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32 38 • STATE AND LOCAL GOVERNMENT ACCOUNTING from the difficulty of developing operationally useful program budgets that meet the governmental notion of accountability, that is, control of the number of employees and other expense items, rather than achievement of results in applying such resources. The operational usefulness of program budgeting has also been questioned as a result of the complexity of the program structure, the vagueness of goals and objectives, the lack of organizational or individual responsibility for program funds that span several departments or agencies, and the inadequacy of accounting support to record direct and indirect program costs. Nevertheless, program budgeting can be an extremely effective approach for a government willing to devote the effort. The steps that departments should take to implement the system are: • • • • • Identify programs and the reasons for their existence Define the goals of programs Define kinds and levels of services to be provided in light of budgetary guidelines (council- or CEO-furnished guidelines, e.g., budget priorities, budget assumptions, and budget constraints) Develop budget requests in terms of resources needed, based on the programs’ purposes, the budgetary guidelines, the projected levels of services, and the previous years’ expenditure levels for the programs Submit budget requests for compilation, review, and approval Performance Budgeting. Formulating expenditure requests based on the work to be performed is the primary function of performance budgeting. It emphasizes the work or service performed, described in quantitative terms, by an organizational unit performing a given activity; for example, number of tons of waste collected by the Sanitation Department and case workload in the Department of Welfare. These performance data are used in the preparation of the annual budget as the basis for increasing or decreasing the number of personnel and the related operating expenses of the individual departments. The development of a full-scale performance budget requires a strong budget staff, constructive participation at all levels, special accounting and reporting methods, and a substantial volume of processed statistical data. Primarily for these reasons, performance budgeting has been less widely used than line item budgeting. The approach to developing a performance budgeting system is as follows: • • • • • • • Decide on the extent to which functions and activities will be segmented into work units and services for formulation and execution of the budget Define the functions in services performed by the government, and assemble them into a structure Identify and assemble or develop workload and efficiency measures that relate to service categories Estimate the total costs of the functions and services Analyze resource needs for each service in terms of personnel, equipment, and so on Formulate the first-year performance budget (For the first year, set the budget appropriations and controls at a higher level than the data indicate.) Perform cost accounting for the functional budget category; initiate statistical reporting of the workload measures; match resources utilized to actual results Zero-Base Budgeting. In the preparation of a budget, zero-base budgeting projects funding for services at several alternative levels, both lower and higher than the present level, and allocates funds to services based on rankings of these alternatives. It is an appropriate budgeting system for jurisdictions whose revenues are not sufficient for citizen demands and inflation-driven expenditure increases, where considerable doubt exists as to the necessity and effectiveness of existing programs 32.4 GOVERNMENTAL ACCOUNTING PRINCIPLES AND PRACTICES 32 39 • and services, and where incremental budgeting processes have resulted in existing programs and their funding being taken as a given, with attention devoted to requests for new programs. Zero-base budgeting can be used with any existing budgeting system, including line item, program, or performance budgeting. The budget format can remain unchanged. The steps to implement zero-base budgeting are as follows: • • • • Define decision units, that is, activities that can be logically grouped for planning and providing each service Analyze decision units to determine alternative service levels, determine the resources required to operate at alternative levels, and present this information in decision packages Rank the decision packages in a priority order that reflects the perceived importance of a particular package to the community in relation to other packages Present the budget to the governing body for a review of the ranking of the decision packages (ii) Budget Preparation. The specific procedures involved in the preparation of a budget for a governmental unit are