Governmental & Not-For-Profit Accounting: By: Gurmu - Eph

GOVERNMENTAL & NOT-FOR-PROFIT ACCOUNTING
UNIT 1: OVERVIEW OF GOVERNMENTAL AND NOT-FOR PROFIT

ACCOUNTING
1.1 INTRODUCTION
There are organizations whose object is not to make profit. These not-for-profit
organizations account their resources and financial activities under different accounting
system. Every organization wants to be successful. Of course 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 (F.P.) or
Organizations whose objective is to make profit, both efficiency and effectiveness can
easily be measured with financial statement. There are certainly non-financial criteria to
judge success like qualitative or quantitative measures. But regardless of what other
measures are employed, ultimately effectiveness will be measured by the income
statement. Not only income statement measures effectiveness, it also measures efficiency.
As with efficiency, there may be non-financial criteria for evaluating efficiency. But
ultimately, efficiency is evaluated by the expense section of the income statement. If
expenses are less than revenue and the organization has earned an “acceptable” profit, then
we can say it is successful in efficiency. We can therefore say that the objective of the
income statement is to demonstrate both the effectiveness and efficiency of the
organization.
For not-for-profit organizations (N-F-P) however, these objectives are not as useful.
Without a good measure of effectiveness, measurements of efficiency become almost
meaningless. If NFP accounting system cannot measure effectiveness (as can profit
seeking accounting systems), what then is their use? They are most often employed to
control public resources i.e. each person given custody of or access to public resources
should report back as to how they were used. The public can then hold the person
accountable for the proper use of the resources. This means that the income statement is
only limited to use in judging effectiveness. Both the nature of non-profit organizations
and the objectives of their financial reporting have given rise to a particular accounting
method, i.e. the use of “fund accounting”
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
BY: GURMU.EPH Page 1

accountable for the resources. Furthermore the definition will be discussed along with the
other principles in the next chapter.
1.3 CLASSIFICATION OF NOT-FOR-PROFIT ORGANIZATIONS
Generally, organizations could be classified either based on their objectives or their

ownership. If Organizations are classified by their:
1. Objectives
 Commercial / for profit organizations- which emphasize on the making of profit
 Non-commercial/ not –for – profit organizations- which do not give emphasis on
the making of profit
1. Ownership
 Non-governmental (Private organizations) – are operating for the benefit of an
individual proprietor or, as partners, a group of partners or shareholders.
 Governmental organization – are operated for the benefit of society as a Whole.
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 cover its expenses. Non-profit organizations comprise a significant
segment of the country’s 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 government (state governments) or those major local
governmental units or organizations within those governments. The federal government of
Ethiopia is comprised of states & Local governmental units.
E.g. - Regions of the federal government of Ethiopia are:
Tigray Harar, Dire Dawa South nations &

Afar Oroma, Benishangul nationalities
Gambella Addis Ababa /Gumuz,
Amhara , Somalia Sidama
- Local governmental units are

1. Zone (Counties) – 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

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
The governmental units which undertake non-profit activates & the other indicated for not-for-
profit organizations are collectively known as Non-business organizations. It is those
organizations that we discuss in this course that use fund accounting system.
Thus the two types of non-business organization i.e. governmental units & the other NFPs
(VHWO, health care, educational, other) have several characteristics in common as well as
differentiating features.
1.4 DISTINGUSH CHARACTERISTICS OF GOVERNMENTAL UNITS & NON-

PROFIT ENTITIES
For all the similarities and differences in the mechanics of accounting and management of
resources, there are very significant resources in what the two types of organizations do and how
they operate. First consider the three distinctions noted by the financial accounting standards
board (FASB) which characterize NFP organizations as
 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
 Operating purposes that are other than provide goods or services at a profit or profit
equivalent.
 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. Putting this points in simple terms we might say that an
NFP
 Gets money from people whom do not necessarily expect anything in return.(eg. Tax
payers, donors to NGOs
 Is not trying to make money
 Does not have ownership shares that can be sold or bought.
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 without the objective of
profiting from those services. Business enterprises are motivated to earn profit.
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 charges for their services are 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. Citizen’s contribution to non-profit organizations is
voluntary donations. There is no comparable source for business enterprise.
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 -
1. Self-assessed taxes: - taxes, which are assessed and declared by the tax payer
E.g. Income tax, value added tax
2. Government assessed taxes:- taxes determined and levied by the governmental authorities.
E.g. property tax, customs duty, Excise Tax
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
Since financial reports are means of communicating the operation results & position, it is
required for both business & non-business organizations. Financial reports could either be for a
year (annual financial reports) or for a period less than a year (interim financial report). 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 an accounting & reporting standards for state & local governmental units in its
concepts statement no.1 “objectives of financial reporting”, it established the following
objectives.
GASB Reporting Objectives

