Governmental accounting

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Government accounting refers to the process of recording and the management of all financial transactions incurred by the government which includes its income and expenditures.

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Various governmental accounting systems are used by various public sector entities. In the United States, for instance, there are two levels of government which follow different accounting standards set forth by independent, private sector boards. At the federal level, the Federal Accounting Standards Advisory Board (FASAB) sets forth the accounting standards to follow. Similarly, there is the Governmental Accounting Standards Board (GASB) for state and local level government.

The public sector is the part of the economy composed of both public services and public enterprises.

United States Federal republic in North America

The United States of America (USA), commonly known as the United States or America, is a country composed of 50 states, a federal district, five major self-governing territories, and various possessions. At 3.8 million square miles, the United States is the world's third or fourth largest country by total area and is slightly smaller than the entire continent of Europe's 3.9 million square miles. With a population of over 327 million people, the U.S. is the third most populous country. The capital is Washington, D.C., and the largest city by population is New York City. Forty-eight states and the capital's federal district are contiguous in North America between Canada and Mexico. The State of Alaska is in the northwest corner of North America, bordered by Canada to the east and across the Bering Strait from Russia to the west. The State of Hawaii is an archipelago in the mid-Pacific Ocean. The U.S. territories are scattered about the Pacific Ocean and the Caribbean Sea, stretching across nine official time zones. The extremely diverse geography, climate, and wildlife of the United States make it one of the world's 17 megadiverse countries.

Federal Accounting Standards Advisory Board

The Federal Accounting Standards Advisory Board (FASAB) is a United States federal advisory committee whose mission is to improve federal financial reporting through issuing federal financial accounting standards and providing guidance after considering the needs of external and internal users of federal financial information. FASAB is designated as the body that sets U.S. generally accepted accounting principles (GAAP) for the United States Government and its component entities, referred to as federal financial reporting entities. The AICPA Council designated FASAB as the body that establishes GAAP for federal entities in 1999.

Public vs. private accounting

There is an important difference between private sector accounting and governmental accounting. The main reasons for this difference is the environment of the accounting system. In the government environment, public sector entities have different goals, as opposed to the private sector entities' one main goal of gaining profit. Also, in government accounting, the entity has the responsibility of fiscal accountability which is demonstration of compliance in the use of resources in a budgetary context. In the private sector, the budget is a tool in financial planning and it isn't mandatory to comply with it.[ citation needed ]

Fiscal policy use of government revenue collection and spending to influence the economy

In economics and political science, fiscal policy is the use of government revenue collection and expenditure (spending) to influence the economy. Fiscal policy is often used to stabilize the economy over the course of the business cycle.

Government accounting refers to the field of accounting that specifically finds application in the public sector or government. A special field of accounting exists because:

  1. The objectives to which accounting reports to differ significantly from that for which generally accepted accounting practice has been developed for in the private (business) sector; &
  2. The usage of the results of accounting processes of government differs significantly from the use thereof in the private sector.

An exception exists on the above-mentioned differences in the case of public utility businesses (for example Electricity Services) that may be intended to produce a net income or profit, but a significant debate exists over whether there should be such an exception. Nationalisation includes, amongst others, the argument that entities should be either private or public, and that the objectives of public entities should differ significantly from that of private entities. In other words, is the generation and reticulation of electricity with the objective to generate a profit in the public interest or not? And if it is the best way, shouldn’t it then be completely private instead of having access to public funds and monopolies?

Governmental accounting standards are currently being dominated by the accounting standards (internationally sometimes referred to as IFRS) originally designed for the private sector. The so-called Generally Recognised Accounting Practices (GRAP) that are being enforced in the public sector of countries such as South Africa, one of the front-runners in this regard is based on the Generally Accepted Accounting Practices originally developed for the private sector. The above and common sense raises the question of whether this is the best solution. It is, of course, cheaper and it is alleged that the history of separate development of accounting practices for government has not been successful. Even at the onset of the current fiscal crisis in Europe and other parts of the world, it was argued authoritatively that the sometimes inapplicable accounting practices of the private sector being used, have contributed to the origination of, and belated reaction to, the fiscal crisis.(1)

Sources (not directly quoted but used in synthesis):

1. Sanderson, I. Worldwide Credit Crisis and Stimulus Packages in Accountancy SA, June 2009, p. 14.

2. Conradie, J.M. The applicability of Generally Accepted Accounting Practice in the Central Government of South Africa (English summary of a thesis written in another language) University of Pretoria, 1994.