usually prescribed by state statute, local charter, or ordinance. There are, however, certain basic steps: • • • • • • • • • • Preparation of the budget calendar Development of preliminary forecasts of available revenues, recurring expenditures, and new programs Formulation and promulgation of a statement of executive budget policy to the operating departments Preparation and distribution of budget instructions, budget forms, and related information Review of departmental budget requests and supporting work sheets Interview with department heads for the purpose of adjusting or approving their requests in a tentative budget Final assembly of the tentative budget, including fixing of revenue estimates and the required tax levy Presentation of the tentative budget to the legislative body and the public Conduction of a public hearing, with advance legal notice Adoption of final budget by the legislative body Revenue and Expenditure Estimates. The property tax has been the traditional basic source of revenue for local government. The amount to be budgeted and raised is determined by subtracting the estimated nonproperty taxes and other revenues, plus the reappropriated fund balance, from budgeted expenditures. This amount, divided by the assessed valuation of taxable property within the boundaries of the governmental unit, produces the required tax rate. Many jurisdictions have legal ceilings on the property tax rates available for general operating purposes. Additionally, taxpayer initiatives have forced governments to seek new revenue sources. Accordingly, governmental units have turned increasingly to other types of revenue, such as sales taxes, business and nonbusiness license fees, charges for services, state-collected, locally shared taxes, and grants-in-aid from the federal and state governments. Department heads, however, ordinarily have little knowledge of revenue figures. As a result, the primary responsibility for estimating these revenues usually lies with the budget officer and the chief finance officer. Most governmental units, as a safeguard against excessive accumulation of resources, require that any unappropriated fund balance in the general fund be included as a source of financing in the budget of that fund for the succeeding fiscal year. Most controlling laws or ordinances provide for inclusion of the estimated surplus (fund balance) at the end of the current year, although many require that the includable surplus be the balance at the close of the last completed fiscal year. 32 40 • STATE AND LOCAL GOVERNMENT ACCOUNTING Departmental estimates of expenditures and supporting work programs or performance data generally are prepared by the individual departments, using forms provided by the central budget agency. Expenditures are customarily classified to conform to the standard account classification of the governmental unit and thus permit comparison with actual performance in the current and prior periods. Personal Services. Generally, personal services are supported by detailed schedules of proposed salaries for individual full-time employees. Nonsalaried and temporary employees are usually paid on an hourly basis, and the budget requests are normally based on the estimated number of hours of work. Estimates of materials and supplies and other services, ordinarily quite repetitive in nature, are most often based on current experience, plus an allowance, if justified, for rising costs. Capital outlay requests are based on demonstrated need for specific items of furniture or equipment by individual departments. In recent years, governmental units, particularly at the county, state, and federal levels, have disbursed substantial sums annually that are unlike the usual current operating expenditures. These sums include welfare or public assistance payments, contributions to other governmental units, benefit payments, and special grants. They are properly classified as “other charges.” Estimates of these charges are generally based on unit costs for assistance, legislative allotments, requests from outside agencies or governmental units, and specified calculations. In addition to departmental expenditures, the budget officer must estimate certain nondepartmental or general governmental costs not allocated to any department or organizational unit. Examples include pension costs and retirement contributions, which are not normally allocated, election costs, insurance and surety bonds, and interest on tax notes. Although most governments still operate under laws that require the budget to be balanced precisely, an increasing number permit a surplus or contingency provision in the expenditure section of the budget. This is usually included to provide a reserve to cover unforeseen expenditures during the budget year. The expenditure budget may be approved by a board, a commission, or other governing body before presentation