Modified accrual accounting definition
/What is Modified Accrual Accounting?
Modified accrual accounting combines aspects of accrual basis accounting with cash basis accounting. The purpose of this approach is to measure the flows of current financial resources in governmental fund financial statements. The standards for modified accrual accounting are set by the Government Accounting Standards Board (GASB). As the name implies, this approach is primarily used by government entities, which need a reporting system that focuses more tightly on their current-year obligations. The accounting requirements of government entities are considered to be sufficiently different from those of for-profit entities to require this different approach. The two main features of modified accrual accounting are noted below:
Revenue recognition. Revenues are recognized when they become available and measurable. Availability arises when the revenue is available to finance current expenditures to be paid within 60 days. Measurability occurs when the cash flow from the revenue can be reasonably estimated.
Expenditure recognition. Expenditures are recognized when liabilities are incurred, no matter when the related cash flows may occur. This is the same approach used under the accrual basis of accounting, though inventory and prepaid items can be recognized as expenditures when purchased, rather than first being capitalized as an asset. In addition, depreciation expense is not recognized. Instead, assets are charged to expense when purchased.
Characteristics of Modified Accrual Accounting
The advantages of the modified accrual accounting system are as follows:
Provides a balanced view of financial performance. This approach captures cash inflows and outflows, ensuring current financial accountability. It also records long-term liabilities and obligations (e.g., outstanding debts), providing a more comprehensive financial picture.
Aligns with nonprofit needs. This approach is tailored for entities where budgets and fund accounting are central to operations. It ensures that resources are allocated and spent according to specific purposes or restrictions.
Enhances budgetary compliance. This approach focuses on recognizing revenue when it is measurable and available, making it easier to track compliance with budgeted revenues and expenditures.
Facilitates accountability. This approach allows stakeholders to assess how well resources are being managed and whether funds are being used appropriately.
Supports fund accounting. This approach is well-suited for managing multiple funds with specific purposes, such as capital projects, special revenue funds, or debt service funds.
Meets regulatory standards. This approach complies with governmental accounting standards.
Less complex than full accrual accounting. This approach reduces the burden of tracking all non-cash transactions, making it more cost-effective and easier to implement than full accrual accounting.
Focuses on cash availability. This approach helps governments and nonprofits focus on liquidity and the availability of resources to meet immediate obligations.
Modified accrual accounting offers the flexibility to meet the financial reporting and accountability needs of governmental and nonprofit entities. Its blend of cash and accrual principles ensures a practical, transparent, and regulatory-compliant approach to managing public resources and obligations.
Modified Accrual Naming Conventions
There are several naming conventions that distinguish modified accrual accounting from accrual basis and cash basis accounting. For example, net income is instead called an excess or deficiency, while expenses are instead referred to as expenditures.