Why public sector and not-for-profit accounting is different

Most of the accounting you have studied so far was built for businesses: entities that raise capital from owners and lenders, sell goods and services at prices customers accept, and are judged by the profit they earn and the cash they generate for investors. Governments and not-for-profit organizations do not fit that model. A city levies taxes that residents must pay whether or not they use the services; a food pantry gives food away to people who pay nothing; neither has owners who expect a return. This course explains how accounting adapts to those differences in the United States, under the standards of the Governmental Accounting Standards Board (GASB) for state and local governments and the Financial Accounting Standards Board (FASB) for private not-for-profit organizations, and how tax-exempt organizations and recipients of federal awards meet their reporting and audit obligations.

The course builds on ACCT-211 and ACCT-212, where you learned intermediate financial reporting for businesses, and it refers to ACCT-331 for the audit concepts that lesson 12 applies to the public sector. The standards and dates in this course were checked in October 2026. Governmental standards are changing: GASB Statement No. 103, Financial Reporting Model Improvements, and Statement No. 104, Disclosure of Certain Capital Assets, apply to fiscal years beginning after 15 June 2025, and Statement No. 105, Subsequent Events, applies a year later. The 2024 revision of the Uniform Guidance and the 2024 Yellow Book also change the audit landscape.

Two running examples

Throughout the course we follow two invented organizations. The first is the City of Aspen Ridge, Nebraska, a city of about 24,300 people with a fiscal year ending 30 September. It provides police and fire protection, streets, a water and sewer utility, parks and a library, and community development. Its fiscal 2027 statements apply GASB Statements 103 and 104 for the second year. The second is Riverbend Community Pantry, a section 501(c)(3) public charity in Aspen Ridge that collects donated food, distributes commodities from a federal food program, buys food with cash donations, runs a school breakfast program funded by a state grant and, in 2027, buys a refrigerated truck with a restricted grant. It prepares financial statements under FASB ASC 958 and files Form 990. All names, people and figures are invented; they are chosen to be realistic for organizations of this size and are consistent from lesson to lesson.

What makes these entities different

Four features shape the accounting of governments and not-for-profit organizations. First, there is no profit motive and no owner. The residual interest in a city's assets belongs to no one who can sell it, and the residual interest in a charity's assets must be used for its purposes. The bottom line of the operating statement is therefore not a measure of success: a city that runs a large surplus may simply have taxed more than it needed, and a charity that runs a deficit may have spent reserves on exactly what donors wanted.

Second, many resources arrive in nonexchange transactions. Taxes, government transfers and donations are not payments for services received by the payer, so the matching of revenue with the cost of goods sold that drives business accounting does not apply. Accounting must decide when a tax or a gift is earned, and how to treat conditions and restrictions attached by the giver. Third, the budget matters more. A government's budget is a legal authority to spend, approved by elected officials, and the financial statements are expected to show how actual results compare with it. Fourth, the users differ. Instead of investors and lenders, the main users are citizens, legislators and councils, donors, grantors, rating agencies and oversight bodies, who want to know whether resources were used as intended, whether services can be sustained and whether the entity complied with legal and contractual limits.

Standard setters and the entities they serve

In the United States, GASB sets generally accepted accounting principles (GAAP) for state and local governments: states, counties, cities, school districts, special districts such as transit and water authorities, and public colleges and universities. The Federal Accounting Standards Advisory Board (FASAB) sets standards for the federal government and its agencies. FASB sets GAAP for businesses and for private not-for-profit organizations, mainly in ASC Topic 958, so a private university and a public university in the same state follow different standards. All three boards operate under the oversight of the Financial Accounting Foundation (GASB and FASB) or the federal government (FASAB). State laws often require local governments to follow GAAP, though some states allow regulatory or cash-basis reporting for small governments. Auditing standards come from the AICPA for most engagements, the Government Accountability Office (GAO) for audits under Government Auditing Standards (the Yellow Book), and the OMB for audits of federal awards.

