(New: 08/2020)
(Revised and Renumbered from section 7130)
There are some key differences in the accounting and financial reporting for governments versus commercial business enterprises. Some of the key differences include:
- The purpose of government, which is to provide services to the citizenry, not to make a profit.
- The users of a government's financial reports which are citizens, their elected representatives, oversight bodies, and creditors.
Governments are accountable for the management and use of public resources. The majority of government agencies are funded at some level by funds received from various taxes or grants. Because government agencies serve as stewards of taxpayer money, using the money to provide valuable services and goods to the public, there is a need for both uniformity and transparency in the way that financial data is reported.
Other differences between government and business include organizational purpose, sources of revenue, the potential for longevity, relationship with stakeholders, and role of the budget. The purpose of governments is to enhance or maintain the well-being of citizens by providing public services following public policy goals. Taxes and fees are the principal sources of revenue and taxpayers are involuntary resource providers. Governments have the potential for longevity because of their ongoing power to tax and the ongoing need for public services, whereas businesses will go out of existence if they are unable to sustain their operations.
The Governmental Accounting Standards Board (GASB) sets financial accounting and reporting standards, known as Generally Accepted Accounting Principles (GAAP), for state and local government. The Financial Accounting Standards Board (FASB) sets standards for public and private companies and non-profit organizations. Both standard-setting bodies receive oversight and administration from the Financial Accounting Foundation.
Budgets are used in governmental accounting as an expression of public policy priorities and a control mechanism by which the citizens and elected officials hold the government’s management financially accountable. A key objective of financial reporting is demonstrating accountability with budget authority. SAM chapter 8300 Budgetary Accounting provides detailed information on the role and importance of budgets, encumbrances, and tracking expenditures.
Fund accounting is used for control purposes that are unique to the government environment. The state is legally required to set up funds for certain transactions, as described in SAM chapter 7400 Funds. The state may also set up funds, sub-funds, or subaccounts for internal control and financial reporting purposes. SAM chapter 7400 Funds provides detailed information on the state’s funds, measurement focus, and the basis of accounting.
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