Accounting for State and Local Governments

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Who uses the financial data produced by state and local government units

Like financial data produced by for-profit institutions, financial data by state and local government units have many users. These users use the data for a variety of uses, which includes decision-making. The following are the three main users:

  • Citizens
  • Legislative and oversight bodies
  • Creditors and investors

The three groups of users listed have differing informational needs because their interests are not the same. As part of their civic duty, citizens are interested in financial data to monitor how public money was utilized. Using the information gleaned from the financial data, they can push for reforms in case of mismanagement. Citizens use the information further to inform their voting decisions. Financial impropriety is a good reason for voting out elected leaders with oversight authority over how public money is being used.

Legislative and oversight bodies are constitutionally mandated to guard the interests of citizens against mismanagement of public resources. The best way they can do this is by going through the financial data produced by state and local government units.

Creditor and investors give out money to state and local governments. They do that by buying bonds and other instruments issued by state and local government units for raising money for public projects (Bowman & Kearney, 2012). This group of users is interested in financial data produced to inform their funding decisions.

Fund accounting and why do state and local governments utilize it

Government accounting is based on a definable group of specialized funds. For accounting and reporting purposes, fund accounting involves accounting for resources classified and placed in groups based on restrictions imposed on the resources or for purposes for which they are set aside.

Each fund is accounted for separately in terms of assets, liabilities, fund balance, and changes in the balance. Typically, separate accounts for each fund are maintained, but in some cases, funds with similar characteristics are grouped to together when preparing financial statements (Bowman & Kearney, 2012).

Many state and local governments units either report on a single fund basis or fund accounting. They receive resources restricted to certain projects and for that reason; they use fund accounting to classify those resources.

State and local governments utilize state and local governments as part of guidelines by the Government Accounting Standards Boards (GASB), a body that generates standards for governmental accounting. Fund accounting is, however, important in showing restrictions imposed on resources. It also reveals revenues and expenditures incurred during the performance of certain activities. Using fund accounting, it is possible to observe limitations placed on the use of certain resources.

Importance of financial accountability in a government. The ways financial accountability is established in the accounting system

Financial accountability is vigorously pursued by companies because they are under pressure to turn a profit. This profit motive provides an important internal control that ensures accountability. The absence of profit in government operations removes this essential internal control. Government accounting, according to standards developed by GASP, strives to enhance financial accountability in the absence of operating without a profit motive (Ruppel, 2010).

Financial accountability is also important in government to safeguard the proper use of resources. In almost all cases, government is required to in invest much more resources than it is able to collect. Hence, proper use of available limited resources becomes critical. The use of public resources creates debate and financial accountability is important to withstand scrutiny.

Financial accountability in government is important because it directs attention to sources of methods used to generate the resources and how the funds are utilized. This attention is important for continuous review of public policy in terms of developing new ways of generating revenue for the government and efficient utilization of funds allocated. Governmental accounting keeps the public informed. What is critical, however, is that billions of dollars is pumped yearly in public projects (Ruppel, 2010). Financial impropriety would lead to massive losses with grave financial and political implications.

GASP has ensured financial accountability by providing guidelines on disclosure of items, modalities of reporting, who reports, when to report, and how to treat revenues, expenditures, and expenses.

Differences between government-wide financial statements and fund-based financial statements, and necessity of both of them

Fund-based, and government-wide financial statements, differ from each other in terms of scope. Fund-based financial statements are for specific activities. Government-wide financial statements, on the other hand, capture revenues and costs of providing services during the current year and resources at the disposal of the governmental unit (Bowman & Kearney, 2012).

Fund-based financial statements have the following characteristics:

  • The focus of a specific distinguishable activity, together with resources allocated to it, and its use of the same.
  • The statements captures amount and flow of resources allocated to the activity in the current year.
  • Recognition of revenue is based on modified accrual approach.
  • The chief goal fund accounting is fiscal accountability.

Government-wide financial statements:

  • Report on all activities of the government unit.
  • Assess accountability of operations.
  • Focus on all resources for all activities.
  • Use accrual accounting.
  • It’s similar to business-type accounting.

The two sets of financial statements are important to determine: How resources for the current year were generated, where they were invested, and the balance remaining.

Measurement focus and basis of accounting that are utilized within the various financial statements produced for a state or local government

Measurement focus and basis of accounting is used as the basis of determining when to recognize revenues and expenditures (Fischer & Taylor, 2012). What is being reported, such as assets and liabilities, is what is referred to as measurement focus. Basis of accounting refers to when a transaction is recognized.

Measurement focus and basis of accounting is interrelated. For example, if a state government elects to use cash as the measurement focus, the cash basis of accounting is necessarily adopted. Also, full accrual basis of accounting is adopted if assets and liabilities, both current and long-term, become the subject of focus.

Some of the measurement focus utilized include cash, all economic resources (current and long-term assets and liabilities), or part of economic resources, such as current financial resources. As a result, the accounting basis utilized includes cash basis of accounting, full accrual, or modified accrual basis of accounting.

When does a government recognize revenues, expenses, and expenditures

Under modified accrual and full accrual basis of accounting, the difficult thing is to determine the precise time to recognize revenue (Fischer & Taylor, 2012). In business, it is easier to determine when revenue was earned because of exchange of transaction that involves consideration for an equivalent value. Much of government revenue is derived from non-exchange transactions; hence, there is no consideration for an equivalent value. This lack of exchange makes it hard for the accountant to determine when to recognize revenue.

In both modified and full accrual basis, GASB provides that revenue be recognized when it is measurable and available for financing projects or expenditures in the fiscal year under consideration (Fischer & Taylor, 2012). By measureable, it means expected revenue from a certain tax that cannot be estimated be recognized as revenue. Revenue is available if raised during the accounting period under consideration or shortly thereafter. Expenses and expenditures are recognized when they are incurred. For modified accrual accounting, the term expenditure is commonly used instead of expenses. In both expenses and expenditures, recognition is done at the point when related liability is incurred.


Bowman, A. O., & Kearney, R. C. (2012). State and local government: the essentials (5th ed.). Boston, MA: Wadsworth Cengage Learning.

Fischer, P. M., & Taylor, W. J. (2012). Advanced accounting (11th ed.). Mason, OH: South-Western Cengage Learning.

Ruppel, W. (2010). Governmental accounting made easy (2nd ed.). Hoboken, N.J.: Wiley.

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