A government’s current or operating budget covers its general fund. The operating budget is almost always an appropriation budget—one incorporating the legislatively granted expenditure authority, along with the related estimates of revenue. In most state and local jurisdictions, the operating budget must, by law, be balanced. Public attention focuses on the appropriation budget because it determines the amount of taxes, other revenues that must be generated to cover expenditures. Owing to the importance of appropriation budgets and the influence, they have had upon the establishment of accounting principles and practices, this chapter directs attention mainly to this type of budget.

Governments may require that appropriation budgets also be developed and approved for special revenue, debt service, or capital project funds, in addition to the general fund. However, such budgets may be unnecessary if a government has established adequate controls over spending by other means. For example, by accepting a federal grant and creating a special revenue fund to account for it, the government may implicitly approve expenditure of the grant resources. Similarly, by issuing bonds, it may authorize spending for specified capital projects. Still, principles of sound management dictate that a non-appropriation budget—a financial plan not subject to appropriation—be prepared each year for such funds and organizational units. Budgets of some type are almost always necessary if activities are to be effectively planned, controlled, and evaluated.


Although the accounting cycle is traditionally one year, the budgeting process commonly extends for a considerably longer period. The needs of an organization’s constituents must be forecast and planned for years in advance.

A capital budget, in contrast to an appropriation budget, typically covers multiple years, often as many as five. It concentrates on the construction and acquisition of long-lived assets such as land, buildings, roads, bridges, and major items of equipment. These assets can be expected to last for many years. Therefore, in the interest of interperiod equity, they generally are financed with long-term debt rather than taxes of a single year. The capital budget is, in essence, a plan setting forth when specific capital assets will be acquired and how they will be financed.

Capital budgets are closely tied to operating budgets. Each year a government must include current-year capital spending in its operating budget. If the capital projects are financed with debt, however, the capital expenditures will be offset with bond proceeds and will not affect the operating budget’s surplus or deficit. Legislators often spend more extravagantly on capital assets than on operating resources.

Capital projects, they reason, can be financed with debt rather than taxes and thus will not affect the surplus or deficit of the general fund, the budget of which must be balanced. Their error is in failing to take into account the additional operating costs associated with new long-term assets. Roads must be repaired, buildings maintained, and equipment tuned up. Further, in future years the debt must be serviced with interest and principal payments made from operating resources.


These are budgets that focus on expected revenues, expenses, and net income under different assumptions of volume. Governments use flexible budgets for enterprise funds, which account for business-type activities, even though enterprise funds are generally not subject to the same statutory budget requirements as governmental funds. Nevertheless, budgets are as important to enterprise funds as they are to businesses and governmental funds. As a rule, governments should prepare the same types of budgets for enterprise funds as would a private enterprise carrying out similar activities. For certain, they should prepare a series of flexible budgets, each of which contains alternative budget estimates based on varying levels of output. Unlike fixed budgets, flexible budgets capture the behavior of costs, distinguishing fixed and variable amounts. A flexible budget is a form of “what-if?” analysis. Fixed budgets may be appropriate for governmental funds in which the expenditures and level of activity are preestablished by legislative authorization. Flexible budgets are especially suited to enterprise funds in which the level of activity depends on customer demand.


  • Granof, Michael H., Saleha B. Khumawala, Thad D. Calabrese, and Daniel L. Smith. Government and not-for-profit accounting: Concepts and practices. John Wiley & Sons, 2016.
  • Jordan, M. M. (2003). Punctuations and agendas: A new look at local government budget expenditures. Journal of Policy Analysis and Management22(3), 345-360.

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Silvia Dewiyanti, S.E., M.Si., Ak., CA., CSRA, Cert.DA.