Public sector accounting concepts/system is actually a series of systems and subsystems that track the financial activates of government and government agencies. Financial management of the government is concerned with budgetary and financial operations of both the individual departments and agencies (NDAs) and of the government as a whole. The appropriation is generally considered the primary accounting entity with the department or agency considered the secondary account entity. The broad concepts/objectives of financial management in government are set forth in the legislation.
The concepts / objectives are:
- Full disclosure of the financial results of department and agency activities;
- Production of adequate financial information needed for department and agency management purposes;
- Effective control over and accountability for all funds, property, and another asset for which each department and agency is responsible;
- Reliable accounting reports to serve as the basis for preparation and support of department and agency budget requests to control the execution of the budget and to provide financial information’
- Suitable integration of department and agency accounting with the central accounting and reporting operations of the treasury department.
Techniques of Accounting in the Public Sector
In public sector techniques of accounting, depending on financial decisions which are usually formulated on the basis of information generated by the accounting system, and also on the type of fund operated. Proper interpretation of accounting data requires an understanding of the assumptions underlying the funds and the laws enacted to operate them. Techniques and concepts of accounting employed in each accounting system also depend on the funding arrangements, methods and management of the organization.
The techniques may be summarized as follows:
There are limited, intermediate and extensive fund systems. Every fund is an accounting entity in itself;
- Basis of accounting
There is accrual, modified accrual, cash modified cash and commitment (obligation) bases of accounting
- Double Entry system
This allows for disclosure of debits and credits in the subsidiary accounts
- Cash Flow Statement
This is important to determine the linkage between inflows and outflows’
- Income Statement
This is necessary to determine the financial position of the entity, and take stock of an entity, and take stock of wealth (funds) at any point in time;
- Balance Sheet Statement
This is to determine assets and liabilities and the net worth position of the entity. It is also used to disclose tangible and intangible assets;
- Variation of the format of fund statement
This is important because of the nature of the funds operated. For example, we have revenue/appropriation accounts, receipts and payment accounts, and revenue/expenditure accounts;
- The flow of funds statement
Some fund statements (source and application of funds) show the flow of funds within the entity and between the entity and the suppliers of the funds;
- Trading and profit and loss statement
This is used by government entities that engage in trading and other commercial activities;
- Comparative statements
Very often fund statements also show a comparative statement (monthly, quarterly, yearly). In such cases, it is easier to identify changes taking place in each balance sheet account as far as the flow of funds is concerned. This is important for planning purposes because the change in inflow indicate certain activities taking place in the organization;
- Ratio Analysis
Presentation of public sector accounts often show variations of flow of funds, either inputs or outputs in different terms. Some of these changes may be an indication of good management, but much depends on whether the bases of comparison are valid or useful;
- Chart of Accounts
This technique of revenue and expenditure classification is very necessary to show the complex nature of government or public sector accounting. It does not only show response-ability accounting but also performance, control and contract approach to accounting. On the chart of accounts MDA’s and MMDA’s are used as expenditure heads, and it is possible to trace revenue collected into the consolidated fund to its primary source. The chart of accounts is also consistent with the country’s MTEF budget format.
Expenditure tracking od the consolidated fund has been practised in public section accounting in Ghana in various forms over the years. In the past, treasuries throughout the nation submitted weekly balances of sub-consolidated fund accounts every Tuesday to Treasury Headquarters. At the present time, expenditure tracking is down by a computerized system. Data form major expenditure spending units such as the national payroll processing unit, the ministries of Health and Education are tracking weekly. Specialized treasuries track all investment and service and administrative expenses in gross. The formal computerized data capture program works as follows:
- Locating major cost centres
- Logging into the national expenditure tracking programme
- Capturing cheque payments
- Selecting the month of expenditure
- Entering more than one record at the same time where necessary
- Making changes to expenditure where necessary
- Deleting an expenditure where necessary
- Closing the payment vouchers dialogue box
- Selecting report
- Selecting a period for the report
- Printing the generated report
- Exiting from the programme
- Copying soft copy of expenditure data
Identifiable channels of data
Inputs into the consolidated fund
|Tax revenue||Revenue Agencies|
|Non- tax revenue
(user fees, administration, charges, sales of goods and services)
(above the line Accounts)
(Below the line account)
|CAGD Clinging with MOFEP and Bank of Ghana|
Purposes and Use of the Techniques
- Accountability and Audit
Audit by internal and external agencies
Expenditure priority planning
Debt levels and coordination with monetary policy
Measurement of the impact of the budget etc.
- Appraisal & Evaluation
Cash accounting is restricted to measuring the change in cash, which is the result of deducting cash payments form cash receipts. Cash accounting records transactions in the period I which the related cash receipts and payments occur.
