Public Sector Accounting is An information system designed to measure financial information (transactions) of public sector organizations for purposes of the planning, appraisal, reporting, evaluation, and management of the organizations.
it can also be define as fellows;
- A financial system designed to capture all transactions involving government funds, allow for comparison of actual and budge Led results, give government timely information about revenue and expenditure, and provide information useful to assess the efficiency of government programs.
- The totality of methods and procedures necessary for accounts keeping to produce the desired results of the objectives of government programs and activities.
- A set of methods and procedures adopted by public sector organizations to manage the financial business of the organizations.
- Public sector accounting is concerned with recording, controlling, analyzing, classifying, summarizing, measuring, and reporting the financial flows of government. It involves the receipt, custody, and disbursement of public and trust monies as
required by law. The purpose is to demonstrate fiduciary stewardship that is to show that government resources have been approved and handled properly by ensuring that government monies are applied honestly, using proper procedures, within budgeted levels and legal limits.
What is Public Sector Accounting
All the definitions sound convincing although the last description of public sector accounting appears to be more comprehensive. The main points we need to know, however, are that public sector accounting is:
A dynamic financial information system.
It is broad-based and limited only to the needs of the information user.
It is based on laws, rules, regulations, policies, methods, and procedures.
To determine that the information produced is analyzed and communicated in a timely way.
To ensure that stewardship and accountability to the public are major hallmarks of the system.
Several developments in recent decades have made the subject of Public Sector Accounting an important part of accounting studies the world over. Firstly, the size of the government budget and the contribution of public expenditure to the Gross Domestic Product (GDP) are very enormous, especially in developing countries.
Secondly, an analysis of the concept and techniques of accounting applied to public sector accounting and general commercial accounting shows that there is only a thin line between the two accounting systems, mainly in the area of accounting methods and management principles.
Thirdly, accounting as an information system is very dynamic and its transformation, storage, retrieval and reporting very much depends on new and emerging technologies and information systems. These new computerized systems are developed to apply to both general commercial accounting organizations and public service organizations with virtually very little or no modifications.
For example, several ledger systems, payroll systems, and pension administration vary little. Fourthly, governments throughout the world have quasi-commercial or sometimes purely commercial, state-owned enterprises.
Accountancy training must, therefore, be comprehensive enough so that a professional accountant can apply his knowledge and skills in a wide range of organizations whether commercial, quasicommercial or a governmental unit.
Brief History
Public sector accounting has a long history in Ghana. The first legislative reference to government accounts seems to have been made in 1954, in the Gold Coast (Constitution) Order in Council of that year.
But the reference is an oblique one, contained in Section 68, which provides for the “accounts of all departments and offices of government” to be audited by the Auditor-General.
This simply assumed that accounts existed and no obligation was imposed on anyone for keeping and rendering accounts; in fact, accounts of government had been kept and published under the authority of Colonial Regulations since the establishment of the Gold Coast Government in 1874. All constitutional legislation since 1954 has similarly repeated this oblique form of reference to the accounts of the government.
However, it was not until 1957, when the country attained its independence that the first comprehensive attempt was made to give legislative recognition to the accounts of the government.
This was the Public Accounts Ordinance, 1957 (no.37 of 1957). This was an enactment enabling rules relating to public accounts to be made; the Public Accounts (Audit) Rules were issued in the same year. They chiefly related to the audit of accounts but contained a section specifying the accounts and statements to be presented for audit by the Accountant-General.
The 1957 Ordinance was replaced for the making of rules. Three sets of rules were issued – Public Accounts (Railway and Harbours Administration) Rules, 1959, Public Accounts (Treasury) Rules, 1959, and Public Accounts (Audit) Rules, 1959.
The Treasury Rules did provide for keeping and rendering accounts, and for several rules relating to how they should be prepared, e.g., specifying the financial year, and that the statements presented to Parliament “shall include only sums which have been paid or received within the period of account”.
The Financial Administration Decree 1967 (NLCD 165) includes a Part VI- Public Accounts (Consolidated Fund), containing two paragraphs, “Keeping public accounts” and “The Public Accounts”.
These paragraphs, drawn partly from the Treasury Rules of 1959 Act, 1959 (Act 3) were eventually repealed by the Audit Service Decree, 1972 (NRCD 49), although some rules are still extant (e.g., the duration of the government’s financial year) had not been replaced.
