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- 10 Marks
Question
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)
Answer
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.
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