OVERVIEW OF

ACCOUNTING FOR PUBLIC SECTOR

AND CIVIL SOCIETY
Definition of Not-for-profit (NFP) Entities
 Not-for-profit (NFP) Entities organizations which
usually arise to meet a need that society feels is
vital/essential but it is considered that this particular
need could not, should not, cannot or will not be met
by profit-seeking organizations
 Examples include
◦ Water supply
◦ Public protection (police and defense)
◦ Religious services
◦ Infrastructure (roads)
Classification of NPOs
 Broad classification
o Governmental organizations (GOs) also known as Public Sector Entities
o Non-governmental organizations (NGOs) or private NFPs or Civil

Societies

 Classification
o Governmental units (federal, regional, local, etc)
o Educational (KGs, schools, colleges, universities, etc)
o Health and welfare (hospitals, orphanages, red cross/crescent, etc)
o Religious (churches, mosques, missions, etc)
o Charitable Institutions
o Foundations
Distinguishing Characteristics of NFOs
 Organizational objective
o Except for some proprietary activities, NFP entities have no
profit motive in providing goods and services
o Goals are something other than to earn net income and/or make
profit
o Render goods/services with no expectation of receiving revenue
o GOs
 ultimate objective is to meet some political and/or social need
o NGOs
 ultimate objective is to meet some social need
o For-profit entities
 primary focus is on earning net income, return on investment
and earnings per share
Distinguishing Characteristics …
 Ownership interest
o There is no clearly defined ownership interest that can be sold,
transferred or redeemed or that convey entitlement to a share of a
residual distribution of resources in the event of liquidation of the
organizations.
o Absence of individuals with legal claim to the excess of revenues over
expenses and excess of assets over liabilities.
 For-profit entities
 presence of individuals with legal claim to the excess of revenues
over expenses and excess of assets over liabilities.
Distinguishing Characteristics …
 non profit (not- for profit) organization is a legal
accounting entity that is operated for the benefit of
society as a whole rather than for the benefit of an
individual proprietor or a group of partners or
shareholders.
 Thus, the concept of net income is not meaningful for
non-profit organization. A non-profit organization
strives only to obtain revenue & support sufficient to
coves its expenses.
 Non-profit organizations comprise a significant
Sources of financial resources for NGOs
 NGOs can get financial resources either by:
◦ Receive significant amount of resources from
individuals/organizations who/which do not expect
to receive either repayment of or economic benefits
in return to the resources provided.
◦ Citizenry support – depend on the general
population for a substantial portion of their support
because revenues from charges for goods/services
are not intended to cover all operating costs .
Sources of financial resources for NGOs…
o GOs
 Primarily supported by taxes
 Legally forceful(involuntary) contributions
 Taxpayers do not necessarily receive an equivalent share of the
government’s goods/services
o NGOs
 Primarily supported by donations/grants
 Voluntary contributions
 Donors contributing resources do not necessarily receive an equivalent
share of the organization’s goods/services
o For-profit entities
 Primarily supported by retained profit and investment by the owner/s
Similarities B/n GO and NGOs
 Organization to serve the society (citizens)
 General absence of profit motive
 Society as a principal source of revenue
 Importance of budget
 Stewardship for resources
Regulation and control of NGOs
o Their activities and resources are subject to more stringent(strict)
legal and/or contractual requirements
o Restrictions as to how and when to use resources
o Formal and restrictive budgets
o Preparation of budgets is mandatory and imposes limit on
spending
o Lack of competitive market, especially government forms a
monopoly for specified services (e.g. public protection)
o For-profit entities
 Market is the major regulatory mechanism
Measurement of objectives/output of NGOs
 Measurement of objectives/output
o Objectives and/or their outputs cannot be objectively measured in
either monetary or any other quantitative terms
o Neither net income or earnings per share can measure the
performance of a fire brigade or a church
o Due to absence of competitive market and involuntary contribution
of resources to government.
 For-profit entities
 Objectives/outputs can be easily expressed in monetary or other
quantitative terms.
Similarities with For-profit Entities
 Both NGOs and profit-oriented organizations:
◦ The same objective of financial reporting
◦ Use the same basis of accounting
◦ Use Double entry accounting.
◦ Passe through the same Accounting cycle.



