Government and not-for-profit (NFP) organizations use a different form of accounting from what you are familiar with. In your accounting studies so far, you have learned about financial accounting that reports the results of operations for each accounting period. You have also studied managerial accounting, in which managerial accountants analyze product costs and other cost scenarios. Like financial accounting, government and NFP entities record transactions to show what has happened. 

However, unlike financial accounting, government and NFP entities use what is called fund accounting. These entities collect funds from taxpayers and donors in return for the support of specialized services. Collections and expenses for multiple funds are treated separately within the organization. Thus, the organization is made up of many different mini organizations, all of which need to be accountable to the donors who support them. Unlike financial accounting, there is no profit motive involved in fund accounting. Federal, state, and local governments have the power to levy and collect funds in the form of taxes. 

Each group of taxes collected is used for specialized purposes for the common good. For example, your local government collects local property taxes from residents who own property. These taxes are used to fund separate functions, such as firefighters, policemen, and local school districts. Each function has a fund where contributions and expenditures are tracked. The same is true for NFP entities. Not-for-profit entities collect charitable contributions from donors to help a special need.

For example, you might want to donate funds to help cancer patients. Once you choose the fund that you want to contribute to, you can suggest that your donation be used for the general fund or be split up into several different funds, such as cancer research and children's cancer patient care. Do you have a special charity that you contribute to? 

Do you want the charity to be accountable for using the money that you give them for the purpose for which it was meant? Fund accounting is used to help government and NFP organizations show accountability to the donors who fund them. Although this accountability does not directly affect you, it is important that you, as an accounting professional, understand the concepts. There are several reasons that fund accounting is important to you, as follows: Fund accounting is covered on the Certified Public Accountant (CPA) exam. 

If working in auditing, you may audit an NFP entity. You may be employed by an organization that uses fund accounting. You may want to volunteer your services to an NFP entity. Furthermore, knowing whom you pay and why you pay them helps you control your financial future. Please answer the following 11 questions: Not-for-profit entities differ from business organizations in several ways. Describe the differences. How is the concept of interperiod equity defined? State and local governments, although not required, usually provide the government's comprehensive annual financial report (CAFR). What report is part of the financial section of a CAFR? 

The Financial Accounting Standards Board (FASB), the governing body of nongovernmental NFP entities, requires NFP organizations to prepare a set of financial statements for the organization. What report is included in this set of financial statements? The U.S. government prepares an annual financial report for the government as a whole. In addition, the Office of Management and Budget (OMB) requires major departments and agencies to prepare a performance and accountability report (PAR). What are the reports that are part of the basic financial section of the PAR? What funds are included in the governmental funds category of state and local governments? What governmental fund balance classifications are listed in the Governmental Accounting Standards Board (GASB) financial reporting standards? Local governments are accountable for the public funds paid to them by residents. The budgets are an important part of showing accountability.

What is a required step for making a budget? In the General Fund budget, there are three primary control accounts needed. Name one of the primary control accounts. 

Governments are required to prepare a schedule of the budget for the General Fund. Both the budget and actual figures are reported. What categories are included in the budget? 

Within government operating statements, each operating statement account has an offsetting budget account. Name one of the operating statement accounts with an offsetting budget account.

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1 Notforprofit organizations use financial accounting in their form of accounting while business organizations use managerial accounting The NFP entit... View the full answer