Governmental Accounting

Governmental accounting is the managing and budgeting of public revenue. It accounts for activities, programs, and other liabilities. The government is accountable to its citizens and taxpayers. Governmental accounting checks if the revenue from taxpayers, municipal bondholders, and businesses is utilized responsibly for the betterment of the community.

It applies to all public entities at the federal, state, county, and city levels. However, there is a fundamental difference between public and private entities. A public entity wants no money left at the end of the accounting period.

• Government accounting plays a crucial role in handling the government's financial affairs and provides accurate information related to the government's financial practices.
• The Government Accounting Standards Board (GASB) and the Federal Accounting Standards Advisory Board (FASAB) are private, non-governmental organizations. They are responsible for ensuring standards of financial reporting.
• There is a distinction between government and private accounting. The government has fiscal accountability toward all stakeholders. The government is expected to be honest and diligent with the funds used.

There is a fundamental difference in how public and private entities operate. Private entities are looking to profit and maximize revenue to increase profits. Public entities are looking to raise, use, and allocate revenue effectively. Typically, this is in the form of taxes paid by citizens or businesses. The government is expected to act in the best interests of the city, state, and country. In addition, its international reputation also hangs in the balance.

A business wants money to be left at the end of the accounting period profits. In contrast, a public entity wants no money left at the end of the accounting period—effective taxation.

The governmental accounting objectives are as follows:

• Recording expenses and revenue related to government activities.
• Minimizing expenses wherever possible.
• Controlling expenditure within the set budget—government activities.
• Providing information related to expenditure and budgets—financial statements and public reports.
• Security and the protection of government property.
• Maintaining fiscal accountability.
• Allocation of revenue.

The Governmental Accounting Standards Board and the Federal Accounting Standards Advisory Board formulate the accounting framework. Public entities need an organization to police them. These principles and standards are applied across sectors to ensure that all parties look at their budgets and profits in the same way.

Two private organizations do this in the US. The Governmental Accounting Standards Board (GASB) is the main organization that creates and updates all standards for governmental accounting at the state level and below. The Federal Accounting Standards Advisory Board (FASAB) sets the accounting standards at the federal level.

Government accounting principles may vary for each state or specific entity but generally follow the following principles outlined by the GASB and FASAB.

1. Accounting and Reporting Capabilities: Every public entity must have financial reporting systems.
2. System of Accounting: The government entity will either follow the Single-Entry System of Accounting or the Double Entry System. 
3. Description of Incomes and Expenditures: Incomes and expen­ditures related to different services should be classified under heads, departments, and specific funds.
4. Valuation and Reporting of Government Assets: All government-owned assets' current and historical valuation has to be reported. It is crucial to ascertain the performance of an entity. In addition, depreciation must be allocated onto financial statements, either as a liability or as an expense.
5. Annual Financial Reports: Financial reports for public entities should be published annually and prepared interim. Governmental accounting ensures that all funds are accounted for. It is important to review if budgets were followed strictly.

Primarily, governmental accounting allocates the large pool of incoming revenue into proper funds. Additionally, government accountants perform detailed budgeting. Further, each fund must be created following specific legal requirements.

The California State Government passed Proposition 64 to legalize cannabis use in the state. Between 2018 and 2021, California raised $1 billion in cannabis tax revenue. The state allocated this new taxable revenue to childcare, public safety, and research. 

Typically, public sector revenue is allocated into the following funds:

• General Fund: This is the primary fund for all government operations. 
• Special Revenue Fund: These funds are meant for one unique purpose—for example, a COVID-19 Special Relief Fund.
• Debt Service Fund: These are funds meant to pay any debt payments that the entity owes. It is further broken down into specific funds for each loan type.
• Capital Projects Funds: These are funds meant for special infrastructure or large capital projects like preserving historic buildings, renovating a city library, or building a new bridge.
• Permanent Funds: Funds like a school endowment fund are meant to grow and not be used regularly.

This has been a guide to Governmental Accounting and its Definition. Here we explain how governmental accounting works along with objectives, principles, and examples. You can learn more from the following articles-

• Consolidation Accounting
• Financial Accounting
• GAAP