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Governmental Accounting Basics Updated Summer I 2009

Governmental Accounting Basics Updated Summer I 2009 -...

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Accounting 401 Advanced Accounting Governmental Accounting and Reporting – Basic Issues Summer I 2009 A. Governmental Activities 1. As a result of the expansion of governmental services and programs, the importance of governmental accounting and reporting has increased. 2. Governmental units and businesses are very much different and thus the accounting and reporting policies of government are much different than businesses. However, it is interesting to note that the newer external reporting requirements for governments are tending to move closer to those used for commercial enterprises. 3. How do state and local governments differ from businesses? a. The government’s resources are derived from taxes, fees, and fines. The major source of a government’s revenue is taxes, which it has a legal right to collect. b. There is nothing like owners’ equity in a governmental unit. Instead of owners’ equity in the balance sheet, a governmental unit will show the fund balance. The fund balance is nothing more than assets minus liabilities. c. State and local governments must follow a budget. Expenditures can not exceed the amount shown in the budget. It is expected that revenues generated will be great enough to cover expenditures. d. Financial inflows are often limited to particular activities. For example, funds from a bond issue for the construction of a city auditorium have to be used for that purpose. e. The primary purpose of a state or local governmental unit is to provide certain services to residents. Expenditures do not have to match with revenues, since revenues result from the services provided. Also, there is no profit motive. f. There are different users of governmental financial statements. g. The GASB rather than the FASB sets requirements for governmental external reporting. Many governments must follow GAAP and are required to issue audited financial statements. h. Activities of the government can be divided into three categories: Governmental activities – benefit the government or its citizens. They consist of primary services such as health and safety, economic assistance, education, recreation, etc. They are funded primarily by property taxes (on the local level) or by income or sales taxes (on the state level).
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Proprietary activities – They are similar to commercial businesses in which goods and services are financed by user fees. Examples are parking and recreational facilities and utilities. Fiduciary activities – They are situations in which the governmental unit holds resources as a custodian for entities or individuals outside of the governmental unit. B. Governmental Accounting Standards Board (GASB) 1. The GASB issues authoritative standards on accounting and financial reporting by state and local governments, including certain not-for-profit entities related to government such as state colleges and universities and public hospitals.
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