ACF 656

PUBLIC SECTOR ACCOUNTING

MR. EVANS AGALEGA

Email: eagalega@yahoo.com Tel:0244811312/0208023879
Jan 2014
 UNIT ONE
PART A

NATURE AND OBJECTIVES OF

GOVERNMENT ACCOUNTING

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 SESSION 1-1: EXPLANATION OF PUBLIC SECTOR AND ITS
CHARACTERISTICS
Definition of Public Sector
Various attempts have been made to define the public sector among
which are the following:
• “All organizations which are not privately owned and operated.
• “Organizations without equity interest that can be owned bought and
sold.
• “Organizations whose goal is something other than earning a profit for
its owners.”

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 In summary, it can be said that the public sector consists of organizations
where control lies in the hands of the public other than private owners and
whose objectives involve the provision of services where the primary
objective is not profit-making.
To achieve the objectives of this course it is appropriate to distinguish
between government and not-for-profit organizations. Governmental
organizations can be generally referred to as Ministries, Departments and
Agencies (MDAs) and may be set up for general and specific purposes.
They play a very important and crucial role in assisting government in the
broad management of the complicated task of national development.
Governmental organizations have different roles they play and perform
different functions; they respectively constitute avenues for spending
public funds.
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 Characteristics of Public Sector Organisations
1) Public sector organisations are established to provide the basic needs of the people, that is,
public sector organisations are generally not established with the purpose of making profit.
2) Legally, public sector organisations enjoy some degree of monopoly. They are usually
established by acts of parliament which empowers them to be sole producers of certain basic
service. By this, they have the power to regulate the prices of Goods & Services produced to
meet the resources of users of those services in other to guarantee affordable prices rather than
competitive prices if left in the hands of private sector organisations.
3) Efficiency, effectiveness and economy known as the 3Es are the basis for measuring
performance in the public sector.
4) Public sector organisations are owned, managed and controlled by the public.
5) Taxes collected from the public are usually the main source of funding for public sector
organisations.
6) Finally, the services provided by public sector organisations are unavoidable; in the sense that
they form part of the basic needs of the public.

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 SESSION 2-1 OBJECTIVES OF PUBLIC SECTOR
ACCOUNTING AND FINANCIAL REPORTING
Public sector accounting involves identifying, recording, analysing,
classifying, summarizing, measuring and communicating the economic
events or transactions of public sector organisations to facilitate
decision making by users of those information. The objectives of Public
Sector accounting and financial reporting can be summarized as
follows:

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 1) Accountability: The primary objective of public sector accounting is “Accountability”.
Accountability requires governments to justify the raising of public resources and the
purposes for which they are used. Financial reports of public sector organizations
therefore reveal how the management and board of such organizations have been using
the resources given them in the form of tax moneys appropriated for them, as well as any
user charges and other financial resources they have been using.
2) Full disclosure of the financial results of department and agency activities.
3) Production of adequate financial information needed for department and agency
management purposes.
4) Effective control over and accountability for all funds, property, and other assets for
which each department and agency is responsible.
5) Reliable accounting reports to serve as the basis for preparation and support of
department and agency budget required to control the execution of the budget and to
provide financial information.
6) Suitable integration of department and agency accounting with the central accounting
and reporting operation of the Treasury Department.

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 Reasons for the Existence of the Public Sector
The reasons for the existence of the public sector can be summarized as follows:

To provide services for all citizens regardless of their ability to pay. They are
established to provide basic needs or in stated differently essential services for all
citizens. The services are so essential that they are made accessible and affordable to all.
To provide services which are beyond the private means of people using those services.
To aid control and economic regulation in key areas. Examples of these key areas
include energy, defence, law and order, health, water etc.
To correct perceived inequalities in the standard of living of the people (e.g. To achieve
certain minimum standards to education, road etc.).
Public sector organisations are set up to fulfil the legal requirements for their
establishment.

