Accrual Accounting

Accrual accounting

There are two forms of accounting typically used in business which are accrual based and cash based. Until relatively recently Australia government accounted primarily on a cash basis and this was justified on the grounds that the government budgetary and control process is an annual, cash based system. Each year, as part of the budgetary cycle, parliament authorizes expenditures of cash and no distinction is made between capital and operating expenditure. As a result, the accounting system was based on cash. This system was called fund accounting and it was designed to enable departmental managers to control departmental expenditures. It shows Australian public sector entities were required to abandon fund accounting and adopt accrual accounting and the shortcomings of fund accounting.

According to Jones R and Pendlebury (2000, pg 143), cash based accounting is a major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out and it was justified on the grounds that the government budgetary and control process is an annual. Benefits of cash basis of accounting are government budgets & appropriations are cash based. Monitoring of receipts and spending are easier, cash based financial reports are budget compliant, principles underlying the cash basis are easy to understand and easy to explain, compilation of cash based information is easier, operating costs are lower and no need to exercise any judgment in determining the amount of cash flows for the period. However, there also have limitations and shortcomings, which are impact of consumption of stock of net assets held by government is not known, cash accounting focuses solely on the cash flows of the current period, accountability of government for use of its resources becomes difficult, reporting of receipts and payments in great detail may lead to problems in understanding the information, there is no system of reporting of...