16 Major Difference between Public and Private Finance

The term “finance” is associated with revenue and expenditure. Public finance is a branch of economics that deals with the government’s revenue and expenditures of an economy. If it is related to the private sector, it is called private finance.

Finance includes those means by which we make various types of payment. It may be defined as the provision of money at the time of need. In other words, it is the arrangement of money sources and the acquisition of funds for the satisfactory conduct of business activities.

Finance consists of providing and utilizing the money, capital rights, credit and funds of any kind which are employed in the operation of an enterprise.

George Terry

It may thus refer to investing in borrowing and spending of money with proper manners for the operation of the business.

Finance is important and essential for the success of any enterprise. Without proper finance, no business can be run smoothly. So a sufficient amount of capital must be provided in order to achieve desired results from the activities.

Sources of Business Funds

The balance sheet represents the amount that is supplied by the contributors. Assets are shown on the right-hand side of the balance sheet which refers to the use of funds. Liabilities are on the left side of the balance sheet which shows the sources of funds. These funds are employed temporarily by the creditors and are expected ultimately to be paid back with the sum they have advanced to the business. But owners make a permanent investment of funds to the business.

Creditors

This source of loan is obtained for short term intermediate and long periods. The repayment of this loan is made on an installment basis if it is more than one year. Creditor’s fund is generally grouped into the following main titles on the liabilities side of the Balance sheet.

Accounts Payable

This is the result of the supply of goods services to the customers. No credit document is used in this kind of credit dealings.

Notes Payable

It arises from the sale of goods, the supply of services, or a loan of funds from the financial institution. It is represented by a written document i.e. promissory note etc.

Securities

Large-size firms may issue secured or unsecured bonds or promissory notes when various term funds are required. It is divided up among a number of creditors. Each creditor holds written evidence or promises to pay for his share of the loan on a future date.

Mortgage

It represents that the firm has accepted a loan from the commercial bank or investment bank for a long period of time against the security of building, land, and machinery.

Outstanding

It refers to the accumulation of indebtedness amount up to the date of the closing books. These generally include the items which have accrued but have not been actually paid. They represent accumulating wages, rent, salaries, interest, and taxes which are found on the liabilities side of the Balance sheet.

Owners

The owner’s investment appears in the Balance sheet by various heads in various forms of Business Organization.

Sole Tradership

The invested amount by the owner may be increased by profit and decreased by losses and withdrawal. The owner’s interest in a sole tradership generally finds a single title in the Balance sheet.

Partnership

Owner’s interests are generally considered similar to the sole traders in the Partnership. But in the partnership, the profit is distributed among the number of partners and if there is any loss, the same partners are to bear it. Therefore the owner’s interest in the partnership is not constant but it may increase or decrease at a rate varying with the profit or loss of the firm.

Differences Between Public & Private Finance

Private: It deals with the revenue and expenditure of the private sector.

Public: It deals with revenue and expenditure of the government sector (public sector)

Time Period

Public finance is related to one year time period whereas private finance is concerned with daily, weekly, and monthly budgets, etc.

Income vs Expenditure

In public, revenue follows expenditure. On the other hand, in private finance expenditure follows revenue.

Deficit Financing

In the case of the deficit budget, Govt. can issue new notes. On the other hand, the private sector has no authority to issue new notes.

Nature of Budget

In the public sector, the deficit budget is appreciable. In the private sector, the surplus budget is appreciable.

Compulsory Loans

The government can take compulsory loans from different financial institutions to meet its expenditure whereas the private sector cannot do it.

Secrecy

A government budget is no more secret, rather Govt. publicizes its budget through T.V, Radio, etc. On the other hand, the private budget is tried to be kept secret.

Nature of Projects

In public finance, Government has to complete long term projects. On the other hand, the private sector has a short terms project to complete.

Nature of changes

Public finance is concerned with remarkable changes whereas the private sector is concerned with minor changes.

Written Document

A public budget is a written document whereas a private budget is not a written document.

Audit System

Govt. revenue and expenditure are regularly checked by an audit system. On the other hand, there is no audit system in private finance.

Foreign Assistance

The Government can depend upon foreign assistance but in private finance, there is no chance of any foreign aid.

Direct or Indirect Source of Income

In public finance, the source of income is indirect i.e., various taxes whereas in private finance source of income is direct.

Prior Sanction

Govt. takes prior sanction from its cabinet, national assembly, senate, etc whereas, no prior sanction is required from any authority.

Future Planning

There is long term planning while in private finance short term planning is the motive.

Use of Financial Resources

In public, the main objective is the social welfare of the people whereas, in private resources are used just for maximum personal satisfaction.

Record of Finance

The private may or may not keep the record of its finance whereas Govt. keeps the permanent record of its finance.

Finally

We can conclude that the finance of both the private and public sectors is concerned with revenue and expenditures. Anyhow, we can differentiate private and public finance on the basis of certain grounds.