Governmental and Non-Profit Accounting - Report Example

Governmental and Non-Profit Accounting Accounting is a process involving recording, ifying and summarizing financial transactions. Accountability is a key theme found whenever a study is carried out on governmental and non-profit accounting. Unlike businesses that are for profit making, governments do not have clients who may willingly choose to purchase products or services. Governments and non-profit organizations do not have services or products that are judged by the bottom-line profits to shareholders or the commercial marketplace as noted by Siegel and Shim (2006). Rather, governmental bodies and non-profit organizations are organized by constituents to provide specific services. Governments are financed to a large extent by various taxes while the non profit organizations derive finances from donations and grants. In both cases, accountability of the utilization of funds is the primary focus of financial reporting. There are however some differences in the accounting systems of the governmental entities and the non-profit organizations. The federal government, comprising of both the local and state governments and non-profit organizations have their accounting standards set by different standard setting bodies (Coe, 2007). This paper seeks to examine the distinguishing characteristic, concepts and objectives of governmental and non-profit accounting. The paper will, in addition, discuss the evolution of government accounting standard setting. Distinguishing Characteristics of the Types of Accounting The characteristic of governmental accounting highlights that the comparison of two different governmental financial statements, such as the financial statements of two governments seen to be at the same level, may be equivalent to comparing oranges to apples (Ruppel, 2004). Governmental accountability can, therefore, not be based on comparison of two different countries as their range of services and sources of revenue may greatly vary, as with non-profit organizations. For this reason Governmental and non-profit organizations accountability is governed by independently formed bodies. Accounting in governmental entities and non-profit organizations is similar in many ways and sometimes could be very difficult to differentiate. In fact the non-profit organizations set up by local authorities are considered governmental entities due to their many similarities in the way they are run. The main difference lies in the set of accounting principles that they follow in accounting (Ruppel, 2004). Governmental entities follow accounting rules laid down by the Governmental Accounting Standards Board (GASB) while non profit organizations follow accounting principles prescribed by the Financial Accounting Standards Board (FASB). The GASB, established in 1984, is an independent organization that improves and establishes financial reporting and accounting standards for the US and its local governments while on the other hand the FASB is a designated organization that establishes financial accounting standards for the private sector. The non-profit organizations that are governmental follow the GASB accounting principles and the non-governmental ones follow the FASB principles. Another difference between non-profits and governmental entities lies in fund accounting. Fund accounting is a presentation and accounting method of grouping assets and liabilities according to the purpose of their use. Whereas the fund accounting is the cornerstone of accounting in governmental entities, non profit accounting principles do not need a fund accounting (Coe, 2007). Many non-profit organizations though utilize fund accounting to maintain financial controls during a fiscal year. Objectives of Financial Accounting Historically, government accounting is seen as a way of moving from absolute power to relative power. Accountability is utilized by parliament as a means of limiting the powers of government leaders when it comes to spending public money, raising taxes and determination of the purpose of government spending. The fundamental foundation of financial accounting and reporting in the US government was established by the GASB in its report titled ‘Objectives of Financial Reporting’ (GASB, 1987). According to the reports, financial reporting is done so to provide information that would facilitate different some three groups in their decision making. The report described the groups as citizens, direct representatives of citizens and creditors and investors involved in the lending process. Accountability was identified as the main objective of financial reporting by the government since it is pegged on transferring responsibilities for resources or actions from citizens to a different group such as the government entity. The accountability assessment is satisfied when the financial report enables the data users determine the extent to which current revenues finance the current-period revenues. Government accounting is also a means by which the government can control its resources. By use if a fund accounting structure, the government segregates each financial activity into different fund groups which enable the government to account for the financial resources used by its daily operations (GASB, 1987).The objectives of financial reporting in non-profit organizations are very similar to that of the governments. Financial accounting in non-profits has the objective of providing financial statement information to the information users to enable them make informed decisions (Graham, 1980). Concepts of Financial Accounting A study of the progress and development of governmental accounting in the US indicated three significant concepts upon which accounting are based namely fund accounting, budgetary accounting and accrual accounting (James, 1951). A fund can be defined as resources or a fund of money set aside for carrying out certain activities or for attaining certain objectives while considering special limitations or restrictions. Morey and Hackett (1942) stated that each fund is a different accounting and financial entity and that when accounting for