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 Users of Public Sector Information
1) The Media: Financial reporting is very important to the media; as the fourth estate of the government. The
media needs this information to make analysis and know how government financial information impacts on
all aspects of the economy and for advocacy where the need arises.
2) Auditor General: Being the government external auditor, the auditor general may want to know whether the
accounts prepared by the Controller and Accountant General has properly kept and records and source
document to these accounts and shows the true and fair view of Government’s state of affairs.
3) Government financial agencies: Government auditors, both internal and external, need financial
information of the public sector organizations to examine them and give their independent opinion on them.
4) Controller and Accountant General: The Controller and Accountant General uses financial reports to
develop and maintain a management information system, capturing real time, the past, present and emerging
developments and behaviour patterns of various governmental organizations.
5) Members of Parliament: This is the organ of the government which the executive or the public financial
managers have to account to. They evaluate the extent to which the executive has performed within the
powers and authority granted them as well as the value for money they have provided with the resources
they were entrusted with. They require government financial information in order to access the various
avenues where the government generate revenue and details of the expenditure of various authorities and
agencies as well as programs and investment activities of the government.

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 SESSION 3-1 DIFFERENCES BETWEEN PRIVATE SECTOR
ACCOUNTING AND PUBLIC SECTOR ACCOUNTING
1) The purposes of accounting
Users of financial information of both the private and public sectors are the same, however,
they differ in their information needs and that accounts for the difference in the content and
form of the accounting information provided by the two sectors.
In the private sector, the traditional financial statements in the form of profit and loss account
and balance sheet are prepared for the purpose of assessing the performance of management
and also to show the existing resources (i.e. Assets and liabilities.)
Public sector organizations are, however, not obliged to prepare accounts to show such
performance. With the public sector the quality and quantity of the Goods & Services are
compared with the funds provided to assess the economy, effectiveness and efficiency of the
organization.
The trend is somehow changing since some of the public sector organizations have some
element of profit motive or breaking even in their operations and charging user fees.

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 2) The Type of Theory Used
The entity or proprietary theory is adopted in the private sector as against
the fund theory found in the public sector. In the former, the capital account
represents the claim of the shareholders in the organization. Management of
the private sector organizations establishes proper financial management
and control to achieve the profit objective. Profit so reported belongs to the
entity and is not linked to any other entity.
In the public sector where the fund accounting operates, the funds are taken
to represent different independent accounting entities or activities in
possibly the same organizational setting. The sector that one manages is
therefore not accounted for as a single system which must be co-coordinated
with others to account for the fund as a whole. Unlike the private sector,
managers account for their stewardship and not the profit generated.

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 3) Accounting Basis
Public sector organizations could use varied basis such as cash Modified
cash, Modified Accrual, or Accrual accounting basis/system of
accounting. Currently Local and Central Government Accounts are
prepared under modified Accrual Accounting but with full adoption of
IPSAS they will both use Accrual Accounting like private sector
organisations. Under the modified cash system, all revenues of both
central and local government are recognised using cash accounting and
Expenditure are recognised using Accrual Accounting .debtors, creditors
and Fixed Assets are shown on the Balance sheet.

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 4) Regulatory Framework
The regulatory framework for accounting in the public sector differs from
that of the private sector. The main regulatory sources of accounting for
the public sector is the constitution of Republic of Ghana (1992); the
Financial Administration Act, 2003 (‘Act 654); Local Government Act
462 and other laws establishing the public sector organizations.
Accounting in the private sector is regulated by a combination of laws and
principles. Among these are the Ghana National Accounting Standards,
Financial Reporting Standards, International Accounting Standards, the
Companies Code, the Incorporated Private Partnership Act, industry
regulations (i.e. mining act, banking act, insurance act, etc.) and the
Constitution of the Republic of Ghana.

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 5) Classification of Expenditure
The public sector differs from the private sector in terms of the
classification of expenditure. The former classifies expenditure using the
GIFMIS current Chart of Account (CoA) which has expenditure line items
of; Compensation of Employees, Use of Goods and Services, Interest
Expense, Government Subsidies, Grants, among other related expenditures.
However, expenditure classification by the private sector differs from
industry to industry as regulated and codified by International Financial
Reporting Standards (IFRS), Industry Regulations and the Companies
Code. Expenditure line items include Cost of Sales, General Administration
Expense, Selling and Distribution, Finance Cost among others for
manufacturing and trading industry.

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 SESSION 4-1: SOURCES OF REVENUE
Introduction
To carry out its activities of rendering services and producing goods for
the citizens and residents, the public sector needs to be funded. Most of
the services rendered are, however, not sold or at most, user fees less
than the cost of services are paid. The public sector derives its revenue
from several sources as outlined below-:

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 1) Taxation
This is the system of raising revenue by the taxes. A tax is a sum of money
which is legally paid or compulsorily required to be paid by individual
owners or users of resources or business organization either directly or
indirectly to the government for the purpose of meeting public
expenditure.

