Financial Accounting and Reporting by Government and Not-for-Profit Entities

By John A. Tracy

The world of financial accounting and reporting can be divided into two hemispheres: for-profit business entities and not-for-profit entities. Accounting and financial reporting standards have also evolved and been established for government and not-for-profit entities.

A large body of authoritative rules and standards called generally accepted accounting principles (GAAP) have been hammered out over the years to govern accounting methods and financial reporting of business entities in the United States.

People generally don’t demand financial reports from government and not-for-profit organizations. Federal, state, and local government entities issue financial reports that are in the public domain, although few taxpayers are interested in reading them.

When you donate money to a charity, school, or church, you don’t always get financial reports in return. On the other hand, many private, not-for-profit organizations issue financial reports to their members — credit unions, homeowners’ associations, country clubs, mutual insurance companies (owned by their policy holders), pension plans, labor unions, healthcare providers, and so on.

The members or participants may have an equity interest or ownership share in the organization and, thus, they need financial reports to apprise them of their financial status with the entity. Government and other not-for profit entities should comply with the established accounting and financial reporting standards that apply to their type of entity.

Many not-for-profit entities use accounting methods different than business GAAP — in some cases very different — and the terminology in their financial reports is somewhat different than in the financial reports of business entities.