Governmental accounting, also known as public sector accounting, refers to the process of recording, analyzing, classifying, summarizing, communicating, and interpreting financial information about a government in aggregate and in detail, reflecting all transactions involving the receipt, transfer, and use of governmental funds and property.
Governmental accounting is distinct from regular (business) accounting in several ways:
- Measurement Focus: Business accounting focuses on measuring economic income and financial position, while governmental accounting focuses on assessing fiscal accountability and compliance with budget and finance-related legal and contractual provisions.
- Budgetary Accounting: Governments must establish budgets, and governmental accounting systems are designed to help ensure that governments adhere to their budgets.
- Fund Accounting: Governments use fund accounting, which is a way to separate money into different categories to identify its source and use restrictions. There are three broad types of funds in governmental accounting: governmental funds, proprietary funds, and fiduciary funds.
- Dual Aspect: In commercial accounting, transactions are recorded based on the dual aspect concept. In governmental accounting, however, four aspects are considered: budgetary accounts, proprietary accounts, fiduciary accounts, and long-term debt accounts.
- Accounting Standards: Governmental accounting standards in the U.S. are established by the Governmental Accounting Standards Board (GASB), whereas business accounting standards are established by the Financial Accounting Standards Board (FASB).
- Reporting: Governments often have a broader, more complex range of reporting obligations to stakeholders like citizens, oversight bodies, creditors, and others interested in government finances.
The goal of governmental accounting is to provide a clear picture of a government’s financial health to its constituents, lawmakers, investors, and oversight bodies. It’s crucial for ensuring accountability, making budget decisions, setting tax rates, and managing public resources effectively and efficiently.
Example of Governmental Accounting
Let’s consider an example involving a city government:
Suppose the City of Pleasantville has received funding from several sources: local taxes, state grants for specific projects, and federal funding for a new public transportation project.
The city uses governmental accounting principles to manage and track these funds:
- Budgetary Accounting: At the beginning of the year, the City Council approves a budget. The budget outlines how much the city expects to receive in revenue (taxes, grants, etc.) and how much it plans to spend on services like public safety, transportation, and education. As the year progresses, the city’s accounting department tracks actual revenues and expenditures against these budgeted amounts.
- Fund Accounting: The city separates its resources into different funds according to their source and intended use. For example, the general fund includes tax revenues used for regular city operations; a special revenue fund handles the state grants designated for specific projects; a capital projects fund manages the federal funding for the new public transportation project. Each fund is accounted for separately, ensuring that the money is used for its intended purpose.
- Financial Reporting: At the end of the year, the City of Pleasantville prepares a Comprehensive Annual Financial Report (CAFR). The CAFR includes a series of financial statements and additional information that provides a detailed picture of the city’s financial position and the results of its operations. This report is made available to the public, providing transparency about the city’s fiscal management.
This is a simplified example. Governmental accounting can get complex, especially for larger governments with more diverse activities. But regardless of the size or complexity of the government, the overall goal is the same: to manage and report on public funds responsibly and transparently.