Government Accounting vs. Private Accounting

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Basic accounting principles apply to both the government and the private sector.
Basic accounting principles apply to both the government and the private sector. (Image: Comstock/Comstock/Getty Images)

All organizations, both in the public and private sector, have to report their periodic activities to their respective stakeholders. Basic principles of accounting apply in both government and private accounting. However, these two classifications of accounting differ and have various distinguishing features.

Focus

The government is engaged in providing essential services to its citizens and consequently the focus of government accounting is basically the receipts, transfer and deposition of public funds. On the other hand, the private sector endeavors to maximize profits and hence its accounting focuses entirely on operating results and the financial position of the business.

Reporting Profit

Government sources funds mainly from various taxes to be able to meet the cost of providing basic services. If the revenues obtained exceed expenditure, government does not report this as net profit. Thus, a government financial report is a tool that ensures accountability and transparency in its operations. Conversely, in private accounting, a return on invested capital is computed by comparing income with expenses. This is reported as net profit or net income in the statements

Separation of Funds

As the government furnishes services to the public, it is involved in various dissimilar operations. This necessitates the creation of an isolated fund for each distinct operation. Government accounting maintains a number of independent sets of accounts for each of these funds. A fund is an independent accounting entity with a self-balancing set of accounts .In contrast, private firms maintain a single set of accounts for all their transactions since they are engaged in interrelated operations.

Authorizations

Government expenditure is usually authorized by a legislative body, e.g., Congress. The governmental unit must maintain budgetary accounts to reflect the authorization for expenditures and if the monies were spent for the intended purposes. However, private firms report their operations by preparing an income statement to show the operating income and a balance sheet to reflect the financial position.

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