Government Accounting: Principles and Procedures in Accounting for Governmental Units

Comprehensive understanding of the principles, rules, and procedures governing the accounting systems used by federal, state, and local government units.

The field of government accounting refers to the principles and procedures used to manage and report the financial activities of governmental units at the federal, state, and local levels. The frameworks for these accounting practices differ significantly from commercial accounting due to the unique nature of governmental operations and objectives.

Principles of Government Accounting

Unique Nature of Government Accounting

Government accounting necessitates the application of specific principles tailored to public sector needs:

• Fund Accounting: A primary principle in government accounting is fund accounting, which segregates resources into separate categories (funds) to ensure they are used for their intended purposes.
• Accountability and Transparency: Public entities must demonstrate accountability to taxpayers and ensure transparency in their financial operations.
• Modified Accrual Basis: Unlike commercial entities, which use the accrual or cash basis of accounting, governmental units often apply a modified accrual basis, which combines elements of both.

Encumbrances and Budgets

A distinctive feature of government accounting is the recording of encumbrances and budgets within the general ledger. Encumbrances represent commitments related to unperformed contracts for goods or services.

Asset Restrictions

Assets in government accounting are typically restricted for specific purposes, which dictates how they can be utilized. This is reflected in the structure of fund accounting.

Government Accounting Standards

Government accounting standards are primarily established by:

• National Council on Governmental Accounting (NCGA): This body sets forth rules and guidelines to ensure consistency and reliability in governmental financial reports.
• Governmental Accounting Standards Board (GASB): Affiliated with the Financial Accounting Standards Board (FASB), GASB issues standards specifically aimed at the public sector.

Applicability

The practice of government accounting is essential across all levels of government entities:

• Federal Government: National-level financial management, reporting, and compliance.
• State Governments: State-level budgeting, expenditures, and fiscal accountability.
• Local Governments: Municipal and county accounting practices, including school districts and public utility companies.

Comparison with Commercial Accounting

Government accounting differs markedly from commercial accounting, especially in the following areas:

• Objective: Government accounting aims to demonstrate accountability and stewardship of public funds, whereas commercial accounting focuses on profitability and financial performance.
• Reporting: Government financial reports emphasize budgetary compliance and fund balance management, while corporate financial statements focus on revenue, expenses, and net income.
• Standards: Different standard-setting bodies and principles apply to government accounting (GASB vs. FASB).

Related Terms

• Modified Accrual Accounting: This approach recognizes revenues when they are both measurable and available to finance expenditures, and recognizes expenditures when the related liability is incurred.
• Encumbrance: These are commitments related to unperformed contracts for goods or services, recorded to prevent overspending.
• Fund Balance: The net position of a governmental fund, reflecting the difference between assets and liabilities.

FAQs

What is the primary purpose of government accounting?

The main objective is to ensure accountability and transparency in the use of public funds, ensuring that financial resources are managed according to laws and regulations.

Why is fund accounting used in government accounting?

Fund accounting helps in segregating resources according to their intended use which ensures compliance with legal and regulatory requirements.

How does modified accrual accounting differ from full accrual accounting?

Modified accrual accounting recognizes revenues when they are measurable and available, and expenditures when the liabilities are incurred, providing a blend of cash and accrual accounting principles.

References

1. National Council on Governmental Accounting. (2023). Governmental Accounting Standards.
2. Governmental Accounting Standards Board. (2023). GASB Statements.
3. Financial Accounting Standards Board. (2023). FASB Publications.

Summary

Government accounting is a specialized field focusing on the financial activities of public sector entities at various governmental levels. Governed by principles and standards set by NCGA and GASB, it emphasizes accountability, transparency, and compliance with legal restrictions. By employing fund accounting and the modified accrual basis, government accounting ensures proper management and reporting of public funds, which is fundamentally different from commercial accounting practices aimed at profitability and performance.