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Commitment basis of public sector accounting

Commitment basis of public sector accounting

There are about 6 (six) bases of public sector accounting as compare to only 3 (three) bases of accounting in financial accounting.

But in this particular public sector accounting guide we will consider the Commitment basis of public sector accounting.

This is an accounting basis where transactions are recognizing when the organization in committed to them by issuing or receiving order.

WHAT IS 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.

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

the 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.

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.

Read Also: Disadvantages of accrual basis accounting in public sector

Linkages with budgeting (which is still done on a cash basis in many countries) and statistical reporting standards, such as the International Monetary Fund’s.

Government Finance Statistics, are also being considered by the IPSASB.

Commitment basis of public sector accounting

Under the commitment basis of public sector accounting, expense is recognized once expenditure decision is made so that, as soon as decision on acquisition of service or an item is made, a sum is committed to meet such cost.

In this case encumbrance is said to be effected. Encumbrance in this context can be defined as an estimated expenditure evidenced or backed by a contract or purchase order.

The prime aim of commitment accounting is to aid financial control by providing information on the total charge on budget provision to the budget holders.

Read Also: Advantages of accrual basis accounting in public sector

It must be noted that, commitment accounting cannot be used as a basis for preparing financial statement. However, when accounts are produced, adjustment needs to be made between the encumbered amount and the actual amount so that cash basis or accrual basis can be applied in the preparation of the financial statement.

Advantages Of Commitment Basis Of Accounting In Public Sector

  1. The main advantage of this accounting basis is its ability to ensure effective budgetary control.

The commitment accounting system reviews the amount of budgetary fund that has be committed so far, thus the amount not committed at any point in time is known and the amount shown at the end of the fiscal period as undischarged commitment. This is effect will help the vote or budget controller to plan other commitment and disbursement of fund.

Read Also: WHAT IS THE BASIS OF GOVERNMENT ACCOUNTING?

  1. Commit commitment accounting allows the posting of expenses before the creation or

collection of the underlying documents such as invoices, purchase orders, etc., and before those committed funds are paid out. This allows the financial records to reflect the allocation of budgetary resources when they are committed instead of when they are paid out, providing financial information earlier than budget to actual reports and preventing budget overruns.

disadvantages of commitment basis of accounting in public sector

  1. Transactions are supported by an order made implying that there is no legal liability incurred, hence orders can be cancelled before they are being fulfilled.
  2. This system encourages end of year spending. This normally occurs when there are uncommitted resources that are expected to lase back into the government fund. Thus rash order can be made to commit such balance and this can show how fund can be misappropriated.
  3. There is the need to estimate the value of commitments and enter them into the accounts and reverse the entries by substituting for the commitment amount with the actual amount.
  4. In operating this system of accounting, it is very difficult to match revenue with expenses as the matching concept demands. This is due to the fact that all expenses should be entered in the commitment fund first before isolation them by reversing the entry
  5. The accounting basis makes it difficult in monitoring the flow of cash, hence exercising control over cash limit.

CONCLUSION

Commitment basis of public sector accounting. This is an accounting basis where transactions are recognizing when the organization in committed to them by issuing or receiving order.

IPSASB allows for use of both cash basis (in the short term) and accrual basis (ultimately) form of financial reporting. Commit commitment accounting allows the posting of expenses before the creation orcollection of the underlying documents such as invoices, purchase orders, etc., and before those committed funds are paid out.

The main advantage of this accounting basis is its ability to ensure effective budgetary control.

Note:

The public sector accounting post or 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 targeted all the countries in the world since public sector accounting is being practice in every country in the world, so wherever country you are in the world can read public sector guides here since public sector accounting applications are similar.

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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