Part I: CONCEPTS AND PRINCIPLES

Unit 1: Over View of Accounting for Governmental & Nonprofit Entities

Unit objectives:
After successfully completing this course the
students will be able to:
understand classification of not for profit
organizations
explain those
organizations using fund
accounting system
compare and contrast accounting for
profitable and non-profitable organizations
identify government financial reporting.

1.1. Introduction

There are organizations:

whose object is not to make profit.
these n-f-p organizations account their resources and
financial activities under different accounting system.
Every organization wants to be successful.
In order to know if it is successful, success must be
defined in terms of goals.
And then it needs some means to measure its results
against its goals.
Measuring success is often thought of in terms of
effectiveness (achieving the goal at the highest level)
and efficiency (achieving the goal through using the
least amount of resources.
for profit seeking organizations whose objective is to
make profit, both efficiency and effectiveness can
easily be measured with financial statement

1.2 MEANING AND DEFINITION

It is very important to understand the meaning of

fund in this context.
in normal conversation fund means simply, a
resource of money.
That is not the meaning fund has in Fund
Accounting.
In fund accounting, fund means a distinct
entity within a larger entity.
A separate journal entry ledger will be kept and
separate financial statements will be kept for
each fund.
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.

1.3 Classification of Not-For-Profit Organizations

classified either based on their objectives or their

ownership. if Organizations are classified by their:
1. Objectives
a. Commercial / for profit organizations- which
emphasize on the making of profit
b. Non commercial/ not for profit
organizations- which do not give emphasis
on the making of profit
2. Ownership
a. Non-governmental (Private organizations)
are operating for the benefit of an
individual
proprietor or, as partners, a group of partners or
shareholders.
b. Governmental organization are operated for
the benefit of society as a
Whole.

cont...
A non profit (not- for profit) organization is a
legal accounting entity that is operated for the
benefit of society as a whole rather than for the
benefit of an individual proprietor or a group of
partners or shareholders.
Thus, the concept of net income is not
meaningful for non-profit organization.
A non-profit organization strives only to obtain
revenue & support sufficient to coves its
expenses.
Non-profit organizations comprise a significant
segment of the countrys economy.
Basically, the following are suggested way of
classifying NFP organizations.

1. GOVERNMENTAL UNITS

When thinking of governmental units,

one tends to focus upon the federal government, or on the
states within the federal
The federal government of Ethiopia is comprised of states &
Local governmental units.
E.g. Regions of the federal government of Ethiopia are:
Tigray
South nations & nationalities
Afar
Gambella
Amhara
Harari
Oroma
Addis Ababa
Somalia
Benishangul /Gumuz
Local governmental units are
1. Zone administrative division of the largest unit of
local government
2. Kifleketema
3. Kebele

2. EDUCATIONAL INSTITUTIONS

These could be private, public or community

E.g. Colleges & University, schools.
3. HEALTH CARE PROVIDERS
Theses could be private , public on community
e.g. Hospitals, clinics, nursing home, red Cross
4. VOLUNTARY HEALTH & WELFARE ORGANIZATIONS
(VHWO)
E.g. NGOS like USAID, Save the children, Care Ethiopia etc.
5. OTHER N.F.P ORGANIZATIONS
These are organizations whose objectives and activities
are different from the above four classifications. E.g.
Philanthropic foundations

Political parties

Civic organizations

Research & scientific organization

Professional associations

cont...
In the above classification, governmental units are being
categorized as N.F.P organizations. However governmental
units may undertake two types of activities.
Profit making activates &
Non-profit making activates
Students beginning the study of fund accounting temporarily
must set aside many of the familiar accounting
principles for business enterprises.
fundamental concept of accounting theory for business
enterprises as the nature of the accounting entity,
the primacy of the income statement and
the pervasiveness of the accrual basis of accounting have
limited relevance in accounting for governmental units.
Thus the two types of non-business organization i.e.
governmental units & the other NFPs (how, health care,
educational, other) have several characteristics in common
as well as differentiating features.

1.4 Distinguishing Characteristics of Governmental Units & Non- Profit Entities

the three distinctions noted by the financial accounting

standards board (FASB) which characterize NFP organizations
as
1. 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
gets money from people whom do not necessarily expect
anything in return.(eg. Tax payers, donors to NGOs)
2. operating purposes that are other than provide goods or
services at a profit or profit equivalent
is not trying to make money
3. 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.

cont...
From the standpoint of the management of resources,
for profit and not for profit organizations are similar
different ways.
1) For example both use the same type of resources as cash,
fixed asset personnel, etc...
2) both need good information for decision making, and
3) both need to exercise careful control of the resources that
they have.
4) mechanics of providing information and control system are
similar for each.
5) Both should imply accounting forms and other types of
controls to restrict the use of assets and capture
information,
6) double entry accounting to record and classify that
information, employing journals and ledgers, and then use
those journals and ledgers as a basis to produce periodic
financial reports which summarise the information in a
meaningful way to guide decisions.

