Governmental accounting entails all the processes involved in managing, recording, summarizing, and classifying the government’s financial transactions, including expenditures and income. This information is helpful during resource allocation and decision-making by the government. Governmental accounting needs to meet the needs of internal and external users. Internal users include government managers who need information concerning available resources and how the resources are being utilized. External users include taxpayers who need to know the expenditure of their tax. For-profit financial accounting refers to a business enterprise’s financial recordings and management while aiming at profit maximization. Examples of for-profit organizations include corporations, partnerships, and sole proprietorships. For-profit financial accounting focuses on bringing more revenues, unlike the amount spent mainly to benefit investors or owners. Financial accounting focuses on recording, analyzing, and reporting business financial transactions by preparing financial statements. Therefore, this discussion focuses on intensive and extensive distinctions between governmental accounting and for-profit financial accounting.
- How do financial reporting of governmental accounting and for-profit financial accounting differ?
- What are the objectives and importance of governmental accounting and for-profit financial accounting?
- Discuss the type of accounting used by governmental accounting and for-profit financial accounting.
Transparency and Accountability
Financial reporting refers to the processes employed in documenting and communicating financial performance and activities after a particular period, typically yearly or quarterly. There is a significant difference between the financial reporting of governmental and for-profit financial accounting. The government must report its financial position and information to the public (Chychyla et al., 2019). Since governmental accounting focuses on public policy, its financial reporting must be transparent, and information offered to the public must be accountable. In contrast, for-profit financial accounting is profit-based; hence its financial reporting is meant for the future or current investors, lenders, business management, and owners. Also, it is not mandatory for for-profit financial accounting to report its financial information transparently because its focus is profiting the owner and shareholders (Chychyla et al., 2019). For this reason, for-profit financial accounting uses some accounting practices that may not be in the public’s best interest, like inflating revenue and hiding expenses.
Tools for Business Evaluation
Governmental accounting has a wider impact when compared to for-profit financial accounting. A governmental financial report may be used to evaluate residential relocation and the entire business to find out services offered to families and businesses. In this case, the focus is to determine the effectiveness of services provided by the government (Chychyla et al., 2019). These services include utilities like water, gas, electricity, and sewerage. Recreation facilities include playgrounds, entertainment, and swimming pools. Other services include education and security. Unlike governmental accounting, which evaluates government entities to assess services provided by the government, for-profit financial accounting evaluates businesses to find out relevant information concerning losses, expenses, gains, and revenues (Chychyla et al., 2019). This information is useful when assessing increasing assets and profitability that correlate with future dividends and return on investments to shareholders and owners. Also, evaluated information is relevant to investors and creditors when assessing the business.
Oversight of Resources Efficiency
Financial reporting of governmental accounting is used by oversight bodies, agencies, and other stakeholders in judging the overall financial condition of the government so that they inform the public about the position and well-being of governmental finances. During oversight, there is clear communication on whether the government is utilizing public resources effectively and efficiently in compliance with grants, contracts, or its budget (Chychyla et al., 2019). Oversight of financial reporting helps lenders determine the ability of the government to repay long-term and short-term debts. In contrast, there is no oversight of the efficiency of the resources in for-profit financial accounting, as their main aim is to make a profit benefiting the owner and shareholders.
The accounting statements for financial reporting by governmental accounting differ from for-profit financial accounting. Governmental accounting uses accrual-basis accounting statements which play a critical role in measuring the ability of the government to cover costs related to the payment of long-term services using the measurement focus of economic resource flows (Chychyla et al., 2019). Activity statements tend to report service costs by program or function, including costs related to the drawn revenue from the general revenues by the government. In contrast, for-profit financial accounting uses income statements. The income statement focuses on the ability of for-profit enterprises to cover operational costs within a single period (Chychyla et al., 2019).
Objectives and Importance
Appropriate use of Taxpayers’ Money
Governmental accounting has various objectives to fulfill, which are of great importance. The first objective of governmental accounting is to ensure the appropriate use of taxpayers’ money. The public finances governmental projects; thus, government resources belong to the public (Haje et al., 2019). Governmental accounting must play a critical role in ensuring taxpayers’ money does the intended purpose. Governmental accounting ensures accountability and transparency in how the government utilizes public resources. Such accountability and transparency are important during appropriate management and tracking public finances. Transparency and accountability promote public trust as public resources are used efficiently and effectively (Haje et al., 2019). Transparent financial details help taxpayers to hold government officials accountable for all the actions they undertake.
Inform on Revenue, Expenditure, Deposits, Loans, and Cash Availability
Governmental accounting has the objective of informing the public about the revenues. Informing on revenues is important in enabling the public to know the government’s worth and the goods and services it will finance. The government must maintain all generational transactions and accrued revenues for a given financial year. Also, it is a requirement for the government to maintain financial data for the past years (Haje et al., 2019). If any member of the public request information on revenue, the government must provide all the necessary information as they are entitled to receive such details under the “Right to Information Act.”
