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WELL COME TO NEW WORLD

OF ACCOUNTING

PUBLIC SECTOR AND CIVIL

SOICIETY ACCOUNTING
 FINANCIAL REPORTING GOVERNMENTAL AND
NFP ENTITIES
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Accounting is the information system that provides

essential information about financial activities of
entity to various individuals or groups for their use in
making informed judgment and decision.
However, users of accounting information are various

groups encountered a different set of problems and

with different information needs.
For that accounting has responded by developing sub

fields, or area of specialization such as financial

accounting, management accounting, Not-for-profit
accounting (Fund Accounting), etc
 WHAT IS NOT FOR PROFIT ACCOUNTING?
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 Not-for-profit accounting-as a
field of accounting specializes
in recording, reporting and
planning various operation of
governmental units and other
not for profit organizations.
 CLASSIFICATION OF
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ORGANIZATIONS
1. Based on ownership
1.Governmental Organizations
 They are organizations operating for the benefit of society as a
whole.

2. Private Organizations
 These are organizations operating for the benefit of an
individual proprietor, or partners, a group of partners or
shareholders.
 2. Based on
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Objectives
1. Commercial (for Profit) Organizations
 These are organizations whose basic motive is to generate revenue
for the owners.
 Their existence usually depends on the ability of the organization to
generate revenue.

2. Non-Commercial (Not-For-Profit) Organizations

 These are organizations established to provide socially
desirable services without the intention of realizing a profit.
 Cont…d
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They have no ownership shares that can be

sold or traded by individuals and any excess of
revenue over expenses or expenditures is used
to enlarge the services capability of the
organization.
The concept of net income is not meaningful

for a nonprofit organization.

 Instead a non-profit organization operates only

to obtain sufficient revenue to cover its

expenses.
 CLASSIFICATION OF NOT FOR PROFIT
ORGANIZATIONS
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1. Public Non-Profit /Governmental non

business/Organization
Governmental organizations are created
by formal community action for the
purpose of providing community services.
They have the sanction of law allowing

them to levy taxes as a source of support

and typically include such entities as
federal, state and local governing unit.
 2. Private Non-Profit Organization
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They are created by groups of people who

are interested in seeing particular services,
such as education or health care provided on
a non-profit basis within the community.
They are chartered by a governmental unit

but have no power to levy taxes as a source

of support.
 They depend on voluntary contribution for

some or all of their resource.

 CLASSIFICATION OF PRIVATE NOT FOR PROFIT
ORGANIZATION
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1.Charitable organization
It includes religious organization, health entities,

educational institutions, and social services and so

on.
 They principally provide their service to the general

public
 The main source of resource for charitable
organization is donations (gifts) and it is tax
deductible.
 2. Membership Organization
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It includes social clubs, fraternal organization or

professional society, labor union, chamber of commerce
etc
They principally provides their service to their members
The main source of resources for membership
organization is membership fees and it is not tax
deductible
 BASIC CLASSIFICATION OF NOT-FOR-PROFIT
ORGANIZATIONS
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1. Governmental Units
 This includes federal, state, county, municipal, township, village other
local governmental authorities, including special districts that is
established.
 The federal government of Ethiopia consists of 13 jurisdictions which
include the federal government, ten regions and two administrative
councils
2. Education Institutions
 Consists of kindergartens, elementary and secondary schools, college
and universities this could be private, public or community
 Cont…d
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3. Health Care Providers

 This could be private, public or community and
consists of hospitals, clinics, nursing home Red-
Cross etc…
4. Voluntary Health And Welfare Organization (VHWO)
 It includes NGOs like USAID, Care Ethiopia, and Save the
Children etc
5. Other Not-for-profit Organization
 Whose objectives and activities are different from the
above four classification, such as political parties, Civic
organization, Research and scientific organization,
Professional association, Churches etc
 CHARACTERISTICS OF PRIVATE NOT-FOR-PROFIT
ORGANIZATION
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1. Service to Society
Private nonprofit organizations often render services to
society as a whole.
 Similar to the services rendered by governmental

entities, the services of private non-profit organization

are of benefit to the many rather than the few.
2. No Profit Motive
 Private non-profit organization does not operate with the
objective of earning a profit.
 Consequently, non-profit organizations generally are exempt
from income tax
 Cont…d
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3. Financed By the Citizens

 As with governmental entities, most private non-profit
organization depend on the general population for a
substantial portion of their support, because revenues from
charges for their services are not intended to cover all their
operating costs.

