In government vs nonprofit accounting there are three main differences. Those differences are in accounting standards, accounting statements, and reports.
Government and nonprofit accounting also differ from for-profit business accounting. Government and nonprofit businesses consume different assets—their budgets or collections—but those consumptions are not calculated as part of the organization’s overall health or net worth. Government accounting, for example, does not discriminate between the capital expenses and current revenue expenditures, tax collections, etc. Auditing of government accounts is principally a matter of making sure an agency complies with budgets and public policy. However, every type of operation—government, non-profit, and for-profit businesses must follow GAAP. We're here to explore the difference between governmental and nonprofit accounting and which reports are required from each entity.
What is GAAP?
GAAP (Generally Accepted Accounting Principles) is a group of standards in accounting. Its main objective is to ensure financial information is organized, reported, and backed up with supporting records and information.
How government and nonprofit accounting differ
Government and nonprofit organizations have accounting standards beyond GAAP. Government accounting follows the GASB (Government Accounting Standards Board.) Nonprofits adhere to the FASB (Financial Accounting Standards Board).
What is GASB?
The GASB, established in 1984, is an independent private-sector organization in Norwalk, Connecticut. The GASB establishes standards for U.S. local and state governments, which follow GAAP.
U.S. state and local governments recognize GASB standards as authoritative in developing transparent accounting standards in the public interest. The Financial Accounting Foundation (FAF), established in 1972, oversees the GASB and appoints members to the GASB as well as the FASB.
What is FASB?
The FASB, established in 1973, is also a private-sector organization in Norwalk. The FASB establishes financial accounting and reporting standards for both private and non-profit organizations that follow GAAP.
Supported by the Securities and Exchange Commission, the FASB is likewise recognized by state and local governments. The FAF also oversees the FASB.
Financial Statements required from nonprofits and governments
Nonprofits and government organizations use three principal financial statements in their reporting. Two of those statements are the Statement of Activities and Statement of Cash flows. Those two statements are applicable to both government and nonprofit organizations.
There is a third financial statement used by both. For government activities it is the Statement of Net Position. For nonprofits it is the Statement of Financial Position. Both statements are similar to balance sheets, summarizing liabilities and assets and assessing the financial health of each. Their main difference is that they reflect assets that affect the constituents of each entity—i.e., taxpayers or, in the case of nonprofits, beneficiaries of the nonprofit operation.
Reports required from government and nonprofit organizations
Both government and nonprofit organizations use the Comprehensive Annual Financial Report (CAFR). Governments are required by statute to put together the CAFR.
The CAFR for government entities includes financial data for the period covered including:
- consolidated financial statements
- accumulations from previous years
- a comparison of the budget for the period vs. the amount actually spent
Nonprofits publish CAFRs based on the individual requirements of their company rules and regulations. The CAFR for nonprofits includes 3 standard reports:
- Statement of Financial Position
- Statement of Activities
- Statement of Cash Flow
- Government/nonprofit accounting differs from for-profit entities.
- All entities, however, are governed by GAAP.
- Government accounting standards are covered by the GASB.
- Nonprofit organizations are covered by the FASB.
- Government and nonprofit organizations submit financial statements and reports in the form of a CAFR.
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