Modified Accrual: Governmental Accounting Method

Comprehensive Guide to Modified Accrual Basis Accounting in Government Entities

Modified accrual basis accounting is a hybrid accounting method used primarily by governmental entities. It combines elements of both accrual and cash basis accounting, aiming to provide a more accurate reflection of a government’s financial situation. This method recognizes revenues when they become both available and measurable, and expenditures when liabilities are incurred, except for unmatured principal and interest on long-term debt, which is recognized when due.

Revenue Recognition in Modified Accrual Accounting

Available Criteria

In the context of modified accrual accounting, revenue is considered available when it is collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. Typically, this period is defined as 60 days.

Measurable Criteria

Revenue is measurable when the amount can be determined or reasonably estimated. This involves a degree of judgment and estimation, particularly for revenues such as grants and taxes.

Expenditure Recognition

Expenditures in modified accrual accounting are generally recognized when the related fund liability is incurred. However, for certain long-term liabilities like general obligation bonds, expenditures are recognized when the payments are due.

Examples of Modified Accrual Accounting

• Property Taxes: Property taxes are recognized as revenue in the period for which the taxes are levied, provided they are available (collectible within the current period or soon enough thereafter).
• Grant Revenues: Grant revenues are recognized when all eligibility requirements are met, and the revenues are both measurable and available.
• Payroll Expenditures: Salary expenses are recorded when the employees provide the services. However, wages owed at year-end are recognized as expenditures, as the related liabilities are incurred.

Historical Context of Modified Accrual Accounting

The use of modified accrual accounting in governmental entities has its roots in the need for fiscal accountability and transparency. Unlike businesses that focus on profitability, governments focus on budget adherence and the availability of resources. The modified accrual basis helps in reporting on the fiscal accountability of public funds.

Applicability and Considerations

Applicability

Modified accrual accounting is used primarily in governmental fund accounting. It is applied in general funds, special revenue funds, capital project funds, debt service funds, and permanent funds.

Considerations

One key consideration in modified accrual accounting is the proper match of revenues and liabilities to the period they affect. Judgment is crucial in determining when revenues and expenditures meet the criteria for recognition.

Comparisons with Other Accounting Methods

Accrual Basis Accounting

Under full accrual accounting, revenues and expenses are recognized when they are earned and incurred, regardless of when the cash is received or paid. This method provides a more comprehensive picture of financial performance and position.

Cash Basis Accounting

In cash basis accounting, revenues and expenses are recognized only when cash is received or paid. This method is simpler, but it does not provide as accurate a picture of financial performance and position as accrual-based methods.

Related Terms

• Accrual Accounting: Accrual accounting recognizes revenues when they are earned and expenses when they are incurred, providing a comprehensive view of financial performance.
• Cash Basis Accounting: Cash basis accounting recognizes revenues and expenses only when cash transactions occur, offering simplicity but less accuracy in financial reporting.
• Governmental Funds: Governmental funds refer to funds used by governments to account for tax-supported activities. These include the general fund, special revenue funds, capital project funds, debt service funds, and permanent funds.

FAQs

What defines revenue as available in modified accrual accounting?

Revenue is considered available in modified accrual accounting if it is collectible within the current period or soon enough thereafter, typically within 60 days, to be used to pay liabilities of the current period.

How does modified accrual accounting differ from full accrual accounting?

Modified accrual accounting differs from full accrual accounting in that it recognizes revenues when they are available and measurable, and expenses when liabilities are incurred, whereas full accrual accounting recognizes revenues and expenses when they are earned or incurred, regardless of cash flow.

References

1. Governmental Accounting Standards Board (GASB). “Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments.”
2. Jensen, G., & Payne, J. (2021). “Governmental Accounting Made Easy.” Wiley.

Summary

Modified accrual accounting is a foundational method for governmental accounting, providing a balanced approach to recognizing revenues and expenditures. By ensuring financial accountability and transparency, this method supports the accurate tracking of public funds and adherence to budgetary constraints. It stands as a middle ground between the straightforward but limited cash basis and the comprehensive but complex accrual basis, tailored to the needs of government entities.