Gov’t & NFP Accounting Chapter One

Government & Other NFP Accounting (Fund Accounting) - Acct 241

Chapter One
Introduction
Economic entities are classified into two broad categories
For Profit (commercial or business) and
Non business (not for profit) entities.
Not for profit organizations are further classified into
Government and
None government organizations (NGO’s)
Governmental organizations include:
Federal, state and local governments, agencies, commissions, authorities, divisions, and offices
etc.
Nongovernmental organizations include
Religious organizations, voluntary health and welfare organizations, charitable organizations etc.
1.1. What are Governmental Organizations?
 General purpose governments are 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).
 Provide a broad array of services
Examples: Federal government, state governments, cities, towns, townships, villages,
counties etc.
 Special purpose governments are 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).
 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.
 Usually provide only a single or just a few services

Examples: Independent school systems, public colleges and universities, public hospitals, fire
protection districts, sewer districts, transportation authorities, and many others

1.2. What are Not-for-Profit Organizations?

 Legally separate organizations
 Usually exempt from federal, state, and local taxation
 Religious, community service, private educational and health care, museums etc.
1.3. Characteristics of NFP entities
A. Objective.
 They render goods and services to the society especially those which are not commercially
feasible.
 Profit is not their primary motive

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B. Control
 They are highly affected by legal requirements or restrictions.
 They use funds and budgets as a control device.
 Market is not used as a control device.
 Their major operating and policy decisions, typically are made by consensus vote of an
elected or appointed governing body
C. Cost benefit relationship
 No direct and proportional relationship between resources provided and the benefits received.
 Those contributing financial resources to the organization do not receive a direct or
proportionate share of their goods or services nor equity interest in the assets of the
organization.
D. Ownership Interest
 Ownership is not clearly evidenced by individually owned equity shares which may be sold
or exchanged.
E. Scope of Operations
 Their operations are mostly diversified; i.e. wide and may cover different areas of activities.
F. Accounting System
 They generally adopt the concept of fund accounting system contrary to business
organizations which adopt the financial accounting system.
G. Source of Revenue.
 Taxation or contribution is the principal source of revenue.
Note that nonprofit organizations exist because the community or society considers it necessary to provide
certain goods or services to its group as a whole and the provision is regardless of
 Whether the costs incurred will be recovered through charges
 Whether those paying for the goods or services are those benefiting from them
In most cases, NFP organizations provide goods or services which are not commercially feasible to produce
through private enterprises.
1.4. Similarity of business and non business organizations.
Accounting Principles
 Consistency: Accounting principles once adopted should not be altered so as to compare
financial statements of different periods. However, the concept does not completely prohibit
changes in the accounting principles used. Changes are permissible when it is believed that the
use of a different principle will more fairly present net income and financial position.
 Objectivity Entries in the accounting records and data reported on financial statements must be
based objectively determined evidence.
 Historical Cost. It states that historical cost rather than a later current fair value continues to
serve as the basis for asset valuation in the accounting records and in financial statements.
 Adequate disclosure. Financial statements and their accompanying foot notes or other
explanatory materials should contain all of the pertinent data believed essential to the readers
understanding of the enterprise’s financial status.

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 Conservatism. It is the tendency of selecting among the alternatives which yields lesser amount
of net income or of asset value.
 Unit of measurement. All transactions are recorded in terms of money.
Activity
 Both organizations are integral parts of the same economic system and utilize similar resources
in accomplishing their purpose.
 Both must acquire and convert scarce resources into their respective goods or services
 In some cases, both produce similar products. For example both government and private
enterprises may own and operate transaction systems like sanitation services, electric or gas
utilities.
1.5. Differences between business and non business organizations
A. Sources of revenue – For government- taxation; which is compulsory
For NGOs- Contribution which is voluntary
For business- sales and others
B. Legality Economic substance is emphasized for business organizations.
Legal form is emphasized for NFP organization
C. The entity concept
For NFP entities
 It refers to separate fund or fund type entities
 Multiple entity concept is applied
For Business organizations
 It refers to the organization as a whole
 Single entity concept is applied i.e. One business organization means one accounting entity
and only one ledger with one set or group of accounts.
D. The matching concept
 NFP entities which use expendable funds refer to matching financial inflows with
financial out flows and estimated data with actual results
 Profit organizations refer to the matching of revenues and expenses, for net income or net
loss measurement of a given accounting period.
E. The periodicity Concept.
NFP entities
 How much resource inflows and resource outflows occur during the budgetary period is
the major concern
 Comparison between budgeted revenue with actual revenue and estimated expenditures
with actual expenditures (budgetary comparison)
Business organizations
 Relates to the determination or measurement of income or profit within one accounting
period
 Determination of revenue and expenses is required.
F. The going concern concept is more important in POs than NFPs.

