H A P T E R

C
1
AN OV E RV I E W
OF
VE RN M E N T 1
 BASES TO CLASSIFY
ORGANIZATIONS
1.OBJECTIVES
1.COMMERCIAL/FOR-PROFIT:- which emphasize on the making of profit.
2.NON- COMMERCIAL/NFP ORGANIZATIONS:- which do not give
emphasis on the making of profit, & the concept of net income is not
meaningful.
2.OWNERSHIP
1.NON-GOVERNMENTAL (PRIVATE ORGANIZATIONS):- are operating
for the benefit of an individual proprietor or, as partners, a group of partners
or shareholders.
2.GOVERNMENTAL ORGANIZATION:- are operated for the benefit of
society as a whole.
2
 BASES TO CLASSIFY
ORGANIZATIONS
GOVERNMENTAL AND NFP organizations
can be classified IN TO:
1.GOVERNMENTAL UNITS
2.EDUCATIONAL INSTITUTIONS
3.HEALTH & WELFARE
4.RELIGIOUS ORGANIZATIONS
5.CHARITABLE AND FOUNDATIONS
NOTE: Governmental units may undertake both Profit making & Non-
profit making activities.
3
 BASES TO CLASSIFY
ORGANIZATIONS
• The governmental units and Non governmental entities which undertake
non-profit making activities are collectively known as Not-for-Profit
organizations which use fund accounting system.
• Fund: is a distinct ACCOUNTING & FISCAL ENTITY within a
larger entity.
1.Accounting Entity: A separate journal entry ledger will be kept and
separate financial statements will be kept for each fund.
2.Fiscal Entity: each fund should be reported separately.
• The fund accounting concept can be used to define very clearly the purposes for
which the resources are to be used, and who is to be held accountable for the
resources. 4
 DISTINGUSHING CHARACTERISTICS OF
GOVERNMENTAL UNITS & NON-PROFIT ENTITIES
DEFINITION:- Governmental Accounting is a complete
activity of identifying, recording, classifying, analyzing,
interpreting, summarizing and communicating economic
events of monetary nature for governmental organizations.
GASB: is an authorative body that develops rules, principles
& concepts for government & NFP organizations.
 The GASB concept statement No 1. Sets forth key
characteristics for governmental unit that impact financial
reporting objectives.
5
 DISTINGUSHING CHARACTERISTICS OF
GOVERNMENTAL UNITS & NON-PROFIT ENTITIES
FASB noted 3 distinctions by which NFPs are characterized:
Receipts of significant amount of resources from resource
providers who do not expect to receive either repayment of
economic benefit proportionate to the resources provided
Operating purposes that are other than providing goods or
services at a profit or profit equivalent
Absence of defined ownership interests that can be sold ,
transferred, redeemed, or that convey entitlement to a share of
residual distribution of resources in the event of liquidation of
the organization. 6
 DISTINGUSHING CHARACTERISTICS OF
GOVERNMENTAL UNITS & NON-PROFIT ENTITIES
Putting this points in simple terms we might say that an NFP:

• Gets money from people whom do not necessarily expect

7
 DISTINGUSHING CHARACTERISTICS OF
GOVERNMENTAL UNITS & NON-PROFIT ENTITIES
1.Source of income
Taxation is a principal source of income for governmental units
Taxpayers are involuntary resource providers;
they are not free to choose whether or not to pay taxes; they are
legally required to provide these resources to the government.
2.The amount of tax paid seldom bears a direct relationship to
the services received
E.g. Property taxes are based up on the value the home
Income taxes are based up on income 8
 DISTINGUSHING CHARACTERISTICS OF
GOVERNMENTAL UNITS & NON-PROFIT ENTITIES
3. Impact of law and regulation
 Operations of governmental entities are highly subject to
governmental laws and regulations or legal enactment
4. No exchange relationships exists
 Citizens who provide these resources do not receive equivalent
coupons for a certain amount of governmental services viz fire
protection, transportation, water supply, police
 There is no matching of revenue provided with service
received 9
 DISTINGUSHING CHARACTERISTICS OF
GOVERNMENTAL UNITS & NON-PROFIT ENTITIES
5. Ownership and Management
 There is no defined ownership is evidenced by separate
share of stock, or any other means.
6. Government often monopolizes Certain Services
• Good examples are police & fire protection, defense,
telecommunication & water supply, electricity power
supply…
10
 DISTINGUSH CHARACTERISTICS OF
GOVERNMENTAL UNITS & NON-PROFIT ENTITIES
• In addition to the aforementioned ones, Governmental
units and private NFP organizations would have the
following common characteristics.
7. Organization to serve the society (citizens)
8. General absence of profit motive
9. Society as a principal source of revenue
10. Importance of budget
11. Stewardship for resources
11
 SIMILARITIES BETWEEN BUSINESS & NFP
ORGANIZATIONS
1.Both are integral part of the same economic system and use
similar scarce resources to produce their respective goods
or services,
2.Due to scarce resources both utilize cost benefit analysis
and other evaluation techniques to assure efficiently to the
extent possible, both use double entry accounting system
3.On some occasions both provide similar goods or services,
4.Exercise financial management processes including
thoughtful preparation, appropriate accounting, meaningful
reporting and timely auditing are essential in both.
 DIFFERENCES BETWEEN BUSINESS & NFP
ORGANIZATIONS
1. Profit motive: Commercial units have a presented profit
motive as part of their objectives; where as governmental
units with some exceptions do not operate with the objective
of earning a profit.
2. Governance: The legislative and executive branches of a
governmental unit share the responsibilities for their
governance where as in the case of commercial entities; it is
governed by elected or appointed directors or managers.
13
 DIFFERENCES BETWEEN BUSINESS & NFP
ORGANIZATIONS
3. Basis of accounting: The modified accrual basis of
accounting is mostly used by some governmental units but
in case of commercial entities the basis of accounting is the
accrual basis.
4. Source of revenue in nature: The primary source of
revenue for commercial entitles is through sales or services
they provide, whereas in case of governmental units, with
some exceptions, the main source of revenue is though
fund or donations. 14
 DIFFERENCES BETWEEN BUSINESS & NFP
ORGANIZATIONS
5. Beneficiaries: Governmental units are operating for the
benefit of the citizenry where as commercial entities are
operating for the interest and benefit of the owners.
6. Sources of financial reporting standards:
• Accounting and financial reporting standards for state and
local governmental units are established by the GASB.
• Accounting and financial reporting standards for profit
seeking enterprise are established by the FASB.
15
 cont
7. Governmental fund accounting focuses on financial
resources, whereas business enterprises focus on economic
resource
8. Treatment of fixed assets and long term liability
governmental funds do not account for their fixed asset and long
term liability under their fund financial statement. However, long
term assets and long term liabilities of governmental funds will be
included under government wide financial statement.

16
 cont
• Government financial statements report all financial
transactions for the government for the year.
9. Budgetary accounts: budgetary accounts are
integrated into the accounting system of the
governmental units. However; there is no record of debt
and credits for budget in business enterprises.

17
 cont
10. Encumbrance accounting: is used and integrated in
the accounting system of governmental units.
11. Flow of financial resources: in business enterprises is
different from that of governmental units.

18
 n d
-E
Z