CHAPTER ONE

BASIS OF GOVERNMENT ACCOUNTING

Learning Objectives
 Financial accountability to the public as a basis of government accounting
 Understand the objective of public sector accounting
 Identifying the various users of public sector accounting information
 Comparison and similarities between public and private sector accounting
 Precedence of legal compliance over accounting principles
 Funds as Government accounting units
Financial accountability to the public as a basis of Government accounting
 Financial accountability to the public is the bedrock of government accounting, ensuring
that governments are responsible for how they manage public resources and can justify
their spending to the citizens.
 This accountability requires transparency, openness and the provision of information,
demonstrating that government actions are in line with their stated purposes.
Why financial accountability matters
 Trust and legitimacy: When governments are transparent and accountable for their
financial decisions, they build trust and legitimacy with the public.
 Good governance: Accountability is a fundamental principle of good governance,
ensuring that public funds are used efficiently and effectively.
 Public trust: By providing clear and comprehensive information about how public
resources are used, governments can demonstrate their commitment to serving the public
interest.
How government accounting maintain accountability
Transparent reporting: Government accounting practices, such as accrual accounting, provide
detailed information about assets, liabilities, revenues and expenses.
Budgetary compliance: Financial reports demonstrate whether government spending aligns
with approved budgets.
Auditing and oversight: Financial audits and independent oversight bodies can verify the
accuracy and reliability of government financial reports.

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Ways of financial accountability
Transparency in public spending: Governments are increasingly publishing detailed financial
information online, allowing citizens to track how their tax are being spent.
Budget transparency: Many governments are implementing budget transparency initiatives,
making it easier for the public to understand the budget process and how funds are allocated.
Accountability for government programs: Financial reports often include performance data
for government programs, allowing the public to assess their effectiveness and whether they are
achieving their intended goals.

What is public sector?

 The simplest definition of public sector is all organizations which are not privately owned
and operated, but established, run and financed by the government on behalf of the public.
 The definition conveys the idea that public sector consists of organizations where control
lies in the hands of public, as opposed to private owners.
 The objective of public sector is to provide services to the public.
 Profit making is not primary to this sector.

Definitions of Accounting:
 This refers to a systematic recording and analysis of financial transactions of a business, or
public sector.
 It is a generally a scientific study in which records of expenditure and income of a company,
individuals or government are kept coupled with other useful information for planning,
decision making and control.
 Public sector accounting is a composite activity of analyzing, summarizing, recording and
interpreting the financial transactions of the government ministries, departments and
spending agencies.
 R. A. Adams (2004), defines public sector accounting as a process of recording,
communicating, summarizing, analyzing and interpreting government financial statements
and statistics in aggregate and details; it is concerned with receipts, custody and
disbursement and rendering of stewardship of public funds entrusted.

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Objectives of public sector accounting
The main purposes of public sector accounting are:
 Ascertaining the legitimacy of transactions and their compliance with established norms,
regulations and statutes. Public sector disbursement should accord with the provisions,
appropriate acts and financial regulations. There should be due authorizations for all
payments so as to avoid an act of fund misappropriation.
 providing evidence of stewardship: The act rendering stewardship is being able to account
transparently and diligently for the resources entrusted. Government and public sector
operators are obliged to display due diligence and sense of probity in the collection and
disposal of public funds.
 Assisting planning and control: The future faces a lot risks and uncertainties. Therefore,
mapping out plans prevents an organization from drifting since plans of actions provides
the focus of activities which are being pursued. The unforeseen circumstance is built into
plans so as to avoid or prevent organization failure. The public sector establishments should
act accordance with the mandate of the government.
 Ensuring objective and timely reporting: Users of public sector accounting information are
anxious to bridge their knowledge gaps on what government is doing. They definitely
treasure prompt and accurate statistics to evaluate government performance.
 Evaluating costs incurred and benefits derived: In Public sector, it is difficult to measure
the costs and benefits in financial terms in all aspects. The analysis of cost- benefit assesses
the economic and social advantages (benefits) and disadvantages (costs) of alternative
courses of actions, to ensure that comfort of the citizens is well catered for.

Other objectives are:

 Providing basis for decision making
 highlighting various sources of revenues receivable and expenditure to be incurred
 identifying the source of funds for capital projects
 evaluating the economy, efficiency and effectiveness with which the public sector
institutions pursue their goals and objectives
 ensuring that costs are matched by at least equivalent benefits accruing therefrom.
 providing details of outstanding long-term commitments and financial obligations.

