Government entities use accounting principles that are different from those used by small businesses. Small businesses usually perform all accounting using one system and one set of ledgers. Most government entities cannot do this because of the number of transactions and accounts they handle. Thus, government accountants use a dual-track approach. They examine each source of a government entity's funds and liabilities related to those funds, as well as report all the revenue the government entity takes in.
Government Entities
Government entities use the dual-track approach, which allows them to keep track of the finances of the government entity's various operations as well as the government entity's overall finances. Some nonprofits also use the dual-track approach to keep track of various forms of funding.
Funding Categories
Government accountants keep track of the government entity's general funds and proprietary funds. General funds refer to funds the government entity collects through taxation. General funds may be allocated for a specific purpose, such as funds in a debt service account, or may be available to the government entity to use for any purpose it considers suitable. Proprietary funds are self-supporting sources of income such as fees. The government entity also has fiduciary funds -- funds held in trust for individuals, such as retirement accounts -- that the accountant must keep track of.
Basis of Accounting
Accountants keep track of the government entity's general funds using a modified accrual accounting method. Using this method, revenues are recorded during the period in which they are earned, and expenses are recorded during the period in which they are incurred, regardless of whether the government receives the money or pays the expenses during that period. However, some types of interest payments are not recorded until they are due. Proprietary funds use regular accrual accounting methods, in which all revenues and expenses are recorded when they are earned or incurred.
Government Entity's Organization-Wide Track
In addition to all these funding tracks, the government accountant provides a government entity's organization-wide accounting for funds. This is a statement of the government entity's assets and liabilities. It does not specifically mention funding or funding sources, and is prepared using the cash method rather than the accrual method. However, the government entity's organization-wide accounting track must balance with the funding track.
