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WHAT IS THE BASIS OF GOVERNMENT ACCOUNTING?

WHAT IS THE BASIS OF GOVERNMENT ACCOUNTING?

MEANING OF PUBLIC SECTOR ACCOUNTING BASIS

These are the main fundamental assumptions that underpin financial statement preparation in the public sector.

It refers to the order in which revenues, expenditures, and transfers are recognized in the accounts and presented in the financial statements, as well as the accompanying assets and liabilities.

It establishes a framework for tracking the government’s and government agencies’ financial activities, as well as when those actions are recognized and reported in the financial statement.

WHAT ARE THE BASES OF PUBLIC SECTOR ACCOUNTING

Depending on the government’s rules and regulations, there are numerous accounting bases that can be used in public sector accounting.

The following are some of the public accounting basis:

  1. Cash Basis
  2. Accrual Basis
  3. Budgetary / Appropriation Basis
  4. Commitment Basis
  5. Modified Accrual Accounting Basis and
  6. Modified Cash Accounting Basis

Both cash basis (in the short term) and accrual basis (ultimately) financial reporting are permitted under IPSASB.

The implementation of accrual-based financial reporting is recommended as the ideal goal for all public financial reporting.

This IPSASB has created standards expressly for nations that continue to report on the cash basis of accounting but encourage the voluntary disclosure of accrual-based data.

The IPSASB is also exploring connections with budgeting (which is still done on a cash basis in many jurisdictions) and statistics reporting standards.

such as the Government Finance Statistics of the International Monetary Fund.

CASH BASIS 

The cash basis of accounting, in contrast to the accrual basis, believes that only the cash effect of transactions should be documented.

In other words, revenue is recorded when cash is received, while expenditures are only recorded when cash is paid.

When cash is paid for capital assets, they are recorded as a cash outflow and no depreciation is levied. As a result of this stance, credit transactions are assumed to be legal.

READ ALSO: WHAT ARE THE SOURCE OF REGULATORY FRAMEWORK

The cash basis financial statements tell readers about the sources of cash raised during the period, the purposes for which cash was utilized, and the cash balances as of the reporting date.

As a result, the statement of financial position only shows a cash and cash equivalent balance, which is represented by fund balance, whereas income statements are just a summary of cash receipts and disbursements.

ADVANTAGES OF CASH BASIS IN PUBLIC SECTOR ACCOUNTING

  • The accounting basis is relatively simple in terms of its development, management and administration as compared to another accounting basis. this makes it less costive to operate as the basis does not require any sophisticated accounting system and expertise.
  • it avoids the subjective judgement required in another accounting basis such as the accrual accounting basis such as treatment of depreciation and provisions.
  • it provides a means of monitoring receipt and payment against cash budget. Government is concerned with the movement of cash within the public sector system, that is, how revenue is obtained and how these revenues are utilized as well as the balance left as against budget.
  • it facilitates fiscal stewardship in that in the public sector where the concept of cash limit is used in budgeting the use of resources, compliance can be determined easily.

DISADVANTAGES OF CASH BASIS IN PUBLIC SECTOR ACCOUNTING

  • The net worth of the government (defined as the excess of an asset over liabilities) cannot be ascertained under this basis.
  • Measuring the performance of an organisation under this basis becomes difficult since the system provides no information on capital and income which serves as a basis for performance financial measurement.
  • The going concern concept is less applicable under this accounting basis since assets and liabilities which give an indication of going concerned are written off in the year in which they occurred.
  • Tracing receivables and payables becomes very difficult since no accounts are maintained on creditors since failure to do so shift the future source of loan.

ACCRUAL BASIS

Accrual basis of accounting is done with the assumption that transactions are recognised when they occur and not when they are paid for.

READ ALSO: WHAT IS INSTITUTIONAL FRAMEWORK FOR PUBLIC SECTOR ACCOUNTING

Thus expenses are booked when they are incurred while revenues are recorded when they are earned not when monies are received for them.

This concept matches revenue to expense in the period in which they are earned and incurred and not when there is the actual movement of cash for them.

Revenue is recognised when it is earned  (that is the benefit has been given and the entity is entitled legally to receive compensation for the benefit given) rather than when it is received.

READ ALSO: WHY IS A REGULATORY FRAMEWORK NECESSARY

Expenses, on the other hand, are recognised when incurred (that is the benefit has been received and the entity is obliged legally to pay in exchange) rather than when paid

ADVANTAGES OF ACCRUAL BASIS IN PUBLIC SECTOR ACCOUNTING

  • The end product of the accrual basis is an operating statement and a statement of financial position which reveal the financial performance and financial health of the government organisation.
  • A more complete financial information is produced from this accounting basis which is necessary for managers in managing their financial activities.
  • Provides records on receivables and payables hence tracing and controlling of receivables and payables becomes easier.
  • the net worth of the government through the statement of financial position is more accurately displayed because all assets and liabilities are known.
  • Results of operations are more realistic because all known costs are incurred and all revenues earned are recorded.

