CHAPTER 1
GOVERNMENTAL AND NONPROFIT ACCOUNTING:
ENVIRONMENT AND CHARACTERISTICS
ANSWERS TO QUESTIONS
Question 1-1
a. The similarities of accounting for profit-seeking and G&NP organizations include:
1. Double-entry system of accounts.
2. Most accounting mechanics, e.g., basic transaction documents, journals, ledgers, charts of
accounts.
3. Where a G&NP organization has a business-type activity, e.g., a municipal electric utility,
the accounting generally parallels that for a similar private business (e.g., electric utility).
b. Among the unique aspects of G&NP organization accounting are:
1. Fund accounting—designed to separate resources according to the purposes for which
they may be used and to account for their uses and balances.
2. Budgetary control techniques—to help assure appropriations are not overexpended and
all resources due the G&NP organization are received by it.
Question 1-2
,a. A fund of a not-for-profit (or G&NP) organization is an independent fiscal and accounting
entity. Each fund has a separate self-balancing set of accounts in which are recorded the
resources segregated for specific purposes, the related liabilities and residual equity (fund
balance), and the changes therein. Financial statements typically must be presented to report
the financial position and operating activities of a fund of a government.
b. As the term is generally used in commercial accounting, a "fund" merely indicates that a
portion of an organization's assets is set aside and/or restricted to certain uses, e.g., a petty
cash fund or a bond sinking fund. Such "funds" are not separate accounting entities, but are
accounted for by establishing appropriately titled asset and liability accounts within the
organization's general ledger.
c. No, the creation of a fund does not constitute authority to spend or obligate its resources. In
most not-for-profit organizations, particularly governments, authority to spend or obligate
fund resources is conferred only upon an appropriation(s) being made by the legislative body
or governing board.
Question 1-3
1. Expendable (governmental) funds are used to account for the current assets; related liabilities;
changes in net assets from revenues, expenditures, and other financing sources (uses); and the
balances that may be expended in a G&NP organization's "governmental" or other"
nonproprietary" activities.
2. Nonexpendable (proprietary) funds are used to account for the revenues, expenses, assets,
liabilities, and equity of a G&NP organization's "business-type" activities.
Question 1-4
"Expenditures" may be defined as the amount of financial resources expended during an accounting
period for current operations, capital outlay, and long-term debt principal retirement and interest.
,(Expenditures are measured in governmental/expendable fund accounting.) "Expenses," on the
other hand, are the costs of goods or services consumed (expired) during an accounting period.
(Expenses are measured in proprietary/nonexpendable fund accounting.) In sum, “expenditures”
are costs incurred plus long-term debt principal retirement, while “expenses” are costs expired.
Question 1-5
a. Organizational objectives. The determination of net income, earnings per share, change in
owner(s) equity, and the like are very important in accounting for profit-seeking organizations.
Such measurements relate directly to the objectives of the owners and are seen to indicate
management success or failure during a given period of time.
On the other hand, a G&NP organization exists to provide certain goods or services to a
community or society as a whole. The objective of such organizations is to provide as many
goods or as much service as available resources permit. Emphasis in this environment is
therefore upon acquiring and using appropriable financial resources—cash flow, working
capital, and budgetary position—rather than the determination of net income or earnings per
share.
b. Methods of fiscal control employed. The profit motive and profit measurement tend to
provide automatic regulation of profit-seeking organizations in a competitive, free-enterprise
society. In this situation, a firm whose management is inept or unresponsive to the desires of
the consuming public will not be profitable and will ultimately be forced to go out of business.
Thus, society concentrates its regulatory activities on those firms in which competition does
not provide effective regulation, e.g., public utilities and other monopolies.
Other controls must be substituted for the profit test/regulator where G&NP organizations are
involved. Thus, G&NP organizations, particularly governments, are subjected to a variety of
legal and administrative controls over such factors as (1) organization structure, (2) personnel
policies and procedures, (3) sources of resources, (4) uses of resources, (5)
Question 1-5 (continued)
accounting, (6) reporting, and (7) auditing. The most obvious result of such alternative
controls is the extensive use of fund accounting and reporting and budgetary accounting and
reporting by G&NP organizations.
