Chapter 2, Problem 1Q

Governmental accounting systems are different from business accounting systems. Why?

To determine

Explain the reason for which government accounting systems are different from business accounting systems.

Explanation of Solution

Explain the reason for which government accounting systems are different from business accounting systems.

• While comparing to business, Governments function in a different environment. Governments should conform to the several “finance-related legal and contractual requirements, regulations, restrictions, and agreements” that impacts their financial management and accounting. Such compliance should be comprehensible and recorded on a continuous basis.
• Governments must also prepare financial statements that comply with “generally accepted accounting principles (GAAP)”, which renders uniform minimum national standards of and guiding principle for annual financial reporting to groups and persons that are external to the government.
• Thus, one of the basic characteristic of a government’s accounting system is that it should render information that achieved several purposes. while business accounting systems should give information for both “GAAP reporting and for income tax reporting”, governmental accounting systems should provide information for both external reporting in compliance with GAAP and for controlling and stating on finance-related legal compliance matters. This requires having different accounting systems for governments and businesses.