public sector organizations differ from those used by companies in the private sector
Category : Financial Report
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Question: To what extent should the financial reporting practices of public sector organizations differ from those used by companies in the private sector?
INTRODUCTION ……………………………………………………………………… 2
( A ) PUBLIC SECTOR ACCOUNTING …………………………………………. 3
1. The nature of the public sector ……………………………………………… 3
2. Nature of Public sector accounting ………………………………………... 4 3.Public sectors and its principles …………………………………………….. 5
4. Aims and Objectives…………………………………………………………. 6
(B). THE PRIVATE SECTOR AND DEVELOPMENT…………………………. 7
1. Private Sector and Accounting ……………………………………………… 7
2. Private Sector Accounting and Principles…………………………………...8
CONCLUSION …………………………………………………………………... 9
REFERENCES …………………………………………………………………. 11
Accounting for managers
To what extent should the financial reporting practices of public sector organizations differ from those used by companies in the private sector?
Accounting is the kind of financial information system which contain financial information in the transactions which involves the receipts of funds together with their expenditures. In this field, the public and the private accounting have many factors in common. But, when we look at the deeper side, it has also much difference regarding these two kinds of sectors in the field of the accounting. One of the major differences between the public and the private sector is the accounting entity definition, wherein for the typical private sector, the organization is the entity itself, and the funds or the accounting entities are for the government sector.
Public and the private sector accounting grew over the period of time in different perspective. In the public sector accounting it remains unique approach in most of the developing countries. The services which are often free provision form the time of the use to the little or to the no direct link between the incomes of the government together with the cost, which are primarily in the taxation form.
In the private sector, the accounts are all done to report the growth of the profits that had achieved and had retained. In the public scenario, all the accounts when compared with the actual payments and of the payments which with has the receipts with those which are preplan in the government agreed annual budget.
It was definitely a major and a never ended debate if the private sector is the appropriate for the public sector. Besides, there are many differences in this two fields. These differences had lead to the more specific and more studied accountability whether in the field of the private or to the public one.
Review public and private sector accounting – key differences
Private sector Public sector
For profit seeking business Fund accounting
Master account Multi-level system of accounts
Shows net worth and profit Net worth and profit are point less
Requirements or regularity, propriety, No equivalent
and the money value
Flexible Budget plan Guided by inflexible budget plan
Accounting records are maintain there is no equity accounting
Cash accrual basis Emphasize the current funds
Has the operational accountability Does not have the operational accountability
Entity is the organization itself Funds
Not determined by the government Determined by central government legislation
Jobs get done in large numbers Jobs Get done with large
Profitability measures numbers
Under the accrual accounting
Concerns in the internal management of the Records liabilities as taxes an
financial resources pensions
(A) PUBLIC SECTOR ACCOUNTING
Outside the private sector is the most striking developments in the economic growth of the twenty first century. By that time the main purpose of the public sector accounting was in the service to the government, its main purpose also was the control and administering the budget. By this time, the State was primarily the accounting user of the information. In relation to this, the public sector accounting is simply budget related information.
1. Public Sector-its nature
Public sector is the economic and the administrative life portion dealing with the goods delivery and services for/by the government, it can be national, regional or local. The activities such as the social security delivery, urban planning administration, and the national defense organization are some examples of the public sector activities. The public sectors groups focused mainly on the foundation of the more efficient and much accountable public sector institutions than provision of the policy advice. Also, the power of management in the public sector was diffused in the branches of public officials of the government. Therefore, the management responsibility in the bargaining at the public sector was obviously divided and the formal responsibility always differs from the actual one. The economics of the public sector is mainly concerned in the study of the government activity as well as its performance of the functions such as the allocations and the distributions. It was also be the study of the government regarding to its policy, tax and the expenditure policy.
2. Public Sector Accounting-its relevance
Accounting is much important in the public finance administration due to the accounting system which are primarily provides financial information regarding the decisions concerning the money are made for the public organizations.