to the central budget-making authority. Presentation of the Budget. To present a comprehensive picture of the proposed fund operations for a budget year, a budget document is prepared that is likely to include a budget message, summary schedules and comparative statements, detailed revenue estimates, detailed expenditure estimates, and drafts of ordinances to be enacted by the legislative body. The contents of a budget message should set forth concisely the salient features of the proposed budget of each fund and will generally include the following: (1) a total amount showing amounts of overall increase and decrease, (2) detailed amounts and explanations of the increases and decreases, and (3) a detailed statement of the current financial status of each fund for which a budget is submitted, together with recommendations for raising the funds needed to balance the budget of each fund. It should identify the relationship of the operating budget to the capital program and capital budget, which are submitted separately. Adoption of the Budget. Most states adopt the budget by the enactment of one or more statutes. Many cities require the formality of an ordinance for the adoption of the budget. In other cases, the budget is adopted by resolution of the governing body. Appropriations. Because appropriations constitute maximum expenditure authorizations during the fiscal year, they cannot be exceeded legally unless subsequently amended by the legislative body (although some governments permit modifications up to a prescribed limit to be made by the executive branch). Unexpended or unencumbered appropriations may lapse at the end of a fiscal year or may continue as authority for subsequent period expenditures, depending on the applicable legal provisions. 32.4 GOVERNMENTAL ACCOUNTING PRINCIPLES AND PRACTICES 32 41 • It may be necessary for the legislative agency to adopt a separate appropriation resolution or ordinance, or the adoption of the budget may include the making of appropriations for the items of expenditure included therein. Provision for the required general property tax levy is usually made at this time, either by certifying the required tax rates to the governmental unit that will bill and collect the general property tax or by enacting a tax levy ordinance or resolution. (iii) Budget Execution. The budget execution phase entails obtaining the revenues, operating the program, and expending the money as authorized. The accounts are usually structured on the same basis on which the budget was prepared. Many governments maintain budgetary control by integration of the budgetary accounts into the general and subsidiary ledger. The entry is as follows: Estimated revenues Appropriations $XXX $XXX If estimated revenues exceed appropriations, a credit for the excess is made to “budgetary fund balance”; if they are less the appropriations, the difference is debited to “budgetary fund balance.” Individual sources of revenues are recognized in subsidiary revenue accounts. A typical revenue ledger report is illustrated in Exhibit 32.1. This format provides for the comparison, at any date, of actual and estimated revenues from each source. To control expenditures effectively, the individual amounts making up the total appropriations are recorded in subsidiary expenditures accounts, generally called “appropriation ledgers.” Exhibit 32.2 presents an example of an appropriation ledger. It should be noted that this format provides for recording the budget appropriation and for applying expenditures and encumbrances (see below) relating to the particular classification against the amount appropriated at any date. When the managerial control purposes of integrating the budgetary accounts into the general ledger have been served, the budgetary account balances are reversed in the process of closing the books at year end. Budgetary accounting procedures thus have no effect on the financial position or results of operations of a governmental entity. Encumbrances. An encumbrance, which is unique to governmental accounting, is the reservation of a portion of an applicable appropriation that is made because a contract has been signed or a purchase order issued. The encumbrance is usually recorded in the accounting system to prevent overspending the appropriation. When the goods or services are received, the expenditure is recorded and the encumbrance is reversed. The entry to record an encumbrance is as follows: Encumbrances Reserve for encumbrances $XXX $XXX The entries that are made when the goods or services are received are: Reserve for encumbrances Encumbrances Expenditures Vouchers payable $XXX $XXX $XXX $XXX Many governments report encumbrances that are not liquidated at year end in the same way as expenditures because the encumbrances are another use of budgetary appropriations. The total amount of encumbrances not liquidated by