Why do governments not use accrual basis for

their own accounting?

I can't help thinking accounting on accrual basis would help in developing

better insights into the management of public funds by governments. Why
do governments use cash basis?

2 Answers

Peter Baskerville, Lecturer of Accounting at TAFE for over 6 years. Applied it to

10+ businesses.
Updated Mar 10
There is no doubt that accrual accounting gives a far more accurate report on the
financial performance and position of any entity - whether that entity be a sole trader, a
corporation or a Government. Accrual accounting is proper accounting in that it matches,
within the same accounting period, the revenue earned with the all the costs incurred in
earning that revenue. This adherence to the matching principle is the cornerstone of
accrual accounting.

The trouble with accrual accounting is that it requires a high degree of accounting
knowledge and skill to operate and accounting skills don't come cheap.

Cash accounting on the other hand is a compromised accounting system but it can be
operated by non-accountants. You only need to record what actually happens (cash
in/out) rather than what is 'deemed' to have happened (revenue/expenses). Stakeholders
choose to use this compromised cash accounting system when the costs of complying
with accrual accounting far outweighs the benefits that it delivers. In this regard,
Governments generally allow small businesses to prepare financial reports using the cash
accounting.

Governments also look at their own operations where so few of their employees are
skilled at applying accrual accounting and apply the same cost/benefit rationale.
Government accounting entities are usually spread throughout the country, from the
capital city to the remotest corners and accounts are kept for a wide variety of vastly
different administrative entities. Besides Governments work with receipts/expenditures
and surpluses/deficits rather than profits/losses and their decision time-frames are
usually far greater than the yearly evaluations required of corporations.

So Governments adopt the cash accounting system for their own financial reporting
because while it requires care it needs no special accounting skills. The huge cost of
accrual accounting compliance would add little benefits to the information needs of
Government decision makers. Also, cash accounting is relatively uniform, making it easy
to verify, simple to learn and operate, it is well adapted to the needs of budgetary control
and it is easy to consolidate. This is why governments us cash accounting.
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Jerry Kitich, studied at ESSEC Business School

Written Mar 10
They use a type of fund accounting, which is a graduate level of accounting studies. In
other words it is more complex than regular accrual accounting. You can try to find some
information on it. Looks for books on government and municipal accounting. They do not
use cash accounting. Cash accounting is simply booking things when you pay for them.

The reason they have to use fund accounting, is that they are not allowed to just pool all
the funds they receive and spend the funds on anything they like. Certain funds given to
them, particularly by other levels of government or from specific sources, can only be
spent on certain things. They also control their short term and long term budgets by
using certain funds for capital projects and other funds for daily needs.