and
 Financial Accounting
and
Reporting for NFP Entities
1. Accounting for NFP Entities
i) Basic features

 Use of fund and budgetary accounting

 Traditional view of equity accounts is modified – fund balance replaces the

traditional/commercial equity accounts

 Recognition of revenues and/or expenditures/expenses for non-exchange

transactions.
 Financial reports must reflect the existence of restrictions on use of certain resources.
 Non-financial performance measures are relatively more important
 Gives more weight to budgetary compliance.
Financial Accounting and Reporting …
i) Fund accounting

 Accounting systems for many NFP entities are organized and operated on fund

basis.
 Use of multiple accounting entities to account for and report on resources

segregated according to purpose.

 Is a system meant to ensure that resources are used in accordance with

restrictions imposed on them

 In strict terms separate accounting records are kept and separate set of financial

statements are prepared for each fund.

 Designed primarily to meet internal reporting and control objectives
 Uses the equation assets = liabilities + fund balance
Financial Accounting and Reporting …
i) Fund

 is a fiscal entity responsible for resources segregated for specific purposes

 is also an accounting entity with a self-balancing set of accounts recording financial resources, claims

against the financial resources and changes in these items

 is a quasi-independent entity entrusted over resources segregated for the purpose of carrying on specific

activities or attaining certain objective in accordance with special regulations, restrictions or limitations
 is a distinct entity within a larger entity
 a part of an organization for which separate accounting records are kept in such a way that enables

preparation of separate set of financial statements

 there may be several funds in an organization
 the fund concept is aimed at clearly defining the purposes for which resources are to be used and who

will be held accountable for the resources

 fund may be unrestricted (general) – to be used for any purposes or restricted to be used only for specific

purpose
Financial Accounting and Reporting …
i) Governmental fund accounting

 Uses modified accrual basis of accounting

 Focuses on measurement of current financial resources also called current
expendable resources
 Current financial resources include
o Cash and other assets which can be readily converted into cash within the current
period or short after the end of the current period (e.g. receivables and short-term
investments)
o Obligations to be settled within the current period or short after the end of the current
period
o Thus, capital assets, some prepaid items and long-term liabilities are excluded from
accounting records and reports.

Financial Accounting and Reporting …

i) NGOs fund accounting

 Uses full accrual basis of accounting
 Focuses on measurement of all economic resources
 Thus, account for both current and non-current assets
and liabilities
i) Budgetary accounting
 Budgetary figures are incorporated/recorded in the
accounting systems
Financial Accounting and Reporting …

2. Users of NPS reports – include

 Providers of resources
o Taxpayers and Donors/grantors
o Creditors

 Employees and managers

 Service beneficiaries and the public in general
 Financial analysts and advisors
 Legislative and oversight bodies
 Researchers and academic institutions and their constituents
Financial Accounting and Reporting …
3. Objectives – objectives of NFP entity financial reporting include
 To compare results with budgets
 To assess conditions and results
 To check compliance with laws and regulations
 To evaluate efficiency and effectiveness
 GOs – set by FASAB and GASB
o Inter-period equity – whether current year revenues are sufficient to pay for current year

services (present costs should not be transferred to future years)

o Budgetary and fiscal compliance – whether resources are obtained and used in accordance with

legally adopted budgets, finance related laws and other restrictions imposed by providers of

resources
o Operating performance – evaluation of service efforts, costs and accomplishments of the

reporting entity
Financial Accounting and Reporting …

3. Objectives – objectives of NFP entity financial

reporting include ..
 NGOs – set by FASB
o Provide information useful to present and potential resources
providers and others in making decisions about allocating
resources to the organizations
 Determine compliance with finance related laws, rules
and regulations including budgets and other
restrictions imposed by providers of resources.
Financial Accounting and Reporting …
4. Financial Statements
 Both general purposes financial statements and specific purpose reports which may include
o Statement of activities
 reporting revenues and expenditures/expenses
 revenues and other financial sources – expenditures/expenses and other financial uses = net

