Government entities – whether local, state, or federal – are diverse and complex, with countless legal and fiscal constraints around how they carry out their various and diverse operations. Consequently, government fund accounting can be a bit of a beast.
Government accounting professionals are held to specific requirements (read: laws) to be completely transparent about how funds are allocated and spent versus how much profit is earned. This is primarily because citizens, who provide a big chunk of government revenue through property taxes, income taxes, general sales taxes, motor vehicle license taxes, public utility taxes, alcoholic beverage sales taxes, etc., want assurances their hard-earned dollars are being well managed.
Unlike a private business, which is accounted for as a single entity, a government agency is accounted for through separate funds, each of which is a fiscal and accounting entity.
There are three categories of funds used in government accounting, per the Office of Financial Management, including governmental funds, proprietary funds, and fiduciary funds. Then, under these three categories are various, multiple funds. For example, under governmental funds are funds such as the general fund, which is sort of the “catch-all” or washing machine of funds.
There’s also the capital project fund, which is used primarily for the acquisition and construction of major facilities, and the debt service fund, which is committed to the payment of long-term debt principal and interest.
How Does Government Fund Accounting Differ from Nonprofit Fund Accounting?
Government fund accounting is similar to nonprofit fund accounting in that both use the system of fund accounting rather than traditional business methods of accounting. Both also deal with multiple funding sources and are subject to restrictions on how dollars are allocated.
But there are also plenty of differences between government and nonprofit accounting, including:
- Government funds are broken up functionally to manage various community components
- The bureaucracy is far greater in government agencies
- Government budget planning is more complex
- There is a greater diffusion of responsibility in government accounting
- The nomenclature and syntax of government accounting is more complex
- There’s a stronger partisan influence on government budgets (though it can trickle down to the nonprofit sector)
Given the complexity of governmental fund accounting, nonprofits and governments (not to mention their stakeholders) are best served by using a customizable fund accounting software. With purpose-built accounting software, government and nonprofit financial professionals can easily adapt to their various funding sources and accurately report their organization’s financial stories with confidence.