Public sector accounting is the process governments use to record their financial transactions, such as issuing bonds to pay for a public stadium.
Public sector accounting is the process used by government agencies and municipalities to record financial transactions. While similar in theory to private accounting, the public sector accounting approach is slightly different. Most government agencies and municipalities need to track funds generated from tax revenues and expenses related to projects or endowments. In addition, nations may be required to follow a defined standard of accounting principles other than private accounting rules. The creation of an international accounting standard helps nations follow similar rules to present information in a similar way.
Government accounting often uses a fund pool that tracks financial information. Instead of trying to determine how much money a public sector entity has earned, the entity should report financial information to interested parties, particularly voters. Separating the money in these funds makes it difficult for a government agency or municipality to spend money for unauthorized purposes. Elected officials or legislatures must create appropriations or spending authorizations to transfer funds between government fund accounts. This process attempts to restrict the spending of money freely, which will quickly deplete an agency’s resources.
Similar to private sector accounting, public sector accounting principles often seek to establish a framework for accounting practices. Instead of creating a rigid set of rules to follow, the principles allow the application of basic principles to large and small entities or municipalities. An international set of accounting principles is also needed for smaller nations to learn and adopt rules that will improve their internal national accounting process. Developing nations often cannot or do not have the resources to create and instill a framework for their accounting practices in the public sector. Adopting an international set of accounting standards will help them overcome this problem and generally help them get on the path of better infrastructure developments.
Another objective of public sector accounting is to create a standard expectation of ethics and responsibility for a nation’s financial reporting. Countries often lend to each other and trade goods through the private sector. The inability to determine the viability of a nation’s infrastructure and governance through its accounting practices can result in reduced cross-border transactions. Standard public accounting principles will also make it easier for a nation to submit to an audit. Audits help a nation prove its creditworthiness in terms of issuing bonds or the ability to repay loans previously made by other countries. It is also more difficult for countries to conceal improper financial transactions when using public sector accounting principles.