Browse the finances of government and non-profit organizations

Although many investors have at least a certain understanding of typical financial statements such as balance sheets, income statements, and cash flow statements, the financial statements of governments and non-profit organizations may not be familiar. But they shouldn’t.

Governments and non-profit organizations use our taxes and donations to provide valuable services-shouldn’t we make sure they use our money wisely?

In this article, we will examine the different financial statements of these non-commercial organizations (NBOs) and teach you how to read them so that you can always determine where your money is going. (Also take a look: Fundamental analysis and 12 things you need to know about financial statements.)

What is a fund account?

Governments and non-profit organizations are not interested in making money, so they use an accounting system called fund accounting. Fund accounts essentially combine financial data into funds or accounts with similar purposes. In this way, the organization can better understand the resources available to complete a specific task. Fund accounting is usually not a favorite topic for people who are accustomed to the concepts of for-profit accounting.

However, understanding what a fund account is and how it works is the only way to confidently view the financial publications published by governments and non-profit organizations each year.

Government and profit

The government treats our money in a unique way-they don’t want to make money. Ideally, the government wants expenditures in any given year to be very close to revenue. The difference between income and expenditure is called surplus (positive difference) or deficit (negative difference). But don’t forget that surpluses are not profits, and deficits are not losses—governments are not in the business of hoarding currency (and they are not in “business” at all, just like it is). Unlike for-profit companies, if the government finds itself operating with huge surpluses (profits), it usually takes measures to reduce the tax burden on residents.

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Government/NBO Fund

Understanding the meaning of various funds is useful for analyzing government financial statements. In the broadest sense, the funds in the government are mainly divided into three categories. these are:

  1. Government funds: used by the government to provide services, and its expenditures cannot be met by the fees charged for these services.
  2. Own funds: Used to describe “commercial type” activities, where services are paid entirely by charging customers (such as garbage collection).
  3. Trust fund: used to account for funds held for the benefit of third parties. These are not reported in government-wide financial statements because they are not government-owned assets (for example, pension funds).

Government report

Every year, every government organization in the United States and Canada publishes a comprehensive annual financial report (CAFR). Although the format and content may vary, these reports show the financial statements of government entities, as well as important analysis tools such as management discussion and analysis (MD&A) and notes to financial statements. CAFR is completed in accordance with GAAP and the Government Accounting Standards Board (GASB). (Also take a look: What you need to know about financial statements and Footnote: Start reading the fine print.)

CAFR usually provides financial information for individual funds (or at least important funds) and government financial statements that show the overall state of the government. The government uses revised accrual accounting in their statements and includes an explanation of how they changed from cash basis accounting (usually used throughout the year) to the revised accrual basis they reported.

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National governments report their consolidated financial statements in CAFR. Although some of the names are different, these statements basically reflect for-profit statements:

Business financial statements Equivalent government statement
Proof of income Event Description
Balance sheet Net Assets Statement
Cash flow statement Cash flow statement

MD&A is a very useful part of CAFR, which allows you to gain insight into the decisions made by government decision makers. Generally, the content of MD&A is much more than the management discussion in the annual report of the business organization. (Also take a look: Understand the income statement, break down the balance sheet and A simple way to analyze cash flow.)

Non-profit report

Just like government organizations, non-profit organizations are not for money. They also use fund accounts and provide annual financial statements for public consumption.

Non-profit organizations span somewhere between the private sector and the government. Because they are not for profit, fund accounting provides the best accounting system for most non-profit organizations. The basic concepts of non-profit accounting and government accounting are the same-the goal is to make annual expenditures very close to annual income.

Non-profit organizations do not publish CAFR-instead, their reports are often referred to as reports on consolidated financial statements. Either way, the statements of government organizations and non-profit organizations are very similar. Non-profit financial statements usually include:

Business financial statements Equivalent non-profit statement
Proof of income Event Description
Balance sheet Statement of Financial Status
Cash flow statement Cash flow statement
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If you are fully familiar with the analysis of for-profit financial statements, once you understand the content of each statement, analyzing the financial statements of non-commercial organizations will not be too laborious. Non-profit organizations use accrual accounting and the Financial Accounting Standards Board and GAAP standards for reporting.

The financial statements of a government or non-profit organization can usually be found on the organization’s website or by calling for a copy.

Let your voice be heard

After you review the NBO’s financial statements, you must determine whether you believe that the organization is treating your funds with caution. If you find a non-profit organization with excessive operating expenses, please don’t give it money. As far as the government is concerned, hold your politicians and government employees accountable for their actions.

Spreading awareness is the only way to have a significant impact, so please share your knowledge of these financial statements with others.

in conclusion

Considering the taxes we pay every year, it is not crazy to look at government financial statements like any other major investment. It is one thing to donate money blindly without making sure that the money is delivered to those in need. To some extent, you have to think of it as an investment decision.

With a little understanding of how the financial statements of government and non-profit organizations work, you can ensure that your funds get the most benefit-even if all you don’t expect to get is a warm, fuzzy feeling as a return on your investment. (Also take a look: Deduct your donation and Donate your retirement assets to charity.)

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