Accrual Basis of Accounting

As we will see in later chapters, the accrual basis of accounting

is what is used in preparing the government-wide financial
statements as well as the types of fund financial statements for
5 what are termed proprietary funds, meaning that they closely resemble
a business-type activity. Accordingly, understanding
the accrual basis of accounting is important for understanding a
governments financial statements prepared in accordance with
GAAP.
10 Under the accrual basis of accounting, transactions are recorded
when they occur, irrespective of when actual cash is received
or paid. Revenues are recorded when earned or when the
government has the right to receive the revenue. Expenses are
recorded when incurred. Some examples will help clarify these
15 concepts.

Many of the differences between the modified accrual basis

of accounting and the accrual basis of accounting concern the
timing of when revenue is recognized. Under the modified accrual
20 basis of accounting, revenues are recognized (i.e., recorded
in the financial statements as revenue) when they are susceptible
to accrual. To be susceptible to accrual, revenues need to be both
measurable and available. In determining whether revenues are
measurable, the government does not have to know the exact
25 amount of the revenue in order for it to be subject to accrual. As
long as a reasonable estimate of the revenue can be made, this
criterion will be met. The available criterion is a bit more complicated.
Available means that the revenue is collectible within
the current accounting period or soon enough thereafter to pay
30 liabilities of the current period. This criterion results in the recording
of only those revenues within a fiscal year that are received
within a relatively short period of time after the close of
the fiscal year.

35

Budgetary Basis of Accounting

The budgetary basis of accounting refers to the accounting principles
that a government uses to prepare its budget for its main
40 operating fund, the general fund, as well as certain other funds
called special revenue funds. Sometimes governments use generally
accepted accounting principles to prepare their budgets for
these funds, in which case the budgetary basis of accounting
would be the same as the basis of accounting required for fund
 financial reporting for these funds, which would be the modified
accrual basis of accounting.

5 Definitions and types of funds

To accomplish the objectives of the governmental unit, the unit
establishes a variety of funds as fiscal and accounting entities of the
governmental unit
A fund is a separate accounting group with accounts to record the
10 transactions and prepare the financial statements of a defined part of
the governmental entity that is responsible for specific activities or
objectives

15 Budgets
Used in governmental accounting to assist in management control and
to provide the legal authority to levy taxes, collect revenue, and make
expenditures in accordance with the budget

20 Types of budgets:
Operating budgets
Capital budgets

25 Government Accounting Defined

Under Section 109, of the Presidential Decree (PD) no. 1445, defines Government
Accounting as one that encompasses the process of analyzing, classifying, summarizing and
communicating all transactions that are involved in the receipt and disbursement of all
government funds and properties, and interpreting the results thereof. In pursuant to this
30 definition, objectives were set to cover several areas in government operations.

Objectives of Government Accounting

1. To produce relevant financial information about past and present transactions of

government.

2. To serve as basis for decision making for future operations

 3. To serve as the control mechanism for the receipt, disposition and utilization of
government funds and properties

4. To come up with financial reports pertaining to the results of operations of various

government agencies that are for dissemination to the public.

5 The need for timely preparation of financial reports in government is necessary to evaluate
the performance of the different agencies of government. The result of the reports would
indicate the areas that may still need improvement, as well as come up with the budgetary
requirements for these agencies if needed.

10

FUNDS ACCOUNTING
Under the new financial reporting model for governments
brought about by GASBS 34, fund accounting, or more
15 correctly fund financial statements, are not the primary reporting
tool for governments. Rather, fund financial statements are one
of the two methods used by GASBS 34 to present a governments
financial position and results of operations. The first
method is the government-wide financial statements. These use
20 the accrual basis of accounting and use the accounting concepts
as the foundation for reporting the various types of assets and
liabilities that were discussed in Chapter 2. The second method
is the fund financial statements. These financial statements use
both the modified accrual basis of accounting (for funds that are
25 considered governmental funds) and the accrual basis of accounting
(for funds that are considered proprietary funds). Just
to complicate things a bit more, a third type of funds, fiduciary
funds, may use either modified accrual or accrual, depending on
which subtype of fiduciary fund they are.