Question

From the perspective of a bureaucrat, which government accounting method (Cash Basis, Modified Accrual or Full Accrual) is more feasible for each revenue source? Explain your response.

1. State Income Taxes   D. Motor Fuel Taxes          G. Gaming Fees (casinos)
2. Public Utility Fees    E. Licenses and Fees          H. Block Grants
3. Donations                 F. Sales Taxes                     I. Property Taxes

Answer 1

Cash Basis of Accounting Method : Cash basis refers to a major accounting method that recognizes revenues and expenses at the time cash is received or paid out.

Modified Accrual method of accounting : Modified accrual accounting is an alternative book keeping 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 borrows elements from both cash and accrual accounting, depending on whether assets are long-term, such as fixed assets and long-term debt, or short-term, such as accounts receivable (AR) and inventory

Modified accrual accounting follows the cash method of accounting when economic events affecting the short-term have occurred. An economic event is recorded in the short-term when the cash balance has been affected. The result of this rule is that almost all items recorded on the income statement are recorded using the cash basis, and items including accounts receivable and inventory are not recorded on the balance sheet.

Modified accrual accounting follows the Accrual method of accounting when economic events affecting the long-term event have occurred, these long-term items are recorded on the balance sheet and depreciated, depleted or amortized over the life of the asset or liability. This systematic distribution of expenses or revenues allows future financial statements to have more comparability.

Full Accrual Basis of Accounting : A basis of accounting in which revenues are recognized when earned regardless of when they are received, and expenses are recorded at the time the liability is incurred, regardless of when it is paid.

All Bureaucrats are Government officials , controlling the government agencies. Governmental agencies have two key objectives, to report whether current-year revenues are sufficient enough to finance current-year expenses and to demonstrate whether resources are being used according to legally adopted budgets.

Modified accrual accounting ticks those boxes. It enables government agencies to focus on short-term financial assets and liabilities like sales tax( Now GST), Donations,State income taxes( Share of the state form Central Government), Motor Fuel taxes, Licence and fees etc.,. It also permits them to divide available funds into separate entities( like creating the Special Purpose Vehicle) within the organization to ensure that money is being spent where it was intended.

A modified accrual accounting system combines the simplicity of cash accounting with the more sophisticated ability of accrual accounting to match related revenues with expenses.

The Government Accounting Standards Board (GASB), which is recognized as the official source of GAAP for state and local governments, establishes modified accrual accounting standards.

Therefore modified accrual accounting system is more feasible for each revenue source, which is elobarated as follows:

1.The accrual accounting system is fulfilling the main two objectives of the goverment.

2. All the revenue sources are qualify for the short term events and qualify for recognising on the cash basis accounting, according to the modified accrual accounting system.

Alone cash basis of accounting may be applied to the all revenue sources but it will not fulfil the Main objectives of the goverment agencies, so it is not more feasible.