PUBLIC SECTOR ACCOUNTING

BACT 402

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 LESSON 2
INTRODUCTION TO
PUBLIC SECTOR
ACCOUNTING
just for you!
“Throw your heart over
the bar and your body will
follow”
 Lesson Objectives
• The objectives are
– To define and explain public sector accounting
– To examine the objectives of public sector accounting
system.
– To compare public sector accounting with private sector
accounting.
– To evaluate the users of public sector general purpose
financial reports
– To evaluate the qualitative characteristics of general
purpose financial reports in public sector

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 What is Public Sector
• Public sector accounting describes the accounting principles
and practices employed by public sector entities.
• It entails the ways by which public entities accounts for the
financial resources employed in the delivery of public goods
and services.
• Technically, public sector accounting may be defined as
– the process of recording, analyzing, classifying,
summarizing, communicating and interpreting financial
information about government in aggregate and in detail,
reflecting all transactions involving the receipt, transfers,
disposition of government funds and property

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 Objectives of PSA
• To fulfill legal requirements to prepare public accounts.
• To demonstrate accountability and stewardship for
public resources.
• To provide of information for making economic, social
and political decisions .
• To support planning and control through budgeting
and budgetary control.
• For evaluating managerial and organizational
performance.
• Monitoring performance

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 Branches of PSA
• Just like business accounting, PSA has many branches:
– Financial accounting and reporting which deals of
compilation of public accounts
– Auditing – internal and external audit of accounts
– Cost and management accounting concentrating on
cost determination, budgeting and budgetary control
– Finance dealing with sources of funds and funds
management
– Public procurement dealing with procurement of
government goods, services and works

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 Differences Between Public Sector accounting and Private Sector
Accounting
• Bases of Accounting
– Multiplicity of bases is permitted. Cash basis, modified cash basis,
accrual basis and modified accrual basis are used by different funds and
entities.
– Accrual basis is the only accepted basis of accounting and has been time
tested.
• Reporting unit
– Fund concept is used where financial reports are prepared on funds
instead of ownership or proprietary concept.
– Proprietary concept is mostly employed where ownership theory is
practiced.
• Base-Line result
– Operational financial result is measured in terms of surplus or deficit
usually through the preparation of receipt and payment statement.
– Operational performance is measure in terms of profit or loss through
the preparation of income statement (profit and loss accounts).
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• Depreciation concept
– Due to the wide spread use of cash basis of reporting,
depreciation is usually ignored.
– Depreciation is well accepted notion in financial reporting due to
the strict adherence to accrual and matching principles
• Accounting Standards
– Accounting standard is a new development in the public sector.
IPSAS is the standard for the public sector.
– The use of accounting standards in the business sector dates
back to 1970s. IFRS is the business standard.
• Applicable laws
– In the public sector, PFM Act and PFMR are key financial laws
– Private is not bound by these laws. Companies Act applies
instead.

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 Users of Public sector accounting information
• Users are placed into two groups by IPSASB:
– Primary users
• Resource providers to government
• Service recipient from Government
– Other uses
• Primary users
– Parliament
– Public/citizens (taxpayers and voters)
– Investors in government securities
– Creditors ( world bank, IMF, etc)
– Donors and sponsors

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 Users
• Other users include
– Rating agencies
– Regulators
– Pressure groups
– Auditors
– Management
– Trade unions
– Financial analyst
– Government statistician
– Others like researchers, press etc

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 Qualitative characteristics of PSAI
• Useful financial information should possess these qualities per
IPSAS:
– Relevance
– Timeliness
– Faithful representation
– Understandability
– Comparability
– Verifiability
• Question
– How can you improve the usefulness of public sector accounting
information?

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 1. Relevance
• information is relevant if it is capable of making a difference in
achieving the objectives of financial reporting.
• Financial and non-financial information is capable of making a
difference when it has confirmatory value, predictive value, or
both

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 Faith Representation (reliability)

• Information must be a faithful representation of the economic

and other phenomena that it purports to represent.

• Faithful representation is attained when the depiction of the

phenomenon is complete, neutral, and free from material
error.

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 3. Understadability
• Understadability is the quality of information that enables
users to comprehend its meaning.
• GPFRs of public sector entities should present information in
a manner that responds to the needs and knowledge base of
users, and to the nature of the information presented.
• Users of GPFRs are assumed to have a reasonable knowledge
of the entity’s activities and the environment in which it
operates, to be able and prepared to read GPFRs, and to
review and analyse the information presented with
reasonable diligence.

