Government and private sector comparison

¶ … Government and private sector accounting and finance

There are various differences between public and private processes of accounting and finance. This is because the government works on accountably managing the public money and interests and has not only capital in mind but other projects too, whilst the private sector focuses on managing its particular business for profit. The nature of public goods and the fact of taxation also give rise to different methods and different elements in the variables of economics and finance.

Diffences include the fact that the private sector accounting is done on an accrual basis, whilst that of the public sector is conducted via cash basis

The accrual basis reports income when earned and expenses when incurred, as opposed to the cash basis of accounting, which reports income when received, and expenses when paid. In other words, accrual accounting recognizes expenses and liabilities when costs are incurred and when measurable commitments are made, not just when checks are written or funds are borrowed.

The accrual basis provides a better measurement of an organization's current economic status since the key difference between the accrual and cash measurements is the annual change in liability. Expenses are accrued annually, and those that are not repaid are reflected as the organization's liability or accrued expenses. The cash budget deficit recognizes current deficits / expenses, whereas the accrual deficit recognizes those made over a period of time. The organization accrues expenses over a period of time and may have an accumulated backlog of expense. It is to this effect, that the accrual basis of accounting is a better measure of an organization's current economic status than is the cash basis of accounting.

2. The public sector account works according to fixed assets treated expense, whilst the private sector accounts works according to fixed assets otherwise known as capital assets. Fixed assets are assets and property that cannot be easily converted into cash. The public sector deals with those that mainly involve expense, whilst the private sector deals with tangible property such as machinery, factory buildings, and large computer systems.

3. The public sector account analysis reports public accounts (i.e. those applicable to the nation and its people as a whole), whilst the private sector, obviously reports accounts that are congruent, relevant, and applicable just to its own peculiar concerns.

4. The public sector account deals with fixed assets not depreciation, whilst the private sector account deals with fixed assets and depreciation included. In other words, the private sector -- working on matters of gaining profit -- also takes into account the gradual and possible permanent decrease of value in the stock. The public sector, on the other hand, does not concern itself with this matter.

In short, the exercise of accountability and the purposes of government accounting cause the accounting and the financial systems of the public and private sector to differ one from the other.