There are three main differences between government accounting and profit-business accounting: accounting standards, statements and reporting. Capital Business Solutions notes that standards refer to the guidelines and principles an organization and entity must follow, statements – as the name implies – concern the kinds of financial statements that businesses, organizations and governments must file, and reports refer to the types of annual financial reports governments and businesses must file. Understanding the distinctions between these three key accounting elements will help you learn the difference between government and profit business accounting.
Before diving into the specific differences in government versus profit accounting, it's important to review major differences in the way these entities operate. Those distinctions lead directly to the differences in accounting methods. Most importantly, governments do not operate on a profit-and-loss principal, as Account Forums notes:
"Unlike the financial (for-profit business) accounting, in the governmental accounting, the consumptions are not calculated as part of the facility assets. The accounts of the governmental accounting do not discriminate between the capital expenses and the current revenue expenditures."
Government agencies and institutions don't have to worry about capital costs, depreciation, and satisfying shareholders. For-profit businesses not only have to concern themselves with those things, those items represent the very reason private businesses exist. While private, for-profit businesses have to answer to shareholders, government agencies answer, nominally, to the citizens of the community, county, state, or federal jurisdiction in which they exist, as well as the legislative and executive bodies they serve. The Government Accounting Standards Board (GASP), notes four basic differences in government accounting vs. for-profit business accounting:
- Governments serve a broader group of stakeholders than profit businesses, including taxpayers, citizens, elected representatives, oversight groups, bondholders, and others in the financial community.
- Most government revenues are raised through involuntary taxes rather than a willing exchange of comparable value between two parties in a typical business transaction.
- Monitoring actual compliance with budgeted public policy priorities is central to government public accountability reporting.
- Governments exist longer than for-profit businesses and are not typically subject to bankruptcy and dissolution.
In these distinctions lie the differences between government and profit business accounting.
Nonprofits, government agencies, and even for-profit businesses follow GAAP, a widely accepted set of accounting standards whose main objective is to ensure that financial information is reported on effectively and efficiently, notes Capital Business Solutions. But, government agencies must also follow GASB or Government Accounting Standards Board. The GASB is an independent, private-sector organization based in Norwalk, Connecticut, that establishes accounting and financial reporting standards for federal, state and local governments, says the group. The GASB follows rules and oversight set forth by the FASB (Financial Accounting Standards Board). The board sets accounting standards for everything from income statements (and how to set them up) to leases, income taxes, and investments.
There are three main financial statements that government entities use in their reporting:
- Statement of activities
- Statement of cash flows
- Statement of net assets
These statements are similar to balance sheets used by profit businesses and published their annual reports, as discussed below. Financial statements for government accounting summarize assets and liabilities, showing the net assets of the organization or agency. Net assets are, then, used by city councils, legislatures, and Congress to assess the financial health of a department, organization, or agency.
Every year, government organizations must put together a CAFR, Comprehensive Annual Financial Report. Profit businesses generally also file annual financial reports, often called annual reports. Although annual reports published by profit businesses do conform to GAAP standards, they are not required to do so, and they do not need to follow the stringent rules for CAFRs, which are usually far more extensive than annual reports that profit business file.
For example, the 2017 CAFR filed by the state of California was 318 pages long and included everything from fund financial statements, which covered nearly 30 pages, to 20 pages on state retirement pension funds and 50 pages on financial trends, revenue and debt capacity, as well as demographic and operating information. By contrast, a for-profit business annual report might contain financial information that comprises 20 pages at most, including a balance sheet, as well as income and cash-flow statements, says the Securities and Exchange Commission, which sets rules on what must be included in annual reports for public companies.