Introduction
Governments and nonprofit organizations just like the commercial entities must prepare financial statements, but unlike the commercial entities whose accounting is for measuring profitability, the governments’ and nonprofit organizations’ accounting is for accountability (City of Cambridge Participatory Budgeting, 2016). The nonprofit and government agencies apply an accounting system known as fund accounting, where a fund is made up of several accounts each set apart for a particular purpose in agreement with law and regulations. Unlike the commercial entities which only have a single account called the general ledger for determination of profits, nonprofit and government agencies can have several general ledgers detailing how funds were raised and spent. In the government books of accounts, such accounts as General account, capital projects account and debt service accounts are used (Bradford 2005. In the nonprofit books of account, such accounts as current account for current assets and custodian accounts for donor funds are used. This is essays is structured into six sections with the introduction in section one, answers on; fiscal and monetary strategies to stimulate economic growth, meaning of balance of payment and capital projects in sections two, three and four. The fifth section highlights the lessons derived from the study and the sixth section provides a conclusion to the essay.
Q1-Strategies based on the Fiscal and Monetary Policies to Encourage People to Spend to create Economic Growth
This section highlights the fiscal and monetary policy strategies that will stimulate economic growth through increased demand and expenditure. First, it is important to note that proper fiscal and monetary policies increase the GDP of a country thus stimulating economic growth which can be achieved by increasing either demand or supply. This paper focuses on growing demand which is mostly used during the recession and slow economic growth. It is also important to note that an unsuitable fiscal policy for a government impacts negatively on a country regarding unstable economy and exchange rates. Bradford (2005) cites the example of Argentina, which experienced a crisis in terms of high inflation, the balance of payment, high levels of external borrowing and political revolutions after the government failed to formulate and implement proper fiscal policies. It was until the early 1990s that the situation was normalized after the then finance minister Domingo Cavallo formulated the policy where one Argentine peso equaled to $1 (Bradford 2005).
One of the most suitable fiscal policies is the government to cut on taxes and increase government expenditure. According to Tejvan (2012), when income tax is relatively low, disposable income increases thus increasing households spending on goods and services. Households will be encouraged to save and invest. A reduction in corporate taxes will be perceived as an incentive for investors and thus will increase investment in the economy, increased job opportunities, increased disposable income thus stimulating economic growth through increased demand. On the other hand, increased government spending will lead to job creation in the country, and increased employment stimulates economic growth through the availability of disposable income.
The central bank may also formulate and implement such monetary policies as reducing interest rates. This is the most effective tool for increasing demand and stimulating economic growth. As noted by Tejvan (2012), reduced interest rates first make borrowing affordable, which acts as an incentive for investors to borrow and invest. When investment in the economy increases, jobs are created and disposable income increases thus increasing consumer demand. Secondly, reduced interest rates also relatively reduce saving and increases spending. Thirdly, when interest rates are low, mortgage interest payments drop too, thus increasing the disposable income for mortgage owners and increased demand for consumable goods and services in the long run.
Q2- Balance of Payment
This section outlines what balance of payment is and cites examples. The Balance of Payment is a record of a country's transactions with the other countries in a particular year. The balance of payment is made up of three components; the capital account, current account and the official reserve settlement balance (Arkolakis 2014).
The current account records business operations and revenues from outside the country. These transactions and revenues are as a result of trade balance, trade in services, income balance and unilateral transfer balance (Arkolakis 2014). The entries are made in such a way that imports are debited, and exports are credited in the BOP current account (Arkolakis 2014). For example, if a car was imported by a US national from Japan, that will be a debit transaction if on the other hand Japan sourced expertise from the US, that will be a credit entry in the BOP current accounts.
Example of transactions in current account from the US perspective;
Trade Balance: Goods for example importing cars from Japan (-)/ Exporting of machinery to South Africa (+).
: Services for example a US national touring Paris France (-)/ A French tourist enjoying Broadway (+).
Income Balance: Chevron US subsidiary makes profits and transfers to Singapore (-)/ Returns on Investment by US investors in France Stock (+).
Net Unilateral Transfers: Charity grants to Cuba (-)/ Germany national sends money to family in the US (+).
The capital account records the net change in asset ownership or investment cash flows. For instance, change in foreign ownership of domestic assets where foreigners purchase domestic stocks. Such entry will be credited to the BOP capital account since income is earned from abroad. If there is a change in domestic ownership of foreign assets, say for example nationals of a country purchasing property abroad, such entry will be debited in the BOP capital accounts since money is being transferred from the home country.