The accounting system is the process use to serve, to control, to manage, and to plan purpose of the pubic finance administration. The public accounting was the one use to emphasize control. The budgeted expenditure information was also responsible to the money spent by the organizational units and introduced into the accounting systems which was also use to control expenditure. This accounting system was use to prevent improper spending. Public organizations are never sold, besides they do make a profit which means its net worth and the profit are pointless in the public organizations. It is also oriented toward the money flow including the revenues and the expenditures in particular to the relationship of the budgeted amounts.
The accounting is the important factor in the public finance administration due to the accounting system which is primarily providing the finance administration because accounting system is primarily provide the financial information for the public organizations when the decision concerning money are made. The accounting in this sector can serve to control, to manage, and the planning purpose of the public finance administration. It simply emphasizes control.
The accounting in the public sector will be useful for the economic, political, and social decision making, and also the demonstration of the accountability and the stewardship. This can also be use in the evaluation for the managerial and the organizational performance.
3. Public Sector Accounting – its principles
Public Sector accounting systems exist in tracking the implementation of budgets. Though public-sector its revenues and its expenditures look superficially similar to the private-sector in their income and expenses as well, the key differences involve the comparison that had made in the two sectors. The public sector, the revenues are being compared with the estimated revenues while the expenditures are compared with the appropriation to the budget compliance track. The public-sector accounting systems are being broken up into the funds. The funds which are essentially divided into public finances into separate parts are accounts for the different public activities. This are also used to record financials for the various activities such as the general funds, the motor fuel tax fund, water fund, and the pension fund. Each of these funds is using separate accounting equations which have to be operated separately, whereas contrast with the use of the single equation for the accounting and reporting for the all of the private organization. In general, the smallest public organizations use only one fund; the village government is likely to have between the 5-20 funds.
The policymaker of the public organizations is the one to decide the level of the publicity that will be provided goods. The funding for the services often comes from the taxes which are required payments that are no relations to the goods and services. To emphasize on control and the fragmentation of the public budget will came from the public sector accounting system. This public sector accounting system is existed to exercise control rather than to provide information which are commonly required in the private sector.
Generally, the public sector accounting should reflect the use of the resources as the cost which is likely in the private institutions; it also indicates the level of the present commitments for the future budgets and the future generations; it allows monitoring of the performance based or the service cost indicators. It reflects the net asset position of the governments’ different levels.
4. Public sector accounting – aims and objectives
The primary objective of the accounting as well as the financial reporting for the public sector is by providing the financial information that is useful in determining and the prediction to the flows, balances, and the requirements of the short-term financial resources of the government unit, by providing the financial statement that is useful in the determination and the prediction to the condition of the government and the unit changes therein, by providing much information regarding the financial report performance under the terms of the legal, the contractual and the fiduciary requirements, by providing the enough information that is useful for the planning and the budgeting as well as the prediction of the impact of the acquisition and the allocation of resources in the achievement of these operational objectives, by providing the information that suits for the evaluation of the managerial and the organizational performances, that is the determination of the costs programs, the functions and the activities in a manner which facilitates the analysis of the valid comparing the establishments criteria which are among time periods and the governmental units, the evaluation of the efficiency and the economy of operations of the organizational units, programs, the activities and the functions, the evaluation of the results and the programs, activities which shows the effectiveness in the achievement to their goals and the objectives and finally evaluating the equity with the burden of the provision resources for the governmental operations that is imposed.
( B ). THE PRIVATE SECTOR ACOUNTING
The legal basis in the financial accounting was contained in the acts of the companies. Before the companies acts of the 1981 was passed, the legal requirements for the accounting were restricted to lay down the general rules on the account’s scope that will give a true and fair view requirements disclosure. During the 1981 and the 1989 Companies Acts incorporated the fourth and the seventh BC directives that will specify the format of the accounts that has to be presented and should be followed by the accounting rules. The act of the 1989 Act was to require a company to a state to the account notes if ever the accounts have been prepared in connection to the accounting standards.
