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A major element of financial data activity rests in the act of budgeting. Budgeting is the process of allocating finite resources to the prioritized needs of an organization. In mostcases, for a governmental entity, the budget represents the legal authority to spend money.

Adoption of a budget in the public sector implies that a set of decisions has been made by thegoverning board and administrators that culminates in matching a government's resourceswith the entity's needs. As such, the budget is a product of the planning process.

The budget also provides an important tool for the control and evaluation of sources and theuses of resources. Using the accounting system to enact the will of the governing body,administrators are able to execute and control activities that have been authorized by the

budget and to evaluate financial performance on the basis of comparisons between budgetedand actual operations. Thus, the budget is implicitly linked to financial accountability andrelates directly to the financial reporting objectives established by the GASB.

The planning and control functions inherent to any organization, including schools,

underscore the importance of sound budgeting practices for the following reasons:

y The type, quantity, and quality of goods and services provided by governments oftenare not subject to the market forces of supply and demand. Thus, enacting andadhering to the budget establishes restrictions in the absence of a competitive market.

y These goods and services provided by governments are generally considered criticalto the public interest and welfare.

y The scope and diversity of operations in an organization make comprehensivefinancial planning essential for good decisionmaking.

y The financial planning process is critical to the expression of citizen preferences andis the avenue for reaching consensus among citizens, members of the governing

board, and staff on the future direction of the governmental unit's operations.

The link between financial planning and budget preparation gives the budget document aunique role in governmental organizations. Budgets in the public arena are often consideredthe definitive policy document because an adopted budget represents the financial plan used

by a government to achieve its goals and objectives. When a unit of government legallyadopts a financial plan, the budget has secured the approval of the majority of the governing

board and reflects

y public choices about which goods and services the unit of government will or will not provide,

y the prioritization of activities in which the unit of government will be involved,y the relative influence of various participants and interest groups in the budget

development process, andy the governmental unit's plan for acquiring and using its resources.

In an educational environment, budgeting is an invaluable tool for both planning andevaluation. Budgeting provides a vehicle for translating educational goals and programs intofinancial resource plans-that is, developing an instructional plan to meet student performance

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goals should be directly linked to determining budgetary allocations. The link betweeninstructional goals and financial planning is critical to effective budgeting and enhances theevaluation of budgetary and educational accountability.

Objectives of Budgeting

Performance evaluation allows citizens and taxpayers to hold policymakers andadministrators in governmental organizations accountable for their actions. Becauseaccountability to citizens often is stated explicitly in state laws and state constitutions, it is acornerstone of budgeting and financial reporting. GASB recognizes the importance of accountability with the following objectives in GASB Concepts Statement 1, Objectives of

Financial Reporting, paragraph 77.

y F inancial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services.

y F inancial reporting should demonstrate whether resources were obtained and used inaccordance with the entity's legally adopted budget. It should also demonstratecompliance with other finance-related legal or contractual requirements.

y F inancial reporting should provide information to assist users in assessing the serviceefforts, costs, and accomplishments of the governmental entity.

Meeting these objectives requires budget preparation that is based on several conceptsrecognizing accountability. Accountability is often established by incorporating theseobjectives into legal mandates that require state and local public sector budgets to

y be balanced so that current revenues are sufficient to pay for current services;y be prepared in accordance with all applicable federal, state, and local laws; andy provide a basis for the evaluation of a government's service efforts, costs, and

accomplishments.

Although some form of a balanced budget requirement is generally necessary to ensure long-term fiscal health in any organization, variations such as the use of fund balance reserves to

pay for current services may be appropriate over a short period. Generally, however, alldepartures from this fundamental objective must be in accordance with applicable state andlocal laws and policies.

Given the importance of demonstrating compliance with the approved budget, the financialreporting system must control the use of financial resources and ensure that budgetary

appropriations and allocations are not exceeded. To demonstrate compliance, accountingsystems are usually operated on the same basis of accounting used to prepare the approved budget. Thus, the actual financial information captured by the accounting system is in a formcomparable to the approved budget. Through budgetary integration, the financial accountingsystem becomes the primary tool to prove financial accountability.

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F inally, the budget is evaluated for its effectiveness in attaining the organization's stated goalsand objectives. Evaluation typically involves an examination of how funds were expended,the outcomes that resulted from the expenditure of funds, and the degree to which these

outcomes achieved the stated objectives. This phase is fundamental in developing thesubsequent year's budgetary allocations. In effect, budget preparation not only is an annualexercise to determine the allocation of funds, but also is part of a continuous cycle of

planning and evaluation to achieve the stated goals and objectives of the organization.