The reserve settlement balance account records changes in reserve assets such as deposits, foreign currencies, and securities, use of debt from the IMF and foreign authorities reserve brought about the movements in the current and capital accounts (Arkolakis 2014).
Let CA represent current Account, Capital Account by KA, Errors and Omissions by E&O and the Reserve Settlement Balance by RFX, then Balance of Payment can be illustrated in an equation as;
BOP=CA+KA+E&O-RFX
BOP is said to be at equilibrium when the above equation=0
Q3- Capital Projects and Debt Services
Capital projects refer to long-term investments that involve building infrastructure like roads, bridges, hospitals, ports and broadband networks, renovations and purchasing of machinery like missile defense systems by the government. The projects usually involve huge amounts of capital like $50,000 and above, they are labor intensive and need specialized support in financing, managing and governing them. The projects are characterized by; long-lived assets like roads and bridges involves construction, requires long-range planning and a substantial amount of capital and have a life project focus (Anon 2016). The projects take the form of; putting up new structures, renovating the existing structures, extending the existing structure, making improvements to increase efficiency or prolong the life of the existing machinery and equipment. Examples of capital projects include; constructing roads and bridges, repairing public buildings, improving public playgrounds, street lighting installations, improvements of streets and sidewalks and improvements of public playgrounds (City of Cambridge Participatory Budgeting 2016).
Debt service, on the other hand, is an amount of money included in the government's annual budget to make payments in respect to debts borrowed and interest accrued on such debts, to finance capital projects (Anon 2016). The debts are usually in the form of government bonds, treasury bills issued to the general public and external debts.
Learning Derived
This paper has been an eye opener especially on strategies of stimulating economic growth. It is clear that reduced interest rates as a fiscal policy in the economy is the most appropriate way of stimulating growth. The events are quite chronological; from the reduction of interest rates to increased borrowing, then increased investments which in turn lead to job creation and when the majority of the household are employed, it means majority have disposable income to spend. Reduced interest rates also increase disposable income through reduced interest repayments on a mortgage. The government can also stimulate economic growth through cutting on income tax and increasing its expenditure. This stimulates economic growth through increasing consumption due to the availability of disposable income that would have otherwise been paid as income tax. Increased government expenditure also creates job opportunities in the economy ; thus, households have the income to spend. Increased aggregate demand is a tool for stimulating economic growth.
The paper also presents a lesson on government and nonprofit organizations’ accounting which are similar but different from the accounting adopted by commercial entities. While the commercial entities prepare financial reports and statements to measure profitability, the government and nonprofit agencies use the financial reports for purposes of accountability on revenues and expenditure.
The final lesson is on the Balance of Payment accounts maintained by the government to record transactions of its citizens with the rest of the world. This is one of the features that differentiate government accounting from commercial entities accounting.
Conclusion
Government and nonprofit agencies' accounting is different from other commercial entities accounting because it is used as a tool for measuring accountability on revenue and spending by the government and nonprofit agencies. Transactions between nationals of a given country with the rest of the world are usually recorded in the Balance of Payment which consists of three main components; the current account, the capital account, and the reserve settlement balance account. Various fiscal and monetary policies like reduction of interest rates and cutting on taxes can be used by the central bank of a country to stimulate economic growth during recession or economic growth stagnation. The government can also stimulate economic growth through spending on capital projects, especially infrastructure. Such projects are capital intensive, but the government can always borrow internally through the issuance of treasury bills and bonds, or borrow externally. When a government borrows either internally or externally, it sets aside an amount that caters for repayment of such debts and interest accrued, and that money set aside is usually referred to as Debt service.
List of References
Anon, (2016). [online] Available at: http://www.dartmouth.edu/~control/capitalproj/index.html [Accessed 9 Apr. 2016]. [Accessed 11 Apr. 2016].
Arkolakis, C. 2014. International Economics. Yale: Printing Press.
Bradford, C. I. Jr 2005 Prioritizing Economic Growth: Enhancing Macroeconomic Policy Choice. New York: United Nations.
Tejvan, T. 2012. "Policies For Economic Growth | Economics Help". Economicshelp.org. N.p., 2012. Web. 9 Apr. 2016.
