Five Questions About Govt Accounting You Need To Know, But May Not Ask

In August of 2007, the GFOAz gave a presentation called “Governmental Accounting: What You Don’t Know Could Hurt You.” We thought this was an interesting title. At the same time, we understand that when new clerks are approached with words like “FASAB”, “GAAP”, “Fund Accounting,” and “MFBA”, as important as these terms are to understand, it can be intimidating to ask.


So we took five questions from this presentation and summarized them, hoping that for some of you it will help clarify the principles behind government accounting…from the privacy of your own computer.

1. How is Government Financials Different Than the Private Sector?

Government provides goods and services to constituents versus creating owner wealth by buying or selling goods.  Unlike in the private sector, all outlined goods and services must be provided BY LAW despite profitability.  In addition, governments have restrictions and budgets that must be upheld by the law, whereas the private sector uses budgets for internal guideline only, and are not restricted to use certain resources.

2. Who are the FASAB and the GASB?

FASAB is the Federal Accounting Standard Advisory Board. They recommend all financial reporting standards for the federal government.  The GASB is the Governmental Accounting Standards Board, in charge of making standards for state and local governments as well as government-related not-for-profit organizations. The GASB is overseen by the FAF (Financial Accounting Foundation) and follows GAAP standards (Generally Accepted Accounting Principles).







3. What is an Encumbrance and Encumbrance Accounting?

In budgetary accounting, encumbrances are the commitment of budgetary resources. An encumbrance is an obligation (i.e. a “purchase order”), not a liability. Encumbrance Accounting is a process used to ensure that governments do not spend more than is appropriated.  The “Unencumbered Balance” refers to appropriations minus encumbrances and expenditures.

Appropriations   –   Encumbrances   –   Expenditures   =   Unencumbered Balance

$1,000,000        –   $200,000            –   $750,000         =   $50,000

4. What is a Fund and Fund Accounting?

A fund is a self-containing accounting entity which has its own assets, liabilities, revenues, expenditures, or expenses under the umbrella of a fund balance or equity account.  Types of fund accounts include Governmental Funds (General Funds, Special Revenue Funds, Capital Project Funds, Debt Services Funds, and Permanent Funds), Proprietary Funds (Enterprise Funds and Internal Service Funds), and Fiduciary Funds (Agency Funds, Pension Funds, Investment Trust Funds, Private Purpose Trust Funds.

Fund Accounting, used fairly exclusively by governments, non-profits, and securities, refers to the system of managing these funds as a self-balancing set of accounts, segregated by purpose, and managed in accordance to laws and special regulations. Unlike in the private sector, where accounting is used to determine profitability, fund accounting focuses on recording accountability.

5. What are Measurement Focus and Basis of Accounting (MFBA)?

Measurement Focus tells you WHAT to recognize: inflows, outflows, balances affecting or reflected in an entity’s net assets. The two most used types of focus of accounting are Flow of Current Financial Resources Measurement Focus and Flow of Economic Resources Measurement Focus.

Basis of Accounting tells you WHEN to recognize it: the financial effect of transactions, events, interfund activities, regardless of timing. The two types of focus of Basis of Accounting are Accrual Basis of Accounting and Modified Accrual Basis of Accounting.

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