PUBLIC SECTOR ACCOUNTING (PSA 712 S) LECTURE NOTES – VACATION SCHOOL 2018 INTRODUCTION TO PUBLIC SECTOR ACCOUNTING LEARNING OBJECTIVES • After studying this chapter, readers will be able to: • Understand the objective of public sector accounting • Identifying the various users of Public sector accounting information • Have good grasp of constitutional and regulatory framework as well as the concepts, principles and bases of public sector accounting
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING • What is public sector? • The simplest definition of public sector is all organizations which are not privately owned and operated, but established, run and financed by the government on behalf of the public. • The definition conveys the idea that public sector consists of organizations where control lies in the hands of public, as opposed to private owners. • The objective of public sector is to provide services to the public. • Profit making is not primary to this sector
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING • Definitions: • Accounting: -This refers to a systematic recording and analysis of financial transactions of a business, or public sector. • it is a generally a scientific study in which records of expenditure and income of a company, individuals or government are kept coupled with other useful information for planning, decision making and control. • Finance : A branch of economics which is concerned with resource allocation as well as resource management, acquisition and investment.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING Definition of Public Sector Accounting: • Government finance (or, Public Sector Finance as it is commonly known, deals with the allocation of resources in accordance with the budget constraint of a public sector organization, especially government. • It is a composite activities of analysing, summarizing, recording and interpreting the financial transactions of the Government Ministries, Departments and Spending Agencies.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING • R. A. Adams (2004) in his book “ Public Sector Accounting and Finance made simple” defines Public sector accounting as a “ process of recording, communicating, summarizing, analysing and interpreting government financial statements and statistics in aggregate and details; it is concerned with receipts, custody and disbursement and rendering of stewardship of public funds entrusted.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING OBJECTIVES OF PUBLIC SECTOR ACCOUNTING The main purposes of public sector accounting are: • Ascertaining the legitimacy of transactions and their compliance with established norms, regulations and statutes. public sector disbursement should accord with the provisions, appropriate acts and financial regulations. There should be due authorizations for all payments so as to avoid an act of fund misappropriation. • providing evidence of stewardship: The act rendering stewardship is being able to account transparently and diligently for the resources entrusted. Government and public sector operators are obliged to display due diligence and sense of probity in the collection and disposal of public funds.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING • Assisting planning and control: The future faces a lot risks and uncertainties. Therefore, mapping out plans prevents an organization from drifting since plans of actions provides the focus of activities which are being pursued. The unforeseen circumstance is built into plans so as to avoid or prevent organization failure. The public sector establishments should act accordance with the mandate of the government. • Ensuring objective and timely reporting: Users of public sector accounting information are anxious to bridge their knowledge gaps on what government is doing. they definitely treasure prompt and accurate statistics to evaluate government performance.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING CONTD’ • Evaluating costs incurred and benefits derived: In Public sector, it is difficult to measure the costs and benefits in financial terms in all aspects. The analysis of cost- benefit assesses the economic and social advantages (benefits) and disadvantages (costs) of alternative courses of actions, to ensure that comfort of the citizens is well catered for.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING CONTD’ Other objectives are: • Providing basis for decision making • highlighting various sources of revenues receivable and expenditure to be incurred • identifying the source of funds for capital projects • evaluating the economy, efficiency and effectiveness with which the public sector institutions pursue their goals and objectives • ensuring that costs are matched by at least equivalent benefits accruing therefrom. • providing details of outstanding long term commitments and financial obligations. • providing means by which actual performance may be compared with the target set. • Eliminating corruption • Modernisation of the financial management system of the public sector entities;
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING CONTD’ USERS OF PUBLIC SECTOR ACCOUNTING INFORMATON: • The users of public sector accounting information can be categorized into two namely; internal and external users ’ • (i) Internal users: this consists of the people such as the president of the country, Ministers, secretary to the treasury, accountant general, auditor general, chief executive officers of parastatals such as NAMWATER, Namport, NAMFISA etc. and heads of government departments
