As you can imagine, accounting in the private sector looks quite different from accounting in the public sector. In the one, you work for a for-profit business. In the other, you work for a government agency or organization. The first exists to make a profit by offering consumers a good or service. The other exists for some other purpose, whether it provides a service to citizens or serves the government itself.
Profit-and-Loss Principal
Perhaps the most important and most fundamental difference between these two forms of accounting lies in that government accounting does not operate on a profit-and-loss principal. This shapes the differences in accounting methods. Accounting in the public sector does not calculate consumption as facility assets and does not differentiate between capital expenses and revenue expenditures. Why? Because the government doesn’t have shareholders (properly speaking), capital costs, depreciation, and the like.
According to the Government Accounting Standards Board (GASP), four other fundamental differences between regular accounting and government accounting exist. These include:
- Businesses serve a narrower group of stakeholders than the government. While businesses deliver to particular consumers and stockholders, the government serves taxpayers, citizens, elected officials, oversight groups, and others.
- Business can come and go at any time, but governments typically exist longer and don’t experience bankruptcy or dissolution.
- While businesses acquire revenue through a voluntary exchange of goods and services, the government acquires revenue through taxation.
- Lastly, monitoring compliance with budgeted public policy is essential to government public accountability reporting.
Annual Reporting
Differences between accounting in the public and private sectors also exist regarding how they report. Similar to balance sheets used in private sector businesses, government agencies typically use three main statements in their reporting, including:
- Statement of activities
- Statement of cash flows
- Statement of net assets
Government accountants collect these into a Comprehensive Annual Financial Report (CAFR), the annual report for the agency. The rules for a CAFR go beyond those required by the GAAP for private sector businesses and their annual reports. So, for example, a single CAFR can extend well over 300 pages, while the typical annual report for a business might be 20-30 pages.
Nevertheless, financial statements like these summarize assets and liabilities, conveying the net assets of the government organization. City councils, legislatures, and/or Congress use these net asset reports to assess the financial health of a department, organization, or agency. Decisions are then made that impact that agency’s budget, or if the agency can no longer be sustained. Therefore, some similarities exist between regular accounting and government accounting, but according to different standards.
Accounting Standards
Another major difference in for-profit business accounting and government accounting is accounting standards. Everyone from government agencies to both for-profit and non-profit businesses follows the Generally Accepted Accounting Principles (GAAP). These standards come from the Financial Accounting Standards Board (FASB). GAAP is comprised of various authoritative standards, as well as the commonly accepted ways of recording and reporting accounting information. It seeks to refine the clarity, consistency, and comparability of the communication of financial information in the United States.
However, as we mentioned above, government agencies must also follow the GASB, which establishes the accounting standards for agencies at the federal, state, and local levels. The board sets accounting standards for everything from income statements to income taxes, government leases and investments.
The CPA and the Private Accountant
Government accounting and business accounting also have different educational qualifications. An accountant who works for the government is known as a Certified Public Accountant (CPA). While a business accountant can earn a job with a bachelor’s degree, a CPA must complete particular educational and work requirements, and pass an exam to earn their certification. And this is in addition to any earned degree. Because of this, CPAs can legally perform certain duties that regular accountants cannot. This includes even simply working for a government agency. Note that each state determines the standards by which an applicant must adhere if they’d like to become a CPA. If you’re interested, be sure to research your states’ standards.
The CPA exam is divided into four parts:
- Auditing & Attestation
- Financial Accounting & Reporting (the hardest part)
- Regulation
- Business Environment & Concepts
Those taking the exam must score 75% or higher on each part to pass. Additionally, applicants must complete all four parts within an 18-month window. If you’d like to learn more about the educational requirements for a CPA or a business accountant, you can click here and here. If you’d like helpful tools for studying for the CPA exam, click here.
DQ Staff
January 2020
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