Budgetary Accounting

By Benoît Chevauchez.

“Budgetary accounting” is a common form of public accounting and yet the Government Finance Statistics Manual, which accountants and statisticians regard as their “bible,” has nothing to say on the subject.

Unlike “government general accounting,” “budgetary accounting” does not play a central role in public financial management. Nor is it addressed in any of the – sometimes heated – debates on the comparative merits (and disadvantages) of cash accounting versus accrual accounting.

Thus “budgetary accounting” appears to be an oddity, vaguely related to Francophone systems and ultimately of only minor interest. It looks like one of those highly unusual forms of accounting in which laymen are inclined to detect mysteries, ambiguities, and misunderstandings.

For those who, nevertheless, would like to know more about it, the French Ministry of Finance has just published a “Budgetary Accounting Framework” (référentiel de comptabilité budgétaire) (http://www.-publique.gouv.fr/fileadmin/medias/documents/ressources/circulaires/recueil_comptabilite_budgetaire.pdf ), which outlines the whole set of rules and practices pursued in France in this area. It includes the major changes made in 2001 to the whole budgetary and accounting field.

“Budgetary accounting” has traditionally played a very important role in budgetary systems found in the Francophone world. One might even say that, before general accounting was truly introduced and before the advent of accrual accounting principles – which really only date back to the Law of 2001 which swung France toward performance budgeting, it was “budgetary accounting” that was regarded as the principal form of public accounting.

To grasp the issues at stake, it is necessary to clearly define the content and purpose of “budgetary accounting” and to distinguish it from government general accounting systems, whether cash- or accrual-based.

“Budgetary Accounting” tracks government budget expenditure and revenue operations in order to verify whether they are in line with parliamentary authorizations. In other words, it verifies proper execution of the Budget Law.

Thus the scope of “budgetary accounting” would appear to be much narrower than that of “government general accounting”: first, and above all, “budgetary accounting” only looks at expenditure and revenue; it does not concern itself with claims, debts, assets, or liabilities. Thus, it does not produce a balance sheet. An additional restriction, moreover, is that “budgetary accounting” is only concerned with expenditure and revenue that are strictly “budgetary,” that is to say formally authorized in the budget law. It ignores all cash-flow and financing operations, whether under resources or outlays. It is therefore a single entry accounting system, yielding summary financial statements on the extent to which appropriations are used and revenues collected; it is a flow-based accounting system, without any accounting of stocks.

Thus, the objective of “budgetary accounting” is to enable verification of the observance by Government of the budgetary authorizations granted by Parliament. That is an important, but technically restricted, objective. It conveys the impression that “budgetary accounting” has a legal and political purpose, whereas the purpose of government general accounting is economic and financial. The former throws no light on changes in Government net worth while, for its part, the latter affords no insight into the government’s observance of parliamentary authorizations.

Bearing in mind the purpose it serves, “budgetary accounting” should use the same language as the budget whose execution it seeks to monitor. In particular:

- “Budgetary accounting” nomenclature will reflect the nomenclature used in the budget: if the latter is economic, the nomenclature used in budgetary accounting will be economic; if the nomenclature used in the budget is functional, that used in budgetary accounting will be functional; if, as is the case with the French budget since 2001, the nomenclature is both functional and economic, the nomenclature used in budgetary accounting will naturally also combine the two approaches.

- Likewise, the triggering point for “budgetary accounting” depends on the scope of parliamentary authorization. Historically, when it voted in favor of an appropriation of 100 in a given year, the French Parliament of the 19th century authorized government authorities to pay 100 in that particular year. However, the need to get a better grip on expenditure upstream from actual payment induced the French system gradually to concern itself with commitment [1],  an approach which was universally adopted in 2001. Henceforth, for each type of expenditure, the French Parliament has voted for two categories of appropriation: one authorizing administrations to commit, the other to pay.  Consequently, since “budgetary accounting” seeks to ensure observance of parliamentary authorizations, it examines two successive triggering points for each expenditure, recording first its commitment and then its payment.

The French Finance Ministry’s new publication describes this budgetary accounting system in some depth, using straightforward diagrams and providing detailed technical indications as to how to combine the two accounting systems. In particular, it shows how to move from “budgetary” results to “accounting” results. It comes across more as a working paper to be further developed (a second volume has been announced) than as a compendium of official rules. It is a document that all professionals in this field might find it useful to consult.