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 It would be difficult to generalize that NFPs are going concern entities, because expendable
resources or funds exist on a year by year or project by project basis and may be intentionally
exhausted and go out of business.
 It is relevant only when commercial or self supporting accounts are involved in NFPs.
G. Accounting and financial reporting for governmental and not-for-profit organizations are markedly
different from accounting and financial reporting for businesses.
H. Business organizations are taxed but NFPs are not
I. Inventory, plant assets and depreciation are insignificant in NFPs
1.6. Distinguishing characteristics of Governmental entities from Business and other NFP entities
 Power ultimately rests in the hands of the people
 People delegate power to public officials through the election process
 Empowered by and accountable to a higher level government constraints are imposed on
state and local governments by the existence of the federal system in which higher levels of
government encourage or dictate activities by lower levels and finance the activities (partially, at
least) by an extensive system of intergovernmental grants and subsidies that require the lower
levels to be accountable to the entity providing the resources, as well as to the citizenry.
 Taxation powers Revenues raised by each level of government come, ultimately, from
taxpayers. Taxpayers are required to serve as providers of resources
 Governments do not operate in a competitive marketplace, face virtually no threat of liquidation,
and do not have equity owners.
 Governmental financial reporting focuses on a government’s stewardship of public resources,
ongoing ability to raise taxes and manage resources, and compliance with legal spending limits,
rather than on information about earnings.
1.7. Objectives of Financial Reporting—NFPs
NFP financial reporting should provide information useful in:
 Making resource allocation decisions
 Assessing services and ability to provide services
 Assessing management stewardship and performance
 Assessing economic resources, obligations, net resources, and changes in them
1.8. Objectives of Financial Reporting—Governments
Governmental financial reports are used primarily to:
 Compare actual financial results with legally adopted budget
 Assess financial condition and results of operations
 Assist in determining compliance with finance-related laws, rules, and regulations
 Assist in evaluating efficiency and effectiveness
 “ACCOUNTABILITY is the cornerstone of all financial reporting in government
“(GASB Concepts Statement No. 1, par. 56)
 Accountability arises from citizens’ “right to know”. It imposes a duty on public officials
to be accountable to citizens for raising public monies and how they are spent.
 Accountability is also the foundation of Federal government financial reporting

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Relating to government reporting, GASB has established three key objectives of accountability as
follows

 Interperiod equity
 Budgetary and fiscal compliance
 Service efforts, costs, and accomplishments.
Interperiod equity is a government’s obligation to disclose whether current-year revenues were
sufficient to pay for current-year benefits—or did current citizens defer payments to future tax
payers? Organizations should not transfer present costs to future years. This concept of inter period
equity applies only to borrowing for operating, not capital expenditures.

Budgetary and fiscal compliance refers to whether or not resources were obtained and used in
accordance with the entity’s legally adopted budget. Since government and other NFPs budgets are
typically prepared on a cash basis, financial reporting to determine budgetary compliance must also
be on cash basis
1.9. Who are the users of financial reports-Governments
 Governing Boards: the prime recipients of the report because they approve budgets, major
purchases, contracts and significant operating policies.
 Investors and creditors
 Citizens and organizational members
 Donors and Grantors
 Regulatory Agencies
 Employees and other constituents
1.10. How Do GASB’s Objectives Differ from Business Objectives?
• There is more emphasis on
– The budget
– Legal compliance
– Efficiency and effectiveness measures other than net income
• GASB Concepts Statement No. 2 emphasizes outcomes may have to be measured by means other
than dollars

1.11. Overview of Basic Financial Statements

 Government-wide Statements are intended to provide an aggregated overview of a government’s
net assets and changes in net assets. The government-wide financial statements report on the
government as a whole and assist in assessing operational accountability—whether the
government has used its resources efficiently and effectively in meeting operating objectives.
– Statement of Net Assets - Similar to business balance sheet
– Statement of Activities -Similar to business income statement

 Fund Financial Statements

• Detailed reports of governmental, proprietary, and fiduciary activities

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• Assist in assessing whether the government has raised and spent financial resources in
accordance with budget plans and in compliance with pertinent laws and regulations. Certain
funds, referred to as governmental funds, focus on the short-term flow of current financial
resources or fiscal accountability, rather than on the flow of economic resources.

• Governmental — general citizen services

• Balance Sheet
• Statement of Revenues, Expenditures, and Changes in Fund Balance
• Proprietary — business-like activities such as water utility
• Statement of Net Assets (Balance Sheet)
• Statement of Revenues, Expenses, and Changes in Fund Net Assets
• Statement of Cash Flows
• Fiduciary — holding money in trust for others
• Statement of Fiduciary Net Assets (Balance Sheet)
• Statement of Changes in Fiduciary Net Assets
1.12. Sources of GAAP and Financial Reporting Standards
FASB– Financial Accounting Standards Board
Business organizations
Nongovernmental not-for-profits
GASB – Governmental Accounting Standards Board
State and local governmental organizations
Governmental not-for-profits
FASAB – Federal Accounting Standards Advisory Board
Federal government and its agencies and departments

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Primary Sources of Accounting and Financial Reporting Standards for Businesses, Governments, and
Not-for-Profit Organizations

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