Chapter one: Introduction

Governmental and Not-for-Profit Accounting Environment & Characteristics

Accounting and financial reporting for governments and nonprofit organizations are based on
distinctive concepts, standards, and procedures designed to accommodate their environments and
the needs of their financial report users. This chapter describes about the major environmental
characteristics of governmental and nonprofit organizations. It also describes about users,
standard-setters, the characteristics of accounting and financial reporting for governmental and
nonprofit organizations and objectives of financial reporting.

What is governmental and not for profit accounting? It is a method of recording financial
information that groups a government’s or not-for-profit’s resources into funds based on their
source and the use of those resources. In other words, fund accounting is the activities of
analyzing, recording, summarizing, reporting, and interpreting the financial transactions of
government and not for profit organization. The operations of each fund are accounted for with a
separate set of self-balancing account that comprises its assets, liabilities, fund equity, revenue
and expense as appropriate. Governmental accounting system should be organized and operated
on the basis of funds.
Distinguishing characteristics of governmental and not for profit organizations
Governmental and not for profit organizations differ in many ways from business organizations.
These are:
 Absence of profit motive- With few exceptions, government and not for profit organizations
render services to the citizen without the objective of profiting from those services.
 They are owned collectively by their constituents; and because ownership is not evidenced
by equity shares that can be sold or traded, residents who are dissatisfied with their
government must await a change in its elected governing body or move elsewhere.
 Those contributing financial resources to the organizations do not necessarily receive a direct
or proportionate share of their services. For example, homeowners pay property taxes to
finance public schools even if they do not have children in school or the welfare recipient
(probably) did not pay the taxes from which welfare benefits are paid.
 Their major policy decisions, and perhaps some operating decisions, typically are made by
majority vote of an elected or appointed governing body − for example, a state legislature, a

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 city council, or a hospital board of directors − whose members serve part time, receive
modest or no compensation, and have diverse backgrounds, philosophies, capabilities, and
interests.
 Decisions usually made “in the sunshine” − is meetings open to the public, including the
news media − and most have “open records” laws that make their accounting and other
records open to the public.
Types of governmental and nonprofit organizations
Governments and not for profit organizations are vast in number and ranges of services provided.
The major types of government and nonprofit organizations may be classified as:
1. General government: federal, state, municipal, township, village, and other local
governmental authorities and special districts. Governments provide many categories of
services to their residents such as police and fire protection, sanitation, construction and
maintenance of streets, roads and bridges.
2. Educational: kindergarten, elementary and secondary schools, vocational and technical
schools, and colleges and universities.
3. Health and welfare: hospitals, nursing homes, child protection agencies, the American
red Cross, and United Service Organizations (USO)
4. Religious: Young Men’s Christian Association (YMCA), Young Women’s Christian
Association (YWCA), Salvation Army, and other religious related organizations.
5. Charitable: United Way, Community Chest, and similar fund-raising agencies; related
charitable agencies; and other charitable organizations.
This general classification scheme has much overlap among the classifications. Many charitable
organizations are operated by religious organizations, for example, and governments are deeply
involved in education, health, and welfare activities.

Determining whether a not for profit organization is governmental

 Public corporations and politics are governmental organizations.
 Other organizations are governmental organizations if they have one or more of the
following characteristics.
a. Popular elections of officers or appointments (or approval) of a controlling
majority of the members of the organization’s governing body by officials of
state or local government.

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 b. The potential for unilateral dissolution by a government with net asset
reverting to a government.
c. The power to enact and enforce a tax levy.

Colleges and universities, hospitals, museums, social service agencies are examples of
organizations that may be either governmental or non-governmental.

Similarities of G&NP organizations with business enterprises

G&NP organizations are similar in many ways with profit-seeking enterprises. For example:
1. They are integral parts of the same economic system and use financial, capital, and
human resources to accomplish their purposes.
2. Both acquire and convert scarce resources into their respective goods and services.
3. Both must have viable information systems, including excellent accounting systems to
assure that managers, governing bodies, and others receive relevant and timely
information for planning, directing, controlling, and evaluating the sources, uses, and
balances of their scarce resources.
4. Because their resources are scarce, cost analysis and other control and evaluation
techniques are essential to ensure that resources are utilized economically, effectively,
and efficiently.
5. In some cases, both produce similar products. For example, both governments and private
enterprises may own and operate transportations systems, sanitation services, and electric
or gas utilities.
Sources of Financial Reporting Standards
Figure 1.1 shows the primary sources of accounting and financial reporting standards for
business and not-for-profit organizations, state and local governments, and the federal
government. Specifically;
 Accounting and financial reporting standards for state and local governmental units are
established by governmental accounting standard board (GASB)
 Accounting and financial reporting standards for profit seeking business are established
by the financial accounting standard board (FASB)
 The authority to establish accounting and financial reporting standards for not for profit
organization is split between the FASB and GASB, because a sizable number of not for

