Environment &

Characteristics
Chapter 1
 Welcome
Contrary to what you may have heard,
governmental and nonprofit accounting
is not a whole new ball game
However, it is a game played by slightly
different rules
The purpose of this chapter is to lay the
groundwork for those rules
The rest of the chapters will examine
those rules more closely
 Learning Objectives
Unique characteristics
Types of G&NP organizations
Similarities & differences between profit-
seeking and G&NP organizations
Characteristics, concepts, & objectives of
GNP accounting & financial reporting
Users and uses of financial information
Determining what GAAP to apply
GAAP hierarchy
 Characteristics of G&NP
Organizations
Absence of profit motive
Owned by constituents no stock
Contributors of resources do not
receive proportional share of benefits
Decisions made directly or
indirectly by voters
Meetings where decisions are made
usually open to the public
 Types of G&NP
Organizations
Governments: Federal, state, county, city,
township, village, and special districts
Education: kindergartens, elementary &
secondary schools, vocational & technical
schools, and colleges & universities
Health and welfare: hospitals, nursing homes.
Religious: Salvation Army, and church-related
organizations
Charities: United Way, Community Chest, &
other fund-raising organizations
Foundations: Private trust that operate religious,
educational, or charitable organizations
 Similarities to the Private
Sector
Operate in the same economy and compete for
same resources: financial, capital, and human
Acquire & convert scarce resources into goods
& services
Use of accounting & other information systems
Need to operate economically, effectively, &
efficiently
Provide goods and services, many of which
may be similar
 Differences from the Private
Sector

Organizational objectives
Sources of financial resources
Methods of evaluating performance
and operating results
 Organizational Objectives
Businesses G&NPs
Operating Motive: Operating Motive:
maximize income maximize services
from revenues and provided from
other resources revenues and other
resources
Operational Focus: Operational Focus:
report quarterly operate on annual
but look to the budget, so current
long-tem as well year is of primary
importance
 Organizational Objectives

In sum, whereas private business seek

to increase their wealth for the benefit
of their owners, G&NP organisations
seek to expand their available financial
resources for the benefit of their
constituencies.
 Sources of Financial
Resources
Businesses raise resources from
sales or from capital stock & debt
transactions must account for
different sources separately
Governments raise resources from
sales or debt transactions typically
no distinction made in sources
 Unique G&NP Sources
Involuntary contributions taxes!
Donations
Appropriations and grants from other
governmental entities
 Evaluating Performance &
Operating Results
In business, continuing a product or
service determined by success in
marketplace
In G&NP organizations:
Profit not a motive and frequently cannot
be measured
Services not found elsewhere so there is
no competition
Face rules and regulations not found in
private sector
 Special Regulations &
Controls Applied to

Governments
Organization structure form; board
composition; number & duties of personnel
Personnel policies & procedures who has
power to appoint or hire personnel; tenure;
termination policies; promotion policies
Sources of financial resources types and
amounts of taxes, licenses, fines or fees;
procedure for setting user charges
 Special Regulations (continued)

Use of financial resources purposes,

including legal restrictions; purchasing
procedures; budgeting methods
Accounting
Financial reporting type & frequency
of reports; format; recipients
Auditing frequency; who performs;
scope & type; time & place
Development of GAAP
Private Sector Public Sector

Committee on 1934 National Committee

Accounting on Municipal
Procedure Accounting

National Committee on
1951
Governmental Accounting
Accounting Principles
1959
Board

FASB 1973 National Council on

1975 Governmental
Accounting
1984 GASB
 Both the Financial Accounting Standards
Board (FASB) and the Governmental
Accounting Standards Board (GASB) are
financed and overseen by the Financial
Accounting Foundation (FAF).
The GASB is responsible for establishing
accounting and financial reporting
standards for activities and transactions
of state and local governments
 Defining a Government
Overall characteristics:
Public corporations an
instrumentality of the state, founded
and owned in the public interest,
supported by public funds, and
governed by those deriving their
authority from the state
Bodies corporate and politic
 Other Characteristics of a
Government
Popular election of officers or
appointment (or approval) of a
controlling majority of members of
governing body by one or more SLGs
Potential for unilateral dissolution by
a government with net assets
reverting to government
Power to enact and enforce a tax levy
Ability to issue tax exempt debt
 Financial Reporting
Standards-Setting Process

Financial
Accounting
Foundation
(FAF)

Financial Financial Governmetntal Governmental

Accounting Accounting
Standards Advisory Accounting Accounting
Standards Advisory
Council Standards Board Standards Board Council
(FASAC) (FASB) (GASB) (GASAC)
 SLG GAAP Hierarchy
A. GASB Statements & Interpretations, which are
periodically incorporated into the Codification
B. GASB Technical Bulletins and AICPA Audit Guides
and SOPs if made applicable to SLGs and cleared
by GASB
C. Positions of GASB EITF (does not currently exist)
and AICPA Practice Bulletins if made applicable
to SLGs and cleared by GASB
D. GASB staff Implementation Guides (Q&As) and
widely accepted practice
E. Other accounting literature
 Typical Activities of a SLG
Governmental activities unique to SLGs
Police and fire protection
Education
Social Services
Courts
Business-type activities similar to private
sector operations
Utilities
Golf Courses
Airports
The governmental type activity
environment is unique in several
aspects. These aspects include the
distinctive SLG
(1) Purpose of Governmental
Activities

