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          Subject:  ACCOUNTING AND FINANCIAL REPORTING - RELATIONSHIP OF
          ACCOUNTING TO BUDGET

2-20-00   Background
               10   Supporting the Budget Formulation Process
     20   Supporting Budget Execution and Program Operations
               30   Cost Finding, Cost Accounting, and Other Allocation Methods
               40   Control of Funds Through the Accounting Classification   
          Structure


          2-20-00   Background

          The need to perform many of the accounting or finance processes
     is required by law.  This includes the administrative control of
     funds procedures and the need to substantiate and support various
     aspects of budget formulation and budget execution.  Further
     requirements of accounting systems results from management and
     program data needs and from guidelines of the General Accounting
     Office (GAO) Office of Management and Budget (OMB), and the
     Treasury.
     
          Accurate and meaningful accounting data are essential to sound
     budget estimating and programing since results of prior periods
     and projections of such experience usually form the basis for
     forecasting future budget authority needs and outlay estimates. 
     The actual data in various schedules of the Budget Appendix are
     products of the accounting systems.  The Budge Appendix by OMB
     from input by government agencies is an important document used
     by Congress and the public.  The Appendix is an annual report
     prepared in January showing the President's Budget for the past,
     current, and succeeding fiscal years.  The past fiscal year data
     is based, in part, on actual amounts reported and shown in
     Treasury's Year-End Closing Statement TFS-2108, OMB's SF-133
     Report on Budget Execution and various other supporting financial
     reports.

          The accounting process serves an equally important role in the
     execution of the budget.  It must provide up-to-date information
     for controlling funds, and to enable managers to track the
     progress of program obligations for conformance with OMB
     apportionment limitations or highlight problems through financial
     reports, that dictate altering the course of operations.  In
     addition, up-to-date accurate disbursements and collection data
     are vital to tracking and monitoring outlay estimates that are .          rquired for various budget updates and OMB reports that occur
     throughout the year.

               A.   Uniformity of Classifications

                    Several parts of the Accounting Manual describe the uniform
          approach that must be taken when assigning descriptors and
          codes as part of the accounting and budget classification
          structure.  The structure includes, for example, fiscal year
          and appropriation, budget activity, budget sub-activity,
          budget sub-activity, allotment, allowance, cost center, etc. 
          Accuracy and uniformity of these elements are key to the
          ability to respond to the information needs of managers, the
          budget requirements, and administrative control of funds
          processes.  As a result of proper coding and structure, the
          accounting system should be able to produce numerous
          varieties of data needed for effective managing and
          budgeting.

               B.   Developing the Classification and Assigning Codes
                                                  
                    This process, which is usually monitored by the finance
          office, cannot be done efficiently and properly without
          active coordination among budget, program, contract and
          grant, administrative, and accounting staffs.  When
          completed, the coding and structure must serve all of the
          aforementioned needs.  Chapter 4-30, Common Accounting
          Number, prescribes the common accounting number structure
          and Chapter 3-30, Internal Machine Number, and Description
          File, prescribes the pyramidal structure of the accounting
          and budget structure.  The common accounting number
          structures are illustrated in X4-30-1 and X4-30-2.

          2-20-10   SUPPORTING THE BUDGET FORMULATION PROCESS

          The Formulated budget material includes, for example, the program
     and financing schedule, object classification schedules, federal
     credit data, business-type statement, along with several other
     supporting schedules, all of which contain, in some form, actual
     data of the accounting system.  These results frequently enter
     into decisions concerning amounts of new budget authority that
     may be requested and subsequently approved.  Thus, it is
     necessary that the data are correct.  An examination of the
     program and financing schedule for a no-year account illustrates
     the importance of accounting data. The amount of new budget
     authority requested is a by-product of the estimated program
     level as well as the accounting system's unobligated balance from
     the prior year. If the latter is incorrect, the planned program
     level requested could be under or over funded and inappropriate. 
     For budget formulation purposes, OMB Circular A-11 contains a
     comparison of data including the Treasury Combined Statement
     (which is prepared by Treasury based on the Year-End TFS-2108
     report prepared by the accounting office), budget's program and
     financing schedule, and the Report on Budget Execution, SF-133.
     This comparison shows the need for consistency among these
     reports and schedules in order to correctly prepare the budget.
     Furthermore, agency heads are required to certify as to the
     validity of all obligations furnished in support of the budget.

