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Accounting on Accrual Basis & Government Accounting

What is Government Accounting ? 

Government accounting is the process of recording. analyzing. classifying summarizing, communicating and interpreting financial information about government in aggregate and in detail reflecting transacts and other economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities. Accounts are kept for a wide variety of administrative entities: ministries, departments taxing authorities and spending units. Accounting entities are spread throughout the country, from the capital city to the remotest corners. In order to ensure adequate accounting from such a wide range of entities, a government accounting system has to be,
i) Relatively Uniform.
ii) Well Documented.
iii) Simple to Lean and Operate.
iv) Easy to Consolidate.

Purposes of Government Accounting 

The purposes of government accounting are as follows :

1) Carrying Out the Financial Business :
The main purpose of government accounting is to carry out the financial business of government in a timely, efficient and reliable manner subject to necessary financial controls. The examples of government financial business are to make payments, settle liabilities, collect sums due, buy and sell assets, etc.

2) Accessible Accounting and Documentary Records:
Another purpose of government accounting is to keep systematic, easily accessible accounting and documentary records as evidence of past transactions and current financial status, so that detailed transactions can be identified and traced and all aggregates can be conveniently broken down into their constituent parts.

3) Financial Information:
It is the purpose of the government accounting to provide periodic financial statements, containing appropriately classified financial information, as a basis for
a) Stewardship and accountability.
b) Decision making.

4) Controls :
Government accounting aim at maintaining financial records suitable for budgetary control, internal control and the needs of auditors.

5) Effective Management :
Another purpose of government accounting is to provide means for effective management of government assets, liabilities, expenditures and revenues.

Components of Government Accounting System 

Government accounting normally has eight main' components. They are as follows :
  • Documents providing evidence of transactions.
  • Bank accounts through which payments and receipts are handled.
  • Accounting records (cash book, ledgers etc.)
  • Procedures and Controls.
  • A means of aggregation of accounting data.
  • Internal accounting reports.
  • External accounting reports (Financial Statements).
  • Staff

What is meant by Accounting on Accrual Basis ?

In recent times there has been an increasing shift towards accrual accounting as distinct from cash in accounting in governments. While developed countries have gone in for some aspects of accrual accounting as basis for budgeting and reporting. the international systems for compiling government finance statistics and national accounts are wholly on accrual basis. The government of India is also considering such a move. Cash accounting does not generate enough useful information e.a about payables and receivables.

Accounting on Accrual Basis

Meaning of Accounting on Accrual Basis :

Basis of accounting refers to when revenues, expenditures, expenses, and transfers and the related assets and liabilities are recognized in the accounts and reported in the financial statements. Specifically, it relates to the timing of the measurements made, regardless of the nature of the measurement, on either the cash or the accrual method.
Under the cash basis of accounting, revenues and transfers in are not recorded in the accounts until the cash is received, and expenditures or expenses and transfers out are recorded only when cash is disbursed. Under the accrual basis of accounting, most transactions are recorded when they occur, regardless of when cash is received or disbursed. The accrual basis is the superior method of accounting for the economic resources of any organisation. It results in accounting measurements based on the substance of transactions and events, rather than merely when cash is received or disbursed. This enhances their relevance, neutrality, timeliness, completeness and comparability. Accordingly, use of the accrual basis to the fullest extent practicable is recommended.

Revenue Recognition

Revenues and other governmental fund financial resource increments are recognized in the accounting period in which they become susceptible to accrual, that is, when they become both measurable and available to finance expenditures of the fiscal period. Available means collective within the current period or soon enough thereafter to be used to pay liabilities of the current period. Application of the susceptibility to accrual criteria requires judgement, consideration of the materiality of the item in question and due regard for the practicality of accrual as well as consistency in application.
In contemporary public finance, some revenues are assessed and collected in such a manner that they can appropriately be accrued, whereas others cannot. Revenues and other increases in governmental fund financial resources that usually can and should be recorded on the modified accrual basis include property taxes, regularly billed charges for inspection or other routinely provided services, most grants from other governments, inter fund transfers and other transactions and sales and income taxes where taxpayer liability has been established and collectibility is assured or losses can be reasonably estimated.

Expenditure Recognition 

The measurement focus of governmental fund accounting is on expenditures decreases in net financial resources rather than expenses. Most expenditures and transfers out are measurable and should be recorded when the related liability is incurred except for :
i) Inventories of materials and supplies that may be considered expenditures either when bought or used.
ii) Interest on general and special assessment long-term debt that is recognized on the date due, and
iii) Use of encumbrances.

Advantages of Accounting on Accrual Basis 

The advantages of accounting on accrual basis can be given as follows

1) Improved Management information :
Cash accounting does not generate useful information e.g. about payables and receivables. On the other hand accrual basis accounting system offers improved management information, particularly on costs and assets including working
capital. This facilitates more informed management decisions on allocation of resources.

2) Beneficial Tool For Planning and Control :
For government as a whole it is a beneficial tool for planning and control of public expenditure and serves as a better indicator of the sustainability of fiscal policies.

3) Facilitates Evaluation :
With more quality data of National accounts, evaluation of economic performance is greatly enhanced.

4) Enhanced Accountability :
As the system provides a stronger basis for executive accountability, Parliament has better control over fiscal management.

5) Comprehensive Financial Information :
Only accrual accounting can generate comprehensive financial information about government e.g. a loan which is written off has no impact on a cash-based statement but under accrual accounting it diminishes net worth. Thus, improved resource allocation, enhanced accountability of the managers, greater fiscal transparency and a comprehensive view of the impact of government activities on the economy are all claimed as major virtues or advantages of accrual accounting.

Disadvantages of Accounting on Accrual Basis 

1) Difficult and Costly:
Accrual accounting system is more difficult and more costly to produce and to use than cash-based accounting information.

2) Not Easily Understood :
The accounts are more difficult to understand. Accrual based data cannot be easily understood by non-accountants. It is not easily comprehensible laypersons.

3) Complex and More Costly:
The adoption of full accrual accounting is more complex and more costly than the simple cash basis. Asset valuation is an example of complexity and cost.

4) Lack of Skilled Accountants :
Poor countries usually lack accounting skills, and therefore have few trained people who can either produce complex accounting information or use it. Accrual accounting is more complex so it needs trained/ skilled accountants.

5) Susceptible To Manipulation :
There is element of subjectivity involved in recognition and measurement oi assets and liabilities rather than cash so it may be susceptible to manipulation.

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