, Question 1-6
1. The Governmental Accounting Standards Board (GASB) was established in 1984 as the
recognized body to set authoritative standards for state and local government accounting and
financial reporting. The GASB recognized the effective National Council on Governmental
Accounting (NCGA) pronouncements and excerpts from certain AICPA publications as
"authoritative" in 1984, and subsequently has issued numerous Statements and
Interpretations.
2. The Financial Accounting Standards Board (FASB) began conceptual research in G&NP or
"nonbusiness" accounting and reporting in l973. Later, in l979, the FASB assumed
responsibility for all nonbusiness organization accounting and financial reporting standards
except those for state and local governments. In June 1993, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 116, "Accounting for Contributions Made and
Contributions Received" and SFAS 117, "Financial Statements of Not-for-Profit Organizations."
(The FASB has since issued two additional standards specifically addressing not-for-profit
organization accounting issues.) These standards established the general guidelines for
financial reporting for all nongovernment not-for-profit organizations—including
nongovernment not-for-profit hospitals, colleges and universities, voluntary health and
welfare organizations, and other not-for-profit organizations. Government not-for-profit
entities of these types, e.g., state universities, are prohibited from applying these SFASs.
3. Although the American Institute of Certified Public Accountants (AICPA) assisted several G&NP
organization committees to establish accounting standards-setting organizations in the l930s,
the AICPA Committee on Accounting Procedure (CAP) focused on business accounting,
particularly that subject to Securities and Exchange Commission (SEC) control. Similarly, the
AICPA's Accounting Principles Board (APB) issued only one opinion ("Disclosure of Accounting
Policies") which applied to G&NP organizations as well as to business organizations.
In the late 1960s and early 1970s, the AICPA issued a series of G&NP organization audit guides
that brought the AICPA into accounting standards-setting for G&NP organizations. All
differences between the AICPA and the committees setting standards for hospitals, colleges
and universities, and state and local governments were ultimately resolved. Too, the AICPA
established standards for voluntary health and welfare organizations and other nonprofit
organizations through its accounting and audit guides and statements of position.
The AICPA's current role involves advising the GASB and participating in the GASB's due
process, as well as issuing audit guides and statements of position that have level b authority in
the GAAP hierarchy if they are both (1) intended to apply to SLGs and (2) cleared by the GASB.
GOVERNMENTAL AND NONPROFIT ACCOUNTING:
ENVIRONMENT AND CHARACTERISTICS
ANSWERS TO QUESTIONS
Question 1-1
a. The similarities of accounting for profit-seeking and G&NP organizations include:
1. Double-entry system of accounts.
2. Most accounting mechanics, e.g., basic transaction documents, journals, ledgers, charts of
accounts.
3. Where a G&NP organization has a business-type activity, e.g., a municipal electric utility,
the accounting generally parallels that for a similar private business (e.g., electric utility).
b. Among the unique aspects of G&NP organization accounting are:
1. Fund accounting—designed to separate resources according to the purposes for which
they may be used and to account for their uses and balances.
2. Budgetary control techniques—to help assure appropriations are not overexpended and
all resources due the G&NP organization are received by it.
Question 1-2
,a. A fund of a not-for-profit (or G&NP) organization is an independent fiscal and accounting
entity. Each fund has a separate self-balancing set of accounts in which are recorded the
resources segregated for specific purposes, the related liabilities and residual equity (fund
balance), and the changes therein. Financial statements typically must be presented to report
the financial position and operating activities of a fund of a government.
b. As the term is generally used in commercial accounting, a "fund" merely indicates that a
portion of an organization's assets is set aside and/or restricted to certain uses, e.g., a petty
cash fund or a bond sinking fund. Such "funds" are not separate accounting entities, but are
accounted for by establishing appropriately titled asset and liability accounts within the
organization's general ledger.
c. No, the creation of a fund does not constitute authority to spend or obligate its resources. In
most not-for-profit organizations, particularly governments, authority to spend or obligate
fund resources is conferred only upon an appropriation(s) being made by the legislative body
or governing board.
Question 1-3
1. Expendable (governmental) funds are used to account for the current assets; related liabilities;
changes in net assets from revenues, expenditures, and other financing sources (uses); and the
balances that may be expended in a G&NP organization's "governmental" or other"
nonproprietary" activities.
2. Nonexpendable (proprietary) funds are used to account for the revenues, expenses, assets,
liabilities, and equity of a G&NP organization's "business-type" activities.
