Overview
Governmental organizations provide a broad range of services to the public in a given geographic area. You are well aware of federal and state governments, cities, towns, counties, and so on. There are also governmental organizations that have a special purpose instead of covering general goals. These would be a transportation organization, public schools, colleges and universities, public health centers, police, and fire protection services.
In terms of assets, liabilities, capital, expenditures items, and other accounting elements, the government can surely be considered as the largest financial organization. Moreover, the government has numerous departments, offices, and so on to be able to carry out all of its functions, such as the promotion of social welfare and the development of the nation. For this, the government needs to have sufficient funds and, most importantly, properly account for every dollar collected from the people and business entities and how each dollar was spent.
There are various spheres that accounting covers and numerous reasons it should be maintained. Governmental accounting covers the analysis, recording, classifying, summarizing, and communicating all the financial transactions that involve governmental funds and property. The goal of governmental accounting is
- to create a record of information on the past government operations and its present condition;
- to provide information on the basis of which future decisions will be made;
- to make it possible to check if the governmental bodies are effectively managing all the funds entrusted to them and are doing it effectively;
- to compile a report on everything the government owns as well as the results of operations of governmental bodies for all persons concerned.
The accountability for the government resources should be set on a very high level and, accordingly, required appropriate documentation of every transfer of the funds. Bookkeepers and accountants doing governmental accounting need to be able to present detailed information to the higher authorities and prove that everything is done as stated in the appropriate rules, regulations, and laws.
Financial reporting
There are a lot of similarities between what you would see in governmental accounting reports and reports in regular for-profit organizations, but there are few important differences that should be brought to your attention. Why should the financial reports for the government differ from the financial statement prepared by businesses?
First of all, different users will be looking at these reports and they are looking for different information for different purposes. The main goal of governmental accounting is to present reports that would show how the government acquired and spent the public resources, which fundamentally differs from what a for-profit business is doing.
The public, which is the main source of governmental resources, has completely different expectations than business owners and investors have when investing their money into a for-profit business. Moreover, there are no stockholders or shareholders, so you would not see an owner’s equity section or a separate report on equity. There is an absence of transferable ownership rights because the citizens who pay the taxes do not own the government in the same sense the investors own the business.
Governmental accounting reports keep the governmental establishments accountable for their actions in regards to raising public funds and spending them before the citizens. The accounting records also help to analyze whether the money coming in was sufficient to cover the expenses incurred during that period or if the government transferred these liabilities on the shoulders of the future taxpayers.
Governmental accounting standards
The differences between governmental accounting and simple financial accounting require different accounting standards. Government accounting principles are used by federal, state, and local government organizations.
FASAB
The federal government, including its agencies and departments, typically follows principles or guidelines developed by the FASAB when doing governmental accounting. These standards are applicable to both the internal users, such as management, and external users.
GASB
State and local governmental entities, as well as governmental not-profits, may be required to follow accounting principles and guidelines developed by the Government Accounting Standards Board (GASB), which tells these entities how they should apply GAAP standards in their accounting practice. These entities need to prepare two sets of financial statements.
One of the reports will be prepared to show revenues and expenditures for each activity and reflect any restrictions or limitations on the resources allocated for each specific activity, department, and so on. In a way, this provides a closer look at the current processes in a particular governmental entity with a lot more details, which is valuable for the management and other internal users. In addition, GASB requires government-wide reports on all revenues and expenditures with a long-term focus. Such reports are of special interest to creditors who want to evaluate the entity’s ability to pay back the loan.
Budgeting
Budgeting is important in achieving success and growth. This concerns individuals, families, businesses, and the government. Budgets allow everyone to properly allocate the limited resources and ensure that they get the most benefit. It is also a way to monitor spendings and prevent overspending. When it comes to governmental budgeting things get much more serious. However, the process of budgeting is well defined and established in the government, so everyone knows what is expected, who should do what, and the time frame within which the work has to be completed.
Governmental accounting plays a key role in the preparation of federal, state, and local budgets. Public budgets are structured to provide resources and accountability for a defined period. The budget is the main financial plan of the governmental entity for a certain period of time, combining the main revenues and expenditures of the organization. The budget consists of expenditure and revenues.
Its revenues part shows where the funds for the budget came from. The main source of budget revenues is taxes. It is in this form that the budget receives a majority of all revenues. In addition, there are so-called non-tax revenue sources. These include revenues from international economic activity (for example, trade with other countries), income from property owned by the state, receipts from targeted budget funds (social insurance funds, obligatory health insurance fund, pension funds), income from government bonds. These are the so-called internal non-tax revenues. Do not forget about external non-tax revenues, i.e. funds that foreign countries provide on a repayable basis, in fact, are interest-bearing loans.
The expenditure part of the budget shows for what purposes the funds collected by the governmental entity are directed. The government redistributes the income received and directs funds for the implementation of the functions of the government as an important social institution and the achievement of its goals. Budget expenditures are typically aimed at social security, maintaining defense capabilities, law enforcement, public administration, servicing public debt, developing infrastructure (road, transport, energy supply, etc.), and so on.
