Accrual accounting in federal accounting: substitute or complement?

Traditionally, in so far as government is concerned, the acceptable and most widely applied accounting principle and policies stemmed out and were cash accounting. Accrual accounting has remained popular in commercial enterprises and is actually the basis of financial presentation and reporting.

Governments are now going a step further in embracing the use of accrual accounting. In some cases, the application has been fruitful while in others the outcome cannot be anything to talk about. This paper seeks to determine what areas of accounting reporting and presentation have governments and state agencies adopted accrual accounting, the notable successes in adoption and implementation,  the challenges experienced on such adoption and the inherent benefits to such adoption.

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The study was be advised by empirical studies conducted by scholars in this area. The research data and information was sought through snow balling. The author identified the area of interest then searched through the internet for appropriate literature. The search yielded other leads that the author gladly followed.

Accrual accounting versus cash accounting

According to Christiaens and  Rommel (2008) cash  accounting (sometimes referred to as cameralistic; though some authors have drawn clear cut distingtion, this paper chooses to consider the two systems as one) does not only focus on cash receipts and disbursements.

They continue to explain that since state budgets have to be authorized to meet the political motive, then the purpose of cash accounting is to safeguard the authorization process. It has been argued that cash accounting will serve responsiveness and responsibility other than efficiency. Its no wonder that Baton (2004), cited in Christiaens and  Rommel (2008), found glaring inadequacies irrespective of long term usage of this approach to accounting within the federal and other government forms.

An accrual system of accounting would mean budgeting using costs rather than expenditure. In the end predictions would occur on expenditure which does not necessarily involve the flow of cash such as depreciation and other numerous provisions recognized in enterprise accounting. Of course this does not happen in government because expenditure is based on allocation.

Christiaens and  Rommel (2008) have summarized the difference in the two approaches  by studying the objective of each approach, to which they have concluded that cash accounting involves registration of appropriated and authorized budgets and registration of the use of those authorized budgets driven by budgetary principles which is aimed at authorization and control of spending (‘public purse’). On the other hand accrual accounting is driven by recording of economic revenues and costs driven by general accounting principles aimed at reporting the financial position and the yearly profit and loss.

Another interesting distinction given by these researchers would be the treatment of the items in a typical  case of procurement. Looking at the accounting consequences in the purchasing cycle, it is clear that the simple cash accounting system only records cash movements. According to Christiaens and  Rommel (2008) generally accepted accounting principles, accrual accounting begins by recording the economic transaction influencing the assets, liabilities and the P/L independent of the corresponding payment.

They state that in practice, the accountant will record purchases at the time he receives the invoice, instead of the exact date when the charge was incurred. This approach is adopted only for the sake of convenience, and therefore the accountant will periodically record ‘end of period adjustments’ in order to comply with the accounting principle of realization.

“One can notice that the final stage in Cameralistic accounting being cash payment, is the same as in the other systems. However, in this system the invoice is not posted at the time of receipt, nor at the time of realizing the charges as in accrual accounting, but mostly at the time of recognizing the invoice in budgetary terms.

The recognition of the invoice means that the government agrees to charge the amount of the invoice to the corresponding budget. This need not be recorded at the time of the invoice, it can be delayed (e.g., because the budgetary resources are not sufficient anymore and the budget of next year is to be charged, disregarding the fact that the cost was realized in the current year). In Cameralistic accounting, one is not interested in the correct effect on P/L of the moment of realization, but only on the acceptability in respect of the budget” (Christiaens and  Rommel,2008).

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