The constitution of the Republic of Ghana has vested power in the

government to impose taxes on the citizens and residents to serve various
reasons. The government of every country imposes taxes for many
reasons; chief among them is to raise revenue. In Ghana taxes account for
over 80% of total government revenue. Taxes may be grouped into direct
and indirect.

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 i) Direct Tax
These are taxes levied directly on the income of individuals or businesses and
collected or taken directly from them or from their incomes at source, with
their personal knowledge of the full amount of the tax. Examples of direct
taxes are:
a. Income Tax - Taxes collected from the incomes of individual income-
earners like employees (PAYE) and self-employed people.
b. Company Tax - Tax paid by business enterprises on profits.
c. Capital Gains Tax - Tax levied on the increase in values of certain kinds
of property on their disposal as compared with++ their values at the time
they were acquired e.g. Stock exchange securities and personal securities.
d. Gift Tax – Tax paid on items/gifts given to individuals.

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 ii) Indirect Tax
These are taxes paid by individuals or organizations unknowingly because they are levied on the
Goods & Services they purchase, sell or produce. The price paid for such commodities include
some amount of tax. Indirect tax accounts for over 70% of the total tax revenue in Ghana.
Examples of indirect taxes are:

a. Export and Import Duties or Custom Duties.

b. Excise Duties – which are taxes imposed on goods produced within the country.
c. Sales Taxes – which are imposed on good irrespective of their origin.
d. Value Added Tax (VAT) – a tax paid by a producer or a service provider in proportion to the
amount by which the value of his output exceeds the expenditure on his inputs.
e. Entertainment Duties and Hotel Taxes - these are taxes paid by those who enjoy certain
public entertainments (like football matches, cultural shows, films, etc.) and hotel facilities.
f. Toll User Taxes – paid by those who use certain public facilities such as bridges, highways,
airports and harbours.
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 2) Borrowing
Government borrowing is done by the Central Bank and it may be either from internal sources or external
sources. Internally, the Central Bank uses such means as the sale of government securities (Treasury
Bills, Government Bonds and Stocks) and direct lending to the Government to raise loans for the
Government. 
Loans from external sources may either come from foreign countries (foreign Governments, firms and
residents) or international monetary institutions (or both) like The World Bank and its affiliates, the
International Monetary Fund (IMF), the International Development Association (IDA), etc. 
Grants are not expected to be paid back and that distinguishes them from loans. They are for specific
purposes and the beneficiaries ensure that they are used for the purposes for which they were given out.
 
3) Service Charges
Some public sector organizations have been granted the authority to charge fees for the services they
render. Although the amount collected may not end up with the central government, it is seen as a source
of revenue for the public sector. Examples of service charges include hospital fees and user fees paid to
educational institutions.
 

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 4) Profit and Dividend from State-Owned Corporations and Firms.
The government obtains revenue by engaging in economic activities directly. The government
derives income in the form of profit from the operation of its own enterprises. Alternatively, the
government owns shares in firms from which it obtains dividends. Another source of revenue
to government along this line is in the form of interest from extending loans to commercial
banks and friendly countries. Examples of state enterprises from which government receives
income are SSNIT, COCOBOD, National Lotteries, AngloGold-Asante, etc.

5) Fines & Licenses, Royalties

The public sector derives revenue from fines imposed by courts on lawbreakers and
those engaged in criminal activities. License is issued to people engaged in some form
of legitimate activities and this also constitutes a source of revenue to the public sector.
Royalties as a source of revenue to the state derives from companies and other entities
engaged in the exploitation of natural resources, examples are the mining companies.

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 6) Exports
The state engages in the export of some commodities directly. Some of these items
are cocoa, minerals and timber. This as well is a source of revenue to the public
sector.

7) Gifts or Donations
Gifts and donations have been an appreciable source of revenue to the government
of developing countries like Ghana. Such assistance comes from multinationals to
help in times of crises such as war, famine or some disaster. Included in this
category is a HIPC (Heavily Indebted Poor Country) benefit which is assistance
from multilaterals.

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 UNIT ONE
PART B

LEGAL BASIS OF GOVERNMENT

ACCOUNTING

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 SESSION 1-2: THE CONSTITUTION AND OTHER
ENACTMENTS
The framework includes:
• The 1992 Constitution of the Republic of Ghana
• The Financial Administration Act 2003, (Act 654).
• The Financial Administration Regulation 2004, (L.I. 1802).
• The Internal Revenue Act 2000, (Act 592)
• The Customs Excise and Preventive Act 1993, (P.N.D.C.L 330)
• The Bank of Ghana Act 2002, (Act 612)
• The Local Government Act 1993 , (Act 462)
• The District Assembly Common Fund Act 1993, (Act 455)
• Public Procurement Act 2003, (Act 663).
• Audit Service Act 2000, (Act 584).
• Internal Audit Agency Act 2003, (Act 658).
• Any other regulation that parliament may enact from time to time.

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 The entire text will refer to relevant portions of these enactments when the need
arises. Detailed discussion of all the enactments cannot be handled in this unit. In
the light of this, few of them have been dealt with in detail.

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 The 1992 Constitution of the Republic of Ghana
The 1992 Constitution of the Republic of Ghana, the supreme law of the land provides the
foundation for the regulatory framework of management of public funds. In Chapter 13, Articles 174
to 189, titled ‘Finance’; various issues related to the management of public finance have been
provided.
It is to be noted that, being the supreme law of the land; these provisions of the Constitution provide
the foundation for the enactment of all other regulations related to public sector financial
management including those that have been listed above.

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 The Financial Administration Act, 2003 (Act 654)
• The Act defines clearly the powers and responsibilities of financial stewards (individual office
holders) and their precise roles. It defines the central players in the financial administration of the
country, the assignment of responsibilities, their functions and roles. This includes the duties of the
Controller and Accountant-General.
• It establishes the conditions for the control and management of public funds
• It establishes the Consolidated Fund, the central mechanism for the control of public finances,
outlining the principles by which funds are collected into the consolidated fund, kept and
disbursed.
• It describes principles for financial control of statutory boards and corporation.
• It establishes the modalities for the collection of revenue.

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 Financial Administration Regulations 2004 (L.I.1802)
These regulations were made by the Minister in the exercise of the powers conferred upon him by the
Financial Administration Act 2003, Act 654. They are basically rules and regulations governing
management of public finances.
The following are some major highlights.
• It enjoins public officers to keep proper records of all transactions and produce them for inspection
when called upon to do so by the Minister of Finance, the Auditor General and the Controller and
Accountant General (CAG) or any public officer authorized to do so.
• It defines Public Funds and classifies all receipts into the Consolidated Fund.
• The definition of Internally Generated Funds (IGF), the procedures for collection and lodgement, as
well as the accounting for them are provided.
• The Regulations make the Minister the main agent for the preparation, presentation and
implementation of the national budget.
• The authority for payment of salaries of judges imposed directly upon the Consolidated Fund is
specified.

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 SESSION 2-2: REGULATORY AUTHORITIES
THE COUNCIL OF STATE
Functions of the Council of State
• The Council of State shall consider and advise the President or any other authority in respect of
any appointment which is required by this Constitution or any other law to be made in
accordance with the advice of, or in consultation with, the Council of State.
• (2) The advice referred to in clause (1) of this article shall be given not later than thirty days
after the receipt of the request from the President or other authority.
• (3) The Council of State may, upon request or on its own initiative, consider and make
recommendations on any matter being considered or dealt with by the President, a Minister of
State, Parliament or any other authority established by this Constitution except that the
President, Minister of State, Parliament or other authority shall not be required to act in
accordance with any recommendation made by the Council of State under this clause.
• (4) The Council of State shall perform such other functions as may be assigned to it by this
Constitution or any other law not inconsistent with this Constitution.
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 THE CABINET
Decisions on government policies with regard to financial outlays are taken by the
office of the President together with the Cabinet representing the executive arm of
government. In the course of making decisions with financial implications, the
President and Cabinet exercise careful control about appropriations. This is because
whatever decisions are taken at that level must be approved by parliament.
Executive control of government finances is therefore very crucial and critical
especially with the view not to overburden the taxpayer, and at the same time
exercise careful commitments acceptable to the legislature.

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 PARLIAMENTARY CONTROL
According to the rules in the 1992 Constitution, no revenue shall be levied or
expenditure incurred except as authorized by parliament. It is imperative therefore
for the Executive to obtain Parliamentary consent, both to raise money (revenue)
and to spend it (disbursements). Parliamentary financial control is exercised in three
different phases, namely, appropriation, audit and review by public accounts
committee.

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 Functions of Parliament

1) Scrutinisation and approval of National Budget

2) Scrutinisation of Auditor General’s report on public accounts and
interrogating public officials on the audit findings and recommendations.
3) Holding Public officers accountable for financial losses to the state.
4) Promulgations of laws and legislative instruments to enforce financial
accountability and transparency.
5) During budget execution, Parliament is mandated to receive in-year
implementation reports through select committees.
6) Parliament may also undertake direct monitoring of projects approved in
the budget through visits to projects sites to monitor project
implementation or service delivery

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 MINISTER OF FINANCE
The Minister is responsible for the management and control of the Consolidated
Fund and other public funds.
The Minister advises the government on the total resources to be allocated to the
public sector and to individual programmes and activities within that sector.
The Minister needs to ensure that there are transparent systems established for
the purpose of providing a full account to Parliament for the use of resources
and public moneys.
The Minister directly or through the Auditor General may cause the inspection
of the books, records and offices of a department within the public sector.
The management of the public debt of Ghana is carried out by the Minister in
consultation with the Governor of BOG and the CAG.

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 CONTROLLER AND ACCOUNTANT GENERAL (CAG)
Functions
1) The CAG is responsible for the compilation and management of the accounts prepared in relation
to the Consolidated Fund and other public funds. For this purpose the CAG gives general
instructions to the Principal Spending Officers of departments.
2) The CAG is the general manager and supervisor of the accounting operations of the government.
He issues all the necessary directions and regulations or instructions to all those that have to
receive and disburse public funds throughout Ghana.
3) The CAG is to protect public and trust moneys against unlawful diversion from their proper
purposes and against accidental loss, and as a result locate such moneys so as to facilitate the
efficient and economical discharge of public financial business.
4) The CAG is responsible for the printing, control and issue of value books such as Licenses,
Hospital Cards, Assembly Tickets, Passport forms, General Counterfoil Receipt Books and
Treasury forms.

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 He operates in consultation with the Auditor General in all matters affecting the accounting basis,
policies and the classification system to be applied in public accounting, all to ensure custody of
public moneys, securities and accounting documents.
The Ministry of Finance as a policy arm of government decides on public financial policies whilst the
CAG sees to their efficient and proper implementation.

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 THE GOVERNOR OF BANK OF GHANA
Functions
1) formulate and implement monetary policy aimed at achieving the objects of the Bank;
2) promote by monetary measures the stabilization of the value of the currency within
and outside Ghana;
3) institute measures which are likely to have a favourable effect on the balance of
payments, the state of public finances and the general development of the national
economy;
4) regulate, supervise and direct the banking and credit system and ensure the smooth
operation of the financial sector;
5) promote, regulate and supervise payment and settlement systems;
6) issue and redeem the currency notes and coins;
7) ensure effective maintenance and management of Ghana's external financial services;

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 AUDITOR-GENERAL
FUNCTIONS
1) It is the responsibility of the Auditor General to examine and certify
government accounts.
2) Auditing of the foreign transactions through the Bank of Ghana.
3) Examination of the Controller and Accountant General’s report of public
accounts.
4) Submission of special audit report to parliament on special assignment
given by parliament.
5) Establishing accounting standards and policies in conjunction with the
Controller and Accountant General’s Department.

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 HEADS OF MDAS AND MMDAS
Functions
1) Manage and operate the MDA’s accounting systems, so as to ensure accountability of all officers
transacting such business and facilitate the efficient discharge of such business;
2) Ensure that the department’s accounting system has been approved by the CAG in consultation
with the Auditor-General;
3) Receive and order the disbursement of any trust monies for which the Head of Department has
been appointed as administering authority by or under any enactment or agreement;
4) Manage and reconcile the bank accounts authorised for the department by the controller and
Accountant-General;
5) Preserve in good order, and secure the economical use of all equipment and stores used by the
departments;

