Difference Between Public and Private Entity Accounting

Public Finance

Philosophy of public finance

All states must raise some sort of revenue to pay for the basic services it must offer to protect its citizens and provide them with needed services. The degree to which the state should act in such a supportive fashion may vary depending on the perspective of the individual but the notion that some state financing is needed for a nation to be functional is difficult to debate. Taxation is one of the primary methods through which the state extracts revenue. Although there are many different competing philosophies about the purpose of government financing, most would agree that the government can serve as an engine of growth if it allocates its assets in an appropriate manner.

One of the most influential texts defining a philosophy of public financing was that of Richard Musgrave's The Theory of Public Finance. Musgrave's (1959) text stressed that "normative goals of efficiency, equity and stable economic growth" should be the main purpose of government financing (Bartle, Scott, & Shields 2008: 3). Other theorists such as public choice theorists "denies the viewpoint that government is a benevolent despot that will act to correct market failures and make distributional judgments in an even-handed way" and reflect a distrust in the ability of the government to make rational choices about allocation (Bartle, Scott, & Shields 2008: 3). They stress the need to allow voters to choose how to allocate resources because of systemic inefficiencies. Other theorists note how bureaucracy can generate conflicts in making choices: "a budget director, agency head, and accounting director may all see a problem from different perspective as drawing from their theoretical frameworks" (Bartle, Scott, & Shields 2008: 7). However, most theorists still see equity and efficiency as ideal goals for public financing, even though they may have different ideas about how to achieve these goals.

Governmental accounting vs. non-governmental accounting

While government accounting is more concerned with adhering to a budget, non-government accounting for-profit entities is more concerned with accounting for profits and losses for shareholders. "The primary purpose of governments is to enhance or maintain the well-being of citizens by providing services in accordance with the public policy goals. Instead, for-profit businesses focus on wealth creation and interact primarily with those segments of society that help them fulfill their mission to generate a financial return on investment for their shareholders" ("GASB identifies key differences," 2006). Governments serve a wide variety of stakeholders; they also have the option of raising revenue through taxation and other non-voluntary sources. Governments, unlike private entities, cannot go bankrupt. Also, programs may be adopted in government which are considered necessary for the public welfare (such as creating a park) which may not yield revenue in the near or even far future.

"The needs of citizens and oversight organizations emphasize accountability for resources entrusted to the government, while the needs of equity investors emphasize information necessary to make rational investment, credit, and similar decisions" ("Why government accounting and financial reporting," 2013: 2). While governments do have creditors like for-profit entities, creditors are interested in seeing government's willingness to levy taxes to generate equity. Citizens who pay taxes wish to see that services are being provided in the most efficient manner possible.

There are also questions about how to account for taxation as revenue in regards to government accounting: since levying taxes do not constitute an equal exchange of value at the point of the exchange as in the case of a for-profit corporation, different accounting methods are required. "Governments may levy or collect property taxes in a period prior to the period for which the taxes legally apply ("Why government accounting and financial reporting," 2013: 4).

Relationship between budgeting and financial reporting in the government

Accurate financial reporting and a demonstration of intelligent budgeting increases citizens' confidence in their governments and ensures continued support for the political process. Every government decision entails some sort of opportunity cost and financial reporting justifies why certain programs may need to be cut in favor of others or because of budget shortfalls. All governments like all businesses operate under constraints, albeit in a different fashion. "The type, quantity, and quality of goods and services provided by governments often are not subject to the market forces of supply and demand. Thus, enacting and adhering to the budget establishes restrictions in the absence of a competitive market" ("Financial accounting," 2015). Given the extent to which government decisions can affect the lives of so many people it is particularly essential that the public can understand allocations in a transparent fashion. Also, accountability is demanded by law in most state constitutions.