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  providing means by which actual performance may be compared with the target set.
 Eliminating corruption
 Modernization of the financial management system of the public sector entities;

Need for Public Sector Accounting

 Report on managers’ stewardship
 Assessment of the performance of public institutions
 Facilitate auditing of financial statements and projects.
 For useful decisions like undertaking public investment projects.
 For economic policy formulation and review
 As a means of sourcing for support from international development agencies

Users of public sector accounting information

1. Resource Providers: Those who provide the resources used by PSEs such as voluntary providers
(donors, lenders, creditors, etc) and largely involuntary providers (taxpayers).
2. Service recipients: People and institutions that depend on PSEs for services.
3. Representatives of the service recipients such as the Legislature including members of
parliament.
4. Other Parties including government statistician, analyst, media, financial advisors, public
interest and lobby groups, etc.
[Link] and oversight bodies like subcommittees of parliament, auditors etc
6. Entity management
7. Rating agencies

Similarities of Public Sector Accounting and Private Sector Accounting

 Both keep financial records in order to account for their stewardship to their users.
 Both the public and private sector accounting are based on the double entry principle.
 Both forms of accounting stress the need for organisations to have an appropriate system
for controlling expenditure through preparation of budgets and budgetary control.
 When government business entities are operated by the state, their regulations are not
different from that of private entities. In other words, they are all required to prepare their

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 accounts following International Financial Reporting Standards (IFRSs)/ International
Accounting Standards (IASs).
 Quality of Accounting Information: Similar qualities of information are required of both
public sector accounting and private sector accounting.
 Good Social Citizens: All of these entities are expected to be socially responsible so that
their activities would not harm the environment in which they operate. Thus, they are
required to report on their corporate social responsibility activities in what is termed as
social reporting.

Differences between Public Sector and Private Sector Accounting

 Meaning: It is an accounting system designed for government and related institutions
while the private sector accounting or commercial accounting is an accounting system kept
by all other organizations that are not government and have the intention of operating for
profit or engaging in commercial activities.
 Objective: public sector accounting is designed to serve as a basis for determining the
position of funds, while private sector accounting is meant to determine the profit and loss
and the financial position of the entity.
 Basis of Accounting: Public sector accounting is predominantly based on the cash basis of
accounting even though the International Public Sector Accounting Standards (IPSASs)
gives them the option to adopt either the cash and or accrual basis. On the other hand,
commercial accounting is predominantly based on the accrual basis even though some
statements are based on the cash basis. PSE can use cash basis, though IPSAS gives them
option to use cash or accrual, private uses accrual basis mixed with cash basis
 Approach to Accounting: the fund system of accounting is common in the public sector
but in the private sector, the entity or proprietorship approach is predominantly used.
 Capital and Revenue Expenditures: The public sector accounting does not distinguish
between capital expenditure and revenue expenditure neither do they capitalize capital
expenditure. This implies that all capital expenditure are written off in the year in which
they are incurred and no depreciation is charged. On the contrary, private sector accounting
capitalizes capital expenditure and only writes off current expenditure. It, therefore,
provides for depreciation.

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  Regulation: Public sector accounting is regulated by the financial administration act,
regulations, public procurement act, other related public sector accounting laws, and
IPSASs. On the contrary, private sector accounting is regulated largely by the International
Financial Reporting Standards (IFRSs), International Accounting Standards (IASs),
Company’s Code, Partnership Act and other relevant laws.

PRECEDENCE OF LEGAL COMPLIANCE OVER ACCOUNTING PRINCIPLES

In general, legal compliance takes precedence over accounting principles when there is a
conflict. While accounting principles provide a framework for financial reporting, legal
requirements can override them to ensure accuracy, transparency and compliance with laws.

Reasons why legal requirements take precedence over accounting principles

 Legal requirements are mandatory - Laws and regulations are binding on all businesses
and failure to comply can result in severe penalties, fines and even legal action.
 Accounting principles are guidelines - Accounting principles are a set of guidelines for
financial reporting and they may not always perfectly align with legal requirements.
 Ensuring fairness and transparency - Legal compliance, such as the preparation of
required financial statements, is crucial for ensuring the fairness and transparency of
financial information.

FUNDS AS GOVERNMENT ACCOUNTING UNITS

A fund is a self-balancing set of accounts with assets, liabilities and a fund balance. Funds show
ownership of cash and fund balance and are distinguished by their source of revenue. Funds may
be restricted or unrestricted and may be specific to one department or shared by many departments.