 Exceptions are professional societies and the philanthropic

foundations established by wealthy individuals or families.
 Whereas the citizenry’s contribution to government
revenues are mostly involuntary taxes, their contribution to
private non profit organization are voluntary contribution.
 Cont…d
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4. Stewardship for Resources

 Because a substantial portion of the resources of a private non-
profit organization is donated, the organization must account for
the resources on a stewardship basis similar to that of government
entities.
 The stewardship requirement makes fund accounting appropriate
for many private non-profit organization as it is for governmental
entities.
5. Importance of Budget
 SIMILARITY BETWEEN NOT-FOR-PROFIT ORGANIZATIONS
AND BUSINESS ORGANIZATIONS
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 They are integral parts of the same economic system and utilize
similar resources in accomplishing their purposes.
 For example: public health institutions and private health
institutions use medical doctors, nurses, medical equipment etc
 They acquire and convert scarce resources in to their respective
goods and services.
 This is to mean weather the resources are donated, received from
customers, acquired from investors, or secured through taxation; it
is scarce and needs to be utilized economically and efficiently.
 Cont…d
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In some cases, both produce similar products and/or

services.
 For example, if we compare one public educational
institutions and one private educational institution,
the products of both are trained manpower;
similarly, private and public hospitals produce the
same output-treated patient.
 DISTINGUISHING CHARACTERISTICS OF NOT-FOR-
PROFIT ORGANIZATIONS FROM BUSINESS
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ORGANIZATIONS
1. Organizational Objectives
 The profit motive is not inherent in the operation

of governmental and not-for-profit organizations.

 Their objective is to provide as many goods or as

much service each year as their financial and

other resource permit.
They may seek to increase the amount of
resources made available to them and most do,
but this is to enable the organization to provide
more or better goods and services, not to increase
wealth, whereas for profit organizations seek to
 2. Source of Financial Resources
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Not-for-profit organization collects a

significant amount of resource from resource
providers who do not expect to receive either
repayment or economic benefits
proportionate to the resource provided.
However, the main source of financial
resources for profit organizations is sales of
goods and services at profit and contributions
from owners.
 3. Ownership Interest
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In a non-profit organization there is absence of ownership

interest that can be sold, transferred, or redeemed, or
that convey entitlement to a share of residual distribution
of resources in the event of liquidation of the
organization.
But for profit seeking enterprises, ownership interest is

clearly defined which can be sold or traded or transferred

to other parties.
A business enterprise might either be owned by a sole

proprietor or partners or stockholders who they do have

the right to sell or transfer their ownership interest to
other parties.
 4. cost-benefit relationship
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 Not-for-profit organization provides goods and service to the

whole society without considering the cost incurred or the
benefit to be extracted from the society.
 That is someone may contribute more but may receive less
or nothing. On the contrary, others may contribute less or
nothing but may earn more.
 However, there exist a direct relationship between costs and
benefits in profit-seeking organizations.
 This implies that those who are capable of afford (incur)
more costs are entitled to get a proportionate more benefits.
 5. Scope of Operation
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The scope of operation of not for profit organizations,

especially for governmental organizations, is mostly
diversified, i.e. they are engaged in a wide area of activity.
 For example, the operation of city municipality of Jimma

covers health, security, administration, investments,

construction, etc
However, the operation or area of activity of for profit

organizations is more specific.