NATURE OF THE PUBLIC SECTOR ACCOUNTING SYSTEM IN GHANA
The scope of activities of government has expanded tremendously since the country gained its independence initially from maintenance of law and order to a corpus of welfare schemes and social development activities.
At the same time over the years, the government has involved itself in creating jobs and providing goods and services for the citizenry by embarking on large scale public ownership of industrial and agricultural development and commercial enterprises.
The dynamic nature of governments and their programs in the country’s history has led to the restructuring, reforming, privatizing and re-organizing of the public sector. Hence the creation of diverse government organizations and administrations, the institution of new methods and management of operations that reflect the diversity of public sector accounting in Ghana.
The composition of the public sector in Ghana may be identified as follows:
- Central government, ministries, departments and agencies,
- Local government units – metropolitan, municipal and district assemblies, and,
- Quasi- government institutions—Public boards and corporations.
- Public educational institutions.
The essential features of these organizations may also be as follows:
Stewardship and control
- Accounting and accountability
- Planning and budgeting
- Audit (internal and external)
- Fund accounting dominated by the consolidated fund;
- Reporting.
- Public ownership of assets and liabilities, cash, accrual,
- Modified cash, modified accrual and commitment basis of accounting.
- Treasury system of accounting, and ° Financial flows.
The public sector accounting system involves recording, analyzing, classifying, summarizing, communicating and interpreting financial information both in aggregate and in detail.
These activities should reflect all government transactions which involve the receipt, custody, transfer and disbursement of government funds and property. The main reason for these practices is that public officials need to demonstrate the propriety of transactions and their conformity with established rules.
It is also to give evidence of accountability for the stewardship of government resources and to provide useful information for the good control and efficient management of government operations.
It is also necessary to recognize that public sector organizations tend to have an excessive emphasis on rules and procedures, a concern for details often dominated by budgeting and financial controls.
THE IMPORTANCE OF PUBLIC SECTOR ACCOUNTING
Whenever a state exists, and the government exercises coercive power by collecting taxes (revenue) and spending the money (disbursements) for the maintenance of law and order or a form of state activity some form of public sector accounting, whether primitive or rudimentary, would be practised. It can also be said that modern states cannot function effectively without public sector accounting. The reason is simple.
All government decisions, even in primitive societies where barter is practised, have to be ultimately broken down into financial terms. In recent years, however, a major effort has been made in several countries especially in the United States, Great Britain and Canada to bring modern techniques of management and financial analysis to bear on public sector accounting.
In the nineties, a major reform initiative called PUFMARP was launched to bring public sector accounting in Ghana in line with modem international financial reporting and management practices.
(ii) LEGALITY
The responsibility for the custody, safety and integrity of the Consolidated Fund, appropriation of government and public funds has by law, been placed in the hands of the Controller and Accountant General who is also the Chief Accounting Officer of government and the head of government treasury.
The treasury is very much concerned with the legality of transactions-be its expenditure or revenue. This requirement is essential because the consolidated fund which is the receptacle for all government revenue, and out which all expenditure are met was created by law.
Transactions therefore must conform to rules and regulations laid down in the FAA, Finance Ministry, and Treasury Circulars, etc. Non-conformity of transactions to the rules and regulations are labelled as “IRREGULAR”. Irregular transactions are claims or documents tainted with illegality which must be disallowed or queried.
(iii) MAGNITUDE OF THE BUDGET
A very large chunk of national income of Ghana flows through the national budget. Poverty reduction strategies, job creation policies, the security of the state, developments in infrastructure, education, health, energy, water, and others, are affected by decisions made in the budget.
Besides, in Ghana, the government is the largest employer. The contribution or limitation of public sector accounting reports is crucial in determining the effects of the budget on the general populace – financial inputs, budget outcomes, etc.
(iv) LINKAGE BETWEEN THE BUDGET AND ACCOUNTING
By our financial laws, budgeting and accounting are closely linked. Public sector accounting is principally concerned with revenue and expenditure control, through the treasury system. In the same vein, the national budget has an impact on the total spending of the economy, how public funds are to be raised, and decisions on the projected deficit or surplus. Other areas where the national budget and public sector accounting are closely linked are:
(1) Consistency in accounting and budget classifications;
(2) Synchronization between accounting and budget classifications and organizational structure (of cost centres); and
(3) Support of the budget justifications by information on performance, programs and activities, costs by cost centres (spending units).
