Accounting, by Its Nature, Requires a Set

Accounting, by its nature, requires a set of standards that are exactly the same industry-wide. If there were not established rules for determining revenues, profits, expenses, and other influences on a company's bottom line, there would be no way to evaluate a corporation's effectivity, production, or potential. A lack of established standards would also mean that no two companies could be honestly compared, since their accounting methods could be so significantly different that their financial statements showed vastly different accounting methods.

In light of these potential discrepancies in reporting methods, the bodies that govern accounting have established Generally Accepted Auditing Standards, or GAAS. Generally These principles are required to be applied in all accounting situations, and they are extensive enough so that almost every possible scenario has a standard response. Interest owed in Houston is reflected on a financial statement in the exact same way that interest owed in New York City is. Government, however, is different for a variety of reasons.

Government -- federal, state, and local -- has many of the same accounting reports as private industry -- revenue, expenses, interest, salaries, pensions. However, government accounting is more complex due to the variety of revenue sources and expenditure time-frames (among other variables) that come with government operation. Occasionally government-mandated standards themselves conflict with Generally Accepted Accounting Principles themselves (Apostolou and Crumbly 1:41).

Government is managed by funds, which have separate accounting reports for each fund, despite there being a need for a comprehensive report of the entire government's balances (i.e., even if one fund is perfectly balanced, the government budget as a whole might not be). Reports detailing expenditures and revenues with a cash basis may be prepared for these individual funds with little variation. Comprehensive annual financial reports help with the task of compiling this information for the government entity as a whole, including its individual funds.

However, these reports, if left on a simple cash basis, "ignore the long-term assets and liabilities of government, and do not fairly present the financial condition and results of government operations" (ibid 1:7). Put more simply, the needs of financial reporting in government are markedly different than those in corporate reporting, since governments must demonstrate "compliance with budgets" (ibid1:40). These compliance techniques "sometimes conflict with GAAP" (ibid 1:41) or at least "are not consistent with GAAP" (ibid 1:45).

What are governments to do about financial reporting, then? To be in compliance with their budgets and other legislative restrictions might mean differing from GAAP/GAAS -- but reporting in complete compliance with GAAP/GAAS might neglect vital information that applies in government but is not a regular part of commercial accounting, for example, income expected from the sale of bonds.

This dilemma is resolved by allowing a few special rules in the GAAP/GAAS for governmental reporting; a specific example of one of these rules is the provision for encumbrances in government accounting. "Encumbrances are treated as expenditures for budgetary accounting, but not for GAAP" (ibid 2:116). Encumbrances, while not reflected in GAAP, do have a significant effect on a governmental budget and need to be disclosed -- this is done by requiring that a government submit a.