Accounting
• “Accounting is a system for keeping track of
the financial status of an organization and
the financial results of its activities” (Finkler
2001, 4)
– Managerial accounting generates information
used to manage and improve performance:
budgeting, cost analysis, asset allocation, etc.
– Financial accounting “provides retrospective
information,” which is “from time to time . . .
summarized and reported to interested users,”
including managers, vendors, creditors,
regulators, legislators, citizens, et al.
Elements of an Accounting System
• Source Documents
Ledger:
Accumulates
transaction results
by account
– Purchase orders, invoices,
receipts, time cards, etc.
• Journals
Journal:
Records transactions,
by accounts
– Chronological records of
transactions for each
account and type of
transaction
• Ledgers
Purchase orders
Invoices
Time cards
Etc.
– Summarize totals and
balances from journals
• Procedures and Controls
• People
Financial Accounting / Reporting
• Government and nonprofit standards
reflect their distinctive purposes
• GAAP: evolving consensus judgments,
codified by standards-setting bodies
– Transparency, relevance, accuracy, reliability,
comparability, and meaningfulness
– FASB: Business and nonprofit
– GASB: State and local governments
– FASAB: Federal government
MFBA
• Measurement Focus
– Economic resources: all financial and capital
resources, and changes in net assets
– Current financial resources: likely to be consumed or
converted to cash within a year (or other current
period), excludes capital resources
• Basis of Accounting
– Cash: record transactions when cash changes hands
– Accrual: record revenues when reasonably certain to
be collected, expenses when resources are used or
consumed
– Modified accrual: record inflows when measurable
and available, expenditures when delivery of
goods/services incurs obligation to pay
Fund Accounting
• Used internally by nonprofits (FASB 117)
• Used internally and for external reporting
by state and local governments
• For purposes of control / accountability
– Ensures that resources are applied to their
designated uses / purposes
– Demonstrates compliance with legal and
budgetary constraints on government
– Segregates restricted, temporarily restricted,
and unrestricted assets of nonprofits
Fund Accounting: Government
• Governmental Funds (“expendable”): (1) general, (2)
special revenue, (3) capital projects, (4) debt service,
and (5) permanent (endowment-like)
– Cover the basic services of government
– Reported on a modified accrual basis, with a current financial
resources measurement focus; also records encumbrances
• Proprietary Funds (“revolving”): (6) enterprise and (7)
internal service funds (ISF)
– Cover externally and internally charged-for goods and services
– Reported on an accrual basis, with an economic resources
measurement focus
• Fiduciary Funds (“revolving”): (8) public pension trust, (9)
investment trust, (10) private-purpose trust, (11) agency
– Account for assets held / managed on behalf of others, not
available to the government for its own purposes
– Reported on an accrual basis, with an economic resources
measurement focus
GASB 34 (issued 1999)
• “A virtual revolution in [government] financial
reporting” (Holder 2004, 207):
• Government-wide statements presented on an
accrual basis, economic resources focus
– Statement of net assets, statement of activities
– Governmental activities
– Business-type activities
– Component units
– Infrastructure and other capital-asset reporting
– Historical cost, net of depreciation ( = [purchase price – salvage
value] ÷ useful life); or
– “Modified approach” (annual maintenance costs)
• Required supplementary information (RSI)
– Management discussion and analysis (MD&A)
– Budgetary comparison: as adopted, amended, actual
results
– Long-term obligations and assets, financial risks
Optional Format: The CAFR
• Introduction and letter of transmittal
• Financial section
–
–
–
–
MD&A
Basic financial statements and notes
Other RSI
Supplemental schedules
• Statistical section
–
–
–
–
–
Revenues and expenditures
Property tax information
Debt and debt service information
Demographic and economic information
Operating information and other
Nonprofit AFR
• External reporting distinguishes among
– Unrestricted assets
– Temporarily restricted assets
– Permanently restricted assets
• “The primary purpose of fund accounting is to
ensure that resources are used in accordance
with their restrictions.” Types of funds:
– Unrestricted / general / operating / current
– Donor-restricted, either permanently or temporarily
(e.g., building replacement, endowment, custodial)
– Board-designated (treated as unrestricted for external
reporting, since easier to change)
• IRS Form 990 an additional public report format
Auditing
• Financial
– Confirm fair presentation of data, without material
error or fraud, and legal compliance
– Examine internal controls
• Single
– For federal grantees receiving > $300K / year
– Accuracy and GAAP compliance of BFS
– Compliance with grant laws and regulations
• Performance
– Economy, efficiency, program effectiveness
– Current GASB-GFOA debate over SEA reporting
• Internal auditing often a useful function as well
Some Elements of Managerial Accounting
• Cost finding / Cost accounting
– Direct labor and materials, plus indirect costs (O/H)
• Simple apportionment / allocation
• ABC
– Breakeven analysis
• P · Q = FC + Q · VC
• Internal service funds / Responsibility centers
– Routine generation of cost data
– Better information on full costs of unit operations
– Greater accountability of central service units, now
that their services are no longer “free” to consumers
• Cost evaluation / Variance analysis
– Spending: actual to budgeted spending variance
– Usage: (dis)economies of scale (fixed, variable costs)
– Efficiency: resource consumption per unit of output