increase/decrease in fund balance

 similar to income statement of business entity
o Statement of net assets
 reporting assets, liabilities and fund balance
 assets – liabilities = fund balance
 similar to balance sheet of business entity
o Statement of cash flows
 reporting sources and uses of cash
 sources – uses + beginning cash balance = ending cash balance
o Note to financial statements
o Auditor’s report
Financial Accounting and Reporting …
4. Financial Statements …
 GOs
o Compressive Annual Financial Report(CAFR) is the government’s official annual
report prepared and published as a matter of public report, contains:
1. The Introductory Section.
 Table of contents
 Letter of transmittal
 Organization structure & roster of elected officials.
2. Financial Section
 The auditor’s report.
 General purpose financial statements
 Combining and individual fund and account group statements.
 Schedules

3. Statistical Section
 NGOs
 Statement of Activities
 Statement of Net Assets
 Statement of Cash flows
Financial Accounting and Reporting …

5. Sources of Financial Accounting and Reporting Standards

 GOs
o Federal government – Federal Accounting Standards Advisory Board
(FASAB) as well as AICPA and FASB to some extent
o State and local governments – Governmental Accounting Standards
Board (GASB) as well as AICPA and FASB to some extent
 NGOs – Financial Accounting Standards Board (FASB) and
AICPA
 But now, IPSAS is adopted for N-F.-P and governmental
organization
What are IPSAS & IFRS?
 IPSAS: stands for International Public Sector Accounting
Standards are a set of accounting standards issued by the IPSASB
for use by public sector entities around the world in the
preparation of F/S.
 IPSAS are financial reporting standards for use by public sector
entities & they are for public sector equivalent of International
 Financial Reporting Standards (IFRS), which apply to private
sector companies and developed by the International Accounting
Standards

 Board (IASB). As of January 2016 the IPSASB had issued 39 IPSAS.

IPSAS and IFRS….
 IFRS: Stands for International Financial Reporting
Standards are a set of accounting rules for the financial
statements of public companies that are intended to make
them consistent, transparent, and easily comparable
around the world. It was also created to bring
 consistency and integrity to accounting standards and
practices, regardless of the company or the country.
 IFRS are issued by the International Accounting Standards
Board (IASB).
IPSAS and IFRS….
 Scope : IPSAS applies to :International organization, public sectors

(National & local government, other government and commission)

but IFRS applies to government business entities and private sectors.

 Basis of accounting : IPSAS follow accruals or cash basis of

accounting while IFRS follow accrual basis of accounting.

 Revenue: IPSAS 19 recode it on the title of revenue from exchange

transaction and it includes revenue from ordinary activity and

gain while IFRS on IAS 18 record on the title of revenue and it only
 include revenue from ordinary activity.
 The Conceptual Framework for Public
Sector Accounting [IPSASB]
 DEFINITON OF FRAMEWORK – The basic structure of something : a set of ideas or facts that

provide support for something.

 CONCEPTUAL FRAMEWORK - It describes the objective & the concepts for general purpose for

something. It is a theoretical structure of assumptions, principles, and rules that holds together the

ideas comprising a broad concept.

 The Framework of IPSASB is structured into with the following topic:
1. Role and Authority of the Conceptual Framework;

2. Objectives and Users of General Purpose Financial Reporting;

3. Qualitative Characteristics;

4. Reporting Entity;

5. Elements in Financial Statements;

6. Recognition in Financial Statements;

7. Measurement of Assets & Liabilities in Financial Statements;

8. Presentation of Information in General Purpose F/S.

Fund accounting
Governmental accounting system 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 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.