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 4. Timeliness

• Timeliness
– Timeliness means having information available for users
before it loses its capacity to be useful for accountability and
decision-making purposes

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 5. Comparability
• Comparability is the quality of information that enables
users to identify similarities in, and differences between,
two sets of phenomena.
• Uniformity and consistency are key elements of
comparability.
• Comparability is enhance by providing information about
the budget, previous year or other entities.

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 6. Verifiability
• Verifiability is the quality of information that helps assure
users that information in GPFRs faithfully represents the
economic and other phenomena that it purports to
represent.
• Verifiability means supportability of information.
• The characteristic implies that different knowledgeable and
independent observers could reach general consensus,
although not necessarily complete agreement, about the
faithfulness in representation and accuracy in recognition.

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A man entered the shop of Shine Your Eyes and
bought items worth GHc200 and paid with
GHc1000 note. SYE ran to the next shop for a
change and balanced the man with GHc800 and
the man disappeared.
Few minute later the shop owner where SYE had
the change came demanding his money back
since the GHc1000 was fake money. SYE
complied in pity.
Required Calculate the Loss of SYE.
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 Accounting Concepts
• Accounting concept refers to the broad assumptions or postulates
that underpin the preparation and presentation of financial
statements.
• Most of the accounting concepts and conventions known in business
accounting are also applicable to PSA, and they include:
• Economic entity concept
• Going concern concept
• Materiality concept
• Consistency concepts
• Historical cost concepts
• Periodicity/reporting period
• Money measurement
• Prudence
• Duality
• objectivity
• Off setting.

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 PSA concepts (cont)
• Going concern
– It is a concept the required that financial statements
should be prepared on the assumption that the entity will
continue to be in operational existence into foreseeable
future.
– Assessment of going concern is PSA is more relevant for
individual government entities than government as a
whole.
– Unlike business accounting, assessment of going concern
of PSE is not predicated on solvency or profitability.
– Going concern of PSEs is based on other indicators.

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 PSA Concepts (cont)
• Indicators of going concern of PSEs include:
– Current and expected performance
– Potential and announced restructuring of entities
– Estimated of revenue or the likelihood of
continued government funding
– Potential sources of replacement financing

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 BASES OF ACCOUNTING
• Basis of accounting refers to the body of accounting
principles that determines when the effects of a
financial transaction or event should be recognized for
financial reporting purposes.
• It is a set of rules that determine when revenues and
expenditures are recognised in the books of accounts
• Unlike BA, many different basis of accounting is
accepted in PSA:
– Cash basis
– Modified cash basis
– Accrual basis
– Modified accrual basis
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 PSA Bases of accounting (cont)

• Cash basis
– It is most common basis in the PS.
– It a basis in which transactions or events are recognized
only when cash is received or paid.
– Under cash basis, no consideration is made of the nature
of the transaction (whether recurrent or capital item)
– Cash based financial reports show the receipt of the
period, payments made from it and the available balance.
– Therefore the main report prepared is the Statement of
Receipt and payments.
– Balance is not required since detail information on assets
and liability will not be available.
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 Cash basis
• Advantages
– Easy to design and operate
– Less costly to operate
– Resulting financial statement is simple to understand
by users
– It ensures fiscal stewardship and control
– It is objective
• Disadvantages
– Poor measure of performance
– Hides information on liabilities
– Fails to disclose information on capital assets
– Its susceptible to manipulation
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 Modified cash basis
• Its same as the cash basis except for an improvement
on cash basis.
• Improvement on cash basis comes in two forms
– The reporting period is held open for a specified
period so that any transaction that occurred in the
prior financial year but the receipt or payment is
effected within the specified period is included in
the financial statement of the prior year.
– Additional disclosure is made of loans,
investments, deposits, debts notes payables,
assets etc.

