Question

A student comment “A government destroys a recently acquired car, sells the remains for scrap and its general fund surplus for the year increases. That’s ridiculous. Government accounting makes so much less sense than private-sector accounting’’.Explain why the situation described by the student arises. Does government accounting in fact differ so much from business accounting?

Answer 1

The situation described by the student arises because the fixed assets are not recognized as assets in the governmental funds. Hence, the proceeds from the sale of scrap increase fund assets. In the business sector, fixed assets, although recognized on the balance sheet, are not necessarily reported at market values. Hence, if an asset were destroyed and sold either as scrap or to an insurance company as part of a settlement! the entity could also report a gain. Neither business nor governmental funds record assets at amounts indicative of their economic values. In businesses they are recorded at historical cost, less depreciation; in governmental funds, they are recorded at zero. In the context of the governmental model, the recognition of the increase in fund balance makes perfect sense.