a A municipalitys budget is prepared on a cash basis What ba

a. A municipality\'s budget is prepared on a cash basis. What basis of accounting would you recommend? Explain. Why are General, Special Revenue, and other governmental (expendable) funds typically controlled by fixed budgets integrated within the account structure, whereas Enterprise and other proprietary (nonexpendable) funds may be subject to less formal control through flexible budgets not integrated within the account structure? b. What types of budgetary amounts (i.e., column headings) are required in an annual budgetary comparison statement? Governments that present a budget variance column in the annual budgetary statement are disclosing the variance between the actual amount and which budgetary amount? c.

Solution

a. The basis of accounting that I would recommend is the accrual basis of accounting in which revenues are recognized in the year in which they are earned, irrespective of the fact whether they have been received or not. Similarly expenses are also recorded in the year in which they are incurred, irrespective of the fact whether they have been paid or not.

The reason for my recommendation is that preparing budget on an accrual basis will enable a municipality to measure its financial position and its assets and liabilities more objectively. When a municipality is using accrual basis of accounting it will gain from better budgeting as well as better planning. This is because accrual basis enables looking at when a liability is incurred and when revenues are earned. The budget will be based not on budgeted cash payments and collections but will be based on actual revenues that will be earned by the municipality and the actual expenses that will be borne by the municipality in the budgeted period. This will enable better and more scientific decision making leading to prudent and rational planning and control.