GOVERNMENT AND NFP ENTITIES ACCOUNTING

CHAPTER 1: INTRODUCTION

Contents
 What are non-business organizations
 Objectives of financial reporting and uses of financial reporting
 Distinguishing Characteristics of NFP organizations
 Major organization types
 Fund types and their uses in Brief

1.1 WHAT ARE NON-BUSINESS ORGANISATIONS?

 Non-business organizations: are economic entities organized to provide a socially
desirable service without regard to financial gain.
 General purpose governments:
governments: governments that provide many categories of services
to their residents (such as police and fire protection; sanitation; construction and
maintenance of streets, roads, and bridges; and health and welfare).
-Example: States, counties, municipalities (for example, cities and villages), and
townships.
 Special purpose governments—governments
governments—governments that provide only a single function or a
limited number of functions (such as education, drainage and flood control, irrigation,
soil and water conservation, fire protection, and water supply).
- Example: Independent school districts, public colleges and universities, and
special districts.
- Special purpose governments have the power to levy and collect taxes and to
raise revenues from other sources as provided by state laws to finance the
services they provide.
 Not-for-profit organizations:
organizations: also exist in many forms and serve many different
functions. These includes: private colleges and universities, various kinds of health
care organizations, certain libraries and museums, professional and trade associations,
fraternal and social organizations, and religious organizations.

1.2 CHARACTERISTICS OF NON FOR PROFIT ORGANISATION

Definition: - Governmental Accounting ፡is a complete activity of identifying, recording,

classifying, analyzing, interpreting, summarizing and communicating economic extents of
monetary nature for governmental organization.

A unique Characteristics of NFP organization includes the followings:

 Source of income
- Taxation is the principal source of income for governmental unit.
- Tax payers are involuntary resource providers; they are not free to choose whether or

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 not to pay taxes they are legally required to provide these resources to the government.
 Impact of law and regulation.
- Operations of governmental entity are highly subject to governmental laws and
regulations or legal Enactment.
Example: - Budgetary compliance
Record keeping e. t. c
 No direct relationship between resources received and services provided.
- Citizens who provide these resources do not receive coupons for a certain amount
of governmental services e.g. fire protection, transportation, water supply, police, e.
t. c
- There is no matching of revenue provided with services received.
 Ownership and Management.
-Under governmental organization ownership is not evidenced by separate share of
stock, but for business firms worship is evidenced by share of stock.
 Government often monopolizes Certain Services.
A good example would be
- Police & fire protection
- Detente
- Telecommunication & water supply
- Electricity power supply
. The government has natural right (monopoly) right for this service.
 Difficulty to measure the optimal quality or quantity of service.
 Stewardship for resources.
- Since the main source of revenue for governmental unit is the citizen, the
managers of governmental unit are representative and expected to be loyal for the
resources the reports of governmental unit should reflect the way of raising and
how it was allocated.
 Organized to serve the society (absence of profit motive).
-The general objective of governmental unit is to serve the society
I.e. To increase the living standard of the society
Similarities of Government with Business

o Operate in the same economic system

o Acquisition of resources to provide goods or services

o Use of financial management processes

o Use of financial information systems

o Use of cost analyses, control and evaluation techniques

o Need to operate economically, efficiently, & effectively

o Compete & acquire scarce resources & provide goods & services many of which
may be similar

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Differences between Government and Business organizations

 Organizational objectives

 Sources of financial resources

 Regulation and control

 Methods of measuring performance

 Ownership interest

 Potential for longevity

 Diversity of Activities

 Financial reporting model (use of Fund Accounting)

1.3 MAJOR ORGANISATION TYPES

The broad classification comprises Governmental organizations (GOs) and Non-

governmental organizations (NGOs) or private NFPs. But the major types of or
governmental & not-for-profit organizations may be classified as follows:
1. Governmental: includes federal, state, county, municipal, township, village, and
other local governmental units including special districts.
2. Educational: includes kindergarten, elementary and secondary schools, colleges
and universities.
3. Health and Welfare: includes hospitals, nursing homes, orphanages, Red Cross,
etc.
4. Religious: includes Churches, Missions, Mosques and other religion related
organizations.
5. Charitable: includes Community chests, United Appeals, United funds, mother
Teresa, Mary Joy and other charitable organizations.
6. Foundations: private trusts and corporations organized for educational, religious
or charitable purposes.