Additionally, governmental accounting is solely responsible for providing all the relevant information concerning the government-incurred expenditure. The parliament must check and ascertain various governmental expenditures incurred. This parliamentary action helps to ensure the effective utilization of public resources. Thus, if the parliament requests such information from the central government, the government must provide all the details requested (Haje et al., 2019). Also, the state legislature might request similar information from the state government, and it must provide all the necessary details.
Furthermore, the government aims to inform the general public about all deposits and loans. Such information is important for the public to know the government’s future and current liquidity needs. The government must provide all the necessary information concerning the loans granted by the government to other parties (Haje et al., 2019). Similarly, governmental accounting has to update the general public about deposit repayments.
Moreover, the government aims to provide the public with all necessary information concerning cash availability. The public need to be aware of the future and current cash availability as it will help to understand if the government has enough cash in its bank to undertake various projects (Haje et al., 2019). Appropriate cash availability communication helps the public know that the government will execute its budget smoothly even when crises arise. Also, available cash helps the government obtain views from the public on the adjustments to undertake during emergency cases.
Compliance with the Law, Safeguarding Assets and Ensuring Efficiency and Effectiveness
Another objective of governmental accounting is to ensure total compliance with the law and all regulations. Since governmental accounting aims at serving the public, total compliance with the law is mandatory. Compliance with the law is important as it ensures that governmental accounting meets all the standards in place, which increases financial statements’ credibility, thus, allows economic decisions based on data accuracy and consistency (Haje et al., 2019). Also, compliance with the law ensures financial transparency hence doing away with unacceptable behaviors like corruption. In addition, compliance with the law produces accurate financial statements free from errors.
Safeguarding government entity assets is another objective of governmental accounting. It is important as it ensures that government assets are protected from theft and loss and serve their intended purpose. Governmental accounting ensures government entities’ effective and efficient operation (Haje et al., 2019). Effective and efficient operation is important as it guarantees effective utilization of public resources. Also, such ensure that government entities operate within their set goals without deviations.
Risk Management, Making Informed Decisions, and Public Trust Promotion
Governmental accounting aims at risk management because government entities are exposed to certain compliance, operational, and financial risks. Appropriate identification and monitoring of related risks are important in offering immediate solutions. In addition, governmental accounting offers useful information that facilitates decision-making (Haje et al., 2019). Individuals in charge of government entities use this information in making essential decisions for the government, especially on strategic matters, operations, and allocation of resources. Finally, governmental accounting focuses on promoting public trust. This public trust is achieved by ensuring that all entities remain transparent and accountable.
For-Profit Financial Accounting
Offer Information to Investors, Creditors, and Owners
Unlike governmental accounting, whose objectives focus on satisfying the general public and bringing government entities to accountability, for-profit financial accounting focuses on satisfying investors, creditors, owners, and shareholders (Haje et al., 2019). The information offered to these stakeholders includes expenses, revenues, new business opportunities, and accrued profits. The information offered to these stakeholders is important in assessing how to increase their profits.
Track Financial Transactions
Furthermore, another objective of for-profit financial accounting is to track financial transactions. Such information is relevant to the stakeholders as it helps make sound decisions about highly profitable investment opportunities and evades those businesses that make losses (Haje et al., 2019). Also, tracking financial transactions help the owners and shareholders communicate their business financial position to outside stakeholders like investors and creditors. These financial statements help these external parties by discouraging or encouraging them to partner with the business.
Communicate Financial Health
Once financial information is tracked, communication is made to the owners and shareholders about the health of the for-profit enterprise. For-profit financial accounting communicates cash flow, operations, and general performance (Haje et al., 2019). The owners and shareholders can understand their debts, profits, and expenses incurred. Owners and shareholders may use this information to compare their performance to that of the competitors. Also, they can compare this information to their previous financial year to find out if they are financially healthy or not. Through this information, the owners and shareholders understand their solvency and liquidity ratios and whether they can pay their debts (Haje et al., 2019).
Type of Accounting
The type of accounting used by the government is called fund accounting. Fund accounting records resources limited in usage by the government, grant authority, the law, and donors. The government uses fund accounting because its main focus is accountability and not making a profit (Alozie, 2020). This type of accounting fits the government as it needs to be accountable to the public. Fund accounting consists of the general ledger, endowments, and grants. Fund accounting has various self-balanced accounts reported as permanent restricted, temporary restricted, or unrestricted, depending on the restrictions set by the provider. Unrestricted funds are those the government can spend on any governmental role. Restricted funds must only be spent on specified governmental roles, or they need a legal requirement before spending them (Alozie, 2020). Restricted funds are mostly communicated as a will, government grant, agreement, or gift. Fund accounting provides an audit trail implying that the expenditure is in line with the money’s intended purpose, hence lifting the restriction.