I. Financial reporting should assist in fulfilling governmental duty to be publicly
accountable & should enable users to assess that accountability by:
a) Providing information’s to determine whether current year revenues were sufficient to
pay for current year services.
b) Demonstrating whether resources were obtained & used in accordance with the
entities legally adopted budget & demonstrating compliance with other finance
related or contractual requirements.
c) 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:
a) Providing information about sources and uses of financial resources.
b) Providing information how it financed its activities and meet its cash requirements.
c) Providing information necessary to determine whether its financial position
improved or deteriorated as a result of the year’s operations.
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.
a) Providing information about its financial position and condition
b) Providing information about its and other non-financial resources.
c) 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 government’s duty to be publicly accountable
in a democratic society. 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,
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 that 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.
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 auditor’s report and the GPFS is found in the governmental reporting entity’s
Comprehensive Annual Financial Report (CAFR) which is considered as the entity’s 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
Introductory materials include such obvious but sometimes forgotten items as title page and
contents page, the letter of transmittal and other material deemed appropriate by management.
The letter of transmittal 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. In either event the letter of narrative material should
cite legal and policy requirement for the report and discuss briefly the important aspects of the
financial condition and financial operations of the reporting entity as a whole of the entity’s
funds and account groups. 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

The financial section of a comprehensive annual financial report (CAFR) should include
 An Auditor’s 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. 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
From the standpoint of the management of resources, for profit and not for profit organizations
are similar different ways. For example both use the same type of resources as cash, fixed asset
personnel, etc... Since both are using the same type of resources, both need good information for
decision making, and both need to exercise careful control of the resources that they have. This

means that mechanics of providing information and control system are similar for each. Both
should imply accounting forms and other types of controls to restrict the use of assets and
capture information, 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.
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
Since the resources of commercial entities are provided by the owners themselves, they are
taking full responsibility or the accountant along with the owner will be taking the
responsibilities for the stewardship of resources. In the same way, members of the governmental
entities should demonstrate adequate stewardship for resources.
3. Importance of Budget
The overall nature of governmental & commercial entities requires 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 whereas
governmental units with some exceptions do not operate with the objective of earning a profit.
2. Governance
The legislative and executive branches of a governmental unit share the responsibilities for their
governance where as in the case of 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
The primary source of revenue for commercial entitles is through sales or services they provide,
whereas 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. Before 1934 in US, there was no governmental
accounting standard. But by 1934, to overcome this confusion & scandal especially in
municipality accounting, the Municipal Finance Officers Association (MFOA) formed, the
National Committee on Municipality Accounting (NCMA) to assure accounting standard for
municipalities. By expanding its scope, the NCMA in 1949 was reorganized as National
Committee on Governmental Accounting (NCGA) to establish accounting standards for states
and local governmental units. In 1974, the committee was again reorganized as a council and
formed the National Council of Governmental Accounting (NCGA). In 1984 the council was
again reorganized as a board parallel to FASB and was renamed as Governmental Accounting
Standards Board (GASB).
Authority to establish accounting principles (financial reporting standards for non-profit

organizations) is split between the GASB and the FASB. Because a sizable number of non-profit
organizations particularly colleges, universities & hospitals are governmentally related. But
many others are independent of governmental units. Accordingly the GASB has the
responsibility for establishing accounting & financial reporting standards for not for profit
organizations whose financial statements may be combined with the financial statements of state
and local governmental reporting entities, or which are considered governmentally owned.
The FASB has the responsibility for establishing accounting and financial reporting standards for
non-governmental non-for profit organizations. Both the GASB and the FASB have issued
concept statements, which are intended to communicate the framework within which the two
bodies strive to establish consistent financial reporting standards for entities within their
respective jurisdictions.
The financial accounting foundations appoints the members of the two boards & supports the
operating expenses of the boards by obtaining contributions from business corporations,
professional organization of accountants, financial analysts, CPA firms and other groups
concerned with financial reporting.
UNIT 2
PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE AND
LOCAL GOVERNMENTS

2.1 INTRODUCTION
The GASBs codification of governmental accounting and financial reporting standards presents
twelve principles of governmental accounting. These principles are basic, carefully thought out
beliefs and specific fundamental tenets which on the basis of reason, demonstrated performance,
general acceptance are generally essential to effective management control and financial
reporting which also have been proven to work well and are accepted by most.
2.2 STATEMENT OF THE PRINCIPLES
2.2.1 Accounting & Reporting Capabilities (principle #1)
A government accounting system must make it possible both

