Introduction to Commitment Basis in Public Sector Accounting Nigeria
It’s a basis for keeping track of projected spending, as demonstrated by a contract or a purchase order.
Budgetary and accounting systems in the public sector are inextricably linked to the commitment foundation.
It involves the recording of obligations of the entity to make some future payments at the time they are reasonably foreseen, not at the time services are rendered and/ or billings are received.
Such obligations include contractual liabilities (when purchase orders or contracts for goods or services are issued) or conditional liabilities (e.g. an arrangement that requires the spending of funds if conditions specified in the arrangement are met).
Types of Commitment Basis in Public Sector Accounting
There are different types of commitment, and they include:
- Continuing Commitments: These necessitate a series of payments or settlement actions spread out over an indefinite time period.
An example is the obligation to make a monthly payment for telephone service or staff entertainment.
- Specific Commitments: These require a single payment or a determined series of payments over a determinate period of time. Examples of specific commitments include contract for goods and services osimilar arrangements like leasing of assets and equipment.
Advantage of Commitment Basis
What is the importance of commitment accounting in public sector?
find below all the importance of commitmnet accounting in public sector and also the advantages of commitment basis
(1) It closes the accounting gap/lag between budget and actual spending that could lead to budget overrun.
(2) If necessary, a separate payment tabulation is available.
(3) It assists in finance prudence in the public sector since the budgeted amount can always be compared to committed amount.
(4) Adjustment occurring when actual expenditure has been obtained does not affect the final accounts.
(5) It assists real time planning within the long-range plan of the government, ministry or department.
(6) It is an aid to financial control. A commitment is thought to be a char It takes a practical approach to financial transactions.
(7) It provides a precise picture of the financial situation at the end of the period.
(8) It is used for both economic and investment decision-making, as all parameters or performance appraisals are available.
(9) It aligns with the ‘matching concept.
(10) It makes allowance for the diminution in the value of assets employed to generate the revenue of the enterprise.
Disadvantages of Commitment Basis
The Disadvantages of the Commitment Basis of Accounting system are as follows:
(1) Commitments are futuristic and this is tainted with uncertainties. For instance, a contract may be cancelled or amended.
(2) The system involves extra work. Actual figures have to be substituted for the commitment provisions to finally determine the running balances under the sub- heads of expenditure.
(3) Over-expenditure is more under commitment basis in the expectation that Government may finally release fund to settle the legal obligations.
(4) At the year end, all commitments that are the subject of unfulfilled orders will have to be written back to reflect the exact picture of the transactions which took place during the year.
(5) Balances which ought to have lapsed in the Vote Book at the end of the year may be spent by issuing local purchase orders to exhaust the votes.
Read also: FORENSIC ACCOUNTING IN THE PUBLIC SECTOR
(6) There is also the difficulty of measuring the exact amount of commitment(s) in any particular period as many orders and deliveries are not always in accordance with the original order or contract.
(7) It is unsuited for flawless financial control in the sense that an organization can enter into a commitment that lacks precision in terms of expenditure timing and quantity.
For instance, a country may sign on an external loan commitment without a draw-down of the loan.
(8) There is lack of security, which is caused by numerous accesses to the financial information system.
(9) The relevance of commitment accounting when related to historical costs and also during periods of inflation is limited.
Profit figures devolve into numbers that can be spent without increasing beginning capital.
A commitment basis is a basis that records anticipated expenditure evidenced by a contract or purchase order.
It involves the recording of obligations of an entity to make future payments at the time they are reasonably foreseen, not at the time services are rendered and/or billings are received.
The system involves extra work. Actual figures have to be substituted for the commitment provisions. It lacks precision as to the timing and amount of expenditure.
There is a lack of security, which is caused by the numerous accesses to the financial information system.
Profit figures become merely amounts that can be spent without improving the initial capital.