governmental organization
financial accounting

Government plays a significant and complex role in society and the economy. Like nonprofit organizations, they are not governed by the market system where price sets value in the exchange of goods. Government services are provided for the general welfare and the public good. The difficulty in assigning discrete value to these services, however, makes financial accounting for government difficult. To accommodate these differences, government financial reports use a different means of accounting than non-profits. The sheer size and unique taxing ability of government requires that it make its finances as public as possible, to insure effectiveness and accountability.

Fund Accounting Systems

Government accounting systems track what it uses money for, rather than what assets it has. It does not track inventory, fixed assets or long term liabilities. Every expenditure or revenue takes place in the current period. As a result, the major fund types that track finances tend to show where funds are going rather than where they came from. For example, Special Revenue funds, Capital Projects funds and Debt Service funds are resources dedicated to particular projects or purposes. The General fund group exists to handle all other resources not required to be in another fund. Separate proprietary and fiduciary fund groups track pension trusts, agency or component government funds, and self supporting government services. Two additional groups track fixed assets and long term debt as lists of accounts rather than funds. This is because some assets, like bridges, roads or sewers, are too old or too large to have any value except in the public domain.

Importance of Government Financial Reporting

Citizens are compelled by law to pay taxes to finance government. Conversely, government uses taxes to serve citizens through programs and services. The political relationship between citizens and government hinges on government's accountability to the wishes of its citizens. Government financial reports, therefore, play an important role in enabling citizens see to what purpose and how efficiently their taxes are being used for services. Internally, government managers also use financial reports to assess their unit's performance and plan for future programs.

Several factors, however, make governmental performance difficult to measure. The number of participants involved in the decision making process often makes agreement on intended results difficult. Even agreements on results may lead to disagreements about the means to achieve them. On the reporting side, inputs for programs are easily measured in terms of dollars or length of time. The activities the program accomplished, however, may be measured differently from the intended social outcomes. External effects on neighboring communities or economies can also influence measures of success or failure of government action.

It is also difficult to measure governmental performance because of the complexity of the reports. Emphasis on current period assets and liabilities makes long term planning and goals difficult to formulate. For example, the scale of infrastructure depreciation, planning for pensions and benefits, and risk financing can be confusing and controversial. Lengthy report formats and dry accounting statistics also help obscure pertinent program information to those most affected by them. Above all, different governmental entities employ a variety of reporting requirements and standards, making direct comparisons difficult.

To help forge consistency in reporting standards, GASB requires state and federal governments to adopt annual budgets and open accounting systems. Combined financial statements, supplementary statistics and special purpose financial reports are mandated to provide a variety of means in which to evaluate government performance. Recognizing the legal impact of budgets, GASB prefers the use of modified accrual accounting to better track encumbrances and the legal rights to revenue and expenditures. Additional standards such as the single audit act and pension, overlapping debt and debt instrument disclosure requirements also help make the financial status of the government entity more clear and accountable.

The Role of Government Action in the Economy

Government has a significant role in providing for the welfare of its city, state or country. However, this role is limited due to the complex interaction of the businesses, taxpayers and organizations that make up the whole economy. The health of individual industries affects the amount of income and property taxes government uses to provide services. National or global changes can greatly affect economies on the local scale. The role of government often is how to provide consistent levels of service while navigating around events beyond its control. Only an informed and actively involved citizenry can give priority to the services which it considers most important. A publicly open and clearly understandable financial reporting system is the surest means to accomplishing this task.

back to fountain send a comment june 1996