Public sector accounting is the process government agencies and departments record financial transactions. It also covers their sources of income, expenditures, the people they report to and the accounting methods used. On the other hand, private sector accounting is the process and methods private businesses record and report financial transactions.
While similar to private accounting in theory, the focus of public accounting is somewhat different. Most government agencies and departments need to monitor funds generated from tax revenues and expenditures on projects or appropriations. In addition, nations may need to follow a set standard of accounting principles different than private accounting rules. The creation of an international accounting standard helps nations follow similar rules to present information in a similar way.
There are three main differences between private and public sector accounting, they are: accounting standards, statements and reporting. Standards are the guidelines and principles an organization must follow, statements – concern the kinds of financial statements that businesses, organizations and governments must prepare, and reports means the types of annual financial reports which governments and private business organizations must prepare.
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Knowing the distinctions between these three key accounting elements will help you understand the difference between public and private sector accounting.
Private Sector Accounting vs. Private Sector Accounting
Before going into details, it's necessary to check major differences in the way these entities operate. Those distinctions lead directly to the differences in accounting methods. Most importantly, governments do not operate on a profit and loss basis, but rather, to give services to the people.
"Unlike the private, in the public sector, consumptions are not calculated as part of the facility assets. The accounts of the government do not discriminate between the capital expenses and the current revenue expenditures."
Government agencies and institutions are not concerned with capital costs, depreciation, and satisfying shareholders. The private sector not only have to concern themselves with those things, those items represent the very reason they are still in business. While private businesses are answerable to shareholders, government agencies are answerable to the citizens of the community, county, state, or federal jurisdiction in which they exist, and also the legislative and executive bodies they serve.
The Government Accounting Standards Board (GASP), explained the four basic differences between government vs. private business accounting:
The government of a country has more stakeholders than profit businesses. Their stakeholders include taxpayers, citizens, elected representatives, oversight groups, bondholders, and others in the financial community.
Most government revenues are generated via involuntary taxes and not a willing exchange of comparable value (goods and services) between two parties in a business transaction.
Monitoring actual compliance with budgeted public policy priorities is central to government public accountability reporting.
Governments are permanent, I.e; they exist longer than private businesses and are not typically subject to bankruptcy and dissolution.
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Nonprofits, profit businesses and government agencies follow GAAP, a widely accepted set of accounting standards whose main goal is to make sure that financial information is reported on effectively and efficiently.
But, government agencies must also follow GASB. The GASB is an independent, private-sector organization based in Norwalk, Connecticut, that establishes accounting and financial reporting standards for federal, state and local governments. The GASB follows rules and oversight set forth by the FASB (Financial Accounting Standards Board). The board sets standards for everything ranging from income statements (and how to prepare them) to leases, income taxes, and investments.
When filing reports, there are three main financial statements that government entities use, they are:
- Statement of activities
- Statement of cash flows
- Statement of net assets
The statements listed above are similar to balance sheets prepared by profit businesses and published their annual reports, as discussed below. Financial statements for government accounting is a summary of all assets owned and all liabilities owed, showing the net assets of the agency, department or even ministry and also the total liabilities. Net assets are, then, used by city councils, legislatures, and Congress to assess the financial health of a department, or agency.
Yearly, government organizations must create a CAFR, Comprehensive Annual Financial Report. Businesses in the private sector also file annual financial reports, often called annual reports.
Although yearly reports published by profit businesses are not in accordance with GAAP standards, however, they are not required to do so, and they do not need to follow strictly the rules for CAFRs, which are usually far more broad than yearly reports filed by profit oriented businesses.
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In a nutshell, these are the differences between private and public sector accounting:
- Accounting procedures in the public sector is based on procedures of services while that of the private sector is based principally on profit maximize
- Public sector accounting does not show creditors while the private sector shows creditors for goods.
- In the public sector, revenues on derived from taxes, fines and fees while in the private, revenues are gotten from sales of goods and services.
- The cost of assets are written off in one year in the public while the cost of assets in the private, cost of assets are spread over the useful life of the assets.
- Public sector records transactions on cash basis while the basis of accounting in the private sector is accrual.
- Accounting in the public sector is based on the legal constitution of the country, in the private, it is governed by the Company and Allied Matters Decree.
- The public sector report to the public or citizens of a country while the private report to the shareholders.