PART – II

Principles of accounting
and
Financial reporting of Governmental Entities
Statement of the principles
Accounting & Reporting Capabilities (Principle #1)
 A government accounting system must make it possible
both:

(a) To present fairly & with full disclosure the financial

operation of the funds & account groups of the
governmental unit in conformity wit International
public sectors Accounting standards

(b) To determine & demonstrate compliance with

finance-related legal and contractual provisions.
Statement of the principles …
a) Adherence to IPSAS is essential to answering a reasonable
degree of comparability among the general-purpose financial
reports of state and local governmental units.

b) Sometimes the legal requirements might be contrary to IPSAS,

GAAP or IFRS;
 For instance, governmental entities may require to keep books
with a single entry ledger, or it may require to keep all account
on a strictly cash basis. In these cases since the legal
requirements are contrary to GAAP/IFRS financial statements
& reports prepared in compliance with state laws are complied.
Statement of the principles …
 In some governmental units however Under such
circumstances where the laws require to follow
practices not consistent with accounting
principles,
 Governmental units may prepare two sets of financial
statements.
1. One set in compliance with legal requirements,
2. One set in conformity with Accounting
principles.
Fund Accounting System (Fund defined)
(principle # 2)
 Governmental accounting systems should be organized &
operated on a fund basis.
 “A fund is defined as a fiscal & accounting entity with a self
balancing set of accounts recording cash & other
financial resources, together with all related liabilities &
residual equities and balances, & changes there in, which
are segregated for the purpose of carrying on specifies
activities or attaining certain objectives in accordance with
special regulations, restrictions or limitations.”
Fund Accounting ….
 The word FUND is given special definition as it relates to Fund

Accounting. The narrow definition of Fund as used in ordinary

conversation is a “resource of money”.

 However in this course it is given the special definition above. It has key

phrases indicating the following points;

 It is by itself is an entity

 Having its own accounting existence and

 A self balancing set of books(double entry system).

 The establishment of the fund will attain a specific objective and

will have regulations, restrictions or limitations.

 Fund categories
Fund is categorized into:
1. Governmental / operating funds (non
business activities)
2. Proprietary funds (business-type
activities)
3. Fiduciary Fund- used to account for assets
being held by a government unit in a
trustee capacity.
1-
36
Governmental Funds
Characteristics:
 Focus on short-term flow of financial resources
 Only account for current assets and current
liabilities
 Use modified accrual basis of accounting
(revenues recognized when measurable and
available for spending and expenditures when
incurred)
Closely tied to budgetary accounting
1-
 37
Types of Governmental Fund
(i) The General Fund – to account for all financial resources except those required
to be accounted for in another fund.
(ii) Special Revenue Funds – to account for the proceeds of specific revenue sources
(other than private-purpose trusts or for major capital projects) that are legally
restricted to use for specified purposes.
(iii) Capital Projects Funds – to account for financial resources to be used for the
acquisition or construction of major capital facilities (other than those financed by
proprietary funds and trust funds).
(iv) Debt Service Funds – to account for the accumulation of resources for, and the
payment of, general long-term debt principal and interest.
(v) Permanent Funds – to account for legally restricted resources provided by trust
in which the earnings but not the principal may be used for purposes that support
the primary’s government’s programs (those that benefit the government or its
citizenry).
Proprietary and Fiduciary Fund
Characteristics:
 Focus on flow of economic resources
 Accrual basis of accounting (revenues recognized when
earned and expenses when incurred)
 Account for both current and noncurrent assets and
liabilities—similar to business accounting
Types of Proprietary Fund
(1) Enterprise Funds- to account for operations
 That are financed and operated in a manner similar to private business
enterprises –where the intent of the governing body is that the costs
(expenses, including depreciation) of providing goods or services to the
general public on a continuing basis be financed or recovered primary through
user charges; or
 Where the governing body has decided that periodic determination of
revenues earned, expense incurred, and/or net income is appropriate for
capital maintenance, public policy, management control, accountability or
other purposes.
(2) Internal Service Funds – to account for the financing of goods or services
provided by one department or agency to other departments or agencies of the
governmental unit, or to other governmental units, on cost-reimbursement basis.
3. Fiduciary Fund
 These are trust and agency funds that are used to account for
assets held by governmental unit in a trustee capacity or as
an agent for individuals, private organizations, and other
governmental units.
 These funds types correspond to the types of activities in
which government’s engage: Governmental funds are used
to account for governmental activities; propitiatory funds
are used to account for business-type activities, and
fiduciary funds are used to account for fiduciary activities.
Types of fiduciary Fund
(i) Pensions (and other employment benefit) trust funds - are used to report
resources that are required to be held in trust by the state for the members and
beneficiaries of defined benefit pension plans, defined contribution pension plans,
and other employee benefit plans
(ii) Investment trust funds - are used to report the external portion of the Local
Government Investment Pool, which is reported by the state as the sponsoring
government.
(iii) Private-purpose Trust Funds - are used to report trust arrangements, other than
pension and investment trusts, under which principal and income benefit
individuals, private organizations, or other governments. The resources held under
these arrangements are not available to support the government’s own programs.
(iv) Agency Funds - are used to account for resources held by the state in a purely
custodial capacity for other governments, private organizations or individuals.
Accounting for General and
Special Revenue Funds
ILLUSTRATION: ACCOUNTING FOR GENERAL AND
SPECIAL REVENUE FUNDS
• The General Fund Trial Balance of the Addis Ketema
Sub-City as of Hamle 1, 2013 E.C. was as follows:
Debits Credits
Cash Birr 20,000
Taxes Receivable-Delinquent 77,200
Estimated Uncollectible Taxes-Delinquent 9,200
Voucher Payable 16,000
Budgetary Fund Balance-Reserve for Encumbrances 8,500
Fund Balance 63,500
97,200 97,200
ILLUSTRATION: ACCOUNTING FOR GENERAL AND
SPECIAL REVENUE FUNDS
• The following data pertain to General Fund operations for the Addis Ketema
Sub-City for the fiscal year ended Sene 30,2014 E.C.
Hamle 1. Budget Approved