Question 1-4
"Expenditures" may be defined as the amount of financial resources expended during an accounting
period for current operations, capital outlay, and long-term debt principal retirement and interest.
,(Expenditures are measured in governmental/expendable fund accounting.) "Expenses," on the
other hand, are the costs of goods or services consumed (expired) during an accounting period.
(Expenses are measured in proprietary/nonexpendable fund accounting.) In sum, “expenditures”
are costs incurred plus long-term debt principal retirement, while “expenses” are costs expired.
Question 1-5
a. Organizational objectives. The determination of net income, earnings per share, change in
owner(s) equity, and the like are very important in accounting for profit-seeking organizations.
Such measurements relate directly to the objectives of the owners and are seen to indicate
management success or failure during a given period of time.
On the other hand, a G&NP organization exists to provide certain goods or services to a
community or society as a whole. The objective of such organizations is to provide as many
goods or as much service as available resources permit. Emphasis in this environment is
therefore upon acquiring and using appropriable financial resources—cash flow, working
capital, and budgetary position—rather than the determination of net income or earnings per
share.
b. Methods of fiscal control employed. The profit motive and profit measurement tend to
provide automatic regulation of profit-seeking organizations in a competitive, free-enterprise
society. In this situation, a firm whose management is inept or unresponsive to the desires of
the consuming public will not be profitable and will ultimately be forced to go out of business.
Thus, society concentrates its regulatory activities on those firms in which competition does
not provide effective regulation, e.g., public utilities and other monopolies.
Other controls must be substituted for the profit test/regulator where G&NP organizations are
involved. Thus, G&NP organizations, particularly governments, are subjected to a variety of
legal and administrative controls over such factors as (1) organization structure, (2) personnel
policies and procedures, (3) sources of resources, (4) uses of resources, (5)
Question 1-5 (continued)
accounting, (6) reporting, and (7) auditing. The most obvious result of such alternative
controls is the extensive use of fund accounting and reporting and budgetary accounting and
reporting by G&NP organizations.
, Question 1-6
1. The Governmental Accounting Standards Board (GASB) was established in 1984 as the
recognized body to set authoritative standards for state and local government accounting and
financial reporting. The GASB recognized the effective National Council on Governmental
Accounting (NCGA) pronouncements and excerpts from certain AICPA publications as
"authoritative" in 1984, and subsequently has issued numerous Statements and
Interpretations.
2. The Financial Accounting Standards Board (FASB) began conceptual research in G&NP or
"nonbusiness" accounting and reporting in l973. Later, in l979, the FASB assumed
responsibility for all nonbusiness organization accounting and financial reporting standards
except those for state and local governments. In June 1993, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 116, "Accounting for Contributions Made and
Contributions Received" and SFAS 117, "Financial Statements of Not-for-Profit Organizations."
(The FASB has since issued two additional standards specifically addressing not-for-profit
organization accounting issues.) These standards established the general guidelines for
financial reporting for all nongovernment not-for-profit organizations—including
nongovernment not-for-profit hospitals, colleges and universities, voluntary health and
welfare organizations, and other not-for-profit organizations. Government not-for-profit
entities of these types, e.g., state universities, are prohibited from applying these SFASs.
3. Although the American Institute of Certified Public Accountants (AICPA) assisted several G&NP
organization committees to establish accounting standards-setting organizations in the l930s,
the AICPA Committee on Accounting Procedure (CAP) focused on business accounting,
particularly that subject to Securities and Exchange Commission (SEC) control. Similarly, the
AICPA's Accounting Principles Board (APB) issued only one opinion ("Disclosure of Accounting
Policies") which applied to G&NP organizations as well as to business organizations.
In the late 1960s and early 1970s, the AICPA issued a series of G&NP organization audit guides
that brought the AICPA into accounting standards-setting for G&NP organizations. All
differences between the AICPA and the committees setting standards for hospitals, colleges
and universities, and state and local governments were ultimately resolved. Too, the AICPA
established standards for voluntary health and welfare organizations and other nonprofit
organizations through its accounting and audit guides and statements of position.
The AICPA's current role involves advising the GASB and participating in the GASB's due
process, as well as issuing audit guides and statements of position that have level b authority in
the GAAP hierarchy if they are both (1) intended to apply to SLGs and (2) cleared by the GASB.
