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Governmental and nonprofit accounting follow different rules from those of commercial enterprises.
Compare public vs. private accounting
Public sector entities have different goals to the private sector, who's main goal is to make a profit. Public entities must be more fiscally responsible. The usage of government accounting processes also differs significantly from the use in the private sector.
Publicly elected officials and their employees must be accountable to the public, and thus government accounting provides information on whether taxpayer funds are used responsibly or not.
Government accounting must also serve the same purpose as commercial accounting, that is to provide information for decision-making purposes. The difference in this case is the recipient of the information is a government official, with different priorities and goals.
Nonprofits also have unique accounting systems and standards. They generally use accrual basis accounting for their funds.
Governmental accounting is an umbrella term which refers to the various accounting systems 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 .
Governmental and Nonprofit accounting follow different rules to those of commercial enterprises.
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 differing 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 is not mandatory to comply with it.
Government accounting refers to the field of accounting that specifically finds application in the public sector or government. 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. Thus, a special field of accounting exists because:
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; and
The usage of the results of accounting processes of government differs significantly from the use thereof in the private sector.
The objectives for which government entities apply accountancy 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 taxes as possible for the essential services for which money is being coerced by law.
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.
Nonprofit organizations generally use the following five categories of funds:
Current fund – unrestricted. This fund is used to account for current assets that can be used at the discretion of the organization's governing board.
Current funds – restricted use current assets subject to restrictions assigned by donors or grantors.
Land, building and equipment fund. Cash and investments reserved specifically to acquire these assets, and related liabilities, should also be recorded in this fund.
Endowment funds are used to account for the principal amount of gifts the organization is required, by agreement with the donor, to maintain intact in perpetuity or until a specific future date or event.
Custodian funds are held and disbursed according to the donor's instructions.