In governmental accounting, the budgetary basis of accounting differs slightly from generally accepted accounting principles, or GAAP, used for preparing the annual report. For budgeting purposes, a modified accrual basis of accounting is used. Thus, various revenues and expenditures of the general fund are treated differently and need to be reconciled accordingly for reporting purposes. For the two methods to reconcile, the differences under the budgetary basis versus the GAAP basis need to be adjusted for disclosure in the notes to the financial statements.
General Fund Reconciliation
Adjust for changes in revenue accruals of receivables and other assets. Under the budgetary basis, revenues are recorded when cash is received, except for certain accruals, as opposed to under GAAP, in which revenues are recorded when they are properly accrued. Also, certain revenues are budgeted on a modified cash basis rather than an accrual basis.
Adjust for changes in expenditure accruals of accounts payable and other liabilities, such as salaries and fringe benefits payable. Under the budgetary basis, expenditures are recorded when paid in cash, as opposed to under GAAP, in which expenditures are recorded when the underlying liability is incurred. Also, encumbrances such as outstanding contractual commitments are treated as expenditures, instead of a reserved fund balance under GAAP.
Adjust for increase or decrease in continuing appropriations. For budgetary reporting purposes, continuing appropriations are reported in the general fund with other financing sources and uses of funds for calculating budgetary surplus or deficit to help show compliance with authorized spending for the reporting period. However, for GAAP purposes, continuing appropriations are excluded from the general fund and are reported as reserves.
Adjust for any transfer of previous surplus and any fund re-classifications. Certain expenditures and revenues accrued under GAAP for the general fund are not accounted for in the same way on a budgetary basis. Namely, fixed assets are depreciated for GAAP purposes but are fully expensed in the period acquired for budgetary purposes. Thus, be sure and properly adjust for varying treatment, timing and recognition between the two accounting methods.