          The outlay portion of the budget also can have a significant
     influence on the amounts appropriated, since current outlays
     resulting from previously obligated funds as well as newly
     obligated funds -along with receipts -results in budget deficits
     or surpluses.  Actual outlays are obtained from the accounting
     records.  These are used as a basis for projecting outlays for
     both the current year and budget year.  In many cases, for
     example, monthly and annual obligations and outlay data from the
     accounting records can be a very accurate predictor when
     simplified statistical analyses or comparisons are applied. 
     Thus, not only are the year-end type accounting reports important
     but the monthly products are equally as useful.

          2-20-20   SUPPORTING BUDGET EXECUTION AND PROGRAM OPERATIONS

               A.   Timely Reports of Current Operations

                    Up-to-date and timely accounting reports can aid
          significantly in tracking program operations and executing
          the budget.  For example, the amount of obligational
          authority apportioned under a continuing resolution is based
          on the rate of obligation in previous years.  In addition to
          historical tabulations of obligations incurred and paid,
          program managers can benefit from timely commitment
          accounting reports.  Budget execution functions such as
          tracking and adjusting allotments, allowance, and operating
          plans; reviewing and monitoring reimbursable and fund
          transfer activities; monitoring staffing and payroll;
          insuring that travel or other  limitations are within
          ceiling, and developing and tracking apportionments can
          depend heavily on timely and current information from
          accounting systems.

                    Reports prepared to maintain the internal operations of an
          accounting system are usually inadequate for budget and
          program purposes since accounting listings are usually
          cryptic in nature, frequently contain codes which are
          difficult to translate and, in many instances contain more
          information than is needed for management of operations. 
          For these reasons, the accounting office must take the lead
          in assisting budget, program, contracting, grant, and
          administrative officials to develop reports and other data
          peculiar to the operation of the organization as well as for
          budgeting purposes.

               B.   Information Exchange and Document Flow

                    Accounting systems are more effective when budget, program,
          and administrative offices give full support to the process
          through day-to-day exchanges of information and by insuring
          a smooth flow of paperwork that represents accounting
          transaction input.  The exchange of information must be in
          both directions to the offices being supported by the
          accounting system, and from the supported offices.  Changes
          to the budget structure, organization structure,
          reimbursable agreements, and activities, fiscal cut-off or
          closing dates, and changes to policy or procedures because
          of OMB or Treasury revisions are but a few examples of
          alterations to routine operations that, through information
          exchanges, can avoid or reduce unnecessary work of any of
          the affected organizations.

                    The flow of documents to an account office is of significant
          importance as is a high degree of accuracy of the documents
          in insuring that up-to-date accounting reports are
          available.  Tests should be performed periodically by the
          organizations involved to determine that the flow of
          documents is timely and without serious obstacles. 
          Accounting offices should time-stamp all incoming document
          to aid in such tests.  The accounting office should also
          test its internal document and transaction flow to determine
          if it is efficient and effective.

                    Another important consideration is that organizations
          supported by accounting reports should provide negative or
          positive feedback to the accounting office indicating that
          reports are correct or that transactions are questionable. 
          Further, certain reports which are sent by the accounting
          office to OMB should be reviewed by the budget office before
          being transmitted.  This will help insure that apportionment
          data and SF-133 are consistent.

.          2-20-30   COST FINDING, COST ACCOUNTING, AND OTHER ALLOCATION METHODS

          Cost finding and allocation methods are alternatives when methods
     of operations prevent direct charging of obligations or
     expenditures to a specific cost center, program, or activity. 
     Such a situation can occur when, for example, an employee
     performs work on behalf of two or more programs or performs
     intermittent work on a reimbursable project, as well as for the
     program to which the employee is routinely assigned.  When such
     efforts cannot be easily identified and accounted for
     extraordinary procedures are required to account for the
     costs/obligations/expenditures on a collective basis, then
     through a redistribution technique, the charges are allocated to
     the various programs or activities.

