Is Fund Accounting Appropriate for Governmental Accounting and Reporting?

By Snodgrass, William R. | The Government Accountants Journal, Spring 1993 | Go to article overview

Is Fund Accounting Appropriate for Governmental Accounting and Reporting?


Snodgrass, William R., The Government Accountants Journal


Governmental accounting, as we know it, began in the early 1900s when fraudulent practices in the financial administration of many cities caused concerned individuals to begin developing uniform accounting and reporting practices, and has evolved to a complex set of standards developed by a formal board, created in 1984. Almost from its inception, governmental accounting has relied on fund accounting.

Organized bodies assumed responsibility for developing sound principles for governmental accounting and reporting. The first was the Bureau of Municipal Research formed by Herman A. Metz, Comptroller of New York City, in approximately 1906. That was followed by the National Committee on Municipal Accounting, organized in 1934 by the Municipal Finance Officers Association.

In 1951, the committee became the National Committee on Governmental Accounting (NCGA). In 1974, the NCGA became the National Council on Governmental Accounting. In 1984, the Governmental Accounting Standards Board (GASB) was created under the auspices of the Financial Accounting Foundation, as a sister organization to the Financial Accounting Standards Board, which is responsible for promulgating accounting and financial reporting standards for nongovernmental entities.

These bodies recognized the disverse nature of the government environment, the complexity of its financial operations and the requirements of accounting for public funds which are uniquely different from the commercial sector. They also recognized that the commercial conceptual model could not meet government's needs, and, therefore, developed an accounting and reporting system to gather and present financial data in a manner that met the needs of government.

The essence of that system is the concept of the fund, which structures financial data in discrete categories. These directly relate to budgetary and other regulatory requirements and considerations imposed over public funds. Fund accounting enables those responsible for the management, stewardship and oversight of public funds to carry out their public sector responsibilities, as well as provide other users complete and meaningful information.

In comparing governmental accounting to commercial accounting, the 1968 Governmental Accounting, Auditing and Financial Reporting (GAAFR), published by the Municipal Officers Association, defined the need for fund accounting:

. .."governments are created by law and are continuously regulated by legal provisions found in constitutions, statutes, charters, ordinances, admistrative regulations, legislative resolutions and judicial interpretation.... the accounting system must produce data and information which indicate the extent to which the financial operations carried out by all agencies of the government pursuant to their designated objectives comply with applicable laws and legal requirements. The existence of a vast network of legal provisions and the diverse nature of governmental operations make necessary the utilization of fund account

The NCGA, in Statement 1, which sets forth the council's basic principles on governmental accounting and financial reporting, requires that governmental accounting systems be operated on a fund basis and defines a fund as:

"a fiscal and accounting entity with a self-balancing set of accounts ... which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations."

Furthermore, NCGA Statement 1 states that "the accounting systems should provide the basis for appropriate budgetary control." GASB Statement 1 adopts all NCGA statements.

The Council of State Governments, in its research report, Preferred Accounting Practices for State Governments, published in 1983, notes that one of the primary arguments against fund accounting is that it is somewhat more cumbersome than single-entity accounting. …

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