Revenues and
Other Financing
Sources
Property Taxes Birr 420,800
Fines, Forfeits, and Penalties 160,000
Miscellaneous Revenues 20,000
Proceeds of general long term debt 50,000
Operating Transfer-Ins 20,000
Birr 660,800
ILLUSTRATION: ACCOUNTING FOR GENERAL AND
SPECIAL REVENUE FUNDS

Expenditures
and Other
Financing Uses
Public Safety 390,000
General Government 120,000
Culture and Recreation 54,000
Operating Transfers Out 30,000
590,000
ILLUSTRATION: ACCOUNTING FOR GENERAL AND
SPECIAL REVENUE FUNDS
Hamle 2. Encumbrances outstanding at the end of Sene 2013 were re-
established.
Nehassie 3. Property taxes of Birr 430,000 were levied. Two percent of the tax
levy is expected to be uncollectible.
Meskerem 5 Purchase orders issued in 2013/14:
Public Safety $152,000
General Government 80,000
Culture and Recreation 54,000
$286,000
Tikimt 2 Cash collections and transfers:
Delinquent Taxes $ 39,200
Current Taxes 368,000
Fines, Forfeits, and Penalties 154,000
Miscellaneous Revenues 20,000
Operating Transfers In 18,000
Bond Issue Proceeds 50,000
$649,200
ILLUSTRATION: ACCOUNTING FOR GENERAL AND
SPECIAL REVENUE FUNDS
Hidar 30 Purchase orders issued in 2013/14 were filled in the following
amounts:
Estimated Actual
Public Safety 149,000 148,400
General Government 80,000 80,000
Culture and Recreation 54,000 54,000
283,000 282,400

Tahisas 15. Purchase orders issued in 2012/13 in the following amounts were
filled in 2013/14:
Estimated Actual
Public Safety 8,500 8,400

Tir 25. Additional vouchers payable for salaries and wages (not encumbered):
Public Safety Birr 230,000
General Government 37,000
Birr 267,000
ILLUSTRATION: ACCOUNTING FOR GENERAL AND
SPECIAL REVENUE FUNDS
Miyaziya 15. Accounts paid amounted to $570,000; the transfer out
to capital projects fund, $30,000, was made in cash.
Sene 5. Reclassify Taxes Receivable—Current and Estimated
Uncollectible Taxes—Current as delinquent.

