What Is Budgetary Accounting?
Accounting is the method by which businesses, nonprofit organizations, government agencies and even individuals can keep track of income and expenditures. There are numerous types of accounting procedures that are tailored to meet specific needs. Budgetary accounting is a specialized area of accounting that focuses on the allotment and expenditure of limited resources.
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Purpose
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The main purpose of budgetary accounting is to allocate funds that are set aside for government agency or individual use. While individuals can use this method to control their own household budgets, this type of accounting is commonly used by local, state and federal governments. In the typical scenario, the state legislature or Congress will pass an annual budget that allocates specific amounts to various agencies. Once the agency receives the funds allocated to them through the budget, they must use budgetary accounting principles to monitor expenditures.
Appropriations
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Appropriations are an essential component of budgetary accounting. When state and federal lawmakers pass their annual budgets, they appropriate or set aside funds for specific purposes. For example, each year the federal government must decide how much of the federal budget they will allocate to the Department of Homeland Security. The actual amount that the Department receives is known as their annual appropriation. This is the amount of money that they may spend to run their agency for the year.
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Encumbrances
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Encumbrances also play an important role in budgetary accounting. Encumbrances are amounts that an agency has committed to pay, but has not yet paid out. For example, each state maintains a Department of Public Welfare that provides financial assistance to needy families. If a person meets the criteria set by the agency, the agency has an obligation to provide financial benefits to that person. This situation creates an encumbrance on the overall budget, meaning that there are less funds available for creating new programs, acquiring new property or hiring additional personnel.
Planned vs. Actual Amounts
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Local, state and federal government agencies often plan their programs for the upcoming year before the legislature or Congress allocates money to fund their programs. Therefore, these agencies are often required to estimate the amount that the legislature will allocate to them before the budget is passed. This is commonly referred to as the "planned budgetary amount." Once the budget is passed by the legislature, the agency will be required to reconcile the planned amount with the actual amount that was allocated to them. This amount may be higher or lower than the planned amount. If it is lower, the agency will be required to cut certain expenditures from their annual budget.
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