Federal Government Accounting vs. Private

Federal Government Accounting vs. Private Sector Accounting In the United States, Governmental accounting is the aggregate notion for several accounting systems exploited by different public bodies for their accounting and financial statement purposes. There are three major governmental levels at which the bodies follow different accounting standards worked out and monitored carefully by private bodies. Federal Accounting Standards Advisory Board (FASAB) works out standards for the federal government, while Governmental Accounting Standards Board (GASB) and Federal Accounting Standards Board (FASB) deliver standards for state and local governmental bodies respectively.

These accounting standards at these three levels differ significantly with those used by the private sector enterprises for many reasons. The accounting standards worked out for different purposes, namely for public vs. private accounting, are delivered for being implemented in different uses, thus with different external environment with the internal environment of the bodies using them being various also.

The end sole purpose of private enterprises is to increase their profits and thus in the long-term to maximize wealth of the shareholders or the owners and the hired management of the company strives their best to allocate the funds available and to generate the necessary funds in the most optimal for the company way.

While in governmental organizations, typically some funds are allocated only for some specific need prescribed in the budget and allocation of the funds there does not necessarily lead to profit growth, while serves other social importance goals. The actors within the environment of the private companies and public companies are different, each of them having different goal in exchange for participating in this cycle.

The fact that shareholders of the company based on the cash flow the management has managed to generate, can any time withdraw the funds or fire the management, is a good controlling tool for the private sector while there is no such a clear controlling tool for governmental bodies.

The funds inflow and outflow systems within the public and private sector companies vary: where in public sector beneficiaries do not pay for a piece of product or services they receive and government does not have to be reimbursed with interest for the money it grants to a public organization, in the private sector shareholders demand returns and pay back on cash they invest and clients pay price for each unit of goods they receive.

The governmental bodies accounting is carried out on funds basis, where "fund is a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equity or balances and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations." The funds are classified as general, special revenue, capital projects, debt service, permanent, enterprise, internal services, pension trust funds, agency, private-purpose trust funds and others.

While for private enterprises for the whole enterprise the assets must be equal on the balance sheet to the liabilities and equity, within public sector the same equation should hold for each fund. The government controls the segregation of funds which leads to more paper work involved when reporting on the ways the funds were used. The public companies have beneficiaries whom it serve, but must not provide the residual value of the company to the shareholders. The treatment of depreciation is completely different within private and public bodies.

Private bodies have to recognize and value their assets at acquisition costs and amortize them during the useful life of the asset as residual value of the company is very important to the shareholders. In public companies, the assets are very often hard to be traded as they are unique which creates differences in treating depreciation and valuing the firms.

The management of private companies can be in the longer term punished by lower profit made for not having invested enough into plant or equipment, while there is not always obvious need for long-term investment into equipment to economize on price of goods produced to the public. According to GASB, depreciation of the capital assets is not necessary to be reported in the accounts of governmental funds.

According to governmental accounting principles, the revenues and expenditures in governmental accounting must be recognized following modified accrual concept where revenues are recognized in the period in which these funds are available to be used, while expenditures are recognized in the period in which the fund liability is incurred and long-term debt must be recognized when it is due.

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.