year end may be considered as a reservation of the fund balance for the subsequent year’s expenditures, based on the encumbered appropriation authority carried over. 32 42 • STATE AND LOCAL GOVERNMENT ACCOUNTING NAME OF GOVERNMENTAL UNIT Budget versus Actual Revenue by Revenue Source for Accounting Period June 30, 20XX Fund Type: The General Fund Revenues Budgeted Actual 015 Real & per. revenue recognized 0110 Real & p. prop rev. recognized Revenue class total $459,449,213 459,449,213 $460,004,317 460,004,317 $0((555,104) (555,104) 16,000,000 0 0 0 0 0 15,000 0 200 22,727,905 2,886,605 32,051 45,378 85,393 2 40,414 155 60 (6,727,905) (2,886,605) (32,051) (45,378) (85,393) (2) (25,414) (155) 139) 16,015,200 25,817,963 (9,802,764) 13,500,000 12,400,000 13,580,142 12,960,966 (80,142) (560,966) 25,900,000 26,541,108 (641,108) 1,000,000 525,000 0 5,000,000 0 100 50,000 150 750,000 10,000 1,600 400,000 250,000 12,000 200 35,000 350,000 1,150,000 40,000 3,350,000 1,746,007 620,124 115 3,835,517 3 6,849 69,038 291 761,238 25,353 914 373,410 231,970 10,633 310 18,691 365,102 1,582,355 161,835 3,775,810 (746,007) (95,124) (115) 1,164,483) (3) (6,749) (19,038) (141) (11,238) (15,353) 686) 26,590) 18,030) 1,367) (110) 16,309) (15,102) (432,355) (121,835) (425,810) $012,924,050 $013,585,565 $0,(661,515) 020 0121 0122 0123 0124 0125 0126 0127 0128 0131 Motor vehicle & other excise M/V taxes—current year M/V taxes—prior 1997 M/V taxes—1996 M/V taxes—1995 M/V taxes—1994 M/V taxes—1993 and prior Boat excise—cur yr 1998 Boat excise—1997 M.V. lessor surcharge Revenue class total 025 0129 0130 Local excise taxes Hotel/motel room excise Aircraft fuel excise Revenue class total 030 0133 0134 0135 0136 0138 3101 3103 3104 3105 3107 3108 3109 3120 3130 3140 3199 3202 3211 3221 3301 Departmental & other revenue Penalties & int-prop. taxes Penalties & int.-M/V taxes Penalties & int.-sidewalk Penalties & interest/tax title Penalties & int./boat excise Data processing services Purchasing services Recording of legal instruments Registry division—fees City record/sale of publication Assessing fees Liens City clerk—fees Election—fees City council/sale of publication Other general services Police services Fire services Civil defense Parking facilities Revenue class total Exhibit 32.1 A typical revenue ledger report. Variance 32.4 GOVERNMENTAL ACCOUNTING PRINCIPLES AND PRACTICES 32 43 • NAME OF GOVERNMENTAL UNIT Budget Versus Actual Expenditures and Encumbrances by Activity for Accounting Period June 30, 20XX Fund Type: The General Fund Expenditures 1100 Rent equity board Elderly commission Physically handicapped comm Arts & humanities office Vet serv-veterans serv div Vet serv-veterans graves reg Jobs & community services Activity total Police department Fire department Arson commission Transportation-traffic div Licensing board Transportation-parking clerk Inspectional services dept Activity total $001,330,977 2,534,005 180,283 211,916 2,871,616 158,270 370,053 $001,274,531 2,289,549 159,768 207,219 2,506,363 146,392 369,208 $0,056,446) 244,456) 20,515) 4,697) 365,253) 11,878) 845) 7,657,120 6,953,030 704,090) 116,850,000 80,594,068 189,244 13,755,915 542,007 7,520,539 10,004,470 117,145,704 79,587,423 175,670 13,707,890 449,825 7,474,462 10,003,569 (295,704) 1,006,645) 13,574) 48,025) 92,182) 46,077) 901) 229,456,243 228,544,543 911,700) 64,900,000 2,250,000 60,281,837 2,360,326 4,618,163) (110,326) 67,150,000 62,642,163 4,507,837) 432,740 1,027,660 6,010,155 1,847,650 504,013 4,677,365 3,063,637 416,569 354,328 6,038,464 1,806,427 458,984 4,697,167 2,808,266 16,171) 673,332) (28,309) 41,223) 45,029) (19,802) 255,371) $017,563,220 $016,580,205 $0,983,015) Public works 011-311-0311 011-331-0331 Public works department Snow removal Activity total 1400 Variance Public safety 011-211-0211 011-221-0221 011-222-0222 011-251-0251 011-252-0252 011-251-0253 011-261-0260 1300 Actual Human services 011-384-0384 011-387-0387 011-398-0398 011-503-0503 011-740-0741 011-740-0742 011-150-1505 1200 Budgeted Property & development 011-180-0180 014-180-0183 011-180-0184 011-180-0185 011-188-0186 011-188-0187 011-188-0188 RPD-general administration div Real property dept county RPD-buildings division RPD-property division PFD-code enforcement division PFD-administration division PFD-construction & repair div Activity total Exhibit 32.2 A typical appropriation ledger report. Allotments. Another way to maintain budgetary control is to use an allotment system. With an allotment system, the annual budget appropriation is divided and allotted among the months or quarters in the fiscal year. A department is not permitted to spend more than its allotment during the period. The International City Managers’ Association lists the following four purposes of an allotment system: 32 44 • STATE AND LOCAL GOVERNMENT ACCOUNTING 1. To make sure that departments plan their spending so as