Finally, on this somewhat technical and arid subject, a few simple conclusions may be reached:

- While it is true that “budgetary accounting” has taken root above all in Francophone countries, the fact of the matter is that all countries also, in one way or another, conduct some kind of budgetary accounting. Indeed, what country or parliament could fail to be interested in observance of the Budget Law?

- Unlike “government general accounting,” “budgetary accounting” does not lend itself to international standardization. Because “budgetary accounting” is a reflection of the budget, everything depends on specific national budgeting rules and practices, which cannot be – nor should be, one might be tempted to add – harmonized internationally. “Budgetary accounting” throws little if any light on the financial and economic aspects of expenditure. For that reason, it is totally incapable of addressing the sustainability and performance requirements of modern budgets, which only “government general accounting” can assess.

- How these two accounting systems – the budgetary and the general – can be interwoven and complement each other in all their technical facets (nomenclature, process and processing chain, managers, software packages, etc.) is something that needs to be researched. Such research will make it possible to ensure clarity and transparency in reporting and at the same time to increase the effectiveness and productivity of the accounting authorities. The “dualism” one finds in most states, which use one language (“cash basis”) for budgeting and another (“accrual basis”) for bookkeeping is an acceptable pragmatic compromise provided that all the complementarities are fully utilized.

On this, it could be said that the most modern and sophisticated way of reconciling budgeting and accounting is to be found in the transition to “accrual budgeting.” In the few countries that practice accrual budgeting, “budgetary accounting” and “government general accounting” can join together in a single accounting system.

Because of its theoretical purity, this unified approach is the most intellectually satisfying solution. However, its implementation entails such turmoil and poses so many difficulties (as the Public Financial Management Blog of February 11, 2009 recently showed) that one would be well advised not to portray it here as an ideal solution for all.

[1] “Commitment” here should not be confused with “service rendered” (delivery), which is the triggering point for government debt in general accounting.

Comments

[Andy Wynne]

Thanks Benoît for a very interesting and thought provoking blog!

I would say that budget accounting is the approach adopted by most governments in the world, certainly until the new public management reforms of UK, Australia etc kicked in from the 1980s. Given the turmoil that the associated neoliberal reforms have recently brought to the world then perhaps we will see a move away from new public management reforms (basically the idea that public sector institutions should behave like businesses including producing private sector style financial statements).

In English speaking countries, at least, in addition to a comparison between the budget and actual receipts and payments, governments also produce a ‘financial balance sheet’ which records the cash and bank balances as assets; and government debt of different types as liabilities. It seems to me that this combination of financial statements provides a full account of the way in which the government’s finances have been managed during the year and especially the extent to which this is in conformity with the budget. Thus these statements fulfil the stewardship function for the use of public money allocated by parliament.

So we should not be so apologetic about budget accounting. It is not an oddity, it is the way which governments (cabinets/ministers) and civil servants account to parliament and so on to the public for the manner in which they have collected and spent public money (and the extent to which this conformed with the budget agreed by parliament). Clearly this is different from private sector accounting and financial reporting, but then the aims are very different. Private sector financial statements aim to disclose the level of profit earned (or the change in the net work of the company) whilst, as Benoît says, “the objective of “budgetary accounting” is to enable verification of the observance by Government of the budgetary authorizations granted by Parliament”.

Given the problems which the private sector have recently had and the sudden reversal of the fortunes of companies with apparently strong balance sheets, then now is perhaps not the time for more governments to adopt private sector accounting practice. Given also the minimal level of benefits which have actually been achieved by the few governments which have actually adopted accrual accounting (see http://tinyurl.com/ceuj72 for a summary) then we should be advocating cash rather than accrual accounting for governments.

Almost all governments essentially report on a cash basis to the IMF. So the two systems of GFS reporting and budget accounting can easily be reconciled on the cash basis.

Of course, no systems or financial statements are perfect, but we should be asking what particular additional financial information is actually required from our governments to make them fully accountable for the way they use public money, rather than suggesting that the whole basis of public sector financial reporting should be changed.

[accountant in Bromsgrove]

Budgetary accounting is a management tool to assist in controlling expenditures. Budgetary accounting is an important control tool for General Funds, Cash Funds, Construction Funds, Federal Funds and Revolving Funds (budgeted fund types) since the annual budget is a legal compliance standard against which the operations of such funds are evaluated.