 Hello and welcome to the session in which we will discuss how governments and not-for-profits compare to businesses. This is a governmental accounting, governmental and not-for- Hello and welcome to the session in which we will discuss how do government and not-for-profit organization compare with businesses. This is a governmental and not-for-profit accounting course so it's very important to start by comparing the overall structure of the government and not-for-profit as compared with businesses. Specifically we are going to be discussing these comparisons on the mission level which is the business purpose, what's the business purpose of the government, what's the business purpose of an actual business. Funding, we're going to look at the accounting equation, how do they differ from each other. The ownership structure slash decision making, we're going to look at the resource utilization and eventually all of those will drive the accountability which is the objective of financial reporting for governmental and how does that differ from business. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today no obligation, no credit card required. Starting with the mission or the purpose. Well what is the mission of the government? Think about your local government, think about your state government, why do government exist? Well government exists to provide what? Public, good and services maintain order like a police force, fire department, protect citizen and facilitate economic growth. That's why government exists. They create enforce, they create and enforce laws and regulation, they regulate the market, they address if there's any market failure, they protect the business at large, that's the purpose of the government. What is the purpose of a not-for-profit organization? Think about not-for-profit organizations, NGOs. Those are created to address social issues, environmental issues, cultural issues. So what do they do? What do they do? They provide services to support underserved population or work toward a specific cause like the environment. On the other hand, business or businesses, the primary purpose is to do what? To generate profit, that's easy. To generate profit to who? Generate profit to the owners because it's very important to understand that businesses will have owners. We're gonna see who are the owners of the government and not for profit because that drives the mission, the purpose of the business is to do what? You invest in a company to eventually make a profit and companies provide goods and services, notice, same thing, goods and services, goods and services, however, in exchange. So when the business gives you a goods and a service, they expect something in return and whether they expect, they expect money, which allows them to grow and create value for the stockholders. You're gonna see later when we talk about revenue recognition for governmental, most of the time, the government don't expect something in return. In businesses, you do expect something in return. So that's a major difference. How about funding? Funding means how do they fund themselves because you need to fund yourself in order at least to start. How do government fund themselves? Think about how do government raise money? Well, think about it. They make you pay taxes, usually taxes, they make you pay fee, license fees, they levies on citizens and businesses as well as borrowing. The government can also borrow through issuing bonds like municipal bonds or going to the bank and borrowing money from the bank. So those are the typical sources of funding for a government. That's how they raise money, funding. How about not for profit? Think about not for profit, they rely on donations, they rely on grants, they rely on fundraising events. Simply put, they ask people, people that believe in their cause, people that want to contribute to their cause, they will ask them for money and eventually will do accounting for not for profit, for profit. Now, bear in mind, they also might participate in income, generating income through social enterprises, which is businesses, they could invest their money and charge fees for services. Now, also the government we're going to see later, they do have what's called enterprise funds, which is business like fund, but they're under the umbrella of a business versus a regular business. How do regular businesses raise money usually through the sales of goods and services, investments, loans and issuing stocks and bonds. Specifically stocks, those comes from the owners of the business. So the business will have owners. How about government? Well, we're going to see the government don't have owners. We're going to see who are the true owners of the government. That's why you cannot issue stocks to raise money. Now, different reporting objective based on the funding, based on the different mission, we're going to have different report objective, which we will discuss later, not in this session, the financial reporting for governmental. How about accounting equation? How does the accounting equation looks like the basic accounting equation for profit? If you remember this, you should remember this assets equal liabilities plus equity. For government, we're going to rearrange this formula a bit to emphasize something. We're going to say assets minus liabilities equal to net position or notice, notice it's called in business equity, which is the difference between asset and liabilities. Because if you rearrange this formula, you're going to take assets minus liability equal to equity, but we're going to call it net position or fund balance. You want to call it net position fund balance. We're going to see that term later on, but that's basically what it comes down to or net asset for business purposes, they use net asset. So the accounting equation is approached differently because we want to know what's the difference between assets and liabilities, but it's basically the same. Now, bear in mind, for government and not for profit, let's talk a little bit of accounting, just to kind of emphasize the difference. The budget is a very important component of their accounting system. Why? Because the sole purpose of government, we're going to see later the final objective for financial reporting is accountability. The government is there to provide goods and services. Your job as a citizen is to hold the government accountable. Therefore, when they produce financial statement, they want to show you the accountability of things. So budget is the culmination of the political process. And most of the time, individuals, accounting who works in government, they spend most of their time determining this budget. Now, the funny thing about business, about government, is they determine their cost first. First, they say, this is how much money we need. Then they will go ahead and they figure out where to get the revenue from. In a business, it's different. In a business, you see, where am I going to get the revenue from? And based on the revenue, I will budget my expenses. So notice, even the starting point is different because the budget is a key physical document for the government. It's a key physical document. So budgets drive accounting and financial reporting when it comes to governmental accounting. That's not the case in financial reporting. Also, when it comes to revenues, remember, we have to generate revenues, revenues are not linked to voters' demand or satisfaction because the voters' demand, you're going to see the voters are the true owners of the government. However, it doesn't mean if you pay more taxes, you get better service or you have more saying, at least from a practical