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 SESSION 3-2: IMPORTANCE OF THE
REGULATORY FRAMEWORK
1) They are intended to generate public confidence in public financial managers
in relation to the efficient, economic and effective use of resources put under
their stewardship.
2) Accounting and non-accounting officers are made aware of the legal
implications of financial transactions, so as to prevent unlawful actions and
decisions that may result in losses and wastes.
3) Its knowledge prevents misunderstanding of the functions of public financial
managers and the controls they exercise; hence they foster good and healthy
relationship among public officers and also between the officers and the public.
4) The enactments prescribe the responsibilities of persons entrusted with
financial management in public finance.
5) The enactments ensure the effective and efficient management of national
revenue, expenditure, assets, liabilities and other resources of the government.
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 SESSION 4-2: ACCOUNTING CONCEPTS, POLICIES,
STANDARDS AND BASES
BASIS OF ACCOUNTING IN THE PUBLIC SECTOR
CASH ACCOUNTING
Characteristics of Cash Accounting
1) Cash inflow and cash outflow is the only basis for recording transactions in the books of account.
The cash book is the main book of document thereafter posting is made to ledger.
2) Credit transactions which result in debtors and creditors are not recorded; debtors and creditors
accounts are therefore not kept.
3) Both revenue and capital income and revenue and capital expenditure are treated in the books as
revenue income or revenue expenditure. Fixed assets are not recognised under cash basis, they are
written off in the year of purchase, so there is nothing like depreciation of asset.
4) Cash accounting reports no profit or loss and no assets or liabilities. In the absence of these items
found in the balance sheet, the cash accounting basis do not require the preparation of a balance
sheet.

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 Advantages of Cash Accounting
1) It is very simple to prepare. An accounting system based on cash receipts and
payments avoids the estimates for depreciation of fixed assets.
2) The simplicity of cash accounting makes it easy to understand. It avoids estimates
for depreciations of fixed assets, provision for doubtful debts and stock adjustment.
3) Cash accounting facilitates accountability and control.
4) Government is much concerned with how cash moves in the public sector system,
that is, how revenues are obtained and how these revenues are utilized and the
balances left and this is easily produced by the cash accounting basis.
5) The legislature can easily play its role of effecting control. The legislature is made
up of persons with different backgrounds who may not be able to make full sense of
financial statements to ascertain conformity with financial estimates.

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 Disadvantages of Cash Accounting

1) Cash accounting makes it impossible to determine the total worth of a state. Balance sheet is not
required under this system of accounting so determination of the capital of the state cannot be
done since there is no asset and liability to ascertain the difference.
2) It is not possible to measure the performance of the country since identifying measures for such
performance can be difficult. The absence of a balance sheet makes it impossible to determine the
capital which ultimately leads to the determination of returns on such capital. If a balance sheet is
prepared, the performance of one year could be compared to another year.
3) Room is created for misuse of state resources because assets' values are not recorded in the
accounts. The expensing of assets makes it impossible to have their book value with which to
compare the state of the asset. This opens the way for wastage and pilferage in the public sector.
4) There is difficulty in tracking debtors when credit transactions take place under cash accounting.
Keeping accounts on cash basis does not mean that there is no credit transaction. The non-
recording of such items in the accounting books makes it difficult to keep debtors in sight and
insist on payment.

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 ACCRUAL ACCOUNTING
Characteristics of Accrual Accounting
1) It recognises 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; debtors and
creditors are found in the accounting books because of the credit terms.
2) There is distinction between capital expenditure and revenue expenditure. This
allows for the matching of output activity and programme with cost incurred, thus
performance measurement. The cost of fixed asset which is depreciated is what is
expensed and not the total cost as applies under the cash accounting.
3) This technique allows for the preparation of the final accounts in the form of
preparation of the operating statement and balance sheet. There is full disclosure of
the resources on the land and the actual use of the resources as well as outstanding
liabilities.

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 Advantages of Accrual Accounting
• It enables performance measurement. Since accrual accounting facilitates the preparation
of the operating statement and the drawing of balance sheet, the performance of the
government organisations can be revealed.
• Accrual accounting discloses relevant information about the organisation. By drawing the
balance sheet, the remaining classes of assets of the organisation and the liabilities are
disclosed. In the same way the financial state of the organisation comes to light.
• It allows better matching of output with costs. Accumulating all costs relating to outputs,
activities or programmes become possible because this technique recognises both cash and
credit transactions. Since the revenue for that period can be obtained, matching the cost for
the period against it allows for better performance measurement.
• It provides better and more complete information for the management and decision making.
When there is information on existing debt and resource, management is in a better position
to take decisions because it has in mind the old debt and the value of the resources.

