Term Paper on "Federal Government Accounting Versus Private Sector"

Term Paper 5 pages (1401 words) Sources: 1+

[EXCERPT] . . . .

Federal Government Accounting vs. Private Sector Accounting

In the United States, Governmental accounting is the aggregate notion for several accounting systems exploited by different public bodies for their accounting and financial statement purposes. There are three major governmental levels at which the bodies follow different accounting standards worked out and monitored carefully by private bodies. Federal Accounting Standards Advisory Board (FASAB) works out standards for the federal government, while Governmental Accounting Standards Board (GASB) and Federal Accounting Standards Board (FASB) deliver standards for state and local governmental bodies respectively. These accounting standards at these three levels differ significantly with those used by the private sector enterprises for many reasons.

The accounting standards worked out for different purposes, namely for public vs. private accounting, are delivered for being implemented in different uses, thus with different external environment with the internal environment of the bodies using them being various also. The end sole purpose of private enterprises is to increase their profits and thus in the long-term to maximize wealth of the shareholders or the owners and the hired management of the company strives their best to allocate the funds available and to generate the necessary funds in the most optimal for the company way. While in governmental organizations, typically some funds are allocated only for some specific need prescribed in the budget and allocation of the funds there does not necessarily lead to profit growth, while serves other social importance goals. The actors within the environment of the private companies and public companies are different, each of them having different goal in exchange for participating in this cycle.

The fact that shareholders of the company based on the cash flow the management has managed to generate, can any time withdraw the funds or fire the management, is a good controlling tool for the private sector while there is no such a clear controlling tool for governmental bodies. The funds inflow and outflow systems within the public and private sector companies vary: where in public sector beneficiaries do not pay for a piece of product or services they receive and government does not have to be reimbursed with interest for the money it grants to a public organization, in the private sector shareholders demand returns and pay back on cash they invest and clients pay price for each unit of goods they receive. The governmental bodies accounting is carried out on funds basis, where "fund is a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equity or balances and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations." The funds are classified as general, special revenue, capital projects, debt service, permanent, enterprise, internal services, pension trust funds, agency, private-purpose trust funds and others. While for private enterprises for the whole enterprise the assets must be equal on the balance sheet to the liabilities and equity, within public sector the same equation should hold for each fund. The government controls the segregation of funds which leads to more paper work involved when reporting on the ways the funds were used. The public companies have beneficiaries whom it serve, but must not provide the residual value of the company to the shareholders.

The treatment of depreciation is completely different within private and public bodies. Private bodies have to recognize and value their assets at acquisition costs and amortize them during the useful life of the asset as residual value of the company is very important to the shareholders. In public companies, the assets are very often hard to be traded as they are unique which creates differences in treating depreciation and valuing the firms. The management of private companies can be in the longer term punished by lower profit made for not having invested enough into plant or equipment, while there is not always obvious need for long-term investment into equipment to economize on price of goods produced to the public. According to GASB, depreciation of the capital assets is not necessary to be reported in the accounts of governmental funds.

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