Governmental accounting maintains tight control over resources, while also compartmentalizing activities into different

funds in order to clarify how resources are being directed at various programs. This approach to accounting is used by all
types of government entities, including federal, state, county, municipal, and special-purpose entities.

Given the unique needs of governments, a different set of accounting standards has been developed for these
organizations. The primary organization that is responsible for creating and updating these standards is the
Governmental Accounting Standards Board (GASB). The GASB is tasked with the development of accounting and
financial reporting standards for state and local governments, while the Financial Accounting Standards Board (FASB)
has the same responsibility, but for all other entities not related to governmental activities.

A fund is an accounting entity with a self-balancing set of accounts that is used to record financial resources and
liabilities, as well as operating activities, and which is segregated in order to carry on certain activities or attain targeted
objectives. A fund is not a separate legal entity. Funds are used by governments because governments need to maintain
very tight control over their resources, and funds are designed to monitor resource inflows and outflows, with particular
attention to the remaining amount of funds available. By segregating resources into multiple funds, a government can
more closely monitor resource usage, thereby minimizing the risk of overspending or of spending in areas not
authorized by a government budget.

Some types of funds use a different basis of accounting and measurement focus. To clarify the difference between these
concepts, the basis of accounting governs when transactions will be recorded, while the measurement focus governs
what transactions will be recorded.

The accrual basis of accounting is adjusted when dealing with governmental funds. The sum total of these adjustments is
referred to as the modified accrual basis. Under the modified basis of accounting, revenue and governmental fund
resources (such as the proceeds from a debt issuance) are recognized when they become susceptible to accrual. This
means that these items are not only available to finance the expenditures of the period, but are also measurable. The
“available” concept means that the revenue and other fund resources are collectible within the current period or
sufficiently soon thereafter to be available to pay for the current period’s liabilities. The “measurable” concept allows a
government to not know the exact amount of revenue in order to accrue it.

The key measurement focus in a government fund’s financial statements is on expenditures, which are decreases in the
net financial resources of a fund. Most expenditures should be reported when a related liability is incurred. This means
that a governmental fund liability and expenditure is accrued in the period in which the fund incurs the liability.

The focus of governmental funds is on current financial resources, which means assets that can be converted into cash
and liabilities that will be paid for with that cash. Stated differently, the balance sheets of governmental funds do not
include long-term assets or any assets that will not be converted into cash in order to settle current liabilities. Similarly,
these balance sheets will not contain any long-term liabilities, since they do not require the use of current financial
resources for their settlement. This measurement focus is only used in governmental accounting.