Budgeting and Accounting Relationship
Both budgeting and accounting are fiscal systems or processes that involve the planning, allocating, and disbursing of monetary resources. This results in an interrelationship and a need for coordination between these two fiscal disciplines. Generally, budgeting is regarded more in terms of planning and enacting a fiscal plan. However, these planning and enactment processes are dependent upon the accounting of past-year and current-year expenditures, revenues, transfers and prior year adjustments.
Accounting focuses on the recording, classifying, and interpreting of financial transactions. These accounting processes are dependent on the budgeting of expenditure authorizations (appropriations) being enacted by the legislative branch.
This write-up focuses more on the budgeting aspects and how accounting relates to it. The Department of Finance (Finance) Fiscal Systems and Consulting Unit offers the State Fund Accounting Course http://www.dof.ca.gov/Budget/Resources_for_Departments/Training/ emphasizing accounting with lesser emphasis on the budgeting process.
In the State of California, there are statutory requirements for an accounting system that will provide data for the budget process—for both the past-year presentation in the Governor’s Budget as well as monitoring budgeted resources for the duration of the life of appropriations. Among these statutes, the following four provisions require a specific linkage between the accounting and budgeting systems.
Government Code Section 13337(a) provides:
"The budget required by the State Constitution... shall contain a complete plan and itemized statement of all proposed expenditures of the State... and of all estimated revenues, for the ensuing fiscal year, together with a comparison, as to each item of revenues and expenditures, with the actual revenues and expenditures for the last completed fiscal year, the estimated revenues and expenditures for the existing fiscal year, and the budgeted revenue and expenditures for the next fiscal year."
Government Code section 13300 provides the following regarding Finance’s role:
- “The department shall devise, install... a modern and complete accounting system... to the end that all revenues, expenditures... be properly, accurately... accounted for and there shall be obtained accurate and comparable records, reports, and statements of all the financial affairs of the state.
- This system shall permit a comparison of budgeted expenditures, actual expenditures, and encumbrances and payables and estimated revenue to actual revenue that is compatible with a budget coding system, developed by the department.
- This system shall include a program cost accounting system which accounts for expenditures by line item, governmental unit and fund source...”
To comply with this Government Code section, Finance developed and continues to maintain the state’s uniform accounting system, as outlined in the Uniform Codes Manual and the State Administrative Manual. Finance also maintains the California State Automated Reporting System (CALSTARS).
Government Code section 12460 provides:
“The Controller shall submit an annual report to the Governor containing a statement of the funds of the state, its revenues, and the public expenditures during the preceding fiscal year. The annual report shall be known as the budgetary-legal basis annual report and prepared in a manner that will account for prior year adjustments, fund balances, encumbrances, deferred payroll, revenues, expenditures and other components on the same basis as that of the applicable Governor’s Budget and the Budget Act, as determined by the Director of Finance in consultation with the Controller.”
Government Code section 13344 provides:
“State agencies shall prepare and maintain financial and accounting data for inclusion in the Governor’s Budget, Budget Act and related documents, and the budgetary-legal basis annual report described in section 12460, according to the methods and bases provided in regulations, budget letters, and other directives of the Finance.”
“The Department of Finance shall consult with the Controller concerning significant changes to these financial and accounting methods, unless those changes are otherwise specified in law. The Department of Finance shall implement procedures, consistent with this section, that facilitate annual reconciliations of General Fund and special fund balances between those provided by a state agency to the Department Finance and the Controller.”
To comply with these Government Code sections and the State Administrative Manual requirements, departments submit year-end financial statements to the State Controller’s Office (SCO). Departments must ensure that data included in both the budget schedules and year-end financial statements are identical unless permitted by law or Finance has approved a different. The SCO then publishes the Budgetary/Legal Basis Annual Report and the Budgetary/Legal Basis Annual Report Supplement.
Traditionally, the initial budget submission by a department includes the past-year presentation of expenditures, revenues, transfers, prior year adjustments, and fund condition statements (for governmental cost funds). The fiscal data in the budget presentation must agree with the amounts reported in the Schedule 10s (Supplementary Schedule of Appropriations) and the Schedule 10Rs (Supplemental Schedule of Revenues and Transfers). Both the Schedule 10 and the Schedule 10R are input forms sent by Finance to departments with a cover Budget Letter instructing them to record the same expenditures, revenues, and transfers reported in their year-end financial statements to the SCO. These schedules are used to accumulate statewide totals for expenditures and revenues for the past, current, and budget years and to produce summary schedules included in the Governor’s Budget.
