Question

Why don’t goverment report on one basis of accounting, instead of two?

Answer 1

There is no doubt that accrual accounting gives a far more accurate report on the financial performance and position of any entity - whether that entity be a sole trader, a corporation or a Government. Accrual accounting is proper accounting in that it matches, within the same accounting period, the revenue earned with the all the costs incurred in earning that revenue. This adherence to the matching principle is the cornerstone of accrual accounting.

The trouble with accrual accounting is that it requires a high degree of accounting knowledge and skill to operate and accounting skills don't come cheap.

Cash accounting on the other hand is a compromised accounting system but it can be operated by non-accountants. You only need to record what actually happens (cash in/out) rather than what is 'deemed' to have happened (revenue/expenses). Stakeholders choose to use this compromised cash accounting system when the costs of complying with accrual accounting far outweighs the benefits that it delivers. In this regard, Governments generally allow small businesses to prepare financial reports using the cash accounting.

---> Governments also look at their own operations where so few of their employees are skilled at applying accrual accounting and apply the same cost/benefit rationale. Government accounting entities are usually spread throughout the country, from the capital city to the remotest corners and accounts are kept for a wide variety of vastly different administrative entities. Besides Governments work with receipts/expenditures and surpluses/deficits rather than profits/losses and their decision time-frames are usually far greater than the yearly evaluations required of corporations.

---> Governments also look at their own operations where so few of their employees are skilled at applying accrual accounting and apply the same cost/benefit rationale. Government accounting entities are usually spread throughout the country, from the capital city to the remotest corners and accounts are kept for a wide variety of vastly different administrative entities. Besides Governments work with receipts/expenditures and surpluses/deficits rather than profits/losses and their decision time-frames are usually far greater than the yearly evaluations required of corporations.

----> So Governments adopt the cash accounting system for their own financial reporting because while it requires care it needs no special accounting skills. The huge cost of accrual accounting compliance would add little benefits to the information needs of Government decision makers. Also, cash accounting is relatively uniform, making it easy to verify, simple to learn and operate, it is well adapted to the needs of budgetary control and it is easy to consolidate. This is why governments us cash accounting.