to have sufficient funds to carry on their programs throughout the year, avoiding year-end deficiencies and special appropriations 2. To eliminate or reduce short-term tax anticipation borrowing by making possible more accurate forecast control of cash position throughout the fiscal year 3. To keep expenditures within the limits of revenues that are actually realized, avoiding an unbalanced budget in the operation of any fund as a whole 4. To give the chief administrator control over departmental expenditures commensurate with the administrative responsibility, allowing the administrator to effect economies in particular activities as changes in workload and improvements in methods occur Interim Reports. The last element in the budget execution process is interim financial reports. These are prepared to provide department heads, senior management, and the governing body with the information needed to monitor and control operations, demonstrate compliance with legal and budgetary limitations, anticipate changes in financial resources and requirements due to events or developments that are unknown or could not be foreseen at the time the budget was initially developed, or take appropriate corrective action. Interim reports should be prepared frequently enough to permit early detection of variances between actual and planned operations, but not so frequently as to adversely affect practicality and economy. For most governmental units, interim reports on a monthly basis are necessary for optimum results. With smaller units, a bimonthly or quarterly basis may be sufficient. With sophisticated dataprocessing equipment, it may be possible to automatically generate the appropriate information daily. Governmental units should prepare interim financial reports covering the following: • • • • • • Revenues Expenditures Cash projections Proprietary funds Capital projects Grant programs The form and content of these reports should reflect the government’s particular circumstances and conditions. (iv) Proprietary Fund Budgeting. The nature of most operations financed and accounted for through proprietary funds is such that the demand for the goods or services largely determines the appropriate level of revenues and expenses. Increased demand causes a higher level of expenses to be incurred but also results in a higher level of revenues. Thus, as in commercial accounting, flexible budgets prepared for several levels of possible activity typically are better for planning, control, and evaluation purposes than are fixed budgets. Accordingly, budgets are not typically adopted for proprietary funds. Furthermore, even when flexible budgets are adopted, they are viewed not as appropriations but as approved plans. The budgetary accounts are generally not integrated into the ledger accounts because it is considered unnecessary. Budgetary control and evaluation are achieved by comparing interim actual revenues and expenses with planned revenues and expenses at the actual level of activity for the period. In some instances, fixed dollar budgets are adopted for proprietary funds either to meet local legal requirements or to control certain expenditures (e.g., capital outlay). In such cases, it may be appropriate to integrate budgetary accounts into the proprietary fund accounting system in a manner similar to that discussed for governmental funds. 32.4 GOVERNMENTAL ACCOUNTING PRINCIPLES AND PRACTICES 32 45 • (v) Capital Budget. Many governments also prepare a capital budget. A capital budget is a plan for capital expenditures to be incurred during a single budget year from funds subject to appropriation for projects scheduled under the capital program. The annual capital budget is adopted concurrently with the operating budgets of the governmental unit, being subject to a public hearing and the other usual legal procedures. The capital budget should not be confused with a capital program or capital project budget. A capital program is a plan for capital expenditures to be incurred over a period of years, usually five or six years. The capital project budget represents the estimated amount to be expended on a specific project over the entire period of its construction. The capital budget authorizes the amounts to be expended on all projects during a single year. Controlling this amount is important for the proper use of available funds. (vi) New Budgetary Reporting Requirements. GASB Statement No. 34 provides new reporting requirements for comparing budgetary and actual information, which will come into effect when Statement No. 34 becomes effective. (l) CLASSIFICATION AND TERMINOLOGY. Principles 10 and 11 establish the requirements surrounding classification and terminology. Governmental fund revenues should be classified by fund and source. The major revenue source classifications are taxes, licenses and permits, intergovernmental revenues, charges