Khaled Rageh Gov. Acc.

3rd
Chapter 1- (class 1)

Governmental & Non profit Accounting

(Environment and Characteristics)
CHARACTERISTICS OF G &NP ORGANIZATION:

1. Absence of profit motive.

2. Owned by constituents – no stock.
3. Contributors of resources do not receive proportional share of benefits.
4. Decisions made — directly or indirectly — by voters
5. Meetings where decisions are made usually open to the public.

MAJOR TYPES OF G &NP ORGANIZATIONS:

1. Governments: Federal, state, county, city, township, village, and special districts.
2. Education: kindergartens, elementary & secondary schools, vocational & technical
schools, and colleges& universities.
3. Health and welfare: hospitals, nursing homes, and American Red Cross
4. Religious: YMCA, Salvation, and church-related organizations
5. Charities: United Way, Community Chest, & other fund- raising organizations
6. Foundations: Private trust that operate religious, educational, or charitable
organization.

THE G& NP ENVIRONMENT:

G&NP ORGANIZATIONS ARE SIMILAR IN MANY WAYS TO PROFIT

SEEKING ENTERPRISES:

SIMILARITIES:

1. Operate in the same economy and compete for same resources financial, capital, and
human.
2. Acquire & convert scarce resources into goods & services.
3. Provide goods and services, many of which may be similar.
4. Use of accounting & other information systems.
5. Need to operate economically, effectively, & efficiently.

DIFFERENCES:

1) Organizational objectives
2) Sources of financial resources.
3) Methods of evaluating performance and operating results.

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1) ORGANIZATIONAL OBJECTWES:

Businesses G&NP:
Operating Motive: Operating Motive:
maximize income from revenues maximize services provided from
and other resources revenue and other resources

Operational Focus: Operational Focus:

report quarterly but look to the long-term operate on annual budget, so current year
as well is of primary importance

2) 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.

Notes

Unique G&NP sources

 Involuntary contributions- taxes.
 Donations
 Appropriations and grants from other governmental entities.

3) EVALUATING PERFONCE AND OPERATING RESULTS:

 In business, continuing a product or service determined by the success in

Marketplace.

 In G&NP organizations:
a) Profit not a motive and frequently cannot be measured.
b) Services not found elsewhere so there is no completion
c) Face rules and regulation not found in private sector.

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NOTES:

a) No open market supply and demand test occurs to evaluate the value of the services
they provide.

b) The relationship, if any between the resource contributors and the recipients of the
services is remote and indirect.

c) G&NP organizations are not profit oriented in the usual sense and are not expected to
operate profitably; thus, the profit test is neither a valid performance indicator nor an
automatic regulating device.

d) Governments can force financial resources contributions through taxation.

SPECIAL REGULATIONS AND CONTROLS APPLIED TO GOVERNMENTS

INCLUDE:

1. Organization structure: Form, board composition, number and duties of personnel.

2. Personnel policies and procedures: who has power to appoint or higher personnel,
tenure, termination policies, promotion policies.

3. Sources of financial resources: types and amount of taxes, licenses, fines, or fees,
procedure for setting user charges.

4. Uses of financial resources: purposes, including the legal restriction, purchasing

procedures , budgeting methods.

5. Accounting: any or all phases of the accounting system; for example, chart of accounts,
bases of accounting, forms, and procedures.

6. Financial reporting: type and frequency of financial reposts; report format and content;
report recipients.

7. Auditing: frequency of audit; who is to perform the audit; scope and type of audit; time
and place.

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Chapter 1- (class 2)
 Objectives of G&NP Accounting & Financial Reporting:

FASB: GASB:
 Is responsible for establishing  Is responsible for establishing
accounting and financial accounting and financial
reporting standards for all reporting standards for activities
other organizations. and transactions of state and local
governments.
 Including government, non profit
organizations.