Provide goods and services that all

constituents need regardless of
ability to pay for goods and services
 Absence of the profit motive in
governmental type activities underlies
several other differences between
governments and business, which are:
(1) Net income (the basic performance
evaluation measure in business) does not
apply to government type activities.
(2) Most governments do not obtain
significant financial resources for
governmental type activities from
service charges to individual recipients in
proportion to the services received.
 (2) Sources of Financial
Resources
(not found in private sector)
Because significant revenues from
sales of services are not available to
finance governmental type activities,
governments must raise financial
resources from other sources. Two
primary examples of these revenue
sources are:
Taxes and grants and subsidies.
 Sources of Financial Resources
(not found in private sector)

Taxes: property taxes, sales taxes, and

income taxes
Taxation is thus a nonexchange
transaction or event that eliminates any
direct association between:
(1)The amount and quality of the services
a constituent receives from the
government, and
(2)The amount the constituent pays to the
government.
Sources of Financial Resources
(not found in private sector)

Intergovernmental revenues: such as

grants and subsidies from other
higher level governments.
 (3) Resource Allocation
Mechanisms
General government financial resource
allocations are derived from processes
clearly different from business enterprises.
Absence of a direct relationship between
the financial resources provided by an
individual taxpayer and the services
provided to that individual taxpayer makes
it impossible for the resource allocations to
be made in the same manner as for
business enterprises.
 Resource Allocation
Mechanisms
Two concepts determine how the
allocation are made:
Restrictions placed by providers:
typical of grantors, taxes for
specific purposes.
One level of restriction requires
that certain resources be used for a
particular purpose or program.
 These numerous restrictions are the
primary reason for the use of funds
and nonfund accounts.
These accounts are account for
financial resources segregated
according to the purpose for which
they may or must be used and any
related capital assets and long term
liabilities, respectively.
 Resource Allocation
Mechanisms
Budget: is an expression of public policy
and intent. It is also a financial plane that
indicates the proposed expenditures for
the year and the means of financing them
It allocates resources to functions
Therefore, taxes and other revenues are
allocated to various uses by placing even
more detailed budgetary restrictions on
their use.
 Resource Allocation
Mechanisms

An adopted budget has the force of

law, It both:
(1) Authorizes amounts to be
expended for various specified
purposes, and
(2) Limits the amount that may be
expanded for each of those purpose.
 (4) Accountabilities
Accountabilities: determining to
whom accountable and the focuses of
their accountability.
To whom accountable: the need for
accountability exists between (1)
SLGs and their constituencies, (2)
SLGs and other governments, and (3)
the SLGs own legislative and
executive bodies.
 Accountabilities
Accountability focus: The financial
reports for governmental type
activities focus on two types of
accountability:
(1) fiscal accountability: is a
governments responsibility to
demonstrate its compliance with public
decision about the raising and spending
of public monies in the short term.
 Accountabilities

(2) Operational accountability: is a

governments responsibility to
demonstrate the extent to which it has
met its operating objectives and
whether it can continue to meet its
objectives in the foreseeable future.
 (5) Reporting Issues &
Problems
Demonstrate compliance with restrictions on
use of financial resources
Budgetary reporting
Impact of restrictions on revenue recognition
Difficulty in measuring effectiveness and
efficiency of operations
Opportunity to hide or disguise availability of
resources
Tax and debt limits
Impact of materiality of reporting certain
actions
 Financial Report Users
The citizenry: Those to whom the
government is primarily accountable,
including (citizens, taxpayers, the media).
Legislative and oversight bodies:
Those who directly represents the citizens,
including (members of state legislatures,
city councils)
Investors and creditors: Those who lend
or participate in the lending process,
including (individuals and institutional
investors and creditors, bond insurer).
 Financial Report Uses
Comparing results with legally adopted
budgets
Assessing financial condition and
results of operations
Assisting in determining compliance
with finance-related laws, rules &
regulations
Assisting in evaluating efficiency &
effectiveness
 Purposes of Business-Type
Activities

Provide same types of services as

found in private sector
Charge fee for services received
Separate, self-sufficient operations
 Issues in Business-Type
Activities
Relationship between services received
and resources provided by consumer
In that exchange relationship, a user fee
is charged for a specific service provided.
Therefore, users of financial reports focus
on measuring the costs of providing the
service, the revenues obtained from the
service, and the difference between the
two.
 Issues in Business-Type
Activities
Revenue-producing capital assets
Similarly designated activities: the
business type activities of government
often perform only a single function.
Nature of political process: some
government business type activities
are designed to be insulated from the
political process.
Budgets and fund accounting
Financial Reporting Objectives
of Business-Type Activities