funds, the record of application and assembly of resources is generated and shown separately. Budgetary accounting is mainly used to manage the accessibility of expenditure funds by agencies and provide the necessary information for administering and monitoring of the budget. The states accounting system provides information about authorized amounts, available amounts, agency commitments and available balances for each fund. This information may be additionally defined to manage each category of expenditure within a fund. Accrual accounting is an accounting method that evaluates the position and performance of an entity by recognizing economic events not regarding when cash transactions happen. Economic events are identified by corresponding expenses to revenues whenever transactions happen rather than when payments are made. The method allows current cash outflows or inflows to be joined with the upcoming expected cash outflows or inflows to arrive at a more accurate scenario of an organization’s current financial condition. Non-profit accounting has four major concepts, namely revenues, in-kind contributions, donor restrictions and classification of expenses. The revenue concept involves the comparison of exchange transactions to contributions. It is the foundation of many nonprofit accounting requirements which receive revenues from varying sources. These revenues are broadly categorized into the two classes of contributions and exchange transactions. In-kind contributions, including donated materials, rent utilities and services, are recorded as revenues with an equivalent amount of expense. For donated assets however, the revenue is considered more of an asset than an expense. Recognition of in-kind contribution brings out a more complete picture of the happenings of the non-profit and the resources utilized in accomplishing its mission. In order to understand donor restrictions, one has to first understand the dissimilarity between assets and net assets. Donor restricted contributions often results in an increase in either permanently or temporarily restricted net assets, but the contributions may not necessarily lead to restricted assets. Functional classifications such as fundraising, program services and membership development illustrate why funds are spent. Natural classes like utilities, rent and salaries illustrate what funds are spent for but do not give any indication of the reason for which they were spent. The Evolution of Government Accounting Standards Setting The Municipal Finance Officers Association (MFOA), founded in 1906 was the first attempt at establishing a uniform governmental accounting standard. MFOA, whose main goal was to improve public finance methods, worked to expand accounting budget procedures and financial reporting for local and state governments and supported the adoption of general presentations and principles. Presently, MFOA is known as Government Finance Officers Association (GFOA) and still provides training and guidance on government accounting, finance and reporting topics. MFOA has over the years published and sponsored the works of numerous groups that are dedicated to developing standards of governmental accounting. In 1936, the first group, the National Committee on Municipal Accounting (NCMA), issued a bulleting on municipal accounting statements which is commonly referred to as ‘the blue book’. This blue book became the source for governments’ Generally Accepted Accounting Principles (GAAP) which set the minimum necessities for the fair management of financial data so as to assure comparability pertaining to financial reporting among dissimilar governments. The National Committee of Governmental Accounting (NCGA) eventually replaced the NCMA (Martin &West, 2006). In the mid 1970s, New York City nearly failed to pay interests and principal on long term bonds. This focused the nation’s attention on the standards of financial and accounting reporting for government units. A bill was taken to the congress to allow federal oversight and the set up of governmental accounting. MFOA responded by creating the National Council on Governmental Accounting (NCGA) to replace the NCGA. In 1979, the NCGA issued the first and second statements that defined a financial reporting model and the management of governmental funds which became the source of governmental GAAP. In 1984 the GASB was formed and it assumed authority to set up GAAP for local and state governmental units. The latest evolution in governmental accounting is the move to a financial reporting model that is more business-like using accrual accounting within governmental statements (Martin &West, 2006). Conclusion Governmental and non-profit accounting is similar in more ways than one and shares a lot in common with a few differences as explained in the paper. Both units have conceptual goals used to measure their service delivery to the public, resource providers and citizens. Knowledge of their day to day operations helps in making decisions on how efficient the government of non-profit is in terms of accountability. References Coe, Charles (2007) Governmental and non-profit financial management, Management concepts, Vienna. Government Accounting Standards Board (1987) Codification of Governmental Accounting and Financial Reporting Standards, Stamford. Graham, Colin (1980) Accounting for Non-Profit organizations-as it is now and maybe in the future-the directors concerns. Retrieved on 16th February, 2010 http://www.lephilanthrope.ca/index.php/phil/article/viewPDFInterstitial/443/443 James, R. M. (1951) “Three major concepts in governmental accounting theory”, The Accounting Review, USA. Martin, Susan and West, Ellen (2006) Today’s essentials of governmental and not-for-profit accounting and reporting, Waveland Pr. Incorporated, Long Grove, Illinois. Morey, Lloyd and Hackett, Robert (1942) Fundamentals of governmental accounting, J. Wiley and sons, California. Ruppel, Warren (2004) Governmental accounting made easy, John Wiley and sons, Hoboken, New Jersey Siegel, J.G. and Shim, J.K. (2006) Accounting handbook, (Fourth edition), Barron’s education series, Boulevard, New York. Read More