1.4 SOURCES OF FINANCIAL REPORTING STANDARD

Financial reporting standards for governmental and other not for profit organizations are
established by the Financial Accounting Standards Board (FASB) or the Government
Accounting Standards Board (GASB).
Governmental Units: The Governmental Accounting Standards Board (GASB) is

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currently the source of generally accepted accounting principles (GAAP) used by state and
local governments. It is a private, non-governmental organization. The GASB is subject to
oversight by the Financial Accounting Foundation (FAF), which selects the members of
the GASB and the Financial Accounting Standards Board (FASB), and funds both
organizations.

The mission of the Governmental Accounting Standards Board is to establish and improve
standards of state and local governmental accounting and financial reporting that will
result in useful information for users of financial reports and guide and educate the public,
including issuers, auditors, and users of those financial reports. The GASB has issued
Statements, Interpretations, Technical Bulletins, and Concept Statements defining GAAP
for state and local governments since 1984. GAAP for the Federal government is defined
by the Federal Accounting Standards Advisory Board (FASAB).

Other Not-for–Profit Organizations: Financial Accounting Standards Board (FASB) is

the standard setting body of financial reporting standards for profit making organizations
and other non-governmental not for profit organizations such as colleges, universities,
hospitals, voluntary health and welfare organizations, etc which are independent of
governmental units.
Summary of Standard Setting Organizations
Reporting Organization Standard Setting Board

Federal Government Federal Accounting Standards Advisory Board (FASAB)

State & Local Governments Governmental Accounting Standards Board (GASB)
Public not for profits Governmental Accounting Standards Board (GASB)
Private not profit Financial Accounting Standards Board (FASB)
Investor owned business Financial Accounting Standards Board (FASB)

1.5 OBJECTIVES OF FINANCIAL REPORTING AND USES OF FINANCIAL

REPORTING
Objectives of Financial Reporting:
 Accountability: The supreme objective/cornerstone of all financial reporting in
government. Accountability requires governments to answer to the citizenry that is,
to justify the raising of public resources and the purpose for which they are used.
 The other important thing in financial reporting of governmental unit is
compliance with legal and contractual obligations. Accordingly, governmental
financial reporting should do the following:
I. Financial reporting should enable users to assess accountability of the
governmental entity, specifically the information should:
a) Permit users to determine whether current year revenue were sufficient to
pay for the current years services and or whether future years citizens must
assume burdens of services provided previously.
b) Demonstrate whether resources obtained were used in accordance with the

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 entity’s legally adopted budget and in compliance with finance related legal
or contractual requirements.
c) Assist users in assessing the service efforts, cost and accomplishments by
the governmental entities.
II. Finical reporting should assist users in evaluating the operating results of the
governmental entity the year by:
a) Providing information about sources and uses of financial resources.
b) Providing information how it financed its activities and met its cash
requirements.
c) Providing information necessary to determine whether its financial position
improved or deteriorated as a result of the year’s operations.
III. Financial reporting should assist users in assessing the level of services that can be
provided by the governmental entity and its ability to meet its obligations as it become
due by.
a) Providing information about its financial position and condition
b) Providing information about its and other non-financial resources.
c) Disclosing legal or contractual restrictions on resources and the risk of
potential loss of resources.
Users of financial reports of Government
 The citizenry: those to whom the government is primarily accountable-including
citizens (taxpayers, voters, service recipients), the media, advocate groups, and
public finance researchers.
 Legislative and oversight bodies: those who directly represent the citizens-
including members of state legislatures, county commissions, city councils, boards
of trustees, school boards, executive branch officials with oversight responsibility
over other levels of government
 Investors and creditors: those who lend and participate in the lending process-
including individual and institutional investors and creditors, municipal security
underwriters, bond rating agencies, bond insurers, and financial institutions
 Government administrators:
administrators: internal executive branch managers who do not
have ready access to the government’s internal information
FASAB has identified four major groups of Users of external Federal financial
reports;

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 - Citizens,
- Congress
- Executives and
- Program managers.
1.6 FUND TYPES AND THEIR USE IN BRIEF
 A fund is formally defined as:
- A fiscal and accounting entity.
- Self-balancing set of accounts, reflecting (with its own) the assets, liabilities,
net assets, and changes in those balances.
- Resources, related liabilities, and residual equities or balances and changes
therein are segregated for the purpose of carrying out specific activities or
attaining certain objectives.
 State and local government financial reporting has been based on fund accounting.
Fund accounting and reporting permit governmental managers to demonstrate
compliance with legal and contractual requirements. Fund accounting and the term
fund, are defined by the GASB as follows:

Governmental accounting systems should be organized and operated on a fund basis.