Expenditure is recognized when cash is paid out, which may be before or after the time when the resource (cost) was consumed and any benefit of that resource received. Similar, revenue or income is recognized when it is received in the form of cash.
On this basis revenue, expenditure, capital expenditure, revenue income and capital income are all treated in the same way. Accounts drawn up in this way are in effect no more than an analysis and summary of the cash book
The main characteristics of cash accounting are set out below:
- Simplicity: it is easy to devise and run a system that only records cash payments and receipts. The financial statements produced by such a system are also easy to understand and do not involve any technical skills other than recording cash movements. That is there is no need to make any estimated or adjustments for accruals, prepayment, depreciation, and so on.
- Compliance can be demonstrated, for example, by keeping within a cash limit, and fiscal stewardship can be fulfilled.
- It is easy to monitor receipts and payments against a cash budget.
- It is more difficult to exercise budgetary control in those organizations with a significant part of their expenditure consisting of bought-in goods and services because of the reliance on the date of payment of invoices rather than the spending decisions of the appropriate manager.
- By identifying costs in the period when cash is paid out the cash system does not recognize when the resources were used. It is therefore difficult to match the physical measurement of the week produced in a period of time against the resources used to produce that output and thus produce meaningful output measures.
- Keeping within a cash limit does not mean that affairs have been conducted with the economy, efficiency and effectiveness and so does not meet the requirements for either budgetary control or public accountability.
Accrual accounting requires that sums are included in the accounts to cover income and expenditure attributable to an accounting period for goods received or work is done. Payment will not necessarily have been made or received by the end of the period for which the accounts are prepared.
This procedure follows from the fundamental and widely accepted accounting principle that income and expenditure should be matched in the period to which they relate. This is irrespective of the actual date of receipt of payment.
Revenue and expenditure are determined with reference to amounts due to the organization from debtors and amounts owed by the organization to its creditors at the beginning and end of the period. This is in addition to the cash receipts and payments during the period.
The main characteristic of accrual accounting is set out below:
- It is superior to cash accounting because it results in accounting measurements based on the substance of transactions and events (this is, what actually happened and when), rather than merely cash received and disbursed, and thus enhances their relevance, timeliness, completeness and comparability.
- By introducing debtors and creditors periodic financial statements and annual accounts become more useful as an indication of the financial position of the organization.
- The information produced for managers is more complete and more useful to them in the management of their activities
- It enables non-cash to be included in financial statements. For example, depreciation and provision for bad and doubtful debts.
- It is not easy to identify cash flow. To do so requires knowledge of all adjustments for non-cash items or the preparation of a separate cash flow statement
- Accounts prepared under the accrual basis require technical knowledge before the user can properly understand them
- Accrual accounting requires the use of judgment as it involves making estimates. Accounts using this basis are therefore more difficult to prepare and easier to manipulate than those using the cash basis
Commitment accounting may be defined as the recording of obligation or commitments entered into as distinct from and in addition to expenditure incurred. The relevant entries may be made in the books of account or in subsidiary or memorandum records.
The system recognizes the transaction when the organization is committed to it. This means that the transaction is not recognized when cash is paid or received, nor when an invoice is received or issued, but at the earlier point, when orders are issued per received.
This purpose of commitment accounting is to aid financial control. A commitment is regarded as a charge that has been made on a budget provision at a far earlier date than if the initial entry is made when the goods are received or when the invoice is paid.
A budget holder needs to know the contents of his or her financial budget and then be given up-to-date information telling him or her how much of that budget has been committed and therefore the number of resources he or she still has available for obtaining goods and services.
Public sector organizations have to determine in advance the level of their activities and thus that level of their planned expenditure. The budget will show the funds appropriate for each area of activity. Once the funds for a particular area of activity (vote number) are used up then no further commitments can be incurred until further funds have been granted.
Amounts charged as commitments must be replaced by actual costs when they are known.
Commitment accounting is not used as a basis for financial statements. Therefore, adjustments have to be made each time accounts are produced so that cash or accrual basis is used.
The system of commitment accounting has the following disadvantages:
- The system involves an extra week in terms of estimating the value of commitments, including these estimated in the accounts, and then withdrawing them by substituting actual costs when they are known
- Determining the correct expense for a match against either revenue of the period or some other measure of service provided may be a problem. Matching commitments to their actual expenditure and extracting any commitments unfulfilled must be done very carefully.
- Matching up the commitment with actual expenditure and substituting one for the other is difficult where there is part delivery of orders. The commitment figure has to be split so that part can be substituted and partly left outstanding in the account.