a budgetary plan. It promotes transparency, accountability, and the control of government expenditures. Without this rule, there would be a risk of unauthorized spending, mismanagement of funds, and potential fraud.
c. A journal entry to record the budget would be:
General Fund Appropriations:
Debit:
General Government - $600,000
Public Safety - $3,100,000
Public Works - $1,400,000
Health and Welfare - $800,000
Culture and Recreation - $400,000
Contributions to Retirement Fund - $700,000
Credit:
Budgetary Fund Balance - $7,000,000
d. An expenditure subledger account should include the following column headings to ensure compliance with legal requirements:
1. Account Code: This is a unique code assigned to each expenditure account, such as General Government, Public Safety, etc.
2. Description: A brief description of the purpose or category of the expenditure.
3. Budgeted Amount: The approved budgeted amount for each expenditure account.
4. Encumbered Amount: The amount of funds that have been reserved or committed for specific expenditures.
5. Expended Amount: The amount of funds that have been actually spent.
6. Available Amount: The remaining balance of funds available for each expenditure account.
By maintaining this type of expenditures subledger, the government finance director can monitor the spending against the budget and ensure that expenditures are within the authorized appropriations. It provides a clear record of each account's activity and helps in financial planning and decision-making.