Business accounting has always been considered to be the model for government accounting. In 1802, Thomas Jefferson, the author of the American Declaration of Independence, wished to “see the finances of the Union as clear and intelligible as a merchant’s book,...” In the 1970s, Arthur Andersen & Co,, an innovative accounting firm, tried to realize Jefferson’s dream by challenging the U.S. Government itself to render its accounts according to Generally Accepted Accounting Principles (GAAP), since it required business firms to follow GAAP, apparently believing that business GAAP was applicable to the U.S. Government. In the 1980s, the late Professor Robert Anthony of Harvard University was similarly convinced that American state and local governments should use business accounting principles, so that it would not be necessary to have a separate Governmental Accounting Standards Board. (It fell on the author as a young academic in 1980 to inform the Financial Accounting Standards Board how government differed from business.) In the 1990s, opinion leaders from several countries adhering to the “business accounting for government” approach successfully elevated this viewpoint to the international level. International Public Sector Accounting Standards (IPSAS) patterned after international (business) accounting standards were developed, with exceptions only when government differed from business. Show
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Editor informationEditors and AffiliationsRights and permissionsReprints and Permissions Copyright information© 2008 Gabler | GWV Fachverlage GmbH, Wiesbaden About this chapterCite this chapterChan, J.L. (2008). A Comparison of Government Accounting and Business Accounting. In: Wagner, F.W., Schildbach, T., Schneider, D. (eds) Private und öffentliche Rechnungslegung. Gabler. https://doi.org/10.1007/978-3-8349-8093-9_4 Governmental accounting maintains tight control over resources, while also compartmentalizing activities into different funds in order to clarify how resources are being directed at various programs. This approach to accounting is used by all types of government entities, including federal, state, county, municipal, and special-purpose entities. The Governmental Accounting Standards BoardGiven the unique needs of governments, a different set of accounting standards has been developed for these organizations. The primary organization that is responsible for creating and updating these standards is the Governmental Accounting Standards Board (GASB). The GASB is tasked with the development of accounting and financial reporting standards for state and local governments, while the Financial Accounting Standards Board (FASB) has the same responsibility, but for all other entities not related to governmental activities. Fund AccountingA fund is an accounting entity with a self-balancing set of accounts that is used to record financial resources and liabilities, as well as operating activities, and which is segregated in order to carry on certain activities or attain targeted objectives. A fund is not a separate legal entity. Funds are used by governments because they need to maintain very tight control over their resources, and funds are designed to monitor resource inflows and outflows, with particular attention to the remaining amount of funds available. By segregating resources into multiple funds, a government can more closely monitor resource usage, thereby minimizing the risk of overspending or of spending in areas not authorized by a government budget. Some types of funds use a different basis of accounting and measurement focus. To clarify the difference between these concepts, the basis of accounting governs when transactions will be recorded, while the measurement focus governs what transactions will be recorded. The Basis of AccountingThe accrual basis of accounting is adjusted when dealing with governmental funds. The sum total of these adjustments is referred to as the modified accrual basis. Under the modified basis of accounting, revenue and governmental fund resources (such as the proceeds from a debt issuance) are recognized when they become susceptible to accrual. This means that these items are not only available to finance the expenditures of the period, but are also measurable. The “available” concept means that the revenue and other fund resources are collectible within the current period or sufficiently soon thereafter to be available to pay for the current period’s liabilities. The “measurable” concept allows a government to not know the exact amount of revenue in order to accrue it. The Focus of Governmental Financial ReportingThe key measurement focus in a government fund’s financial statements is on expenditures, which are decreases in the net financial resources of a fund. Most expenditures should be reported when a related liability is incurred. This means that a governmental fund liability and expenditure is accrued in the period in which the fund incurs the liability. The focus of governmental funds is on current financial resources, which means assets that can be converted into cash and liabilities that will be paid for with that cash. Stated differently, the balance sheets of governmental funds do not include long-term assets or any assets that will not be converted into cash in order to settle current liabilities. Similarly, these balance sheets will not contain any long-term liabilities, since they do not require the use of current financial resources for their settlement. This measurement focus is only used in governmental accounting. What are the main differences between government accounting and accounting for businesses?Information: Government accounting provides information to the government about the receipts, transfer and deposition of public funds. Commercial accounting provides information to the concerned parties about the operating result and financial position of the business.
What is the difference between government accounting and private sector accounting?Public accounting and private accounting are similar in that they both focus on a company's financial statements. Public accounting is regulated by the government, while private accounting is not. Public accounting also has to follow generally accepted accounting principles (GAAP), while private accounting does not.
Why is government accounting different?The government world is referred to as the public sector and public sector accounting is different from the private sector (business world), as there are many entities that oversee and monitor them, such as elected officials, creditors, other governmental agencies, and people within the communities they serve.
How and why does the accounting system used by governmental nonprofit entities differ from the system used by for profit entities?The key difference in for-profit and nonprofit standards is the concept of fund accounting, which focuses on accountability rather than profitability. Whereas a profit entity would have a general ledger, which is a single self-balancing account, nonprofits typically have a number of general ledgers, or funds.
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