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:
- Cash Basis
- Accrual Basis
- Budgetary / Appropriation Basis
- Commitment Basis
- Modified Accrual Accounting Basis and
- 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.
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
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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 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 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.
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.
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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.
This is an accounting basis that recognizes transactions when the company commits to them by issuing or receiving a purchase order.
Expense is recognized as a spending decision is made, so that a sum is committed to cover such cost as soon as a decision on the acquisition of a service or an item is made.
Encumbrance is said to be accomplished in this scenario. An projected expenditure that is proved or backed by a contract or purchase order is referred to as encumbrance in this context.
The primary goal of commitment accounting is to improve financial control by providing budget holders with information on the entire charge on budget provision.
It’s important to highlight that commitment accounting can’t be used to prepare financial statements. When accounts are prepared, however, an adjustment must be made between the encumbered amount and the actual amount so that the cash basis or accrual basis can be used in the financial statement preparation.
Advantages of the Commitment Basis of Accounting in the Public Sector
- The capacity to maintain good budgetary control is the fundamental benefit of this accounting basis.
The commitment accounting system examines the amount of budgetary funds that have been committed thus far, allowing the amount not committed at any point in time to be determined and the amount indicated as undischarged commitment at the conclusion of the fiscal period to be determined. This effect will assist the vote or budget controller in planning future financial commitments and disbursements.
- Commit commitment accounting provides for the recording of expenses prior to the creation or completion of a project.
Before those committed monies are paid out, the supporting papers, such as invoices, purchase orders, and so on, must be collected. This permits the financial records to reflect the allocation of budgeted resources when they are committed rather than when they are paid out, allowing financial information to be delivered ahead of schedule to actual reporting and avoiding budget overruns.
disadvantages of accounting on a commitment basis in the public sector
- Transactions are backed up by an order, suggesting that no legal liability is committed, and hence orders can be canceled before they are performed.
- This approach encourages people to spend at the end of the year. This usually happens when there are unspent funds that are expected to be returned to the government fund. As a result, a hasty decision to commit such a balance can be made, demonstrating how funds can be hijacked.
- Estimate the value of commitments and enter them into the accounts, then reverse the entries by substituting the actual amount for the commitment amount.
- It is quite difficult to match revenue with expenses in this accounting system, as the matching idea requires. This is because all expenses must first be recorded in the commitment fund before being isolated by reversing the entry.
- The accounting basis makes it harder to track cash flow and so exercise cash limit control.