(a) To present fairly & with full disclosure the financial operation of the funds & account groups
of the governmental unit in conformity with generally accepted accounting principles (GAAP)
(b) To determine & demonstrate compliance with finance-related legal and contractual
provisions.
1. Adherence to GAAP is essential to answering a reasonable degree of comparability
among the general-purpose financial reports of state and local governmental units.
2. Sometimes the legal requirements might be contrary to GAAP; for instance,
governmental entities may require to keep books with a single entry ledger, or it may
require to keep all account on a strictly cash basis. In these cases since the legal
requirements are contrary to GAAP financial statements & reports prepared in
compliance with state laws are complied. Sometimes legal requirements are also
contrary to good financial management. For example a purchase for 3 birr might require
the same amount of paper work as a purchase of 10,000 birr. In this case the cost of the
forms, the labour to complete them and the storage space to keep them might actually
exceed the 3 birr. It is the law. But it is good management of resources.
In some governmental units however under such circumstances where the laws require following
practices not consistent with GAAP, Governmental units may prepare two sets of financial
statements.
1. One set in compliance with legal requirements,
2. One set in conformity with GAAP
2.2.2 Fund Accounting System (Fund defined) (principle # 2)
Governmental accounting systems should be organized & operated on a fund basis. “A fund is
defined as a fiscal & accounting entity with a self-balancing set of accounts recording cash &
other financial resources, together with all related liabilities & residual equities and balances,
& changes there in, which are segregated for the purpose of carrying on specifies activates or
attaining certain objectives in accordance with special regulations, restrictions or limitations.”

The word FUND is given special definition as it relates to Fund Accounting. The narrow
definition of Fund as used in ordinary conversation is a “resource of money”. However in this
course it is given the special definition above. It has key phrases indicating the following
points; It is by itself is an entity, having its own accounting existence and a self-balancing set of
books(double entry system). That set of books is established for recording a specific financial
activity. The establishment of the fund will attain a specific objective and will have regulations,
restrictions or limitations.
Example
Two examples follow to illustrate the concept of fund. First the ministry of education operates
several colleges. Although all are part of the MINISTRY as a whole each one is treated as a
fund. Each college will be given money that is specifically for its operations, is not to be mixed
up with other institutions. Therefore each college will keep its own set of books, and issue its
own Financial Reports, irrespective of the performance of other individual institutions or the
ministry as a whole.
Or take the case of Non-governmental organizations. For instance, a single NGO will likely have
several projects; it may have the following different projects, which are funded by different
donors.
1. Construction of a Dam in region 1
2. Water development project in region 2
3. Cattle development project in region 3
Under this case the donor for each project will not necessarily be given the financial statement of
the NGO as a whole. The donor for a cattle development project will want financial statements
for only the project, which he is funding. There for, each project will have its own set of books &
produce its own financial statements.
So each project will be a separate distinct fund. The very reason of setting up of funds
accounting in governmental entity is that of legal requirement & good financial management.
2.2.3 Types of Funds (Principle # 3)
There are seven types of funds, which are subdivided into three categories:
I. GOVERNMENTAL FUNDS
1. The General Fund- to account for all financial resources except those required to be
accounted for in another funds.
2. Special Revenue Funds- to accounts for the proceeds of specific revenue sources (other than
expendable trusts or for major capital projects) that are legally
restricted to expenditure for specific purposes.

3. Capital Project Fund- to account for financial resources to be used for the acquisition or
construction of major capital facilities (other them those financed
by proprietary & trusts funds)
4. Debt Service Funds- to account for the accumulation of resources for & the payment of
general long term debt principal & interest.
II. PROPRIETARY FUNDS
5. Enterprise Funds- to accounts for operations

1. That are financed and operated in a manner similar to private business
enterprises-where the intention of the governing body is that the costs (expenses,
including depreciation) of providing goods or services to the general public on a
continuing basis be financed or recovered primarily through user charges; or
2. Where the governing body has decided that periodic determinations of reveries
earned, expenses incurred and/or net income is appropriate for capital
maintenance, public policy, management control, accountability, or other
purposes.
6. Internal Service Funds- to account for the financing of goods or services provided by one
department or agency to the department or agency of the
governmental unit, or to the other governmental units on a
cost reimbursement basis.
III. FIDUCIARY FUNDS
6. Trust And Agency Funds-To account for assets held by governmental unit in a trustee
capacity or as an agent for individual private organizations, other governmental units &
or funds. These include:
a) Expandable trust funds
b) Non-expendable trust funds
c) Pension trust funds
d) Agency funds
All governmental funds are Expendable Funds; expendable funds are meant to be expended or
their resources are used up entirely usually within one fiscal year. As a practical matter, any
money that remains in an expendable fund at the end of the year typically must be returned to its
source. Therefore managers of expendable funds normally try to ensure that all their funds are
used up within one time period. If they are not used up, the manager is often perceived as being a
poor budget planner. This course deals primarily with accounting for expendable funds.
The accounting equation for an expendable fund is slightly different from an FP. recall the
accounting equation for an FP: A - L = C. The accounting equation for an expendable fund (from
the definition of Fund above) is cash plus other financial resources minus liabilities = fund
balance. (C + OR - L = FB). There are no ownership interests in an NFP. So there is no capital
or owners’ equity. There is only a balance remaining to be used for specific purpose.

