This paper seeks to analyze and discuss why governmental accounting and financial reporting is—and should be—different. This paper will therefore highlight the more important reasons for the distinction between the two. Government exists to serve the public but people business enterprises are primarily organized for profit. Although the business enterprises serve the public too, they particularly direct their products or services to their customers where they could generate profits to satisfy the owners or investors who are risking their capital.
Stockholders therefore want the increase of their wealth made as investments in corporations. Government serves the public which demands public accountability. From these statements it should not be difficult to see the difference between government accounting and financial reporting. Government Accounting Standards Board (GASB) agreed with us when its said, "Governments are fundamentally different from for-profit business enterprises in several important ways. They have different purposes, processes of generating revenues, stakeholders, budgetary obligations, and propensity for longevity.
These differences require separate accounting and financial reporting standards in order to provide information to meet the needs of stakeholders to assess government accountability and to make political, social, and economic decisions. Although state and local governments in the United States have had separate standards for over 100 years, occasionally the question is raised: Why can’t general purpose governments (cities and counties, for example) simply apply the standards established for business enterprises?
” As stated above the two necessarily require different standards. Hence, GASB emphasized the same by stating that separate accounting and financial reporting standards are essential because the needs of users of financial reports of governments and business enterprises differ. GASB explained that due to their unique operating environment, governments have a responsibility to be accountable for the use of resources that is significantly different from business enterprises.
In making the distinctions clearer, GASB said that although businesses receive revenues from a voluntary exchange between a willing buyer and seller, governments obtain resources primarily from the involuntary payment of taxes. GASB further said, “ Taxes paid by an individual taxpayer often bear little direct relationship to the services received by that taxpayer. Overall, taxpayers collectively focus on assessing the value received from the resources they provide to government.
Governmental accounting and financial reporting standards aim to address this need for public accountability information by helping stakeholders assess how public resources are acquired and used, whether current resources were sufficient to meet current service costs or whether some costs were shifted to future taxpayers, and whether the government’s ability to provide services improved or deteriorated from the previous year. ” The difference between the two reporting has also something do with the assumptions on operations of the two entities.
Under business reporting, we have the going concern concept while under government accounting, the entity is assumed to be exist perpetually. This is confirmed by GASB when it said “The longevity of government and its role to maintain and enhance the well-being of citizens through the provision of public services also result in information demands that differ from those of business enterprises. For example, governments do not operate in a competitive marketplace, face virtually no threat of liquidation, and do not have equity owners. ”