for services, fines and forfeits, and miscellaneous. Governmental units often classify revenues by organizational units. This classification may be desirable for purposes of management control and accountability, as well as for auditing purposes, but it should supplement rather than supplant the classifications by fund and source. (i) Classification of Expenditures. There are many ways to classify governmental fund expenditures in addition to the basic fund classification. Function, program, organizational unit, activity, character, and principal class of object are examples. Typically, expenditures are classified by character (current, intergovernmental, capital outlay, and/or debt service). Current expenditures are further classified by function and/or program. • • • Character classification. Reporting expenditures according to the physical period they are presumed to benefit. The major character classifications are: (1) current expenditures, which benefit the current fiscal period; (2) capital outlays, which are presumed to benefit both the present and future fiscal periods; and (3) debt service, which benefits prior fiscal periods as well as current and future periods. Intergovernmental expenditures is a fourth character classification that is used when one governmental unit makes expenditures to another governmental unit. Function classification. Establishing groups of related activities that are aimed at accomplishing a major service or regulatory responsibility. Standard function classifications are as follows: General government Public safety Health and welfare Culture and recreation Conservation of natural resources Urban redevelopment and housing Economic development and assistance Education Debt service Miscellaneous Program classification. Establishing groups of activities, operations, or organizational units that are directed at the attainment of specific purposes or objectives, for example, protection of 32 46 • • • • STATE AND LOCAL GOVERNMENT ACCOUNTING property or improvement of transportation. Program classification is used by governmental units employing program budgeting. Organizational unit classification. Grouping expenditures according to the governmental unit’s organization structure. Organizational unit classification is essential to responsibility reporting. Activity classification. Grouping expenditures according to the performance of specific activities. Activity classification is necessary for the determination of cost per unit of activity, which in turn is necessary for evaluation of economy and efficiency. Object classification. Grouping expenditures according to the types of items purchased or services obtained, for example, personal services, supplies, other services and charges. Object classifications are subdivisions of the character classification. Excessively detailed object classifications should be avoided since they complicate the accounting procedure and are of limited use in financial management. The use of a few object classifications is sufficient in budget preparation; control emphasis should be on organization units, functions, programs, and activities rather than on the object of expenditures. (ii) Classifications of Other Transactions. Certain transactions, although not revenues or expenditures of an individual fund or the governmental entity as a whole, are increases or decreases in the equity of an individual fund. These transactions are classified as other financing sources and uses and are reported in the operating statement separately from fund revenues and expenditures. The most common other financing sources and uses are: • • Proceeds of long-term debt issues. Such proceeds (including leases) are not recorded as fund liabilities; for example, proceeds of bonds and notes expended through the capital project or debt service funds. Operating transfers. These include legally authorized transfers from a fund receiving revenues to the fund through which the resources are to be expended; examples are transfers of tax revenues from a special revenue fund to a debt service fund and transfers from an enterprise fund other than payments in lieu of taxes to finance general fund expenditures. Other interfund transactions are: • • Interfund loans and advances. These funds are disbursed by one fund for the benefit of another. If the funds will be repaid shortly, the amount should be reclassified as due from other funds by the lending fund and due to other funds by the receiving fund. When two funds owe each other, the amounts receivable and payable should not be offset in the accounts. However, for purposes of reporting, current amounts due from and due to the same funds may be offset and the net amounts shown in the respective fund balance sheets. If the advance is long term in nature and the asset will not be available to finance current operations, a fund balance reserve equal to