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- 8 Marks
Question
The Director of Finance and the Principal Spending Officer of a Public Sector Organization are in disagreement as to which basis of accounting will provide the most useful information to the users. The Principal Spending Officer strongly believes that whether an entity applies cash basis or accrual basis, the effect is the same. The Director of Finance disagrees with him totally, arguing that different accounting treatments apply to both and therefore affect the level of disclosure in the financial report. The Director of Finance proceeded to illustrate his point by drawing on the basis of accounting on these items in the financial statement:
i) Motor vehicle donated to the entity
ii) Revenue due but not received by the entity
iii) Furniture acquired in the current year
iv) Electricity consumed for the year but not paid to the Electricity Company.
Required:
The Director of Finance has tasked you to present a brief paper on how the two accounting bases would be applied in the treatment of items i) to iv).
Answer
i) Motor vehicle donated to the entity:
- Cash Basis: No recognition of the vehicle since no cash is involved.
- Accrual Basis: The vehicle is recognized as an asset at its market value, and the donation is recorded as revenue.
ii) Revenue due but not received by the entity:
- Cash Basis: No recognition of the revenue since cash has not been received.
- Accrual Basis: The revenue is recognized in the financial period it is earned, even if not received, and recorded as a receivable.
iii) Furniture acquired in the current year:
- Cash Basis: The entire cost is recorded as an expense when paid.
- Accrual Basis: The furniture is capitalized and depreciated over its useful life.
iv) Electricity consumed for the year but not paid to the Electricity Company:
- Cash Basis: No recognition of the expense since it has not been paid.
- Accrual Basis: The expense is recognized in the period it is incurred, with a corresponding liability recorded.
- Tags: Accrual Basis, Cash Basis, Financial Reporting, Public Sector Accounting
- Level: Level 2
- Uploader: Joseph