Non-Expendable Funds are used when maintenance of capital is desired, and the unexpended
funds are not meant to be returned. All proprietary funds are non-expendable funds.
1. The general fund is the first one mentioned. All governmental units should have a
general fund except if the resources are to be accounted in other funds. There will be one
general fund established. Some governmental units will have only a general fund. If any
of the other types of funds are needed, the governmental unit may have several of those
funds as needed. The general fund is used for general government services. It is basically
used for a service that does not require a separate fund.
2. An example of a special revenue fund might be “The Unity and safety of the motherland
tax” that was collected during the Derg regime. This fund was not for the general fund of
the government but was raised specifically for the armed forces. it would have needed to
be accounted for and reported on separately. Another example is the oil price contingency
fund which was established by the government specifically for the purpose of controlling
the fluctuation of oil prices in the country.
3. An example of Capital Projects Funds could be the construction of new building for the
city government Administration. The costs incurred in the construction of the building
are quite different from the operating cost of the city administration and would need to be
accounted for and reported on as an entity in itself.
4. If money has been borrowed for the construction of new building that would give rise to a
Debt service Fund. Assume that 10,000,000 birr was borrowed at 10 % simple interests
and is to be repaid in full in 10 years, each year 2,000,000 birr would be needed to be put
in a debt service fund- 1,000,000 for the payment of the principal plus 1,000,000 for the
payment of each year’s interest.
5. A public park could be an example of an Enterprise Fund. The park would charge a user
fee, from which it could pay the expenses (eg. Salaries) of operating the park. As a non-
expendable fund, it would not have to return unused money to its source at the end of the
year. Therefore, it might also accumulate money from year to year for the purchase of
equipment, furnishings and the like from its income from the user charges.
6. A shared garage is a common example of an Internal Service Fund in government
ministry offices. The garage would repair all the ministries` vehicles regardless of which
project, offices or funds use them. Charges are made to various funds for the repair cost.
as a non-expendable fund, part of the charge made to the various funds could be intended
to be accumulated for future years for the purchase of tools and equipment.
7. Fiduciary funds are used to account for money which one branch of government has on
behalf of another fund, organization or individual. a common example of a fiduciary fund
is a central tax collection agency, such as the Inland Revenue Authority. The taxes it
collects are not for its own benefit, but are rather passed on to other ministries or

departments. Fiduciary funds are expendable as well as non-expendable depending upon

the type of fund.
N.B- one additional type of fund i.e. special assessment fund has been eliminated by GASB for
financial reporting purposes.
2.2.4 Number of Funds (Principle # 4)

Governmental units should establishes and maintain those funds require by law & sound
financial administration. Only the minimum number of funds in consistent with legal and
operating requirements should be established, however since unnecessary funds result in
inflexibility, undue complexity & inefficient financial administration.
The seven fund types are to be used if needed by Governmental unit to demonstrate compliance
with legal requirements or if needed to facilitate sound financial administration.
In rare instances the use of a certain fund type is required by GASB standards. If legal
requirements GASB standards or sound financial administration do not require the use of a given
fund type, it should not be used. In the simplest possible situation, a governmental unit could be
in conformity with GAAP if it used a single fund, the general fund, to account for all events &
transactions. In addition to that one fund, however it would need two account groups.
This principle is especially important in NGOS, who intend to do a number of limited life
projects, each of which is accounted for as a separate fund. When the project is finished the fund
should be closed. As long as the fund remains open, financial statements continue to be produced
for it. Wasting paper, ink, labour and time.
2.2.5 Accounting for fixed assets & long-term liabilities (Principle #5)
A clear distinction should be made between Fund fixed assets & general fixed assets & Fund
long-term liabilities & General long-term debt
A. Fixed assets related to specific proprierty funds & trust funds should be accounted for
through those funds. All other fixed assets of governmental units should be accounted
for through the general fixed asset account group.
B. Long term liabilities of proprietary funds & trusts fund should be accounted for through those
funds. All other un matured general long-term liabilities of governmental unit including
special assessments debt for which the government is obligated in some manner should be
accounted for through the general long-term debt account group.
1. General fixed assets include land, buildings, and improvements other than buildings, car
& equipments used by activities accounted by the four fund types classified as
“governmental funds”. Which belong to the governmental unit as wholes, rather than to a
particular, fund and are to be shared among the different funds e.g. A fleet of cars or
office building that is shared among the funds of the municipality. General fixed assets