cont...
Despite the wide range in size and scope of
governance, similarity & differences as the accounting
treatment as compared to business organizations,
Governmental
units
and
other
non-profit
organizations would have the following common
characteristics.
1. Organization to serve the society (citizens)
The basic principle of governmental philosophy is that
governmental units exist to serve the citizens subject to
their jurisdictions. Thus the citizens as a whole establish
governmental units through the constitutional & charter
process. In contrast, business enterprises are created
by only a limited number of individuals.
2. General absence of profit motive
With few exceptions, governmental units render services to
the citizenry with out the objective of profiting from those
services. Business enterprises are motivated to earn profit.

Cont...

3. Society as a principal source of revenue

As with governmental units, most non- profit organization depend on
the general population for a substantial portion of their
support.
Because revenue from charges for their services is not intended to
cover all their operating cost.
Exceptions are professional societies and the philanthropic
foundations established by wealthy individuals or families, whereas
the citizenry contributions are mostly involuntary Taxes.
Citizens contribution to non-profit organizations is voluntary
donations. There is no comparable source for business enterprise.
N.B it is important to know about types of taxes for the future topics.
Tax is an involuntary contribution from the society to the government.
based upon their assessment, taxes could be classified into i) Self assessed taxes: - taxes, which are assessed and declared by
the tax payer
e.g. Income tax, value added tax
ii) Government assessed taxes:- taxes determined and levied by the
governmental authorities.
e.g. property tax , customs duty, Excise Tax

cont...
4. Importance of budget
Governmental accounting systems as we have seen are employed by
government resources.
That is each person given custody of or access to resources
should report back as to how they were used.
The government can then hold the person accountable for the
resources. This means that budget become highly important in
governmental entities.
Since expenditures are divorced from revenue collections, the use of
governmental resources is compared to the budget.
The four-proceeding characteristics of non profit organizations also
cause their annual budget to be as important as for governmental
units.
Non- profit organizations may employ object budget, programming
budget or performance budget.
5. Stewardship for resources
A primary responsibility of governmental units in financial reporting is
to demonstrate adequate stewardship for resources provided by
its citizenry.
Non-profit organizations have a comparable responsibility to their
donors but not to the same extent as governmental units.

1.5

Uses

And

Users

Of

Financial

Reports

Of

Governmental

Units

Every states and local governmental units are

required to prepare annual financial reports,
which would render information about the
operation results & position to users.
The users are categorized into as:
i) Internal who are the governing body of the
states & local governmental
ii) External - who are the society /citizenry
The governmental accounting standards board
(GASB),
which is one of the responsible body in
developing a accounting & reporting
standards for state & local governmental units

GASB Reporting Objectives

I. Financial reporting should assist in fulfilling governmental duty

to be publicly accountable & should enable users to assess
that accountability by:
Providing informations to determine whether current year
revenues were sufficient to pay for current year services.
Demonstrating whether resources were obtained & used in
accordance with the entities legally adopted budget &
demonstrating compliance with other finance related or
contractual requirements.
Providing information to assist users in assessing the service
efforts, costs & accomplishment of the governmental entity.
II. Finical reporting should assist users in evaluating the
operating results of the governmental entity the year by:
Providing information about sources and uses of financial
resources.
Providing information how it financed its activities and met its
cash requirements.
Providing information necessary to determine whether its
financial position improved or deteriorated as a result of the
years operations.

cont...
III. Financial reporting should assist users in assessing the level
of services that can be provided by the governmental entity
and its ability to meet its obligations as it become due by.
Providing information about its financial position and condition
Providing information about its and other non-financial
resources.
Disclosing legal or contractual restrictions on resources and
the risk of potential loss of resources.
It can be understood from the statement that Accountability is
the cornerstone of all financial reporting in government.
Accountability requires governments to answer to the citizens, to
justify the raising of public resources and the purposes for
which they are used.
Governmental accountability is based on the belief that citizenry
has a right to know a right to receive openly declared
facts that may lead to public debate by the citizens and their
elected representatives.
Financial reporting plays a major role in fulfilling governments
duty to be publicly accountable in a democratic society.

cont...

the GASB believe that inter period equity is a significant

part of accountability and is fundamental to public
administration.
It therefore needs to be considered when establishing
financial reporting objectives. In short financial reporting
should help users assess
whether current year revenues are sufficient to pay
for services provided that year and
whether future taxpayers will be required to assume
burdens for services previously provided.
Financial reports of Non profit organizations- Voluntary
health and welfare organizations, college and universities,
Hospitals, religious organizations and others have similar uses but, in recognition of the fact that the
financial operations of NFPs are generally not subject to
as detailed legal restrictions as are those of
governments,

cont...

