Public sector accounting is the process government agencies and municipalities use to record financial transactions. While similar to private accounting in theory, the focus of public sector accounting is somewhat different. Most government agencies and municipalities need to track funds generated from tax revenues and expenditures related to projects or appropriations. Additionally, nations may need to follow a set standard of accounting principles different than private accounting rules. The creation of an international accounting standard helps nations follow similar rules in order to present information in a similar manner.
Government accounting typically uses a set of funds that tracks financial information. Rather than attempting to determine how much money a public sector entity has made, the entity must report financial information to interested parties, primarily constituents. The separation of money into these funds makes it difficult for a government agency or municipality to spend money on unauthorized purposes. Elected officials or legislatures must create appropriations or spending authorizations to transfer funds among government fund accounts. This process attempts to restrict the spending of money on a free-wheeling basis that will quickly deplete an agency’s resources.
Similar to private sector accounting, public sector accounting principles often seek to lay a framework for accounting practices. Rather than creating a hard set of rules to follow, the principles allow for an application of basic principles to either large and small entities or municipalities. An international set of accounting principles is also necessary for smaller nations to learn and adopt rules that will enhance their internal national accounting process. Many times, developing nations cannot or do not have the resources capable to create and instill a framework for their public sector accounting practices. Adopting an international set of accounting rules will help them overcome this problem and typically helps them start on the path better infrastructure developments.
Another purpose of public sector accounting is to create a standard expectation of ethics and accountability for a nation’s financial information. Countries often make loans to each other and trade goods through the private sector. The inability to determine the viability of a nation’s infrastructure and government through their accounting practices can result in reduced international transactions. Standard public accounting principles will also make it easier for a nation to undergo an audit. Audits help a nation prove its creditworthiness in terms of issuing bonds or the ability to repay loan previously made by other countries. It is also harder for countries to hide inappropriate financial transactions when using public sector accounting principles.