perspective. However, in a business, if you are an owner of the business or if you pay for something, you'll get better service. The government, that's not the case. The revenue may not be linked to the satisfaction of the voters who are the owners of the company. No direct link between revenues and expenses. So when we set revenues and expenses, we don't set the expenses based on revenue. Remember, we start with cost, we start with expenses, then we generate revenues versus what we know from a business perspective. First, we say, here's our revenues. How are we going to incur, how much expenses we should incur to generate a profit? That's not a, that's not a concern for the government because the government is happy to break even. That's all what they want. If they can get a surplus, that's fine. But they're happy to break even, not business. Also, there's no distinction between internal and external accounting and reporting for governmental entities. In other words, there is no financial accounting and managerial accounting. Like for business purposes, remember, as an accounting student, you took a financial accounting course and you took a managerial accounting course. Notice the financial accounting deals with external reporting. The managerial accounting deals with internal reporting. For governmental purposes, you don't have this, you don't have those two distinction because the whole purpose of financial reporting, which we'll see in the next session is accountability and accountability start with a budget. Now let's talk about the ownership structure. Who owns a business? Who owns the government? In quote, who owns the government? No one really should own the government. But let's see what it looks like. Well, government are usually structured with elected official representing the interests of the citizens. Who are the citizens? The citizens are the voters. So the decision making for a government could be bureaucratic because you really don't have anyone pushing you to do so because it's the voter citizen and they can only help you accountable during the voting process. And it could involve multiple layers of oversight and approval. Part of it, they assume it's part of the internal control. However, the ultimate power for the government rests in the hands of the people. And when I say people, specifically voters, if you vote, you are part of the government. Citizen vote and delegate that power to elected officials, to elected officials. So simply put, they elect you, they vote you, they vote you into power, and they're going to hold you accountable. So the collective owners are the voters. And guess what? Although you are an quote owner in the government, you cannot transfer your ownership. We're going to see if you own a stock in a company, you can transfer your ownership. So for government, well, in quote, the voters are the ultimate owner of this entity, in quote, owners. Not for profit organization, typically they have a board of directors or trustee that make decision on behalf of the organization because you need people. But again, no one in fact owns the not for profit. The decision making here could be more flexible and mission driven. Our decision is based on what we do as an up for profit, then in business or government. Businesses are totally different. Businesses are driven by market forces, and they make decisions more quickly. But who owns the businesses? Here's the difference, the owners, the shareholders, or it could be executive management who are also owners and shareholders. So notice because your motivation is totally different. In a business, you are being held accountable to the people that owns the company, the stockholders. Therefore, the reporting will target their need. For the government, your reporting should target the need of the voters, which is what? Which is totally accountability, which we'll see that later on when we talk about financial reporting. Also from a resource utilization perspective, what is resource utilization? Resource utilization is how are you using your asset? How are you using your resources? For government and not for profit, there is no direct or proportional relationship between resources provided and benefit received. Going back to that revenue expense relationship, the government, just because you pay more taxes, it doesn't mean you're going to get more of the resources. That doesn't work that way. Also, when the government invests in an asset, let's assume a road, they don't do net present value analysis. They don't do a cash flow analysis. So when they, let's assume they need to open a road, they're not going to take into account how much is that road going to provide for us. So they might pay $5 million, invest $5 million to open a new road in town or in the state or in the government or in the country. They don't take into account. They don't have to kind of basically, is this going to be profitable or not? Why? Because they're not looking at making a profit. They're looking to provide a public service. Therefore, they don't care about cash flow analysis because that's not their purpose. Also, what could the government do? They may be restrict. They might be restrict resources for particular activities or purpose. And that's why we're going to see later that government will use what's called fund accounting. What is fund accounting? Basically, restricting a fund, some money for a particular purpose. For example, the federal government might grant the local government or the state government money for low income housing. If they give you the money for this purpose, if the federal government gives money to the state government, but stipulate that this money should be used for low income housing, then you can only use it for low income housing. The resources are restricted. And we'll see later on how we do this from an accounting perspective. Also, a state might impose a certain tax, but that tax can only be used for a particular purpose. For example, state, they can impose a gasoline tax, which they do in the state of Pennsylvania, for the purpose of maintaining highways, construction and maintenance. So the money that comes from that state gasoline tax, it can only be used for that purpose. Also, for not for profit, if you contribute money, if you donate money for not for profit, for example, if you donate money to your university, you can specify, you can tell them, look, I want this money to be used in the business department or in the science department, or I want it to be used to fund this new building. So you can make those restriction. This is what we mean by resource utilization. You can restrict how the resources are used from a government perspective. However, businesses, they don't have that restriction. Once they receive the money from sales of goods and services, they can practically do anything with it. They can practically do anything with it. Now, bear in mind sometime we might have, we might have restriction by loan covenant, but that's really minor. It's not by law. But for the government, there's much, much more restriction on how you would utilize your resources. Bottom line, all these differences, they're going to drive the purpose of financial reporting for governmental and not for profit, which we will discuss in the next session. What should you do now? Look at farhat-lectures.com, complete additional exercises, multiple choice, true false, that's going to help you understand this concept better. Governmental accounting is a course by itself. It's an important course. It's also covered on the CPA exam. So you want to know this course inside out as an investment in your career. Good luck, study hard and stay safe.