1

Chapter

Introduction to Governmental
and Not-for-Profit
Accounting
 Uniqueness of Government
Operations
 Absence of a profit motive
 Legal requirements (and environment)

 Diversity of activities

 Government
 Business or proprietary

 Fiduciary

 Use of fund accounting

 Different terms, concepts and reporting format
 Continued
 Organizational purposes,
 Processes of generating revenues,

 Stakeholders,

 Budgetary obligations, and

 Potential for Longevity

 These differences require separate accounting and financial

reporting standards in order to provide information to meet
the needs of stakeholders to assess government accountability
and to make political, social, and economic decisions.
 Definition of government
accounting
 Government accounting is a complete activity of
identifying, recording, classifying, analyzing,
interpreting, summarizing and communicating
economic events of monetary nature for
governmental organizations.
 Purposes of govenrment
accounting
 To comply with the constitutional, statutory and
other legal requirements of the country;
 Related to budget classifications;

 Identify the objects and purposes for which funds

have been received and expended;

 Facilitate audit by audit by external review

authorities;
 Permit effective administraive control of funds and

operations, programme management and internal

audit;
 Purposes of govenrment
accounting
 Effectively disclose the economic and financial
results of programme operations;
 Capable of serving the basic financial information

needs of development planning and programming,

and the review and appraisal of performance in
physical and financial terms;
 Provide financial data useful for economic
analysis.
STANDARD SETTING IN THE
GOVERNMENTAL & NONPROFIT
SECTOR
 GASB is the standard-setting body for
governmental entities in the United States. It issues
statements, interpretations, and technical bulletins
that guide financial reporting for state and local
governments.
 GASB Statements: These are the primary source of

financial reporting standards for governments. For

example, GASB Statement No. 34 established the
framework for government-wide financial
statements.
 Continued
 FASB is the primary standard-setting body for financial
reporting for private-sector businesses, but some NFP
entities in the U.S. also follow FASB standards.
 IPSASB develops international standards for financial

reporting in the public sector. Although IPSAS are not

mandatory for U.S. governmental entities, they provide
global best practices for governments, especially those
outside the United States.
 Users of Financial Reports

 Resource providers (tax payers, donors and

potential donors, investors and potential investors,
bond-rating agencies and grant providing
organizations).
 Legislative and oversight bodies (higher-level
governments and regulating agencies)
 Service recipients (citizen advocate groups)
 Fund accounting
 Governmental accounting systems should be organized
and operated on a fund basis.
 A fund is defined as a fiscal and accounting entity with a

self-balancing set of accounts recording cash and other

financial resources, together with all related liabilities and
residual equities or balances, and changes therein, which
are segregated for the purpose of carrying on specific
activities or attaining certain objectives in accordance with
special regulations, restrictions, or limitations.
 Fund Accounting ….
 Because all governmental units receive financial resources
that may be used only in accordance with restrictions
established by law or by agreements with donors or
grantors, their accounting systems must enable officials to
demonstrate compliance with such restrictions. This need
led to the development of the fund accounting concept as a
control device.
 Continued
 Each fund must be accounted for in a separate self-
balancing set of accounts for its assets, liabilities, equity,
revenues, expenditures or expenses (as appropriate), and
transfers. This requirement refers to identification of
accounts in the accounting records and does not necessarily
extend to physical segregation of assets or liabilities. For
example, it is not necessary to have a separate bank account
for each fund unless required by law, bond indenture, or
other reason.
 TYPES OF FUNDS
 Three categories of funds are used in governmental
accounting, which are then subdivided into eleven fund
types for accounting and financial reporting purposes.
 Governmental Funds
 Proprietary Funds

 Fiduciary Funds
 Government Funds
 General fund: general activities
 Special revenue fund: specific revenue activities

 Capital projects fund: major facility construction activities

 Debt service fund: long-term debt service activities

 Permanent fund: restricted resource activities

1-14
 Proprietary Funds
 Enterprise funds: fee-based business activities
 Internal service funds: support activities
 Fiduciary Funds
 Pension trust funds: benefit activities
 Investment trust funds: pooled investment activities

 Private-purpose trust funds: other trust activities

 Agency funds: custodial activities

 OBJECTIVES OF
FINANCIAL REPORTING:
CONCEPTS STATEMENT
NO. 1
 Underlying concepts
 Accountability

 Interperiod equity
 Accountability
 In its Concepts Statement No. 1, “Objectives of
Financial Reporting,” the Governmental
Accounting Standards Board stated that
“Accountability is the cornerstone of all financial
reporting in government.
 Governmental accountability is based on the belief

that the citizenry has a ’“right to know,” a right to

receive openly declared facts that may lead to
public debate by the citizens and their elected
representatives. Financial reporting plays a major
role in fulfilling government’s duty to be publicly
accountable in a democratic society.
 Inter period equity
 Inter period equity: help users assess whether
current-year revenues are sufficient to pay for
services provided that year and whether future
taxpayers will be required to assume burdens for
services previously provided.
 It is considered by –

