Differences between Public and Private Sector Accounting
“Government should be run like a business.” James Chan examines this myth in “A Comparison of Government Accounting and Business Accounting” in the International Journal on Governmental Financial Management. Chan focuses on the American experience from the days of Thomas Jefferson who wanted the “finances of the Union as clear and intelligble as a merchant’s book.”
Unlike business accounting, public financial management is budget driven. “Budget specialists tend to view accounting as part of financial management, and financial management as part of budget execution. ..(T)he budget serves as the basis of management control and legislative oversight,” according to Chan. He points out the conflicting objectives of budget specialists and accountants in government. His chart, “Contrasting Views of Two Financial Specialists,” provides an excellent synopsis. This need to satisfy budget and accounting requirements results in more complex charts of accounts and control mechanisms in the public sector.
Chan -A Comparison of Government Accounting and Business Accounting
Chan points out the benefits of many accounting practices that derive from the private sector including double-entry bookkeeping. However, as described by Norvald Monsen in the same publication, there is a single-entry bookkeeping method in operation in German speaking countries called “cameral accounting.” Cameral accounting is a single-entry system that provides accrual reporting capabilities.
Monsen – Enterprise Cameralistics
There is significant debate about the need for accrual accounting in government. This controversy increases when considering accrual budgeting . “Government budget specialists greet the introduction of accrual into budgeting with considerable skepticism, ” asserts Chan. The costs to adopt accrual accounting in government can be significant. For example, valuing property and assessing contingent liabilities can be onerous. And, the benefits of accrual accounting can be a disincentive for politicians. Politicians are keen to present budget “inputs” – the amount spent in their districts, not the value of the investment. The true value of government initiatives, including long term liabilities like pension plans, are not of interest to politicians looking for re-election.
Chan attempts a big picture view showing how elements of both business and government accounting are similar or converging. The need for transparency is an important trend in both the public and private sectors. This is a very interesting point given the complexity of business reporting requirements, particularly for publicly-traded companies in the United States. Unlike accrual accounting, there are incentives for politicians to support transparency. Transparent and financial facts show whether governments have executed on promises. Without these facts, opponents or the press are free to present misleading information.
Tags: accrual accounting, budget deficit, budget execution, business accounting, cameral accounting, Financial Accounting, Government, government financial presentation, ICGFM, ipsas, james l. chan, Managerial Accounting, norvald monsen, public sector
April 1st, 2013 at 11:55 pm
1. Meaning
The accounting system maintained by the government offices is known as government accounting. The accounting system maintained by business organizations is known as commercial accounting.
2. Objective
Government accounting is maintained by the government offices to know the position of public fund. Commercial accounting is maintained by business organizations to know the profit or loss and the financial position of the business.
3. Budget
Government accounting strictly follows the government budgeting system. commercial accounting does not follow the government budgeting system.
4. Basis
Government accounting is prepared on cash basis. Commercial accounting is prepared on cash as well as accrual basis.
5. Level Of Accounting
Government accounting has the system of central level and operating level accounting. Commercial accounting has no provision of central level and operating level accounting.
6. Rules And Provisions
Government accounting is strictly maintained by following the financial rules and provisions of government. Commercial accounting is maintained by following the rules and principles of ‘Generally Accepted Accounting Principles’.
7. Information
Government accounting provides information to the government about the receipts, transfer and deposition of public funds. Commercial accounting provides information to the concerned parties about the operating result and financial position of the business.
8. Auditing
An Auditor General Office audits the book of accounts kept under government accounting. A professional auditor can audit the books of accounts kept under commercial accounting.