Question

Why do most governments and not for profits budget on a cash basis even though the cash basis does not capture the full economic cost of the activities in which they engage?

Answer 1

Faced with the increasing complexity of government activities, most of the nations prefers the cash budget. A cash budget refers to the estimation of the cash inflows and outflows over a defined time frame. The cash budget ensures that the government receives in taxes as well as other revenues only what it is required to disburse. Moreover a capital budget would be inclusive of the depreciation of outlays on past investment as an operating expense and thus an increase in volume of public investment would lead to counter pressures because the accumulating depreciation charges had to be covered out of current revenues. Thus the moving to a budget which is more reliant on accrual-based accounting may result to diminishing the transparency, increasing in complexity, and making the federal budget process more sensitive to small changes in assumed parameters, such as the rates of depreciation.