 They can be classified as given business entity in a

service, a merchandising or a manufacturing.

 6. Regulation and control
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 For profit organizations are regulated and controlled by the market i.e. if
goods and services not needed within the market it will be out of the
market.
 The market itself regulates (guide) the organization existence.

 However, not for profit organization cannot be controlled and regulated by

the market rather by administrative and legal principles because of;

1. The absence of the need to operate profitably

2. The absence of open market test of the value of outputs because of

monopoly
3. Indirect relationship between resource contributor and to whom goods and

will be provided
4. The ability to force resource contributions via taxation
 How Do Governmental Entities Differ From
Not-For-Profit Organizations ?
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Power ultimately rests in the hands

of the people
People delegate power to public
officials through the election process
Empowered by and accountable to a

higher level government

Taxation powers
 SOURCE OF ACCOUNTING AND FINANCIAL REPORTING
STANDARDS
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 International Public Sector Accounting Standards (IPSAS) are a set

of accounting standards issued by the IPSAS Board for use by public
sector entities around the world in the preparation of financial
statements.

 IPSASs govern the recognition, measurement, presentation and

disclosure requirements in relation to transactions and events in
general purpose financial statements.

 These standards based on International Financial Reporting

Standards (IFRS) issued by the International Accounting Standards
Board (IASB).
 SOURCE OF ACCOUNTING AND FINANCIAL REPORTING
STANDARDS
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 The IASB sets standards for for-profit

business organizations and
nongovernmental not-for-profit
organizations;

 the IPSASB sets standards for state and

local governments, including
governmental not-for-profit organizations.
 SOURCE OF ACCOUNTING AND FINANCIAL REPORTING
STANDARDS
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 IPSASs are currently intended for application for

general purpose financial statements of all public
sector entities.

 Public sector entities generally include national and

regional governments
 E.g., state, provincial, territorial governments,
 local authorities (e.g., towns and cities) as well as
 related governmental entities (e.g., agencies, boards,
commissions and enterprises).
 SOURCE OF ACCOUNTING AND FINANCIAL REPORTING
STANDARDS
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 GAAPs are uniform minimum standards of and guidelines to financial

accounting and reporting
 Adherence to GAAP provides a reasonable degree of comparability

among the financial reports

 The FASB sets accounting and financial reporting standards for

commercial (for-profit) organizations and nongovernmental not-for-

profit organizations, that are independent of governments.
 The GASB sets accounting and financial reporting standards for

state and local governments, including governmental not-for-profit

organizations.
 The FASAB(Federal Accounting Standards Advisory Board)

sets accounting and financial reporting standards for the federal

government and its agencies and departments.
 OBJECTIVES OF FINANCIAL REPORTING BY GOVERNMENTAL AND NOT FOR
PROFIT ENTITIES

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1.Objectives of Financial Reporting By Governmental Entities

 The GASB issued concept statement No-1 “objectives of
financial reporting” in which it states that accountability is the
cornerstone of all financial reporting by government units.
 Accountability requires governments to answer/justify/ the
raising of public resources, the purposes for which they are
used and used in the way instructed.
 Governmental financial reports are used primarily to:

 Compare actual financial results with legally adopted budget

 Assess financial condition and results of operations

 Assist in determining compliance with finance-related laws, rules, and

regulations
 Assist in evaluating efficiency and effectiveness
 Cont…d
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2. Objectives of Financial Reporting For Not-For-Profit

Organizations
1. Assess services and ability to provide services
2. Make resource allocation decisions ( planning and budgeting)
3. Evaluate management stewardship (compliance) and
performance
4. Know economic resource, obligations, net resources and
change in them.
 Cont…d
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3. Objectives of Financial Reporting—Federal Government

 Accountability is also the foundation of federal government financial reporting.

 Federal Accounting Standards Advisory Board (FASAB) standards are targeted

at both internal users (management) and external users.