A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts
recording cash and other financial resources, together with all related liabilities and
residual equities or balances, and changes therein, which are segregated for the purpose
of carrying on specific activities or attaining certain objectives in accordance with special
regulations, restrictions, or limitations.

 Note that the definition of the word fund requires that two conditions must be met for a
fund, in a technical sense, to exist: (1) there must be a fiscal entity —assets set aside
for specific purposes, and (2) there must be a double-entry accounting entity created
to account for the fiscal entity.

 State and local governments use 11 fund types. These fund types are organized into
three categories: governmental funds, proprietary funds, and fiduciary funds.

Governmental Funds: Five fund types are classified as governmental funds:

1. The General Fund: Every state and local government has one and only one General
Fund.
Most departmental operating activities, such as those of police and fire, public works,
parks and recreation, culture, education, and social services, as well as general government
support services, such as the city manager’s office, finance, personnel, and data
processing, are typically accounted for in the General Fund.

2. Capital projects funds: Governments often engage in capital projects to accommodate a

growing population or to replace existing capital assets. These projects typically involve
major construction of items such as buildings, highways or bridges, or parks. To
account for tax or grant revenues, or bond proceeds earmarked for a capital project, as well
as payments to architects, engineers, construction contractors, and suppliers, a capital
projects fund is typically created. Multiple capital projects funds may be created if a
government has multiple capital projects..

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3. Debt service funds: Governments that have bond obligations outstanding and certain
other types of long-term general liabilities may be required by law or bond covenants to
create a debt service fund. The purpose of a debt service fund is to account for financial
resources segregated for the purpose of making principal and interest payments on general
long-term debt. Some governments account for all debt service on general long-term debt
in their General Fund, but governments ordinarily create one or more debt service funds if
they have general long-term debt.

4. Special revenue funds: When tax or grant revenues or private gifts are legally restricted
for particular operating purposes, such as the operation of a library or maintenance of
roads and bridges, a special revenue fund is created. The number of special revenue funds
used by state and local governments varies greatly, ranging from a few to many.

5. Permanent funds: A permanent fund is used to account for permanent endowments

created when a donor stipulates that the principal amount of a contribution must be
invested and preserved but earnings on amounts so invested can be used for some public
purpose. Public purposes include activities such as maintenance of a cemetery or aesthetic
enhancements to public buildings. If the earnings from a permanent fund can be used to
benefit only private individuals, organizations, or other governments, rather than
supporting a program of the government and its citizenry, a private-purpose trust fund—a
fiduciary fund—is used instead of a permanent fund.

Proprietary Funds: Proprietary funds of a government follow accounting and financial

reporting principles that are similar to those for commercial business entities. There are
two types of proprietary funds:
1. Enterprise funds: Enterprise funds may be used to account for activities in which
goods or services are provided to the public for a fee that is the principal source of revenue
for the fund.. Examples of enterprise funds include water and other utilities, airports,
swimming pools, and transit systems.
2. Internal service funds: Internal service funds are created to improve the management
of resources and generally provide goods or services to departments or agencies of the
same government and sometimes to other governments on a cost-reimbursement basis.
Examples of services typically accounted for by internal service funds include central
purchasing and warehousing of supplies, motor pools, centralized data processing, and
self-insurance pools.

Fiduciary Funds Fiduciary funds: sometimes known as trust and agency funds,
account for resources for which the government is acting as a collecting/ disbursing agent
or as a trustee. Fiduciary activities of a government are reported using the same principles
as proprietary fund and government-wide financial statements: the economic resources
measurement focus and accrual basis of accounting.
Four types of fiduciary funds exist:
1. Agency funds: Agency funds generally are used when the government holds cash on a
custodial basis for an external party (individual, organization, or government). An example
is taxes collected by a government on behalf of other governments. There are no net assets
in agency funds, since for every dollar of assets held there is a dollar of liability to the
external party (total assets in the fund always equal total liabilities).

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2. Pension (and other employee benefit) trust funds: are used to account for pension and
employee benefit funds for which the governmental unit is the trustee. That holds assets in
trust to provide retirement benefits for employees.
3. Investment trust funds: account for the external portion of investment pools reported
by the sponsoring government. Used to report the equity of external participants (typically
other governments) in a sponsoring government’s investment pool.
4. Private-purpose trust funds: created to benefit private individuals, such as a fund to
provide scholarships for the children of firefighters and police officers killed in the line of
duty.

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