Page 367 - Encyclopedia of Business and Finance

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Government Accounting

GOVERNMENT estimated revenues and appropriations for expenditure for
ACCOUNTING a specific fiscal year. Capital budgets control the expendi-
tures for construction projects and fixed asset acquisitions.
Government accounting has been viewed historically as a Operating or capital budgets are recorded in the account-
key element in the movement from absolute power, (i.e., ing system as a means of control or compliance.
the government or a king or emperor) to relative power
Many governmental entities are required by law to
(i.e., a shared model of government). Under the shared
maintain a balanced budget in that revenues must equal
model of government, government accounting was used
or exceed appropriations; the latter situation results in a
by a parliament to limit the king’s power to (1) spend budgetary surplus. If a budgetary deficit occurs in a gov-
public money, (2) raise taxes to cover the expenditures,
ernmental entity with a balanced-budget requirement,
and (3) determine the purpose of the expenditure. The use additional appropriations must be enacted by the legisla-
of governmental accounting remained unchanged during tive process.
the evolution into modern democratic systems.
Governmental accounting uses a fund accounting
Thus government accounting requires the executive structure as a means of controlling resources. That is, each
to (1) state the amount, nature, and purpose of the
type of financial activity is segregated into a separate set of
planned expenditure and the taxes needed to fund it, (2)
self-balancing asset, liability, and net asset accounts.
ask for and obtain approval from the legislature, and (3)
GASB codification identifies three fund groups—govern-
comply with the expenditure authority—appropriation— mental, proprietary, and fiduciary (GASB, 1999, Sections
granted by the legislature and demonstrate such compli- 1100.103 and 1100.105). Governmental funds are used
ance. Under government accounting, the legislature is to account for financial resources used in the day-to-day
allowed to steer and control the behavior of the govern- operations of the government. Proprietary funds are those
ment. used to account for the government’s business-type activ-
The basic foundation of governmental financial ities where fees are charged for the services rendered, for
accounting and reporting in the United States was estab- example, utility services. Fiduciary funds are those used to
lished by the Governmental Accounting Standards Boards account for funds held by the government in trust for oth-
(GASB) in its “Objectives of Financial Reporting,” which ers that cannot be used to support the government’s pro-
stated that the purpose of financial reporting is to provide grams, for example, an employee pension fund.
information to facilitate decision making by various State and local governments report dual-perspective
groups (GASB, 1987). The groups were defined as (1) cit- financial information with both full accrual information
izens of the governmental entity, (2) direct representatives and fund-based modified accrual information in accor-
of the citizens, such as legislatures and oversight bodies, dance with GASB Standard No. 34, Basic Financial State-
and (3) investors, creditors, and others who are involved ments—and Management Discussion and Analysis—for
in the lending process. Although not specifically identi- Statement and Local Governments (GASB, 1999).
fied, intergovernmental agencies and other users have
The management’s discussion and analysis (MD&A)
informational needs similar to the three primary user
is required supplementary information presented before
groups. While the three user groups have overlapping the financial statements that is subjected to limited audi-
membership with corporate financial information users, tor review and presents an overview of the government’s
citizens and legislative users are unique to governments. financial activities for the part year. This narrative descrip-
The use of governmental accounting information centers tion of the financial performance is much like the man-
on political, social, and economic decisions in addition to agement discussion required of corporations by the
determining the government’s accountability. Securities and Exchange Commission (SEC). The
Accountability (GASB, 1987, 56-58) was identified MD&A provides an objective and easily readable analysis
as the paramount objective of governmental financial of the government’s financial activities based on currently
reporting because it is based on the transfer of responsibil- known facts, decisions, or conditions. The discussion
ity for resources or actions from the citizens to some other compares the government’s current-year results with the
party, such as the management of the governmental entity. previous year and may include charts, graphs, or tables to
The assessment of accountability is fulfilled when finan- illustrate the discussion. The discussion is general rather
cial reporting enables financial data users to determine to than specific so that the most relevant information is pro-
what extent current-period costs are financed by current- vided. At a minimum, fourteen prescribed elements are a
period revenues. Two basic types of budgets are used by part of the MD&A discussion. These elements explain the
governments and are the same as those used by corporate relationship among the financial statements and any sig-
entities—an annual operating budget and a capital nificant differences in the information provided in the
budget. Governmental annual operating budgets include financial statement.

344 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION