Chapter 3 · Fundamentals of accounting

the integrity of the transactions. The consequent records and the subsequent
measurement and valuation that produce relevant reports have to be reliable.
The cash basis has no exogenous way of defining when cash should flow, either
in or out. The amounts that should flow can be defined but not when. Given the
centrality of the fiscal year in accounting, this lack of definition means that the
annual account can be seriously manipulated, without in any way being judged
improper – beyond commonsense judgements. Cash payments can be properly
postponed by as little as 24 hours to yield markedly different operating state-
ments and balance sheets. For example, the monthly salaries bill can, with the
agreement of the employees, be postponed from the end of month 12 in the old
fiscal year to the beginning of month 1 in the new. An accrual basis appeals to
the measurement of the cost of services provided to identify that there would
then only be 11 monthly salaries payments in the old year and adjusts for that
fact; a cash basis has nothing to which to appeal.

3.3 National accounting and government budgeting

There are two other forms of ‘accounting’ that complement and sometimes com-
pete with public sector accounting, especially in national governments. The first
is the set of macroeconomic accounts for each country (known as national
accounting) and, second, there is each national government’s budget.
National accounting is a statistical system that produces economic statistics for
each economy, particularly of national income and wealth. As well as the focus
on each economy, it focuses on each of five sectors within the economy: two
for business (finance and non-finance), one for non-profits, one for households
and one for government. The operating statements and balance sheets for the
last of these – known as the general government sector – provide a competing
view of a national government from that provided by government accounting
as a whole.
National accounting is a globally standardised system that derives its theoret-
ical framework from economics and is carried out by central statistical offices.
In its modern form, it developed from the 1930s onwards, as part of the macro-
economic management that had emerged in the USA and the UK to deal with the
Depression. World War II then provided a special impetus. Governments in the
UK and then the USA had the responsibility of deciding which resources should
be applied to the overriding military needs (and export need) and which to the
civilian population.
To do this systematically and rationally also required knowledge of the
nation’s available resources. The national income accounting that developed
subsequently promoted and reinforced the peacetime national economic per-
spective that the UK increasingly adopted, accompanied by a surge in the nation-
alisation of utilities and other fundamental services. National income accounting
became known as national accounting as the theory and practice added balance
sheets to the operating statements. The global system is called the System of
National Accounts, with a European version that is fully consistent with the
global system. Another set of national economic statistics that developed in

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 3.3 National accounting and government budgeting

parallel – known as the Government Finance Statistics – focuses on economic

relations between economies.
National accounting has much in common with accounting. Both use money
for their measurements; national accounting is accrual-based and government
accounting includes accrual bases; national accounting depends, in part, on the
accounting records of transactions in each organisation; and national accounting
partially defines itself in terms of its points of departure from for-profit accounting.
National accounting, however, is also very distinctly different from accounting
(as a matter of language, obviously confusingly so), even though both systems
are in part addressing the same economic activities of government. National
accounting uses a ‘double-entry’ system, but it is fundamentally different from
double-entry bookkeeping.
The two versions of ‘double-entry’ have a common foundation – a transaction
is recorded as an exchange between two parties, in which each party is taken to
benefit equally. Double-entry bookkeeping, however, keeps the records of actual
transactions of a single organisation, but national accounting records aggregate
estimates of actual transactions between five large sectors, which are groupings
of organisations (and people).
There are two obvious consequences of this different definition of a ‘trans-
action’. The first is that the transactions of double-entry bookkeeping can be
audited in the narrowest and most traditional sense of that word: they can
be verified as correct. The transactions of national accounting, however, cannot
be audited in that sense. The second is that double-entry bookkeeping provides
the possibility of external verification of a balancing figure: the amount of cash
at the bank. The double-entry in national accounting cannot provide such a
check.
Other fundamental differences between national accounting and accounting
are that the reporting entities of national accounting are the aggregate sectors of
the economy, not individual organisations, and the definition of the general
government sector is not necessarily a government’s definition of itself or an
accountant’s definition of it. Moreover, the definition of accruals for particular
line items can be very different, in theory and practice. One striking example is
accounting’s requirement for inventory to be an asset, contrasted with national
accounting’s requirement for it to be an expense.
National accounting, then, by its nature, demands comparable information
across each economy. In countries such as the UK and the USA, accounting – also
by its nature – cannot provide such information. National accounting avoids this
contradiction essentially by using statistical processes. It has produced, in a
single country, significantly different income figures for gross domestic product
measured from different points of view. This is an obvious weakness, but it does
produce relevant data in standardised forms worldwide.
Both national accounting and government accounting provide inputs to a
national government’s budget, but each budget’s rules and practices are typically
distinctly different. They are not, and cannot be, apolitical, being at the heart of
government. The rules are developed by each government, which protects its
sovereignty over those rules. They are subject to the due process of law and
practice, but those processes can be arcane, ad hoc, complicated – and far from

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Chapter 3 · Fundamentals of accounting

transparent. There are international pressures on the rules and practices (from
bodies such as the International Monetary Fund, World Bank, OECD), but there
is no international set of policies. Government budgets can, therefore, draw on
an array of accounting bases, legitimated within accounting or national account-
ing, as well as by the assertion of sovereignty, to produce an amalgam that has
no technical meaning.

FURTHER READING
Aiken, M. (1994) ‘Parliamentary sovereignty and valuation accruals: uncongenial conven-
tions’, Financial Accountability and Management, 10(1): 17–32.
Anessi-Pessina, E., Nasi, G. and Steccolini, I. (2008) ‘Accounting reforms: determinants of
local governments’ choices’, Financial Accountability and Management, 24(3): 321–42.
Caperchione, E. and Mussari, R. (2000) Comparative Issues in Local Government
Accounting, Kluwer.
Christiaens, J. and Rommel, J. (2008) ‘Accounting reforms: determinants of local govern-
ments’ choices’, Financial Accountability and Management, 24(1): 59–75.
Ellwood, S. (2008) ‘Accounting for public hospitals: a case study of modified GAAP’,
Abacus, 44(4): 399–422.
Jones, R. (2000) ‘National accounting, government budgeting and the accounting discip-
line’, Financial Accountability and Management, 16(2): 101–16.
Lüder, K. and Jones, R. (eds) (2003) Reforming Governmental Accounting and Budgeting
in Europe, Frankfurt: Fachverlag Moderne Wirtschaft.
Mellett, H. (1997) ‘The role of resource accounting in the UK government’s quest for
“better accounting” ’, Financial Accountability and Management, 27(2): 157–68.
Perrin, J. (1998) ‘From cash to accruals in 25 years’, Financial Accountability and
Management, 18(2): 7–10.
Van der Hoek, M. (2005) ‘From cash to accrual budgeting and accounting in the public
sector: the Dutch experience’, Public Budgeting and Finance, Spring: 32–45.

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