Government accounting uses funds to represent capital appropriated for specific uses. Accountants must appropriate funds according to predetermined budgets, and appropriations must be used for their specific purpose. A lien allows the agency or municipality to pay for assets using an accounts receivable system.
Budget accounting is one of the most widely used accounting by local, state and federal municipalities. Businesses in the private sector use budgets to help guide their spending, but it is not the same as budget accounting. Government accounting uses a series of funds that represent capital appropriated for certain uses. Other entries posted on the funds are appropriations and encumbrances, which detail how the state or federal agency will spend the appropriate money in each fund. A fund is generally marked as general to represent non-appropriate capital.
Government accounting is often a difficult process for most accountants to understand and maintain. This is due to the budgeting process associated with the few sources of revenue earned by the government agency, such as sales, property, or income tax. With each income received by the municipality from the government, the accountants must appropriate the funds according to the predetermined budget. Most agencies or municipalities have a budget council that determines how they spend tax revenue. The budget process is often a detailed process that is not necessarily governed by accountants, but rather by elected officials of the agency or municipality.
In some forms of budget accounting, each allocation made by a governing body may represent a fund. For example, allowances may be made for payroll, maintenance, police and fire, infrastructure improvements, new roads, or other major projects. Appropriate accounts and funds will represent a specific purpose for the money allocated to the account. For most government agencies or municipalities, spending funds earmarked for one use on another project is illegal. For example, funds earmarked for street cleaning cannot go toward repairing police cars. Appropriation funds can be unlimited in the way a municipality spends capital.
Appropriations are the specific amounts of money that a government agency or municipality will place in each fund in the budget accounting system. Allocations generally occur when the municipality receives money from tax revenue. Accountants must divide each portion of money and record it in the specific fund. This is a common process for collecting sales tax. Many municipalities use sales tax revenue to pay for a variety of different purposes. Accountants must create allocations to account for earned capital in each fund.
A lien is a particular use of tax revenue that may or may not be paid when the municipality makes the lien. Most governments only receive tax revenue at specific times during the year. A lien allows the agency or municipality to pay for assets using an accounts receivable system, that is, credit payment. Accountants will record the entry in the budget accounting system using a lien. Once tax revenue comes in, accountants will pay the lien and remove it from the ledger.
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