Required:
a. Prepare journal entries to record the effects of the foregoing
data.
b. Prepare closing entries.
c. Prepare for the General Fund of Addis Ketema Sub-City
(1) A Statement of Financial Performance for the year ended
Sene 30, 2014.
(2) A Statement of Financial Position as of Sene 30, 2014,
assuming there are no restricted or committed net resources
and the only assigned net resources are the outstanding
encumbrances.
General Fund [General Ledger] General Fund [Subsidiary Ledger]

Ham 1. Estimated Revenue 600,800 Ham1. Estimated Revenue SL

Budgetary Fund Balance 600,800 Estimated Property Taxes 420,800

Est. Fines, Forfeits and Penalties 160,000
Est. Misc. Revenues 20,000
600,800

1. Estimated OFS 70,000

1. Estimated OFS SL
Budgetary Fund Bal. 70,000
Est. operating transfer out 20,000
Est. proceeds of GLTD 50,000
70,000
1. Budgetary Fund Balance 564,000

Appropriation 564,000 1. Appropriation SL

Public Safety 390,000

General Government 120,000
Culture and Recreation 54,000
1. Budgetary Fund Balance 30,000 564,000

Estimated OFU 30,000

Ham. 2 Fund Balance 8,500 1. Estimated OFU SL

Encumbrance-12/13 8,500 Est. Operating Transfer out 30,000

50
General Fund [General Ledger] General Fund [Subsidiary Ledger]

Revenues SL
Neh. 3. Tax Rec.-Current 430,000
Property Taxes 421,400
Est. Uncol. Tax-Cur 8,600

Revenues 421,400
Encumbrance SL
Mes. 5 Encumbrance 286,000 Public Safety 152,000
General Government 80,000
BFB-Reserve for 286,000 Culture and Recreation 54,000
Enc. 286,000
Tik. 2 Cash 39,200

Tax Receivable-Del 39,200

Tik. 2 Cash 368,000

Revenues SL
Tax Receivable-Cur 368,000
Fines, Forfeits, and Penalties 154,000
Tik.2 Cash 174,000 Miscellaneous Revenue 20,000
174,000
Revenues 174,000
Other Financing Source SL
Tik.2 Cash 68,000 Operating Transfer In 18,000
Proceeds of GLTD 50,000
Other Financing Source 68,000 68,000 51
General Fund [General Ledger] General Fund [Subsidiary Ledger]

Encumbrance SL:
Hid. 30. BFB-Reserve for enc 283,000
Encumbrance 283,000 Public Safety 149,000
General Government 80,000
30. Expenditure 282,400 Culture and Recreation 54,000
Voucher Payable 282,400 283,000

Tah. 15 BFB-Reserve for Enc 8,500

Encumbrance 8,500
Expenditure SL:
Public Safety 148,400
15. Expenditure-12/13 8,400
General Government 80,000
Voucher Payable 8,400 Culture and Recreation 54,000
282,400
Tir. 25. Expenditure 267,000
Voucher Payable 267,000

Mia. 15. Vouchers Payable 570,000 Expenditure SL:

Other Financing Use 30,000 Public Safety 230,000
Cash 600,000 General Government 37,000
267,000
Sen. 5 Tax Receivable-Deli 62,000
Tax Receivable-Cur 62,000
Other Financing Use SL:
Est. Uncollect Taxes-C 8,600 Operating Transfer out 30,000
Est. Uncollect Taxes-D 8,600 52
General Fund [General Ledger]

Sene 30: Appropriation 564,000

Estimated OFU 30,000

Budgetary Fund Balance 76,800

Estimated Revenue 600,800

Estimated OFS 70,000

Sene 30: Fund Balance 3,000

Encumbrance-05/06 3,0000

Sene 30. Revenues 595,400

Other Financing Source 68,000

Expenditure 557,800

Other Financing Use 30,000

Fund Balance 105,600

53
ILLUSTRATION: ACCOUNTING FOR GENERAL AND
SPECIAL REVENUE FUNDS
Addis Ketema Sub City
General Fund
Trial Balance
Sene 30, 2006
Debits Credits
Cash Birr 69,200

Taxes Receivable-Delinquent 100,000

Estimated Uncollectible Taxes-Delinquent 17,800

Voucher Payable 3,800

Budgetary Fund Balance-Reserve for Encumbrances 3,500

Fund Balance 114,100

169,200 97,200