          The redistribution process must be a formally documented
     procedure that can be substantiated through audit.  Cost
     accounting and cost finding are acceptable methods.  Cost
     accounting is usually the more expensive and formal process,
     frequently applying units of measure to accumulated costs for
     subsequent reallocation.  Cost finding is normally used when
     infrequent allocation or redistribution is needed.  The data
     produced are usually not as precise because this process is not
     an integral part of the accounting system.  However, this latter
     procedure may be the most reasonable and economical approach to
     the problem.

          2-20-40   CONTROL OF FUNDS THROUGH THE ACCOUNTING CLASSIFICATION
          STRUCTURE

          The accounting and budget classification structure and codes
     discussed in Department Accounting Manual Chapters 3-30 and 4-30
     are key to the preparation of data and reports required by
     various laws, regulations, and management.  The development of
     the structure and specific codes are not the sole responsibility
     of the accounting staff.  As demonstrated earlier, the budget
     program, and administrative staffs must contribute to this
     process in order to insure that all needs are met.

          The code hierarchy prescribed in Chapter 3-30-30 serves a number
     of purposes, two of which are budget formulation and budget
     execution.  Some of the important code elements that serve these
     functions are:

                              Fiscal Year         The Appropriation act or other law
                         prescribes the fiscal year.

.                              Appropriation       This number is determined by appropriation
                         act or as a result of other laws permitting
                         creation of an account.

                              Allotment           Within each appropriation, a limited number
                         of allotments are issued to control and
                         administer funds.  Not less than one
                         allotment is required for each
                         appropriation of other fund, and fund
                         limitation as appropriate, which is subject
                         to obligations and expenditures including
                         reimbursements, revolving fund resources,
                         and funds transferred-in from external
                         agencies.  It is practical to do so, the
                         allotment should be kept at the major
                         budget activity level. 

                              Allowance           There must be not less than one allowance
                         per allotment.  The allowances are
                         subdivisions of allotments and may identify
                         fund authorization at the budget sub and
                         sub-sub-activity level.

          Budget Activity,
          Sub-activity, and
                              Sub-Sub-activity    These three elements are formal sub-
                         designations of the appropriation account
                         as depicted in the President's Budget
                         Appendix and other documents.  The Sub-
                         activity and sub-sub-activity elements are
                         shown in the Appendix as "indented" sub-
                         elements of budget activity.  These
                         elements must be coded in accounting
                         systems in the manner and form presented in
                         the budget as amended by Congressional
                         expression in appropriation acts.  This is
                         necessary to insure that the budget is
                         executed according to the desires of the
                         President and Congress and for the purpose
                         of being able to support the next year's
                         budget.  The assignment of Common
                         Accounting Numbers (CANs) allotments and
                         allowances must be done in a manner that is
                         consistent with budget activity coding.

          Chapter 4-30 prescribes the manner in which the Common Accounting
     Number (CAN) is developed and applied.  In brief, the CAN is a
     code, at the bottom of the classification hierarchy, that is used
     along with other transaction information, such as contract number
     and dollar amount, to facilitate linking such transaction data to
     the accounting classification elements described above which have
     been previously entered in the accounting system.  The
     computerized accounting system performs this linking function,
     thus permitting input of a minimal amount of data with each
     transaction by the accounting staff.

          Not less than one CAN must be assigned and used within each
     allowance.  The number of CANs generally should be kept to a
     minimum but not to the point of diminishing the need to maintain
     separate accountability where managers dictate that such controls
     are essential.  Above all, CANs must be representative of the
     entire accounting and budget classification in order to insure
     that all of the functions and needs are served.

          An illustration of the CAN assignment is found in Exhibit 4-30-1.