Cash-Basis Accounting
Under pure cash-basis accounting, financial transactions are recorded only when cash is received or paid out. Revenue is recognized when cash hits the government bank account, and expenses are logged when cash leaves the system.
- Advantages: It is simple to operate, highly objective, and aligns perfectly with tracking physical cash balances.
- Limitations: It ignores future liabilities, fails to track capital assets, and distorts the true cost of public services provided during a specific period.
Accrual-Basis Accounting
Accrual accounting recognizes financial events when the underlying economic transaction occurs, regardless of when the cash moves. Revenue is recognized when earned, and expenses are matched to the period they are incurred.
- Advantages: It reflects total public debt liabilities, captures the depreciation of infrastructure, and shows the true long-term financial position.
- Limitations: It is technically complex, demands specialized accounting software, and requires subjective valuations for non-financial assets.
Modified Bases of Accounting
- Modified Cash: Records transactions on a cash basis during the fiscal year but keeps the books open for a short period (e.g., 30 days) post-year-end to clear pending payments.
- Modified Accrual: Recognizes revenues when they become both measurable and available to finance expenditures of the current period, while expenditures are recognized when the liability is incurred.
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