Appendix A-3: Basic Budgeting Concepts
Examples of Basic Budgeting Concepts
The preceding example in Appendix A-2 illustrates the relationship between the Beginning Balance, the budgeted and actual revenue, and the budgeted and actual expenditures. In this example we see a fund that was new for Year 1, therefore having no Beginning Balance.For the first year of its existence the revenue budget was established at $100,000 and the expenditure budget was set at the lower amount of $85,000. Had all revenues and expenditures occurred as planned, this fund would have ended the year with a $15,000 balance which would have become the Beginning Balance for Year 2. Actual revenues fell short at $95,000, which was still sufficient to support the expenditure budget. Additionally, expenditures totaling only $72,050 were posted. The result at the end of Year 1 was a balance of $22,950 for the fund.
In this example, the revenue was posted to a single DA, but expenditure postings were distributed across several DAs. This exemplifies an appropriate relationship between fund and DA. In very simplistic terms, the fund can be viewed as a checking account with a bank. The checking account is a joint account and two people each have a check register. Either of the two individuals can tell you how much they have deposited and spent, but neither can produce a balance for the checking account. Both check registers must be used to reconcile to the balance shown by the bank. The bank can not separate the checking account balance between the two individuals. The two individuals intended to operate in a manner where all of their resources were combined, just as an organization opts to combine various resources into one fund.
The $22,950 balance from the end of Year 1 became the Beginning Balance for Year 2. It is important to note that just as described in the checking account analogy above, there was no system generated balance below the level of the fund. The existence of a single fund assumed that there was a Fund Owner who would make decisions on how to use the Beginning Balance. In Year 2 the Fund Owner decided that the Beginning Balance would not be used to support expenditure budgets but would instead be set aside as a reserve for future use.
In Year 2 the revenue budget was established at $110,000 and the expenditure budget was set at the lower amount of $92,500. Had all revenues and expenditures occurred as planned, and considering the Beginning Balance of $22,950, this fund would have ended the year with a $40,450 balance which would have become the Beginning Balance for Year 3. Actual revenues for Year 2 were in excess of the revenue budget and amounted to $112,000. Expenditures were slightly below the budgeted amount and totaled $91,100. The result at the end of Year 2 was a balance of $43,850 for the fund.
Year 3 therefore started with a Beginning Balance of $43,850. This year the Fund Owner decided that some of these resources would be expended during the year.This can occur when a planned acquisition requires multiple years of “savings” before sources would be sufficient to make the purchase. This is the same process thatan individual may go through when saving up for a major purchase. A similar situationcan occur when expenditures originally intended to be supported by revenue from thesame year are deferred until the next year. This results in a larger than expected Beginning Balance for the next year. This balance will in turn support a larger than normal spending plan. A comparison can be drawn here with an individual putting a major expense until a later date.
In Year 3 the revenue budget was established at $110,000 and the expenditure budget was set at the higher amount of $132,500. This situation is appropriate given the decision to utilize a portion of the Beginning Balance. Had all revenues and expenditures occurred as planned, and considering the Beginning Balance of $43,850, this fund would have ended the year with a $33,250 balance. Actual revenues for Year 3 were in excess of the revenue budget and amounted to $112,000. Expenditures were slightly below the budgeted amount and totaled $122,600. The result at the end of Year 3 was a balance of $33,250 for the fund.