DISADVANTAGES OF ACCRUAL BASIS IN PUBLIC SECTOR ACCOUNTING

  • The accounting basis incorporates non-cash transactions such as depreciation and provision which are all based on estimation. incorporating these elements in the financial statement can be complicated and subjective.
  • Using accrual basis to measure management performance can encourage creative accounting where managers manipulate the financial statement to show improved performance.
  • It is not useful for cash flow management, in fact, it may hide cash flow problems. As a result, full accrual basis financial statements are normally accompanied by statements of cash flows.

MEANING OF PUBLIC SECTOR ACCOUNTING BASIS

These are broad basic assumptions which underlie the preparation of financial statements in the public sector.

it refers to the timing of recognition of revenues, expenditures and transfers and the related assets and liabilities in the accounts and reported in the financial statements.

it provides a framework which track the financial activities of the government and government agencies and when those activities are recognised and presented in the financial statement.

WHAT ARE THE BASES OF PUBLIC SECTOR ACCOUNTING

There are several accounting bases that can be applied in public sector accounting depending on the policies and regulations of the government.

these public sector accounting bases include the following:

  1. Cash Basis
  2. Accrual Basis
  3. Budgetary / Appropriation Basis
  4. Commitment Basis
  5. Modified Accrual Accounting Basis and
  6. Modified Cash Accounting Basis

IPSASB allows for the use of both cash basis (in the short term) and accrual basis (ultimately) form of financial reporting.

It is recommended that the adoption of accrual-based financial reporting be ideally the goal for all public financial reporting.

The following form, this IPSASB has developed standards specifically for countries that continue to use the cash basis of financial reporting but encourages the voluntary disclosure of accrual-based information.

The IPSASB is also considering linkages with budgeting (which in many jurisdictions remains on a cash basis) and statistical reporting standards,
such as the International Monetary Fund’s Government Finance Statistics.

CASH BASIS 

Contrary to the accrual basis, the cash basis of accounting holds the view that only the cash effect of transactions is recorded.

In other words, revenue is recorded when cash is received and expenditures find their way into the accounts only when cash is paid.

Acquisition of capital assets is recorded as cash outflow when cash is paid and no depreciation is charged on such assets. This position implies that credit transactions

The financial statements prepared under the cash basis provide readers with information about the sources of cash raised during the period, the purposes for which cash was used and the cash balances at the reporting date.

Hence, the statement of financial position reflects only a balance of cash and cash equivalent which is represented by fund balance while income statements simply are a summary of cash receipts and disbursement.

ADVANTAGES OF CASH BASIS IN PUBLIC SECTOR ACCOUNTING

  • The accounting basis is relatively simple in terms of its development, management and administration as compared to another accounting basis. this makes it less costive to operate as the basis does not require any sophisticated accounting system and expertise.
  • it avoids the subjective judgement required in another accounting basis such as the accrual accounting basis such as treatment of depreciation and provisions.
  • it provides a means of monitoring receipt and payment against cash budget. Government is concerned with the movement of cash within the public sector system, that is, how revenue is obtained and how these revenues are utilized as well as the balance left as against budget.
  • it facilitates fiscal stewardship in that in the public sector where the concept of cash limit is used in budgeting the use of resources, compliance can be determined easily.

DISADVANTAGES OF CASH BASIS IN PUBLIC SECTOR ACCOUNTING

  • The net worth

ACCRUAL BASIS

Accrual basis of accounting is done with the assumption that transactions are recognised when they occur and not when they are paid for.

Thus expenses are booked when they are incurred while revenues are recorded when they are earned not when monies are received for them.

This concept matches revenue to expense in the period in which they are earned and incurred and not when there is the actual movement of cash for them.

Note:

The public sector accounting posts, guides, or articles are not limited to these 10 countries alone:

  1. Ghana
  2. Nigeria
  3. United States
  4. Uganda
  5. India
  6. Kenya
  7. Philippines
  8. Malaysia
  9. Tanzania
  10. South Africa

But instead, it targeted all the countries in the world since public sector accounting is being practiced in every country in the world, so wherever country you are in the world, you can read public sector guides here since public sector accounting applications are similar.

Please leave a comment below for more guides.

Eric Adjei

Eric Adjei

A professional with six (8) years’ experience in finance and accounting. Demonstrating expertise in accounting procedures, computerized accounting system management and financial operations. Financially astute with excellent analytical, problem solving, management, people supervision, organizational, business administration, operation and commercial management and teaching skills.

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