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chapter 1 introduction to accounting for governement and non-profit entities

Accounting for
Governments and Nonprofit Entities
chapter 1
Why is governmental and not-for-profit accounting covered
separately from business enterprise accounting?
In fact, many aspects of governmental accounting and most
aspects of not-for-profit accounting are no different from those
of business enterprise accounting. Governments and not-forprofit entities do have some unique transactions—governments
are financed primarily by taxes, and not-for-profit entities
receive significant amounts of contributions. But the answer to
the question lies deeper than that. Governmental and not-forprofit entities operate in an environment different from that of
business enterprises, and the users of their accounting data have
somewhat different information needs.
Why are accounting practices for these organizations
very different from those of business organizations?
purposes in society
by resource providers who do not expect
benefits proportional to the resources they provide
has a special duty to be accountable for how
resources are used in providing services
What are Governmental Organizations?
General purpose governments
 Provide
a broad array of services
 Examples:
Federal government, state governments, cities,
towns, villages,
Special purpose governments
 Usually
provide only a single or just a few services
 Examples:
Independent school systems, public colleges
and universities, public hospitals, fire protection districts,
transportation authorities, and many others
Some Characteristics of Governmental
Their officers are popularly elected, or a controlling majority
of their governing body is appointed or approved by
governmental officials;
They possess the power to enact and enforce a tax levy;
They hold the power to directly issue debt whose interest is
exempt from federal taxation; (eg. interest on municipal bonds, issued
by states or cities, is exempt from federal income tax.)
What are Not-for-Profit Organizations?
Not-for-profit organizations exhibit certain basic characteristics
that distinguish them from business enterprises. They:
(1) receive contributions of significant amounts of resources from
resource providers who do not expect equivalent value in return;
(2) Operate for purposes other than to provide goods and services at
a profit; and
(3) lack ownership interests like those of a business enterprise.
As a result, not-for-profit organizations may obtain contributions
and grants not normally received by business enterprises. On the
other hand, not-for-profit organizations do not engage in
ownership-type transactions, such as issuing stock and paying
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, and fraternal and social
organizations, among many other kinds of organizations
How Do Governmental and Not-ForProfit Organizations Differ from
Business Organizations?
Resource providers do not expect to receive proportional
Lack of a profit motive
Absence of transferable ownership rights
How Do Governmental Entities Differ
From Not-For-Profit Organizations?
ultimately rests in the hands of the people
delegate power to public officials through the election
by and accountable to a higher level government
Sources of GAAP and Financial Reporting
FASB (The Financial Accounting Standards Board)
Business organizations
Non-governmental not-for-profits
GASB (The 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
Operating environment
Governmental and not-for-profit organizations operate in a
social, legal, and political environment different from the
environment of for-profit business enterprises. As a result,
users of governmental and not-for-profit financial statements
have somewhat different needs than do users of business
enterprise financial statements. These environmental
differences have caused accounting standards-setters to
develop accounting and financial reporting requirements for
governmental and not-for-profit entities that sometimes differ
from requirements for business enterprises.
Operating environment
The Governmental Accounting Standards Board (GASB), the
accounting standards-setting body for state and local
governments, suggests that the major environmental
differences between governments and business enterprises
relate to organizational purpose, sources of revenue,
potential for longevity, relationship with stakeholders, and
role of the budget.
Organizational Purposes
Business enterprises exist to enhance the wealth of their
owners. Because income is quantifiable and can be measured
in monetary terms, business enterprise financial reporting
focuses primarily on earnings and its components.
Governmental and not-for-profit entities exist to provide
services to their constituents. They generally try to
accumulate a reasonable surplus of financial resources to
cushion against economic contraction and to provide for
emergency needs.
Organizational Purposes
The challenge to financial reporting lies also in demonstrating
accountability for the resources entrusted to these
organizations. When used in the broad sense of the term,
accountability embraces not only probity and legal
compliance, but also efficiency in delivering services and
effectiveness in accomplishing program results.
“Accountability is the cornerstone of all financial reporting in
government… Accountability requires governments to answer to
the citizenry—to justify the raising of public resources and the
purposes for which they are used.” -GASB Concepts Statement
No. 1
Sources of Revenue and Relationship
with Stakeholders
Business enterprises derive virtually all their revenues from
exchange transactions, generally involving specific products
or services, between willing buyers and sellers.
Governments, on the other hand, obtain most of their
revenues from taxation—wherein taxpayers involuntarily
transfer resources for a basket of services that may or may
not bear a direct relationship to what the taxpayer wants or
Sources of Revenue and Relationship
with Stakeholders
Not-for-profit entities obtain significant resources from
voluntary donors who expect no product or service in
exchange, but who are nevertheless concerned with whether
their donations are achieving their intended purposes.
Importance of accountability
The nature of taxes and donations creates relationships with the
providers of those resources that emphasize the accountability
aspects of financial reporting.
Objectives of Financial Reporting—
SLG (Cont’d)
Q: What do we mean by accountability?
A: Accountability arises from citizens’ “right to
know.” It imposes a duty on public officials to
be accountable to citizens for raising public
taxes and how they are spent.
Potential for Longevity
Business enterprises are at risk of going out of business for
many reasons, such as global competition, emerging
products, changing consumer tastes, inefficiencies, and
recession. Not-for-profit organizations face similar risks.
However, because of the power to tax and the nature of
their services, general-purpose governments rarely go out of
business and are not bought and sold like business
As a result = longer-term perspective than their business
enterprise counterparts in developing accounting standards.
Role of the Budget and Legal Requirements
Business enterprises are free to provide only those goods and services they believe will
enhance their profits, and no budget requirement.
Governmental entities, are required by law to provide certain services (police and fire
protection.) Financial resources are provided by the government to finance these
Hence accounting records are needed :
to ensure compliance with laws and donor restrictions.
to ensure adherence to spending limitations contained in legally adopted budgets and
other legal documents.
to ensure that purpose and time restrictions imposed by donors are heeded.
Both internal and external users
Internal user
For example, governmental managers need accounting
information to keep day-to-day control over spending to
ensure that amounts authorized by the budget are not
exceeded and that sufficient resources will be available to
cover the full year’s operations. Managers of not-for-profit
entities need accounting data to help keep expenses in line
with budgets and within limitations imposed by donors
External users
- resource providers (include taxpayers, donors, higher-level
governments and foundations)
oversight bodies (higher-level governments and regulatory
- service recipients. (citizens)
General purpose reporting
Minimum Requirements for General
Purpose External Financial Reporting
Use of Fund Accounting
Fund accounting is an accounting system for recording resources whose use has
been limited by the donor, grant authority, governing agency, or other individuals
or organizations or by law. It emphasizes accountability rather than profitability.
Incorporation of Budgets into Accounting Systems
Measurement Focus and Basis of Accounting (modified accrual basis of
accounting. Measure only inflows and outflows of current financial resources,
rather than all economic resources.)
Entity-Wide and Fund-Level Reporting
Financial Reporting of Restricted Resources
Martin Ives, Terry K. Patton, Suesan R. Patto, Introduction to Governmental and
Not-for-Profit Accounting. Copyright © 2013, 2009, 2004 by Pearson
Education, Inc., publishing as Prentice Hall.
Tax levy definition: the amount of money charged as taxation on particular
assets or goods.
Constituents : citizens