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING CONTD’ • (ii) External users: This group comprises of : the National Assembly, members of the public, foreign countries, international financial institutions such as international Monetary Fund(IMF) , Africa Development Bank (ADB), World Bank; creditors both locally and internationally, political parties, Trade Unions and Researchers. International rating agencies such Fitch, Morgan etc.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING CONTD THE IMPORTANCE OF PUBLIC SECTOR ACCOUNTING TO THE USERS. • The internal users require the accounting information in order to ascertain the various levels of regulatory compliance and whether the actual expenditure is in accordance with the budget. • Further they would like to ascertain whether or not adequate safeguards are available for the protection of public resources • Conversely , the external users would need the information to ascertain the financial viability of a public sector organizations and the efficiency and effective management.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING CONTD’ CONSTITUTIONAL AND REGULATORY FRAMEWORK OF PUBLIC SECTOR ACCOUTING The public sector accounting is regulated by the following: • (i) The Constitution of a country. The constitution of the country is one of the legal frameworks that regulate the receipt and disbursement of public funds. • Auditor general’ s office. The office of the auditor general is mandated by the constitution to audit all government ministries and spending agencies. This is to ensure that accountability of government resources is done. The auditor general’s report is submitted to the president and thereafter to parliament. • Accountant general’s office, an office mandated to prepare government financial statements.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING • State Finance Act. The State Finance Act of various countries provide guidance on management and operation of government funds. The act would regulate on the accounting system, books of accounts to be kept and the procedures to be followed in preparation of government financial statements. • Financial Regulations: These are manuals of government Ministries/ government departments which deals with financial and accounting matters. The regulations set out the procedures and steps to be followed in treating most of government transactions
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING C DUTIES OF AN ACCOUNTING OFFICER • The functions of an Accounting Officer include the following • To establish and manage an effective, efficiently run and result-oriented Internal Control Department in his Ministry. • To ensure that proper books of accounts and system as specified by the Minister of Finance are kept. • To ensure that all revenue accruable to his Ministry are collected and accounted for as and when due. • To ensure that there is provision for effective security system over all government funds. • To install adequate preventive measures against frauds and misappropriation of funds. • To ensure that only trustworthy, dedicated and reputable officers are entrusted with government funds. • To ensure that all payments are backed up with proper authority and that only services and goods provided are paid for. • To make available all the cash, stamps, bank statements etc. in his custody when such is requested for by the Accountant-General of, or Auditor-General for, the Government. • To ensure that financial statements statutorily required are prepared without delay.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING C CONCEPTS AND PRINCIPLES APPLICABLE TO PUBLIC SECTOR ACCOUNTING • concepts have been defined as broad basic assumptions which underlie the preparation of financial statement of an enterprise. Public sector accounting is an integral but separate branch of financial accounting sharing in common many concepts and principles applicable in the private sector. these concepts include: Consistency, Materiality , Periodicity, Duality, Historical, prudency, Going concern etc.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING BASES OF PUBLIC SECTOR ACCOUNTING There are three bases on which financial statements of Public Sector Institutions are compiled. These are: • The Cash Basis • The Accrual Basis • The Commitment Basis • (i) The Cash Basis: This is a basis of accounting under which revenue is recorded only when cash is received, and expenditure recognized only when cash is paid, irrespective of the fact that the transaction might have occurred in the previous accounting period
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING Advantages of Cash Basis: • It is simple to understand • Its eliminates the existence of debtors and creditors • It permits easy identification of those who authorize payments and collect revenue • It allows for comparison between the amount provided in the budget and that actually spent. • It saves time and easy to operate • It permits the delegation of work in certain circumstances • The cost of fixed assets is written off in the year of purchase resulting into fewer accounting entries
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING Disadvantages of Cash Basis • It takes unrealistic view of financial transactions as only the settlement of liabilities recognized. • It does not provide for depreciation since assets are written off in the year of purchase • It does not convey an accurate picture of financial affairs at the end of year. • It can not be used for economic decisions since it tends to hide basic information e. g. missing information relating to fixed assets, debtors and creditors • Its does accord with ‘matching concept’ *Modified Cash Basis: under this basis books of accounts are left open for a maximum of three months after the end of year, so as to capture substantial amount of income or expenses relating to the year just ended
