Why is governmental and not-for-profit accounting covered separately from business enterprise

accounting?
Governments and not-for-profit entities do have some unique transactions:
 Governments are financed primarily by taxes.
 Not-for-profit entities receive significant amounts of contributions.
 Governmental and not-for-profit entities operate in an environment different from that of
business enterprises, and the users of their accounting data have somewhat different
information needs.
 Legally adopted budget plays a particularly significant role in governmental financial activities.
 Legal restrictions and resource-provider restrictions on the use of resources play a greater role in
governmental and not-for-profit entities than in business enterprises.
 As a result, both internal accounting systems and external financial reporting for governmental
and not-for-profit entity users are designed to provide certain types of data that differ from the
data reported by business enterprises.
 Business enterprises exist to enhance the wealth of their owners. Because income is
quantifiable and can be measured in monetary terms, business enterprise financial
reporting focuses primarily on earnings and its components.
 In sharp contrast, governmental and not-for-profit entities exist to provide services to
their constituents. They generally try to accumulate a reasonable surplus of financial
resources to cushion against economic contraction and to provide for emergency
needs.
 Business enterprises derive virtually all their revenues from exchange transactions,
generally involving specific products or services, between willing buyers and sellers.
 Governments, on the other hand, obtain most of their revenues from taxation—
wherein taxpayers involuntarily transfer resources for a basket of services that may
or may not bear a direct relationship to what the taxpayer wants or needs.
 Many not-for-profit entities obtain significant resources from voluntary donors who
expect no product or service in exchange, but who are nevertheless concerned with
whether their donations are achieving their intended purposes.
 Business enterprises are at risk of going out of business for many reasons, such as
global competition, emerging products, changing consumer tastes, inefficiencies,
and recession. Business enterprises may also go out of business by being bought out
by other enterprises

 Not-for-profit organizations face similar risks.

 However, because of the power to tax and the nature of their services, general-
purpose governments rarely go out of business and are not bought and sold like
business enterprises.
 Business enterprises are free to provide only those goods and services they believe will
enhance their profits. They usually cannot be required to provide goods and services
against their will, and if they cannot cope with the legal or social environment, they are
free to leave the market. Their spending decisions may or may not be subject to
budgets, but if they are, the budgetary amendment process is relatively simple.
 Governmental entities, on the other hand, are required by law (constitution, charter, or
statute) to provide certain services. For example, most city charters provide for police
and fire protection. Managers cannot refuse to provide these services because of cost
or because they believe their residents do not deserve them.
 Spending decisions made by the federal government, states, and general-purpose local
governments are based on budgets that have the force of law.
 Budgetary appropriations typically cannot be exceeded with- out specific legislative
approval.
 Generally, resources provided by higher-level governments must be used only for the
specific purposes designated by those governments.
Internal Users
 Governmental managers need accounting information to keep day-to-day control
over spending to ensure that amounts authorized by the budget are not exceeded
and that sufficient resources will be available to cover the full year’s operations.

 Managers of not-for-profit entities need accounting data to help keep expenses in line
with budgets and within limitations imposed by donors and grantors.

 Managers of both governmental and not-for-profit entities need to monitor the day-
to-day availability of cash.

 Boards of trustees require reports derived from accounting systems to help them
perform their governance responsibilities.
 External users—those not directly involved in the operations of the reporting entity.

 The major external users of governmental and not-for-profit entity financial reports are
resource providers, oversight bodies, and service recipients.

 Resource providers include taxpayers, donors and potential donors, investors and
potential investors, bond-rating agencies (which provide data to investors), and grant-
providing organizations, such as higher-level governments and foundations.

 External oversight bodies include higher-level governments and regulatory agencies.

 Service recipients include citizen advocate groups. Because of the wide array of external
users of financial reporting, the statements and related notes that comprise external
reporting are often referred to as “general purpose” reporting.
1. Use of Fund Accounting
 Fund accounting is perhaps the most distinctive feature of governmental and
not-for-profit organization accounting.
 Fund accounting segregates an entity’s assets, liabilities, and net assets into
separate accounting entities based on legal requirements, donor-imposed
restrictions, or special regulations.
2. Incorporation of Budgets into Accounting Systems
 A unique feature in governmental fund accounting is the use of budgetary accounts in
the accounting system for certain types of funds.
 The requirement for incorporating budgetary accounting into governmental fund
accounting systems highlights the importance of ensuring that legally adopted
budgets are not exceeded.
3. Measurement Focus and Basis of Accounting

 Business enterprises use the accrual basis of accounting, as distinguished from the
cash basis of accounting, when they prepare financial statements. Basis of
accounting is a term that refers to when assets, liabilities, revenues, and expenses
are recognized as such in an entity’s financial statements.

 Not-for-profit organizations, including not-for- profit hospitals, and the federal

 State and local governments also use the accrual basis of accounting when they
report on their business-type activities. For their basic governmental functions,
however, state and local governments use a unique, hybrid-type basis of accounting
called the modified accrual basis of accounting
4. Entity-Wide and Fund-Level Reporting

 State and local governments report on two levels: a government-wide level that
distinguishes only between governmental and business-type activities, and a
fund level that reports on individual funds.

 Not-for-profit organization financial statements are required to focus on the