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 profit organizations are governmentally owned (particularly collages, universities,
hospitals, etc) are government related, but many others are independent of governmental
unit. Accordingly, the GASB has the responsibility for establishing accounting and
financial reporting standards for NFP organizations which are considered to be
governmental related, the FASB has the responsibility for establishing accounting and
financial reporting standards for non-governmental for not for profit organization.
 Accounting and financial reporting standards for federal governmental units are
established by Federal Accounting Standard Advisory Board (FASAB )

Figure 1.1: Primary Sources of Accounting and Financial Reporting Standards for
Businesses, Governments, and Not-for-Profit Organizations. (Source: Statement on
Auditing Standards (SAS) 69, amended by SAS 91, April 2000, AICPA Professional Standards,
v.1, Au Sec. 411.)

Comptroller General
Director of the Office of
Financial Accounting
Foundation
Management and Budget
Secretary of the Treasury

Governmental
Financial Accounting
Accounting Standards
Standards Board (FASB) Federal Accounting
Board (GASB)
Standards Advisory Board
(FASAB)
Business Nongovern-mental State and local
Governmental not-for-
(for-profit) not-for-profit governmental
profit organizations
organizations organizations organizations

Federal government and its

agencies and departments

Objectives of financial reporting

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1. Accountability- the GASB states that accountability is the corner stone of all financial
reporting in government. Accountability requires governments to answer to the citizenry- to
justify the raising of public resources and the purposes for which they are used.
Financial reports of state and local governments, according to the GASB, are used
primarily to
Compare actual financial results with legally adopted budget
Assess financial condition and results of operations
Assess in determining compliance with finance related rules and
regulations
Assess in evaluating efficiency and effectiveness.
2. Inter period equity- Closely related to the concept of accountability as the cornerstone of
governmental financial reporting is the concept that the GASB prefer to as inter period
equity. The GASB believe that inter period equity is a significant part of accountability and
is fundamental to public administration. Financial reporting should help users to assess
whether current year resources are sufficient to pay for services provided that year and
whether future tax payers will be required to assume burdens for services previously
provided

Financial reports of not for profit organizations (voluntary health welfare organizations, collages,
hospitals, religious organizations and others) have similar uses, but in recognition of the fact that
the financial reporting of NFP organizations are generally no subject to as detailed legal
restrictions as the governments.
N.B: The objectives of financial reporting for government and NFP organizations stress the need
for the public to understand and evaluate the financial activities and management of the
organization.
Users of Financial Reports
Users of G&NP entity accounting information

 Resource providers (tax payers, donors and potential donors, investors and potential
investors, bond-rating agencies and grant providing organizations).
 Legislative and oversight bodies (higher-level governments and regulating agencies)
 Service recipients (citizen advocate groups)

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 Growth and importance of G & NFP sector
Governments and other non profit organizations have experienced dramatic growth in recent
years and have emerged individually and collectively as major economic, political, and social
forces in our society. For example, the G & NP sector now accounts for more than one-third of
all expenditures within US economy and includes many growth industries.
Like profit seeking enterprises, G & NP organizations are:
 Integral parts of the economic system and use resources to accomplish their
purposes,
 They acquire and convert scarce resources in to their respective goods or services.
 They create employment opportunities
Comprehensive Annual Financial Report (CAFR)
Users of governmental information have need for which more detail than is found in the audited
general purpose financial statement; detailed information about a governmental reporting entity
is usually in annual reporting known as comprehensive annual financial report (CAFR).
The CAFR has 3 sections. These are:
1. Introductory section- it includes items such as a title page and content page, a letter of
transmittal, a description of the government and other items deemed appropriate by
management (e.g., list of principal officials, organization chart, location, etc).). The letter of
transmittal may be literally that a letter from the chief financial officer addressed to the chief
executive and governing body of the governmental unit. The letters discuss briefly the
important aspects of the financial condition and financial operations of the report entity as a
whole and of the entities funds and account groups.
2. Financial section- this section includes an auditor’s report, management’s discussion and
analysis (MD&A), basic financial statements, required supplementary information (other
than management discussion and analysis)
3. Statistical section- it presents tables and charts showing demographic and economic data
(such as information on personal income, unemployment rates, and employers) and financial trends
in detail needed by readers.

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