Public sector accounting tracks government financial transactions, with a focus on tax revenues and project expenditures. It uses a fund pool to restrict unauthorized spending and establish ethical standards. An international standard helps smaller nations improve their infrastructure and demonstrate creditworthiness.
Public sector accounting is the process used by government agencies and municipalities to record financial transactions. While similar to private accounting in theory, the approach to public sector accounting is somewhat different. Most government agencies and municipalities need to track funds generated by tax revenues and expenditures related to projects or appropriations. In addition, nations may need to follow an established standard of accounting principles other than private accounting rules. Creating an international accounting standard helps nations follow similar rules to present information in a similar way.
Government accounting generally uses a fund pool that tracks financial information. Rather than trying to determine how much money a public sector entity has made, the entity should report financial information to interested parties, primarily constituents. Separating the money into these funds makes it more difficult for a government agency or municipality to spend money for unauthorized purposes. Elected officials or legislatures must create spending appropriations or authorizations to transfer funds between government funding accounts. This process attempts to restrict the spending of money on a free basis that 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 difficult set of rules to follow, the principles allow for the application of basic principles to large or small entities or municipalities. An international set of accounting principles is also necessary for smaller nations to learn and adopt rules that improve their internal national accounting process. Many times, developing nations are unable or do not have the resources 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 generally get them started on the path to better infrastructure developments.
Another purpose 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 international transactions. Standard public accounting principles will also make it easier for a nation to submit to audit. Audits help a nation demonstrate 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 hide inappropriate financial transactions when public sector accounting principles are used.
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