Governmental Accounting

Updated on January 2, 2024
Edited byCollins Enosh
Reviewed byDheeraj Vaidya, CFA, FRM

What is 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 periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more.

Governmental Accounting

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Key Takeaways

  • 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.

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Objectives

There is a fundamental difference in how public and private entities operate. Private entities are looking to profit and maximize revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more 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 periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more 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:

Governmental Accounting Principles

The Governmental Accounting Standards Board and the Federal Accounting Standards Advisory Board formulate the accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements.read more 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 reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.read more systems.
  2. System of Accounting: The government entity will either follow the Single-Entry System of Accounting or the Double EntryDouble EntryThe double-entry accounting system refers to the double effect of every journal entry. It is based on the dual aspect i.e. Debit and Credit and this principle states that for every debit, there must be an equal and opposite credit.read more 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 liabilityLiabilityLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more 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.

Example

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:

Frequently Asked Questions (FAQs)

What is meant by governmental accounting?

Governmental accounting is the handling of governments’ financial affairs. Government accountants prepare financial statements and budgets and provide accurate information about financial practices.

Who does accounting for the United States Government?

The Governmental Accounting Standards Board (GASB) is the independent organization that establishes accounting and financial reporting standards for the US state and local governments. State and local governments recognize the GASB standards.
The Federal Accounting Standards Advisory Board (FASAB) plays a major role in fulfilling the government’s responsibility to be publicly accountable.

Where do government accountants work?

Government accountants are employed at all levels of government — federal, state, and local. At the federal level, government accountants manage public funds, investigate white-collar crime, perform financial statement audits for government agencies and conduct research on emerging accounting issues.

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-