The government uses fund accounting due to its numerous advantages. First, fund accounting ensures transparency and accountability. The government needs to inform the public how it uses its funds and accounts for each coin. Fund accounting increases accountability by isolating restricted funds from unrestricted ones (Alozie, 2020). Transparency and accountability displayed by fund accounting increase public trust in their government. Besides, fund accounting has accurate and detailed financial statements. Such information helps the government in explaining to the public how they use their resources. Fund accounting is advantageous as it increases understanding of spending and structure (Alozie, 2020). The government uses fund accounting to show the purpose of the money and its expenditure. Those members of the public who are not familiar with governmental accounting can easily determine the funds’ usage. In addition, fund accounting is useful as it ensures accurate financial reporting. Through fund accounting, the government can pass an audit with ease. Also, fund accounting provides adequate financial reports, which are helpful to the government when it applies for grants (Alozie, 2020). Thus, fund accounting is good at providing detailed statements that indicate the respective uses and usefulness of the funds to the government.
For-Profit Financial Accounting
Unlike governmental accounting, which uses fund accounting, for-profit financial accounting uses a general ledger. For-profit financials prefer the general ledger because it is a self-balancing account. Accounting data in a general ledger is posted from journals, and aggregation is done from sub-ledgers. These sub-ledgers include projects, purchases, fixed assets, receivables, payable accounts, and cash management (Alozie, 2020). In addition, the general ledger holds non-financial and financial data for a for-profit enterprise. Expense and income categories derive income and financial statements in a general ledger. Mostly, a general ledger has seven or more categories. These categories include losses, gains, expenses, revenues, owner’s equity, liabilities, and assets (Alozie, 2020). General ledgers may further be subdivided into accounts payable and account receivable. Trial balance refers to extracting accounts balances, and it acts as a preliminary stage of preparing a financial statement that leads to credit and debits equality.
For-profit financial accounting uses a general ledger during financial accounting due to its numerous advantages. First, a general ledger records financial transactions accurately; hence this helps shareholders and owners in making quick decisions (Alozie, 2020). Also, accurate recording is essential to shareholders and owners during budgeting. Besides, a general ledger facilitates compiling the trial balance. It is relevant in facilitating book balancing as for-profit financial accounting will easily detect errors, especially in double entries, and rectify them easily. In addition, a general ledger makes it easier to file tax returns, as all incomes and expenses are in one place (Alozie, 2020). The owners and shareholders can stay at the top of spending since they have actual expenses and revenues from the general ledgers. Shareholders and owners can spot any unusual accounting transactions and make all the necessary changes to stay on the course of profit maximization. Since owners and shareholders aim to maximize profits, a general ledger helps them easily identify and stop fraud (Alozie, 2020). Finally, a general ledger facilitates key financial statements compilation essential for evaluating the overall financial health, liquidity, and profitability.
Governmental and for-profit financial accounting needs adjustments to serve its intended purpose effectively. Therefore, a recommendation is made to establish a single truth source to ensure transparency and accountability of taxpayers’ resources in governmental accounting. In contrast, in for-profit financial accounting, a single truth source will help in decision-making by the owner, shareholders, creditors, and investors as they will have the same data. In addition, there is a need to ensure that final reports are in a single location to ease oversight of resources in governmental accounting. In contrast, in for-profit financial accounting, reports in a single location will enable the owners and shareholders to quickly analyze the overall performance to identify losses, expenses, gains, and growth opportunities. Also, it is recommended to organize information effectively to facilitate public evaluation in governmental accounting. In contrast, effective information organization in for-profit financial accounting will help investors and creditors during a business assessment. Finally, it is recommended that both governmental and for-profit financial accounting adheres to their types of accounting to realize their greater usefulness.
Significant distinctions exist between the two types of accounting. One of the distinctions is financial reporting. Governmental accounting needs to be transparent and accountable to serve the public, while for-profit financial accounting does not need transparency since its focus is to make profits. Financial reporting helps business evaluation to achieve varying objectives among the two accounting processes. Also, financial reporting helps oversight resources in governmental accounting, unlike for-profit financial accounting. In addition, the financial statements between the two differ. Also, the objectives and importance of governmental accounting include ensuring the appropriate use of taxpayers’ money. Governmental accounting must inform the public about revenues, expenditures, deposits, loans, and cash availability. Besides, governmental accounting must comply with the law, safeguard assets, and ensure efficiency and effectiveness. Governmental accounting also focuses on risk management, making informed decisions, and public trust promotion. The objectives and importance of for-profit financial accounting include offering information to investors, creditors, owners, and shareholders. Also, it tracks financial transactions and communicates financial health. Finally, governmental accounting uses fund accounting, while for-profit financial accounting uses general ledgers, which have different advantages.
Alozie, C. E. (2020). Fund accounting and government-wide financial reporting during the Pre-IPSAS implementation era from a Nigerian experience. Journal of Public Budgeting, Accounting & Financial Management. https://doi.org/10.1108/JPBAFM-01-2019-0017
Chychyla, R., Leone, A. J., & Minutti-Meza, M. (2019). Complexity of financial reporting standards and accounting expertise. Journal of Accounting and Economics, 67(1), 226-253. https://doi.org/10.1016/j.jacceco.2018.09.005
Haje, P., Arystanbaeva, A., Оralbaeva, Z., & Kupenova, Z. (2019). The role and importance of accounting information system in the context of digitalization. Central Asian Journal of Social Sciences and Humanities, 5(1), 64-73. https://doi.org/10.26577/CAJSH-2019-1-s8