1. Private Sector Accounting – its nature
Accounting in private sector can in these two types: the management accounting or the financial accounting. The management accounting is the activity which provides information so that management can make efficient decisions in the field of the use of the allocation and resources. It is directed towards the needs of the management and not subjected to the any form of the external review. On the other hand, financial accounting emphasizes the stewardship functions. This will make an assurance to the providers of the financial resources or the shareholders which will determine to spend their funds, which has relation to the manager in accordance to the law. The managers are always concerned with the profit. Therefore, the accountability process is also concerned in the highest profit possible with minimal cost. Profit – the bottom line in this sector and not can be found in the government sector which was focused in the field of auditing and accounting. The accounts therefore must be reliable to check on the managers because it will be their basis in connection to the growth of the company. The security can be acquired by requiring the financial accounting to comply in the series of legal rules as well as accounting practices.
2. Private Sector Accounting - its Principles
Private organizations have the plans which include all the budgets, but they are dependent on the market sector. These are also relating their selves to the income of and the expenses due to the fact that they vary together. In the private sector, its income and expenses are compared with the profit being computed and the impact of the corresponding net worth in the organization. In these organizations also they use only one equation for the computation and of the accounting as well as its reporting due to the reason that its main objective is the profit. Most of the private organizations also use the accrual basis when recording the transaction when the legal obligation is concern. In private organizations, the level of the costs must be tailored in accordance to the expected revenues.
It was pointed out earlier in this assignment that an increasing range of public sector activities are now required to be exposed to competition. Typical of these is the laundry service of a hospital, and in the example that follows the issues that need to be considered when deciding whether to continue with in-house provision or contract out to the private sector are examined. It is also one of the major differences between the private and the public sector of accounting is the accounting entity definition. For the private sector environment, its entity is the also the organization itself whereas the accounts are also designed to the reflection of its entire resources. On the other hand, the public sector separates the financial resources from the accounting entities which are distinct the so called the funds whereas every fund was there to record and account the use of the specific group of assets or the revenue sources as well as the collection of each type of costs.
In general, the difference between the financial practices in the public sector and the private organizations are summaries in the following form:
1. The public sector financial practices are guided by the inflexible budget plan, on the other hand, the private sector employs a flexible budget plan changes as soon as the volume of the output also make change.
2. The public sector, there is no equity accounting and the funds are mostly based on the legal requirements whereas the private organizations the accounting records are maintained to have a copy and to show to the owner’s equity to the one consolidated account.
3. The non-profit- organizations or the public sector are trying to emphasize the current funds without the recognition of the capital or the fixed assets while the private accounting sector was typically used the modified cash accrual basis or the cash basis.
4. In the private sector accounting reflects the results of the economic activities or the operational accountability which express the efficiency with which objective profit has been achieved. This only shows the direct matching of the revenues in connection with the expenses for the required period and the specific responsibility center. Then, management can be held operationally which is accountable to the owners, to the creditors, and also the other interests.
5. The not-for-profit sectors or the public one does not have the operational accountability or the principle of matching as its central objectives. Primarily, these organizations, do not set make sets of their prices either in their goods or to their services. Often, little or no revenue has been collected coming from their beneficiaries to whom their activities are primarily directed. As much in hospital whereas the major source of their revenues comes from the health care and the services are not that market determined. Therefore, operational accountability is not primarily reflected in the accounting statement. Due to this reality, it has been emphasis in the not-for-profit organizations is to put in the stewardship or the fiduciary role of the administrators.
To experience in the environment of the public as well as the private sector will definitely have their respective differences. The employees in the corporate accounting sector has the responsible for certain duties to help the accounting department be complete the job, besides it’s their job, which means that they make sure that the right number is they most prioritize. On the other hand, in the public sector accounting, the employees are more responsible for the aspects of the clients’ projects. This is to make sure the right numbers are right but the numbers are their own.
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