(v) MACROECONOMIC MANAGEMENT
Apart from what may be described as policy mix or fusion between accounting and budgeting in Ghana, it has been recognized increasingly that the success or otherwise of macro-economic management of the national economy depends very importantly on treasury control of public expenditure by spending agencies.
This is because uncontrolled spending by the Central Government, Public Institutions, MDA’S and MMDA’S, and commitments could derail the policies for the macro-economic management of the country.
GOVERNMENT AND COMMERCIAL ACCOUNTING TYPE OF ORGANISATION
Public and private sector organizations have different purposes, different reasons for existence and make different contributions to society – and so they need different
objectives, different measures of success, and different arrangements for their management, accounting and control.
Public sector organizations generally lack the single criterion of profit to provide an overall measure of efficiency and effectiveness. Often, there is no need or justification for making a profit, and services are provided to meet some identified need, at an acceptable cost.
Any surplus or profit can often be used for improving services, rather than for payment to the owners, as is the case with commercial organizations.
In the private sector, the central aim is usually to earn profits for the owners of the enterprise and to improve the return on capital employed (the amount invested in the enterprise).
Most public sector organizations are less subject to the forces of the marketplace and less dependent on customers for financial support than private sector organizations. Competition usually provides a powerful incentive to use resources efficiently and provide what the market wants and will pay for.
Public sector bodies obtain finance predominantly from tax revenue, non-tax revenue loans and grants, rather than from income earned from the sale of goods or services. The one who pays for the service (the taxpayer) does not have much of a choice as to what the money is spent on.
Public sector bodies continue to exist due to political will, whereas private sector bodies survive due to financial success.
OBJECTIVES OF THE ACCOUNTING SYSTEM
Both government and commercial organizations are concerned with measuring financial returns and communicating financial information to serve the needs of their stakeholders.
The information produced is used to assess past performance and to help to plan for the future.
Commercial organizations are concerned with judging the performance of managers and then returns to the owners of the enterprise. Although some public sector bodies will have similar concerns, the majority will be more concerned with demonstrating stewardship; that is, that the funds that they have raised or been allocated have been efficiently used for the benefit of the country and its citizens.
Public bodies must reveal, justify and explain to the general public their policies and actions because such bodies provide services using public money. Accountability has traditionally been demonstrated through the regulation and control of expenditure and compliance with rules and regulations.
There is now a move towards measuring, evaluating and reporting performance and value for money. This is often difficult, as the benefits of providing a service (for example, free basic education) may not be easy to measure in financial terms.
COMPARISON BETWEEN PUBLIC SECTOR ACCOUNTING AND PRIVATE
SECTOR ACCOUNTING
The principal differences between the system of accounting used by central governments and that found in the private sector are as follows:
i) With a central government, the ‘fund’ system of accounting is in operation whereas in the private sector we find the ‘entity’ or ‘proprietorship’ approach. The distinguishing feature of ‘fund accounting’ lies In the fact that we find within one organization many independent accounting entities with a self-balancing set of accounts reflecting monies voted to the fund, receipts and expenditures.
(ii) The system of accounting utilized by a central government is based on cash payments and receipts. In the private sector, there are adjustments for debtors and creditors at year-end to bring the correct expenses or revenue into the accounts for the year. Due to how a central government raises its finance on an annual basis, any cash not paid out soon after the year-end is lost to the department concerned, and the creditor will haw to be paid out of the following year’s allocation.
ii In central government accounting, there is no comparison of expenses with revenue raised. Many services yield no, or very little income. Therefore, the matching concept is not applied in its conventional sense. Instead, expenditure is compared with the funds voted by Parliament and a summary statement, the Appropriation Account is drawn up at the end of the year.
- iv) In private sector accounting, the prime summary accounts for the year are the Profit and Loss Account and the Balance Sheet. Neither is found in the central government system. Instead, the main summary statement is the receipts and payments and statement of Assets and Liabilities.
