Page 368 - Encyclopedia of Business and Finance

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Government Accounting

The full accrual information reports the full cost of Fund activity displayed in the fund-based financial state-
providing government services, with details on how much ments is grouped by governmental, proprietary, and fidu-
of the cost is borne by taxpayers and by specific users of ciary categories as identified by the GASB codification.
the government’s service. The full accrual reports are sim- The equity component of modified accrual fund-based
ilar to those of profit-seeking corporations. The govern- financial statements is reported as fund balance rather
ment’s equity is displayed as net assets rather than than net assets, which is used in the full accrual statement.
stockholders’ equity. The full accrual results of the govern- A balance sheet and a statement of revenues, expen-
ment’s financial activity are displayed in two government- ditures, and change in fund balance are required for each
wide reports—(1) the statement of net assets and (2) the of the three fund groups. Because the fund financial state-
statement of activities. ments are prepared using the modified accrual basis, a
The statement of net assets displays information required reconciliation is prepared that explains the differ-
about the government as a whole, reports all financial and ences between the net change in fund balances and the
capital resources, and assists the financial statement user change in net assets in the government-wide statement of
in assessing the medium- and long-term operational activities. The proprietary funds also present a statement
accountability of the government. Separate columns are of cash flows. Unlike corporate cash flow statements, the
used to distinguish between the financial data for the gov- governmental cash flow statement is prepared using the
ernmental activities and the business-type activities that direct method and has four categories—operating, non-
comprise the total primary government. As the term state- capital financing, capital financing, and investing activi-
ment of net assets implies, the statement format presents ties.
the assets minus liabilities that equal the total net assets, Although some similarities exist between accounting
that is, equity. Assets and liabilities are presented in their for state and local governments and accounting for the
order of liquidity. That is, assets are presented in the order federal government, there are selected areas specific to
to their nearness to producing cash, and liabilities are pre- each. For example, federal agencies account for quarterly
sented in the order to their nearness to consuming cash. apportionments to procure goods and services, a process
Assets and liabilities may be displayed in a classified, cur- that is generally ignored by state and local governments.
rent, and noncurrent format if desired. The government’s The head of each agency in the executive branch of the
net assets are presented in three components: (1) capital federal government has the responsibility for establishing
assets net of related accumulated depreciation and debt, and maintaining accounting and control systems in con-
(2) restricted net assets with constraints imposed on their formity with principles, standards, and requirements
use by parties outside the government, and (3) unre- established by the Federal Accounting Standards Advisory
stricted net assets. Board and the Federal Financial Management Improve-
The statement of activities reports the net expense ment Act of 1996.
over revenue of each individual function or program oper- Federal accounting provides the information needed
ated by the government. The net expense over revenue for financial management as well as the information
format reports the relative financial burden of each of the needed to demonstrate compliance with budgetary and
programs on the government’s resource provides—taxpay- other legal requirements. Thus, federal accounting is
ers. The format highlights the extent to which each pro- based on a two-track system. One track is a self-balancing
gram directly consumes the government’s revenues or is set of proprietary accounts intended to provide informa-
financed by fees, contributions, or other revenues. tion for management. The other track is a set of self-
In addition to the government-wide full accrual balancing budgetary accounts that assure that available
information, state and local governments present financial budgetary resources and authorities are not overexpended
statements on the fund-based modified accrual basis. In or overobligated and assist in budgetary reporting require-
the modified accrual basis of accounting, revenues are rec- ments.
ognized only when they become both measurable and Like its state and local government counterpart, the
available to finance expenditures for the fiscal period. federal financial statements include an MD&A that pro-
Expenditures are recognized when the related liabilities vides a clear and concise description of the reporting
are incurred, if measurable, except for unmatured interest entity and its mission, activities, program and financial
on long-term debt, which is recognized when legally due. results, and financial condition (OMB, 1996). Federal
Fund-based financial statements assist in assessing the financial statements are less prescriptive than state and
government’s short-term fiscal accountability. Most funds local financial statements because federal agencies are per-
are established by governments to show restrictions on the mitted significant latitude on the level of aggregation pre-
planned use of resources or to measure, in the short-term, sented. The six statements in the federal financial report
the revenues and expenditures of a particular activity. include a (1) balance sheet, (2) statement of net cost, (3)

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 345