Modified accrual accounting is a bookkeeping method commonly used by government agencies that combines elements of accrual basis accounting with cash basis accounting. This hybrid approach aims to provide a clearer picture of a government’s financial status by recognizing revenue when it is both measurable and available, and expenditures when they are incurred.
Principles of Modified Accrual Accounting
Recognition of Revenue
In modified accrual accounting, revenue is recognized when it is both measurable and available. “Measurable” means that the amount can be reasonably estimated whereas “available” refers to the funds being collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period.
Recognition of Expenditures
Expenditures are recognized when the associated liability is incurred, much like in traditional accrual accounting. However, long-term expenditures, such as those for capital improvements, are not recognized until they become a current liability.
Applications of Modified Accrual Accounting
Modified accrual accounting is predominantly applied within the public sector, especially by local and state government entities. This method is tailored to meet the budgeting and financial reporting requirements of government agencies, providing a balance between timely reporting and reasonable measurement of financial activities.
Government Financial Statements
Financial statements prepared using modified accrual accounting include the Governmental Fund Financial Statements, such as the General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds. These statements provide insights into the fiscal accountability and short-term financial health of the governmental agency.
Budgeting and Financial Planning
Governments use modified accrual accounting to develop budgets that reflect a balance between cash inflows and outflows within a specific fiscal year. This approach ensures that budgets are realistic and funds are available to meet the government’s obligations.
Comparisons and Related Terms
Modified Accrual vs. Full Accrual Accounting
Full accrual accounting recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash is received or paid. In contrast, modified accrual accounting focuses on when revenues are measurable and available, providing a middle ground between full accrual and cash basis accounting.
Modified Accrual vs. Cash Basis Accounting
Cash basis accounting recognizes revenues and expenditures only when cash is received or paid. Modified accrual accounting, however, recognizes revenues when they are measurable and available, and expenditures when they are incurred, offering a more accurate reflection of financial activities.
Examples
Property Tax Revenue
In modified accrual accounting, property tax revenue is recognized when it is both measurable and available. For instance, if taxes are due on January 1 and are expected to be collected within 60 days, they would be recorded as revenue in the current fiscal year.
Capital Project Expenditure
A capital project expenditure, such as the construction of a new school, would not be recognized until it is a current liability. Thus, the expenditure would appear in the financial statements when the funds are legally obligated.
FAQs
Why Do Governments Use Modified Accrual Accounting?
What Are the Limitations of Modified Accrual Accounting?
References
- “Governmental Accounting: A Guide to Modified Accrual Accounting,” Financial Accounting Standards Board.
- “Modified Accrual vs Full Accrual Accounting: Key Differences,” Journal of Government Financial Management.
Summary
Modified accrual accounting is a systematic approach used primarily by government entities to reflect financial activities accurately. Combining elements of both cash basis and full accrual accounting, this method ensures that revenues and expenditures are recorded in a manner that supports fiscal accountability and transparent financial reporting.
By utilizing this approach, government agencies can create budgets that are both realistic and reflective of their financial status, aiding in sound financial planning and decision-making.
