Park City uses encumbrance accounting and formally integrates its budget into the general fund's accounting records. For the year ending July 31, 2005, the following budget was adopted:
Estimated revenues
$30,000,000
Appropriations
27,000,000
Estimated transfer to debt service fund
900,000
When Park's budget is adopted and recorded, Park's budgetary fund balance would be a
A. $3,000,000 credit balance.
B. $3,000,000 debit balance.
C.
$2,100,000 credit balance.
D. $2,100,000 debit balance.
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Example:
After closing all nominal accounts except encumbrances, Morgan City had the following account balances at the end of the year:
Assets $10,000,000
-------Liabilities $7,000,000
There were $2,000,000 of purchase orders outstanding at the end of the year. There were no nonspendable, restricted, committed, or assigned amounts in the fund balance.
Currently, Morgan City's General Fund has an Unassigned, Undesignated Fund Balance of $3,000,000 ($10,000,000 assets less $7,000,000 liabilities). Since there are no nonspendable, restrictions, commitments, or assigned amounts within the fund balance, this entire amount is available for appropriation (e.g., the legislative body can decide to spend the money).
However, is that money truly available? Consider the outstanding purchase orders. They are not included in Liabilities, but they are legal obligations to purchase goods. Should the amount available for appropriation really be $1,000,000 ($3,000,000 less $2,000,000 outstanding purchase orders)?
The closing entry for the encumbrances takes note of this legal obligation:
Budgetary Fund Balance $2,000,000
-----------------Encumbrances $2,000,000
Unassigned Fund Balance $2,000,000
--------------Fund Balance - Assigned for encumbrances $2,000,000
As a result of these entries, the Unassigned Fund Balance is now $1,000,000 ($10,000,000 assets less $7,000,000 liabilities less $2,000,000 outstanding purchase orders/encumbrances). The obligation for the outstanding purchase orders is seen in the Fund Balance Assigned account balance of $2,000,000.
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