GTZ Report on Accrual Accounting Status Quo - LGCDP
GTZ Report on Accrual Accounting Status Quo - LGCDP
GTZ Report on Accrual Accounting Status Quo - LGCDP
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Cash <strong>Accounting</strong> vs. <strong>Accrual</strong> <strong>Accounting</strong> 5<br />
transparency by not being able to tell relevant stakeholders like tax payers the source and applicati<strong>on</strong> of specific<br />
resources e.g. taxes. In the c<strong>on</strong>text of Nepalese Municipalities, most of the public properties are not accounted in the<br />
books of accounts and inventories of such valuable public assets (land, public parks and other important historical<br />
m<strong>on</strong>uments) are ignored due to the applicati<strong>on</strong> of cash accounting. A comprehensive strategic financial<br />
management plan of municipal bodies is impossible to be developed and implemented <strong>on</strong> base of cash<br />
accounting systems.<br />
Advantages of <strong>Accrual</strong> <strong>Accounting</strong><br />
Most of all accrual accounting allows displaying informati<strong>on</strong> <strong>on</strong> n<strong>on</strong>-m<strong>on</strong>etary resources, assets, true costs, future<br />
liabilities, receivables, payables and therefore provides important knowledge for the development of a financial<br />
strategy, a transparent, effective and efficient revenue and expenditure management as well as decisi<strong>on</strong> making<br />
processes of a municipality.<br />
Moreover, the financial statements and informati<strong>on</strong> produced according to accrual accounting provide local and central<br />
government agencies, creditors, d<strong>on</strong>ors, foreign investors, rating agencies, tax payers and other stakeholders with<br />
reliable informati<strong>on</strong> about the financial and ec<strong>on</strong>omic situati<strong>on</strong> of a municipality (SAFA, 2006, p.2).<br />
Furthermore, it enhances transparency by disclosing current and future liabilities (e.g. outstanding<br />
reinvestments into assets), resource c<strong>on</strong>sumpti<strong>on</strong>, true costs and the source and applicati<strong>on</strong>s of funds<br />
according to cost centres (IMF, 2007, p.6, p.17; Champoux, 2006, p.14-15).<br />
Therefore it also provides the necessary informati<strong>on</strong> to hold the administrati<strong>on</strong> and different cost centres<br />
accountable and resp<strong>on</strong>sive for their acti<strong>on</strong>s. This is especially important in Nepal since a well developed tax<br />
culture does not exist. With accrual accounting it is possible to show the tax payers what was achieved with their<br />
m<strong>on</strong>ey.<br />
Additi<strong>on</strong>ally, it also empowers cost centres, a slaughter house for instance, by giving them the freedom to self<br />
manage their resources in an efficient way because they can see their expenses that are matched to their revenues.<br />
For the reas<strong>on</strong> that accrual accounting always affects the debtors and the credits side and that it recognizes ec<strong>on</strong>omic<br />
events when they occur, an accountant can draw a linkage between the taxes already received and the total amount of<br />
taxes to be paid. On the other hand depreciati<strong>on</strong>s and the allocati<strong>on</strong> of reserves for crucial assets and future liabilities<br />
provide a sustainable accounting approach for debt management, strategic planning as well as asset<br />
management including the maintenance of and reinvestment into assets. <strong>Accrual</strong> informati<strong>on</strong> also allows a proper<br />
evaluati<strong>on</strong> to be made <strong>on</strong> quality, feasibility, efficiency and effectiveness of investments (Athukorala & Reid,<br />
2003, p.17, p.28). This is possible because accrual accounting can c<strong>on</strong>nect the source with the applicati<strong>on</strong> of funds.<br />
Therefore it allows a better allocati<strong>on</strong> of scare resources in the l<strong>on</strong>g run. Furthermore that evaluati<strong>on</strong> also provides<br />
a municipality with important implicati<strong>on</strong>s for budgeting, reporting and auditing.<br />
Additi<strong>on</strong>ally, accrual accounting is also able to compare services and costs across organizati<strong>on</strong>s.