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING (ii) Accrual Basis • Under this method, revenue is recognized when earned and expenditure acknowledged as liabilities when known or benefits received, notwithstanding the fact that the receipts or payments of cash has taken place wholly or partially in other accounting periods. • It based on the principle of matching income and expenditure to the time a transaction occurs rather than when payments are made or received. This means that an expense is recorded at the point goods or services are received by an organisation rather than thirty days later when the invoice for goods is paid. Similarly, income is recorded at the point the sale is made • The accrual basis is practiced in private sector and all parastatals. • The reason private sector uses this method is because private concern are for profit oriented • Therefore, it is necessary to estimate the profit made in each period with the view to keeping investment assets intact and making periodic distributions to shareholders by way of dividends.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING Advantages of Accrual Basis: • It takes a realistic view of financial transactions • It gives an accurate picture of the state of financial affairs at the end of the accounting period • It aligns itself with matching concept • It can be used for both economic and investment decisionmaking as all parameters for performance appraisal are available. • It gives allowance for depreciation of assets used in generation revenue for the enterprise
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING • Disadvantages of Accrual Basis • It is difficult to understand , especially by non accountants. • It does not permit easy delegation of work in certain circumstances
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING (iii) Commitment Basis • It is a basis that records anticipated expenditure evidenced by contract or purchase order. • In public sector financing, budgetary and accounting systems are closely related to commitment basis Advantages of Commitment Basis • It is an aid to financial control since it is regarded as a charge made on budget provision. • It can give a separate payment tabulation when it is required/requested
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING Advantages of commitment basis contd’ • It takes a realistic view of financial transactions • It reveals an accurate picture of state of financial affairs at the end of accounting period. • It aligns itself with matching concept • It can be used for both economic and investment decisionmaking as all parameters for performance appraisal are available. • It gives allowance for depreciation of assets used in generation revenue for the enterprise
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING Disadvantages of Commitment Basis • The system involves extra work. Actual figures have to be substituted for commitment provisions to finally determine the running balances under sub-head of expenditure • Over expenditure is more under commitment basis in the expectation that the government may finally release funds to settle the obligations • At the end of the financial year, all commitments that are subject of unfulfilled orders have to be written back to reflect the exact picture of transactions which took place during the year.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING COMPARISON BETWEEN GOVERNMENT ACCOUNTING AND PRIVATE SECTOR ACCOUNTING • The main objective of commercial enterprise is to maximize profit while that of government is to provide adequate welfare to people at reasonable costs. • Government revenue is derived from the public in terms of taxation, fines, grants, fees, etc, where as business concerns obtain their income from sale of goods and services • In government financial transactions are recorded on ‘Cash basis’ while in private sector it is on accrual basis. • In Public sector accounting, tangible fixed assets such as land building, plant and machinery are not shown in the balance sheet where as, in private sector accounting they are reflected, showing Historical Cost, Accumulated Depreciation and Net Book Value (NBV) of each
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING COMPARISON BETWEEN GOVERNMENT ACCOUNTING AND PRIVATE SECTOR ACCOUNTING • In public sector accounting, current assets such as stocks and debtors are not shown on the balance sheet where as in private sector accounting system both current assets and liabilities are shown. • In government there is no Annual General Meeting (AGM) of stakeholders/shareholders, unlike the private sector which has the AGM. In government what happens is just holding public briefing on specific issues. • In Public sector what operates mostly is the fund accounting, where as in private sector the proprietary approach is adopted.
INTRODUCTION TO PUBLIC SECTOR ACCOUNTING BASIS OF ACCOUNTING (ACCRUAL AND CASH) • Accruals in Payroll (Leave pay provision) – pg. 46, 47 (study guide) • Why use the accrual basis for financial reporting – pg. 47 (study guide) • Problems with cash accounting – pg. 49 (study guide)
SOURCES OF GOVERNMENT REVENUE • Tax Revenue – taxes on income and profits (Company tax, PAYE), Property taxes, VAT) • Non-tax revenue – admin fees & charges , fines, licenses, mineral rights, capital revenue (sale of government assets) • Direct revenue (State Fund) – PAYE, income tax, VAT, mineral rights, • Indirect revenue (Consolidated Revenue Fund) – fees, licenses, sale of assets, interest received, refunds/reimbursements, rental income on properties.
