Government accounting

Government accounting is the specialized branch of accounting that records, measures, and reports financial transactions and activities of public sector entities including federal, state, and local governments (GASB 2023)^[1]. The rules differ from business accounting because governments differ from businesses. A corporation maximizes shareholder value; a government provides services to citizens. A corporation has owners; a government has taxpayers and voters. These fundamental differences require different accounting approaches.

Taxpayers deserve to know how their money is spent. Voters need information to evaluate elected officials. Creditors assess creditworthiness before buying municipal bonds. Government accounting serves all these users—providing accountability and transparency for public resources.

Key differences from private sector

Government accounting diverges from business accounting in several ways:

Purpose. Businesses exist to generate profits for owners. Governments exist to provide services to constituents. Profit isn't the goal—service delivery is. Financial statements must reflect this different purpose.

Fund accounting. Governments segregate resources into separate funds based on legal restrictions and intended uses. A highway fund can't cover education expenses. A trust fund's principal can't be spent. Fund accounting tracks these restrictions—something businesses rarely need^[2].

Budget emphasis. Budgets are legally binding for governments. Spending beyond budgeted amounts violates law. Financial statements must compare actual results to budget. Businesses have budgets but without legal force.

Revenue sources. Businesses earn revenue from customers choosing to buy. Governments collect taxes—compulsory payments without direct exchange. Grants, fees, and fines supplement tax revenue. Each source has different recognition and reporting rules.

No ownership equity. Businesses have shareholders with ownership stakes. Governments have no owners in that sense. "Net position" replaces "shareholders' equity" in governmental statements.

Fund types

Governmental accounting uses three fund categories:

Governmental funds. Account for most basic government services. Includes the general fund (unrestricted resources), special revenue funds (legally restricted for specific purposes), debt service funds (accumulate resources for debt payment), capital project funds (account for major construction), and permanent funds (principal remains intact, earnings spent).

Proprietary funds. Account for business-like activities. Enterprise funds operate like businesses—charging fees to external users (water utilities, airports). Internal service funds serve other government departments (motor pools, print shops)^[3].

Fiduciary funds. Account for resources held in trust for others. Pension trust funds, investment trust funds, custodial funds. The government is a trustee, not the owner.

Standard setters

Different bodies establish government accounting standards:

GASB (Governmental Accounting Standards Board). Since 1984, GASB sets standards for U.S. state and local governments. Based in Norwalk, Connecticut. Issues Statements, Interpretations, and Technical Bulletins.

FASAB (Federal Accounting Standards Advisory Board). Sets standards for U.S. federal government entities. Different standards than GASB because federal operations differ from state/local.

IPSASB (International Public Sector Accounting Standards Board). Sets standards for public sector entities internationally. Many countries adopt or adapt IPSAS standards^[4].

Basis of accounting

Governments use different accounting bases:

Accrual basis. Recognizes revenues when earned and expenses when incurred, regardless of cash flows. Used for government-wide financial statements and proprietary funds.

Modified accrual basis. Recognizes revenues when measurable and available. Expenditures recognized when liability is incurred. Used for governmental fund financial statements. More conservative than full accrual.

Cash basis. Recognizes transactions only when cash changes hands. Simple but provides limited information. Some smaller governments use cash basis for internal purposes.

The dual approach—modified accrual for fund statements, full accrual for government-wide statements—provides different perspectives for different users.

Financial reporting model

GASB Statement No. 34 (1999) established the current reporting model:

Management's Discussion and Analysis. Narrative introduction providing overview and analysis. Explains significant changes and trends.

Government-wide financial statements. Statement of net position and statement of activities. Full accrual basis. Shows overall government financial position.

Fund financial statements. Separate statements for governmental, proprietary, and fiduciary funds. Modified accrual for governmental funds, accrual for others^[5].

Notes to financial statements. Essential disclosures explaining accounting policies, significant items, contingencies.

Required supplementary information. Budget-to-actual comparisons, pension funding progress, infrastructure condition.

Budgetary accounting

Budgets dominate governmental accounting:

Legal significance. Appropriations are legal authorizations to spend. Exceeding appropriations may violate law. Officials face personal liability for over-expenditures in some jurisdictions.

Encumbrance accounting. Commitments for future expenditures (purchase orders, contracts) are recorded. Prevents accidentally exceeding budgets by committing funds before spending them.

Budget-to-actual comparison. Required supplementary information shows how actual results compared to original and final budgets. Significant variances require explanation^[6].

Budget amendments. Governing bodies may amend budgets during the year. Tracking original vs. final budgets matters for accountability.

Special topics

Government accounting addresses unique issues:

Pension obligations. GASB Statements 67 and 68 revolutionized pension accounting, requiring governments to recognize their share of pension liabilities. Many governments showed dramatically weaker financial positions after implementation.

Infrastructure reporting. Roads, bridges, and other infrastructure may be reported using depreciation approach (like other capital assets) or modified approach (preserve condition above threshold level). Modified approach requires maintaining condition assessments.

Revenue recognition. Exchange transactions (fees for services) differ from nonexchange transactions (taxes, grants). Each type has specific recognition criteria.

Component units. Related organizations (authorities, special districts) may require inclusion in government financial statements based on financial benefit/burden relationships and control^[7].

Users and uses

Government financial reports serve multiple audiences:

Citizens and taxpayers. Understand how money is raised and spent. Assess stewardship of public resources.

Elected officials. Monitor program effectiveness. Make budget decisions based on financial condition.

Legislative bodies. Conduct oversight. Approve budgets and financial policies.

Bond investors and credit rating agencies. Evaluate creditworthiness. Set borrowing costs through bond ratings.

Federal and state grantors. Verify compliance with grant requirements. Monitor use of provided funds.

Auditors and oversight bodies. Assess compliance and internal control effectiveness.

Current developments

Recent GASB standards address evolving issues:

Leases (GASB 87). Requires lessees to recognize lease assets and liabilities. Significantly changed lease accounting.

Fiduciary activities (GASB 84). Clarified what constitutes fiduciary activity requiring separate reporting.

Subscription-based IT arrangements (GASB 96). Addresses cloud computing and software subscriptions.

Financial reporting model reexamination. Ongoing project potentially revising the Statement 34 model^[8].

Government accounting — recommended articles

Accounting theory — Financial statement — Government expenditure — Public finance

References

• GASB (2023), Governmental Accounting Standards Board Publications, GASB.
• Ruppel W.D. (2020), Wiley GAAP for Governments, Wiley.
• Freeman R.J., Shoulders C.D. (2014), Governmental and Nonprofit Accounting, 11th Edition, Pearson.
• GFOA (2023), Government Finance Officers Association Best Practices, GFOA.

Footnotes

1. ↑ GASB (2023), About the GASB
2. ↑ Ruppel W.D. (2020), Wiley GAAP for Governments, pp.23-45
3. ↑ Freeman R.J., Shoulders C.D. (2014), Governmental and Nonprofit Accounting, pp.78-112
4. ↑ GASB (2023), Codification of Governmental Accounting
5. ↑ Ruppel W.D. (2020), Wiley GAAP for Governments, pp.134-167
6. ↑ GFOA (2023), Budgeting Best Practices
7. ↑ Freeman R.J., Shoulders C.D. (2014), Governmental and Nonprofit Accounting, pp.234-267
8. ↑ GASB (2023), Current Technical Agenda

Author: Sławomir Wawak