do not represent resources available for expenditure, but rather are items for which
resources have been used. Note that the construction or purchase fixed assets is
accounted for in a fund as the resource for those assets is being expended. The two
principles quoted below establish requirements that relate to fixed asset accounting.
2. General long-term debt would be borrowings of the entire governmental entity rather than
by a specific fund. The money would be backed by the full faith and credit of the
governmental entity rather than by specific fund. They are to be paid from general tax
levies, specific debt service tax levies, or special assessments. The rationale for not
including general long-term debt in the general fund’s account is like that of general fixed
assets. The general long-term debt is not something will require current period resources
for payment. These liabilities do not constitute a fiscal entity either. But they do need
accountability, so the general long term debt account group is used to provide this.
2.2.6 Valuation of Fixed Assets (PRINCIPLE # 6)

Fixed assets should be accounted for at cost, or if the cost is not practically determinable, at
estimated cost, donated fixed assets should be recorded at their estimated fair value at the time
received.
Note: as with FP, Fixed assets should be recorded at their historical cost. But one difference
with profit making accounting is that fixed assets are not usually donated to profit making
entities. So they are not concerned with accounting for them.
2.2.7Deprecation of Fixed Assets (PRINCIPLE # 7)

A. Deprecation of general fixed assets should not be recorded in the accounts of governmental
funds. Deprecation of general fixed assets may be recorded in cost accounting systems or
calculated for cost finding analysis; & accumulated depreciation may be recorded in the
General Fixed Asset Account group.
B. Deprecation of fixed assets accounted for in a proprietary fund should be recorded in
accounts of that fund. Deprecation also recognized in those trust funds where expenses, net
income &/or capital maintenance are measured.
1. Depreciation is not recognized in as expenditure in governmental funds because it is not a

decrease in fund financial resources. However, It should be calculated in the general
fixed asset account group because knowing depreciation is helpful for good financial
management and helps in planning for the replacement of assets in the future.
2. Proprietary fund fixed assets- because a proprietary fund needs to know that it is covering
all its costs, it includes depreciation as an expense in its accounts. Remember that
accounting in a proprietary fund is similar to FP accounting.
2.2.8 Basis of Accounting (PRINCIPLE # 8)

The Modified Accrual or accrual basis of accounting as appropriate should be utilized in
measuring financial position & operating results.

A. Governmental fund revenues & expenditures should be recognized on the modified accrual
basis. Revenues should be recognized in the accounting in which they become available &
measurable. expenditures should be recognized in the accounting period in which the fund
liability is incurred, if measurable, except for un matured interest on General Long-Term
Debt which should be recognized when due.
1. Revenues & other governmental fund financial resource increments (e.g.) bond issue
proceeds are recognized in the accounting period in which they become susceptible to
accrual i.e. when they become both measurable & available to finance expenditures of the
fiscal period.
B. Proprietary fund revenues & expenses should be recognized on the accrual basis. Revenues
should be recognized in the accounting period in which they are earned & become
measurable. Expenses should be recognized in the period incurred, if measurable.
2. Proprietary fund account is virtually the same as for profit account.
C. Fiduciary funds revenue and expenses or expenditures (as appropriate) should be recognized
on the basis consistent with the fund’s accounting measurement objective. Nonexpendable
trusts and Pension Trust Funds should be accounted for on the accrual basis;
3. Expendable trust funds should be accounted for on the modified accrual basis. Agency
fund assets and liabilities should be accounted for on the modified accrual basis.
4. It is sufficient to say that the basis of accounting for Fiduciary funds depends on whether
or not the nature of the fund is expendable or non-expendable. Both kinds are possible in
fiduciary funds.
D. Transfers of financial resources among funds should be recognized in all funds affected in the
period in which the inter fund receivables & payable(s) arise.
1. Sometimes there are transfers made between funds. Because each fund is a separate
accounting and reporting entity, these transfers must be reported.
2. In business enterprise accounting, the accrual basis is employed to obtain a matching of costs
against the revenues flowing from those costs, they producing a more useful Income
Statement. In governmental entities, however, even for those funds that do attempt to
determine net income, only certain trust funds have major interest in the largest possible
amount of gain. Internal service and enterprise funds are operated principally for service.
They make use of revenue and expense accounts to promote efficiency of operations and to
guard against importance of ability to render the services desired.
For these reasons, operating statement of proprietary funds, non-expendable trust funds &
pension trust fund are called statement of revenue and expenses rather them income statement.
GASB standards require that modified accrual basis is appropriate for the four governmental

