Government entities – whether local, state, or federal – are diverse and complex, with countless legal and fiscal constraints around how they carry out their various and diverse operations. Consequently, government fund accounting can be a bit of a beast.
And, government accounting professionals are held to specific requirements (read: laws) to be completely transparent about how funds are allocated and spent, versus how much profit is earned. This is primarily because we citizens, who provide a big chuck of government revenue through property taxes, income taxes, general sales taxes, motor vehicle license taxes, public utilities taxes, alcoholic beverage sales taxes, etc., want assurance our hard-earned dollars are being well managed.
Unlike a private business, which is accounted for as a single entity, a governmental unit is accounted for through separate funds, each of which is a fiscal and accounting entity, in and of itself. There are three overarching categories of funds used in government accounting, per the Office of Financial Management, including governmental funds, proprietary funds, and fiduciary funds. Then, under these categories are various, multiple funds.
For example, under governmental funds are funds such as the general fund, which is sort of the “catch all” fund, or washing machine of funds. There’s also the capital project fund, which is used primarily for the acquisition and construction of major facilities. And, the debt service fund, committed to the payment of long-term debt principal and interest.
How Does it Differ From Nonprofit Accounting?
Government accounting is similar to nonprofit accounting in that they both use the system of fund accountancy, rather than traditional business methods of accounting. And, they’re both dealing with multiple funding sources and are subject to restrictions on how dollars are allocated and spent.
There are also a number of differences between the two, including:
- Government funds are broken up functionally, to manage various community components; whereas, nonprofit funds are broken up by to whom the nonprofit is reporting
- The bureaucracy is far greater in government agencies
- Government budget planning is much more complex
- There is a greater diffusion of responsibility in government accounting
- The nomenclature and syntax of government accounting is much more complex
- There’s a stronger partisan influence on government budgets (though, it does trickle down to the nonprofit sector)
Given the complexity of fund accountancy, nonprofits and governments (not to mention their stakeholders) are better served by using true fund accounting software, versus off-the-shelf accounting software, designed for small businesses. With purpose-built software, government and nonprofit financial professionals can easily adapt to their various funding sources’ unique conditions, and confidently and accurately report their organization’s financial story.