Federal Government Accounting vs Private Term Paper

Excerpt from Term Paper :

As opposite, in private sector accounting (for the purpose to improve the financial position of the company) the sales are recognized when the products or services have been rendered and the payment has been received or is expected to be received in a very short time. The costs are recognized as deduction from income if there is a subjective view that these costs are to lead to future income generation in the coming periods. Usage of accrual accounting is considered an advantage for public firms as balancing expenses and income is a good controlling and performance measure. On the other hand, in public sector, the income for the company does not depend on the performance of the management, nor does the expenditures are not a function of beneficiaries actions, accrual accounting system must be adopted to the specific economic nature of these organizations. This difference in accounting by private firms is dictated by the fact that the companies strive to work longer term and attract funds from shareholders at lower cost possible by promising them good returns from the investment decisions they make. While hired management of the governmental companies are not usually that long-term horizon driven and are simply hired to carry out specific typically prescribed functions. For the private enterprises management it is more important to show that the business is rolling by reflecting the sales when the products were shipped, for example, while for the governmental bodies it is more vital to represent that the cash is spent according to the schedule and not necessarily rapidly.

Some scholars argue that transferring the public sector to the same economic principles than private firms would be more beneficial to the nation as the U.S.A. And other developed countries enjoy their wealth only due to market environment and profit maximizing actions of the enterprises. On the other hand, a recent study has revealed that transferring some of the governmental defense purchases to commercial base did not lead to more efficiency in this process and only lead to more costs incurred as DOD was no longer able to exploit its' "monopoly purchasing power."

The public sector accounting system also treats differently post employment benefits accounting and is striving to allocate these expenses in the periods in which they actually occur. Furthermore, the law requires governmental bodies to separate transfer of funds between each other and account for them separately either in income or expenses. Within private enterprise, equity can be distributed among the shareholders and is a residual value of the firm. In public companies, equity is more a balancing notion and is contrast to rights of owners in the private business. Required Supplementary Information (RSI) must be submitted together with the annual financial reporting of a governmental body and this addendum is basically a comparison of the funds prescribed to the governmental body by the budget and the actually incurred expenses. In federal government accounting the notion where the funds are allocated from the government to the company only for specific purposes and then are checked to comply is referred to as fiscal accountability.


1) Sunder, S. A Theory of Accounting and Controls for Organizations Producing

2) Basic Governmental Accounting Principles, available at http://www.osc.state.ny.us/localgov/pubs/arm/arm2.htm

3) Besselman, Joseph J., Ashish Arora, and Patrick Larkey, "Buying in a Businesslike Fashion: And Paying More?" Carnegie Mellon University Working Paper, January 1999.

Public- Versus Private-Goods, School of Management, Yale University.

A www.wikipedia.org www.fasab.org

6) Penno, M., Simon, D. Accounting choices: public vs. private firms, Journal of Business Finance and Accounting, Volume 13(4), Winter 1986.

Basic Governmental Accounting Principles, available from: ttp:/ / www.osc.state.ny.us/localgov/pubs/arm/arm2.htm

Besselman, Joseph J., Ashish Arora, and Patrick Larkey, "Buying in a Businesslike Fashion: And Paying More?" Carnegie Mellon University Working Paper, January 1999.

Federal Government vs. Private Accounting

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