Government Accounting: Definition, Types & Importance

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  • 0:02 Government Accounting
  • 1:30 Fund Accounting
  • 2:38 Financial Reporting
  • 5:10 Lesson Summary
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Lesson Transcript
Instructor: Amina Borrero

Amina has a Master's in Business Administration

In this lesson, we'll take a look at government accounting, specifically some of the differences between accounting in the private sector and that in the public sector. This will include regulation and oversight, fund accounting, and financial reporting.

Government Accounting

Accounting is an important function of any business. Knowing when and where your money is coming and going is crucial. Without that knowledge, it's impossible to know who or what got paid or needs to be paid. In the business world, also know as the private sector, this is pretty straight forward. In government, or the public sector, revenue streams function a little bit differently.

The majority of governmental agencies are funded at some level by funds received from various taxes or grants. Because government agencies serve as stewards of taxpayer money, using the money to provide valuable services and goods to the public, there's a need for both uniformity and transparency in the way financial data is reported. To establish uniformity in their accounting processes, government agencies follow what's referred to as generally accepted accounting principles, or GAAP for short.

These principles serve as the basis for the rules and regulations put forth to establish uniform accounting procedures in government. Having a uniform method in which financial data is reported allows agencies to show that they're functioning as good stewards of taxpayer dollars. The Government Accounting Standards Board, or GASB for short, is an independent, non-political entity that helps governments report their finances in a transparent manner by establishing and providing oversight for GAAP.

Fund Accounting

Among the basic principles of governmental GAAP is fund accounting. This is the most common form of government accounting in the United States. It's used at the federal, state, and local levels. Governmental operations, by nature, are diverse, and there are numerous legal and fiscal constraints under which those operations must be conducted. This makes it impossible to record all governmental financial transactions and balances in a single accounting entity. Therefore, unlike the private sector, where most transactions are accounted for as a single entity, a governmental unit is accounted for through separate funds, each of which is a fiscal and accounting entity with a self-balancing set of accounts.

Per GAAP, there are three generic categories of funds: governmental funds, proprietary funds, and fiduciary funds. Governmental funds are associated with funding received from legislative sources, such as tax revenue or appropriations. Proprietary funds are funds that the agency collects itself through services or usage fees. Examples of fiduciary funds would be pensions and retirement investments.

Financial Reporting

It's important for government agencies to be able to accurately report their finances. Not just because it's good business practice, but as we mentioned before, they're stewards of taxpayer money, and the public wants to know that the money is being spent correctly. To do this, government agencies must first determine how to record financial transactions. Determining how financial transactions are to be reported is based on two separate criteria: measurement focus and basis of accounting.

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