BUDGET AND BUDGETARY CONTROL • A budget is a financial and/or quantitative statement prepared and approved prior to a defined period of time for the purpose of attaining a given objective. A budget is normally for a year. It is therefore a short-term plan. One of the primary objectives of budget is to measure the profit earnings of an organisation. However, in the case of Government, which is non-profit making, budgets are used: • (a) As a guide for the present and future. • (b) To plan, control and estimate the amount to be received and spent during a specified period. • (c) To distribute limited resources. • (d) To motivate managers towards the achievement of corporate goals. • (e) As a means of evaluating performance. • (f) To inform managers about the results and operations of their responsibility domains. • (g) As a standard of measurement for the purpose of controlling ongoing economic endeavours.
BUDGET AND BUDGETARY CONTROL • The Purposes of a Budget • A budget is an economic and financial document. It highlights Governments policies which are designed to promote economic growth, full employment and enhance the quality of life of the citizenry. • (b) It is a useful guide for the allocation of available resources. • (c) Through the Legislature, the Executive arm uses the budget as a means of accountability for the money earlier entrusted and the appropriations newly approved. • (d) The budget stands for the request of the Executive arm of Government for the Legislature to collect and disburse funds.
BUDGET AND BUDGETARY CONTROL Line-item budgeting A line-item budget is prepared along departments or programmatic lines and focuses on what is to be purchased with the funds. It provides a separate lineitem appropriation for each major category of expenditure in an agency or organisation. Advantages of Line-Item Budgeting Method (a) It is simple to understand operate. (b) It suits the country's level of development, where there is paucity of data. (c) It is cheaper to produce. (d) It encourages the continuity of projects. (e) The method ensures that budget is translated in monetary language and relates to the relevant activity operations. (f) Allocations into Heads and Sub-heads facilitate the monitoring of performance.
BUDGET AND BUDGETARY CONTROL Disadvantages of Line-Item Budgeting Method (a) The method allows past errors to be carried forward. It is therefore not efficient in its operations. (b) Detailed scrutiny is not contained in the budget. The budget preparation is consequently not well researched. (c) It fails to clarify the cost of alternative methods of achieving programmed objectives. (d) It results in continual growth budget totals related to inflation, as opposed to serious economic needs. (e) It fails to fund new programmes of high priority on &sufficiently reasonable scale. (f) The method does not clearly spell out the relationship between capital and recurrent expenditure.
BUDGET AND BUDGETARY CONTROL Zero-Based Budgeting Method The technique requires every item of expenditure to be justified as if the particular activity or programme is taking off for the first time. It is the preparation of operating budgets from a 'zero-base' of expenditure cost. Under the technique, resources are not necessarily allocated in accordance with the previous patterns. Advantages of Zero-Base Budgeting • (a) It acts as a tool for change from which benefits are likely to accrue. • (b) It allows for optimum allocation of resources. This is made possible by the formulation of alternative courses of action and evaluating each on its own merit. Resources are therefore allocated by need and benefit accruing, rather than political or emotional considerations. • (c) It creates questioning attitude instead of assuming that current practice maximizes expected money value. Wasteful spending is thereby reduced. • (d) It provides a better yardstick for the measurement of performance.
BUDGET AND BUDGETARY CONTROL • The technique allows for the participation of the various organs of the decision unit. • (f) It focuses attention on the future rather than the past; old and new projects are therefore appraised on the same basis. • (g) Under 'Zero-Base' budgeting, important projects can continue to receive funds, owing to their viability. • (h) It is good for profit-oriented projects. Disadvantages/Problems of Zero-Base Budgeting • (a) Lack of and sometimes unreliable data may inhibit or undermine the usefulness of the approach in the less developed economic environment as ours. • (b) It may cause a major shift in resource allocation. • (c) Bureaucrats often do not trust the approach and hence frustrate its effectiveness.
BUDGET AND BUDGETARY CONTROL • (e) It involves the task of analyzing and ranking a lot of data and information which a number of civil servants find difficult to manage. This situation is further complicated by lack of qualified and competent personnel in the public sector, to handle the application of this technique. • (f) There is need to make accounting structure conform with the 'Zero-Base philosophy, for the purpose of evaluation and control. This may necessitate a general review, overhauling, adding or scrapping of activities and functions, • (g) It is not so good for recurrent expenditure. It has not been successful in the public sector.
BUDGET AND BUDGETARY CONTROL Performance Budgeting Method Performance budgeting can be defined as a technique used for presenting public expenditure in form of functions or projects to be undertaken, highlighting the cost involvements. The anticipated costs are compared with the expected income. The focus of the technique is on results or output achieved, rather than how much has been expended.