Understanding Government Accounting: A Comprehensive Overview

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. To ensure the proper segregation of resources and to maintain proper accountability, a governmental entity’s accounting system should be organized and operated on a fund basis.

An accurate display of how efficiently elected officials use public resources and authority is important for society to put its confidence in the government. Under this basis, revenues are recognized in the accounting period in which they become measurable and available for spending. In other words, decreases or increases in the financial resources will only be recorded in a financial statement when they are expected to be paid or collected within the twelve months after the fiscal period ends. 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.

Accountability for government spending

However, overcoming these challenges is critical to maintaining public trust and ensuring efficient use of public funds. The operating statement of a governmental fund focuses on changes in current financial resources. And so, all the governmental funds use modified accrual basis accounting, where any change in financial resources gets documented only to the extent that it reflects an imminent governmental accounting definition cash inflow or outflow. When the major fund criteria are applied to governmental funds, revenues do not include other financing sources and expenditures do not include other financing uses. The concept of major fund reporting was introduced and defined by GASB Statement 34 to simplify the presentation of fund information and to focus attention on the major activities of the reporting entity.

Taxes and fees are the principal sources of revenue and taxpayers are involuntary resource providers. Governments have the potential for longevity because of their ongoing power to tax and the ongoing need for public services, whereas businesses will go out of existence if they are unable to sustain their operations. The public sector environment is fundamentally different from that in which private-sector organizations operate, thus different accounting and financial reporting practices have developed for governments. Established in 1984, the Governmental Accounting Standards Board (GASB) is an independent, private-sector organization that develops and issues accounting and financial reporting standards for U.S. state and local government.

Financial Management

Both groups are important sounding boards to ensure that the GASB makes the best decisions for the tax payer, finance, and business communities. In a corporate setting, the main goal is to generate profits and ensure the company’s financial health. However, in a government setting, the emphasis is on public service, aiming to ensure taxpayers’ money is used appropriately to fund various public services. Over the last decades, major changes have been introduced in government accounting under what is known as the New Public Financial Management (NPFM) reforms. Considered as a fundamental element of the New Public Management (NPM), NPFM is a global movement that focuses on financial aspects and accounting practices in the public sector (Guthrie et al. 1999).

• Governments have the potential for longevity because of their ongoing power to tax and the ongoing need for public services, whereas businesses will go out of existence if they are unable to sustain their operations.
• These branches of accounting, working together, aim to provide a crystal-clear financial representation of the public sector to ensure its accountability, efficiency, and transparency.
• The need for meticulous record-keeping and comprehensive financial reporting can place a significant burden on government accountants.
• Under this basis, revenues are recognized in the accounting period in which they become measurable and available for spending.
• In other words, accounting reports can determine whether a budget or revenue-to-expenditures ratio makes sense.