Government and nonprofit accounting are often lumped together as they both use fund accounting principles. However, the way in which they operate, organize financial information, and report on their data differ greatly.
Below are the 3 major differences between nonprofit and government accounting processes.
3 Big Differences between NPO and Government Accounting
Like all accounting programs, there are certain guidelines and principles an organization and entity must follow. Both nonprofits and government agencies must follow GAAP, the Generally Accepted Accounting Principles. GAAP’s main objective is ensuring that financial information is reported on effectively and efficiently. This is done through the GAAP’s set of principles, standards, and procedures that aim to help to standardize accounting across the industry and regardless of for-profit, NPO, or government status.
In addition to GAAP, government and nonprofit organizations have additional standards they need to follow that differ from each other:
- Government – GASB (Government Accounting Standards Board)
- Nonprofits – FASB (Financial Accounting Standards Board)
Both the FASB and GASB “develop and issue accounting standards through a transparent and inclusive process intended to promote financial reporting that provides useful information.” However the GASB is intended for “taxpayers, public officials, investors, and others who use financial reports”, specifically for state and local government agencies within the United States. The GASB defines three different reporting methods for government accounting.
The FASB is intended for “investors and others who use financial reports,” essentially any public, private, or nonprofit organization or business. Unlike the GASB, the FASB defines only one method of reporting for nonprofit accounting.
There are 3 main financial statements that nonprofits and government entities use in their reporting. Two of them are the same: Statement of Activities and Statement of Cash Flows. The third statement, while technically a statement of the same information, is referred to differently by both entities:
- Government – Statement of Net Position
- Nonprofits – Statement of Financial Position
These statements are similar to balance sheets. They summarize the assets and liabilities, showing the net assets of the organization and assess the financial health of the government body or organization. The statements are similar to each other because in both the nonprofit and the government, there is no owner. The main difference is that the statements represent the assets that affect different people: for the government’s statements, it affects the taxpayers; for the nonprofit’s statements, it affects those who benefit from the nonprofit.
Every year, government organizations must put together a CAFR (Comprehensive Annual Financial Report). The CAFR analyzes the financial status of the entity, and is put together using the GAAP and GASB.
The CAFR can include overall financial data as well as information on specific funds and reports the results of the period in question, often the financial year. The CAFR also includes consolidated financial statements and includes accumulations from previous years. This also includes a comparison of the period budget and the actual spend.
Nonprofit organizations are not required to publish CAFRs. However, they are required to put together financial reports for their Board of Directors and subsequent investors. These are called the Report of Consolidated Financial Statements which will include:
- Statement of Activities,
- Statement of Financial Position, and
- Statement of Cash Flow.
Nonprofits typically do this through their fund accounting software, as most solutions include templates that make reporting easier to read.
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