the amount of the advance should be established. Quasi-external transactions. These transactions would be treated as revenues, expenditures, or expenses if they involved organizations external to the governmental unit. Examples are payments in lieu of taxes from an enterprise fund to the general fund; internal service fund billings to departments; routine employer contributions from the general fund to a pension trust fund; and a routine service charge for inspection, engineering, utilities, or similar services provided by a department financed from one fund to a department financed from another fund. Amounts should be accounted for as revenues in the recipient fund and as expenditures in the disbursing fund. 32.4 GOVERNMENTAL ACCOUNTING PRINCIPLES AND PRACTICES • 32 47 • Reimbursements. These transactions constitute reimbursements of a fund for expenditures or expenses initially made from it that are properly applicable to another fund. An example is an expenditure properly chargeable to a special revenue fund but initially made from the general fund, which is subsequently reimbursed. The transaction should be recorded as an expenditure or expense in the reimbursing fund and as a reduction of an expenditure or expense in the reimbursed fund. (iii) Residual Equity Transfers. Another type of interfund transaction, residual equity transfers, is not classified as another financing source or use because it is a change in fund balance that is not considered in the determination of the results of operations. A residual equity transfer is a nonrecurring or nonroutine transfer of equity between funds. Examples are a general fund’s contribution of capital to an enterprise fund or an internal service fund; the subsequent return of all or part of such contribution to the general fund; and transfers of residual balances of discontinued funds to the general fund or a debt service fund. (iv) Classification of Fund Equity. Fund equity is the difference between a fund’s assets and its liabilities. In the governmental funds, it is called the “fund balance”; in the proprietary funds, it consists of retained earnings and contributed capital. The important amount in the fund equity account for governmental funds is the amount available for future appropriation and expenditure (i.e., unreserved and undesignated fund balance); therefore, governments should clearly delineate amounts that are not available for such purposes. Fund balance can be segregated into reserved and unreserved amounts. Unreserved fund balance can be segregated further into designated and undesignated amounts. Reservations of fund balance identify: (1) third-party claims against resources of the entity that have not materialized as liabilities at the balance sheet date, or (2) the existence of assets that, because of their nonmonetary nature or lack of liquidity, represent financial resources not available for current appropriation or expenditure; for example, inventories, prepaid expenses, and noncurrent assets (usually receivables). Such reserves are not intended as valuation allowances, but merely demonstrate the current unavailability of the subject assets to pay current expenditures. Designations of fund balance identify tentative plans for or restrictions on the future use of financial resources. Such designations should be supported by definitive plans and approved by either the government’s CEO or the legislature. Examples of such designations include the earmarking of financial resources for capital projects and contingent liabilities. Reserves and designations are established by debiting unreserved, undesignated fund balance and crediting the reserve or designation. The reserve is not established by a charge to operations. Since reserves relate to certain assets not being available for future appropriation, establishing a reserve may create or increase a negative unreserved fund balance. Designations, on the other hand, may not create or increase a negative unreserved fund balance because the designation represents an internal plan. Another type of fund equity, existing only in the proprietary funds, is contributed capital. It represents the amount of fund equity or permanent capital contributed to a proprietary fund by another fund or by customers, developers, other members of the general public, or other government bodies toward the cost of capital facilities. (v) Investment in General Fixed Assets. Although presented in the fund equity section of a governmental unit’s balance sheet, investment in general fixed assets is not considered fund equity. (vi) Accounting Coding. Charts of accounts in governments range from simple three-digit codes designed for manual accounting systems to multidigit codes that use the logical arrangement of numbers within the codes to signify such things as fund, organizational unit, program, fiscal year, activity, and source of revenue.