funds, for agency funds & for expendable trust funds while the accrual basis is used for the
two proprietary funds, non-expendable and pension trust funds.
The difference between Expenses and Expenditure must be known properly to understand the
distinction between NFP and FP accounting. In the dictionary these words have almost exactly
the same meaning. However in fund accounting, they have been given specialized meanings.
3. An Expense is a current period consumption of resources.
4. An Expenditure a decrease in the fund financial resources.
For example in a profit making accounting a car would be considered as an asset and
depreciation would be recorded as an expense as the car is “used up” or “wears out”. In a
governmental fund, the car would be considered as an expenditure at the time of purchase.
2.2.9 Budget and Budgetary Accounting (Principle # 9)

A. An annual budget (s) should be adapted by every governmental unit.
B. The accounting system should provide the basis for appropriate budgetary control.
C. Budgetary comparisons should be included in the appropriate financial statement & schedules
for governmental units’ funds, for which an annual budget has been adapted. [Budget with
Actual]
1. Budgeting is the process of allocating of resource to meet unlimited demands.

There are three primary questions to ask when preparing a budget.
Q, How much will we spend?
Q, why will we spend it?
Q, where will we get the money?
2. Budgets are key elements of legislative control over governmental units. The executive
branch of a governmental unit proposes the budget, the legislative branch reviews,
modifies & enacts the budget and finally approves and the executive branch then carries
out the provisions. Budgets have a greater role in governmental accounting than in profit
making business, because governmental budgets are fixed by law and are generally
unchangeable, so exceeding them may carry severe penalties. Budget in profit making
enterprises are usually more flexible & can change as conditions change during the year.
A budget, when adopted according to procedures specified in state laws is binding on the
administration of a Governmental unit. Accordingly, a distinctive characteristics of
Governmental accounting resulting from the need to demonstrate with laws governing the
sources of revenues available to governmental units, & lows governing the utilization of
those revenues is the formal recording of the legally approved budgets in the accounts of
funds operated on an annual basis.
2.2.10 Financial Reporting (Principal # 10)
Interim financial reports

A. Appropriate interim financial statements & reports of financial position, operating results &
other pertinent information should be prepared to facilitate management control of financial
operations, legislative oversight & where necessary or desired for external reporting
purpose.
3. In NFP accounting interim reporting is used if it fulfils one of these three purposes:
1. For good management
2. For the legislature (legal compliance)
3. For external reporting (perhaps for those who have loaned money to it)
Comprehensive Annual Financial Reports (CAFR)

B. A comprehensive annual financial report covering all funds & account groups of the
governmental unit including appropriate combined, combining & individual fund statements,
notes to the F.S, schedules, narrative explanations & statistical tables should be prepared &
published.
4. Combined statement would should the operations of the entire governmental entity
constituting all the individual funds in to one statement. Combining would candidate the
results of all funds of same type e.g. all special revenue funds. Individual fund statement
would be prepared for each individual fund.
General purpose Financial Statement (GPFS)

C. General Purpose F.S may be used separately from the comprehensive annual financial report.
Such statement should include the basic F.S & notes to the financial statement that are
essential to fair presentation of financial position and operating results (changes in
financial position of proprietary funds & similar funds)
1. The general purpose F.S is essentially the same as the combined statement.
2. NOTE: governmental reporting entity
3. The first thing that must be clear in accounting for governmental units is that what
agencies, commissions, institutions public authorities or other governmental
organizations (called component units) are to constitute the reporting entity for a
governmental unit. The basic criteria for inclusion in the reporting entity is the ability
of governmental units, elected officials to excise oversight responsibility over the
organization in question the primary indication of oversight responsibility is financial
independency of the organization & other indicators are – the ability of ducted officials
to influence the operations.
2.2.11 Classification and Terminology (Principle # 11, 12)
Classification (principle # 11)