- v) In central government accounting, capital assets are not recorded separately as part of the double-entry system, and neither is depreciation charged. Accordingly, expenditure on assets is charged wholly in the year of acquisition along with all other expenditure.
The contents of the financial statements produced by companies are dictated by legislation, the Companies7 Code. For other commercial organizations, the form of the financial statements is similar but adapted to meet investors’ requirements and management’s needs.
Both public and private sector organizations will produce financial statements comprising an Income Statement and Balance Sheet.
In financial statements prepared using the accrual basis, that is, those for the vast majority of the private sector and some public sector bodies, the income statement will be the Trading and Profit and Loss Account. An Income and Expenditure Account of Receipt and Payment Account are the income statement for those organizations using cash accounting.
The Balance Sheet for an organization using accrual accounting will include all its assets and liabilities.
On the other hand, the Balanced Sheet prepared using the cash basis will only record those assets and liabilities relating to cash transactions. There will be no fixed assets, provisions or debtors and creditors (except those relating to loans made or received).
Even though the characteristics of public sector organizations are often very different from private sector organizations, there are more common areas than is generally recognized.
All organizations follow the same basic principles of double-entry bookkeeping and need appropriate records of assets, liabilities, revenues and expenses. Many of the existing differences in accounting are in terminology, form and procedure rather than in substance.
All organizations have the same desire to control costs to be efficient and to make work
productive, and face similar challenges in meeting the needs.
All organizations have the same need to justify the use of resources when required to do so, to be socially responsible and to be subjected to performance tests as much as possible.
Both the public and private sectors need to perform well if society is to function properly.
Besides the above, financial information reporting will provide the government with the following advantages:
° Improvement of government organization, information, and management system;
° Development of new information systems to provide the president with needed performance and other data;
° Improvement of governmental budgeting and accounting and financial reporting; and
° Improvement of governmental budgeting and accounting methods and procedures.
SUMMARY OF DIFFERENCES BETWEEN COMMERCIAL AND PUBLIC
SECTOR ORGANISATIONS
| Differences | Commercial | Public Sector |
| Accounting
concept |
Accrual | cash, modified cash, commitment, accrual, modified accrual |
| Balance Sheet | Assets and liabilities | liquid Assets, Purchase of Fixed Assets are written off within the year. State-Owned and quasi – state-owned Enterprises however have fixed Assets. |
| Management | Board of Directors | Elected representatives, Board of Directors/ commissioners. |
| Purpose | Profit motive This is the measure of efficiency and effectiveness | Social motive
Services are provided to meet social needs. State-owned enterprises have a profit motive |
| Regulations Sources of | Company Laws, Partnership Laws etc. | Financial Administration
Act and Regulations |
| Financing | Sale of goods and services, Equity, Loans etc | Taxes and other funds, |
| Continued | Financial | The political will of the electorate |
| Existence | success | or the government. |
USERS OF PUBLIC SECTOR FINANCIAL INFORMATION |
|
| Users | Information Needs |
| Donor Community | whether organizational objectives are pursued, and plans and targets are attainable |
| Media | how government financial information impacts on all aspects of society |
| Economic | whether government financial information is |
| Planners | adequate and received timely for planning purposes? |
| Taxpayers | the consequences of Government spending, whether they will result in improvements in their living standards and/ or increase taxation or inflation? |
| Bankers andLenders to
GovernmentRegulator}7 bodies |
the financial position of government especially its ability to
pay loans and interest thereon and governments ability to borrow money. whether government spending meets legal requirements and whether financial controls are adhered to by spending agencies? |
| Governments | whether there is a deficit or surplus on current accounts |
| Economic | the quantum, and whether to borrow or mop up |
| long term Authorities | liquidity in the economy? |
| Budget Analysts, | the trends of current monthly accounts and |
| Managerial | historical costs to help predict the future financial |
| Accountants And Investors | and economic position of tine economy |
| Revenue and other | Monitor the financial position of government as a basis |
| Finance related | for structuring managerial and employees |
| Agencies of government | the rewards system, such as bonuses for staff |
THE OBJECTIVES OF ACCOUNTING AND FINANCIAL REPORTING
FOR THE PUBLIC SECTOR:
The objectives include;
1) to provide financial information useful for determining and predicting the flows, balances and requirements of short-term financial resources of the government;
2) to provide financial information useful for determining and predicting the economic condition of the government unit and changes therein;
| Controller and | Uses financial reports to develop and maintain a |