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 Disadvantages of Accrual Accounting
1) It is not easy to be adopted because some of the figures cannot be estimated with precision, for
instance tax revenue. It is difficult to recognize the amount of tax to be collected from debtors.
2) Another problem making it difficult for accrual accounting to work is keeping up-to-date
records of Government resources. It is difficult identifying all resources belonging to the state
left alone recording it; it is therefore difficult keeping current values of state resources.
3) The method of valuing the varied assets of the state is another setback of accrual accounting.
The assets of the state are so numerous that it is difficult adopting a policy for valuing them.
4) It is not easy adjusting nominal expenditure in terms of accruals and prepayments for
consolidation in national accounts. Getting all recurrent expenditures and accruals for inclusion
in the national accounts is an impossibility taking into account all MMDAs, departments,
services, councils, boards and commissions.
5) Subjective judgments go into many policy choices, if principles or practices have to be adopted;
it is likely that no quality decisions may be reached.

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 MODIFIED ACCRUAL ACCOUNTING
Revenue Recognition:- Revenue is recognized when it is available and can
be measured with certainty. This means that revenue is recognized and
recorded when received as cash or when it can be collectible in some future
time with some element of certainty because it is possible to make an estimate
of such revenue.
By way of example, corporate tax, value added tax, court fines and charges are
revenues whose identification and measurability is not easy. Revenues of such
nature are recognized on cash basis. Revenue from property tax can, however,
be recognized on the accrual basis because the property exists and its value can
be estimated; by applying a tax rate, the revenue to be derived can be
estimated with certainty. While some of the revenues can be recognized on
cash basis, there are others which cannot be recognized as such.

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 Expenditure Recognition:- Apart from physical assets which are treated
under cash basis, all other expenditure are recognized using the accrual basis.
Physical assets are expensed on acquisition and not considered for depreciation, in the
same way, sale of physical assets is recognized as revenue in the books.

When goods or services are received on credit, liability is created and must be
recognized in the books. The treatment is done on the accrual basis. At the end of the
accounting period, the relevant expenditure recorded is made up of cash paid and
adjustment for any outstanding balance or advance payment.

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 ACCOUNTING BASIS AVAILABLE FOR ADOPTION
• IPSASB provides countries with the option to adopt either cash and/or accrual
basis depending on the specific needs and systems of financial operation in place
for the government or the country in question.

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 REASONS FOR ADOPTION OF IPSAS
The prospects and benefits to the nation for adopting the standards are enormous, and based on the
following driving force:
1) International Trends: The last few years have seen dramatic developments and changes on the
International Standards setting scene. Along with this has come a rapid adoption of
International Standards in a number of countries, which previously had their own national
Standards.
2) Pressure from Donor Community: The United Nations General Assembly approved the
adoption of IPSAS, together with the requisite resources. This means that all UN agencies
comply with IPSAS. In a related development, the World Bank and its agencies, World Health
organization (WHO), World Bank, European Commission, NATO and OPEC have also adopted
the IPSAS.
3) Enhanced Government Financial Reporting: Over the years, several governments in the
Public sector have no standardized way of reporting financial performance. The adoption of the
IPSAS will be seen as a step towards uniform financial reporting and better communication to
the public and other donor agencies.

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 4) International Harmonization: The adoption and implementation of IPSAS in
Ghana and Africa in general will help in the harmonization of financial operation
and uniformity in the reporting of public sector accounting information and its
disclosure which:
• will provide better financial information supports, and improve accountability,
transparency, and governance;
• will provide better information to donors and countries providing external
assistance and also better quality and credible financial reports.

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 Key challenges to the Adoption of IPSAS
• Implementation Cost: Accounting manuals must be rewritten to incorporate IPSAS terminologies and also
conform to local requirements. Education and training will require substantial amount of government outlay
as the nation prepares to adopt IPSAS.
• Availability of Qualified Accountants: Most of the Public sector and government agencies lack the
necessary qualified accountants to adequately carry out the changes in IPSAS as opposed to the financial
reporting framework currently existing in the Public Sector.
• Apparent Complexities: The use of common language to bring uniformity across cultures and governments
in the Public sector is very key. Some terminologies used in the IPSAS may not apply to the country or
Government's financial reporting system due to some uniqueness in its financial operations
• Readiness of Government Departments and Agencies: Some organizations including central
administration, regions and a large number of public sector bodies still use traditional modified cash based
accounting even if cost and management accounting is compulsory.
• Resistance: Not all government systems and administrative machinery will support IPSAS. Currently most of
the government agencies and departments have the Budget and Performance Monitoring Software (BEPEM)
which is yet to be put to full use.

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