 Requiring balanced budgets;

 Requiring that any deficit generated in one period be

made up in the subsequent year; or

 Establishing limited time periods for debt issues,

forcing a given generation to repay the debt incurred

for the assets it uses.
 Uses of financial reports
 To compare actual financial results with the legally
adopted budget;
 To assist in determining compliance with finance-

related laws, rules, and regulations;

 To assess financial condition and results of

operations, and;
 To assist in evaluating efficiency and effectiveness.
 Governmental Accounting and
Financial Reporting Principles
 Principle 1: Accounting and Reporting Capabilities
 (a) to present fairly and with full disclosure the funds and
activities of the government in conformity with generally
accepted accounting principles, and
 (b) to determine and demonstrate compliance with finance-

related legal and contractual provisions.

 Principle 2: Fund Accounting System
 1. There must be a fiscal entity: assets set aside for a
specific purposes, and
 2. There must be a double entry accounting entity: created
to account for the fiscal entity.
 Continued
 Principle 3: Types of Funds
 Governmental Fund: are used to account for activities of a
government that are carried out primarily to provide services
to citizens and that are financed primarily through taxes. It
contains: the General Fund, special revenue funds, debt service
funds, capital projects funds, permanent funds.
 Business-type fund: are used to account for a government`s

continuing business-type organizations and activities.

Proprietary funds of a government follow accounting and
financial reporting principles that are similar to those of
commercial business entities. There are two types of
proprietary funds: internal service funds and enterprise funds
  Fiduciary fund: are used to account for assets held by a
government in a trustee or agency capacity, whether for
individuals, private organizations, other governmental units, or
other funds of the government.
 Principle 4: Number of Funds
 Governmental units should establish and maintain those funds
required by law and sound financial administration.
 Principle 5: Reporting Capital (Fixed) Assets
 Capital assets of proprietary funds should be reported in both
the government-wide and fund financial statements.
 Capital assets of fiduciary funds should be reported in only the

statement of fiduciary net assets.

 Principle 6: Valuation of Capital (Fixed) Assets
 Capital assets should be reported at historical cost or, if the
cost is not practically determinable, at estimated cost.
 Donated capital assets should be reported at their estimated fair

value at the time of the acquisition plus ancillary charges, if

any.
 Principle 7: Deprecation of Capital Assets
 Capital assets should be depreciated over their estimated useful
lives unless they are either inexhaustible or are infrastructure
assets using the modified approach set forth in GASBS 34.
Inexhaustible assets such as land and land improvements
should not be depreciated.
 Principle 8: Reporting Long-Term Liabilities
 Long-term liabilities directly related to and expected to be paid
from proprietary funds should be reported in the proprietary
fund statement of net assets and in the government-wide
statement of net assets.
 Long-term liabilities directly related to and expected to be paid

from fiduciary funds should be reported in the statement of

fiduciary net assets.
 Principle9: Measurement Focus and Basis of Accounting in
the Basic Financial Statements
 (1) Financial statements for governmental funds should be
presented using the current financial resources measurement
focus and the modified accrual basis of accounting.
 (2) Proprietary fund statements of net assets and revenues,

expenses, and changes in fund net assets should be presented

using the economic resources measurement focus and the
accrual basis of accounting.
 (3) Financial statements of fiduciary funds should be reported

using the economic resources measurement focus and the

accrual basis of accounting
 Principle 10: Budgeting, Budgetary Control, and Budgetary Reporting
 a. An annual budget(s) should be adopted by every governmental unit.
Budget is a plan of financial operation embodying an estimate of proposed
expenditure s for a given period and the proposed means of financing them.
 b. The accounting system should provide the basis for appropriate
budgetary control. Budgetary control refers to the control or management of a
government or enterprise in accordance with an approved budget for the purpose
of keeping expenditures within the limitations of available appropriations and
available revenues.
 c. Budgetary comparisons schedules should be presented as required
supplementary information (RSI) for the General Funds and each major special
revenue fund that has a legally adopted annual budget.

