The article discusses interrelationships in governmental accounting theory. In governmental accounting, a fund is composed of a group of related assets and equities. The relationship between the items in the grouping is the common purpose for which the assets are destined. The fact that many of the assets which governmental units come into possession of can and must be used for various specific purposes makes it desirable to administer, expend and receive as revenue the assets dedicated to one purpose separately from the assets dedicated to all others. In governmental accounting, accrual accounting has made it possible to record and thereby report on liabilities and other assets in addition to cash. This was felt to be desirable in order to make it possible to administer and control in a more satisfactory manner such items as permanent property, inventories, taxes and other receivables and liabilities, particularly funded debt. The use of budgetary accounts makes this comparison automatic and almost inescapable. Also, due to the legal significance of the budgetary appropriations, budgetary controls necessary to prevent illegal acts as well as to help coordinate governmental operations and make them more efficient.

This article discusses aspects of a governmental audit. Probably the principal purpose of a governmental audit is to prepare a report containing an opinion of the independent auditor on the financial statements of the governmental unit as presented by its officials. This is a culmination of the other two purposes which are to be mentioned below in that the opinion expressed in the report of the auditor is based upon the results of the investigation by the auditor of the reliability and reasonableness of the records and acts which they record. The first purpose is to appraise the judgments and decisions made by responsible officials concerning accounting matters and to prepare information to assist others in appraising all of their judgments. This appraisal is made from the point of view of determining whether or not the judgments of responsible officials as reflected in the records are justifiable, reasonable, adequately supported, representation of the best alternative if other possibilities were present, etc.

A study of the development and progress of governmental accounting theory in the U.S. indicates that there are three important concepts upon which it is based. These concepts are fund accounting, accrual accounting and budgetary accounting. Almost without exception, when individuals or organizations consider governmental accounting theory, their consideration centers around one or more of these concepts. In as much as these three concepts have such an important position in governmental accounting, it would seem to be worth while to look at them more carefully. As additional control becomes desirable, accounting theory must be considering constantly the ways and means by which accounting practice can be changed in order to provide better control. Before intelligent changes can be proposed, the present technique used in governmental accounting must be thoroughly understood. The purposes of this study are to present some ideas about the theory of governmental accounting and to provoke additional discussion out of which understanding may be advanced.