1st Mini Test Flashcards
Definition of Accounting
Process of measuring, recording, interpreting and communicating (financial) data.
Object: the (economic) activity of an entity (a public organisation in this case).
Values promoted by keeping accounting records, especially in the public sector
- Good decision-making in the definition of public policies and strategies.
- Accountability
- Transparency
- Combats lack of awareness
- Managerial Control
Why is accounting a PUBLIC management tool?
- Macro level: to cope with the classic problem of managerial/political agency -> countries that implemented accounting reforms have a higher level of governance quality
- Meso and Micro level: better performance in terms of
1) Management of fiscal risks
2) Delivery of public services
3) Transparency and Accountability
Possible user needs and related accounting goals
- Assess financial viability
- Assess efficiency & effectiveness
- Ensure budgetary compliance
- Evaluate performance
- Ensure accountability on public resources
Budgetary Accounting
Budgetary accounting = Accounting that looks forward -> it measures costs of planned activities in a given period and the economic resources used as funding.
The budget is, at the beginning of the year, the law to be followed. Budgetary accounting focuses on cash flows (inflow and outflow). It is traditional in the sense it focuses on cash & commitment. It is more closed to the political context, to demonstrate the money is being used to what it was supposed -> functional, accountability
Financial Accounting
Financial Accounting = Accounting that looks backwards -> oriented to collecting information during the year so that at the end of the year we can measure the economic performance of the company or institution.
In financial accounting, we focus on assets & liabilities, revenues & expenses. Its basis is accruals. It is closer to a managerial dimension -> applied to public organisations that are closer to firms or production.
What are accruals?
Accruals are revenues earned or expenses incurred that impact a company’s net income on the income statement, although cash related to the transaction has not yet changed hands. Accruals also affect the balance sheet, as they involve non-cash assets and liabilities.
Purpose of Budgetary Accounting?
Rational tool of control:
1) Define mandatory limit for expenses
2) Ensure budgetary compliance
The main tool is the budget:
- plan for future spendings
- limits for future spending
- plan of sources of financing (revenues)
- requests for money
- authorisation to spend money
-> A topical budget has a column for expenses and another for revenues. The sum of the expenses cannot exceed the sum of the revenues.
In which ways is the budget mandatory?
- Ex-ante: expenditures cannot exceed revenues
- Ex-post: the actual expenditures cannot exceed the predicted expenditures
What factors can make budgets vary?
- accounting rule we use in doing it (cash or commitments - we’ll study both)
- classification of revenues and expenditures
- balanced budget requirements
- budget cycle & revisions (first presentation of the budget, implementation and final revision changes - - according to what we want to highlight)
- principles of budgetary accounting for specific sectors (state, municipality, public agency, enterprise, etc, with specific regulation for the specific sectors in which they work).
Phases of the budget
Formulation: where the mandatory limits are defined (preliminary should be balanced in terms of expenses and revenues + amount included in the preliminary budget is the limit max amount that can be spent during the year). Priorities set by politicians are put into numbers by managers, bureaucrats, technicians. Priorities and strategies are defined. It ends with formal approval from the political body. It expresses the political preferences and is a long process of negotiation between the government, political parties and the citizens.
Execution: the choices that have been made have to be implemented. We have the limits, expected expenditure and we start to record the actual values (for example, what was the real value of taxes collected from the citizens? We planned investment but the works required more investment). The budget may be modified within specific constraints in terms of the amendments and prerogatives (virements/transfers) between different items of the budget (we’ll see this later in the course).
Reporting: compare and report the expected values with actual values. Surplus/deficit is reported. Reports are prepared by the executive & bureaucracy and approved by the legislature/representative body (again politics). In the public sector, if you have extra resources that were not used (surplus) you have wasted them: the purpose is not to generate profits but to provide public value.
General principles of budgetary accounting
- Comprehensiveness
- Transparency
- Realism
- Annuality
- Unity
Core principles of budgetary accounting
- Secure balanced budgets: budgeted revenues should cover budgeted expenses
- Balanced sub-budgets:
1) current balance: current revenues should cover for current expenditures + interests + debt repayment
2) capital balance: capital expenditures can be covered by both capital revenues and current revenues (surplus - part that exceeds current expenditures) - Intergenerational Equity
- Efficiency in the use of different sources
- We record expected revenues and expenses of the current year
3 techniques to prepare the budget (formulation)
Incrementalism: the budget formulation is determined by the baseline, copy-paste from the previous year and modify for specific changes for the current year. Can be smoother/easy has you have a very strong starting basis. It is a fast way to approach the budget but also very dangerous.
Rationalism: you have to consider every year as a new one. Go back and rationally consider the allocation of resources. Blank page, new numbers but the contents are still there. Time-consuming,
Zero-based budgeting: determining new numbers and also contents. The zero-base effect has some positive effects, for example, it is unbiased towards previous mistakes. But the past has also a big influence on the present and future that should be considered. In which cases it is also useful to apply this approach to the current part of the budget? New political cycle, reforms, after important events and big changes.
Participatory budgeting
Participatory budgeting: the way in which we approach the budget by adding steps. Has an impact in changing the first stage of budgeting (formulation) giving more voice to the citizens. The decision is made up by citizens through groups.
Typical project:
- design
- formation of the citizens group
- proposal
- choice
