GTZ Report on Accrual Accounting Status Quo - LGCDP

Cash Accounting vs. Accrual Accounting 2
02. Cash Accounting vs. Accrual Accounting
2.1. Definition and comparison of the Cash Accounting System and the
Accrual Accounting System
Definition of Cash Accounting
The cash accounting system primarily focuses on the inflow and outflow of cash transactions within one period. That is
why it only knows two accounts in its pure form – the cash inflow account (cash receipts) and the cash outflow account
(cash payments) and therefore can only produce cash flow statements that cover cash inflow, cash outflow as well as
opening and closing cash balances. Transactions are only recorded when the money for revenues actually is received
and on the other side expenditures are only recorded when they are actually paid. This is related to the development of
accounting systems in the past. In former times there was no major time difference between the receipt and payment
of a certain good, which is why it was not necessary to develop separate accounts in order to reflect this time gap
through receivables or payables or whatsoever. This has the effect that cash accounting is blind towards future
revenues or expenditures until they are recorded in the cash accounts. Besides that the cash accounting system does
not recognize the interlinkage between the source and the application of funds, since the sums normally simply
“appear” in the cash inflow or cash outflow account without a connection. Therefore one can not track down the linkage
between the money (e.g. taxes or fees) that was used to achieve a certain outcome (e.g. a new bridge). For the same
reason one can not connect received cash to the total cash to be received (e.g. in tax management). Furthermore the
cash accounting focuses only on cash and therefore doesn’t reflect the status, value or wear and tear of assets and
resources and therefore has no incentive for planned, strategic maintenance or reinvestment. Thus it is possible that a
municipality lives from their “asset substance” e.g. a street by not acknowledging that assets are devaluing when being
used. Therefore maintenance of and reinvestments into assets are not specifically planned in cash accounting or cash
budgeting and because of this, necessary “sudden” maintenance or the reinvestment into an asset at risk (e.g. a bridge
with cracks) might not be affordable for municipalities in a current fiscal situation. Cash Accounting is the dominant
public sector accounting system.
Definition of Accrual Accounting
On top of the known cash transaction accounts from the cash based accounting system, the accrual accounting
system knows multiple accounts, like receivables, payables, asset accounts, depreciations to be made on assets.
Therefore it can provide a complete financial overview of e.g. a municipality.
It displays full financial information on all cash transactions, assets, resources, resource consumption, true costs,
arrears and current as well as future liabilities and revenues. Moreover it recognizes economic events and transactions