GTZ Report on Accrual Accounting Status Quo - LGCDP

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Cash Accounting vs. Accrual Accounting 7 2.3. The dimensions of Accrual Accounting – Financial Statements The dimensions of accrual accounting which are recommended by international standards consist of balance, income, capital change and cash flow statements (IPSASB, 2008b; Grossi, 2006). Balance Statement of Financial Position The balance statement of financial position consists of the different values on the debits and credits side. The debit side consists of floating assets and capital assets. The credits side consists of reserves and liabilities. On both sides one can distinguish between current and non current values. Through the calculation of the difference between debits and credits side, the equity capital can be displayed. Therefore one can see if the municipality has accumulated a deficit or a surplus. Income Statement (Operating Statement) The income statement is a sub account of the equity capital account, showing on each side of the account the revenues and expenses of a fiscal period separated according to operational and non operational activities as well as ordinary activities and extraordinary items. On the one hand revenues are recorded according to their source and on the other hand expenses are recorded according to their function, nature or use. The matching principle directly connects expenses to specific items of revenue on the basis of cause and effect relationships. The result of a fiscal year, the net income or net resource consumption, is calculated through the difference between revenues and expenses. As a result, the profit or loss of a fiscal year can be displayed. Statement of changes in net assets/equity This statement records all adjustments in net assets which are for example due to necessary revaluation of assets, past valuation errors or changing accounting policies. Cash Flow Statement The cash flow statement is being used for the documentation; supervision and steering of the cash flow and therefore ensures the liquidity and solvency of a municipality. These information are prerequisites for the access to loans on the capital market, e.g. if municipalities needed to cover expensive infrastructure investments partly by loan. Moreover this knowledge about solvency is also a signal on the credit market that reduces the risk and uncertainty for lenders when giving loans to municipalities.
Cash Accounting vs. Accrual Accounting 8 A Cash flow statement is essential because even a surplus in the balance statement is no guarantee that sufficient resources for operational activities are available. Cash flows are inflows and outflows of cash and cash equivalents. Receipts of cash (cash inflow) are booked according to the source of funds. Disbursements (cash outflow) are booked according to the application of funds. On each side the values are separated according to operating, investing and financing activities. These information allow to ensure operating activities of a municipality and also allow to decide on future investment activities and liquidity needs. Overview 2: The three most important dimensions of Accrual Accounting Financial Statements Cash Flow Statement Balance Statement Income Statement Cash Receipts Disbursements Debits Floating assets Credits Equity capital Revenues Expenses Liquidity capital assets Debits Reserves Liabilities Credits Fiscal Year Outcome 2.4. In-Betweenism: Mixed Approaches of Cash and Accrual Accounting When looking at accounting systems in the public sector usually mixed approaches rather than pure forms of cash based accounting or accrual based accounting are in place. These mixed forms of accounting systems are in practise at different government levels and countries. In both systems differences arise on the one hand about the time of booking and on the other hand on the preconditions for booking. The modified cash basis of accounting recognizes transactions and events which belong to the previous fiscal year and normally would be reflected in a cash inflow or outflow within the current fiscal year (Schiavo-Campo & Tommasi, 1999, p.3). The difference compared to the pure cash accounting system lies in the fact of leaving “the books open” for cash transactions (mostly expenditures, sometimes also revenues) that are related to the previous fiscal year throughout a complementary period during the next fiscal year. Therefore it recognizes cash transactions that belong together and ensures a greater “conformity” within one fiscal year (Schiavo-Campo & Tommasi, 1999, p.3).
Page 1 and 2: Urban Development through Local Eff
Page 3 and 4: Contents 01. Executive Summary (p.1
Page 5 and 6: Cash Accounting vs. Accrual Account
Page 9: Cash Accounting vs. Accrual Account
Page 17 and 18: Findings and observations in the Ne
Page 25 and 26: How to implement Accrual Accounting
Page 33 and 34: Annex 30 05. Annex Annex 1 IPSAS Li
Page 35 and 36: References 32 06. References ADB (2
Page 37: References 34 Schiavo-Campo, S. & T

GTZ Report on Accrual Accounting Status Quo - LGCDP

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