Typically, departmental budgets are amended one or more times after the initial submission. Any changes to budgets for the past-year or prior-year data need to correspond to or reconcile to changes being reported to the SCO via amended year-end statements, and changes made by the SCO.
A chart, available in PDF Format, summarizes the use of data from financial statements to prepare the past/prior-year portion of summary statements for revenues, expenditures, transfers, prior year adjustments, and fund conditions for the Governor’s Budget.
In most departments, appropriations for the current year are typically shown fully expended in the Governor’s Budget. However, if accounting or budget estimates records indicate savings will be realized or that deficiency funding will be needed, expenditures may need to be adjusted, as appropriate, for the budget.
Reconciling Budget and Controller’s Numbers for the Past-Year
The Government Code, beginning with section 12400, sets forth the duties and requirements of the SCO. Included in these duties is the maintenance of appropriation accounting, reporting of expenditures and revenues, and the Budgetary/Legal Basis Annual Report to the Governor.
The Budgetary/Legal Basis Annual Report contains statements that reflect the financial condition of all funds. It is prepared in compliance with state laws and accounting procedures and is in conformance with the Budget Act and other financial legislation. It is compiled from the SCO accounts, which are on a cash basis, and are updated at year-end with financial statements received from state departments. Departments’ year-end financial statements contain assets, liabilities, and accruals not in the SCO accounts. This brings the SCO accounts, for reporting purposes, to the same basis as the accounts maintained by the departments.
Departments are instructed to use their year-end financial statements as the basis for preparation of budget documents for the Governor's Budget. These financial statements must be prepared on the same basis as that of the applicable budget. Therefore, revenues, expenditures, transfers, prior year adjustments, and fund balances displayed in the Governor's Budget should agree with the Budgetary/Legal Basis Annual Report for the past year. Departments are responsible for the consistency of this data and any differences must be approved by Finance.
Finance designates a fund administrator for each fund and the organization is responsible for preparing the fund condition in the Governor's Budget. Since Finance prepares the fund condition (Summary Schedule 1) for the General Fund, Finance reconciles with the SCO General Fund data to ensure that the past year balance is as accurate as possible. Departments are required to follow that same process for other funds if they are designated as the fund administrator for the fund.
Each fund’s fund administrator and its fund user(s) are required to certify (1) Past/prior year information provided to Finance is accurate and reconciles between budget and accounting records; (2) Information is consistent with information provided to the SCO.
Each department head or designee must sign Form DF-117A (Certification of Past and Prior-Year Information for Fund Administrators) or Form DF-117U (Certification of Past and Prior-Year Information for Fund Users) to certify they have fully reconciled accounting and budgeting information provided to Finance.
Finance’s process to track legislative changes and veto actions to the Budget Bill involves very little interaction between the accounting and budgeting processes. The accounting link essentially begins with the enactment of the Budget Act and the recordation of appropriations (accounts) in the systems of the departments and the SCO.
Upon enactment of the Budget Act, the departmental accounting offices and the SCO record the initial appropriation authorizations. Early in July, Finance sends a Budget Letter instructing departments (with multiple funding sources) to remove payables from the main support item and to schedule program detail in the subsidiary items. This step is necessary to accommodate program cost accounting by program and fund source of the CALSTARS system and other automated systems.
Also, during the course of the operating year, adjustments may be made to the budget authorizations. Typically, the adjustments are authorized by specific provisional language in individual items, by general control sections in the Budget Act, or other legislation. These adjustments are usually prepared on Budget Revisions (Std. Form 26) or Budget Executive Orders. Finance approves Budget Revisions and prepares Budget Executive Orders. Copies of these documents are then sent to the SCO and to departments.
Some of the reasons for budget adjustments are:
- Various statewide adjustments to be allocated by Budget Executive Orders
- Receipt of unanticipated federal funds
- Unanticipated reimbursements
- Transfers of funds within an appropriation
- Legislation enacted after the Budget Act
- Technical errors and corrections
During the year, departments incur expenditures, collect revenues, and post them to budgeted accounts. Expenditures at the mid-year point are used in estimating the current-year expenditure amounts, and collections are used in forecasting the revenue amounts presented in the Governor’s Budget. At the end of the fiscal year, collections, disbursements, encumbrances, and payables are reported in year-end financial statements. Then, as mentioned previously, these statements are used for the past year presentation in the subsequent Governor’s Budget.