| Accountant- | management information system, capturing real |
| General | time, the past, present and emerging development and behaviour patterns of various government organizations |
| Auditor – General | whether government accounts have been properly kept and records properly reported on |
| The government | Require financial information to be used in salary |
| Trade Unions | negotiations. |
| Contractors and | Are there enough money to pay for government |
| Suppliers of goods | contracts? |
| Non – Governmental | Want to know key areas of the state that require |
| Organizations | social or economic intervention. |
| The World Bank, I.M.F, | Wants to know the financial and economic |
| Multilateral and Bilateral | performance of the country was to assist, |
| Agencies and Foreign | where to advise. They want to assess the |
| Governments | effectiveness of spending on HIPC and Poverty alleviation, the sustainability of fiscal Policies, net debt, net wealth, contingent claims against the government and obligations for government pensions. |
| Private Sector | whether government borrowing from the |
| Businesses | commercial banks would affect their business, and whether they can do business with the government? |
3) to provide financial information useful for monitoring performance under terms of legal, contractual and fiduciary requirements;
4) to provide information useful for planning and budgeting and for predicting the impact of the acquisition and allocation of resources on the achievement of operational objectives; and
5) to provide information useful for evaluating managerial and organizational performances.
6) determining the costs of program, functions and activities in a manner which facilitates analysis and valid comparison, with established criteria among periods and with other sector ministries;
- for evaluating the efficiency and economy of operations of organizational units, programs, activities and functions
- for evaluating the results of programs, activities and functions and their effectiveness in achieving their goals and objectives; and
- for evaluating the equity with which the burden of providing resources for government operations is imposed.
The primary objective of accounting and financial reporting in government is to provide useful information for assessing management performance and stewardship.
Assessing this involves determining what an entity has achieved and what it can achieve in future. In assessing past performance, information must provide indications on:
financial viability (the ability of the entity to provide the same level of resources) ° program activity (the degree of activity under various programs including costs of inputs and value of outputs);
fiscal compliance (whether financial and related laws and regulations were followed.
Another aim of financial statements of public sector bodies is to provide information on which constituents (taxpayers, ratepayers, lenders, donors, etc.) can base a decision to retain or replace decision-makers.
Decision-makers have a corresponding obligation of accountability to publish
financial statements to fulfil the requirements of accountability. They should provide evidence of:
(a) stewardship of financial resources;
(b) faithful compliance with legal requirements and administrative policies;
(c) economy and efficiency of operations; and
(ci) produce results of programs and activities.
By way of summary, the objectives of government financial reporting should achieve the
following:
Show whether financial resources are obtained and spent following the national budget;
Show whether the government overspent or underspent budgeted amounts and what changes necessitated those performances;
Show whether control over commitments and obligations are effective and whether any challenges that exist are due to cash outlays or revenue inflows;
Show whether financial flows may be determined or predicted;
0 Evaluate the performance of the economy and state institutions.
INFORMATION TO REPORT BY PUBLIC SECTOR ENTITY
As discussed earlier on, public sector entities have different reasons for their existence and produce different types of information both to the government that created them and to other users of their information.
Again the information they produce is by no means static. Indeed financial information produced by public sector entities has varied with time.
The information has been limited only to the needs of the user, whether it is an internal user or an external user. The language may also differ about whether it is for planning evaluation of performance, or it is a requisition for government or donor funding. In general, we may categorize the different types of information generated by public sector entities as:
Statutory Information Financing Reporting Planning Reporting ° Budgetary Information Control Information Fiscal Reporting
An MDA shall prepare monthly accounts in a form prescribed and at a period set by the CAG in the Accounting Manual and prepare, sign and submit within three months after the end of the year, to the Minister, the Auditor General and the CAGD annual departmental accounts in the form prescribed by the CAGD in consultation with the Auditor General.
The above example is a rule in the Financial Administration Regulations which compels MDA’S to produce monthly, quarterly and annual reports of their financial and other operations.
Indeed, the FAR and the laws establishing various spending agencies stipulate various mandatory reports which are expected to be produced by the spending agencies and communicated to the appropriate regulatory authorities regularly.