Transfer, Revenues, Expenditure and Expense account classifications

I. Classification of Transfers
A. Inter fund transfers & proceeds of general long-term debt issues should be classified
separately from fund revenue and expenditures or expenses.
1. Inter fund transfers- a transfer from one fund within the unit to another fund within the
same unit
e.g.- suppose on NGO operates clinics, & these clinics charges to cover wages &
medicines. During the year one clinic had a surplus & another had a loss. The head of the
organization decides to transfer funds from one to another.
2. Proceeds of general long term debt issues- money that is received from borrowing.
3. Donation from outside – goes in to the general fund or into a particular project fund as
the donor indicates.
4. -There are basically fund types of inter fund transaction and transfers we commonly
encounter in state and local govt. these are: -
1. Quasi-external transactions- transactions that would be treated as revenues,

expenditures, or expenses if they organization external to the government unit.
2. Reimbursements- one fund pages a bill on behalf of another
 E.g. an NGO operates a clinic in Hawassa City& BensaWoreda,
 The Hawassa clinic, for convenience, might pay a bill for medicine on
behalf of the Bensa clinic.
 The Bensa clinic would then reimburse the Hawassa clinic & it would be
expenditure for the Bensa clinic.
3. Residual equity transfer- lifts over money at the end of a certain project given to
another. E.g. Funding for water project in Aroresa transferred to a water project in
Aleta Wondo after the Aroresa project is finished.
4. Operating transfers- all other inter fund transfers E.g. legally authorized transfers
from a fund receiving revenue to the fund through which the resources are to be
expended. E.g. Transfers of fund from general fund to a special reserve fund.
N.B: 1&2 are merely transactions whereas 3&4 are transfers.
II. Classification of Revenues and Expenditures

A. Governmental fund revenues should be classified by fund and source. Expenditures should be
classified by fund, function (or programmes), organization unit, activity, character &
principal classes of object.
III. Proprietary fund Revenues and Expenses

C. Proprietary fund revenues & expenses should be classified in essentially the same manner as
those of similar business organizations functions or activities.

Expense is a current period consummation of resources while expenditure is a decrease in fund

financial resources.
E.g. in profit making accounting, a car would be considered as an asset & depreciation would be
recorded as an expense as the car is used up on wears out, in a fund the car would be considered
as expenditure at the time of purchase.
Terminology (Principle #12)

A common terminology & classification should be used consistently throughout the budget, the
accounts, and the financial reports of each fund.
1. The common terminology and classification principle is simply a statement of common

sense proposition that if the budgeting, budgetary control, and budgetary reporting
principle is to be implemented, persons responsible for preparing the budgets and persons
responsible for preparing the financial statements and the financial reports should work
with the persons responsible for designing and operating the accounting system.
Agreement on a common terminology and classification scheme is needed to make sure
the accounting system produces the information needed for budget preparation and for
financial statement and report preparation
2.3 COMMON ACCOUNTING CHARACTERISTICS OF THE FUND TYPES.
2.3.1 Accounting Characteristics Common to Funds of the Governmental Fund

Category
The four governmental funds (i.e. general, special revenue, capital project & debt service funds)
have common characteristics that would distinguish them from that of the other two fund types
(i.e. proprietary & fiduciary)
1. Governmental funds are created in accordance with legal requirements.

 Each fund has only those resources allowed by law.
 Any governmental unit might or might not use the allowed resource but they should
not utilize unauthorized resources.
 The resources may be expended only for purposes & in amounts approved by the
legislative branch. So the measurement focus of governmental fund accounting is on
the flow of financial resources (as distinguished from business organization focus on
determination of net-income)
 Governmental funds are expendable i.e. resources are received & expended with no
exceptions, that they will be returned through user or departmental charges.
 Revenues & expenditures (not expenses) of governmental funds are recognized on the
“modified accrual basis of account”.
2. Legal constraints on the raising of revenue & the expenditure of revenue are, in most
jurisdictions, set forth by a legally adopted budget.

 Accounting systems of governmental funds should provide the basis for appropriate
budgetary control.
3. Governmental funds account only for financial resources: cash, receivables, marketable
securities, and, if material, prepaid items & supplies inventories.
 They do not account for plant & equipment.
4. Funds in the governmental category account for only those liabilities to be paid from fund
assets.
5. The arithmetic difference between fund assets & fund liability is called fund equity which
could either be reserved or not.
 The portion of fund equity that is not reserved is called fund balance. Residents of the
governmental unit do not have legal claim on any portion of it.
 It is not equivalent to the capital section of an investor owned entity.
2.3.2 Accounting characteristics common to funds of the proprietary fund category.
 Proprietary fund provide services to users on a cost reimbursement basis.

