The budget for the City of Goodville for the year ending December 31 was adopted and recorded on January 2 of the same year

The budget for the City of Goodville for the year ending December 31 was adopted and recorded on January 2 of the same year. After recording the budget, the accounting records showed a debit balance of $50,000 in the budgetary fund balance account. What does this indicate? Select one: a. Appropriations are $50,000 greater than estimated revenues. b. Estimated revenues are $50,000 greater than appropriations. c. Appropriations are $50,000 greater than revenues. d. Revenues are $50,000 greater than appropriations.

The correct answer and explanation is:

The correct answer is:

a. Appropriations are $50,000 greater than estimated revenues.

Explanation:

In governmental accounting, the budgetary fund balance is used to track the difference between estimated revenues and appropriations (the planned expenditures authorized by the budget).

When a budget is adopted and recorded, the accounting entry typically involves:

• Debiting Estimated Revenues (an estimated amount of incoming funds),
• Crediting Appropriations (an estimated amount of authorized spending),
• And adjusting the Budgetary Fund Balance to balance the entry.

The Budgetary Fund Balance acts as a plug figure to ensure the budget entry balances, reflecting whether appropriations exceed estimated revenues or vice versa.

• If appropriations exceed estimated revenues, the Budgetary Fund Balance will show a debit balance.
• If estimated revenues exceed appropriations, the Budgetary Fund Balance will show a credit balance.

In this case, the Budgetary Fund Balance has a debit balance of $50,000, indicating that appropriations are $50,000 greater than estimated revenues. This means the city planned to spend more than it expected to receive in revenue by $50,000.

Why is this important?

Governments are generally expected to balance their budgets. A debit balance in the Budgetary Fund Balance account suggests a potential budget deficit if actual revenues and appropriations remain consistent with estimates. It could require the city to find additional funding sources, cut expenditures, or use fund balances/reserves to cover the shortfall.

Summary of the logic:

Here, a debit balance of $50,000 means appropriations are $50,000 higher than estimated revenues.