3. Conradie, J.M. Die toepaslikheid van Algemeen Aanvaarde Rekeningkundige Praktyk in die Sentrale Owerheid van Suid-Afrika. Universiteit van Pretoria, 1993. (Original full text of the summary.) 4. Donald amcool

The governmental accounting system sometimes uses the historic system of fund accounting. A set of separate, self-balancing accounts are responsible for managing resources that are assigned to specific purposes based on regulations and limitations.

Fund accounting

Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organisations or by law. It emphasizes accountability rather than profitability, and is used by Nonprofit organizations and by governments. In this method, a fund consists of a self-balancing set of accounts and each are reported as either unrestricted, temporarily restricted or permanently restricted based on the provider-imposed restrictions.

Budget constraint A budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.

A budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference map to analyze consumer choices. Both concepts have a ready graphical representation in the two-good case.

The governmental accounting system has a different focus for measuring accounting than private sector accounting. Rather than measuring the flow of economic resources, governmental accounting measures the flow of financial resources. Instead of recognizing revenue when they are earned and expenses when they are incurred, revenue is recognized when there is money available to liquidate liabilities within the current accounting period, and expenses are recognized when there is a drain on current resources.

Revenue income that a business has from its normal business activities

In accounting, revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover. Some companies receive revenue from interest, royalties, or other fees. Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, earned during a period of time, as in "Last year, Company X had revenue of $42 million". Profits or net income generally imply total revenue minus total expenses in a given period. In accounting, in the balance statement it is a subsection of the Equity section and revenue increases equity, it is often referred to as the "top line" due to its position on the income statement at the very top. This is to be contrasted with the "bottom line" which denotes net income.

Liability (financial accounting) sum of the equity and the liabilities

In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

Governmental financial statements must be accompanied by required supplementary information (RSI). The RSI is a comparison of the actual expenses compared to the original budget created at the beginning of the fiscal year for the Government's General Fund and all major Special Revenue Funds.

Fiscal year 1 year term for government and business financial reporting

A fiscal year is the period used by governments for accounting and budget purposes, which varies between countries. It is also used for financial reporting by business and other organizations. Laws in many jurisdictions require company financial reports to be prepared and published on an annual basis, but generally do not require the reporting period to align with the calendar year. Taxation laws generally require accounting records to be maintained and taxes calculated on an annual basis, which usually corresponds to the fiscal year used for government purposes. The calculation of tax on an annual basis is especially relevant for direct taxation, such as income tax. Many annual government fees—such as Council rates, licence fees, etc.—are also levied on a fiscal year basis, while others are charged on an anniversary basis.

Objectives

The unique objectives of government accounting do not preclude the use of the double entry accounting system. There can, however, be other significant differences with private sector accounting practices, especially those that are intended to arrive at a net income result. The objectives for which government entities apply accountancy that can be organized in two main categories: - The accounting of activities for accountability purposes. In other words, the representatives of the public, and officials appointed by them, must be accountable to the public for powers and tasks delegated. The public, who have no other choice but to delegate, are in a position that differs significantly from that of shareholders and therefore need financial information, to be supplied by accounting systems, that is applicable and relevant to them and their purposes. - Decision-making purposes. The relevant role-players, especially officials and representatives, need financial information that is accounted, organized and presented for the objectives of their decision-making. These objectives bear, in many instances, no relation to net income results but are rather about service delivery and efficiency. The taxpayer, a very significant group, simply wants to pay as little as possible taxes for the essential services for which money is being coerced by law.


Sources (not directly quoted but used in synthesis):

1. Conradie, J.M. The applicability of Generally Accepted Accounting Practice in the Central Government of South Africa (English summary of a thesis written in another language) University of Pretoria, 1993.

2. Conradie, J.M. Die toepaslikheid van Algemeen Aanvaarde Rekeningkundige Praktyk in die Sentrale Owerheid van Suid-Afrika. Universiteit van Pretoria, 1993. (Original full text of the summary.)

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