 They are for a part of the government that is run like a private business where the
income & fees for services of the fund is expected at least to cover part of the expenses.
 They are not subject to income taxation, nor do they have owners in the sense that
business enterprises do.
 Their account is similar with profit making business.
 Proprietary funds are established in accordance with enabling legislation & their
operations and policies are subject to legislative oversight.
 The purpose of legislative oversight and served by proprietary fund account and
financial reporting that focuses on the matching of revenues & expenses(not
expenditures) on the full accrual basis recommended for business organizations.
 Proprietary funds should prepare budget as an essential element in the management
planning & control process.
 Proprietary funds do not have to adopt budgetary documents by law as governmental
funds do. Account systems of this fund do not need to provide the integrated budgetary
accounts.
 Proprietary funds account for all assets used in fund operations- current assets, plant &
equipment & any other assets considered as belonging to the fund.
 Proprietary funds account for current & long-term liabilities to be serviced from fund
operations &/or to be paid from fund assets.
 They are non- expendable funds.
2.3.3 Accounting Characteristics Common to Funds of the Fiduciary Fund Category
1. All fiduciary funds are used to account assets held by governmental unit as a trustee
or agent.
2. Agency fund & expendable trust funds are to be accounted in the same way as
governmental funds.
3. Non-expendable & pension trust funds are to be accounted in the some way as
proprietary funds.
4. Fiduciary funds can be expendable or non- expendable depending on the purpose of
the fund.
5. An endowment (gift of income producing assets such as bonds) is a good example
of fiduciary funds. The principal of the endowment is to be kept intact but the
income (interest) may be used up. The income would then be accounted as
expendable & the principal non- expendable.

Governmental & Not-For-Profit Accounting: By: Gurmu - Eph

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GOVERNMENTAL & NOT-FOR-PROFIT ACCOUNTING

UNIT 1: OVERVIEW OF GOVERNMENTAL AND NOT-FOR PROFIT

1.2 MEANING AND DEFINITION

It is very important to understand the meaning of fund in this context. In normal

BY: GURMU.EPH Page 1

1.3 CLASSIFICATION OF NOT-FOR-PROFIT ORGANIZATIONS

Generally, organizations could be classified either based on their objectives or their

E.g. - Regions of the federal government of Ethiopia are:

Tigray Harar, Dire Dawa South nations &

- Local governmental units are

BY: GURMU.EPH Page 2

3. HEALTH CARE PROVIDERS

4. VOLUNTARY HEALTH & WELFARE ORGANIZATIONS (VHWO)

5. OTHER N.F.P ORGANIZATIONS

BY: GURMU.EPH Page 3

1.4 DISTINGUSH CHARACTERISTICS OF GOVERNMENTAL UNITS & NON-

1. Organization to serve the society (citizens)

2. General absence of profit motive

5. Stewardship for resources

1.5 USES AND USERS OF FINANCIAL REPORTS OF GOVERNMENTAL UNITS

ii) External - who are the society /citizenry

GASB Reporting Objectives

BY: GURMU.EPH Page 6

Financial reports of Non-profit organizations- Voluntary health and welfare organizations,

Government Financial Reporting

II) Financial section

BY: GURMU.EPH Page 7

1.6 SIMILARITIES AND DIFFERENCES BETWEEN GOVERNMENTAL AND

BY: GURMU.EPH Page 8

1.7 SOURCE OF ACCOUNTING STANDARDS

BY: GURMU.EPH Page 9

Authority to establish accounting principles (financial reporting standards for non-profit

BY: GURMU.EPH Page 10

2.2 STATEMENT OF THE PRINCIPLES

2.2.1 Accounting & Reporting Capabilities (principle #1)

A government accounting system must make it possible both

2.2.2 Fund Accounting System (Fund defined) (principle # 2)

BY: GURMU.EPH Page 11

2.2.3 Types of Funds (Principle # 3)

BY: GURMU.EPH Page 12

II. PROPRIETARY FUNDS

5. Enterprise Funds- to accounts for operations

BY: GURMU.EPH Page 13

BY: GURMU.EPH Page 14

departments. Fiduciary funds are expendable as well as non-expendable depending upon

2.2.4 Number of Funds (Principle # 4)

BY: GURMU.EPH Page 15

2.2.6 Valuation of Fixed Assets (PRINCIPLE # 6)

2.2.7Deprecation of Fixed Assets (PRINCIPLE # 7)

1. Depreciation is not recognized in as expenditure in governmental funds because it is not a

2.2.8 Basis of Accounting (PRINCIPLE # 8)

BY: GURMU.EPH Page 16

2. Proprietary fund account is virtually the same as for profit account.

BY: GURMU.EPH Page 17

2.2.9 Budget and Budgetary Accounting (Principle # 9)

1. Budgeting is the process of allocating of resource to meet unlimited demands.

2.2.10 Financial Reporting (Principal # 10)

Interim financial reports

BY: GURMU.EPH Page 18

Comprehensive Annual Financial Reports (CAFR)

General purpose Financial Statement (GPFS)

2.2.11 Classification and Terminology (Principle # 11, 12)