Modified Accrual Accounting
Modified accrual accounting is an alternative bookkeeping method that combines accrual basis accounting with cash basis accounting. It recognizes revenues when they become available and measurable and, with a few exceptions, records expenditures when liabilities are incurred. Modified accrual accounting is commonly used by government agencies.
Modified Accrual Accounting
Definition
Modified accrual accounting is an alternative bookkeeping method that combines accrual basis accounting and cash basis accounting. It recognizes revenue when it is both available and measurable, and records expenditures when liabilities are incurred (with few exceptions). This method is commonly used by government agencies.
Origin
The origin of modified accrual accounting can be traced back to the mid-20th century when governments and public sectors needed a more flexible and accurate accounting method to better reflect their financial status and operational results. Over time, this method has been widely accepted and applied.
Categories and Characteristics
Modified accrual accounting mainly falls into two categories: partial modified accrual accounting and full modified accrual accounting. Partial modified accrual accounting uses the accrual basis in certain specific situations, while using the cash basis in others. Full modified accrual accounting combines the accrual basis and cash basis in all situations.
Its main characteristics include:
- Revenue Recognition: Revenue is recognized when it is both available and measurable.
- Expenditure Recording: Expenditures are recorded when liabilities are incurred.
- Flexibility: Combines the advantages of both accrual and cash basis, providing more comprehensive financial information.
Specific Cases
Case 1: A city government received a federal grant in 2023 to build a new bridge. Under modified accrual accounting, this revenue is recognized in 2023 because it is available and measurable in that year. Meanwhile, the expenditures for building the bridge are recorded as they occur, even if the payments span multiple fiscal years.
Case 2: A public school system signed a contract in early 2024 to purchase new teaching equipment. Although the equipment will be delivered and paid for by the end of 2024, under modified accrual accounting, the expenditure is recorded when the contract is signed because a liability has been incurred at that time.
Common Questions
1. Why do government agencies prefer using modified accrual accounting?
Answer: Because this method can more accurately reflect the financial status and operational results of the government, providing more comprehensive financial information.
2. How does modified accrual accounting differ from pure accrual accounting?
Answer: Modified accrual accounting combines both accrual and cash basis, while pure accrual accounting only uses the accrual basis.
