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Accounting for Governmental
& Nonprofit Entities
EARL R. WILSON
JACQUELINE L. RECK
SUSAN C. KATTELUS
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Chapter
1
Introduction to Accounting and Financial
Reporting for Governmental and Not-forProfit Entities
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
1
What are Governmental Organizations?
 General
purpose governments
Provide a wide variety of services
 Examples: Federal government, state governments,
cities, towns, townships, villages, counties, boroughs,
and parishes

 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,
sewer districts, transportation authorities, and many
others

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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
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2
CHARACTERISTICS OF GOVERNMENTAL
AND NOT-FOR-PROFIT ENTITIES
a. Receipts of significant amounts of resources from
resource providers who do not expect to receive either
repayment or economic benefits proportionate to the
resources provided.
b. Operating purposes that are other than to provide
goods or services at a profit or profit equivalent.
c. Absence of defined ownership interests that can be
sold, transferred, or redeemed, or that convey entitlement
to a share of a residual distribution of resources in the
event of liquidation of the organization.
How Do Governmental and Not-For-Profit Organizations
Differ from Business Organizations?
Governmental Accounting Standards Board (GASB)
distinguishes governmental entities in the United States
from not-for-profit entities and from businesses by
stressing that:
governments exist in an environment in which the power
ultimately rests in the hands of the people .
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How Do Governmental and
Not-For-Profit Organizations Differ
from Business Organizations?
 Resource
providers do not expect to receive
proportional benefits
 Lack
of a profit motive
 Absence
of transferable ownership rights
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How Do Governmental Entities Differ
From Not-For-Profit Organizations?

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

Taxation powers
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4
How Do Governmental Entities Differ
From Not-For-Profit Organizations?
In the GASB’s view, accounting and financial reporting
standards for governments must be separate from those for
business organizations because the needs of users of financial
reports are unique and different.

GASB white paper which notes that “governments do not
operate in a competitive marketplace, face no threat of
liquidation, and do not have equity owners.

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How Do Governmental Entities Differ
From Not-For-Profit Organizations?
Governmental financial reporting focuses on 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.

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Sources of GAAP and
Financial Reporting Standards





FASB
Business organizations
Nongovernmental not-for-profits
GASB
Governmental organizations
Governmental not-for-profits
FASAB
Federal government and its agencies
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Sources of GAAP and
Financial Reporting Standards
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6
Objectives of Financial Reporting—State
and Local Governments (SLG)
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
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Determining whether a not-for-profit
organization is governmental
In practice, it may be difficult to determine whether
some not-for-profits are governmental in nature or not.
 The U.S. Bureau of the Census defines a government
as:
An organized entity which, in addition to having
governmental character, has sufficient discretion in
the management of its own affairs to distinguish it
as separate from the administrative structure of any
other governmental unit
 This definition fails to explain the meaning of “having
governmental character.”

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Determining whether a not-for-profit
organization is governmental
Public corporations, bodies corporate and politic are
governmental organizations.
 Other organizations are governmental organizations if
they have one or more of the following characteristics:
1. Popular election of officers or approval of a controlling
majority of the members of the organization’s governing
body by officials of one or more local governments,
2. the potential for unilateral dissolution by a government
with the net assets reverting to a government, or
3. the power to enact and enforce a tax levy.

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Objectives of Financial Reporting—
SLG (Cont’d)
“ACCOUNTABILITY is the cornerstone of all
financial reporting in government “
(GASB Concepts Statement No. 1, par. 56)
Governmental accountability is based on the belief
that the citizenry has a “right to know,” a right to
receive openly declared facts that may lead to public
debate by the citizens & their elected representatives.
Financial reporting plays a major role in fulfilling
government’s duty to be publicly accountable in a
democratic society.
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Objectives of Financial Reporting—
SLG (Cont’d)
 there
are several ways that state and local
governmental financial reporting is used in making
economic, social, and political decisions and assessing
accountability.
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Objectives of Financial Reporting—SLG
(Cont’d)
Q: How does “inter-period equity” relate
to accountability?
A: Inter-period equity is a government’s
obligation to disclose whether currentyear revenues were sufficient to pay for
current-year benefits—or did current
citizens defer payments to future
taxpayers?
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Financial Reporting of State & Local
Government
Government-wide financial statements aim to provide an
aggregated overview of a government’s net assets and changes
in net assets. It assists in assessing operational accountability
“whether the government has used its resources efficiently &
effectively in meeting operating objectives.

Fund financial statements 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

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Financial Reporting of State & Local
Government
Management
Discussion & Analysis
(MD&A)
Financial Statement
--------------------------Notes to Financial Statements
Governmental-wide
Financial Statements
1.
2.
Statements of net assets
Statement of Activities
Required
Supplementary
Information
Fund Financial
Statements
1.
2.
Balance sheet
Statement of revenues, expenditures,
and changes in fund balances
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