FUNDING REQUIREMENTS
Donor and other funding agencies demand financial reporting according to a format agreed upon. Often they require information on key accountability indicators, the impact of performance or activities on the community, guidance on appropriate courses of future actions, objectivity on the public interest of the programmes.
PLANNING REQUIREMENTS
Planning by spending agencies in Ghana is based on a medium-term expenditure framework (MTEF) which operates on a cash basis normally for three years.
All spending agencies are expected to prepare their budgets on this planning model and report on the progress of their planning, programming and budgeting schemes. The use of budgetary reserve and increases in cash limits will require the approval of Parliament, normally through a supplementary estimate.
The exceptions are where the expenditure is contingent on but not covered by an estimate, such as allocations for much of local authority capital expenditure in waste management. Pending this approval, the Government can use a contingencies fund for urgent expenditure, subject to certain restrictions.
Penalties for exceeding limits are largely moral, though there are financial penalties too. If supply estimates are exceeded, there will be an excess vote, and, depending on the reasons, recriminations from the Public Accounts Committee. In the (rare) cases where a cash limit is exceeded, there will be an investigation into the reasons, and the amount set aside for the next year will usually be reduced.
BUDGETARY INFORMATION
Budgetary information relate to the utilization of budgets as instruments of national economic management, communicating the resource constraints to spending departments, reducing gaps between planned and actual expenditures and achieving better control of public expenditures.
The budget circular, for instance, whilst is mentioned in existing law explains policy objectives of the government, areas to be controlled, methods of control and checks and balances in the system as they relate to financial management.
CONTROL INFORMATION
Central control and monitoring of expenditure during a year are done by the treasury, which provides regular reports on what has been spent and the estimated outturn for the year.
Departments draw up a quarterly profile of expected expenditure, which is agreed with the Treasury. Much information for monitoring comes each month from the (analysis of expenditure)- records of receipts and payments to the Consolidated Fund maintained by the treasury.
Further information on half-yearly estimated expenditure is given by departments, each of which has an internal monitoring system, together with any revisions to budgets believed to be necessary.
These figures are used to give estimated outturn figures in the main published documents on expenditure.
Control is also exercised through cash limits that provide a system of government control of expenditure during a financial year; that is, where policy has already determined entitlement to payments.
Flexibility to meet unexpected events is nevertheless available during the year. First, for public expenditure as a whole, there is the reserve, which is an amount set aside at the beginning of the year to cover unforeseen items of expenditure and those items that cannot be properly quantified when estimates are published.
This applies even to those elements that are cash limited, where there is some flexibility.
Cash limits can be revised during the year, and not infrequently are, though like all revisions, they will have to be approved by the Treasury.
FISCAL REPORTING
Fiscal reporting can be divided into three categories describing their major purposes-
Some ensure accountability. They include Departmental Reports, and Financial Statement and Budget Report. The budget circular usually comes out in August giving a summary of economic prospects for the coming financial year, an outline of public expenditure for the subsequent three years, and other information.
The second set of information documents are departmental reports, giving full details about expenditure for each department in the context of policy objectives.
The final information document is the budget statement which is published at the time of the budget, normally in January. It gives the macroeconomic background to the budget as well as details of budget tax measures.
PUBLIC SECTOR ASSETS
The concept of an asset in public sector accounting is varied.
They include:
- consolidated fund Balance Sheet items in line with General Accounting Practice;
- Local Government Balance sheet asset items in line with standard Accounting Practice;
- Ministries, Department and Agencies Balance Sheet Reporting format;
- International Monetary fund (IMF) categorization of public sector Asset.
CENTRAL GOVERNMENT
CONSOLIDATED FUND BALANCE SHEET ASSET ITEMS IN LINE WITH GENERAL ACCOUNTING PRACTICE
| IDENTIFICATION | DESCRIPTION |
| Cash/Banks | Treasury Collection – BOG
Treasury Collection – Commercial Banks Internally Generated Fund – (IGF) |
| Advances | Staff Vehicle Advance
Staff Special Advance Staff Salary Advance Dept. Revolving Fund Dept. Fuel Revolving Fund Dept. Value Books Revolving Fund |