Introduction to governmental accounting

1. Introduction to
Governmental
Accounting
An ever-growing segment of the nation’s resources is allocated to non-
business activities, including federal, state, and local governments, as
well as non-profit organizations. These organizations differ from
businesses in their lack of profit-seeking motives and their focus on
specific goals. This chapter explores the distinctive characteristics of the
accounting and reporting systems used by non-business organizations.
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2. Accounting for Governments
1 Users of Financial Reports
The principal users of government’s external financial reports
include the citizenry, legislative bodies, and creditors/investors in
government securities. These reports are used to assess
accountability, financial condition, and compliance with finance-
related laws and regulations.
2 Information Needs
In addition to the specific needs of users, governmental financial
reports should meet the basic characteristics of any financial
reporting system, such as understandability, reliability, relevance,
timeliness, consistency, and comparability.

3. Government and Non-Profit
Organizations
Governments
Governments perform a wide variety of
functions and are primarily funded through
taxes levied by legal authority. The
accounting systems and principles used by
governments are governed by the
Governmental Accounting Standards Board
(GASB).
Non-Profit Organizations
Non-profit organizations, such as universities
and hospitals, have specified functions and
are funded through charges imposed on the
direct beneficiaries of their services. Other
non-profit organizations, like charities and
religious organizations, rely on donations and
endowments from donors.

4. Distinctive Characteristics
1 Profit Orientation
Unlike business organizations, non-profit organizations are not profit-seeking to any
significant degree. Their focus is on achieving specific goals rather than maximizing
profits.
2 Resource Contributions
Resource contributions to non-profit organizations do not result in ownership equity
interest. For example, taxpayers do not receive ownership shares in their government.
3 Funding Methods
Non-profit organizations are funded through various methods, including taxes for
government organizations and donations/endowments for non-profits.

5. Accounting Standards
1 Financial Accounting Standard
Board (FASB)
The FASB is the primary accounting
standard setting authority for the
accounting activities and events of non-
profit and business organizations.
2 Governmental Accounting
Standard Board (GASB)
The GASB is the primary accounting
standard setter for state and local
governments. It sets the accounting
standards specifically for the unique needs
of governmental entities.

6. Role of Financial Reports
Assessing Accountability
Financial reports are used by citizens, legislators,
and oversight bodies to assess the accountability
of the government and ensure responsible
operation.
Evaluating Financial Condition
Creditors and investors in government securities
rely on financial reports to assess the financial
stability of the government and its compliance
with finance-related laws and regulations.

7. Information Needs
1 Understandability
Financial reports should be clear and
easily understandable, even for non-
accounting professionals.
2 Reliability
Financial reports should be accurate and
free from material errors and bias.
3 Relevance
Financial reports should provide
information that is useful for decision-
making and assessing the financial
health/status of the government.
4 Timeliness
Financial reports should be prepared in a
timely manner, allowing users to make
informed decisions based on up-to-date
information.
5 Consistency
Financial reports should be prepared
using consistent accounting policies and
practices to ensure comparability over
time.
6 Comparability
Financial reports should allow for
meaningful comparisons between
different periods and between different
government entities.

8. Conclusion
1 Governmental Accounting
Governmental accounting serves the unique needs of
governments and non-profit organizations, providing information
that helps assess accountability, financial condition, and
compliance.
2 Standard Setting Authorities
The Financial Accounting Standards Board (FASB) sets
accounting standards for non-profit and business organizations,
while the Governmental Accounting Standards Board (GASB) sets
standards for state and local governments.