Identify and describe one of the five environmental differences between governments and for-profit business enterprises as identified in the Governmental Accounting Standards Board's Why Governmental Accounting and Financial Reporting Is-and Should Be-Different.
Wednesday, January 16, 2013
Chapter 1 - governmental accounting differences
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One of the five environmental differences between governemtns and for-profit business enterprises is SOURCES OF REVENUE.
ReplyDeleteMost businesses make a profit by having higher net sales than the cost of providing a good or product. However, for governments, they make their "revenue" off of taxes. These taxes are enforced to be paid because there is a penalty to businesses and individuals if they do not pay. This makes it difficult and "cloudy" for the timing of the recognition of the tax revenue.
A second on of the five environmental differences between governments and for-profit business enterprises is POTENTIAL FOR LONGEVITY.
ReplyDeleteAs mentioned above, governments have the ability to tax, which means that the almost never go out of business. Due to these circumstances, the accounting can be different than that of a for-profit organization. For example, instead of focusing on short-term recovery amounts of invested assets, governments can have a longer-term focus. Therefore, short-term changes in the value of any assets or liabilities are not recognized as often in the short term and on the government's financial statement.
According to the GASB’s Why Governmental Accounting and Financial Reporting Is-and Should Be-Different, government and for-profit business have five environmental differences that distinguish them in accounting practices.
ReplyDeleteThe first distinction is the difference in their organizational purposes.
While for-profit businesses operate to make money for their owners, governmental organizations operate to better the well-being of the public. Profit is not the focus. A business measure of net income is not an accurate indication of operational efficiency of governmental organizations, because governmental revenue is not generated from sales; it comes in the form of taxes, grants and other sources.
The purpose of both government accounting and financial reporting is to improve decision making for stakeholders. However, governmental agencies are largely funded by grants that require extensive repots and audits, so they have different users with different information needs than for-profit businesses. This is why governmental accounting information is more complex than financial reporting.
Looks like I get the honor of finishing up the last two, which are Relationship with Stakeholders and the Role of the Budget.
ReplyDeleteUnlike for-profit businesses, governments do not have shareholders. Instead, they have stakeholders which consist of the population represented by the government including government officals themsleves. All stakeholders are required to pay taxes which in turn are used by the government for specific purposes. To insure that the taxes are spent correctly, according to legal and donor restrictions, governments set up funds. By doing this, governments can easily keep track of spending and fund raising while also demonstrating compliance with laws.
Budgets are also prepared differently for goverment purposes. A for-profit budget is meant to help companies stay on track in terms of spending. Budgets are used more as a control and measuring stick. Government budgets are more of a public policy and can carry leagal implications which prevent government officials from over spending. Governments are also required to include a report in their financial statemnts comparing budgeted to actual amounts.