 Defining Government:
Public corporation" an instrumentality of the state, founded and owned in the public
interest, supported by the public funds and governed by these deriving their authority from
the state.

Notes:

1. The FASB and GASB jointly developed a definition of government entities as

follows:

Governmental organizations include (1) public corporations and bolides corporate and
politic, and (2) other organizations if they have one or more of the following characteristics:

 The popular election of officers or appointment (or approval) of a controlling majority

of the members of the organization's governing body by officials of one or more state or
local governments.

 The potential for unilateral dissolution by a government with the net assets reverting to a
government.

 The power to enact and enforce a tax levy.

 The ability to issue directly (rather than through a state or municipal authority) debt that
pays interest exempt from federal taxation.

2. One unique aspect of the SLG environment is that governments may be involved
in both governmental – type and business type activities.

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Governmental-type-Activities Business-type-Activities
(unique to SLG) (similar to private companies)
1) Fire and police protection. 1) Public utilities.
2) Courts 2) Other activities for which user fees
3) Education are charged and which are
4) Street and traffic control. operated similarly to private
business

 Governmental - Type - Activities:

The governmental - type - activities environment is
unique in several respects:

1) Purpose

2) Sources of F.
resources

3) F. resources allocation
mechanisms

4) Accountability

5) Reporting issues
&problems
1- Purpose:
The primary goal of governmental-type-activities is to provide goods or services, often without
regard to the individual recipient's ability to pay for them.

2- Sources of F. resources:
Two primary sources of F. sources of governmental type activities are taxes and intergovernmental
grants and subsides.

3- F. resources allocation mechanisms:

Note:
 Absence of direct relationship between the financial resources provided by an individual
taxpayer and the services provided to that individual taxpayer makes it impossible for the
resources allocations to be made in the same manner as for business enterprises.

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The Mechanisms
are:

(A) Restrictions on resources use (B) Budget

(A)Restrictions on resources use:

One primary mechanism used for allocating general G. resources to various uses is for restrictions
to be placed on F. resource use by the resource providers or their representatives.

(B) Budget:

Taxes and other revenues are allocated to various uses by placing even more detailed budgetary
restrictions on their use.

 The budget is an expression of public policy, it is also a financial plan that indicates the
proposed expenditures for the year and the means of financing them.

4- Accountabilities:

In terms of:

(A) To whom SLGs and their (B) Focuses to their

officials are accountable accountability.

(A)The accountability between:

 SLG and their constituencies.
 SLG and other governments.
 SLG own legislative and executive bodies.

(B) Focuses to their accountability:

Accountability Focuses the financial reports for governmental-type activities focus on two types of
accountability: fiscal accountability and operational accountability.

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5- Reporting Issues and Problems:

 Financial Report Users:

1. The citizenry:
2. Legislative and oversight bodies.
3. Investors and creditors:

 Financial Reporting Uses:

The GASB notes that financial reporting should provide information useful in making economic and
political decisions and in assessing accountability by:

1. Comparing actual financial results with the legally adopted budget.

2. Assessing financial condition and results of operations.

3. Assisting in determining compliance with financial related laws, rules, and regulations.

4. Assisting in the evaluating efficiency and effectiveness.

 Business-Type Activities:

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Very Important Note:

The two most important types of legal and administrative control provisions affecting
accounting in SLG environment are:
1) The use of funds.
2) The role of the budget.

1) Fund Accounting:

Funds: are separate fiscal and accounting entities and include both cash and non cash
resources segregated according to the purposes or activities for which they are to be used as
well as related liabilities.

Two basic categories of fund accounting

entities are used by SLGs:

1) Governmental (expendable) 2) Proprietary (non

Funds. expendable) Funds.

To account for the financial assets,
related liabilities, changes in net assets,
and balances that may be expended in
the non business type activities (e.g for
fire and police protection)
To account for the revenues, expenses,
assets, liabilities, and equity of its
business type activities (e.g utilities,
cafeterias, or transportation systems).