Question Tag: Cash Accounting

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  • 10 Marks

PSAF – May 2017 – L2 – Q1b – Accounting policies for cash and accrual-based accounting systems

This question explains the differences between accrual and cash accounting, justifies the adoption of accrual accounting in the public sector, and describes the concept of commitment accounting.

You have received an official email from your Director which reads:

“Hello Accountant,

Hope you are doing well. We have closed from a workshop organized by the Controller and Accountant General’s Department on public financial management not long ago and the discussion was all about the adoption of accrual accounting in the public sector. It was emphasized that migration from cash basis to accrual basis is necessary to improve financial reporting and transparency in the public sector. You know I have little knowledge in Accountancy so I was completely lost in the discussions and I wished you had attended the workshop with me.

Another issue discussed was commitment accounting. We were made to understand that commitment accounting strengthens public financial management and therefore departments must ensure that every expenditure is committed in accordance with the appropriation prior to spending.

Please could you help me with some information on these issues?

Thank you, Director.”

Required: i) Explain to the Director THREE differences between accrual accounting and cash accounting. (3 marks)

ii) Identify THREE justifications for adopting accrual accounting in the public sector. (3 marks)

iii) Explain the term commitment accounting and illustrate how it could strengthen public financial management. (4 marks)

 

i) Differences between accrual accounting and cash accounting:

  • Comprehensive Reporting: Accrual accounting provides comprehensive financial statements, while cash accounting mainly focuses on receipts and payments.
  • Capitalization of Non-Financial Assets: In accrual accounting, non-financial assets are capitalized and depreciated, while in cash accounting, they are expensed in the year of acquisition.
  • Obligations Disclosure: Accrual accounting discloses all obligations, whereas cash accounting only records transactions when cash is exchanged.

ii) Justifications for adopting accrual accounting:

  • Provides a superior measure of performance, focusing on cost, efficiency, and service delivery.
  • Enhances accountability and transparency by disclosing all assets and liabilities.
  • Offers comprehensive financial information that supports decision-making and control.

iii) Commitment Accounting is a method where expenditures are recorded when management decides to spend on an activity or item, encumbering appropriations for future expenditures. It strengthens public financial management by:

  • Ensuring departments do not overspend their appropriations.
  • Promoting effective planning of expenditures within available resources.
  • Synchronizing disbursements with commitments, reducing fund misapplication.
  • 9 Marks

PSAF – May 2019 – L2 – Q1a – Accounting policies for cash and accrual-based accounting systems

Explain the key characteristics of commitment, accrual, and cash accounting bases used in public sector accounting.

a) Accounting Concepts and Bases are broad basic assumptions, which underlie the preparation of the periodic financial statements of entities in the public sector. Unless stated, it would be assumed that they have been adhered to when preparing financial statements.

Required:
Explain THREE (3) key characteristics of each of the following Accounting Bases used in Public Sector Accounting:
i) Commitment accounting
ii) Accrual accounting
iii) Cash accounting
(9 marks)

i) Characteristics of Commitment Accounting

  • Commitment accounting is used solely in relation to expenditure; not revenue.
  • It is an alternative accounting base that is more theoretical and less widely adopted in practice compared to cash and accrual accounting.
  • The entries are complicated when orders are canceled or when there is an amendment to the content or an order. To avoid returning uncommitted resources back to the government’s general fund, rush orders for inappropriate jobs or services can be made to commit unused cash balances.

ii) Characteristics of Accrual Accounting

  • It recognizes the existence of the transaction in terms of service to be given or received but not the inflow and outflow of cash. It is a realistic and practical concept because it takes both cash and credit transactions into consideration.
  • There is a distinction between capital expenditure and revenue expenditure. This allows for the matching of output activity and program with cost incurred, thus performance measurement.
  • Accrual accounting allows for the preparation of the final accounts in the form of preparation of the operating statement and balance sheet, ensuring full disclosure of resources and outstanding liabilities.

iii) Characteristics of Cash Accounting

  • Cash inflow and cash outflow is the only basis for recording transactions in the books of accounts. The cash book is the main document, and postings are made to the ledger thereafter.
  • Credit transactions which result in debtors and creditors are not recorded; hence, debtor and creditor accounts are not kept.
  • Both revenue and capital income, as well as revenue and capital expenditure, are treated as revenue income or revenue expenditure. Fixed assets are not recognized under cash basis and are written off in the year of purchase.
  • 4 Marks

PSAF – May 2020 – L1 – Q1a – Accounting policies for cash and accrual-based accounting systems

Discusses the differences between cash accounting policies and accrual accounting policies concerning their recognition and treatment in financial statements for various accounting elements.

Cash accounting policies and accrual accounting policies, when applied respectively to the same transaction or events of the same entity, will produce different pictures of the financial performance, position, and cash flow information of the entity. Thus, the choice of alternative policies needs to be given much consideration. The International Public Sector Accounting Standards Board (IPSASB) permits the use of cash accounting policies whilst encouraging the application of accrual accounting policies in the preparation of financial reports for the public sector.

Required:
Discuss the difference between cash accounting policies and accrual accounting policies in terms of recognition and/or treatment of the following in the Financial Statements: i) Revenue
ii) Capital asset
iii) Allowances and provisions
iv) Contingent liability

  • Revenue
    • Cash accounting policy: Revenue is recognized in the statement of cash receipt and cash payment when received. No asset is recognized when the revenue is not received at the reporting date.
    • Accrual accounting policy: Revenue is recognized when earned but not when received. Revenue receivable is treated as assets on the statement of financial position.
  • Capital asset
    • Cash accounting policy: Capital assets are recognized as expenditure for the year in which the asset was purchased or developed. No depreciation is charged to the determination of the cost of service of the period.
    • Accrual accounting policy: The asset is recognized as an asset. The cost of the asset is written off over its useful life in the determination of financial performance.
  • Allowances and provisions
    • Cash accounting policy: No room for allowances and provisions since recognition is purely on a cash basis.
    • Accrual accounting policy: Allowances and provisions are made on receivables, stock loss, and non-current assets.
  • Contingent liability
    • Cash accounting policy: Contingent liabilities are not recognized until they result in an actual cash outflow.
    • Accrual accounting policy: Contingent liabilities are recognized when they are probable and can be reasonably estimated, even if no cash outflow has yet occurred.
      ===============

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