 Federal government financial reporting should assist report users in evaluating:

 Budgetary integrity-demonstrate accountability with regard to the

raising and expending of moneys in accord with the budgetary

process and laws and regulations.
 Operating performance

 Stewardship-enable an assessment of the impact on the nation of

the government’s operations and investments.

 Adequacy of systems and controls
 Financial Reports of Governmental
Entities
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 They are the means by which

management or the governing body
of a reporting entity discharges its
accountability to the users of the
reported financial information
 They are an important means of
demonstrating how the public sector,
both at individual entity and whole of
 TYPES OF FINANCIAL REPORTS BY GOVERNMENTAL
UNITS
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1. Interim financial report

 Interim financial reports prepared on a monthly or quarterly basis
that show financial position, operating results, and other pertinent
information.
 They are prepared primarily for the use of management or for
governmental oversight.
 The key criteria by which the interim financial reports are
evaluated are relevance and usefulness for management
control and planning.
 Cont…d
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.
2 COMPREHENSIVE ANNUAL FINANCIAL REPORTS / CAFR
 The Comprehensive Annual Financial Report (CAFR) is a
complete and detailed presentation of the governmental units’
activities and balances (financial conditions) for each fiscal year.
Major Sections of CAFR
A. Introduction section-It includes title page, table of content, letter of
transmittal, an organizational overview, and details about organizational
officials
B. Financial section-It provides financial information on fund types and
individual funds
C. Statistical section- presents tables and charts showing demographic and
economic data, financial trends, fiscal capacity, and operating information of
the government in the detail
 Cont…d
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 The financial section of a comprehensive annual financial report should

include
1. The independent auditor's report
 An audit report on the financial statements of an entity provides an
independent opinion on whether the financial statements are prepared and
give a true and fair view, in all material respects, in accordance with an
identified financial reporting framework
2. Management discussion and analysis / MDA
 It is classified as required supplementary information, is a narrative
introduction, overview, and analysis of the state’s financial statements.
 Its purpose is for easy comprehension of basic financial statements since it
may be too complex and loaded with numbers
 It precedes basic financial statements
 Cont…d
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3. Basic financial statements

 These are the core of annual financial reports that reports
the entity’s;
1. Assets and liabilities (financial position) at the beginning

and the end of the fiscal year

2. How the financial position improved or deteriorated during
the year in terms of inflows and out flows of resources
3. Amounts of cash at the beginning and end of the year, and
the activities which increased or decreased the level of
cash during the year
 Cont…d
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4. Combined and individual fund statements

and schedules
Combined statements would show the operations
of the entire governmental unit, considering all
the individual funds into one statement
 It consolidate the results of all funds of the same

type
 Individual funds statement would be prepared for

each individual fund

 Cont…d
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3. GENERAL PURPOSE FINANCIAL STATEMENTS

A. Governmental wide financial statements
 It combine the governmental and business type
activities of the government for the purpose of
presenting an overall picture of the financial position
and results of operations of the government.
 An important feature of the government-wide financial

statements is that they are prepared using a common

measurement focus and basis of accounting.
 Provides an overall view of government’s net assets
and changes in net assets using the economic
 Cont…d
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B. Fund financial statements

1. Governmental funds
They use the current financial resources measurement focus

and the modified accrual basis of accounting;

1.Balance Sheet
2.Statement of Revenues, Expenditures, and Changes in Fund
Balances
2. Proprietary Funds
They use the economic resources measurement focus and the

accrual basis of accounting;

1.Statement of Fund Net Assets
2.Statement of Revenues, Expenses, and Changes in Fund Net
 Cont…d
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3. Fiduciary Funds
1. Statement of Fiduciary Net Assets

2. Statement of Changes in Fiduciary Net Assets

C. Notes to financial statements

 It is the means by which the entity amplifies
or explains the information presented in the
main body of the statements.
 They explain amounts shown in the financial
statements and provide additional information
that is essential to fair presentation
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END OF CHAPTER
ONE