s
 Principle 13: Interim and
Annual Financial Reports
 a. Appropriate interim financial statements and reports of financial
position, operating results, and other pertinent information should be
prepared to facilitate management control of financial operations,
legislative oversight, and where necessary or desired for external
reporting purposes.
 b. A comprehensive annual financial report [CAFR] should be

prepared and published, covering all activities of the primary

government (including its blended component units) and providing an
overview of all discretely presented component units of the reporting
entity: including introductory section, management`s discussion and
analysis (MD&A), basic financial statements, required supplementary
information other than MD&A, combining and individual fund
statements, schedules, narrative explanations, and statistical sections.
 c. The minimum requirements for MD&A, basic financial
statements, and required supplementary information other
than MD&A are:
 (1) Management`s discussion and analysis
 (2) Basic financial statements. The basic financial
statements should include:
 Government-wide financial statements
 Fund financial statements
 Notes to the financial statements
 (3) Required supplementary information other than MD&A
Chapter 2: Issues of Budgeting
& Control
 Budgets are to governments and not-for-profits what the sun
is to the solar system. Trying to understand government and
not-for-profit accounting without recognizing the centricity
of the budget would be like trying to comprehend the earth’s
seasons while ignoring the sun.
 Budgeting is an essential element of the financial planning,

control, and evaluation processes of governments. Every

governmental unit should prepare a comprehensive budget
covering all governmental, proprietary, and fiduciary funds
for each annual (or, in some states, biennial) fiscal period
 Governments and not-for-profits are disciplined mainly by

their budgets, not by the competitive marketplace.

 Key purpose of Budget
 Planning.
 How much resource will be required
 How much resources will be expended
 Controlling and administering.
 Legislative bodies use budget to impose spending authority to
executives
 Reporting and evaluating
 Goals accomplished
 efficiency
 Types of budgeting
 The benefits of the budgetary process cannot be fully achieved by a
single budget or type of budget. A well-managed government or not-
for-profit—just like a wellmanaged business—should prepare budgets
for varying periods of time from multiple perspectives. These include:
1. Appropriations budgeting
 Called operating budget: covers general fund
 In many jurisdictions this must be balanced
 Determines the amounts of tax that must be generated for the year
2. Capital budgeting
 Typically covers multiple years
 Concentrated on long lived assets such as highways, building,

 Financed with long term debt instead of current year taxes

3. Flexible budget
 Used primarily for business types activities that are not subject
to the same budgetary requirements
 Alternative budget based on varying level of demand for

services and product

 Budgetary Approaches
 (1) incremental budgeting;
 (2) performance budgeting;

 (3) program budgeting

 (4) planning programming budgeting system (PPBS);

 (5) zero-based budgeting (ZBB);

 Incremental Budgeting
 Simple and widely used
 Focuses on department on departmental expenditures by

applying a percentage increase “across the board” to all line

items.
 the increase my be annual rate of inflation, or specific

adjustments that relate to expected salary increases or

shrinkage related to scaling back operations.
 Does not relate to inputs and outputs or outcomes, so is not

considered one of the rational approaches.

 Performance Budgeting
A plan for relating resources inputs to the efficient production
of outputs
 Performance auditing is the subsequent evaluation to determine

that resources in fact were used efficiently and effectively in

accordance with the plan
 Program Budgeting
 Discloses the full costs of programs or functions without
regard to the number of organizational units that might be
involved
 Often considered synonymous with performance budgeting;

however; that method focuses on the relationship between

input and outputs of each organizational unit rather than
programs.
 Program and Planning
Budgeting System (PPBS)
 Comprehensively integrates planning and control into one
system
 Provide legislator and public administrators with output

oriented information that can be used in evaluating how

successful the government is in meeting strategic objectives
 It is difficult to implement
 Zero-Based Budgeting
 Requires that the very existence of each activity be justified
each year, as well as the amount of resources that will be
allocated to it.
 Many organizations use combinations of budgeting

techniques, such as applying ZBB to a set of programs each

year so that all programs are justified over a period of time,
although not each year
 Key Phases of Budget Cycle
 Preparation

 Legislative adoption and executive approval

 Execution

 Reporting and Auditing

 Budgetary Terms
 An appropriation is a legal authorization granted by the
legislative body to incur liabilities for purposes of specified
in the appropriation act or ordinance. (how much money can
be spent in the year
 An allotment are internal allocation of the funds by the

executive management to quarters of the other time periods.

 An encumbrance is an estimated amount recorded for

purchase orders, contracts and other expected expenditure

chargeable to the appropriation. Prevent overspending the
budget.
 Budgetary Accounts
 purpose: used to record the budgetary inflows and outflows
expected or authorized in the annual budget
 Accounts

 Estimated revenues, estimated others and financing sources

 Appropriations, estimated others and financing sources

 Encumbrances
 Budgetary Control:
Expenditure
 Budgetary control of expenditures is achieved by:
 Ensuring that a valid appropriation exists prior to recording an
encumbrance or expenditure and
 Periodically comparing encumbrances and expenditures with

appropriations.
 Budgetary Control: Revenue
 Periodically compare:
 Actual revenues to
 Estimated revenues