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 Accrual Basis
• It is also known as resource accounting. IPSAS is accrual
based.
• Under accrual basis, transactions are recognized when
they occur (and not only when cash is received or paid).
• It recognised all elements of financial statement: Assets,
Liabilities, Expenses, Revenues and fund balances.
• Comprehensive financial reports are prepared:
– Revenue and expenditure statement
– Statement of Financial position
– Cash flow statement
– Statement of changes in equity
– Notes to accounts

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 Accrual basis

• Advantages
– It is a superior measure of performance
– It provides full info on assets and liabilities
– Cash flow info is separately provided
– Provides better data for planning and control
– It is realistic
• Disadvantage
– It difficulty in identifying and valuing public assets
– Complex financial statements
– High adoption and operation cost
– It encourages subjectivity or judgment

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 Modified accrual basis
• It is a mixed system developed for state and local
governments that finds is difficult to fully adopt the
accrual rules.
• It’s a combination of the features of cash basis and
accrual basis
• Modified accrual focuses on financial resources
instead of only cash or all resources.
• Revenues are recognized in the period when they
are susceptible to accrual- when they measured
and available.

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 Modified Accrual basis
• Revenue item is recognized on either cash basis or
accrual basis.
• However, expenditures are on accrual basis except
that
– NCAs, including inventory (non-financial assets)
are expended in the year of payment
– No depreciation is charged
• All financial assets are shown on the balance-
bank, receivables, advances, loans, investments
etc.
• All liabilities are disclosed on the balance sheet
except commitments and contingent liabilities.
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 Techniques/methods of accounting
• Main techniques used are
– Commitment accounting
– Budgetary accounting
– Fund accounting
• Commitment accounting recognizes
expenditures when a expenditure decision is
made, eg placing an order, or signing a
contract for services.
• It is also known as encumbrance accounting.
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 Commitment Accounting
• Commitment accounting recognizes expenditures when a
expenditure decision is made, e.g placing an order, or signing a
contract for services.
• It is also known as encumbrance accounting.
• Commitment is an essential element of public spending process in
that all expenditure must be committed prior to spending
• The primary benefit of commitment accounting is that it eliminates
spending outside the budget and overspending the budget.
• Failure to commit expenditure prior to spending is an offense under
the PFMA.
• Commitment accounting process is integrated into the GIFMIS.
• Vote books/ledgers are usually used to account for commitment of
appropriations.

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 Vote service ledger/Vote ledger
• It keeps records on the departments commitments,
expenditures and unexpended appropriation.
• Its purpose is to help the vote controller operate within
the appropriation of his department.
• It also makes it easy to track commitments of the
department.

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 Vote Ledger (sample)
Date Ref. Encumbrance Expenditure Appropriation

Dr. Cr. Open Dr. Cr. Cr. Bal

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 Illustration
• The warrant for a department for Item 2 for the first
quarter of 2015 was GHC120,000
• 3rd Jan, Purchase order was issued for Stationery costing
GHC20,000
• 6th Jan, service order was made for the repairs of air
conditioners at GHC 8,000
• 15th Jan, Cleaning contract was made with chief cleaners
ltd for GHC 3,000
• 20th Jan, 80% of the stationery was delivered at invoice of
GHC17,000
• 30th Jan, aircon was repaired at invoice of GHC7,500.
• 31st Jan, cleaning bill was same as agreed.
– Prepare the vote service ledger to account for the transactions
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 Budgetary accounting
• it a technique of integrating the budgeted amounts into
the double entry system of book keeping.
• Its purpose is to strengthen budgetary control through
generation of regular budget variance report.
• IPSAS 24 provides for disclosing budget information in
the general purpose financial reports.

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 Fund accounting
• Fund accounting is a technique where funds
are accounted for separately as a fiscal
accounting entity.
• A fund is defined as a fiscal and accounting
entity with self balancing set of accounts
recording cash and other financial resources,
together with all related liabilities and residual
balances, which are segregated for the
purposes of carrying on specific activities or
objective in accordance with certain
regulations restrictions and limitations.
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 Trial Questions
1. Outline three (3) factors you will consider in
assessing the going concern of a public sector entity.
2. Explain the four (4) bases of accounting used in the
public sector.
3. What is commitment accounting? Explain the
advantages and disadvantages of it.

4. You are required to choose between the use of cash

basis and accrual basis of accounting for your entity,
state three (3) considerations in making the
decision.
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 Trial Questions
1. What is public sector accounting? Explain the processes
involved in public sector accounting.
2. Every government need good accounting system. Explain
five(5) objectives of Public sector accounting system.
3. Identify five (5) primary users of Public sector financial report
and their information need.
4. State and explain the six (6) qualitative characteristics of
general purpose financial report in the public sector.

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