Accountability and interperiod equity

The central idea in governmental reporting is accountability: the government must account to the public for the resources entrusted to it and for how it used them. GASB Concepts Statement No. 1 identifies accountability as the paramount objective of financial reporting and links it to interperiod equity: whether current-year revenues were sufficient to pay for current-year services, or whether the cost was shifted to future taxpayers. It also emphasizes compliance with the budget and with legal limits, and the assessment of service efforts, costs and accomplishments. The two measurement focuses that lesson 2 develops, current financial resources for governmental funds and economic resources for the government-wide statements, give different answers to the interperiod equity question.

Not-for-profit organizations are accountable too, but to a narrower group: donors, grantors, members and the regulators who protect the public interest in charitable assets. Their statements must show what resources they hold, which of those resources are restricted by donors and therefore not available for any purpose the board chooses, what programs they ran and what those programs cost, and whether they can continue. Because donated resources often come with conditions, the accounting for restrictions is the defining technical feature of not-for-profit reporting, and lessons 9 and 10 are devoted to it.

The table below summarizes what each user group of Aspen Ridge's statements wants to know. Few of the questions concern a single bottom line. A council member reviewing the fiscal 2027 statements wants to compare spending with the appropriations the council approved; a state oversight official wants to see whether the city respects its levy and debt limits; a bond analyst wants to see unrestricted net position, the pension liability and debt service coverage for the utility; a resident wants to know what the city spends on streets and whether taxes will rise. The pantry's board and donors want different answers again.

A first look at the numbers

The program computes a few headline indicators for Aspen Ridge at 30 September 2027. Read them as a preview: each is explained later in the course. Net position of $167.5 million is dominated by capital assets, which cannot be spent. General revenues, mainly property and sales taxes, provide 73.1 percent of the revenue of governmental activities, while program revenues such as charges and grants provide the rest. Debt per resident of about $1,428 combines governmental bonds and the utility's revenue bonds, which are repaid from water and sewer rates.

# Key financial indicators for the invented City of Aspen Ridge, Nebraska,
# primary government, fiscal year ended 30 September 2027 (thousands of dollars).
population = 24_300
gov = {"current and other assets": 31_500, "capital assets, net": 121_000,
       "deferred outflows": 2_600, "current liabilities": 5_900,
       "long-term liabilities": 27_400, "deferred inflows": 4_100}
bta = {"current and other assets": 7_800, "capital assets, net": 58_000,
       "deferred outflows": 400, "current liabilities": 1_500,
       "long-term liabilities": 14_600, "deferred inflows": 300}

def net_position(a):
    return (a["current and other assets"] + a["capital assets, net"] + a["deferred outflows"]
            - a["current liabilities"] - a["long-term liabilities"] - a["deferred inflows"])

for name, a in (("Governmental activities", gov), ("Business-type activities", bta)):
    print(f"{name:26} net position {net_position(a):>9,}")
total = net_position(gov) + net_position(bta)
print(f"{'Primary government':26} net position {total:>9,}")
print()
debt = 21_800 + 12_900            # bonds and notes: governmental, business-type
print(f"Debt per resident ($)          {debt * 1000 / population:,.0f}")
print(f"Current ratio, governmental    {gov['current and other assets'] / gov['current liabilities']:.2f}")
general_rev, total_rev = 27_700, 37_900   # governmental activities
print(f"Share of revenue from general revenues  {general_rev / total_rev:.1%}")

Governmental activities    net position   117,700
Business-type activities   net position    49,800
Primary government         net position   167,500

Debt per resident ($)          1,428
Current ratio, governmental    5.34
Share of revenue from general revenues  73.1%

These figures already show why governmental analysis needs its own indicators. Aspen Ridge's governmental activities have a high current ratio of 5.34 because the capital projects fund holds unspent bond proceeds, so liquidity looks stronger than it is. The large share of general revenues means that most services are financed by taxes rather than by the people who use them, which is the defining feature of governmental activities as opposed to business-type activities such as the utility.