GTZ Report on Accrual Accounting Status Quo - LGCDP

Cash Accounting vs. Accrual Accounting 9
All in all modified cash accounting would be a first step to match cash transactions related to an economic event to the
same fiscal year. For this reason the planning and operation of next year’s budget is not that much affected by the past
fiscal year arrears.
The modified accrual basis of accounting uses the same accounting framework as full accrual accounting.
However, it is bound to a single fiscal period and therefore short term focused by merely recognizing economic
transactions as revenues if they are available or measurable to liquidate liabilities in the current fiscal period or soon
thereafter. Similarly, expenditures are only recognized if they are expected to draw on the currently spendable
revenues in the fiscal period rather than long term resources. Although modified accrual accounting recognizes the
total amounts in the different accounts on the debits and credits side, e.g. through receivables or payables, it only
operates with the measurable or spendable funds and values. This has the advantage that there are no big
expectations regarding the upcoming revenues since only the available funds matter. For example even though an
accountant knows receivables in tax he does not book them as revenue until they are actually received and spendable.
For this reason, long term revenues or long term expenses are excluded in modified accrual accounting. The same
holds true for assets that are of long term use. Under modified accrual accounting they are written off immediately
when acquired. Therefore no systematic asset management exists in modified accrual accounting. This is also the
reason why modified accrual accounting does not use the term “expenses” and uses merely “expenditure” instead.
Compared to the two mentioned forms of cash accounting, the modified accrual accounting has the advantage of being
able to link the source and the application of available or spendable funds as explained before. Therefore it recognizes
if payments have been used according to their purpose. Moreover it ensures fund availability and fund flows for
expenditure purposes. All in all modified accrual accounting is a good first step for incremental accrual accounting
implementation since it uses the same principles like full accrual accounting.
2.5. Which accounting approach for which level of government
Regarding accounting systems for the public sector one has to take into consideration that there is a functional
difference between the national and sub-national level of government. This difference is mainly due to the different
scope of their actions towards the citizens as well as their public goods and services they provide. That is why it is not
necessarily compulsory to use one accounting system throughout all administrative levels of government even though
an integrated approach of accounting would be very useful and easier to handle in terms of budgeting, reporting and
auditing.