The financial accounting standards board believes the

financial reports for not-for-profit organizations
should provide
1. Information useful in making resource allocations
decisions;
2. Information useful in assessing services and ability to
provide services;
3. Information useful in assessing management
stewardship and performance; and
4. Information about economic resources, obligations, net
resources and changes in them.
Note the objectives of financial reporting for
governments and for non-profit entities
stress the need for public to understand and
evaluate the financial activities and management
of these organizations.

cont...

Government Financial Reporting

Serious users of government financial information have
the need for much more detail than what is found in
the audited general-purpose financial statement (GPFS).
Much of that detail as well as the auditors report
and the GPFS is found
in the governmental reporting entitys Comprehensive
Annual Financial Report (CAFR) which is considered as
the entitys official Annual report published as a
matter of public record.
Government financial reporting, Comprehensive annual
financial report (CAFR) contains three main sections,
I. An introductory section
II. A Financial section
III. A statistical section

I) Introductory section

include
title page and contents page,
the letter of transmittal and
may be literally that a letter from the chief finance
officer addressed to the chief executive and the
governing body of the governmental unit- or
it may be a narrative over the signature of the
chief executive.
should cite legal and policy requirement for the
report and discuss briefly the important aspects of
the financial condition and financial operations.
significant changes since the prior annual report
and changes expected during the coming year
should be brought to the attention of the reader of
the report.

II) Financial section

should include
An Auditors Report
General purpose financial Statement (GPFS)
Combining and individual fund and account group statements
and schedules.
The financial section
has sufficient information to disclose fully and present
fairly the financial position and results of its operation during
the fiscal year.
in addition agreements with creditors and others provide
constraints over the financial activities and
introduce financial reporting requirements.
In order to make it possible to determine and demonstrate
compliance with laws,
regulations and agreements using fund accounting system,
indicating the nature of each fund type and account group
prepare combined statements in which financial data are
presented in a columnar form for each fund type and account
group used by the reporting entity.

cont...
The five combined statements that comprise the GPFS
and that must be included in the financial section of a CAFR
are
1. Combined balance sheet- all fund types and account
groups
2. Combined statement of revenues, expenditures and
changes in fund balances- all governmental fund types.
3. Combined statement of revenues, expenditures and
change in fund balances- budget and actual-general and
special revenue fund types, and similar fund types for which
annual budgets have been legally adopted.
4. Combined statement of revenue, expenses, and
changes in retained earnings (or equity)- all
proprietary fund types.
5. Combined statement of cash flows- all proprietary fund
types and non-expendable trust funds. The notes to the
financial statement are also an integral part of the GPFS.

III) Statistical Section

In addition to the introductory section

and the financial section the report
should contain the statistical
section,
which presents tables and charts
showing social and economic data,
financial trends and the fiscal
capacity of the government in detail
needed by readers who are more
than casually interested in the
activities of the governmental unit.

1.6 Similarities And Differences Between Governmental And Commercial Entities

Similarities
1. Impact of legislative process: The federal, state & local laws &
regulations would have an impact upon both Governmental &
commercial entities.
However the level of legislative impact is not as strong for commercial
units as it is for governmental entities.
2. Stewardship for Resources
In Commercial entities the owners themselves, are taking full
responsibility or
the accountant along with the owner will be taking the responsibilities
for the stewardship of resources.
members of the governmental entities should demonstrate adequate
stewardship for resources.
3. Importance of Budget : The overall nature of governmental &
commercial entities
require a plan of expected expenditure and income to be
implemented for both entities.
it is important to employ relative budgets as per their accounting
entities.

Differences

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
a governmental unit share the responsibilities for their governance
where as commercial entities, it is governed by elected or
appointed directors or managers.
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
commercial entitles is through sales or services they provide, in
case of governmental units, with some exceptions, the main source of
revenue is though fund or donations.
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.

1.7 SOURCE OF ACCOUNTING STANDARDS

Accounting and financial reporting standards for

state and local governmental units are established by
the governmental accounting standards board (GASB).
Accounting and financial reporting standards for profit
seeking business are established by the financial
accounting standards board (FASB)
The GASB and the FASB are parallel bodies under the
oversight of the Financial Accounting Foundation.
they are referred to as independent standard
setting boards in the private sector.
Before the creation of the GASB & FASB, financial
reporting standards were set by groups sponsored
by professional organizations.
Activity 1, what is the sources of standard in
Ethiopia?

End of chapter
one