THE MIDLANDS STATE UNIVERSITY

FACULTY OF SOCIALSCIENCES
LOCAL GOVERNANCE STUDIES

NAME : IDAH V MUTEKERI

REG NUMBER : R213359R

LEVEL : 1.2

MODULE CODE: LGS135

MODULE NAME: PUBLIC SECTOR ACCOUNTING AND AUDITING

QUESTION: Discuss the concept of accrual accounting and its benefits in the financial
accounting, reporting and management in the public sector. [20]
CONCEPT OF ACCRUAL ACCOUNTING:

Accrual accounting is a method in which businesses do accounting in the mean-time and
giving them a more accurate picture of the true profitability and not forgetting the financial
health of the business. It records all revenue or expenses when a transaction occurs versus
when payment is received or made. Accrual accounting method follows the matching
principle which says that revenues and expenses should be recognized in the same period.
This method seems to be different from cash accounting because cash accounting only
recognizes transactions when a payment is made. In accrual accounting, revenue is
accumulated by sales and expenses incurred are recorded as they occur. Financial reporting is
the financial results of an organization that are released to its stakeholders and the public.
Financial reports are also the mechanism through which legislators, auditors and the public at
large hold governments accountable for their financial performance.

Accrual refers to an entry made in the books of accounts related to the recording of revenue
or expense paid without any exchange of cash. Accrual accounting is financial accounting
method that allows a company to record revenue before receiving payment for goods or
services sold or expenses are recorded as incurred before the company has paid for them. The
method follows the matching principle which says that revenues and expenses should be
recognized in the same period. The use of accrual accounting is typically useful in businesses
where there are a lot of credit transactions or the goods and services are sold on credit, which
simply means that there was no exchange of cash.
There are several types of accrual accounts which include accounts payable, accounts
receivable, goodwill, accrued interest earned and accrued tax liabilities to mention but a few.
Accounts payable is a specific type of accrual which refers to debts a company incurs when it
receives goods or services from its vendors before it has actually paid for them. Using the
accrual accounting method, when a company incurs an expense, the debt is recorded on the
balance sheet as an account payable liability and the income statement as an expense. General
account payable involves expenditures related to business operations and they do not include
employee wages or loan repayments. Accounts payable is an important figure in a company’s
balance sheet. If accounts payable increases over a prior period, that means the company is
buying more goods or services on credit rather than paying cash. If it decreases, it means the
company is paying on its prior period debts at a faster rate than it is purchasing new items on
credit.
Accounts receivable is any amount of money your customers owe you for goods or services
they purchased from you in the past. This money is typically collected after a few weeks and
is recorded as an asset on your company’s balance sheet. Late payments from customers are
one of the top reasons why companies get into cash flow or liquidity problems. When a
company have a system to manage its working capital, it can stay ahead of issues like these of
late payments. Many business’s use accounts receivable aging schedules to keep taps on the
status and well-being of accounts receivabele accounts.

Goodwill, is accrued when an entity pays more for an asset than its fair value, based on the
company’s brand, client base or other factors. Goodwill cant be separated or divided from the
entity which it is associated. Goodwill can be sold, transferred, licensed, rented or exchanged,
either individually or together with a related contract, identifiable asset or liability. It does not
carry contractual or other legal rights, regardless of whether those are transferable or
separable from the entity other rights or obligations. Corporations use the purchase method of
accounting, which does not allow for automatic amortization of goodwill.

Financial reporting is one of the foundations of good fiscal management. High-quality

financial reports are essential to ensure that government’s fiscal decisions are based on the
most up-to-date and accurate understanding of its financial position. Financial reports are also
the mechanism through which legislators, auditors and the public at large hold governments
accountable for their financial performance. Finally, financial reports are a critical source
of information for markets and other stakeholders to understand the government’s
financial operations and their implications for their own economic decisions.

According to Cameroon (2021) Unlike most private sector organizations, governmental

entities must be responsive to a number of different groups and organizations, including
elected officials, other units of governments, investors, creditors, and citizens that are focused
on monitoring their activities. All forms of monitoring include collecting and interpreting
data, and this oversight function is often performed through information provided in
governmental reports. Among the most important types of communication is the annual
financial report, which presents the financial position, operating results, and cash flows for a
particular accounting period. All governments, including school districts, develop their
annual financial reports in accordance with principles established by standard-setting
authorities to provide consistency and comparability for users.

