GTZ Report on Accrual Accounting Status Quo - LGCDP

Cash Accounting vs. Accrual Accounting 3
when they occur rather when money is actually exchanged. This effectively addresses the time difference between the
receipt and payment of goods and also makes future strategic planning and multiple years planning possible. For
example an accountant knows that in the fiscal year of 2008/2009 a certain total amount of tax is to be received even
though it is not yet paid by the tax payer. As a result the accountant would be able to track down the reason for arrears.
Transactions always affect two accounts in the accrual based accounting, the credits and debits side, which always
have to be matched and balanced. Therefore it is possible to show the source and application of funds which makes an
allocation of resources according to specific cost centres possible. For example a cost centre can be created for a bus
park by showing the revenues but also the matched expenses (e.g. operational and maintenance cost) of the bus park.
This would make the calculation of product costs possible. For example one could calculate an appropriate bus ticket
fee in order to cover all the expenses of the bus park. However, cost centres can also be established for individuals
(e.g. in tax management), projects, departments and so on.
The connection of the source and application of funds also makes performance based budgeting, reporting, auditing
and in general outcome orientation possible since one knows the crucial linkage between what was invested by whom
to achieve a certain outcome. For this reason accrual accounting has the potential to change the steering tools on
which cash accounting is based on towards performance and outcome orientation. For example accrual accounting
provides a mayor or executive officer with much more financial information which enables him to optimize the
budgeting process.
Another major characteristic of accrual accounting is the usage of depreciations and/or reserve allocation in order to
reflect the wear and tear of assets and future resource consumption. Depreciations are bookings, used to artificially
display the real happening devaluation of e.g. a street through usage. Reserve allocation is a connected tool to reserve
money for maintenance or reinvestment in order to address this devaluation. Through the income statement, where
total revenues are matched to expenses, the net resource consumption of e.g. a municipality is being displayed. The
income statement together with the balance statement of financial position displays the profit or deficit of a financial
period.
Accrual based accounting is the dominant private sector accounting system.
Overview 1: Cash Accounting vs. Accrual Accounting (Broader Overview available under
Athukorala & Reid, 2003, p.26-27)
Cash Accounting
Accrual Accounting
Full knowledge of all payment flows Only cash transactions
Complete financial overview possible
Time of booking
Recognizes transactions and economic Recognizes transactions and economic
events only when cash is received or paid events when they occur
Management of Assets and
Resources
No single accounts for assets and
resources
Full knowledge on the value of
resources and assets