Enable users to assess accountability

Provide information about operating
results for the period
Provide information to assess level of
services provided
 Characteristics of SLG
Accounting & Reporting

Use of fund accounting

Funds: are separate fiscal and
accounting entities and include both
cash and noncash resources
segregated according to the purposes
or activities for which they are to be
used as well as related liabilities.
 There are two basic categories of fund
accounting entities used by SLGs:
(1) Governmental funds: to account for
the financial assets, related liabilities,
changes in net assets and balances that
may be expended in its nonbusiness
type activities (fire and police
protection).
(2) Proprietary funds: to account for the
revenues, expenses, assets, liabilities,
and equity of its business type
activities ( utilities, cafeterias)
 A fund of a commercial enterprise is
simply a portion of its assets that has
been restricted to specific uses, not a
separate and distinct accounting
entity.
A = L +OE
 A fund in the G&NP accounting sense
is a self contained accounting entity
with its own assets, liability, revenue,
expenditure or expense, and fund
balance or other equity accounts.
A L = FB (fund balance)
(governmental funds)
A L = NA (net assets or fund equity)
(proprietary funds)
 Characteristics of SLG
Accounting & Reporting
Budgets and appropriations
A fixed dollar budget is commonly
prepared for each governmental fund.
That is, the organization's chief executive
asks the governing body for permission
to incur a specified (fixed) amount of
expenditures (for salaries, equipment,
supplies) during the budget period to
carry out the departments mission.
 When approved by the governing body,
the budgetary expenditure estimates
become binding appropriations, which
both authorise expenditures for specific
purpose and limit the amount that can
be expended for each specified purpose.
Most governments establish budgetary
accounts within governmental fund
ledgers to ensure control.
 The cost measurement focus of
proprietary fund accounting and of
entity wide financial reports of G&NP
organisations, like that of business
accounting, is expenses ( the cost of
assets and services consumed during
the period).
 In contrast, The cost measurement focus of
governmental fund accounting is
expenditures (the amount of net financial
resources expended during the period for:
(1) Current operations (salaries and utilities).
(2) Capital outlay (acquiring capital assets).
(3) Long term debt principal retirement and
interest.
 Exercise
Family services, a small social service non-profit
agency, began operations on January 2007 with
$40,000 cash and $150,000 worth of equipment, on
which $60,000 was owed on a note to City Bank.
The equipment was expected to have a remaining
useful life of 15 years with no salvage value. During
its first year of operations, ending December 2007,
Family services paid or accrued the following:
(1)Salaries and other personnel costs, $100,000.
(2)Rent and utilities $24,000.
(3)Debt service interest $5,500 and payment on
long term note principal $10,000.
(4)Capital outlay- additional equipment purchased
January $30,000 expected to last 6 years and have
a $6,000 salvage value.
(5) Other current operating items paid with cash,
$4,500.
There were no prepayals or unrecorded accruals
at December 2007 and no additional debt was
incurred during the year.
Required:
Compute for the Family Services agency, for the
year ended December 2007, its total (a) expenses
(b) expenditures.
 Solution
Expenses
Expenditures
Salaries and other
personnel costs $100,000 $100,000
Rent and utilities 24,000 24,000
Debt service:
a) Interest on note 5,500 5,500
b) Note principal payment 10,000
Capital outlay/Depreciation:
a) Capital outlay 30,000
b) Depreciation of equipment 14,000
Other 4,500 4,500
Total $148,000 $174,000
Depreciation of equipment
i) $150,000/15 =
$10,000
ii) ($30,000-$6,000)/6 =
4,000

14,000
 MCQs
1) Which of the following would not be
considered a government or nonprofit
organization?
A) A software company that sells software
exclusively to state and local governments
B) A public elementary school
C) A church
D) A private trust organized for charitable
purposes
2) The Financial Accounting Foundation
has oversight responsibilities over
A) The Financial Accounting Standards
Board (FASB).
B) The Governmental Accounting
Standards Board (GASB).
C) The Government Accountability Office
(GAO).
D) All of the above
E) Items A and B only
F) Items B and C only
3) Which of the following statements is
false?
A) The power to tax is unique to
governments.
B) Taxation is a nonexchange transaction.
C) Governmental entities may not finance
a function or service with both a user
fee and tax revenues.
D) All of the above statements are true
statements.
E) Both items B and C are false
statements.
4) The primary users of external
financial reports, as identified by the
GASB, include all of the following
except
A) Investors and creditors.
B) Citizens.
C) Governing boards.
D) All of the above are considered to be
primary users of external financial
reports.
E) Both items A and B.
5) Business-type activities differ from
governmental-type activities in that
A) Most capital assets of business-type activities are
considered to be revenue producing capital
assets, while those in governmental-type
activities generally are not.
B) Business-type activities never have the power to
levy a tax.
C) Business-type activities do not adopt a budget.
D) All of the above statements accurately reflect
actual differences between business-type and
governmental-type activities.
E) Items B and C only accurately reflect primary
differences between business-type and
governmental-type activities.