Cash vs Accrual Accounting

Cash Basis Accounting Vs. Accruals Basis Accounting

The cash basis accounting which is currently use by the government has many weaknesses which need to be addressed. The present system does not give a real reflection and real time position of the government’s financial matters. Expenditures were recorded as they were spent and paid for, not as they were incurred whereas revenue was recorded as it was received and not when it was earned. Assets are seldom accounted for and tracked after purchasing and consequently these assets are generally not added to the cost of production of goods and services provided to the public. With such system, the government would not be fully able to get a true picture of how much goods and services actually cost or is it able to accurately know the full extent of its liabilities.
The limitations of cash basis accounting is that it is simpler however the concept is unfamiliar to the public, as the use of accrual accounting is more wide spread in commerce. Modified cash accounting only provides basic cash information. It is easy to manipulate and therefore less comprehensive.
One of the main objectives of moving form cash to accrual basis accounting is to make the government’s spending or cost more transparent. For example, by using accrual accounting, we could view the correct attribution of the pension cost of the government employees to the time period when they are employed and accumulating their pension rights, rather than reporting this as an unrelated expenditure once they have retired. Under the present system, it also allows outstanding government debts to be designed in a way that all interest expenditure is paid in lump sum at the end of the loan rather than being spread through the years when the loan was outstanding, as would be done under accrual accounting. From the examples above, it shows that cash accounting focus only on cash hence it would distort the true cost of the government’s expenditure. Cash basis