For governments to achieve the objective of accountability, financial information must be

both relevant and reliable for reasonably informed users as stated by Hayes (2020). Financial
reports must satisfy numerous and diverse needs or objectives, including short-term financial
position and liquidity, budgetary and legal compliance, and issues having a long-term focus
such as capital budgeting and maintenance. Additionally, differences exist in the amount of
detail that various users need.

Following a decade of research and analysis, the GASB recently concluded that to meet the
varied needs of a wide range of users, governmental reports must provide information
regarding the public entity as a whole in addition to the traditional fund financial statements.
Accordingly, in June 1999 GASB introduced a new financial reporting model in Statement
34, Basic Financial Statements—and Management's Discussion and Analysis—for State and
Local Governments. The new model integrates the traditional focus of governmental fund
financial statements relating to fiscal accountability and the modified accrual basis of
accounting with new forms of reporting for example government wide financial statements.
The two levels of financial reporting are intended to provide more relevant information that
will result in greater accountability by state and local governments and enhance the
understandability and usefulness of the annual financial reports to users of these reports to
enable them to make more informed economic, social, and political decisions.

This chapter provides an overview of governmental accounting and financial reporting,

including the new requirements, as well as a discussion of current approaches used in
compiling financial reports. In particular, the following elements are included, governmental
GAAP Hierarchy, measurement focus and basis of accounting, fund Structure, Internal
control structure, other issues affecting educational entities.
It is important for governments to provide effective financial information to constituencies in
a consistent and clear format. Specifically, the information provided by governments should
contribute to accountability in the following areas which include financial position and results
of operations, Actual financial results compared with adopted budgets, Compliance with
finance-related laws, rules and regulations, efficiency and effectiveness of operations,
maintenance of governmental assets

Consistency in financial reporting by governments is provided through accounting standards.

GASB is the standard-setting authority of generally accepted accounting principles (GAAP)
for state and local governments, including school districts. In cases for which no GASB
pronouncement is applicable, other authoritative sources of guidance exist. The following
chapter presents a hierarchy of GAAP in descending order of authoritative literature for
governments. Madison (1999) The hierarchy was established in Statement of Auditing
Standards (SAS) 69, The Meaning of Presents Fairly in Conformity with Generally Accepted
Accounting Principles in the Independent Auditor's Report, effective March 15, 1992, and
issued by the American Institute of Certified Public Accountants (AICPA).

According to www.imf.org/external there are three main criteria for high-quality financial
reports: their completeness, in terms of the nature of financial operations reported; their
comprehensiveness, in terms of entities covered and their integrity, in terms of the degree of
external validation. In around three-quarters of oecD countries, governments have improved
the completeness of their financial reports by moving away from pure cash accounting
toward accrual accounting. Cavanagh (2016) submitted that governments that have adopted
accrual accounting establish balance sheets that: report on their stocks of assets and
liabilities; show whether liabilities are matched by corresponding assets and measure whether
their activities and decisions generate a fiscal burden. However, countries have progressed to
different levels in populating their balance sheet. For example, civil service pensions and
natural resources are reported in the balance sheet by 11 and 3 oecD countries respectively.

According to oecD/IFac (2017) fiscal activity is carried out by different levels of government.
Government agencies, pension funds or local governments can raise, spend, and in some
cases borrow significant fiscal resources. Where information on the financial situation of
these public entities is not centralized, consolidated and publicly available, the transparency
of public finances is more limited. However, only five oecD countries (14%) provide an
overview of the public sector as a whole in their financial statements. external independent
and public assessment of the f inancial information prepared by the government is one of the
major safeguards of financial report’ integrity. In all oecD countries, year-end financial
reports are subject to independent external control or audit by national supreme audit
institutions. to perform these audits, international auditing standards are used in 19 oecD
countries 56%, showing that audit techniques have been modernized simultaneously with the
adoption of accrual accounting by governments. overall, there has been clear progress in the
completeness and comprehensiveness of governments’ financial reports over the last two
decades. However, a high proportion of supreme audit institutions’ audit reports mentions
various issues and concerns with financial reports, showing that governments still have a way
to go for improving the quality of their reporting practices.
REFERENCE LIST:

Cameroon. M, (2021) Cash Basis Accounting vs Accrual Accounting

cavanagh J. (2016), “Implementing accrual accounting in the Public Sector, International

monetary Fund”, Washington, Dc,

Hayes. A, (2020), Accrual Accounting

Madison. A (1999), Financial reporting by national governments

oecD/IFac (2017), “accrual Practices and reform experiences in oecD countries”, oecD
Publishing, Paris, http://dx.doi.org/10.1787/9789264270572-en.

www.imf.org/external/pubs/cat/longres. aspx?sk=44121.0